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CommonWealth Reit Message Board

  • clynesn clynesn Jan 11, 2012 11:45 AM Flag

    book value versus multiple IPOS

    if CWH were to gradually convert all of its holdings in successive IPOs ,is it correct to assume that (assuming the market is a perfect assessment of value) CWH would hold assets (in the IPOs ) equivalent to the "book value" estimates of the current comapny (CWH).

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    • Bubba: Best of luck to both of us.

    • Jumps-

      Good luck.

    • Once again I disagree and its the same reason we spoke of months ago; LXP has little to no upside because for some reason, they cant seem to make money yet CWH with their alleged bad leases somehow makes tons of money and has room to increase since their properties are not fully occupied.

      Next you state "care about the future POTENTIAL upside of the portfolio"... I am not sure what market you are looking at but the stock market definitely cares about future potential of companies. In fact, stock valuation is based entirely on future potential and safety.

      Right now the market agrees with you but I did not make my fortunes by agreeing with the market. I made it by going against the market and finding good deals. 3000%+ return over the past 4 years speaks for itself. Sometimes the market is right, but sometimes the market simply gets it wrong. My argument is that its all about valuation and that both LXP & CWH are troubled but between the two CWH is priced much more attractively in many ways. You disagree citing things like dilution, spin offs, BV, and current vs future growth. Ok so here is my rebuttal list:

      #1 - Dilution - LXP has diluted significantly more than CWH despite spin offs, SO's and such. Massive dilution of 300% since 2005/2006.

      #2 - BV mutilation - LXP has devalued significantly more than CWH. Huge 66% drop in BV since the peak in '06. The BV at LXP is about half of what it was 10 years ago! CWH has lost a little less than 25% over the last 10 years which was also their peak.

      #3 - Management Incompetence - The above two illustrate incompetence fairly well. I submit that they both suck but LXP managers suck twice as much over the past 10 years and over the past 5 years.

      Okay so for the sake of argument, lets just assume that all the above doesnt matter and that both companies are the same. Lets look at other metrics:

      #4 - Price to Book. LXP ~144%. CWH ~59%. That means you are actually paying a premium to book if you bought LXP today (according to y-charts LXP BV is at $6.02) vs a steep discount for CWH. Great if LXP wants to do an SO if there are enough buyers.
      #4b - Potential to build and purchase more - LXP > CWH because they are trading at a premium to BV thus a SO would give them cash to buy and build more.

      #5 - Current Yield - LXP 5.7%. CWH 10.0%. So I get twice as much money back every year at CWH.

      #6 - Tax Treatment - CWH 75% profit, 25% RoC. LXP 76% profit, 24% RoC. They are basically the same here barring dep.
      Calculation: ($0.472 - $0.349)/$0.472 *100 = 26%

      #7 - Credit Rating - CWH > LXP
      #7b - Return on investment - CWH > LXP since they get lower interest rates.

      #8 - Occupancy LXP > CWH

      #9 - Potential for greater income based on current occupancy - CWH > LXP since they have lower occupancy. *If it fills up then CWH will significantly outperform, the operative word is *If.


      So there you have it. Even without the 1st 3 points, CWH seems to have the edge due to price valuation. If you include the 1st three points CWH wins handily.

      If it were not for the huge discount to BV I wouldnt touch CWH but at current prices this is a steal with great yield and tons of upside. LXP will barely beat inflation for the next decade & on top of that, there is a risk of PPS decline since it is priced over book.

      This is of course the contrarian perspective since I am basically going against the market opinion. I am betting that the market has it wrong.

    • Jumps-

      Book value is not net present value NPV. NPV is the market value estimated by an appraisal.

      The ups and downs of the cap rates dont affect BV because the assets are not appraised annually. So there is the original BV (acquisition cost)and the depreciated BV.

      As I pointed out elsewhere in this posting the market doesnt much care about the future POTENTIAL upside of the portfolio. The market price and therefore market cap is based on present cash flow with some consideration to virtually certain near term increases in the income stream.

      So the distinction that I have been trying to make between lxp and cwh is the certain nature of the present and near term increase in the income stream.

      Cwh just bought a 1m sf bldg on wacker drive. Over the next year 1/3 of the bldg will be vacated by the present tenants and 135k sf (13%) has been leased. Net result. The bldg was reported as being 80% leased. So 20% of its income STREAM is on the come and may be leased at some undetermined date in the future.

      lxp is acquiring build to suit single tenant properties leased for 15+/- years. The properties are currently under construction. Upon completion, it gets 100% of the income stream because there is no vacancy factor.

      Bingo-Lxp gets credit for 100% of the income stream day one. Cwh gets 80% of its projected income stream and eats the expenses attributable to the 20% of the bldg that is vacant.

      Which do you think the market will value more.

      The IMMEDIATE 100% 15 year income stream or the 80% income stream with a potential for some undefined (maybe) upside in the income stream provided a)the economy recovers, b) the repubs win the election, c)the dems win the election, d), e) f) blah, blah.

      So why the big difference between cwh market cap and shareholder equity. Mostly because of the huge income loss due to vacancy AND the $35m override. Cap the $35m override at 7% and it results in a $500,000,000 loss in share value. That alone is $6-7/share out of the shareholders pockets.

      Good luck. Nice hearing from you.

    • Im just looking at the biggest drops in BV. So here is the history:

      '05 - 43.73
      '06 - 39.67
      '07 - 36.47
      '08 - 35.03
      '09 - 34.83

      The real estate bubble reached it max in '06. By the end of '06 all RE pros noticed a huge slow down. 2007 was a horrible year for most real estate professionals (we have a mortgage brokerage and real estate brokerage), as prices flat-lined and no one was buying any more. '08 is when it finally burst but prices started to fall late '07 and continued to accelerate down through '08 before finally halting in '09. They climbed in '10 and then went back down to '09 levels late '11.

      For a cREIT their property values are determined by both market and cap rate. Business started slowing down well before '06 which led up to the slow down in home purchasing in later years. Thus we can assume that cREITs had to start mark-to-market their properties earlier than residential REITs. Thus those BV's make sense. Businesses were closing shop in '06 and '07. People finally started noticing in '08 that all the businesses were gone and that people who had lost their jobs were not getting them back. This led to defaults on homes, lenders getting hammered, and the ensuing crash of the market that began in late '08 and Plateaued in March of '09.

      Since then there has not been a huge improvement in the small business sector, it makes sense that BV has not increased. Value of cREIT properties is highly dependent on the health of small-medium size business. Its true that we have some big clients but the majority of properties are leased by smaller than large businesses. What CWH has done is beef up the portfolio by trading some high performers (thus high prices since cap rates were high) for some distressed stuff that isnt performing very well due to the economy. The trade off here is that *if the economy corrects and businesses pop up again, the potential profit of the new properties is significantly higher than the old full occupied property.

      So again, its the same story as before.

      Bull are betting that the economy corrects, businesses open up, and CWH flys high due to the potential returns on the new under-performing or barely performing portfolio. In the meantime they are waiting it out with a beefy dividend.

      Bears tend to prefer the safety of stuff that already performs and dont like the new risky strategy nor are they happy that the management gets a commission for various transaction (this i agree with but again its true of all REITs and is worse on the open market). The bears will be right if the economy does not correct for an extended period of time (5 year or more). Bears also believe that the current div is unsustainable however last years tax treatment tells us that 75% was actual profit and only 25% was RoC of which some if not most was depreciation (I need to do the calculation to see exactly how much).

    • Jumps-

      Yu say the BV dropped when the real estate bubble started to deflate in 2006 and 2007. Please explain?????

    • Yes but--

      Some of the assets could not be sold for book value so true value is probably in the mid to high 20's. It would not matter the CWH retained the equity or cash as we are shareholders with pro rata interests in the equity. We could all get together and call for liquidation. CWH is undervalued and will get back to $25 this year. In the meantime we are earning 10.4%.

    • No, the shareholders will not receive the money from any IPO's. The company CWH will receive the funds from the IPO's. The company CWH will remain the owner of any shares not sold in the IPO. Shareholders will remain holders of the shares of the company CWH which they previously owned. I'm comfortable with that. Gee, what a gigantic fraud!!!!!!!!!!!!!!!!!

    • Trouble is you are getting NONE of those IPO's. The whole while CWH stock is rolling off the printing presses like Zimbabwean currency. Note the 30%+ share count increase last year. CWH is paying dividends and Management with stock printing and asset sales. Book value just decreased 30% last year based on share count increase.
      Just go to the CWH financial stmt on it's website. There is a quarterly summary.
      Then go to the 10Q qarterly SEC filings. Note the share count sky rocket. They are printing share cash almost as fast as Ben Bernake and Timmy Geithner are selling bonds for cash, Zimbabwe style.
      Be careful of those using old share count numbers when believing any book value for CWH.
      These guys should be taking $1 per year salaries, and leaving the share count stable until the company is turned around. Just like the Ford execs. CWH managment is doing neither.
      Now they continue to loot off assets into an IPO that the CWH shareholders will get NONE of.
      WARNING!!!! RED ALERT!!! RED is the CWH website theme color for a reason, Capt.

      • 2 Replies to bluelivermore
      • I just ran the numbers and you are indeed exaggerating. Here are the actual numbers since you seem math deficient:

        Q1 2011 BV
        $3140/72m = $43.66

        Q3 2011 BV
        $3592/84m = $42.76

        My numbers are from the released reports but the shares are not exact so there might be a slight variance but very small. As you can see the book value only fluctuated by 2.3%. Nothing to write home about.

        To answer the question about the spin off. Most of the arguments are drivel and nothing short of a laugh to read since many of the people on yahoo have no math skill whatsoever. What it boils down to is the following:


        Bear Camp: RMR is a bunch of dolts who dont know what they are doing so giving them more money is always bad.


        Bull Camp: RMR is using a long term strategy that mulls short term earnings but pays off huge in the long term if the economy corrects in the next 5 years.


        All the other arguments are bs. Note that no regulatory entity would ever let a company spin off a company unless it was mathematically correct. Thus the spin off is generally meaningless to us as shareholders on the surface. Under the hood, it allows us to sell assets at full value rather than 50% of value (alternative being a stock offering of CWH), while still maintaining control over those assets. This lets us deploy that money to buy more properties. Risky, yes but it all comes down to what camp you are in. I am a bull. I believe in the USA and a business sector rebound in 5 years or less.

      • blueliver,

        Don't post lies,stick with facts.
        CWH did not increase the shares by 30% last year and book value did not go down 30% last year.