We have taken a second look at the concerns raised by Ackman now that we have a copy of his short thesis on Realty Income (O) in PowerPoint and have come up with the following observations. For those who do not subscribe to my blog, I have decided to make a significant portion of my real estate analysis available to the public, so as to fully communicate the apparently unforeseen cash flow and valuation situations of some of these REITs. This is in anticipation of a slew of fresh REIT short candidates to be delivered to subscribers in the upcoming weeks. I feel the sector is ripe for a revisiting in terms of valuation, cash flow issues and macro outlook. For part one of my review of Ackman's "Realty Income (O)" opinion, click here (requires a quick, "free" registration).

To begin with, I have taken an earlier look at Realty Income, and while I agree that they may not be in the best shape and do not have strong macro prospects, I didn't see an absolute case for a short. I was then forwarded the full presentation given by Ackman, in which I was able to review more of his reasons for the short thesis. The following are my findings, followed by a detailed analysis of another REIT that, although may not be facing as stringent a macro dilemma, has a much more pressing cash issue at hand. Before we get to that, let's go over my second (albeit still relatively and admittedly cursory) review of the Ackman "O" short thesis. Keep in mind that Ackman and his crew probably took more time to review "O" and interact with its management than I did.

Somebody decided to call me out on my General Growth Properties (GGP) thesis and did so by putting me in the same sentence as Goldman Sachs (GS) and Bill Ackman. Can’t decide whether to argue with or thank them….I’ll do both.

Now full disclosure: The accuser is the same site that earlier had one of their “experts” copy verbatim one of my AutoNation (AN) posts and claim it as their own (they eventually removed the post). So no assumptions of their “expert status” ought to be assumed per their claims…

Readers have been recently inquiring why it is that so many financial advisors have sprouted all over the place and are scrambling to represent bankrupt companies: after all the company is, well, "bankrupt" - how much money can financial advisors really make on these kinds of deals? The answer may be surprising, especially in light of the proliferation of various splinter financial advisors who had previously been part of larger firms.

I present to you comparable fee schedule, compliments of Miller Buckfire, which itself was recently the target of a gratuitous campaign to demonetize the advisor in its noble (yet definitely not pro bono) cause of representing bankrupt REIT General Growth Properties (GGP). Luckily, the firm managed to convince the Judge and anyone else who cared that the total complete all in cap of $33 million in the event of a successful restructuring (and somehow nobody even jokingly assumed the Obama administration would let this bellweather of everything that is wrong in CRE liquidate) is more than earned: whoever said being proficient with excel macros, making pretty powerpoints and having a (formerly) big rolodex does not pay off.

REIT euphoria is not limited to the equity market. The REITs have found a new willing participant (not new really, but noticably absent for a while) - the senior unsecured market.

Federal Realty (FRT) announced a debt issue this morning, doing $150MM of a 5 year (talked at +350/5y).

My most recent post on mall REITs (SPG in particular) got me thinking about Sears Holdings (SHLD), a company that I disparaged a few weeks ago in a post called, “Unsuccessful Profits.” More particularly, my chart on REIT valuation based on square footage owned made me wonder.

A colleague of mine recently brought an interesting phenomenon to my attention. REITs and one particular REIT – Simon Property Group (SPG) – have had quite the run in the last few months.

Pershing Square Capital Management’s Bill Ackman recently sent out his quarterly letter to the hedge fund firm’s investors. Over the first quarter of 2009, his funds all managed to post positive gains net of fees, handily outperforming the S&P 500 and DOW, which were down 11% and 12.4%, respectively.

While the principal objective of the Target proxy contest was to maximize the value of our investment in Target, we believe the follow-on impact of the contest will lead to board governance improvements at other companies as boards examine their practices to determine whether they are at risk to shareholder scrutiny and potential future challenges.

Disclosure: No positions

Hedge funds gained over 5% in May and are now up over 9% for 2009, according to various hedge fund indices. This means it is the industry's best monthly return in a long while. This of course comes after their general under-performance in March and April.

Such lagging led us to pen a piece entitled, 'under-performance angst' in which we examined how fund managers react to the notion of panic to the upside as they are left behind. But, it seems as if May was an equalizer month for many funds; especially those who were playing the commodity trade. Don't forget that we're tracking almost all of the funds listed below in our hedge fund portfolio tracking series.

Moody's out with a piece, in which it joins the S&P chorus (well, not technically a chorus if just one is singing) Zero Hedge wrote about earlier, in which it seems the two major rating agencies are now taking both REITs and associated securitization conduits to the woodshed, and making it inevitable that Geithner adjusts the requirements for CMBS TALF participation. For once being a 1-10 year lagging indicator may actually be a market normalizing influence.

In the meantime, I present some of the relevant leverage charts from Moody's piece titled "US REIT and REOC Review & Outlook: Declining Fundamentals Cloud Outlook for Ratings." These should probably be kept in mind as one considers Bill Ackman's "bull" case in GGP. The debt/EBITDA trends should soothe all those who keep buying follow on after follow on offering. Come refi time, those 10% cap rates will also make sure their lives are a walk in the park.

This is the 1st Quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings series preface.

Next up, we have John Griffin's Blue Ridge Capital. Now, Griffin is similar to Andreas Halvorsen of Viking Global and Stephen Mandel at Lone Pine Capital in that they are all 'Tiger Cubs' (pupils of Julian Robertson during their time at Tiger Management). Griffin though, is more well-known because he was Julian Robertson's right hand man. So needless to say, he knows his stuff.

In an amended 13G filed with the SEC due to activity on April 30th, 2009, Pershing Square Capital has updated its stake in Wendy's Arby's Group (WEN). Bill Ackman's hedge fund has completely sold out of its position. In its previous 13F filing, which disclosed Pershing's positions from December 2008, the fund owned over 45 million shares. Now, it owns none.

Bill Ackman has been quite busy lately, as we just yesterday covered his thoughts on his positions in General Growth and Target. Pershing runs a concentrated portfolio of around 8-10 long positions. Ackman's main focus is currently on his largest position, Target (TGT), where he is leading an activist campaign to elicit change in the company's board. He is also dealing with the bankruptcy of General Growth Properties (GGP), whom he thinks will emerge out of Chapter 11 with shareholders intact. Wendy's Arby's Group was one of Pershing's smaller positions and it seems to be moving on to other projects now. You can view the rest of Pershing Square's portfolio, but be aware that the fund is due to update its filings at the end of the week. We will be covering its new portfolio changes in our hedge fund tracking series, so be on the lookout.

Those of you readers who, like me, have taken a position in General Growth Properties (GGP) at the time of its bankruptcy filing, will be very interested to watch CNBC's Squawkbox on Monday morning, May 11. Bill Ackman of Pershing Square, is appearing as a guest host on the morning show and will discuss his investments in Target (TGT) and also GGP. I don't know the exact time he will discuss GGP, but I will be DVDing the entire show (which runs from 6am to 9am EDT) so I don't miss a thing.

So far, so good, with the bankruptcy process. The market for financing commercial real estate is slowly improving, as shown by the high yield debt interest rates continuing to decline (and bond values continuing to appreciate). The major casino stocks (LVS, WYNN, MGM) are also improving in price after being near the brink of bankruptcy themselves. Because there was so much casino construction activity in Las Vegas and elsewhere in the past five years, all done with loads of debt, the casino stocks are a good proxy for GGP's prospects.

After the CMSA, through the valiant efforts of one Chris Hoeffel, Managing Director at InvestCorp, got what it wanted in the TALF extension for CMBX from 3 to 5 years, but subsequently realized it is insufficient to package all existing loans and lower rated securities, it is now focusing on other, much more relevant aspects of the ongoing crunch in Commercial Real Estate (but don't think they are done with TALF, only a matter of time before the push for the new version is rekindled, see below). Their most recent concern: General Growth Properties and the troubling development of Bankruptcy Remote Entities potentially suffering substantive consolidation, a topic whose dramatic implications Zero Hedge has discussed previously.

The CMSA has apparently read Zero Hedge and is now sweating which buttons to push and reverse the course that GGP has taken, which as I speculated, could be very adverse not just for the bankrupt mall REIT but for the entire industry. Here is a press release the Commercial Mortgage Securities Association has issued:

In April there was a development at General Growth Properties (GGP), a recent very speculative investment by yours truly: GGP declared Chapter 11 bankruptcy. Ordinarily, this would mean "end of story", I rolled the dice and lost. But in this case, not so. In fact, as reported on April 4, this is really the outcome that was expected (if not exactly hoped for).

Bill Ackman of Pershing Square Capital, stated in an interview posted by Wealth-Ed on April 4, that it was his preference as 25% common stock holder, to file for Chapter 11. Because the biggest investor in GGP is aligned with my small stock position (1200 shares), I am fairly confident this will work out profitably, maybe very profitably. If Pershing instead was a large debt holder, I would instead be worried, or would never have made the investment in the first place.

A couple of days ago one of my Urban Digs readers pointed out an interesting article from the Financial Times. The article notes that REIT prices in the U.K. have declined significantly below their net asset values and that these declines have exceeded the price declines of the underlying real estate that REITs own. The article touched off some reflection on my part regarding the "REIT indicator".

First a little history: There was a flurry of activity in the late 90s when many REITs came public. After a while the Street worried that the capital they raised would be used to overbuild new properties and the REIT stocks tanked. This also coincided with the Asia crisis and some interruptions in capital market liquidity (yes this is not the first time that the CMBS market has gone kablooey). Further, Internet stocks were just starting to become all the rage, temporarily distracting folks from the value of big fat dividends. A big correction in REITs left valuations quite low.

Commercial real estate continues to be a hot topic among visitors to Research Recap. And while there’s a general consensus that times are bad, there’s disagreement on how bad and whether they are bad enough to prompt widespread downgrades and defaults.

The Chapter 11 bankruptcy filing of General Growth Properties (GGP), which controls many of America’s leading shopping malls, led Fitch to downgrade the outlook for a bunch of related CMBS transactions to negative. Despite the GGP filing, CreditSights reiterated its view that no major REIT is likely to default.

The shoes are starting to drop in the aftermath of the bankruptcy filing of retail shopping mall REIT General Growth Properties (GGP). Fitch Ratings has revised its Rating Outlook to Negative from Stable on 96 U.S. commercial mortgage-backed securities (CMBS) classes across 20 transactions. Fitch said the revised Rating Outlooks are in large part due to the Chapter 11 bankruptcy filing of GGP and certain affiliates which are borrowers in CMBS transactions. The filing includes the special purpose entity (SPE) borrowers for 158 retail properties. Of these, 63 properties secure 58 loans in Fitch rated U.S. CMBS transactions.

“The inclusion of the SPE borrowers within GGP’s bankruptcy filing creates a level of uncertainty for CMBS investors. For example, while the voluntary filing of the SPE borrowers is an event of default on the CMBS loans, a bankruptcy court judge may prevent special servicers from foreclosing on the properties. If the properties remain within the bankruptcy proceedings, based on the material equity in many of these high performing assets, GGP could seek additional leverage secured by the mortgaged properties to help repay their corporate unsecured debt. The presence of additional debt would put substantial additional stress on the properties and impair the performance of the CMBS transactions. GGP has already requested $375 million of Debtor-in-Possession (DIP) financing. At a minimum, CMBS trusts which include GGP loans will incur additional servicing fees.”

Early Thursday morning, the managers of General Growth Properties (GGP) opted to file for Chapter 11 Bankruptcy protection. General Growth has been the poster child of extreme overleveraging in the real estate industry. The filing totals approximately $24 billion in debt and is the largest real estate bankruptcy in U.S. history. General Growth had been working for months to try and settle its debt obligations outside of bankruptcy court. It had been working with creditors to try and relax the terms of the agreements, through not paying interest and extending the time period it would have to repay the debt. However, no across-the-board resolution was reached. It was only on March 31st that the front page of the Marketplace section of The Wall Street Journal had a large article on how General Growth had avoided Chapter 11. So what should you look at going forward and how will this impact the commercial real estate market in general?

Remember Simon?

Zero Hedge discloses all the deals and loans which will inevitably suffer as a result of General Growth Properties' (GGP) bankruptcy, in order to allow readers to make their own conclusions whether or not Bill Ackman's thesis is correct.

One interest tangent: GGP's CMBS entities have filed for bankruptcy as well. This is shocking as these securitized malls had been structured as bankruptcy remote special purpose entities, which, traditionally, is designed to prevent individual properties from being consolidated in the event the parent declares bankruptcy. Lender protections have disappeared. A likely very adverse ramification is that each of GGP's loans will be moved to special servicer status, implying increased special servicing fees, and further reducing recoveries to lenders.