2houndz

DDR to Sell Malls at 30% Discount...to 2004 Prices

If these eleven assets represent FMV for the industry as a whole, then we are clearly screwed, but it would be impossible to jump to that assertion. Real Estate is lumpy and illiquid, and it changes hands for all sorts of reasons. A seller who has his back against the wall will do some semingly stupid things, but one transaction does not usually tell a clear story. I'm not saying we are not screwed, but we can't divine that opinion from this deal alone.

The story that seems to be coming into focus is that many of the public REITs are getting hammered, while the smart, patient private investor is finding golden opportunities. The fact is that real estate, being lumpy and illiquid, is a terrible platform when chasing quarterly profits to report to Wall Street. Time and time again I see the REITs fall into one trap after another and spin stories on the quarterly call that don't make long term sense, while many of the private companies have a long term horizon and do what is expedient looking out for the next five years or for the life of the asset. Kimco once had the long term approach, and it was a good, steady income generator that promised less than it could deliver. Then they started promoting people who knew little to nothing about actual real estate, but knew (or thought they knew) how to grow the business exponentially because they possessed financial genius.

Some of the analysts I have spoken to over the years don't understand the business well enough to really get it, so they can't help watch the henhouse - they are part of the problem. Maybe this industry should get back to the basics of understanding real estate and having a long term plan and objective for a portfolio BEFORE they close the deal. Highly leveraging cash flowing assets just because they can borrow the money is not a solid reason to risk stockholder equity. My fear is that most of the people who understand this are either retired or working for private capital.

As an aside, I heard about a guy last night (investor, not a real estate guy) who bought quite a few centers from a company where I once worked. He bought his portfolio at a 6% cap average, levered with a personally guaranteed mezz loan to 95%. A good offhand guess at the current value would be a 10% cap. Obviously this guy is about to lose everything he has. Even the private money is getting crushed if they didn't go into this for the right reasons, with solid plans, sensible leverage and realistic purchase prices.

CRE is going to get a lot uglier before it gets better. When this is over, my hope is that the industry can winnow away the people who don't know what they are doing. Also, I hope the investors buying the new offerings know what they are doing, because it seems like folly to me.