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What Are Inland Western Shares Really Worth?

Posted: Fri Feb 19, 2010 12:13 am
by REIT Wrecks
Inland Western is no stranger to pulling rabbits out of a hat, but that is not the process this Non-Traded REIT should force on shareholders when it comes to the valuation of their shares. Unfortunately, based on their January 21st letter to shareholders, this appears to be precisely what they have done.

Inland Western remains highly levered and operating earnings continue to be depressed. In a sign of just how unhealthy its fundamentals are, Inland Western slashed its dividend by 90% and suspended its share repurchase program indefinitely. Consequently, the only current means for shareholders to get their cash out is through an extremely thinly traded secondary market, or to accept one of two tenders that offer $1.50/share (CMG Acquisition) or $2.30/share (REITCo). Given these tenders, why does Inland Western's letter claim the shares are worth $6.85? And if they're not worth $6.85, what are they really worth?

The best way to objectively value Inland Western shares is to use Inland Western's own financial results. Using their own reported results and a few simple mathematical excercises, it's clear that the shares are not worth anything close to $6.85. In fact, Inland Western's reported book value, based on their September 30th 2009 10Q (attached below), is only $5.19/share. One can easily arrive at this number by dividing total equity ($2,501,384) by total shares outstanding (481,164). Both of these numbers can be found at the bottom of the consolidated balance sheet on page 1 of the attached 10Q. It's certainly possible that a REIT could trade above book value, but that's not likely in Inland's case.

Nevertheless, book value is an imperfect measure because it ignores prospective earnings ability. So what would the share price be if one were to account for the cash flows generated by Inland's huge portfolio? It's possible to quickly calculate a very close and very accurate estimate by using Inland Western's reported Funds From Operations ("FFO"), which is reported on the bottom of page 49 of the 10Q, and then applying a market-based FFO multiple. In terms of calculating FFO, it's simple. Inland Western is reporting annualized FFO of .34/share as of September 30th 2009. The math is: (($122,696/9)x12)/481,164.

Determining the appropriate FFO multiple is more art than science, but that isn't difficult either. The trick is to compare Inland to its peer group, and I have done just that in the below chart. The chart shows the closing price and FFO multiples (far right column) of 36 publicly-traded REITs as of January 21st, which is conveniently the same date as the Inland Western shareholder letter.

Based on the average 2010 FFO multiple of these 36 publicly traded REITs (14.3x), Inland Western could be worth $4.86/share. However, using the average 2010 FFO multiple of 36 publicly traded REITs is far too generous; this multiple actually needs to be discounted, and that means Inland Western is worth much less.
REIT FFO Multiples
REITFFOMultiples.jpg (430.62 KiB) Viewed 44331 times
There are several reasons to discount the multiple. First, Inland Western is completely illiquid. You could not sell it without great effort, assuming you could manage to sell it at all. Second, Inland Western offers a paltry divided yield of 1.3%, which is 70% below the average dividend yield of these 36 REITs. Furthermore, Inland has a portfolio concentration in retail assets, so it does not deserve the benefit of the higher FFO multiples given to public REITs with better performing assets in stronger markets. Moreover, based on the silly valuation included in the January 21st letter, the veracity of management is, shall we say, subject to scrutiny.

So Inland Western clearly warrants a discounted FFO multiple, and one that is much more closely aligned with highly levered REITs with large portfolios stuffed full of retail properties. Based on this logic, a much more applicable FFO multiple would likely range from a low of 5.3x (GGP, a large mall owner, highlighted in red) to a high of 10.6x (MAC, a large owner and manager of retail properties).

This would translate into a value of $1.80 to $3.60 per share at most, which is far from management's ridiculous estimate of $6.85, but much closer to the real value of the shares based on actual earnings and current market multiples. An even more accurate estimate can be derived by using the forward FFO multiple of Developers Diversified Realty (DDR). DDR bought Inland Retail Real Estate Trust, a very close cousin of Inland Western, for $6.2 billion in February 2007. DDR now trades at an 8.0x forward multiple, which indicates that Inland Western is worth no more than $2.72 per share.

Non-Traded REITs have never been known as hallmarks of transparency, but Inland Western is leading the race to the bottom with its January 21st letter. Worse, if you are participating in Inland Western's Dividend Reinvestment Program, you are being sold shares at $6.85 per share. This is at least twice what the shares appear to be worth.
January 21st shareholder letter
(43.61 KiB) Downloaded 1739 times

Re: What Are Inland Western Shares Really Worth?

Posted: Sat Mar 06, 2010 7:21 am
by crabsofsteel
$500MM of their loans were used as collateral in one of the only new CMBS to be issued recently, which priced around 12/13/09

J.P. Morgan Chase Commercial Mortgage Securities Trust 2009-IWST Commercial Mortgage Pass-Through Certificates, Series 2009-IWST

So they have some cash to play with. DDR did something similar, but their most recent capital raise was done in via the stock market.

Re: What Are Inland Western Shares Really Worth?

Posted: Tue Mar 09, 2010 4:51 pm
by REIT Wrecks
Yup, and the only thing more amazing than Inland's ability to raise that debt was JP Morgan's ability to sell it. You'll remember that JP Morgan managed to get off the last CMBS deal of 2008 (J.P. Morgan Chase Commercial Mortgage Securities Trust 2008-C2), just before the market completely slammed shut. It was chock full of 2007 vintage loans that had been sitting on JP Morgan's balance sheet, and which they desperately needed to unload. Within six months of closing, almost 20% of the collateral was in default :mrgreen: (see [url=]BIG CMBS Loans Near Default, CMBX Soars, REITs Tank[/url]).

In order to redeem themselves after that little debacle, JP Morgan needed a borrower who would do almost anything, which would allow them to do a deal they could sell to almost anyone, no matter how skeptical. It's still unclear how much JP Morgan made them pony up, but Bob Parks, Inland's founder, and Dan Goodwin (a large investor) collectively made a major equity contribution (i.e. payed down the balance of the original loans) in order to get them refinanced. Based on the numbers reported in Inland Western's December 1, 2009 8K, it looks like they put up at least $50 million. Had Parks and Goodwin not reached very deeply into their personal bank accounts to bail it out, Inland Western might have gone bankrupt.

I suppose this tacit support from management could be viewed as a good sign for investors, but I see it differently. Had Inland Western gone BK, not only would Parks have been fighting expensive lawsuits into the next century, but he also could never have raised another dime in this market. Raising money is the core of this business, not managing real estate. Quite simply, the cost of bailing out Inland Western was cheaper than giving up all the prospective fees, so they allowed JP Morgan to mount them from behind....

Re: What Are Inland Western Shares Really Worth?

Posted: Wed Mar 24, 2010 9:57 am
by Robert
Thanks for putting this up. Do they have any plans to go public? How can I get my money out of this horrible investment? I am retired and this is a big chunk of my savings earning no money!

Re: What Are Inland Western Shares Really Worth?

Posted: Sun Mar 28, 2010 8:15 am
by REIT Wrecks
Robert, it does look like they intend to go public. Parks and Goodwin now have a significant chunk of change tied up in Inland Western, and an IPO would be a logical exit for them. When they intend to pull the trigger, whether the market will be open to IW, and how much money you'll get back are all separate questions (Parks et al gave themselves preferred shares, which are senior to your common). There is some good news though - Inland Western just announced an .11/per share increase in the common dividend, to $.4375 per share, payable April 9th.

Based on the tender offers announced before the dividend increase, the actionable secondary market price for Inland Western was about $3.00. If you want to look into that, there is more information on selling non-traded REITs in this thread:

Good luck and sorry to hear about your predicament.

Re: What Are Inland Western Shares Really Worth?

Posted: Mon May 03, 2010 7:00 am
by ddo2
Interesting analysis. Unlike the previous poster, I'm relatively young, so the dividend reduction (and the switch from quarterly to montly payments) isn't a big deal for me day to day, and I've sort of decided to ride this out. But, I will say that when I agreed to this investment (and the less toxic Inland American), my broker pitched as "the alternative to bonds" for a stabilizing effect in my portfolio. And, during the 2008 meltdown they did mitigate the damage - at least on paper. But now, with the stated price cut to 6.85, I'm under water after 5 years-ish, so not real happy with that invetment. Given the low offers and the secondary market of $3.00 that you point out, I guess I'm stuck with them until the finish their recovery and see what I get for it. I remember when they first 86'd the buy back program I called my broker to express concern. He assured me that they had $1B in cash and were doing great. (Completely wrong, that's Inland American). If I end up losing money on this, he's going to get a crash course in the new found unenforceable nature of arbitration clauses.

Great work on this site. I pretty certain these are the last non-trade REITs I'll ever own.

Re: What Are Inland Western Shares Really Worth?

Posted: Sat Apr 09, 2011 2:59 pm
by moneybags
What are everybody's thoughts a couple of months after the huge line of credit?

Re: What Are Inland Western Shares Really Worth?

Posted: Fri Dec 09, 2011 5:47 pm
by Vcorreia9
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