Cutting Back Commercial REIT Shorts, Again

I am doing this trade over and over in the commercial REITs - every time they lift I'm shorting them, and they seem to fall 15%+ within 48 hours. Money.

I'm covering good portions of Macerich (MAC), Kimco (KIM), Duke Realty (DRE), and Prologis (PLD)... not sure what happened to the latter name yesterday but it imploded in the last 20 minutes of the trading day. Down another quick 6% this morning. So this "basket" was about a 6% allocation and I'll take it down to under 3%... and keep repeating this trade. We've already done it twice in a week. Duke Realty is almost at $5 so we might lose the ability to add to our short position soon...

On the Federal Reserve short squeeze late Wednesday, all these names jumped to their 20 day moving average where I added to all shorts - and now they've all dropped 15%+ since. Lovely.

Here is what is going to be happening over and over in this group - courtesy of Simon Property (SPG): 'essentially we will keep diluting our common shareholders to pay our debt load. Enjoy, common shareholders!' [emphasis mine]

• Mall owner Simon Property Group Inc., the largest U.S. public real-estate investment trust, said Thursday it intends to sell up to 17.25 million shares of common stock and issue $500 million of senior notes. The stock represents about 7.5% of Simon's outstanding shares.

• The company, based in Indianapolis, expects to use the net proceeds of about $1.1 billion to partially repay the $1 billion outstanding balance of its $3.5 billion unsecured credit facility and for general corporate purposes.

Disclosure: Short all names mentioned except Simon Property Group in fund; no personal position

Comments

[malach hamo...:]

it's not really a dilution for simon; they were never worth the 100 per share

the bigger problem that simon showed is that they had to pay 10.75% for 10year corporate paper.

doesn't bode well ~

Mar 20 03:55 PM

[igggy:]

Why not use SRS? It's pretty much acting the same way but with a double bang. And you don't have to short.

Mar 20 06:57 PM

[Wez:]

Hey Mark,

It seems to me the market is due for a bullshit rally. We are still down 15% on the SnP for 09. Coming off a 20% rally from 666.

From here the mrkt either goes up or down. A straddle seems the best way to go. Happy Hunting......

Mar 21 01:35 AM

[Big K:]

Issuing shares is the correct thing to do, and should have been how they raised capital in the first place. Poor corporate governance practices, not only in REITS but in many companies across all industries, have allowed themselves to lever up their balance sheets. They constantly roll over any debts due, and even borrow more, forever increasing debt. Just like the federal government! Why should a company generating cash and paying dividends need to keep borrowing so frequently? Reducing debt and diluting the shares will eventually make SPG more stable, however, somewhat less profitable. SPG bought out another REIT called Mills Corp who similarly borrowed themselves into oblivion with easy credit for explosive expansion. Explosive expansion is risky and Mills couldn't handle it. Hopefully SPG can unwind itself from its debt orgy and emerge as a viable enterprise, unlike Mills Corp.

Mar 21 09:37 AM

[Hazel Hende...:]

Bring back the uptick rule and crack down on naked shorting , CDSs and other abuses ,so as to help bring back retail investors who don't trust Wall Street any more.

Mar 21 12:03 PM

[Old Trader:]

Big K,

Its a juggling act for REITS, since they're not able to retain any substantial earnings for expansion, by virtue of their REIT status. To expand their operations, they either have to issue additional shares, potentially diluting existing shareholders, or issue debt, levering the balance sheet, or most likely, a combination of the two.


On Mar 21 09:37 AM Big K wrote:

> Issuing shares is the correct thing to do, and should have been how
> they raised capital in the first place. Poor corporate governance
> practices, not only in REITS but in many companies across all industries,
> have allowed themselves to lever up their balance sheets. They constantly
> roll over any debts due, and even borrow more, forever increasing
> debt. Just like the federal government! Why should a company generating
> cash and paying dividends need to keep borrowing so frequently? Reducing
> debt and diluting the shares will eventually make SPG more stable,
> however, somewhat less profitable. SPG bought out another REIT called
> Mills Corp who similarly borrowed themselves into oblivion with easy
> credit for explosive expansion. Explosive expansion is risky and
> Mills couldn't handle it. Hopefully SPG can unwind itself from its
> debt orgy and emerge as a viable enterprise, unlike Mills Corp.

Mar 21 04:58 PM

[scearybeary:]

REITS are an inflation hedge, thanks for shorting, making it cheaper for longs to buy in. How did you like the 25% jump in DRE? R.E has always been avery long term play. Only in a deflationary economy it is a lousy bet. But the FED actions don't look deflationary to me.

Disclosure: long in DRE

Mar 23 11:23 PM