Stripnomics

I’m going to analyze 2 paragraphs from ProLogis’ 10K and I’ll use graphs to explain what’s goin on. The paragraphs relate to a deal with Macquarie, an Australian bank (by the way…I think this really illustrates how global the crisis is). Here are the first two sentences of the 1st paragraph:

“On July 11, 2007, we completed the acquisition of all of the units in Macquarie ProLogis Trust, an Australian listed property trust (“MPR”). At the time of acquisition, MPR owned approximately 89% of ProLogis North American Properties Fund V and certain other assets. “

Although this statement does not say who owns the other 11%, I’ll assume it’s ProLogis. I think this is a fair assumption because later you will see that ProLogis ends up owning 100% of ProLogis North American Properties Fund V. Anyhow, here is a pie chart showing the current state of affairs between the two in the fund:

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The next two sentences of the paragraph read:

“The total consideration was approximately $2.0 billion consisting of cash of $1.2 billion and assumed liabilities of $0.8 billion. The cash portion of the acquisition was financed primarily with a $473.1 million term loan and a $646.2 million convertible loan. As a result of the MPR transaction, on July 11, 2007, we owned 100% of, and began consolidating, ProLogis North American Properties Fund V. “

OK, so they are basically saying that ProLogis bought out the remaining 89% owned by Macquarie. The cost was $2B. They paid by forking out $80.7 MILLION and financed the balance of $1.9193 BILLION in some way or another. Now, that’s an LTV of 96%… not quite like those 110% deals you used to be able to score from some 19 year old, Escalade drivin (with 22″ spinnerz of course!) slimeball that sold loans out of a boiler room, but still quite highly leveraged.

I can’t discount the possibility that there were other liquid assets (cash) in Macquarie Prologis Trust, but it would not make rationale business sense. It is always a wash to buy cash with cash. Anyhow, the ProLogis North American Properties Fund V now looks like this:

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Ok, here are the next few sentences of the next paragraph:

“On August 27, 2007 the lender converted $546.2 million of the convertible loan into equity of a newly formed property fund, ProLogis North American Industrial Fund II. In addition, we made an equity contribution of $100.0 million into the fund, which was used to repay the remaining balance on the convertible loan. The conversion resulted in us owning 36.9% of the equity of ProLogis North American Industrial Fund II. We account for our investment under the equity method of accounting. “

Remember that 96% financing? Part of it was made up with something called a convertible note. A convertible note is a loan that converts to stock if the lender elects to do it. Apparently, the lender thought there was a better deal being in the ProLogis North American Industrial Fund II. The final part of the transaction involved ProLogis paying another $100M to the lender. This all takes place within 1 1/2 months. Here is a diagram of everything going on:

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As you can see, from ProLogis’ point of view, it gave $$ and notes but only got the ProLogis North American Properties Fund V and a 37% share in ProLogis North American Industrial Fund II. It did not get any cash out of the deal. Like I said, it never makes sense to trade cash for cash so I wouldnt expect large sums of liquid assets in either entity. However, look at last sentence (the punchline, really):

“Upon conversion, we recognized net gains of $68.6 million.”

WHAT??? They ultimately didntget anything but real estate! That’s all the two property funds amount to. I’m sure they obtained some rights to future rents but where is the CA$H? How do you get to recognize “gains” when you don’t get an actual check or cash? You’re probably thinking that there is some complicated tax reason for this but you are are overthinking it. Gains like this do not happen after one and a half months! These were nothing more than “paper profits” that can be easily erased.

I don’t know what the “Equity Method” is, but it ROCKS!!!!!

This entry was posted on Wednesday, October 1st, 2008 at 1:24 am and is filed under Accounting, Law, ProLogis (PLD). You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.