Tuesday, June 2, 2009

Simon Property Group (SPG) : The next WorldCom?

This may be a conspiracy theory but the more I read about Simon Property Group, the more things do not add up. As a REIT, they base their earnings on Funds From Operations (FFO) such as rental income, royalties, sale of properties, etc., rather than earnings per share.

As you look at SPG's earnings reports and history, it is quite amazing how their FFO grows rather dramatically each quarter despite other REIT's struggling to stay in business. SPG's business model is not much different. They own similar properties, particularly malls and super-malls. They are exposed to the same toxic assets as the others. They have similar short and long term debt issues as the others.

Yet, their FFO grows while others fall. General Growth Properties (GGP) went bankrupt in April as it was obvious they could not keep up with upcoming debt maturities. there were no lines of credit available to them to refinance their debt. There was not enough equity to sell more shares to generate capital to pay off the debt.

For SPG, they were able to tap into more credit lines and also offer a secondary offering on the market due to the stock price so high based on FFO performance.

But is SPG really performing? Are they really generating higher rental income in the worst recession we have seen in our lifetime? Are they somehow able to reduce operation costs that much to offset lower rental income? Are their commercial properties really not losing value?

This goes against not only what experts are saying about commercial real estate, but also against the actions of SPG itself.
  • They issued a secondary offering which diluted their shares by close to 20% in order to raise enough cash to pay off some due short term debt.
  • They reduced their dividends from .90 to .60. But not only that, it is also no longer a cash dividend but a dividend in mostly stock but a little bit of cash, further diluting their shares by adding to the float.
  • Yet despite these actions, they claim to have record FFO and earnings.

Why does a company have to dilute stock if they have record growth in earnings? It is because their debt far outweighs their capital. SPG will have to have blow out earnings for many quarters to come in order to manage the growing debt and reduced values of properties. To do this, they have to show they are reducing costs and growing revenues from rents. And you can't tell me they are increasing rent growth.

This smells very much like a cooking of the books. I suspect SPG, if they continue to show 10% growth in FFO each quarter, has to be a red flag to the SEC. I am not long or short SPG although I do trade SRS once in awhile but I think SPG is a stock to keep your eye on for a possible WorldCom type collapse in not so distant future.

The other issue with SPG is by reducing the dividend and moving it mostly to stock, it may create a bubble for SPG. As the stock goes up more investors may be diving in buying SPG wanting the stock dividend. This may be what we are seeing today. At the same time, insiders will be selling their shares to the company perhaps to payout the stock dividends. But in months to come, if SPG even falls 10% or more, it can create a spiral effect as investors heavy in SPG may opt out since their stock dividends are getting smaller and more risky. A stock like this will fall very quickly without regard to resistance levels.


  1. Your not the only who thinks this. I just checked the Put Premiums on various strikes and Maturities and they are all damn expensive.

  2. http://www.finviz.com/quote.ashx?t=spg&ta=1&p=d

    5.51 : 1

    debt to equity ratio