The Great REIT Unravelling Begins? Simon Property Group Defaults on 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.

Disclosure: No positions

Comments

[malach hamo...:]

The Source was a uniquely poorly laid out, poorly positioned, poorly tenanted piece of drek in an area overstuffed with shopping.

If Simon is walking away from the property by defaulting on a non-recourse loan, it's to their ultimate credit.

Sooner or later, the idiot who made the loan will be fired, and the holder of the loan will take a lot less than its face for the property.

Real estate investing includes dropping properties; real estate lending includes underwriting for good and bad times - a skill that has long since been forgotten.

Mar 31 06:02 AM

[wobatus:]

good point malach. tyler is just shillin'.

Mar 31 07:22 AM

[wobatus:]

online.wsj.com/article...;mod=yahoo_hs

I'm a bankruptcy lawyer, btw. This article gives you the picture of what is happening. Not that I'd buy General Growth. KIM may be a good gamble.

Mar 31 07:27 AM

[waldipup:]

Is Simon the owner of the mall , and party of record on the loan - or not?

It would be unfortunate if they are not and being headlined here as

defaulting imaccurately.

Mar 31 01:40 PM

[ptgkc:]

It's on Reuters. SPG as partner in default for this mall. It also contains other discussed comments that sometimes it's best for a REIT to walk away from a property that is going to underperform. They have also refinanced other malls at interest rates that are OK for a REIT in current conditions (under 8%). Add to that the completed stock offering, and they are in better shape than most.

www.reuters.com/articl...

Personally, I still don't like the sector. While the new offering raised cash, it is dilutive. Add that to recent change to pay 90% of dividends in stock instead of cash. SPG will hold up better in this storm than others, but we still don't know how long or strong this downturn will be. Like buying Wynn as best casino. It might be, but the business stinks, so you just lose smaller amounts of capital.

I'd stay with tech, healthcare, and energy, along with some pure defensive stocks. And a little gold. Too much risk elsewhere.

Mar 31 07:01 PM

[Big K:]

Some REITS like many other companies loaded up on interest only debt, never paying any of the principle off. When it comes due, they just rolled it over and borrowed even more. A Ponzi scheme thus was born. The US government is doing the same thing, but on an even grander scale. The leverage house of cards will eventually fall, and those entities that practice this nonsense will ultimately disappear. The entire REIT sector has been lumped into this group, however, not all of them have levered up their balance books so irresponsibly. If we go back to an 18th century style economy, I would say all REITS are in trouble. But that scenario aside, I think most REITS will survive, although I would like to see them pay down debt as in amortization. I think these interest only balloon type loans should be history.

Mar 31 10:36 PM

[CJJ:]

Are we going to be continually amazed by terrible malls or mini malls that go out of business in the next year or few? Really? Maybe we'll read that ALL MALLS ARE DEAD.

Can't wait for all of the articles which are basically retreads of this with new specifics subbed in.

Maybe people should be focussing on what to do with this space. That's where the money will be.

Apr 01 12:00 AM

[REITBull:]

This headline is very misleading and irresponsible, in my opinion. The Source at Westbury is a joint venture in which Simon Property Group only has a 25.5% ownership interest for operating rights. Keep in mind that this a company that has $774 million in cash and equivalents as of the end of 2008.

Source: SPG 10K

Apr 01 09:56 AM

[FreeMkts:]

Debt, Debt, Debt. Look at the traded bonds and preferred stocs in just about any REIT, especially for income investors. Huge YTMs abound. The thesis above that most will survive but equity is toxic sends you to the debt markets for the opportunity! Many preferred stocks also offer cummulative dividends, so if they cut the dividend to hoard cash they will have to pay it all back when they reinstitute the dividend. Stock dividends get cut or paid in stock where bond interest payments are not negotiable.

CRE market screwed itself (again) b/c financing is traditionally short term for these long term assets.

Apr 02 10:42 AM

[wobatus:]

How's the great unraveling going? I warned ya. This was written for folks ready to get out of their shorts. Malach knows what's goin' on.


On Mar 31 07:22 AM wobatus wrote:

> good point malach. tyler is just shillin'.

Apr 03 03:46 PM

[wobatus:]

i figured kim might be a decent bet. shorty was covering his bets, not reloading. maybe now they reload. peace out, all my negative recommenders. :)


On Mar 31 07:27 AM wobatus wrote:

> online.wsj.com/article...;amp;mod=yahoo_hs
>
>
> I'm a bankruptcy lawyer, btw. This article gives you the picture
> of what is happening. Not that I'd buy General Growth. KIM may
> be a good gamble.

Apr 11 11:56 AM

[wobatus:]

Since the morning this article was published, SPG is up 56%. KIM, which i suggested (I said I wouldn't buy GGP, now bankrupt), is up 67%.

Of course, the story isn't over. More retail bankruptcies to come. But, KIM raised equity and was able to do some debt deals, the sky hasn't fallen in.

Indeed, GGP remains cash flow able to service. It just couldn't roll in this market. Ackman is providing DiP financing.

And KIM is down about 50% from the beginning of the year. I took some off the table in the early january bounce.

Long term, KIM will be in very good position, i'd say. The capital markets nearly collapsed. Some benefited greatly from that.

Later.

Apr 17 11:25 AM

[REITBull:]

Just for the record (Source: SeekingAlpha SPG transcript):

"We have a 25% carried interest in that property behind significant preference for what I will call the true economic owner; there are two other partners in that deal. We have no invested capital in that project. We were working toward a refinance kind of as the property manager of that asset.....we are actually trying to work with the true economic owner and the lender to figure out how to come up with an acceptable alternative to extend the maturity date and give us the time to figure out how to fill the space....Both the true economic owner and the lender have expressed an interest in us maintaining our role in that, even though we don’t get any cash flow and the management fee is de minimus in terms of what we’re doing. So, we are actually trying to be an honest happy broker to figure out how to make and give both of those lender and the borrower the ability to maintain the status quo for a better environment down the road. So, that is the source."
-David Simon

May 04 05:22 PM