Friday, October 15, 2010

Intentional Obfuscation
I am still catching up on the second quarter 10-Q readings.  The excerpt below is from the footnotes from a major non-traded REIT discussing its new $150 million credit facility: 
Draws under the credit facility are secured by a pool of certain multifamily communities directly owned by our wholly owned subsidiaries, where we may add and remove multifamily communities from the collateral pool in compliance with the requirements under the credit facility agreement.  As of June 30, 2010, $73.6 million of the net carrying value of real estate collateralized the credit facility.  The aggregate borrowings under the facility are limited to 70% of the value of the collateral pool, which may be different than the carrying value for financial statement reporting.  As of June 30, 2010, available, but undrawn amounts under the credit facility are approximately $32.9 million.
What does the above say?!?  I read it that the $150 million line of credit is really only 70% of $73.6 million, or $51.5 million.  So the actual line of credit is $51.5 million not that stated $150 million.   How much is outstanding on this line of credit?  Sharpen your pencil.  Rather than just stating the amount outstanding, the undrawn amount on this line is given.  So you have to figure out the amount available and then subtract the undrawn amount.   Using my math, if the amount available is $51.5 and the undrawn amount is $32.9, million the amount outstanding at quarter end must be $18.6 million.

Does this number tie to balance sheet?  No effing way.  The amount listed on the balance sheet for credit facility payable is $10 million.  Nonsense.

The above is but one example of repeated obfuscations.  Try and figure out the total acquisition price for each property from information in the 10-Q.  The details of this non-traded REIT might as well be in hieroglyphics. 

Here is what you need to know about this REIT:   It is paying a 6% distribution, which was recently lowered from 7%, and is not generating operating cash flow.  In the first six months of 2010, the REIT had operating cash flow of -$70,000, but still declared $25 million in distributions.  There is no obfuscation in that discrepancy. 

(This REIT is not even able to disguise its lack of cash flow by playing with FFO and MFFO figures, like other non-traded REITs.  Its FFO was more than $1 million negative and its MFFO was just shy of $5 million for the first six months of 2010, both well off the $25 million that the REIT declared in distributions.)

In rare moment of clarity, the REIT says "future distributions my change over time and future distributions declared may continue to exceed cash flow from operations."  In other words, the REIT will keep overpaying its distributions until it can't, then it'll cut its distribution.  You can't say you haven't been warned.

It is troubling that this REIT has more than twenty properites, many that have achieved stabilized operations, and still can't generate meaningful operating cash flow.  There a number of apologists for this REIT in the broker / dealer community, and this REIT is still raising tens of millions of dollars per month.  I am guessing some broker / dealers will keep selling this REIT until the weight of its business plan causes it to collapse and then look for an external excuse, like the real estate crisis or the economy to justify their decision to keep selling this REIT.  Good luck with that.  The sustained lack of operating cash flow tells the whole story.


James said...

Care to name names?

Anonymous said...

If you follow the Non-Traded REITs -you would know this is Behringer Harvard Multi-Family REIT.

Kurt said...

Another conclusion to be drawn is that the properties in the collateral pool are worth $61.3 million (i.e. ($10 + 32.9)/.7 = 61.29. So these properties are valued at 27% below carrying value (cost - depreciation). This may be why the issue is obfuscated.

Rational Realist said...

James, see comment number two. The point was not yet to name names, I will do that soon enough. I wanted first to show the complex language.

Kurt, I am not sure I follow your math, but will look to specific value issues later in the week.