Foreign real estate companies operating in the US, registered in the Virgin Islands as a tax shelter, and issuing huge volumes of bonds on the TASE are daily showing how their dream of rescheduling debt is slipping away. As of now, 16 of these companies' bonds, with an aggregate debt of NIS 9 billion, are trading at junk-bond yields of over 10%, while three others are on the border of this danger zone.
The Tel Bond Global index of foreign bonds went down another 1% today, completing an 8% drop in the past three months and 11% since the beginning of the year. The steep falls were again led by the companies with the largest bond issues: All Year, whose bonds are unsecured, tumbled 8% today, and has lost 28% since the beginning of December.
Reporting failures fueled the downtrend
In addition to All Year, falls of over 30% were also posted by the bonds issued by Klein Group, Starwood West, Waterstone Properties, and MDG. Among other things, this wave of losses in the US companies' bonds was affected by reporting failures discovered in some of the companies, which led investors' fear of weak corporate governance prevailing in them.
For example, Waterstone was forced yesterday to republish its board of directors' report for the third quarter of 2018, after the original report did not include any comment on the company's continual negative cash flow at the solo level. "At the request of the Israel Securities Authority, in Section 1.4 of the board of directors' report concerning the analysis of the company's liquidity and sources of financing, details of the company's ongoing negative cash flow from current activity have been added according to the company's separate financial information as of September 30, 2018," Waterstone wrote in its notice to the TASE.
Waterstone deals in income-producing real estate, focusing mainly on commercial real estate, which is currently under pressure because of the rapid switch by the US public to online purchases. The company first issued bonds on the TASE in the summer of 2017, and now has bonds with a par value of NIS 407 million traded on the TASE.
The company's controlling shareholders are chairperson of the board of directors and CEO Neal Shalom, director Anton Melchionda, and Josh Levy. Waterstone finished the first three quarters of 2018 with 17% growth in rent revenue, mostly from leasing more space in properties and occupation of other properties.
The company also reported a 13% rise to $27 million in net operating income (NOI) and a 33% drop to $4.6 million in funds from operations (FFO) in the first three quarters of the year. Waterstone's net profit zoomed to $13.6 million in the first three quarters, compared with only $1.8 million in the corresponding period last year, but this was primarily due to a $5.1 million profit caused by an increase in the value of real estate owned by the company and the shekel depreciation against the dollar, which generated $5.1 million in revenue from exchange rate differences.
Waterstone reported $241.1 million in shareholders' equity as of September 30, 2018, amounting to 31% of its assets. The company has $504.5 million in debt, but only $1.7 million of this is classed as short-term debt.
Positive cash flow from current activity
In its consolidated reports, Waterstone reported a $24.1 million positive cash flow from current activity, following a $23.5 million positive cash flow in all of 2017. At the same time, Waterstone's solo balance sheet shows a negative cash flow of $704,000 in the first three quarters of 2018 and negative $1.7 million in all of 2017.
The Securities Authority holds this to be a warning signal requiring special comment by the board of directors. In the original reports published in late November, the company did not comment on this matter; following the Securities Authority's demand, the board of directors held another meeting, following which a comment by the board of director was added to the reports.
The addition to Waterstone's reports stated, "The company is managing its working capital according to its projected cash flow and expected payments at the monthly level. Cash flow from operating properties is usually predictable. The board of directors assessed the company's sources of financing for repayment of its existing and projected obligations on the basis of this assessment of the company's ability to repay its current obligations, mainly through net proceeds from positive cash flow from current activity."
The company accordingly concluded that the company's continual negative cash flow in its solo reports did not indicate a liquidity problem in the company. At the same time, as of now, this clarification is not calming the investors. Waterstone's bonds were traded today at a 20% yield to maturity. The bonds have an average duration of three years.
Published by Globes, Israel business news - en.globes.co.il - on December 10, 2018
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