Simon Property Group: Time to Go Short

Simon Property Group’s (SPG) decision to eliminate 90% of their cash dividend is the most vile of breaches between shareholder and management. They’ve used a small loophole that allows REITs to issue shares instead of cash and still retain their REIT status.

They claim it’s the prudent thing to do and reserve the right to “reinstate the cash dividend when it becomes less prudent.” What does that mean? When would one ever enter into a less prudent transaction? To add insult to their arrogance, they also claim that this is not in response to the current retail operating environment. On the conference call they also stated that their smaller tenants need them more than they need their tenants. Delusional is the word that comes to mind.

I for one, am thrilled. I’ve been short SPG for some time now. My carry cost just went down nine-fold. Additionally, whatever modicum of fear I’ve had about management being able to pull the rabbit out of the hat over the next 24 months has been completely eradicated.

I eagerly await their next testament to the high quality of their portfolio and their exceptionally strong balance sheet (so strong, in fact, that they’ve eliminated the dividend). Also, next quarter’s inevitable admission that they were somewhat surprised by the huge, “unforeseeable” number of retailer bankruptcies, the “unprecedented” downturn in consumer spending and the “astonishingly” rapid collapse in rental rates.

Hubris (/hjuːbrɪs/) or hybris (/'haɪbrɪs/) is a term used in modern English to indicate overweening pride, self-confidence, superciliousness, or arrogance, often resulting in fatal retribution.

DISCLOSURE: The author is short SPG common stock

Comments

[thesnowjob]

I agree the dividend was a joke. Mattel earnings won't help either. But short term SPG was $49 two days ago and a much better short.

Long term under $5.

2009 Feb 02 09:34 AM

[Amateur Hour]

The retailers are telegraphing where SPG is headed. Mall REITS are going to lag the retailers just as banks lagged the residential real estate slide. Take a look at what news came out of Macy's today (a major SPG tenant).

As more and more retailers close stores and go bankrupt, REITs will see their cash flow suffer and their massive debt come due (SPG is leverage more than 18x).

Plus, by issuing 90% of their dividend in stock, they are just diluting existing shareholders.

Combine this with the fact that most institutional investors are in REITs for their steady stream of dividend income and there is no telling how far this dog will slide.

2009 Feb 02 04:28 PM

[soonerxii]

There are probably a few other names besides SPG that will go down with this group. Though, I'm avoiding the ETF

2009 Feb 03 03:54 PM

[Adam Sharp]

Anybody else listen to the conference call? They're claiming 2009 will be better than 2008, and ask analysts to ignore Q4 of 08 when predicting profits in 09. Added to my original short of $55 at $48, and again at $43.

I did a writeup of the conf call here:
www.bearishnews.com/po...

2009 Feb 03 04:31 PM

[Adam Sharp]

Any insight on their balance-sheet vs. total debt would be appreciated. Their SEC report says "our total share of debt" is over $24 Billion. But their balance-sheet debt only shows $18 billion. Here's the SEC doc:

idea.sec.gov/Archives/...

It's on page 45. Can someone clarify if they're fully responsible for this debt? From what I read, it seems they are. But this debt is part of a joint venture, so it's not on the main balance sheet for some reason?

I may be completely off-base here, but the numbers look odd.

2009 Feb 03 07:12 PM

[Urbane Gorilla!]

Sure... They said that they were sooooooo certain that rents will go up in 2010, that they're offering cheap 1 year rents to **all the companies that are eager to move into those soon to be vacancies!!!"..... Yeah! Right!

jegan ;-)


On Feb 03 04:31 PM Adam Sharp wrote:

> Anybody else listen to the conference call? They're claiming 2009
> will be better than 2008, and ask analysts to ignore Q4 of 08 when
> predicting profits in 09. Added to my original short of $55 at $48,
> and again at $43.
>
> I did a writeup of the conf call here:
> www.bearishnews.com/po...

2009 Feb 03 08:04 PM

[Adam Sharp]

Jegan - I had forgotten about that part. Their answers on the 1-year leases were odd. I thought everyone loved long-term leases for the rent stability. But Simon says they prefer 1 year leases here?

The tenants should have more bargaining power when their leases run out in a year (unless retail spending and demand for CRE space has rebounded strongly, which seems unlikely).

2009 Feb 03 10:34 PM

[tshk1221]

Marty Cohen, one of the leading gurus of REITs, says SPG is the biggest, well capitalized and well managed commercial REIT in the US, and SPG is slashing down its cash dividends to 10% for serious lack of cash. What a funny situation!

This is the signal of very serious shortage of cash. Since SPG's leverage was the highest in the US, SPG has no cash left to pay for dividends after paying for interests. Even Vornado is paying only half of its dividends in stocks.

I don't think the US credit market has the generous room now to extend more loans and cash out more for SPG's real estate projects and equipment with overall loan to cost ratio of 95% (equity made of 5%).

2009 Feb 05 06:55 PM

[tj987]

well dont really think that was much of an analysis of Simon property. I do agree with the short. I would really be excited if they had to refinance more the the 900 million, because that will be the deathblow(there is no money for this stuff, unless of course the governments comes in for more) However this stock traded at 2X book 8 years ago and i do expect it to trade back to that level, if it survives. Asset values going down, cash flow going down .. and cost of HUGE dubt going up.. not a good combination

2009 Feb 06 07:27 AM

[ColinJIo]

How did you get LEVERAGE 18X?


On Feb 02 04:28 PM Fact Check wrote:

> The retailers are telegraphing where SPG is headed. Mall REITS are
> going to lag the retailers just as banks lagged the residential real
> estate slide. Take a look at what news came out of Macy's today (a
> major SPG tenant).
>
> As more and more retailers close stores and go bankrupt, REITs will
> see their cash flow suffer and their massive debt come due (SPG is
> leverage more than 18x).
>
> Plus, by issuing 90% of their dividend in stock, they are just diluting
> existing shareholders.
>
> Combine this with the fact that most institutional investors are
> in REITs for their steady stream of dividend income and there is
> no telling how far this dog will slide.

2009 Feb 25 05:28 PM