Spain has crossed the rubicon, and entered into bad decision nirvana as it too decided to ban short selling, which has worked so well for all of those other smart countries which have done so. For instance, when the US did it in 2008, they helped their bank's shares float to the tune of -48%! Hey, with friends like that, who needs enemies. When will they learn that tempering/tampering with financial markets is not ever as good as it sounds. Keep in mind that short sales put a natural floor under weak securities by creating natural sellers at the end or a trade (whether the trade is successful or not). If the stock is truly overvalued (hear's to you European banks), then the shares are going to drop anyway as the holders of those shares sell to get out of them. Without shorts, there will be no buying on the way down as speculators and astute investors cover profitable short sales and the only bids you will get are at rock bottom where fundamental guys feel there "deals that can't be refused" (except for the occasional BTFD fools along the way). That is usually a bid that's much higher than would have been achieved through the short sale. Of course, nobody explained this to the Spanish.

An additional issue is that the banning of short selling broadcasts a message that Spain should want to mute, and that is the message of FUD (Fear, Uncertainty and Doubt)! Why else would one make the normally legal and necessary action of selling bad stocks illegal? Fear of the facts! Of course, as word gets out it just makes situations that much worse...

From CNBC:

Spain's stock market regulator banned short-selling on all Spanish securities on Monday for three months and said it may extend the ban beyond October 23. 

The ban, which will not apply to market makers, will apply to any operation on stocks or indexes, including cash operations, derivatives traded on platforms as well as OTC derivatives, the regulator said in a statement.

European shares extended their losses following the move by Spain, which raised fears that the region's sovereign debt and banking crisis may be worse than expected.

Subscriber's related reading (click here to subscribe):

File Icon The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers

File Icon Spanish Banking Macro Discussion Note

File Icon Spain public finances projections_033010

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This is part seven and the last (I think) of my forensic rant on what I believe to be the CRE Short of the Year and the dead REIT walking known as PEI. In this installment, I will show that PEI can't even sell off it's portfolio due to a lack of value add to its rather dire situation - nearly all of the properties are either underwater, negative cash flowing or fully leveraged. As concluded in my previous analyses, the company's assets are, in essence, of null or negative value to the shareholder. If you haven't yet read parts one or two or three or four or five or six, please do for there is a wealth of data and analysis behind them that will bring the new reader up to speed. Please refer to PEI Cashflows and Debt Preliminary Analysis, PEI Sample Property Valuation  and  PEI Foreclosure Scenario Analysis for the background to this document which is the 3rd of 3 scenario analyses that detail the likely bankruptcy of PEI.

Scenario III : Sale of properties to fund debt repayment

The “fire sale” or distressed asset disposition scenario seems like the least possible, least likely and the least practical scenario. The reason is that the Company’s portfolio has either properties (1) which have negative valuation after considering debt due on them or (2) have properties that don’t have specific debt against them but are mortgaged under the revolving credit facility.

Please see the details on valuation of 27 properties we have valued…


PEI Underwater  Overly Encumbered Properties
PEI Underwater Overly Encumbered Properties

The properties that we didn't specifically value had similar characteristics. Those properties that are highlighted in blue do not have a mortgage, but are used to collateralize credit facilities that are being actively used and are expected to be maxxed out.

PEI Properties Not Valued By BoomBustBlogPEI Properties Not Valued By BoomBustBlog

As illustrated above, almost all properties with a positive valuation (see Column L) lack property-specific debt against them. But all of these properties have been encumbered under the revolving credit facility. The properties not covered under the revolving credit facility and having positive valuation after deduction of debt due on them are (1) Exton Mall (2) Moorestown Mall (3) Patrick Henry Mall. The total positive value of these three properties is around USD 36 mn which is insufficient to meet net refinancing requirement of USD 295 mn (as of Nov. 2011) as detailed below:

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

77.34

Unused credit lines

155.00

Debt due for repayment

621.08

Shortfall (before proceeds from sale of properties)

294.80

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

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This is part six, and the second to last of my forensic rant on what I believe to be the CRE Short of the Year and the dead REIT walking known as PEI. In this installment, I will simply show that much of PEI's portfolio is either underwater, negative cash flowing or fully leveraged - in essence of null or negative value to the shareholder. If you haven't yet read parts one or two or three or four and five, please do for there is a wealth of data and analysis behind them that will bring the new reader up to speed. 

I'm releasing this proprietary blog research for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

I'll keep this one short and simple. Most of PEI is U-N-D-E-R-W-A-T-E-R!!! That translates to the majority of its portfolio being of no value to equity shareholders or bondholders upon sale. In addition, at least 4 properties are kick negative cashflows, draining valuable and much needed cash from the rest of the company. See below and  Click to enlarge to print quality...PEI negative cash flow properties

 

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

Of course, many may be asking, "Well, what about those properties that you didn't look into independently?". Well, the reason why we didn't look into the others independently (other than resource constraints - this stuff is a lot of work and consumes many man-months of analytical labor) is that the state of the properties were rather obvious without deep digging. Below is a list of those properties we did not value. Please keep in mind that we feel (and we're most likely quite correct) that the carrying value of assets on management's balance sheet are often heavily skewered to the optimistic side. Not to say that they are explicitly lying, per se, just that they may have been feeling particularly good the day they spit out the numbers. With that being said, notice the amount of red that you see below.

PEI Properties Not Valued By BoomBustBlog

Again, paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names.

I will continue this analysis with a conclusion in the Fire Sale scenario, and offer professional and institutional subscribers property by property analysis in full and complete detail (about 10 pages per property). In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

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This is part five of my forensic rant on what I believe to be the CRE Short of the Year and the dead REIT walking known as PEI. If you haven't yet read parts one or two or three or four, they are necessary in order for you to get the full picture. In the spirit of full disclosure, although BoomBustBlog is a subscription research site, I'm releasing this fee-only proprietary content for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

If we look at PEI's response to the current weak macro economic environment, they are extremely defensive. Defensive - due to the reason that they realize where they stand. There has been no real capex over the last few quarters and (as I mentioned earlier conversations wiht clients) their strategy is to survive - moreso than to move ahead and fight with minimal odds. The mounting loan obligations and their struggle to fight each quarter is evident.

On top of this, a few of the properties have either been sold or have been used to raise mortgage finance, further making it tougher for the future years. In addition, the capacity to raise financing will dry up as all the properties stand 'effectively mortgaged' currently. Any imbalance in managing loan payouts can have a ripple effect. It will be interesting to see if the company manages to come out of it and if so, how it will do so. One thing for certain, with 3 senior managers getting a roughly $6 million slice of the cash flow pie while shareholders enjoy a mere $2 million slice in dividend increases, not only is there a lack of effective shareholder activism, but management appears to be ready, willing and able to drain the company's coffers via executive compensation faster than through cash return to shareholders. For a REIT whose mantra should be investor income, one would expect this to raise eyebrows at the very least. This REIT resembles the business/compensation model of Wall Street banks where employee compensation trumps ROI to investors as a corporate goal.

Subscribers, please refer to PEI Cashflows and Debt Preliminary Analysis and PEI Sample Property Valuation for the background to this document which is the 2nd of 3 scenario analyses that detail the likely potential bankruptcy of PEI. Those who are interested may subscribe to our research here.

Scenario II : Foreclosure of properties

In this scenario we assume that the Company would go the “Jingle Mail” route through allowing foreclosure on some of its properties, particularly those which have loans due for repayment in the next couple of years (2012-2014).

We looked at the portfolio of 27 properties that we valued and screened them to find out properties that are likely to have loans that would incentivize foreclosure. Below is the table showing such properties:

image001

We assume that in 2012 the company will possibly face foreclosure on (1) Beaver Valley Mall and (2) Cherry Hill Mall. The total amount of loans due on these properties in 2012 is USD 278 mn.

The following is likely to be the impact on revenues and operating expenses and net profit

Year – 2012

USD mn

Revenue loss

39.3

Operating expenses saved

24.2

Interest saved

15.9

Net Profit (negative impact)

0.8

Following is likely to be cash flow situation during 2012

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

91.8

Foreclosure of properties (Net WDV)

278.0

Proceeds from revolving credit facilities

155.0

Debt due for repayment

621.08

Shortfall

2.3

If the company forecloses both its properties having loans due for repayment in 2012, it may just be able to meet its loan obligations for 2012. However, this is going to have a cascading impact on the company in the form of the following:

  1. Interest rates on its existing debt will increase. As of now, in our assumptions for financial projections (below) we have assumed a reasonable increase of 120 bp, on average, for the company from around 6% currently.  This has materially increased its interest burden and its financial performance will deteriorate in kind.
  2. The Company has close to USD 443 mn and USD 140 mn in loans due in 2013 and 2014, respectively. A foreclosure scenario will make it almost impossible (considering its already stressed financial situation) for the company to refinance such loans or extend their maturity. The Company with the current deteriorating operating performance will be under more stress to refinance its obligations.
  3. The covenants under the revolving credit facility were recently revised under a modified agreement between the Company and the Lenders’ group led by Wells Fargo Group. Most of the revised covenants are considerably more stringent, making it highly unlikely the company will continue to have the credit facility under the agreement if the solvency ratios and interest coverage requirements are not met. These covenants are likely to be infringed if the interest rate on property loans is increased.

Projected Financials statements are furnished via the full foreclosure scenario document -File Icon Foreclosure Scenario Analysis
(Commercial Real Estate)
. Click here to subscribe.

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

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 This is part four of my forensic rant on the the dead REIT walking known as PEI. If you haven't yet read parts one or two or three, they are necessary in order for you to get the full picture. As stated in my last missive on this topic, although BoomBustBlog is a subscription research site, I'm releasing this proprietary blog research for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

Blog subscribers can access the full recapitalization document here - PEI Recapitalization Scenario. Those who are casual readers, please see below...

I left off demonstrating how PEI only had a mere handful of properties that were able to take on additional debt (assuming banks were to do a halfway decent job at underwriting), and the additional cash available from leveraging those properties would do very little to assist in digging PEI out of the hole. The incremental loans expected to be availed by the Company is detailed below:                                                                                                                        USD Million

Property Name

Debt

Cap Rate (%)

Market Value of Property

Incremental loan

New Debt-to-WDV ratio

Exton Square Mall

68.4

6.19%

98.5

30.1

82.4%

Moorestown Mall

55.2

7.67%

66.6

11.4

101.5%

Patrick Henry Mall

91.9

7.71%

98.6

6.7

93.5%

Total

48.3

The Company would be able to get 48.3 mn loan if it goes for refinancing based on recapitalization of its properties - and that's using sky high optimistic assumptions. The Incremental interest due to from the above financing based on the assumption that the lenders would raise  the interest on the loans roughly 50 basis-point (bp), roughly US 4.6 mn. The net cash-inflow would be USD 43.8 mn. This is grossly insufficient based on total requirement of around USD 295 mn. 

Our analysis was originally performed in the 4th quarter of last year, and since then PEI has raised $100 mln in a preferred offering. A few readers have asked if this alters our scenario, to which I reply - take the optimistic debt refinancing presented above, combined with the $100mln 8% preferred, and an addition $100 mln 8.5% preferred, and you are still observing PEI with a  roughly $50mln shortfall and a hell of a heftier debt service to boot. As I said, this is a dead REIT walking!!!

Alternate options

The other options before the Company are as under:

  1.  Raise finance against properties which have no specific mortgage against them. However, we looked at the covenants for loan facilities restricting company’s access to these properties for raising finance. Almost all of these properties have been mortgaged under revolving credit facilities.
  1. Raise finance against properties that we have not yet valued as part of the current analysis of valuation of PEI. We valued 27 properties. We looked at other properties to assess probability of raising finance against them.

Out of the remaining 19 properties, 10 properties were acquired between 2003 -2005 and the rest were acquired before 2000. The properties acquired between 2003-2005 are likely to have their valuation fallen in line with the valuation we have witnessed for the properties we valued. As such, probability of raising adequate finance on such properties is also quite minimal. The properties acquired before 2000 already have high debt-to-Net WDV ratio and therefore are likely to have less cushion for further debt.

Schedule of properties not valued

Properties highlighted in blue have been mortgaged under revolving credit facilities

 PEI unvalued properties

Looking at the graphic above, it is plain to see that the company has leveraged its portfolio to the hilt, either through property depreciation or outright equity stripping. Those potential cash sources that were unlevered properties have been wrapped up as credit line collateral, while most of the other properties are dramatically underwater - I mean dramatically. What makes this even worse is that these numbers are from management's proclamations and history tells us (as well as BoomBustBlog analysis) that management's views are usually always much more rosy (read bullshitistically unrealistic) thine own hand borne calculations.

Forecasted Financial Statements

Below are PEI’s projected financial statements for 2012 based on the assumption that the shortfall (though unlikely) is met through additional borrowing and as a result the average interest increases to 6.7% annually.... Blog subscribers can access the rest of the full recapitalization document here - File Icon PEI Recapitalization Scenario. Click here to subscribe.

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

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JP Morgan is now calling for a clawback of INA Drew's excessive compensation. OF course, Sheila Bair (one of the few regulators whom I actually respect) declaresJamie Dimon's compensation should face a claw back as well. Well, it's apparent that Dimon's lobbying and influence reaches a bit farther than Ina Drew's, no? Ahhhh, regulatory capture at its best (as in How Regulatory Capture Turns Doo Doo Deadly).

BoomBustBlog readers remember this scenario from several years ago, to wit: Even With Clawbacks, the House Always Wins in Private Equity Funds. In said article, I explained that althought Blackstone instituted a clawback that returned funds to investors, the investors still got RIPPED OFF!!! Don't believe me? Read the following excerpt and keep in mind that private equity and LLP investors are easily replaced by public equity investors in the JPM scenario!

I have written extensively on this topic. For one, the CRE bubble was obvious, but funds plowed ahead because they receive fees for deals done as well as performance fees. I warned about Blackstone and the Sam Zell deal blowing up back in 2007 as it was being done (see Doesn’t Morgan Stanley Read My Blog?). It was quite OBVIOUS that the top of the market was there , but it doesn't matter if you get paid for both success AND failure, does it? They are often in a win-win situation. On April 15th, 2010 I penned “Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!” wherein I espoused much of my opinion on market manipulation and the state of CRE. I will excerpt portions below in an attempt to explain how REITs and the bankers that they deal with get to add 2 plus 2 and receive a sum of 6, or worse yet have 4 subtracted from their 6 and get to sell 5!!! Straight up Squid Math!

Oh, yeah! About them Fees!

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost abuot 2/3rds of thier clients money. I though to myself, “Damn, now that’s some bold, hubristic s@$t”. So, I decided to attempt to lay it out for everybody in the blog, see ”Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity?“. I excerpted a large portion below. Remember, the model used for this article was designed directly from the MSREF V fund. That means the numbers are probably very accurate. Let’s look at what you Morgan Stanely investors lost, and how you lost it:

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders – lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.

realestate_fund.pngrealestate_fund.pngrealestate_fund.png

To depict a varying impact on the potential returns via a change in value of property and operating cash flows in each year, we have constructed three different scenarios. Under our base case assumptions, to emulate the performance of real estate fund floated during the real estate bubble phase,  the purchased property records moderate appreciation in the early years, while the middle years witness steep declines (similar to the current CRE price corrections) with little recovery seen in the later years.  The following table summarizes the assumptions under the base case.

re_scenarios.pngre_scenarios.pngre_scenarios.png

Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

re_fund_returns.pngre_fund_returns.pngre_fund_returns.png

re_fund_returns_tables.pngre_fund_returns_tables.pngre_fund_returns_tables.png

re_fund_returns_tables.pngre_fund_returns_tables.pngre_fund_returns_tables.png

Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..

re_fund_returns_tables3.pngre_fund_returns_tables3.pngre_fund_returns_tables3.png

Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds…

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In continuing my proclamation of truth, my rant in favor of that long lost art of investment valuation known as old fashioned fundamental analysis, I bring to the BoomBustBlog reading public my 3rd installment of PEI - Dead REIT Walking (or, the short candidate from hell). If you haven't yet read parts one and two, they are necessary in order for you to get the full picture. I'm releasing this proprietary blog research for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

In Excellent Short Candidate Also Known As Dead REIT Standing! I left off posing the question of PEI breaking covenants. While it hasn't happened yet, methinks it's simply a matter of time. OF course, since the banks involved are engaged in their own incessant can kicking exercises, this may very well be a moot point - at least for now, but more on that later when I not only list the banks that have lent to PEI but show how far underwater their loans are and exactly how, why and where those properties have tanked.

PEI OBservations page 5

There are only three options of PEI:

Scenario I : Refinancing through debt based on recapitalization of properties

Scenario II: Foreclosure of select properties

Scenario III: Firesale of select properties

Of course, there's always the possibility of the company mixing and matching these three scenarios. 

Scenario I : Refinancing through debt based on recapitalization of properties

Refinancing requirement for 2012...

PEI has a total shortfall of around USD 295 million which it needs to finance. We have projected its operating results and have looked at available resources (cash balance, unused credit lines, etc). The following table shows the summary of the Company’s finances for 2012.

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

77.34

Unused credit lines

155.00

Debt due for repayment

621.08

Shortfall

294.80

Under the current scenario, we have assumed that the Company would try to avail itself of an increased loan on its properties, particularly on those which have (relatively) reasonable cap rates and debt-to-market value (LTV) ratios. Consequently, we looked at the company’s portfolio of 27 properties, each of which were valued independently by our team.

The table below shows that while there are quite a few properties with Debt-to-Net WDV (written down value) ratio of less than 100%, those with Debt-to-Market Value ratio are only three in number (where market values is defined as teh value derived by our proprietary analysis based upon market-based inputs and actual cashflows). Put another way, out of 27 properties analyzed, only three of them actually had any value to shareholders from a sale perspective. That's right, 88% of the properties of examined by us were underwater!!! Of the three that weren't underwater, all had reasonably good cap rates (more than 6% in all cases) and would therefore, in our opinion, enable the company to avail itself of incremental loans from its existing lenders on the properties. We (over)optimistically assume that the Company would be able to raise up to 100% of market value on these loans. From a realistic perspective, this is probably unlikely - highly unlikely actually. Remember, we are being optimistic here.

Portfolio of 27 properties valued – Table showing incremental finance that can be availed.thumb PEI Assets Eligible for Cash Out Refinancing

 

Despite all of this, the stock is actually close to its highs! 

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

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In continuing with yesterday's empirical rant Lazy Analysis Allows For Outright Silly Pricing Of Near Insolvent REITS: A Forensic Analysis Of A Prime Example (a must read for anyone with exposure to - or interest in - this company, whether short or long), I continue with the piece meal release of Q4's BoomBustBlog primary CRE short candidate...

 PEI's share price has surged despite an absolute dearth of positive prospects for the company....PEI stock chart

As a matter of fact, the company has clocked continuous and increasing losses into an ever darkening fundamental and macro outlook. PEI has accomplished a net increase in occupancy due to its strip malls, unfortunately that net occupancy increase comes with a dramatic decrease in revenues - i.e. base rents.

PEI OBservations page 3

From a balance sheet solvency perspective, one of PEI's primary problems is the average cost of its portfolio and points of acquisition. Net-net, the overpaid for many properties during the peak of the bubble. Now that prices are normalizing (facing reality), PEI faces a dramatic portion of its portfolio underwater. Let's take a look at the mall CRE picture during the bubble...

 

As you can see, Q4 2005 marks the absolute tippy top of the bubble in terms of rents (which drive prices). Now, let's take a look at when PEI acquired the bulk of its portfolio...

PEI OBservations page 4

My subscribers and team actually know precisely what properties are underwater and what properties aren't since we actually valued roughly 78% of the properties by hand using discrete, individual and independently derived inputs. I will be releasing both the summary of that exercise as well as some individual property analysis throughout this week.

Of course, if the company acquired the bulk of its portfolio at the peak of the CRE bubble, and rents have basically trended nearly straight down from that point, one need not wonder which direction cashflows are headed, no? As European banks choke on sovereign debt issues and they face a historically high CRE debt rollover period (now that should be fun), and American banks choking from 360 degree fraud (LIeBORgate, Fraudclosuregate and mortgage putbacks) and litigation contingent liabilities on top of having balance sheets full of the stuff that funded companies's CRE acquisitions such as PEI's in the first place, I really don't see who is going to give PEI the cash to dig itself out of the hole. Of course you can always rely on the foolish equity investors, after all, just look at the share price. It's not as if some smart ass blogger or independent investor is going to snatch the covers off to show these guys naked and completely under-endowed, is it????

Despite all of this, the stock is actually close to its highs!

I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

The next installment of the PEI saga (24 hours from now on BoomBustBlog) will go into intricate detail as to the reasons this REIT has close to no way out besides bankruptcy or a foreclosure/fire sale routes. As a precursor to that, we will go over covenant issues, though.

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There's an awful lot of chatter in the blogoshpere over the last 48 hours discussing the remote possibility that Morgan Stanley would be able to defend the Facebook offering as properly priced. PUHLEASE! In case my readers and subscribers don't recall my many warnings on this company and the hype job put on it by Goldman and Morgan - reference As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!, let's run through a quick refresher course.

As is often said, a picture is worth more than 982 words...

fb 6-26

Keep in mind that a deluge of supply (in terms of common shares) is about to hit the market which should do wonders for this extremely richly valued price. So, the question remains, "Is Facebook Yet a 'Buy' (in Sell Side Wall Street huckster parlance)?" Well, the sell side seems to believe so. Check this out...

6 Buys, 3 Neutrals
Average Price Target = $39

BofA/Merrill – Neutral - $38 PT
Goldman Sachs – Buy - $42 PT
Oppenheimer – Outperform - $41 PT
JPMorgan – Overweight - $45 PT
Piper Jaffray – Overweight - $41 PT
Wells Fargo – Outperform - $37-$40 Range 
Credit Suisse – Neutral - $34 PT
Citigroup – Neutral - $35 PT
Morgan Stanley – Overweight - $38

The specific, numerical, actionable answer from my team is the purview of paying subscribes only, but we can always throw some common sense on the topic for free - as per pages 6 and 7 of our March Facebook valuation report -icon FB IPO Analysis & Valuation Note - update with per share valuation (317.36 kB 2012-05-21 09:43:30), pages 6, 7 and 10.

FB IPO Analysis  Valuation Note Page 06

FB IPO Analysis  Valuation Note Page 07

FB IPO Analysis  Valuation Note Page 10

Of course Facebook enthusiasm was burning hot. The coals in the "investor" (and I put this lightly) fire are being stoked by none other than the sell side agents doing God's work, among others. It appears as if those who stoked said coals may be making another run at it. Well, it's just a simple as this. Who are you going to believe, the sell side hype machine or your lyin' eyes (AKA, BoomBustBlog performance and accuracy)? Reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for our Facebook analysis, available for immediate download - Facebook Valuation Model 08Feb2012. The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011) as well as the following free blog posts on the topic:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
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The latest Q2 qualitative observations for JPM are now available for all paying subscribers to download: JPM June 20 2012 Observations. This document contains a few interesting tidbits that, of course, you will get from nowhere else. For instance, did you know that the Q1 2012 financial results have many hidden secrets? We have looked at the Bank’s Q1 2012 financial results and have the following observations:

  • The Bank reported Q1 2012 revenues of $26.7 billion , an increase of $1.5 billion , or 6% , from the prior-year quarter. That sounds decent for a big bank in tough recessionary times, eh? However, the increase was primarily driven by a $1.1 billion benefit from the Washington Mutual bankruptcy settlement. Excluding this benefit, the revenues were almost the same as that in Q1 2011. With flat revenues like these, just imagine what could happen to the bottom line when a multi-billion dollar trading loss occurs.
  • The Bank had booked a loss on fair value adjustment of Mortgage Service Rights (MSR) in Q1 2011 of $1.1 billion. Hey, you know they just don't make those ephemeral, totally contrived 2nd order derivative products like they used to, eh?

Excluding the effect of the MSR loss along with the impact of gain from Washington Mutual bankruptcy, the bank’s Q1 2012 revenues actually decreased compared to Q1 2011.

Combine these secrets, derivative trading (oops, I mean hedging) losses and that bland ZIRP sauce that sucks profits in an increasingly expensive compensation landscape and you'll get one hell of a safe return for your 401k, right Mr Bove, et. al.? 

From the 2009 BoomBustBlog "I told you so" archives...

To wit regarding JP Morgan, on September 18th 2009 I penned the only true Independent Look into JP Morgan that I know of. It went a little something like this:

Click graph to enlarge

image001.pngimage001.png

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide. 

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent...

... You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish. JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

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