Wednesday, May 24, 2006

Feeding the Beast
I was sent some audited financial statements from a TIC sponsor this week. I do not do much business with the sponsor so an unsolicted package is usually tossed. Rather than routing the package straight to the garbage, I happended to open it and found the financial statements. Pretty scary stuff. The company has a leverage ratio greater than 80%, some in the form of debentures and investor notes raised from individual investors not banks. With a leverage ratio that high it's not hard to figure out why there is no bank debt.

The company has substantial cash on hand, so long as it keeps putting deals together it should be able to sustain its high leverage ways. One intriguing comment in the notes is that the company classifies the reimbursement of operating expenses incurred by it in the management of properties (presumably for TIC investors) as income. I would think that this would be a wash on the balance sheet - operating expense reimbursements offset by operating expenses. Not even close, in fact other income (which I am assuming is where the operating expese reimbursements are presented) is three times greater than operating expense entry. I wonder if the reimbursements are marked up? These financials definitely require a closer analysis and raise serious questions, but I have spent too much time on this as I don't closely work with this sponsor.


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