I've not quoted our earlier posts to keep the thread more readable.Thegipper wrote: it encourages me to sell this stock. You are making a lot of assumptions with your back of the envelope calculations. I guess you have a lot of first hand dealings with dealing with insurance companies after a major flood. It's far from a slam dunk process. Business interruption is another can of worms. I live in High River and could tell you lots about the assumptions you are making.
Whether or not you buy or sell is your capital allocation decision but it's the reasoning behind an action that is worth discussion so that others may benefit. And more importantly, an attempt to quantify the decision as opposed to making decisions based on a whim or on media footage of a large scale disaster that may or may not have any bearing on the specific properties.
I know nothing about dealing with insurance companies after a flood. I imagine its a hassle but fortunately, we don't need that knowledge for valuation purposes. We can simply can come up scenarios that cover a range of outcomes with the goal of getting an idea of how bad the situation might or might not be. Think of it this way, we're just looking at people and discussing whether or not they're fat, we don't need to know exact weight or BMI.
There are a ton of assumptions in my asset impairment scenarios in an earlier post but option 1 is pretty pessimistic, it assumes no insurance on structures or business interruption and the properties go from stated value to land value immediately. Using Pure's valuations and assuming a 50:50 land to building ratio puts the impairment between 4% and 5% of the total portfolio. We're now got both Houston properties reduced to land value with zero insurance coverage but it does assume there is not a full recourse mortgage on what is now a couple of soggy lots with structures that need demo and disposal. Even with this dire scenario, we're only at mid single digit impairment. If we were convinced this was the case and were bothered by it, further consider the tax loss this event generates mitigates the impact even further. But we don't want to got there because that takes us from asset base impairment to financial modelling the impairment, which is real work. Option 1 was just trying to ballpark a pretty bad scenario.
Option number 2 is much less dire. It says the structure is not significantly impaired or assumes insurance remedies structural impairment but not business interruption, your typical rebuild scenario. Hopefully, the reason we can look to the NOI of these properties and knock off a year or two is obvious, the asset (earning power) will be rebuilt and the NOI foregone is the business interruption the firm is on the hook for in the meantime. There will be a moderate to significant impact on near term financial results but not much effect on the asset base as a whole, this is because the portfolio's value comes from capitalization (of the income streams) in perpetuity and the scenario assumes the asset is impaired but only for a year or maybe two.
I think these two scenarios, reasonable and dire, illustrate how small the small impact this event is to Pure's total asset value. If anyone can come up with better scenarios for bracketing the event's effects, please share.