Stripnomics

Alexandria Real Estate Equities has three types of traded stock, symbols ARE, ARE.C and AREEP. Per their website (www.labspace.com) the Symbols, Last Sale Price, Quarterly Dividend and Dividend Yield as of May 5, 2009 are as follows:

 (Normally I would just post screengrabs but I didn’t want to violate their terms of service ;-).

I’ve listed the above in order of priority for a liquidation. The top of the list has the highest priority and the common stock has the lowest. That means that the ARE.C and the AREEP shares would be paid-off before the common stock in any liquidation and, therefore, are LESS RISKY.

However, as you can see, the yield on ARE.C and AREEP is greater than (>) the yield on the Common. The AREEP shares also have a $25/share liquidation preference and may be converted at .2479 shares of common per $25 liquidation preference (representing a conversion price of approximately $100.85 per share of common.

Essentially, this means that you get actually get paid more to take on less risk in the company. ARE.C and AREEP trade on debt markets. The common stock trades on the equity market. One of the markets is wrong. If you know which market is wrong, you can profit through arbitrage.

What is causing this disturbance in the FORCE?

This disturbance is caused because the debt market (the smart market) is pricing risk in Alexandria Real Estate greater than the equity market (the dumb market). If you think this disconnect is going to correct itself, you can profit by selling the common stock and buying the preferred. For example, you could short 1 share of common stock and receive $36.74 and use the proceeds to purchase 2.624 shares of AREEP. You would receive $1.15 per quarter on the AREEP dividend (2.624 × $.4375) but you would only have to pay the common dividend of $.35 per quarter for shorting the stock. Essentially, you would make $.80 per quarter for simply assuming less risk.

Further, as the stock prices converge and cross you can make money on the narrowing of the real spread between the two securities. For example, today you could have bought back the common at $1.35 less than yesterday and sold the AREEP for $1.80 more than yesterday. You could make money on both trades. However, you will lose money if the real spread (in % terms) widens or if it narrows at a slower rate than the cost of margin.

You will also lose money if you are in the strategy if they both go to ZERO. That will happen to preferred shares and unsecured debt if there are not sufficient assets to go around. For example, if secured lenders repossess all their properties and are unable to sell them at auction, the other creditors would get the leftovers (which would likely be nada). In that case, all junior secured and unsecured creditors get completely WIPED OUT. That’s why it is so risky to be a junior creditor to a company that has the majority of it’s assets in real estate… particularly in a deflationary environment.

So, who is correct…. the debt market or the equity market? We shall see very soon, I think.

I know the executives are smart (at least when it comes to all the stock market games). You will recall that they pre-announced lower earnings and FFO. If they were truly smart and on their game, they will conveniently beat those pre-announced lower numbers. That’s one of the tricks Wall Street uses to fool you into believing that things are better than they seem even though they just told you they were’nt.

After the quiet period is over, I predict you will see the selling begin… just like I told you last time. Boy oh boy did those executives sell last quarter!  Mr.Marcus and Dean were on fierce race to liquidate! I expect they will do it again. (I just hope they file all those disclosures on time and not late.)

They know where the math leads. For that, I respect them as traders that are not blinded by emotion and act on the facts.

This entry was posted on Wednesday, May 6th, 2009 at 12:55 am and is filed under Accounting, Alexandria Real Estate Equities (ARE), Economics, Law, Trading. 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.