Has The Merrill REIT Equity Offering Well Run Dry?

In a surprising development on the REIT scene, today the Omaha World Herald announced that Merrill REIT group darling Simon Property Group is selling the Crossroad Mall in Omaha on 72nd and Dodge Streets. With tenants such as Finish Line, LensCrafters, Old Navy, Victoria' Secret and near bankruptcy Claire's, it is not too hard to see why the mall has fallen on hard times.

What is mildly troubling is that Crossroads is located less than three miles away from the famous Borsheim's store at 120 Regency Parkway where the annual BRK B share circle jerk takes place, and where Becky Quicky has a lifetime 100% discount.



What should be much more troubling (especially to holders of REIT stocks), is that instead of simply doing a tactical drive by follow on offering (we are talking $$$ peanuts here), SPG is forced to stoop to the level of actually selling assets for cash. What's wrong - not enough ammo left to institute a little REIT short squeeze? Someone is slipping.

Back to the mall - Omaha Herald notes that the price will be "market value" and that in 2002 the mall was appraised for $57.1 million "according to a JP Morgan" report. Add this to the increasingly larger number of CRE market tests currently percolating in the market place: someone may be very unpleasantly surprised with the price this (and other) mall fetches. Also, whatever happened with the whole premise that SPG would be an acquiror for real estate? Uhm, doesn't this refute both the "logic" of both NAREIT and the most recent Merrill upgrade, and I quote:

"We are moving from Neutral to Buy on Simon given the company’s opportunity to boost external growth (and improve SPG’s core U.S. portfolio) as they prepare to become a major player in the emerging “M&A” market in U.S. retail real estate."

Sooo.... Schmidt was actually referring to the company being a divestor of assets, not acquirer....honest mistake - now it all makes sense. Sphere: Related Content

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Not So Deep SPG Thoughts Post The 2nd Equity Dilution

Everyone's favorite REIT analyst Craig Schmidt raising his Price Objective from $48 to $52 on the second dilution orchestrated by his parent in just as many months.

I am Cohen And Steers' total lack of surprise.

Sphere: Related Content

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Geneal Growth Partners -Tenant Quid Pro Quo Begins

Interesting article out of WSJ, that dovetails with Zero Hedge's expectation that the mega REIT bankruptcy will portend only bad things for all other mall operators as this develops into a stressed "market test". WSJ reports that while retailers have said they would be willing to stay with GGP, they will likely demand an arm and a bone in terms of concessions for remaining as a tenants. And the resulting looser lease terms will only have negative implications for even relatively healthy mall operators (SPG) who will be forced to meet GGP's reduced terms or risk losing their own tenants. Sphere: Related Content

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Simon Property Group Defaults On Mall Loan

And so it begins. Newsday reports what many were expecting: "The owners of the Mall at The Source in Westbury have defaulted on a $124-million interest-only balloon loan." The data was caught by Zero Hedge favorite TREPP: this could be the beginning of the great unravelling for even the heretofore "healthy" REITs.

The mall - where stores of bankrupt retailers Fortunoff and Circuit City are liquidating their goods and where Steve & Barry's once had a location - had a 10-year-old balloon loan that matured on March 11, said Thomas Fink, senior vice president of Trepp, which tracks the performance of commercial real estate loans that have been securitized. The loan servicer, LNR Properties of Miami, listed the loan as a nonperforming mature balloon loan, he said, which means the servicer does not expect the balance of the loan to be paid.

It originally was issued in 1999 by Nomura, and the owner of the mall is listed as W&S Associates. Records from the New York State Department of State show the address of W&S as the Simon Property Group, owner of the Roosevelt Field Mall, Walt Whitman Mall and Smith Haven Mall. The records were unclear regarding the ownership composition of W&S.

"What's been happening is that more and more commercial properties have been having trouble refinancing balloon payments that are coming due," Fink said. "There's no market right now or the market is not giving them the proceeds or the rate they want to refinance the mortgage."

This is a story we will be following closely as it fits closely with our expectations that the CRE default explosion will wipe out the bulk of "equity" value at highly leveraged public REITs.

Update

The oracles at RBC have decided to go all out here, and have lowered their target price on SPG from $80 to $70, which is only a 100%+ rise from current levels. Talk about a gutsy call. Sphere: Related Content

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REITs Continue The Dividend Trap

If only companies knew they would be rewarded with aggressive buying of their stock after reducing and/or PIKing cash dividends they likely would have done so much, much sooner... After all why would investors demands cash out of "dividend stocks." This little trick however has not escaped REITs Mack-Cali and Simon Properties. CLI announced after market close today that it would be reducing its dividend by 30%, from $2.56 to $1.80 (a 30% reduction) and would pay the quarterly dividend of $0.45 on April 13 with an ex-div date of April 3.

This is not quite as egregious as what SPG did last Friday, when it decided to pay only 10% of its dividend in cash. But such is life when everyone is looking at your space as the next big potential blow up: saving cash is probably a good idea. Sphere: Related Content

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Yet More REITs Conserving Cash

REIT Simon Property Group announced results of its dividend election today, which for all practical purposes could be called anything but an "election." The final outcome is that shareholders will receive a dividend of $0.90/share consisting virtually entirely of stock (90%) and the balance in cash. The irony is that when queried, shareholders predominantly opted for a cash distribution (193.6 million shares, or 93%), versus those opting for shares (15.2 million, or 7%), while 22.5 million "shares" didn't care either way.

The REIT, which has roughly $773 million in cash and $18 billion in debt currently, has reason to conserve cash, as the deteriorating cash flow generation from its portfolio of regional malls and community shopping centers is likely being impacted very adversely as a result of the accelerating bankruptcies among its retailer tenant base. Surprisingly, the company has a market cap of $8 billion, which, based on a closing share price of $34.73 and representing a 20x multiple of its consensus 2010 earnings of $1.73 (a number which could be in threat of reduction if ongoing deteriorating within the commercial real estate community continues), seems somewhat rich based on its growth prospects. Without doubt the primary factor in determining its recent share price moves is its short interest which at 24.3 million is slightly more than 10% of the company's total stock float of 212.7 million shares. Sphere: Related Content

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