Commercial Real Estate

From a Credit Bubble Stocks correspondent

There is a nice looking strip mall on Penn Avenue, in Bloomington, at its intersection with 90th Street. It is 3/4 empty. This strip mall collects customers from traffic that is driving north or south on Penn. There is a large furniture store on Penn, just south of 90th, on the southbound side of Penn. It has been empty for several years.

There is a much larger, more varied mall - Southtown - and quite a few other nearby stores, at 78th and Penn. It draws enough traffic away from the Penn & 90th strip mall to have mostly put it out of business in a depression like this one. Anyone driving east or west on 90th who bothers to turn onto Penn can reach Southtown in 3 or 4 minutes, tops. Anyone driving south on Penn probably has passed Southtown, three or four minutes earlier

There is an older, smaller strip mall on 90th Street, starting at Penn and going half a block east on 90th. It is full. It trolls traffic that is driving east or west on 90th. There is no other shopping area on 90th close enough to draw east- or west-bound traffic away from this mall.

The shopping center anchored by the Festival supermarket at 98th and Lyndale, has three empty stores. The former Burger Brothers sporting goods store in that shopping center is still empty after six years. One of the stores in this mall is occupied is occupied by a tailor. He is just one man. He is rattling around in space that used to be filled by a Blockbuster video store.

Also, there is the Mall of America. Its T-shirt store count goes up, year by year. It is in what has been called a 'senseless killing neighborhood" that has low income, low education and high crime. The Light Rail boondoggle sends endless streams of Section 8 youths who drive customers away.

I understood, a long, long time ago, that most of the baby boomer yuppies who refused to have children would find nobody to buy their stocks and their two-story houses when they wanted to retire.

One thing that happens with old people is that they stop buying things. I have looked at the interiors of thousands of houses. When people are older than 55 or 60, they have almost nothing new in their houses unless they are quite wealthy.

So lots of strip strip malls are going down because baby boomers mostly failed to reproduce.

Marginal locations will die off during this depression, possibly to be re-purposed as soup kitchens, Make facilities, store-front churches, grow rooms, low-security prisons or easy mini storage.

I'd liken the ongoing die-off of marginal commercial locations to what happened to agricultural land use following the mass die off caused by the Black Death plague in the 1340s and 1350s. Marginal land slipped from production. Survivors living on marginal land migrated to fill any fertile land emptied by the plague, abandoning land on hilltops or land that was too-dry, too-cold, too-stony or too-infertile.

Some strip malls and shopping intersections will survive. 50th and France looks as fat and happy as a tick that has just had a blood meal.

So much that we have taken for granted is going to be destroyed because people failed to make intelligent plans.

Very bearish for commercial real estate.

Bearish on Commercial Real Estate

WSJ: As Big Boxes Shrink, They Also Rethink .

There are so many super-bearish headwinds facing commercial real estate in the U.S.: the internet, aging population, global wage arbitrage, massive overcapacity.

Today's Trading

During the last half hour, the equity put/call ratio was 0.86. We've had a nice 100 point correction in the S&P and now it pays to be disciplined about covering some shorts.

Credit Bubble Stocks short Grubb & Ellis (GBE) is down an amazing 11 percent today, so I'm buying back some of my short. This one tends to bounce after a massive down day, which will allow me to reshort if it happens.

Also bought back some of my Regency Centers (REG) short.

A Little Bit of Short Covering

A nice down day in the short portfolio. Buying back some of the MGM, WGO, and REG that I sold earlier in the week.

Doing Some Covering

For weeks I warned about the manic sentiment and unprecedentedly high levels of call buying. I was starting to sound like a broken record. During that time I built short positions.

The S&P 500 subsequently fell 100 points and we are seeing equity put buying at parity with call buying.

I had some limit orders to cover shorts that got set off on this morning's dip, with the result that I covered some REG, WGO, and MGM. Also some of my Treasuries calls sold.

The market is struggling here in the afternoon even though call buying has picked up again. If we get a selloff anytime the rest of the day, it will be an easy decision to cover a bunch more shorts.

Call Buying is Back

Equity put call ratio for the first half hour was 0.47. Not what I would want to see if I was bullish.

REG and GGC reported earnings after hours yesterday. REG is up huge this morning.

Taking a look at the REG financial information supplement - I'm not impressed. Same property NOI declined 0.3% from the previous year.

Sell Signal: REITs Yield Less than 10-year Treasury

This is a reliable sell signal for REITs:

In the wake of the price surge in real estate recently, the yield on equity REITs fell to 3.49% as of April 29, according to data from the National Association of Real Estate Investment Trusts. That’s slightly below the 10-year Treasury’s 3.76%.

Regency Centers (REG) Q4 2009 Supplemental Information

Regency Centers (REG) has posted their fourth quarter 2009 financial supplement [pdf].

There are a number of interesting elements in the report:

• Fourth quarter net operating income (NOI) was down 7.4% year over year, and the full year NOI was down 6.7%, meaning that the decline steepened in the most recent quarter.
• During the quarter they acquired (their pro rata share) $116 million of property at an average 8.79% cap rate, and sold (their pro rata share) $136 million of property at an 8.12% cap rate. Additionally they sold $53 million of completed development properties at a 9% cap rate.
• For the full year, the payout ratio of diluted FFO was 192% as opposed to 77% in 2008.
• The fixed charge coverage ratios have also deteriorated since 2008.

NOI for the full year was $328 million.

Regency's NOI means its income from shopping centers, but Regency has additional sources of income that should be accounted for: property management fees, leasing commissions, etc. These totaled $40.5 million for the full year.

Of course, it has expenses that are not included in NOI either, especially general and administrative expenses. Counting only the operating, cash expenses, these non-NOI expenses were $56 million - greater than the non-NOI income by $15.5 million. (In 2008, the amounts were about $80 million for income and $51 million for expense.)

Regency has an enterprise value of $4.95 billion. Taking just the NOI for 2009 that implies a 6.6% cap rate. [If you subtract the $15.5 million that the side businesses lost, that implies a 6.3% cap rate. On the other hand, if you thought the side businesses could recover and sustainably make $30 million a year again, that would imply a cap rate of 7.2%.]

One thing that needs to be added in is the value of the development portfolio. They have a certain amount of square footage under development/construction that represents underutilized assets. I haven't put a number on this yet.

Selling REG-E

I have sold out of the REG-E preferred and am now just short REG.

Thoughts on REG and RMIX

Investors' exuberance for Regency Centers (REG) on Friday was not rewarded today - gave it all back.

I have been looking at U.S. Concrete (RMIX) as a possible short for about a month now. Today it rallied 25% on nothing more than O'bama's vague suggestions that we should spend the TARP money on make-work road projects.

RMIX bonds - with hardly any debt senior to them - trade at a 25% yield.

More on YRCW and REG

Regency Centers sold 8 million shares at $30.75 and immediately jumps to over $33. Too exuberant.

On the YRCW exchange offer: it looks like (assuming 100% bondholder participation) the current equity gets 5% of new equity, and then the union gets cut in for 20% of the new equity after that, and then management gets cut in for 5%. So current equity = 0.95*0.8*0.05 = 3.8% of new equity. Current equity valuation is $71 million which implies the post restructuring equity would be worth $1.86 billion. That is more than the entire enterprise value today.

Regency Centers (REG) Stock Offering is Good News for Our Pair Trade

Regency Centers Corporation (REG) announced today that it will sell 8,000,000 shares of its common stock.

That is good news for the REG / REG-E pair trade I have on. Increased supply of REG shares will weigh on the market incrementally more, while creating a larger equity cushion to support the preferred, REG-E.

Regency Centers (REG) Gives Guidance for 2010

Their guidance is for a drop in same store NOI of 1% to 4% in 2010.

They are finding that "failures, closings and move-outs continue at high levels," and that "lenders and CMBS servicing agents are kicking can down the road.”

Please read about my REG/REG-E pair trade if you haven't already.

Adding to REG/REG-E Trade

The spread on my REG/REG-E pair trade has moved against me over the past week, so I added more capital to it today.

One of the attractions of this trade is that REG-E yields 8.2% Here is the prospectus for REG-E.

What I'm Doing Today

-Sold more GGC at 15.6.
-Adding capital to my short YRCW / long U.S. Freightways 8.5% note due Apr 2010 trade - see the 8-K they just filed about an exchange offer.
-Looking at adding capital to my short REG / long REG-E trade.

I need to write more about the YRCW trade. Also I am reviewing the third quarter REG earnings and conference call and I'll be posting about it later.

Regency Centers (REG) Reports Decline in Same Property NOI

I'm looking at the Regency Centers (REG) supplemental information release for third quarter 2009. For the quarter ended September 30, 2009, same property net operating income (NOI) declined 6.5%.

When I started talking about the REG/REG-E pair trade, I concluded that "my key disconnect with [RBC's bullish stance on REG was that] they expect NOI growth and I would consider them lucky just to maintain present levels."

So... NOI is dropping, just as a reasonable person would suspect. The key drivers of NOI are the rents and occupancy of their shopping centers. These are determined by the supply and demand for retail space. Supply increased during the credit bubble and demand is decreasing due to the crash.

Time to Add Capital to Regency Centers (REG) Pair Trade

The other big pair trade (besides GGC/OLN) that I am doing right now is the short REG, long REG-E trade.

This trade has been cleaning up too: REG is down 10.8% and REG-E is up 5.8% (chart). The spread really widened the past few days.

I am planning to add more capital to this trade, so I made a P&L matrix:

Assumes equal share amounts. I bolded the values that I think are likely outcomes. This trade is also nice because it has positive carry.

Regency Centers (REG) Pair Trade Working Brilliantly

Regency Centers common stock is down 7.49% since my post on the short REG, long REG-pE pair trade. The preferred is up 5.5%. This trade is full of win!

Obligatory Trading Ideas

This is a trading blog not an audit the fed blog, so I put these ideas to you for this week:

I will be looking to buy GGC puts in size. I like OLN and OLN debt. REG needs a 50% haircut.

Nasty Day for Garbage Stocks

My favorite short, GGC, down 5% today and more after hours. I have been meaning to post about GGC for some time. I'll try to put something out this weekend. My price target for this one is $5-$10.

REG pair trade is working quite well - down 5% versus the preferred down 1%. Oppenheimer initiated coverage today with an underperform. My price target is <$20.