Simon Property Group, the nation’s largest retail REIT, reports Q1 earnings tomorrow morning before the bell. It should be interesting. The brutal short-squeeze (which I think was orchestrated by Goldman Sachs, among others) sure hasn’t stopped.

SPG is up about 100% from their March 9 low. S&P, who lists Simon as a Client, also did yet another strong buy reiteration today. It’s so nice of them, to reiterate their strong buy (which was initiated at $107) every single week.

The funny thing is, I’m not seeing the upcoming earnings report mentioned anywhere. This is the largest mall owner in America, which will provide priceless insight into the REIT and retail environment (on a lagging basis). That’s a big deal. None of the wires have it on their news page. I only found it here, on Simon’s investor relations page.

A skeptic might think management told the PR dept not to submit any releases or advertise earnings at all. Maybe they did submit the stories, but no one picked them up? Doubt it. Simon’s has a great PR department. Read this this Forbes piece for proof, where one of the quotes is “David Simon refused to prop his REIT atop a mountain of debt. Now he’s ready to feast on fallen rivals.” HAH! Simon has a debt/equity ratio of 6, with $19b of debt on their balance sheet, plus another $6b off-sheet. Any cash they can scrounge will go to pay off their debt. They’re paying out their dividend in common stock, for the love of god.

Questions I have include:

  • Will retail weakness start to show up in their results?
  • How are vacancy levels?
  • Will mgmt lower guidance, or provide any at all?
  • Will they write-off the Liberty PLC investment (british reit they invested in, which has plummeted in value)

This could be the quarter where things start to break down for CRE – rising vacancies, write-downs, higher cost of capital, etc. Consumer spending habits have changed, and I don’t think it’s temporary. This will be brutal for Retail REITs. Especially highly-leveraged ones like Simon (6x debt/equity).

I expect a nasty report and conference call. But so far Simon has been able to maintain strong institutional support (95% institutional ownership). Until that erodes, they could float along for a while, like a big ass debt-laden Zeppelin.

But if they start to lose that support, things could get bad quickly. Will it happen this quarter? Maybe. But I strongly believe that it will eventually. What are the other options? Debt has to go, consumer spending will decrease, commercial property values will fall. I suppose they could get bailed out by a combination of government assistance and inflation. Inflation would make all their assets rise, and debt shrink in relative dollars.

Sorry Simon. You do have some great properties. But like GGP, you have too much debt. Your debt just has a better maturity schedule. And you have strong institutional support, which means a lot. But they’re starting to ask more for your debt. And I bet the share offering cost a pretty penny too.

Link to my comments on SPG’s Q4 2008 earnings call.

disclosure: short SPG