Simon Properties Earnings Call

According to their call today, SPG’s management expects 2009 to be better than 2008. In today’s market, that’s puzzling to say the least. I’m going to summarize the case against commercial real estate (CRE), then give you some of the more interesting quotes from the call. So skip to the bottom if you already know about CRE’s dismal outlook.

The case for shorting SPG and CRE

  1. Retailers are closing at a record pace. And it’s not just the small ones closing either. Large ones, including “anchors”, like Macy’s are closing too. When a mall’s anchor(s) close, it usually becomes easier for other tenants to break their leases. Overall traffic to the mall decreases, and can create a downward spiral.
  2. Borrowing costs have increased significantly, and SPG has $900 million debt due this year. Overall debt seems high, at around $18 billion.
  3. Many CRE tenants are demanding rent-cuts. They realize deals are being cut for those in trouble, and they understand that more open space = less demand.

Ok, let’s assume I’m wrong, and that all of the above is irrelevant. Then why did SPG change their dividend from 100% cash, to 90% stock + 10% cash today? They probably realize how horrible 2009 will be, but think it’s better to bring expectations down slowly. I’m guessing here.

On to the conference call. Bravo to Michael Bilerman from Citi, for doing his homework and asking important questions. Unlike some other analysts (cough, JPM and GS, cough, softballs, cough). Excerpts:

Michael Bilerman, Citi: “I noticed that you removed the fourth quarter same store NOI numbers, we calculated it for the malls, it was down about between 4 and 5%, wondering whether you could outline what the main drivers of that were, and given your forecast for growth for next year, given that drop in the fourth quarter I’m wondering what keeps you confident in those numbers.”

Steve Sterret, Simon Properties: “You are right in that on the surface the fourth quarter comp NOI which showed down in the 4% range but its irrelevant because 300 of that 400 basis points was simply related to the way we adjusted the methodology and how we calculated cam revenues….. Don’t put credence into the fourth quarter number and really look at the overall trend for the year in that 1% range.”

Q4 was the worst of ’08 by far, especially for retailers. And this year will probably be the same at best. But SPG management says we should use the first three quarters to predict ’09 earnings? Hmmmm. Luckily Mr. Bilerman presses on:

Michael Bilerman, Citi: “So you’re saying it would only be down about 1%.”

Steve Sterrett: “That’s correct. If you normalize the way we accounted for cam in the fourth quarter, the fourth quarter comp NOI in the mall business would have been down about 100 basis points.”

David Simon, SPG: “And that’s a function of overage rent and bad debt.”

Steve Sterrett: “Mostly overage rent in the quarter.”

Michael Bilerman: “But that’s going to accelerate into next year as well. You have to assume that if sales trends continue to go the way they are the overage rents will continue to get squeezed, you’ll have some increased vacancy, you’ll be able to still have positive mark-to-market but I have to assume the same headwinds that effected you during this year where you were able to eek out the 80 basis points positive but take in more towards the lower end or even negative same store.”

David Simon, SPG: “We feel confident about what we’ve told you. Its flat to 1%. We have work to do. We’re pretty good at what we do. We have leases that will roll over. We’re still making leases. We’re watching our costs. And also we don’t think our bad debt will be as bad as it was in 2008. We will work hard to achieve what we’ve just explained to you.”

Here’s the full transcript at SeekingAlpha (link goes to page 5, where the exchange above starts. I’d also recommend listening to the conference call if you have a stake in Simon. I think it was rather revealing.

Simon Properties Exposure to KB Toys Liquidation

The bankruptcy and liquidation of all KB Toys stores was announced over a month ago. But I just found out how much exposure Simon Properties (SPG) has to them. I was searching around and found out that Simon has 40 KB Toy Stores in their properties.

Note: I can’t link to this page. To see it for yourself, you need to go to, click on “find a store”, then search for “k b toys”.

The KB liquidation itself probably won’t have a huge material impact on Simon’s bottom line. But it’s certainly worth noting, and SPG reports before the open tomorrow. I haven’t seen this info anywhere else, but that’s understandable. Most wall-street analysts don’t have search-engine skills like me.

Starbucks announcing the closure of 300 additional stores yesterday can’t help the Commercial Real Estate situation either. Not to mention that a lot of these malls have lost their “anchor” stores like Macy’s. That means other tenants may be able to ditch their leases without penalty.

Disclosure: Short SPG.

Side note: Also bought TBT (ultrashort 20 year treasury bonds) today at $25.58. Looks like a good risk/reward here, with the Fed only threatening to buy treasuries (so far).

Goldman Sachs’ Amazingly Low Tax Rate

Goldman got $10 billion in taxpayer cash in 2008, plus loan guarantees. Yet according to Bloomberg, they only paid $14 million taxes on $2.3 billion in profits. Their effective tax rate went from 34% in 2007 to just 1% in 2008. How’d they do it? Tax credits and, here’s the key “Changes in geographic earnings mix“.

I’m not a CPA, but that screams “tax shelter” to me. According to the Bloomberg piece,

The rate decline looks “a little extreme,” said Robert Willens, president and chief executive officer of tax and accounting advisory firm Robert Willens LLC. “I was definitely taken aback,” Willens said. “Clearly they have taken steps to ensure that a lot of their income is earned in lower-tax jurisdictions.”

It’s good to know that we’re giving trillions in taxpayer dollars to companies who use offshore tax havens. Let’s keep the bonus money flowing to these guys too. The average Goldman Sachs employee got a bonus of $600,000 in 2007, on top of base salary. That added up to $18 billion, double the average on wall st.

I’m agnostic, but will continue to pray nightly for executive bonus clawbacks. It looks like taxpayers are about to shell out $1-$2 TRILLION to buy the toxic assets of these banks. The least we can ask is a return of their ill-gotten gains.

More reading:
Bailed-Out Firms Have Offshore Tax Havens
GAO: US Firms Use Tax Havens
Hank Paulson’s Ultimate Tax Shelter

Dutch Bank Funded U.S. Tax Shelters

Geithner’s Chief Of Staff is an Ex-Goldman Sachs Lobbyist

No conflict of interest there. Mr. Geithner’s pick, Mark Patterson, just left Goldman in April. I had hoped for a more unbiased team from Mr. Obama. But this seems like a blatant departure from his pledge to exclude lobbyists from areas where they would be biased. Excerpt:

Melanie Sloan, executive director of the Citizens for Responsibility and Ethics in Washington, said President Obama was retreating from his own ethics rules barring lobbyists from working on the issues they lobbied about during the previous two years. “It makes it appear that they are saying one thing and doing another,” she said.

Goldman Sachs is up 13% today. Let’s keep that revolving door moving.

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