GLG News by Mr. Kenneth Leonard, Principal
GLG News is now G+ Insights
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G+ is a community for professionals, academics and entrepreneurs to connect through online discussions and in-person meetings. You will continue to see G+ Insights (formerly GLG News) here as well as on the G+ website, where you can share and discuss the G+ Insights you read.
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The Myth Of Department Store Real Estate Value Is Finally Put To Rest
December 19, 2008
PREIT, Cafaro Lend Boscov's a Helping Hand | www.printthis.clickability.com
For the first time in history, two major shopping center REITs are helping keep a regional department store company in business through substantial unsecured loans. This should lay to rest any notion that a troubled department store company such as SHLD, could use the so called "collateral value" of their real estate holdings as a means of raising funds when bankruptcy threatens.
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NAVs and Other Fictional Characters
December 17, 2008
A Year of Tumult For REITs | www.nytimes.com
This article highlights the financial community's dependence on what is in reality a myth! By measuring the level of discounted value in relation to some real or imagined NAV or value of the underlying assets, the financial community is looking through the wrong end of the telescope. Further, this reliance on NAV makes no allowance for the impending increase in anchor tenant vacancies that have already been announced by several of the department store anchors. These vacancies and the attendant "domino effect" they will have on the nearby inline stores, are sure to have a profound impact on the 2Q and beyond FFO and NOI of all Mall REITs!
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How Much Equity In Equity REITs?
December 17, 2008
U.S. Equity REITs Susceptable to Downgrades in 2009 | www.printthis.clickability.com
Fitch Ratings lowered its outlook for the Equity REIT sector to negative. In this writer's opinion they did it for many of the wrong reasons and ignored some of the most important reasons for not downgrading the sector further.
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Mall Pall----Appallingly Awful
December 12, 2008
The Mall Pall: Have America's Biggest Shopping Centers Lost Their Allure? | knowledge.wharton.upenn.edu
According to new Wharton research by the "fifth survey of Customer Dissatisfaction" by the little known department of Penn's Graduate School of Business' " Jay H, Baker Retailing Initiative", malls are all but dead unless they quickly fix the problems revealed by a few graduate student's survey. What a crock! It is doubly disappointing because not only is this a less than useful rehash of cliches and very old and obvious complaints that are well known in the industry, it is being circulated by a prestigious institution with close ties to the shopping center industry who should have known better!
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A Classic Case of Greed and "Dumb Lenders"
December 8, 2008
Two Looks At Mervyns and Private Equity | blog.retailtrafficmag.com
The BusinessWeek article referred to above is my nomination for one of the "Best Short Business Stories of 2008". It has everything, lust, greed, envy, vicious internecine battles, tragedy, sorrow, and large doses of human emotions. In a genre as classic as the "Movie Western" it details how Cerberus Capital Management, Sun Capital Partners, and Lubert-Adler bought Mervyn's from Target in 2004, proceeded to load it up with debt, paid themselves $537 million in "distributions" and then took the company into bankruptcy in 2007 and liquidation in 2008.
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December 5, 2008
Centro, GGP Find Ways To Hang On | retailtrafficmag.com
Both REITs have contributed to their own demise by over bidding for groups of mediocre assets and then compounding the problem by over leveraging their acquisitions. The fact that they paid too much at the height of the "feeding frenzy" in retail real estate and then took advantage of accepting far too much money in loans to finance them, is reminiscent of the movie, "The Perfect Storm". Such conditions are unlikely to happen again in our lifetime and consequently only those cockeyed optimists such as Pershing Square Capital Management, Morgan Stanley and Citicorp still believe in the "hidden value" theory of real estate investments which posits that these geniuses know more about how to value shopping centers than all the experts in the shopping center industry.
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Office Depot Sends A Message That GLG Readers Must Listen To
December 3, 2008
More Risks in Store for Retailers | online.wsj.com
In 40 + years of close involvement in the retail real estate industry I have never seen such a risky course of action taken by any troubled retailer. Not only is Office Depot actually closing numerous underperforming stores, but they are announcing to the world that almost all of their new store decisions were bad and either could not produce enough profit to pay the rent or were based upon the blind hope of continued cheap money into the indefinite future. Either way, the management team that allowed this type of strategic planning to proceed should be replaced. It is evidence of even more stupidity than that displayed by the big three auto makers when they flew their private jets into Washington.
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Let's End The Myth Of "Hidden Value" In Retailer's Portfolios.
December 3, 2008
For Sale: 200,000-Square-Foot Box | www.slate.com
This brief commentary about what is happening to big-box buildings when a retailer abandons them comes at a critical time when so many of the "big name" analysts are still talking about the value of retailer's real estate providing some type of "cushion" to a failing retailer. The article properly points out that the vast majority of empty big-box buildings have little or no value! The article correctly gives a very brief list of reasons for this counterintuitive phenomenon. First they mention the lack of demand for this single-use purpose. Next, and of equal importance they note the cost of demising or renovating them to other smaller uses is prohibitive. Finally they mention the need of the communities to continue receiving real estate taxes as the motivation for those communities to arrange for churches, flea markets museums, schools and government buildings to occupy them for $1.00 per year rental, just to get a taxpayer to open the doors.
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Believe Half of What You See and None Of What You Read
November 25, 2008
Mag Mile Maul | www.chicagobusiness.com
This front page article from one of the Midwest's leading business publications is the perfect example of the kind of silly journalism I predicted would flourish during the bursting of the retail bubble. Ms. Monee Fields-White is a new and know nothing business reporter who is quite good at spinning a few quotes about the coming shopping season along the Mag Mile into a scream that "The Sky Is Falling". The key implication of my analysis is to point out how ludicrous and dangerous articles of this type can be to the GLG client base.
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The Failure Of Programed Investing, All REITs Are Not The Same
November 24, 2008
Shocks in Commercial Mortgage Trigger Selloff in REIT Stocks | online.wsj.com
This is another classic example of the blind, sheeplike behavior of both investors and analysts. By treating all REITs as generic commodities, the market has done what it does best,---acting without thinking based upon some computer software ringing a Pavlovian bell. Dumping all REIT stocks seems to me to make as much sense as dumping all retail stocks just because SHLD is going down the toilet and a few marginal retailers who have been dying for several years have finally decided to submit to doctor assisted suicide.
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WITH FRIENDS LIKE THIS, TARGET DOESN'T NEED ENEMIES
November 24, 2008
Ackman Says Target REIT IPO Would Raise $5.1 Billion | www.bloomberg.com
This plan that Mr. Ackman is proposing is good for Mr. Ackman and other stock speculators and short term players but lethal to Target in the longer term. The only way this plan makes sense is if ALL THE PROCEEDS were used to pay down debt and even then, only if the cost of the new debt created by the sale-leaseback costs less than the debt they will be replacing!
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15% of all U.S. Malls Will Be Hurt Bad
November 24, 2008
It's Official, Steve & Barry's To Liquidate | blog.retailtrafficmag.com
The announcement of Steve & Barry's closing an additional 173 stores immediately after Christmas will be a devastating blow to that many Malls. Not only have those malls not yet amortized the several million dollar "bribe" money they paid to entice S & B to take over a vacant anchor store position in their mall,but now they have no idea how they will ever find a replacement anchor! After all S & B was their "replacement anchoe of last resort".
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November 20, 2008
Sears to shutter Schaumburg Great Indoors | www.chicagobusiness.com
With the announcement of the closing of 7 Great Indoors and 3 Sears Essentials and Sears Grand stores in addition to the 4 Sears Department stores and 8 Kmarts previously announced, SHLD is sending a very strong indication that the program of closing Mr. Lampert's earlier forecast of 200 to 300 "underperforming stores", has begun. Although this may be more accurately be classified as part of the "General Merchandise" category or listed in the Retail Sector, I have placed it under "Real Estate" because of the impact these closing will have on the REITs that own the shopping centers and malls that these Sears Stores are in.
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The Other Shoe Has not Dropped Yet
November 20, 2008
Regional Mall REITs Hang ON During Third Quqrter | retailtrafficmag.com
This is a perfect example of what I have been preaching for the past year, namely that there is a definite lag between poor sales performance and Mall REIT FFOs. September, October and November have been retail disasters yet the FFO column for most REITs seem unaffected. Furthermore, the all important NOI column is only beginning to show some weakness. What should the GLG client make of this puzzling news?
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Messrs. Lampert and Balter are Heading Towards Divorce, Finally!
November 19, 2008
Whatever you do, don't buy Sears | money.cnn.com
As readers of GLG News have long known, SHLD was identified as "circling the drain" as soon as Eddie Lampert bought the company and announced it was due to the $12 to $15 billion of "hidden" real estate value in the Sears portfolio. Gary Balter, senior analyst from Credit Suisse has been enamored of Mr. Lampert's brilliance and has endorsed the stock and the portfolio value of Sears stores until just recently. Even today he continues to predict 2008 earnings at $1.19 a share despite admitting "it is the most expensive stock we cover". This is after Mr. William Ackman of Pershing Square Capital, Eddie's strongest supporter, sold 6.2 million shares of SHLD stock. What is going on in this love affair and what does it say about the wisdom of listening to big name analyst who fall in love with some financial "genius" and send the stock price to $190 per share and continue supporting it after it falls to $34.
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October 21, 2008
Analyst decries REITs sell-off | www.investmentnews.com
REIT stocks have plummeted 30% so far in October, says Jan Morrissey of INVESTMENT NEWS and I have no reason to doubt her. However is this a newsworthy event or something that might be helpful in guiding the investment decisions of GLG clients? Without going into detailed analysis of each type of real estate investments, this broad generalization is virtually meaningless.
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Is This Any Way To Run A Retailer?
October 14, 2008
Sears names CFO-elect | www.chicagobusiness.com
Although this article deals with the management of SHLD, I have placed it under the REIT category because it is the single most important issue that will be influencing the success of Mall REITs for many years to come. Mr. Lampert is rebuilding his management team from the bottom up rather than from the top down and still expects to attract a top notch retail executive to "save" the company. The continued decline of Sears and the proposed closing of 200 to 300 "underperforming" Sears stores will have a profound effect on all Mall REITs. When it happens, (and notice that I did not say "if") the short term decline in FFO will be substantial but nowhere near the long term impact that will be felt for the next 5 years it will take to rebuild the anchor attractions of the vacant Sears stores. Talk about fiddling while Rome burns!
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October 13, 2008
General Growth's Free Fall | online.wsj.com
WSJ is indicating that GGP is all but dead and buried. I disagree! After closely following this company from its' earliest beginnings, I can attest to their basic conservatism and good business sense. The only exception was when they got caught up in the feeding frenzy and overbid in the auction for the Rouse Company. Except for the Rouse acquisition, this is a very healthy company.
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Just Like 2001 But Very Different
October 10, 2008
Analysts cautious commercial real estate outlook | www.forbes.com
The recent Goldman Sachs analysis of the prolonged downturn in commercial real estate is based upon a strict comparison with the 2001 downturn during that recession. Their numbers reveal that the 38 REITs they follow will suffer a total return of NEGATIVE 4.5% Are they for real? What do these young analysts know about what is really happening in the commercial real estate markets? I submit, not very much!
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THIS IS NOT YOUR FATHER'S EQUITY REIT MARKET
October 2, 2008
REIT history bodes well for outlook in current volitile market | www.investmentnews.com
If this writer is correct there is very little to worry about for holders of stock in mall and strip shopping center REITs. While I am not an expert in other types of equity REITs, my experience tells me that they generally move in tandem to the shopping center REITs. It is my firm belief that this writer has overlooked several key elements that must be factored into any analysis of the near term prospects of shopping center REITs. My commentary will outline the two most important factors that will prevent the shopping center REITs from making any substantial rebound in the foreseeable future.
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