GRT is a horrible long position. This is why:
(1) The balance sheet. At 9/30/08, GRT had $1.626 billion in debt and $210 million in preferred stock (against $1.86 billion in assets). If you take that hybrid debt out and leave only true equity on the balance sheet, you’ve got a negative tangible net worth of $80 million. All of this debt is supporting a bunch of shopping malls that are being sold off at substantial discounts. The actual market value of the PP&E is about 60% of what is on the 9/30/08 balance sheet. Retail commercial real estate values are only beginning to drop. That’s a disgusting balance sheet. This balance sheet is even worse than General Growth Properties, and look at the mess they are in.
(2) Liquidity. At 9/30/08, you’ve got $12-13 million in cash and $90 million of availability on the company’s credit facility. Given that the company pays $93 million annually on dividends and roughly an equal amount on debt maturities, it will not have the cash to meet its obligations. This is why GRT is desperately selling off assets to come up with cash. It will eventually stop paying cash dividends thanks to a recent IRS ruling, and will dilute existing shareholders each quarter when it makes its distributions.
(3) The management team is a joke. This company is run by some second-generation, trust fund baby that is learning the job on the fly. His daddy, who did all of the heavy lifting with the company, was the CEO and handed him the steering wheel as CEO of GRT in his 30’s. The CEO, COO and CFO of the company are all in their 40’s. Try and find any other retail REIT on the IYR index that has a CEO that is younger than Michael Glimcher and I’ll send you a check for $10,000 (you won’t find one).
GRT won’t be able to make its cash dividends, and must issue dilutive dividends to preserve liquidity to meet its debt. It’s only hope is massive dilution to common equity to come up with the cash it needs to avoid chapter 11. GRT is not the only REIT selling off assets; GGP must move shopping malls to meet its debt obligations in late January. The market is flooded with REITs selling shopping malls, and more will follow. Who is honestly going to pay fair market value for shopping malls these days?!? Sellers will be taking MAJOR haircuts.
The CEO of this company is way in over his head. In periods of great distress, you’d like an experienced CEO that actually knows the ropes. This guy is just trying to keep his head above water.
If I could find the shares to borrow, I would short the POS stock to $0. The preferreds are in better shape, but not by much. There is absolutely no value in common equity on GRT, and if you’re long GRT, you might as well be flushing your money down the nearest toilet b/c this company is a POS.
GRT to $0
1. The balance sheet. You really don't know what the true value of the assets are. In real estate we all know book means nothing. They have been unloading their least productive assets in favor of hanging on to the ones that are most likely worth more than book.
2. Liquidity. You're right, but they will probably cut the dividend. Even so, if they survive and cut dividend by 50%, your returns are still fabulous at the current price.
3.I don't know, but using your age basis assessment sounds absurd and smacks of jealousy. I have worked with many brilliant guys in their late 20s and 30s who could manage GRT.
Last of all, my bet is you are short. If not, why give a damn?
Pat, I appreciate you being civil about things b/c that is when the best conversations are had.
First, I would like to partially retract some statements I made about the current CEO of this company. I have never met him and I am applying generalities to him that may be unfair. However, in my experience, sons and grandsons of the originator of the business running the show doesn’t work out too well. I am sure I would love Michael Glimcher if I ever played golf with the guy; I don’t doubt he’s great, but if I had my hard earned dollars in this company, given the ferocious macroeconomic headwinds facing the CRE industry, I would prefer to have a more experienced CEO than a 40-year old grandson of the original owner.
You likely know much more than I do about commercial real estate given your involvement in it. As you mentioned, we do have different approaches toward investing. I’m a bit more simplistic. I’m an outsider that begins analysis with wide-scale macroeconomic analysis, and then focuses on quick financial analyses of companies that I believe are adversely or beneficially affected by the macro trends. From this, I make my investment decisions.
In this case, I think CRE is an industry that has benefited from a credit and retail spending bubble (retail REITs). I believe there is great refinancing and liquidity risk for overleveraged property developers, and I looked for the companies that appeared to be in the most trouble. Glimcher was one of those companies that I thought faced significant risk.
General Growth Properties may be a day away from Chapter 11. Outside of dilution and/or selling assets at distressed prices (if buyers can be found), GRT looks to be headed in the same direction. It’s certainly possible that the company can work the qualitative factors you speak of back to a higher stock price, but I’m (obviously) skeptical.
Iif any of you have a significant amount of money in GRT, I hope you are hedged in one fashion or another b/c there is a significant amount of risk in this company.
GUYS GUYS GUYS !!!!!!!!!!!!!!!!!!!!!!!!!!!
GRT is not the only retail reit going down. So is CBL and PEI and many others. CBL and PEI are good retail reits with great management. However, the whole sector is being hit. You are looking at book value and trying to determine market value. Real eastate is location specific. They may have good ones and bad ones. Secondly their loans are non recourse so they can walk away from the worst and still survive. Also you are confusing the wholsale CRE and bank loans on commercial real eastate. Today you can refinance a decent shopping mall for 4.5% 5 year fixed money. That is 3% lower than it was last year. Hence, refinancing is cheap. That means that if you have decent properties your costs will come down. That allows you to obsorb greater vacancies without going out of business.
I do not know if they will be one of the survivors. However, at $2 it is nuts to short this stock. If the sentiment turns you could have a 2-4 dollar loss in a day. YOu would have to see it going completely bust to make $2.
I understand your logic in shorting a reit index. It sucks right now. Retail sales have dropped off the cliff and liquidity has dried up. So on face value, I understand your explanation, and congrats.
I'd be a little careful now. Be smart and be quick, because a mild-depression has been baked into several of these reits, and there is help coming.
Pat, I get the qualitative issues but the FUNDAMANTAL issue here is that GRT has major cash flow issues and and a significant amount of debt. It doesn't take much to understand that this company has major issues. It appears as though the only hope for this company is diluting the common shareholder into oblivion, and that means that people like you will be wiped out on your investment.
Also, stock dividends are (1) dilutive and (2) taxed at a much higher rate (cost basis of $0) than cash dividends. GRT will be paying dilutive stock dividends from now on.
Do yourself a favor and check out http://alfred.stlouisfed.org/. Over the last few decades, check out retail sales, the personal savings rate, money supply, the money multiplier, etc. The personal savings rate has declined from above 10% to nearly 0% at its recent trough. It is already ascending and will continue to do so, killing the retail industry. Stock market wealth has been wiped out, consumers can no longer use their homes as ATM machines -- the game has changed.
The US consumer is over-leveraged, and it will take years for them to pay off their debts and build wealth through savings.
GRT was a leveraged play (see the balance sheet and poor credit ratings) on the consumer and commercial real estate values. The consumer won't be the same for many years, and the world is going through a massive real estate deflationary correction.
GRT is either going backrupt or common equity will be diluted into oblivion.
What an excellent post, PatManley, and what a good time to accumulate and hold shares in this well-managed company. The over-reactions, shorts, and daytraders have provided some incredible buying opportunities and that's why I love them, even with their bad attitudes.
Crunching numbers seldom reveals a company's long term prospects for success. One has to look at its history and most importantly, the quality of its management.
In the case of GRT, I certainly expect lower earnings and a reduced dividend considering the economy as a whole. I don't expect anything else other than continued improvements in the business over the coming years.
Its no secret GRT is currently 94% leased company wide. This is a good number even in a growing economy. In fairness, some leases have been re-negotiated at lower rates and new leases are also lower or at best not seeing increases in most cases. Does it matter in the short term? No.
In this economy the priority is to keep tenants (and help them stay in business) and sufficient cash flow to pay your bills until things turn around again. Glimcher has both, and the economy will improve. It always does.
If one's goal is to make short term trades and monitor stock prices all day its easy to fall into the trap of analyzing everything and believing every little blip or calculation means something. In reality, most daily fluctuations mean nothing. Overreaction, worry and fear seem to be the dominant personality traits for day traders and short traders. That's ok. This is what benefits buy and hold investors the most.
Those of you who invest over the long term and only invest in businesses they understand, or have owned their own business for at least ten years, understand exactly what I am talking about.
I am willing to bet, that you, like me, don't worry much about what happens in the stock market from day to day and may not even pay much attention to prices on stock you own. You invest in businesses and people, not speculate on stock prices. One has nothing to do with the other in the short term.
Evaluating a business has very little to do with in-depth financial analysis. In fact, the financial part of the analysis literally takes about five minutes at most. A cursory analysis takes even less time.
The real analysis, the things that count, are more time consuming (and admittedly more mundane) and involve studying management, their background, experience and longevity with the company or in the industry. Studying the philosophy of the founder and understanding the continuity of that philosophy by their family members (as in the case of GRT), and last but not least, but the absolute most important factor, studying their reputation with those they do business with including their stockholders.
Every business has problems from time to time. This is normal and to be expected. However, when the management is competent and honest, as is the case with GRT, and you see them helping their tenants stay in business, and you see banks working to help them, these are huge green flags telling you this is a company everyone expects to be around for a long time.They are willing to invest in them, not buy purchasing stock, but by giving up something and risking their businesses for greater gain in the future. REITs more than most businesses are built on tight, long term relationships with people, not on financial reports.
I don't want to dissuade anyone from looking at the financials, but I don't believe stock analysts are at their best when they begin to rely on numbers and ignore the qualitative factors. If one spends all day in an office crunching numbers and fails to talk to management, the people that finance their projects, or their tenants, of course they are going to come to negative conclusions.
I hate to tell you GRT longs this, but tommy is right. Credit spreads for commercial mortgage backed securities with BB ratings are over 4,400 basis points, which is just absolutely ridiculous. I've never seen anything like it before. GRT has a BB- credit rating by S&P, so you can only imagine how GRT debt is trading right now (at SUBSTANTIAL discounts).
This company has bankruptcy written all over it. It's a no-brainer unless they are lucky and come up with a ton of dilutive capital, and that's not exactly good for common shareholders.
A 40.8% dividend screams "We don't have the cash to pay this". This dividend is going to be paid in dilutive shares, and if this country has people honestly looking at this stock and buying it for the dividend yield, then we need to pump billions into financial education of our people b/c that is just being dumb. GRT cannot afford to pay cash dividends of 40.8% and it will certainly be paid in dilutive shares in 2009.