Thursday, 12 July 2012 07:51

As ECB, Fed & the Bund Enjoy Negative Interest Rates, PEI Sports Negative Asset Values Featured

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


Cash flows from operations


Unused credit lines


Debt due for repayment




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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