Tuesday, January 19, 2010

Grubb & Ellis Company (GBE)

I am looking at Grubb & Ellis Company (GBE) as a possible short.

On November 6, 2009, they sold $90 million of a new issuance of a 12% cumulative participating perpetual convertible preferred stock to various qualified institutional buyers and accredited investors. The proceeds were used to "repay in full its credit facility at the agreed reduced principal amount equal to approximately 65% of the principal amount outstanding [!] under such facility."

Each share of preferred stock is currently convertible into 31.322 shares of the Company’s common stock, meaning that the strike price is $3.19/share, which is about 2x the current level. GBE has 67 million shares outstanding and so the preferreds are potentially convertible into approximately 30 million shares.

My reasoning is that GBE has pretty consistently negative EBITDA, largely because compensation costs are so high that, and now they have added to that $10.8 million dollar burden from preferred stock dividends.

Here's another tidbit: "the Company provides guarantees of loans for properties under management. As of June 30, 2009, there were 148 properties under management with loan guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.7 billion."

To put that in context, the property management segment makes less than $20 million annually. Now, the $3.5 billion is a "non-recourse/carve-out guarantee" which they say "imposes liability on [them] in the event the borrower engages in certain acts prohibited by the loan documents." The recourse guarantees are limited to $40 million.

They have a really complicated balance sheet and mess of subsidiaries which I will have to delve into. Are any readers following this situation? Does anyone know what price the preferred stock is trading at?


Rob Dawg said...

Your questions are exactly why I gave up trying to trade Grubb & Ellis. I have a "gut" that they are Tishman squared but I can't prove it.

CP said...

I think it is a good short. If you could buy the preferred for anything under par - and I am trying to locate it - you could go all in on the pair trade.

Rob Dawg said...

If you could buy the preferred for anything under par - and I am trying to locate it - you could go all in on the pair trade.

How "safe" is the preferred regardless of price? As you note, GBE got into transaction financing and while I cannot prove it I suspect that much of their current income is commercial loans exercising access to lines and/or accounting accruals from delayed penalties and fees on loan payments.

There's so much CFC coming from the other side I cannot help but suspect even the preferred debt is risky.

CP said...


The point of the trade is that the preferred is undervalued relative to the common. (It would pretty much have to be, since the common is worth zero.) So you would buy the pref and short the common.

The preferred is now the senior debt because they used it to pay off the bank loan, so it's not that bad.

But it is amazing how much of the income the employees take, and that they use loan guarantees to get property management business.