Big K

Cramer's Lightning Round - The Hottest Market in the World (6/9/09)

Realty Income Corp's leverage is less than half of most REITS. They
will not have trouble refinancing in 4 years, when their earliest note
is due. Realty Income also has been paying down some debt. Cramer has been right about many companies, but here I think there is much less risk than he is giving them credit for. Many REITS have an unbelievable amount of debt, with little chance of repaying it. Not the case for Realty Income who has a debt of only $1.3 billion (about $13/share). Consider, for example, similarly sized Weingarten Realty, a company that up until the last several years, had been well managed and conservative. Their debt has suddenly ballooned to $3.2 billion in the last several years (about $26/share after they issued more shares). Unlike irresponsible Weingarten and many other REITS, Realty Income has been much more prudent and conservative in their use of debt to expand, so I believe much less risk than most.

Mack-Cali Late to the (Follow-On) Party

I was looking at the April Value Line report on WRI. It is
shocking to see how this once very successful business has been run
into the ground. While WRI's properties are performing adequately,
unfortunately, the management has trashed the business over the last
decade. They allowed the debt to balloon to $36/share. How does a
fairly small company like this allow their debt to grow to $3.2
billion? The good news is that they have solved the problem by adding
more shares, reducing the debt to somewhere between $20- $26/share.
The bad news is the debt is now $20-$26/share. If they kept all the
dividends to pay off the debt, at the now lofty new dividend rate of
$1/year, it would take 20 years to pay off this debt.

This is what killed the REIT industry. Borrow, borrow and borrow some
more, and don't pay down any debt, just roll it over. Oops, credit is
cut off to the debt junkies. The drinking party is over.
Accordingly, WRI will stagger in a stuporous hangover for years, and
that is if the retail situation doesn't get any worse. Now that
rolling the debt over may no longer be an option, WRI is a potential
bankruptcy candidate, despite a fairly robust business. It's time to
remove the fools in the executive suite and replace with people who
know how to balance a checkbook.

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

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.

Commercial Real Estate Implosion Is Imminent

This seems to be a common argument I've seen recently. Because there was massive defaulting in residential real estate, there will be massive defaulting on the commercial side. And by analogy, there will be massive defaulting on everything else. The only answer as to why it will happen, given in the article, is that it hasn't happened yet.