Open Letter to SEC: Wall Street's REIT Bait-and-Switch 37 comments
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Zero Hedge is well aware that our regulatory friends at the SEC and FINRA enjoy going through our articles in search of the "next big scam." We are always happy to make their lives a little easier and not only connect the dots but give them everything they need on a silver platter so that even a green securities lawyer, 4 hours fresh out of law school, would be able to comprehend and litigate.
A few weeks ago I caught on to a troubling trend whereby Merrill Lynch/Bank of America (BAC) embarked on an epic quest to underwrite equity follow-on offerings for a vast majority of the lowest quality REITs including Kimco (KIM), ProLogis (PLD), Duke Realty (DRE) and others. I say lowest quality, because Merrill's own analysts had a Sell rating on these names as recently as March 31 (for Kimco) and January 6 (for ProLogis). How the global economy has really changed for the better in terms of REITs since then is still a mystery to me. But I digress.
In the true and tried Wall Street mantra "if something works why fix it", late last week (April 16th to be exact: bear with me, this will be very relevant in a moment) Merrill Lynch also underwrote yet another follow-on offering, this time for marginal Southwest-focused REIT Weingarten Realty Investors (WRI) (checking the holders yields no real surprises: Cohen and Steers at number 5, with 3.3 million shares; much more ominously for new shareholders, Barclays Global Investors is at number 1...readers who have been following the quant theme at ZH should appreciate the connection). And while Merrill analyst Steve Schmidt has not upgraded the company yet, presumably as he is still restricted while the 4.2 million overallotment is exercised, I am willing to place a bet for $xxx - you name it - with any reader, that within 3 days WRI will see an upgrade from Sell to at least Neutral by Mr. Schmidt, with a report titled "Upgrade to ___ on improved balance sheet." (disclaimer: Zero Hedge has absolutely no insight into what occurs inside BofA/ML's research department, but can use its head).
Yet, as much as I want to keep focusing on Merrill Lynch, it is another company that piques the interest on this occasion. The company at hand is smallish Wachovia, which, at least, in theory does not exist anymore as an entity separate from its recent acquiror, Wells Fargo (WFC).
First, I present the back cover page of the WRI prospectus through which Weingarten Realty sold 28 million shares at $14.25, where one can clearly see the prominent role of Wachovia/Wells Fargo.
Also don't let the date on the prospectus fool you: the formal dilution press release announcement came out at 4:13 pm on April 16.
Why is this relevant? As the prospectus itself says in the Use of Proceeds section:
Affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Wachovia Capital Markets, LLC, BBVA Securities, Inc., and J.J.B. Hilliard, W.L. Lyons, LLC are lenders under our unsecured credit facility and will receive a share of the net proceeds from this offering used to repay borrowings under the credit facility proportionate to their respective commitments under the facility.
How much longer will banks keep offloading their REIT credit exposure to unwitting equity investors? Yes, the i's are dotted with this terrific one sentence disclaimer, however we don't get it. If these companies are such great and worthwhile investment prospects, why are banks rushing to offload their credit exposure, which by the way is the least risky part of the capital structure, while investors are buying equity to pay down the banks credit exposure, and taking on the first-loss risk in the balance sheet? The use of proceeds in every single REIT follow-on offering has been to pay back the banks that have underwritten it. Is it that complicated to see this for the bait-and-switch it is?
Zero Hedge tries to preserve investors what little capital they may have left. However, some just seem hell bent on throwing their money into the CRE fire pit.
But I digress... again. Back to Wachovia. As readers can recall, Zero Hedge had some heartfelt words for Merrill analyst Schmidt, who the day of the ML/BofA offering, decided to upgrade Kimco stock from a Sell to a Buy. Ok, one can structure conspiracy theories about this event, but for all intents and purposes it is not outright illegal... regardless of how many Ambien CRs said analyst has to take at night to sleep soundly. However, taking a look at the WRI offering, some much more serious questions come to mind: like, does Wachovia/Wells Fargo have a compliance department and is it aware that its REIT analyst is issuing an upgrade on the stock, a day before Wachovia/Wells Fargo will issue stock in the upgraded company in order to repay Wachovia/Wells Fargo's credit facility.
The facts: on April 15th, a day before the WRI stock offering, Wachovia/WF analyst Jeffrey Donnelly, CFA, releases an upgrade report on WRI with the following title "WRI: Upgrading To Market Perform, More Confident In Capital Plan Raising Estimates On Possibility Of Shallower Near-Term Trough." Donnelly had downgraded the stock to a Sell a mere two months prior, on February 23, providing a 2009 FFO target of $2.25/share (his upgrade, as seen below, upward adjusts his 2009 FFO target by a whopping 7 cents to $2.32/share which in any book is worthy of an upgrade).
It is unfathomable how Mr. Donnelly would not be restricted by his compliance department, by his research supervisor and by his capital markets desk from publishing a material, stock moving report 24 hours ahead of a follow on offering in which his bank is a key underwriter. The first rule for any sell-side analyst is do not publish research reports that could get you in hot water with the regulators. Wachovia squarely broke that rule.
The only logical (and legal) explanation is if the WRI offering was put together so haphazardly and hurriedly, that the bank really had no idea it would be an underwriter until the day of the offering and thus did not even give Donnelly the change to get restricted. Of course, this possibility only spells doom for any investors who got caught in the manic rush to catch the last minute window of capital markets access as underwriters were scrambling to allocate share blocks to their respective syndication desks, knowing full well the window would close within hours (not days) and the stocks would come tumbling down. However, both possibilities reside strongly in the ethical twilight zone, with the first one likely being in the legal zone as well. It is, again, shocking, that Wells Fargo's compliance team did not catch this report before it came out, as its publication will inevitably cause serious headaches for all parties involved, especially if WRI stock proceeds to crash over the next several days and the class action lawsuits start trickling in.
Adding insult to injury, WRI management itself came out on April 17th and stated that it now expects its 2009 FFO (see above) to be in the $1.83-$2.06/share range, after giving effect to the offering (yes it is diluted, and yes it is a about 20% lower than Donnelly's $2.35/share target, serving as the basis for his upgrade report).
Speechless.
And of course it doesn't end there.
JP Morgan (JPM) and Wachovia announce yesterday they are doing a follow on offering for Regency Centers Corporation (REG), another small REIT. What is the use of proceeds? Yup, you guessed it:
We intend to use approximately $205 million of these net proceeds to repay outstanding indebtedness under our line of credit. Our line of credit matures in February 2011 and currently has a variable interest rate equal to LIBOR plus 40 basis points, which as of April 17, 2009 was 0.96%.
Zero Hedge wonders yet again, just which banks benefit from new investors parting with their money so that banks can minimize their secured credit exposure to yet another REIT. Come to think of it, it is about time FINRA and the SEC did too.
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This article has 37 comments:
haven't you been paying attention?
offering and flip them. All 4 of the stocks mentioned are trading above
the offering price.
Great reporting.
IF (big if) the credit markets thaw, I like KIM. Despite the debt, on and off balance sheet. GGP, for example, had decent cash flow. It just couldn't roll. KIM is raising equity and raised unsecured. Obviously, the banks are pulling in their horns. And it is risky. But no pain no gain.
Did you see Milken's paean to capital structure adjustments in yesterday's WSJ?
But in any event, if one is going to roll the dice, good to know what is going on. So kudos, Messrsr. Fight Club Pseudonym and ZH. File this under you can lead a horse to water but can't make him drink.
The question I'd like to see answered is who is buying up the new issuance? Is it the guy on the street or is there a further wrinkle that it is other banks?
4.0 (a) ii. Ensure that investment banking objectives or employees do not have the ability to influence or affect research or recommendations;
Why do the top 10 components of the index move like a school of fish?
Why does the IYR have such huge volume at the end of the day, as well as when it is at the day's high?
I am trying to use logic to short this sector of the market and I keep getting creamed for no apparent reason.
On Apr 22 09:31 AM oddsneds wrote:
> Weingarten is one of the better REIT's, I have followed it for more
> than 15 years. Their ability to sell sizeable stock so as to replace
> debt is a good sign and that alone is worthy of an analyst reconsidering
> their viewpoint as to the company's prospects. I don't know the analyst
> or her age, experience, reputation etc. so I wouldn't necessarily
> consider her opinion too highly on my reasons to buy or sell. I also
> think occasional conflicts of interest are inevitable and don't mean
> collusion or some secret plan to defraud us poor unsuspecting investors.
If the regulatory agencies allow the financial institiutions to keep getting away with this outright manipulation and maneuvering against the interests of unsuspecting investors, there will be another long period of chaos and deep suspicion that will keep independent investors away from the market. This has happened before, and it served to change the way people employed their surplus capital.
On Apr 22 09:23 AM jasonjim wrote:
> I see nothing wrong about the transactions discussed in this article.
> It is normal business with a buyer beware sign. The banks win by
> having their loans repaid. DRE and WRI and other REITs win because
> they get rid of debt on their balance sheets. The purchasers of the
> equity offering who buy at a discount may or may not win depending
> upon how the market views the transaction. Since DRE and WRI and
> other REITs are in a much better position now to conduct their business
> I expect that their shares will rise, maybe considerably. So the
> purchasers of the new equity will win also. Everybody wins, so what
> is the problem here?
On Apr 22 10:08 AM jhartz wrote:
> The VNO (Vornado) stock was manipulated upwards some two and a half
> points last night at the close. Is it a coincidence that a close
> of 47 allowed ML and cohorts to price the offering of 14 million
> new shares at a higher level?
>
> If the regulatory agencies allow the financial institiutions to keep
> getting away with this outright manipulation and maneuvering against
> the interests of unsuspecting investors, there will be another long
> period of chaos and deep suspicion that will keep independent investors
> away from the market. This has happened before, and it served to
> change the way people employed their surplus capital.
On Apr 22 09:50 AM Insiderman wrote:
> There is simply NO WAY a firm's compliance department should issue
> a market moving research report within 48 hours of an issue.
On Apr 22 09:26 AM Insiderman wrote:
> Sounds to me like Jeffrey Donnelly, CFA needs to review the CFA Institute
> Research Objectivity Standards:
>
> 4.0 (a) ii. Ensure that investment banking objectives or employees
> do not have the ability to influence or affect research or recommendations;
>
>
Long term, logic will prevail. Short term, irrationality rules the day. Not to mention a heck of a lot of obfuscation, lies, cheating and out and out manipulation.
Good luck on your quest to make some money.
On Apr 22 09:45 AM predictorman1000 wrote:
> Why are REIT stocks yo-yoing? Down 10% one day, up 9% the next.
>
>
> Why do the top 10 components of the index move like a school of fish?
>
>
> Why does the IYR have such huge volume at the end of the day, as
> well as when it is at the day's high?
>
> I am trying to use logic to short this sector of the market and I
> keep getting creamed for no apparent reason.
On Apr 22 10:12 AM wobatus wrote:
> A picayune point, but the compliance department doesn't issue a report.
> They may bless it. Perhaps they were side-stepped, duped or brow-beaten
> (the last 2 hardly good defenses). But yes, the firm is to blame.
>
The subprime crisiis, we know is bad. Commercial real esatte, same. But (and as Pee Wee herman says everybody has a big butt):
GGP could service debt. It just couldn't roll. Yes, some reits are awful. Some are usually fairly well run and got in too deep, not seeing through to what happens in a credit drain the likes of which hasn't been seen ina longwhile, to this extent maybe not in their working lives or in their lives period.
Yet GGP services. KIM services. Not all of KIM's tenants are Circuit City or Linens and Things. GGP is bankrupt. But Ackman gives them DiP funding and holds many tiers through equity.
I don't and did not recommend their (GGP's) equity. But Ackman is no dummy. He made a killing shorting MBI etc.
I pointed out, in response to another "Tyler" post, that while I wouldn't buy GGP, i liked KIM below $7. Despite the risk. And reporting of The Great REIT Unraveling reaching a crescendo only made that seem more likely, and that some may get out of those shorts that had been in for a while. if only temporarily.
KIM and reits have had a nice run, and could raise equity to breath for a spell.
But let's get back to this thread: why would it be so hard to roll over performing loans? Because things will get worse? Things always seem oike they will be a never ending spiral down. You always read that. More unemployed, fewer people to buy goods, etc. if that were always never ending we would never get out of any downcycle. maybe there is something to this social safety net? :)
I digress.
Some folks figured out how things would play when their was a big hole blown in the side of the banks. Smart people. Kudos. There is now a push back. One can say it is manipulation. There is a lot of manipulation that goes on in equity markets. both ways.
In the very long run, if you can get past the short run (always a big if, look at GGP), reality does set in. Reality right now may say more unemployment, economy getting worse before it gets better.
What will be reality in 3 years? 5 years? 10 years? Maybe everyone will shop on amazon for what limited amiounts of stuff they can afford. maybe folks will still want to hit a mall now and then. Although I personally don't want any stuffed spuds at the food court, and I am past the age where I play video games, and why play there when you have your wii and playstation? But heck, i gotta do something on saturday, and i DO need a new weed-whacker, and we have that wedding upstate...maybe I can get a gift at, oh, the hell with Nordstrom, they'll just have to be happy with that crap from TJmaxx.
because they have to pay out 90% of profits every year they
HAVE TO GO TO THE CREDIT & EQUITY MARKETS EVERY YEAR FOR NEW CAPITAL.
Recently the SEC said they could pay up to 90% of those dividends in stock,
BUT THAT DIDN'T AFFECT THE DEBT ALREADY ON THE BOOKS.
ALL THE REITs you mentioned have debt more than 5x market cap.
They need to rebalance their balance sheets.
It's tough for the existing stockholders, but necessary.
On Apr 22 11:08 AM wobatus wrote:
> The banks obviously were desperate to get the debt off their books.
> Why? They have capital requirements and it is hard to roll and the
> market pricem, because of that, is low. Why is it hard to roll? Because
> many who would lend also have requirements and can't do it, and many
> of the shadow system can't do it because THEIR funding sources have
> capital requirments, losses in other areas etc. And because, due
> to unemployment, reining in of credit card limits, again due to their
> other losses, and over-extended consumers, malls are losing stores,a
> nd rents are being driven down, and collateral is lower, with other
> reits having to raise, some in bankruptcy a la GGP.
>
> The subprime crisiis, we know is bad. Commercial real esatte, same.
> But (and as Pee Wee herman says everybody has a big butt):
>
> GGP could service debt. It just couldn't roll. Yes, some reits are
> awful. Some are usually fairly well run and got in too deep, not
> seeing through to what happens in a credit drain the likes of which
> hasn't been seen ina longwhile, to this extent maybe not in their
> working lives or in their lives period.
>
> Yet GGP services. KIM services. Not all of KIM's tenants are Circuit
> City or Linens and Things. GGP is bankrupt. But Ackman gives them
> DiP funding and holds many tiers through equity.
>
> I don't and did not recommend their (GGP's) equity. But Ackman is
> no dummy. He made a killing shorting MBI etc.
>
> I pointed out, in response to another "Tyler" post, that while I
> wouldn't buy GGP, i liked KIM below $7. Despite the risk. And reporting
> of The Great REIT Unraveling reaching a crescendo only made that
> seem more likely, and that some may get out of those shorts that
> had been in for a while. if only temporarily.
>
> KIM and reits have had a nice run, and could raise equity to breath
> for a spell.
>
> But let's get back to this thread: why would it be so hard to roll
> over performing loans? Because things will get worse? Things always
> seem oike they will be a never ending spiral down. You always read
> that. More unemployed, fewer people to buy goods, etc. if that were
> always never ending we would never get out of any downcycle. maybe
> there is something to this social safety net? :)
>
> I digress.
>
> Some folks figured out how things would play when their was a big
> hole blown in the side of the banks. Smart people. Kudos. There is
> now a push back. One can say it is manipulation. There is a lot of
> manipulation that goes on in equity markets. both ways.
>
> In the very long run, if you can get past the short run (always a
> big if, look at GGP), reality does set in. Reality right now may
> say more unemployment, economy getting worse before it gets better.
>
>
> What will be reality in 3 years? 5 years? 10 years? Maybe everyone
> will shop on amazon for what limited amiounts of stuff they can afford.
> maybe folks will still want to hit a mall now and then. Although
> I personally don't want any stuffed spuds at the food court, and
> I am past the age where I play video games, and why play there when
> you have your wii and playstation? But heck, i gotta do something
> on saturday, and i DO need a new weed-whacker, and we have that wedding
> upstate...maybe I can get a gift at, oh, the hell with Nordstrom,
> they'll just have to be happy with that crap from TJmaxx.
However, I find it hard to be sympathetic to investors that rely soley on analyst recommendations to purchase or sell a stock. If you are not going to do your own homework, be prepared for additional risk.
Disclosure: I'm long REITs
as we and the IMF all know. Because of the public distaste out gov't can't get money to them directly anymore. so every other trick in the book is OK.
take a look at the S&P volume buying spikes. when things are going up the buying is small and measured. when things start to go down and we would turn down someone is spending a lot of money to make sure it isn't happening. I have never seen it so clear that an agent is doing all it can to prop up the market. we are dealing with a market that is being manipulated and a covert program to capitalize the banks at the expense of the tax payer at the same time a massive disinformation campaign (like Bush and the iraq war) is being fought by our government.
Have to keep the market propped up to get rid of inflated crap assets to the public. happening with our governments blessing because they won't tell us the truth and can't get the money they need to the banks via the front door. At the same time lobby money has bought enough influence in washington that it does't really matter which party is in power.
We have the illusion of democracy, no more that that.
That said, if what you say is being done, why was it not done when the market went to 12 year lows? or if "they" benefit from that, why is it up now?
Anyway, i suppose if we forced banks to liquidate today, they are insolvent. I saw that scene in It's a Wonderful Life. :) Kidding. I know citi has gone bust about every 10 years for decades now.
On Apr 22 01:51 PM dcb wrote:
> Folks, we are all smart here. Let us face facts. the banks are insolvent
>
> as we and the IMF all know. Because of the public distaste out gov't
> can't get money to them directly anymore. so every other trick in
> the book is OK.
>
> take a look at the S&P volume buying spikes. when things are
> going up the buying is small and measured. when things start to go
> down and we would turn down someone is spending a lot of money to
> make sure it isn't happening. I have never seen it so clear that
> an agent is doing all it can to prop up the market. we are dealing
> with a market that is being manipulated and a covert program to capitalize
> the banks at the expense of the tax payer at the same time a massive
> disinformation campaign (like Bush and the iraq war) is being fought
> by our government.
>
> Have to keep the market propped up to get rid of inflated crap assets
> to the public. happening with our governments blessing because they
> won't tell us the truth and can't get the money they need to the
> banks via the front door. At the same time lobby money has bought
> enough influence in washington that it does't really matter which
> party is in power.
>
> We have the illusion of democracy, no more that that.
Personally, I own O and VNQ.
On Apr 22 01:28 PM REITBull wrote:
> Tyler lays out a very good case. I appreciate the work he has done
> on this and his work to highlight conflicts of interest.
>
> However, I find it hard to be sympathetic to investors that rely
> soley on analyst recommendations to purchase or sell a stock. If
> you are not going to do your own homework, be prepared for additional
> risk.
>
> Disclosure: I'm long REITs
On Apr 22 04:47 PM Lightway wrote:
> I've pretty much put analyst buy/sell recommendations up there with
> credit agency debt ratings. Neither is reliable.
If possible could you please take the level of your articles down a little. I read them over a couple of times and start to get what you are saying. You are obviously intelligent and followed but I need a little dumbing down. Forgive me but keep up the good (god) work. that
On Apr 22 11:59 AM jimmy46 wrote:
> Read any REIT ANNUAL report:
> because they have to pay out 90% of profits every year they
>
> HAVE TO GO TO THE CREDIT & EQUITY MARKETS EVERY YEAR FOR NEW
> CAPITAL.
>
> Recently the SEC said they could pay up to 90% of those dividends
> in stock,
>
> BUT THAT DIDN'T AFFECT THE DEBT ALREADY ON THE BOOKS.
>
> ALL THE REITs you mentioned have debt more than 5x market cap. <br/>They
> need to rebalance their balance sheets.
>
> It's tough for the existing stockholders, but necessary.
Add VNO@43 (offered this week), and CIM@3 (235,000,000 shares last week) to the list and all 6 Merrill Lynch led REIT offerings are up.
Buy them, sell them. Make money.
If you want to invest, buy P&G and Exxon Mobil.
It is clear that capitalization rates have more than doubled on commercial real estate from the glory years of 2005-2007, yet none of the loss in market value seems to reflected in annual reports or the financial press. It seems to me that the huge sale of stock we are now seeing is only to raise cash that can be paid out in dividends.
WILL THERE EVER BE MARK-TO-MARKET ACCOUNTING OF REAL ESTATE PROPERTY VALUES?
Talk about a HUGE PONZI SCHEME!
Time for the SEC to investigate and not keep sweeping this scandal under the rug.
Both are up 15%. Makes 8 in a row for Merrill.
What's not to like. This is the new game. REITs need to raise
capital. Hedge funds are underperforming and grab the deals. Lenders want to be repaid.
Seriously, what's not to like. You can complain about it, but it's like complaining about professional wrestling. It's fixed. So what.
We are here to make money. While CNBC is talking about MSFT and YHOO, this is the real Fast Money.
Just kidding. Kinda.
You'd have to go back and see the timing of the "Great REIT UnRaveling" post and this one, etc.
When you start getting free, publicly disseminated advice that makes a hell of a lot of sense, but made more sense if acted upon sooner and privately first....
Oh, i'm being cynical. These reports were fairly contemporaenous with the shenaigans. At least the public docs. There must have been some lead time to all that.
All the best, y'all.