Wednesday, March 19, 2014

D'Oh

At a conference earlier this week I over heard a real estate sponsor claim with pride - and a strait face -  that his REIT had no debt.  He then added the caveat that he didn't count the REIT's $40 million line of credit as debt (I'm sure his bankers have the same impression).  The sponsor also didn't include the 60%-plus debt on each of the REIT's properties.  The sponsor can make this specious boast because the REIT owns the properties through what is known as special purpose entities (SPEs), stand-alone companies (usually limited liabilities companies) whose sole purpose is to own one asset.  The catch is that the SPE's sole owner is the REIT.  So the while the sponsor's pronouncement is technically correct, it is also complete BS.

5 comments:

Anonymous said...

Was it the "REIT" has no debt or the "Sponsor" has no debt? I've heard the sponsor line before...

Rational Realist said...

No, it was a Sponsor claiming the REIT had no debt.

Anonymous said...

yikes

Tony said...

But they've got to get the money from SOMEWHERE to buy the bloody buildings! You can't be suggesting everybody lives in a little "daisy blue sky rose coloured spectacles world" and everything is bought with cash? What's your point? Debt IS used as a benchmark to differenciate REITs. Sorry,.........am I missing the point again?

Rational Realist said...

Tony, you missed my point. It's not that debt's bad - at today's rates it's crazy not to use debt - it's that the Sponsor said his REIT had no debt, and was therefore less risky than other REITs, when in actuality the REIT was highly leveraged through its line of credit and its SPEs.