Big K

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.

Cutting Back Commercial REIT Shorts, Again

Issuing shares is the correct thing to do, and should have been how they raised capital in the first place. Poor corporate governance practices, not only in REITS but in many companies across all industries, have allowed themselves to lever up their balance sheets. They constantly roll over any debts due, and even borrow more, forever increasing debt. Just like the federal government! Why should a company generating cash and paying dividends need to keep borrowing so frequently? Reducing debt and diluting the shares will eventually make SPG more stable, however, somewhat less profitable. SPG bought out another REIT called Mills Corp who similarly borrowed themselves into oblivion with easy credit for explosive expansion. Explosive expansion is risky and Mills couldn't handle it. Hopefully SPG can unwind itself from its debt orgy and emerge as a viable enterprise, unlike Mills Corp.

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.