I have not found any evidence (though, they may be doing it) that CWH is 1) understating their capital expenditures by classifying them as building improvements, 2) not being competitive in TI (tenant improvement) allowances, or 3) skimping on their general building maintenance. We seem to agree doing these things would be short sighted and detrimental in the long term. RMR, I assume, is selfish, but smart, and I would think they would also deem it harmful to their long-term interests to do these things. If the cash for these expenditures was not all available from CWH’s cash flow, they have the ability to readily borrow it at a reasonable rate. Leasing vacant space at a competitive rate with the TI financed, typically increases current cash flow, not decreases it. An example, 1 sf leased at $12/sf/yr NNN with $10/sf TI amortized over 5 years would produce an increase in cash flow of $9/sf +/- after subtracting from base rent any un-reimbursed expenses (Est. $1/sf) and financing costs (Est. $2.25/sf).
We may have different views on what denotes a reasonable and normalized annual capital expense. In 2009, their TI & Leasing expense was about $45.0 million ($1.63/sf for each year of lease made) and their Building Improvements expense about $15.2 million ($.23/sf of total sf) for a total Capital Expenditure, excluding development & redevelopment expenses, of about $60.2 million ($.90/sf of total sf). For the first 9 months of 2010, their TI & Leasing expense was about $56.0 million ($2.00/sf +/- for each year of lease made) and their Building Improvements expense about $4.6 million ($.07/sf of total sf) for a total Capital Expenditure, excluding development & redevelopment expenses, of about $60.6 million ($.90/sf of total sf). Assuming most of CWH’s properties are Class A and B+ properties in an average condition, these reported capital expenditures raise no red flags for me and appear reasonable.
We agree AFFO and dividends are more important than FFO. I am estimating an AFFO for CWH in 2010 of about $2.51/sh by taking its analyst estimated FFO of $3.76/sh and subtracting out $1.25/sh for capital expenditures (CWH has approx. 72.5 million diluted shares and a total building sf of 67.0 million). Dividends for 2010 are expected to be about $2.00/share. AFFO should more than cover the dividend. CAD (Cash available for distribution) for the third quarter in 2010 is reported in their Supplemental at $.73/sh. If this quarter is representative, CAD will also cover a $.50/sh per quarter dividend. If for some reason CAD comes in below the dividend, they have the ability to readily borrow.