Monday, February 14, 2011

More Bluerock
I have a few comments on my previous post on Bluerock Multifamily Trust.   I noted that it was uncommon for a REITs single purpose entity to enter into its own working capital line of credit.  But the more I thought about it, I can see the logic of having the single purpose entity's line of credit.  The property has four owners, and it was probably unlikely that one of the four owners was going to commit financially without committing the other three, unless it received additional ownership or protections, which probably would not have been forthcoming.  In this scenario,  the line of credit at the special purpose entity level makes sense.

It is important to note that the working capital loan, because it is at the property ownership entity level and not at the REIT level, is an off-balance sheet transaction for the REIT, and the REIT's share of the obligation needs to be added when determining the REIT's debt level.

Bluerock Multifamily's restated September 30, 2010 10-Q lists all four of its property investments as investments in unconsolidated entities, which is how you should account for joint venture investments.   Unconsolidated investments are shown on the REIT's balance sheet as a net figure, and don't reflect any debt of the joint venture.  Again, this is the proper method to account for joint ventures, which is how the REIT invested in all four of its properties.  Investors now need to dig through the financial statements' notes to find property-level data.  The four Bluerock Multifamily  investments have an aggregate leverage of 78%, and none of that debt is on the REIT's balance sheet.  The debt on Bluerock Multifamily's balance sheet, which is 74% of its unconsolidated investments, is its borrowings from affiliates that the REIT used to make its equity investments.  This debt is separate from the REIT's property specific debt.  I getting light headed with debt this high.


KY Investor said...

Rational Realist,
I have been reading your blog since spring of 2010 when I had a near miss with the HealthCare Trust of America. I was invited to one of their seminars and they told a very compelling story: Purchasing undervalued assets from corporations trying to raise short-term cash; Strong cash flow from stable tenants; Investing in an industry that will always grow. I was interested and met with my Advisor. He read the prospectus with me, looked at the numbers & strongly urged me to avoid this REIT. I then looked them up online and found your post about them. Ponzi scheme.
I have been putting my “speculative money” in Emerging Markets & Natural Resources Mutual Funds, (Black Rock, American Funds, & Goldman). This is doing fine but I still feel there are opportunities to participate in a real estate market recovery. You sound like you do this for a living. What direction should I be looking and more importantly, why?
After learning more about Non-publicly traded REITs I am scared to death of them. So what is a good type of investment (Stock, Mutual Fund, Traded REIT, ETF) for a “little guy”? Once I pick a vehicle where do you see light at the end of the tunnel that hasn’t already been priced in?

Thanks again for an interesting & detailed blog

Kentucky Investor

Rational Realist said...

KY Investor, thanks for reading. I don't want to say that Non-traded REITs are bad investments, I just try to point out issues that I feel are important. I can't give investment advice, but there are plenty of real estate options available to the "little guy." No one can say whether a real estate recovery has already been priced into real estate securities. Good luck.