So, if REITs are supposed to distribute ~90% of their Earnings each quarter, are they forced to pay default payments on their mortgages (i.e., not allowed to use positive Cash Flow to pay down mortgages quicker)? What if they want to pay down a property quicker, say to complete ownership of a property quicker and get even more Cash Flow? Are they not allowed to do that?
I am not a preferred guy. In the world of reit preferreds I function from the simple concept that as long as the common dividend is maintained the prfd will trade in the market along with interest rates.
When the common dividend gets cut or eliminated the prfd will trade at lower levels to accomodate the new risk (perceived or real) that the prfd dividend may be stopped. FCH would be a recent case where the common dividend is stopped and the threat to the prfds became a reality when it was disclosed that the banks have the authority to demand that FCH stop prfd payments.
In PGE's case there is a serious question about the overall valuation of the common. Until you resolve what form of recapitalization or other strategic option is exercised you have no clue what the prfd is worth.
As far as indebtedness goes I do not discount it because for those in the know we have seen the direct impact of such refinancings in the case of VTR. PGE cannot do those refinancings w/o a change in corporate structure. That change will come at a price to common holders to be sure. To prfd holders??? Who knows until the deed is done.
CHI is a very diverse marketplace. Someone has to explain to me why so much space is coming on board at this time. 4.2M is a lot of space. Was it a mistake related to the bubble economy? Was it the belief that Boeing was going to be a major player needing support businesses proximate to them in the CHI CBD as it was in Washington state? Was it pure speculation? Was it because older buildings labeled as Class A really are not because they need major renovations that are not forthcoming that would prove too costly?
I think its a little of both. But when you hear that BOS market is expected to start recovery in 06 and realize that BOS and CHI are bringing on so much more space than any other city and rents in CHI are not yet at the bottom it is no stretch to conclude that the CHI CBD will also lag any national recovery.
I got a report today indicating that the PHIL suburban and CBD are seeing and expecting more vacancies in 03 w/recovery in 05.
The key is that PGE is no position to save itself so all that is being waited for is what the price is and who will pay that price; clearly the common. And yes I do believe PGE is more or less being priced for what some believe the common will end up with after the capital restructuring or other event that lifts PGE out of its mess.
thought. You addressed the value of PGE common, but not the preferred. I'm not sure if I disagree with you on the common, although I think Chicago is more diversified than just one or two tenants in the airline business.
I also think you minimize the relative value of very high priced PGE indebtedness that could be refinanced by a good credit to derive huge savings and free up a large amount of restricted cash.
What's your assessment of the preferred's value?
PGE isn't big enough to fill the bill. PGE is in one of two markets where the largest amount of office space under construction has yet to hit the market. The impact on rents is unknown and is playing a part in continued rent deterioration in that market as reported by PP during their cc.
Unfortunately, those of you on the PGE board believe that a savior is going to lift the stock price for common holders. Past history is not a good foundation for that belief. If there was any good word on the variety of possiblities "available" to PGE it would have been "translated" into stock price by now.
PGE is not a typical office reit story. It is a CHI story now. CHI simply has too much office space coming on line. I don't know if this relates to Boeing's move to CHI in advance of all the perceived needs of Boeing but Boeing is in the process of major changes and major restructurings within that will surely cut Boeing's anticipated future impact on the CHI CBD. Do not discount the fact that developers anticipated a "Boeing multiplier" effect on the CBD. The literal demise of the commercial airline industry at this point with all the major players in or heading to BK soon has killed Boeing's airline business. There are years of plane inventories in the desert now.
The other major CBD being overbuilt in Boston. The NYT had a piece on the BOS CBD with analysts speculating that recovery in that market will not occur until 2008 because of all the new footage coming on line.
I tend to superimpose many of the thoughts in that article to the CHI CBD and believe PGE is being priced for a significant lag in recovery of the CHI CBD.
Translation. IMHO I do not see a payday for PGE common holders. I see some transaction coming in that will be a tough pill for common holders to swallow.
Ferdie says, "EOP needs to make some big acquisition accretive enough to counterbalance bubble rent negatives IMHO. I look for them to takeout another public reit or get ahold of a significant private portfolio of assets.". Why isn't PGE a viable target then, selling at maybe 5.5 times ffo AFTER AA termination is factored in?
One major problem with EOP is that they were a big beneficiary of "bubble rents" in SF and they are watching a rent collapse occur in SF to the extent of the BK tenants. There will be further unwinding of bubble rents over the next few years that will hurt EOP more in terms of NOI going forward.
VNO on the other hand was already in a historical high rent market (midtown Manhatten) that tends to hold rents up very well. VNO has a lot of rollover rents that will go at higher rates and should compensate for any remaining negative occupancy issues. They did not gain much in bubble rents in their markets and should not face the same issue as EOP will have to face going forward.
EOP needs to make some big acquisition accretive enough to counterbalance bubble rent negatives IMHO. I look for them to takeout another public reit or get ahold of a significant private portfolio of assets.
EOP grew exponentially because Zell could find distressed assets (thus his nickname of grave dancer). In this downturn you are not seeing distressed sellers to date meaning that EOP along with the other office reits are not beneficiaries of the demise of others which will dampen growth going forward for all office reits. VNO believes its entire VA/DC portfolio acquired from Charles E. Smith Commercial has a lot of rent growth built into it as leases come due.
Barring terrorism in NYC VNO should be a better long term growth vehicle than EOP IMHO. I would like to see VNO rid itself of this cold storage nonsense and redeploy.
>>>Any opinions on Equity Office (EOP)? <<<
As with many other stocks, EOP took a beating in 2002.
One of the biggest concerns that many have with EOP, is its heavy interest in the San Francisco area.
However, EOP is in many major markets- they are well diversified. I like EOP for their diversity, size, dividends, cash flow (ffo) and debt level. With their size and strength, I feel comfortable that they will be able to withstand a prolonged recession (or whatever they are calling it these days) if it comes to that.
Disclosure. I hold EOP, I do not presently hold VNO.
Thanks for this excellent information. VNO seems to have some smart management.
They have a lot of interest in NYC, however. What are your opinions on how they will fair with a difficult market in NYC (terrorism fears, Bloomberg raising property taxes, high unemployment in NYC, etc.)?
Any other REITs look interesting to anyone? Any opinions on Equity Office (EOP)?
REITS aren't just supposed to distribute approx 90% of their earnings each year, they are REQUIRED to distribute a MINIMUM of 90% of their earnings in order to maintain their status as a REIT.
However, the definition of earnings includes depreciation. An equity REIT can have earnings of $1,000,000; but will still have cash flow in excess of earnings due to depreciation.
Less: Op. Expenses: $2,000,000
= Net Op. Income $2,000,000
Less: Interest Expense $450,000
Less: Depreciation $550,000
= Net Income (Earnings) of $1,000,000.
Required dividend to be paid out: 900,000 +
However Cash Flow (or AFFO) may look closer to this:
Less: Debt service (P & I) $600,000
Less: Capital Expenditures $150,000
Cash Flow is $1,250,000 before $900,000 distribution/dividend.
Therefore there would really be $350K positive cash flow remaining, not $100K. Theoretically, the REIT could use positive cash flow to pay down mortgages more quickly; but in reality they would probably be more likely to use the positive cash flow towards purchasing additional properties.
To the rest of you- I realize I have oversimplified this, which means someone will decide to flame me. So be it.
Thanks, yes that helps to understand some. But do REITs tend to pay down mortgages and just keep properties or do they have a lot of turnover? For instance, what percentage of VNO's properties does it own outright? Where can I get a list of VNO's properties, property payments, terms of mortgages, etc? Do the SEC filings disclose all of this information?