Tarragon's Bitter Taste

The analysis used projected net operating income of $72 million for the Sage properties, and the analysis concluded the properties would sell for an average 6.4% cap rate, or initial rate of return.

However, Friedman admitted at the investor day that the NOI estimate will not necessarily be met, since the company will continue to sell buildings this year. Several developments are also coming online. Thus, trying to pinpoint the value of the Sage division is not a simple task. The apartment portfolio division posted $47.4 million of NOI in 2006. Average monthly rents on the properties are $889, among the lowest of public apartment owners.

On the fourth-quarter earnings call, Friedman said the Sage division will initially be cash-flow negative, assuming no refinancing or sale transactions. The issue is that the NOI of the portfolio is being eaten up by large debt payments and capital expenditures to maintain the properties.

The Sage division, centered in Connecticut and Florida, also is being stuck with a portfolio of several apartments buildings that Tarragon overpaid for in 2005 at the height of the condo mania boom.

Those buildings could no longer be sold at a profit as condos. Rather than take a writedown on those projects, Tarragon switched them into apartment rentals, and the properties remain unprofitable.

Add it all up and Friedman's numbers say the stock is worth at least $20. Value investors seem to have bought into this hype.

So far, the shorts are winning.

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