Grubb & Ellis Looks Like a Possible Short

Jan.20.10 | About: Grubb & (GRBEQ)

I am looking at Grubb & Ellis Company (GBE) as a possible short.

On November 6, 2009, they sold $90 million of a new issuance of a 12% cumulative participating perpetual convertible preferred stock to various qualified institutional buyers and accredited investors. The proceeds were used to "repay in full its credit facility at the agreed reduced principal amount equal to approximately 65% of the principal amount outstanding [!] under such facility."

Each share of preferred stock is currently convertible into 31.322 shares of the Company’s common stock, meaning that the strike price is $3.19/share, which is about 2x the current level. GBE has 67 million shares outstanding and so the preferreds are potentially convertible into approximately 30 million shares.

My reasoning is that GBE has pretty consistently negative EBITDA, largely because compensation costs are so high, and now they have added to that a $10.8 million dollar burden from preferred stock dividends.

Here's another tidbit: "the Company provides guarantees of loans for properties under management. As of June 30, 2009, there were 148 properties under management with loan guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.7 billion."

To put that in context, the property management segment makes less than $20 million annually. Now, the $3.5 billion is a "non-recourse/carve-out guarantee" which they say "imposes liability on [them] in the event the borrower engages in certain acts prohibited by the loan documents." The recourse guarantees are limited to $40 million.

They have a really complicated balance sheet and mess of subsidiaries which I will have to delve into. Are any readers following this situation? Does anyone know what price the preferred stock is trading at?