RE: Jumped in today EBITDA is crazy. And so is REIT accounting for that matter. REITs already ignore D&A, which is particularly nonsensical for class B office focused REITs. Tax isn't an issue. But, for an entity using 70% leverage, to ignore interest expense is absurd. Your EBITDA figure excludes operating expense, which it shouldn't.
Putting everything in per unit figures based on the Q2 six month figures and, of course, the $3.37/unit/year distribution rate:
$12.93/unit/year in revenue
$9.83/unit/year in interest, operating and G&A expense
$3.55/unit/year in amortization expense (you determine how much of it is real; pay attention to the West Mall deal if you think this can be added back willy-nilly; also ask yourself why a REIT with a covered distribution needed to raise so much cash)
$2.62/unit/year cash provided by operating activities (now you know why they issued $10-million of units at 70% below self-determined NAV and borrowed $5-million+ at 9.5% on their best asset)
$90.01/unit in assets (mostly purchased in the asset bubble boom years of '05-'08)
$72.42/unit in liabilities
$17.59/unit in equity (interestingly, equity as a % of assets is 19.54%; if assets have fallen 20% from the '05-'08 heights, how much equity is there really, and how prudent is that leverage?)
It's 2x EBITDA (by your reckoning) and 6 times EBTDA (including interest and operating expenses). Cash from operating activities adds back the D&A, without which there's a loss. Personally, I'm skeptical for class B office assets. The West Mall and 200 Ste. Foy had in excess of ten million spent in the 7 and 3 years leading up to Whiterock's acquisition. For the West Mall, that's $2.85-million per year, and for the ING building it's $4-million per year. Those are big time numbers for WRK. If you believe the goobledygook spewed by WRK management, the distribution is covered, but look at their actions: $10.9-million equity raise at a 70% discount to self-determined NAV and borrowing $5.3-million via a second mortgage on the ING property at 9.5%. If you believe management's December 8, 2008 news release stating that 200 Ste. Foy (ING property) has an appraised value of $56.5-million, the REIT now has a debt to appraised value of 75.7% on that asset. The improvements totaled 25% of West Mall purchase price and 21% of there ING property's re-appraised price. And WRK is using 70-75% LTV borrowing to finance both acquisitions.
The point is that EBITDA not only ignores D&A, which is very real for these second class office properties, but leveraging as well. You could use 110% leverage and pretend that never a penny goes into maintaining the buildings, and the EBITDA multiple would be unchanged. WIth a lot of leverage, anything will look awfully cheap under EBITDA.
IMO, WRK will need a lot of cash to re-tenant it's properties. This spending will get bucketed into revenue enhancing capex and be excluded from FFO/AFFO. So the REIT will say, yes, our distribution is covered, yet still find it necessary to draw on very expensive capital.
Why WRK borrowed at 9.5% on the ING asset instead of the apparently underlevered 655 Bay, is still a mystery. Either Whiterock Advisors has plans for 655, the banks want it relatively unencumbered as security for the lines, or the acquisition wasn't as “clean” as implied.