Monday, March 8, 2010

Feedback on My Grubb & Ellis (GBE) Short

Over at Seeking Alpha where my posts are syndicated, someone comments:

Suggest that you cover your short position. Shift in tenant mind set to lock in lower rental obligations with improving real estate market dynamics on the horizon, will generate higher transactional revenue than what GBE is conservatively projecting this year. CBRE and JLL will ride this emerging wave too.
Management's "conservative" projection for 2010 is based on: a 25 to 30 percent increase in investment sales activity, a 10 to 15 percent increase in and leasing activity, and substantial cost cuts. They say that those assumptions will result $10 to $15 million in adjusted EBITDA.

Meanwhile, the preferred stock carries a 12% dividend, which is a $10.8 million annual obligation. So if they hit the high end of the EBITDA projection, they would have $4.2 million available for equity - and that's before taxes and depreciation. 

Even ignoring depreciation, are you willing to pay $128 million for that annual $4.2 million pre-tax pittance?

The problem with these human services companies - and a quick glance at the CBG and JLL income statements seems to confirm my understanding - is that the "human capital" arranges to be paid most of the profit as salary and bonuses, leaving precious little for the ignorant shareholders.

Since it's so easy to start a property management or real estate brokerage firm, they argue, you'd better pay us the lion's share of the money we bring in, or we'll leave. 

Does that sound like a business with a moat? Is that a business you feel compelled to own?

One day, when the world returns to sanity, these types of businesses will trade at discounts if they are even publicly held at all. 

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