CNBC reports that Groupon [GRPN  5.815 -1.735  (-22.98%)] plunged more than 20 percent after the daily-deals site missed sales expectations and handed in a cautious earnings outlook, due to Europe's weak economy and currency fluctuations. Shares have already plunged nearly 70 percent since the company's IPO last November. At least eight brokerages slashed their price targets on the firm.

You know that you really don't have to follow eight brokerages to make money on Groupon. All you really had to do was subscribe to BoomBustBlog, reference For Those That Want To Take A Peek Inside the Professional BoomBustBlog Paywall, Here's All of My Groupon Research - MUPPETS!!!

I have commented ad nauseum on the percieved need to do business with name brands, those who do God's work, and those who simply cannot trade - muppet masters and all - as I clearly articulated on the Max Keiser show last week.
... and on previous shows. 

Now, all of you Goldman, Morgan Stanley, et. al. lovers, don't get your muppetware in a bunch, you know that I know that you know that It Is Now Common Knowledge That Goldman’s Investment Advice Sucks???, as excerpted:

It's official, the mainstream media has turned on those "doing God's work" and come to the side of BoomBustBlog.

............................

Okay, enough the Muppet Manipulating, Money Marauding, Doing Work in God's Name Brand Bank Bashing... Let's get down to the nitty gritty of the report that I said I will give away for free. I am offering the report, earnings advisory addendum and accompanying simplified model to show what we're made of. Of course paying subscribers, and even casual blog readers, cannot say that I didn't thoroughly warn you! Early shorts on this stock as per our research notes valuation matrices would have given pleasant Christmas presents and would have also stuffed one hell of an Easter basket as well!!!

In case you still don't get it, the sell side research departments of these banks did not offer BoomBustBlog research to their clients. Oh no, then how in the hell can they dump their stock??? They issued glowing reports from their own analytical cum soft sales staff.

On that note, let's reminisce.... In June of 2011 I release proprietary research to BoomBustBlog Subscribers. You can now download said report absolutely free, here icon Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36). After reading said report, prepare for some real comedy, as reported by Dailypolitical.com:

Groupon (NASDAQ: GRPN) was downgraded by equities research analysts at Stifel Nicolaus from a “hold” rating to a “sell” rating in a research note issued to investors on Monday.

Other equities research analysts have also recently issued reports about the stock. Analysts at Bank of America (NYSE: BAC) downgraded shares of Groupon from a “buy” rating to a “neutral” rating in a research note to investors on Monday. They now have a $20.00 price target on the stock, down previously from $30.00. Separately, analysts at Benchmark Co. cut their price target on shares of Groupon from $32.00 to $28.00 in a research note to investors on Monday. They now have a “buy” rating on the stock. Finally, analysts at Goldman Sachs (NYSE: GS) reiterated a “buy” rating on shares of Groupon in a research note to investors on Thursday, February 9th.

Groupon traded down 3.20% on Monday, hitting $14.54. Groupon has a 52-week low of $14.85 and a 52-week high of $31.14. The company’s market cap is $9.376 billion.

Whoa!!! Goldman Sachs reiterated their "buy" recommendation just in time for their damn Muppet Clients to lose ~40% by the close of the market today. Go ahead, stuff those damn Muppets, fellas!

Groupon_Crash_warnings

For the record, in June of 2011, a full ten months ago, I made clear to my subscribers the following (as excerpted from the now free download)...

We value Groupon at $6.6bn using DCF. The current valuation is based on 10 years of revenue projections which are overly optimistic in our view.  We have forecasted revenues of $4.0bn in 2011 and expect revenues to nearly double to $7.5bn in 2012 and reach $35bn by 2020. We have assumed cost of equity of 12% and terminal growth of 3% from 2021 onwards. We have kept gross profit at stable levels and assumed operational gearing to (∆ Operating Profit / ∆ Revenue) to improve considerably. Despite these optimistic projections we were still not able to justify a valuation close to $10bn let alone $20-25bn. We only see downside risks to valuation of $6.6bn and believe that Groupon’s rejection of Google offer of $6.0bn was a mistake in first place. Google’s valuation of $6.0bn most assuredly included a premium for synergies that Google could have achieved with Groupon which would be clearly absent in the standalone entity. We see the fair value of Groupon close to $3.0-4.0bn if we assume a more realistic picture. Given all kinds of questions surrounding Groupon’s business regarding the sustainability of revenue growth, costs control and even the business model itself (i.e., the relationship with merchants) and external competition, we remain deeply concerned even on the sustainability of a successful IPO for Groupon. 

For the record, at about $14 per share, Groupon is market-valued at about $9.1 billion dollars!!!! Here are some key highlights: Groupon restates revenue, EXACTLY as I warned just three months earlier.

  1. Monday, 26 September 2011 What's The Best Way To Profit From Groupon's IPO?
  2. file iconGroupon Revenue Restated 09/26/2011
Groupon starts trading on the Nasdaq via IPO...
  1. Sunday, 13 November 2011 I Hope You Groupon IPO Investors Got Coupons At The IPO!!! Yeah, That's Right I Was The First To Say It
Favorite hits from said documents...
Groupon_revenue_restated_Page_1_copy
Groupon_revenue_restated_Page_2_copy
Groupon_Valuation_redacted_Page_03_copy
Groupon_Valuation_redacted_Page_04_copy
Groupon_Valuation_redacted_Page_05_copy
There's a WHOLE LOT MORE, but this post is long enough as it is. Simply download the links above, and don't forget to reference the valuation section of original forensic report. There's an early Christmas present in there for the stingy muppets!
 

 

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I got this in my mailbox the other day:

How did PEI just refinance the Christiana Center with a $50 million loan when they are carrying the asset at a value of $30 million on its balance sheet?

Refinancing: http://finance.yahoo.com/news/preit-reports-second-quarter-2012-115500466.html 

Asset Value: 2011 10-K

 Well, that's a damn good question. If you recall, I went over PEI's portfolio with fine toothed, valuation comb in Q4 - reference When A REIT Trading Over $15 A Share Is Shown To Have Nearly All Of Its Properties UNDERWATER!!!

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 -  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

If you haven't yet read parts one or two or three or four or five or six or seven in this series, its some engaging reading. Trust me! On that note, let's review my observations of the most recent quarter. Subscribers can download File Icon PEI Q2 Earnings Review _July 2012 to view the document in full.

Overall, the quarter has seen better performance compared to the previous ones. However, the negatives are:

  • The higher base rent achieved this quarter was due to a higher occupancy rate while the per square foot rental metrics continued to slide. I don’t foresee this trend reversing in the near future.  As a matter of fact, the likely course of the US, EU and Chino-Japan is that of recession. Reference RGE Monitor’s Christian Menegatti on US: No more risks of stall speed…stall speed is here, recession next?
  1. The US is witnessing 1.5% real growth through Q2 GDP - Sad.
    July ISM manufacturing data (with a headline still in contraction territory at 49.8) confirms last month’s weak reading. Most components moved roughly sideways- the exceptions included a jump up in inventories from 44 to 49 (which should be viewed as a negative development, amid falling new orders and exports) and a step down in employment (from 56.6 to 52).
    Employment is still positive, but note that it is a lagging indicator—the contraction territory reading of new orders and a worsening of export orders lead us to expect continued pressure on the labor market going forward.
  2. The drop economic outlook is most important when viewing PEI’s quarterly results. Despite the fact that PEI pulled some impressive base rent growth, a closer look at said growth is illuminating…

PEI rents

  1. Average base rent (per square feet basis) has decreased

(US$ per square feet)              

June 2011

June 2012

% Change

Malls Weighted Average

32.40

31.74

-2.0%

Consolidated Properties

31.54

30.87

-2.1%

Unconsolidated Properties

41.73

41.23

-1.2%

Same Properties

32.40

31.74

-2.0%

Pertinent observations:

Base rent (on a total rented basis) is growing in 93% of PEI’s properties (@1.17%) considerably slower than average base rent is decreasing (@-2.0%). Moving up 1.17 inches for every 2.0 inches you have moved down results in a lower position – period!

This means that if we revalue the Company’s property portfolio, it should be negatively impacted by lower average base rent, with that negative impact offset roughly 59% by the higher occupancy rate - which has increased. Of course, that still leaves us 41% underwater, doesn't it?

  1. The company has about 10% of its leases due for renewal in 2013, which if impacted by worsening economic condition described above, could negatively and materially impact the Company’s rental income.
  1. We see the Company as marginally being able to meet its debt obligations for 2012, and that’s assuming nothing else goes wrong in a macro environment that has new things going wrong nearly every weak!!! 

I will most likely launch my TV show sometime next week via YouTube as I shop it around to various networks, and I will included significant PEI analysis in the pilots. I welcome one and all to view and participate. Feel free to tell all of your friends, colleagues and associates about the guy kicking Wall Street in the balls...

PEI analysts

Compare everyone above to my analysis of PEI, then feel free to look at our track record throughout this malaise, starting from 2007. As a matter of fact, don't compare analysis, compare me against the entire banking establishment!!! 

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Follow me:

  • Follow us on Blogger
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  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube
 
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The following is a submission from an astute BoomBustBlogger known as "LongShortTrader (LST)". His opinion is his own, and not that of BoomBustBlog or Reggie Middleton. If you like what you have read, let me know - there's plenty more where this came from - and remember, GMCR reports at 4pm today. Herb Greenberg and Greenlight Capital have noticed funny dealings with this company as well...

Green Mountain Coffee Roasters Report - 2012 08 01 Page 3Green Mountain Coffee Roasters Report - 2012 08 01 Page 4Green Mountain Coffee Roasters Report - 2012 08 01 Page 5Green Mountain Coffee Roasters Report - 2012 08 01 Page 6Green Mountain Coffee Roasters Report - 2012 08 01 Page 7Green Mountain Coffee Roasters Report - 2012 08 01 Page 8

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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.

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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.

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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.

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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..

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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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