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REITs Living on a Wing and a Prayer, Revisited


Positive cash flow no sign of whether any equity value remains.

As an addendum to my suggestion that there may be far less equity for REITs' shareholders than the stock price may suggest, last night, the Wall Street Journal reported that Maguire Properties (MPG) will hand the keys to 7 properties back to the lenders because all of those buildings are under water. According to the article, arguably all of MGP buildings are worth less than the debt . Pull up the gross asset value (which is what most owners would use for marketing purposes)

Click to enlarge

and the outstanding secured debt as stated on the last 10-Q:

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and you would never be able to tell that MGP is totally upside down.

The only difference between MGP and any other REIT whose stock is trading at 2x, 3x, 5x book value is that the latter still has positive cash flow to finance the debt. But positive cash flow says absolutely nothing as to whether there's any equity value left in the company, except for the illusory price of the stock.

I've also received several emails anguishing over the action in the ProShares UltraShort Real Estate Fund (SRS), the 2:1 inverse fund of the iShares DJ Real Estate (IYR). I've written a whole bunch of buzzes and articles in which I offered that the SRS -- because of its derivatives structure -- simply doesn't work as a buy-and-hold vehicle.

Over the last couple of weeks, several regulatory bodies have sued the leveraged funds underwriters, and many brokers are now restricting clients from accessing these funds. Toddo and Macke also warned months ago that these instruments would eventually fall apart for structural rather than fundamental reasons.

My sense is that the "eventually" is pretty much here, and I plan to exit all leveraged funds sooner than later.
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Positions in IYR, SRS.
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