Real Estate: Carrying Value Concerns

An article earlier today about AMD selling its “Lone Star Campus” in Austin got my attention. 

Now I have no opinion on the merits of AMD’s sale lease-back on this property, its impact on capital and working capital, or the value of the property. In fact, I know very little about AMD in general (outside my circle of competence). 

However, what I found interesting was the last paragraph of the press release:

“The company expects to record a special charge of approximately $50 million in the first quarter of 2013 primarily related to the difference between the sale proceeds and the carrying value of the property.” 

A $50 million loss on a property is a big loss. How the $50 million is calculated I don’t yet know (perhaps more info will come in the 1Q13 10Q), but a quick web search indicates that the facility cost $190 million when completed in January 2008. Ignoring any depreciation, capital expenditures, additional construction on the facility, or potential that the $50 million loss is part of the sale lease-back incentive, the $190 million construction cost less the net sales proceeds of $164 million is still a loss of $26 million (14% of original cost). 

Many value investors – particularly investors buying stocks below book value (myself included) – get into the shorthand habit of assuming that the market value of real estate is always worth more than the balance sheet carrying value. I've often heard this argument trotted out in relation to retailers – the business may be declining, but the real estate is worth multiples of its carrying value. In an economy coming off of the biggest housing bust since the Great Depression, we need to check that logic and be double sure the real estate is even worth its financial statement carrying value. 

I guess the point here for myself is to not shirk the due diligence process. From the income statement to the balance sheet, facts and figures need to be checked. As an old acquaintance of mine used to say, “Trust everyone, but brand your cattle.” 

Disclosure: No Position

Harvest Investor © 2013. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.