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Monday, 23 March 2009 00:00

Final valuation numbers on the March Residential REIT are now available for all subscribers

My final valuation numbers and assumptions are now available for the March Residential REIT subject. Enjoy!


Most of the company's properties were acquired recently with nearly 64 properties, or 74% of total properties acquired in or after 2006. These included 40 properties which were acquired due to the acquisition on June 11, 2008. Keeping in mind the lengthy transaction cycle in real estate deals, one can assume that the pricing for the deals preceding the deal closing by 6 to 18 months. This is pertinent in that the commercial and residential real estate bubble peaked between the 2nd half of 2006 and the 2nd half 2007, when the majority of the properties where purchased.

Year of acquisition / development

# of properties

% of total

Before 1999















2008 and later



Total Properties



Under the base case scenario XXX's fair value per share stands at $10.2 and $13.2 under CFAT (Cash Flow After Taxes) and NOI (Net Operating Income) based valuation approach, respectively. Assuming equal weights to both these techniques this translates into weighted average share price of $11.7 representing 39.1% downside from current price of $19.3.

XXX's valuation under bear case scenario is expected at $8.4 based on weighted average NOI and CFAT valuation technique, which represents a 56.4% downside risk from current price of $19.3.

Even under the most optimistic set of assumptions XXX's per share valuation pose a downside risk of 8.5% with weighted average share price of $17.6. Needless to say, I feel XXX is overpriced, and optimism has not been the operative word of the day in recent macro circles!

Refinancing existing loan obligations would be a challenging affair for the company, particularly in view depressing operating performance

Owing to the acquisition, XXX's debt increased to $1.3 bn in 2008 from $0.5 bn in 2007. As of December 2008 XXX's debt-to-FFO was at 28.8x while average maturity of its debt is 4.3 years, clearly demonstrating that the company will have to resort to external sources of funding, most likely borrowing, to meet its financing obligations. In 2009, XXX has debt obligations of $231 mn, with a total of $531 mn payable by 2011. In addition to this, the company has new development financing needs to the tune of $205 mn by 2011 and recurring capex requirement of $28 mn by 2011. Overall AXXXs total funding requirements for re-financing upcoming loan obligations and capex expenditures is about $764 mn by 2011. Despite huge financing requirements, the company's operating cash flows at $33 mn for 2008 was not even sufficient to finance its dividend distribution of $51 mn. With the market's appetite for CMBS securities completely dried up, XXX will have a GGP-style, tough time in raising $810 mn by 2011 - including $303 mn by 2009 alone. If you remember, I made a similar call on GGP late in 2007 (see GGP and the type of investigative analysis you will not get from your brokerage house). As long as CMBS market is hampered as it is, and the regional banks and insurers suffer due to operating losses and hits to their investment portfolios, the traditional and extant REIT business model is broken, and those REITS which binged on cheap, yet excessive debt and/or those who rushed to overpay for properties with compressed cap rates will suffer significantly through value destruction and collapsing share prices. I expect to see the trendline of XXX to start showing more of a correlation to that of GGP's.

Properties purchases made in 2008 seem to be an expensive buy

XXX has grossly overpaid for properties acquired in 2008 and 2007 with an average purchase price of 33% and 48% higher than current valuations, respectively. Of the 44 properties acquired during 2008, 9 properties have LTV greater than 100%. XXX's overall loan-to-value ratio is at 70% under the base case scenario and 77.7% and 62.4% under bear case and bull case scenario, respectively. My understanding is that the refi threshold in reference to LTVs is currently in the 65% range (keep in mind that this is the refi threshold, not the purchase threshold), with banks and lenders capital constrained and under the assumption that rents, valuations and macro conditions will be trending down before things improve. XXX's aggregate LTV in both the base and bear scenarios is well above that, and in the bull (rosily optimistic) scenario barely squeaks by. This is the exact problem GGP ran into last year, and I expect them to file for bankruptcy within a few weeks. With a significant number of properties acquired during the peak of the real estate and credit bubble financed with debt, these properties have quickly fell under water which could further complicate the problems in refinancing XXX's relatively large debt obligations.

I will be releasing an advanced property valuation schedule for Professional and Institutional Subscribers within 5 business days.

American Campus Communities (ACC) Forensic Summary Forensic Summary 2009-03-23 00:21:15 538.57 Kb

Last modified on Monday, 23 March 2009 00:00

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