Bankrupt on Friday?

By Travis Johnson, Stock Gumshoe, December 11, 2008

Porter Stansberry, whose newsletters I write about from time to time, is revamping his new Porter Stansberry’s Put Strategy newsletter to focus not on his original plan — which was selling puts to buy bargains at even lower cost — but on betting on the demise of companies, and particularly (at the moment, at least) companies in commercial real estate.

And here’s the “tease” for the recent letter he sent out about this Put Strategy newsletter:

“America’s Next Major Bankruptcy (it’s not GM or CitiGroup)… Happens this FRIDAY at Midnight”

What is this one?

“… the company I’m talking about, which is the 2nd biggest in its industry, and is headquartered in Chicago, has until Friday, December 12th at midnight to pay back a $900 MILLION loan.

“In the current market, this amount of debt is lethal….

“There is absolutely no way the company can make this $900 million payment or raise this kind of money.

“And there is absolutely no way they can continue as an ongoing business. The firm basically said as much, in their most recent Quarterly Report (10-Q), dated November 10th of this year.

“Our potential inability to address our 2008 or 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a going concern.”

So what is this company? Porter goes on to provide a few other clues, including that they operate about 200 locations throughout the country.

And the Thinkolator and a dozen or so alert readers agree:

This is General Growth Properties (GGP)

They do indeed have $900 million in debt that comes due tomorrow — that debt is essentially a mortgage on a couple of their large properties, and the due date has already been pushed back by a couple weeks to give them a chance to dig out of their hole, but I’d have to agree with Porter that I don’t see many options for them to refinance that debt. Of course, they have some big institutional shareholders, so it’s always possible that they’ll find a way to make good … at least with this debt expiration.

I suppose their best hope in the near term, absent a quick turnaround in the economy, would be the sale of some properties, but as you might expect they’re worth much less now than they were a while back (the company trades at a small fraction of its stated book value, a value they’d have a really hard time realizing at the moment). And with probably few buyers out there with the interest or wherewithal to buy malls right now, you’d imagine that any buyers will be those who smell blood in the water and make lowball bids.

General Growth Properties is a developer and operator of regional malls, the traditional large type with big anchors and hundreds of little stores. With the soft retail environment and expected poor Christmas sales, many folks expect empty slots to proliferate in malls across the country as retail bankruptcies emerge as a major issue next year. The short term theory is that many of these retailers have pinned their hopes on survival on a decent Christmas, and they’ll be forced to give up the ghost once those sales fail to materialize.

I spent a few minutes at the mall yesterday, and even in the wealthy suburb where I was the traffic was very light, the discounts were immense, and the weakest “anchor” store of all, Sears, looked like it was desperate to make a sale, any sale, at below cost. (Just as an aside, I can’t believe Sears has bounced so nicely with our little December rally, they still look doomed to me.)

So what does one do with that information? Well, even if General Growth Properties is forced to declare bankruptcy, either on Friday or, if they make a rescue deal, perhaps later, there’s not necessarily a fat pitch for making lots of money on that eventuality — it’s probably tough to short the stock right now, and the potential downside of doing so is dramatic if you’re wrong. GGP shares trade at about $1.60, so if the company was rescued by someone or managed to avoid or even postpone bankruptcy it wouldn’t be shocking to see the shares double or triple in a relief rally — not likely, perhaps, but certainly important to consider. After all, even GM has had some big snapback rallies in the last few months.

If you use Porter’s strategy on GGP specifically, you could buy puts on GGP shares for either December or January — the December bet is extremely short term, since those puts expire a week from tomorrow and that would mean the shares would have to fall materially within the next eight days. GGP puts for December 19 at $2.50 are currently going for $1.15, which means you’re assuming the shares will fall through $1.35. It will cost you another 20 or 30 cents to extend that expiration to January.

Those bets would potentially allow you to come close to doubling your money, but be careful — bankruptcy almost always means that equity holders get left with nothing and the common stock goes to zero, but it doesn’t necessarily happen right away, or every time. Sometimes investors keep trading stocks that are going through Chapter 11, betting on little swings or just taking advantage of unsophisticated retail investors who, usually for foolish reasons, speculate on the company’s value in bankruptcy. GGP has less than $500 million in stock market value right now and nearly $25 billion in debt, so those debtholders, as is typical, will be splitting the spoils amongst themselves in any bankruptcy reorganization or liquidation (assuming that they do indeed go bankrupt).

But this short-term deal is probably not Porter’s main focus right now — if he recommended that his readers buy puts against GGP in past issues, they’re probably doing extremely well on those bets, but what he’s promising to do is tell you about the next failed stories in commercial real estate and recommending puts on those stocks to bet on their fall.

Here’s the scenario that Porter lays out for us:

“JANUARY 15th: A Colorado firm in essentially the same businesses has a huge $50 million debt payment they can’t afford that’s due on January 15th, just over a month from now. The company owes another $200 million in June of next year.

“JANUARY 30th: An Ohio company in the exact same business has a $275 million debt payment they can’t afford due on January 30th, just seven weeks from now. They have another $500 million due in 2010… and another $500 million due in 2011.

“MARCH 7th: A Georgia company in the same business has a $400 million payment they can’t afford due on March 7th.

“MARCH 15th: A New York company in the same business has a $200 million payment they can’t afford due March 15th.

“I believe–as strongly as I have believed anything in my financial career over the last decade–that at least a half-dozen of these companies will go bankrupt over the next year.

“In short, I predict the first bankruptcy will take place this Friday, December 12th, before midnight. It will start a domino effect over the next 12 months, in which we’ll see plummeting share prices and bankruptcy for these highly-leveraged firms.”

The argument he makes is that these companies are going to fall like dominos because the failure of GGP will destroy the market for retail real estate (if there’s a fire sale on their malls, the value of all malls will fall — just like what happens when a neighborhood starts to see a lot of foreclosures and short sales). And he also points out that the structure these companies operate within, the Real Estate Investment Trust, sets them up to fail. This is an interesting point, since the tax status of a REIT requires that they pass through essentially all their income to investors as dividends … so, as Porter says, they don’t have much flexibility or incentive to save money or hoard cash even when it might be wise to do so. They can, of course, pay down debt with their cash flow — but that doesn’t boost dividends, and until a few months ago investors would have complained that they wanted more leverage.

So if we accept Porter’s stipulations, that General Growth will go bankrupt, and that this will start a chain of bankruptcies across the commercial real estate sector, how do we “play” that?

Well, I want to get this note out quickly, so I’ll just tell you that those clues don’t seem to match the other big regional mall operators (Simon Property Group, Macerich, and Taubman), but they could well match one of the more numerous strip mall, outlet mall, and shopping center owners — there’s one list here if you want to start your own research, and there are many other diversified REITs that have some shopping center exposure — to say nothing of the fact that many folks think we’ll have severe problems with commercial real estate in general, not just in the retail space. There are some more conservative players in this space, too — Realty Income, for example, is still often teased as a buy and I wrote about it recently.

Remember, the man who is often called “The Grave Dancer” because of his skill in buying distressed property at bargain prices is today going through an embarrassing bankruptcy (Sam Zell and the Tribune) — even the folks who are experts in this business, and have the icewater in their veins that allows them to take advantage of these calamities without flinching, sometimes make mistakes. I can’t tell you whether or not Porter Stansberry’s strategy of buying puts against owners of retail real estate will be successful, or if you’ll find it to be worth the $2,500 asking price for the newsletter, but certainly there’s some logic to the strategy.

I’ll look into the clues, and see if there are some specific companies that match those debt expirations and might be in trouble … if I figure out what they are and have anything interesting to say, you’ll be hearing from me again. Or if you’ve got ideas on these, or on other bets to take against real estate, feel free to let us know with a comment below.

(And yes, there is an inverse ETF for real estate, if you want to take the leveraged index approach — SRS is the ticker for the UltraShort Real Estate ETF from ProShares, which is extremely volatile. This returns twice the negative return of the Dow Jones Real Estate index, whose largest holding is GGP competitor Simon Property Group).

full disclosure: I do not have a position, long or short, in any of the stocks or investments mentioned above, and won’t trade in any investment mentioned for at least three days.

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39 Comments on "Bankrupt on Friday?"

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Gukdorak
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Gukdorak
December 11, 2008 10:46 am

Bill Ackman of Pershing Square has been buying this stock like a madman. I think he owns 17% of the firm now. I would hate to bet against him. I think the likely scenario is they avoid bankruptcy this week.

joost
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joost
December 11, 2008 10:55 am

Interesting article. highly appreciated. december options expire on friday 19 or am i wrong?

reit raider
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reit raider
December 11, 2008 11:08 am

I think the colorado compnay is Prologis (PLD),
Glimcher is definitely the company with the January 30th debt payment due. I don’t know about the other two yet.

Gukdorak
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Gukdorak
December 11, 2008 11:09 am

I think Porter was being coy about mentioning other firms in the same sector having debt coming up for renewal. I am pretty sure he was referring to commercial REITs in general. I can’t remember if it’s him or Amos but they have been advocating shorting overleveraged commercial REITS for a week or two now.

Steven Martin
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Steven Martin
December 11, 2008 11:25 am

OK, given that REITs with too much debt can’t refi, can’t sell properties, etc etc this still should present an outstanding buy opportunity for the survivors with low debt, those that will get stronger by buying assets on the cheap. So Gumshoe and others, who are the best REIT survivors?

Whit
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Whit
December 11, 2008 11:52 am

Gum:
I have always wondered: where is the money to pay options come from? Is it just investors on the big board with too much money bilked from the little guys?
Whit

JohnnnyB
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JohnnnyB
December 11, 2008 1:30 pm

Glancy Binkow & Goldberg LLP, Representing Investors Who Purchased General Growth Properties, Inc., Announces Class Action Lawsuit and Seeks to Recover Losses – GGP

This is the headline at Yahoo here is the link: http://biz.yahoo.com/prnews/081210/la51553.html?.v=1

Potter seems to be the serious and practical one at S&A. I think its worth remembering that he called the short on GM, FNMA & FreddieMac soon enough for his subscribers to make a big profit.

JohnnnyB
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JohnnnyB
December 11, 2008 2:08 pm
Another observation. I am in the camp that believes the commercial real estate market is going to experience the same fate as the housing market (any idea how much money Wells Fargo has in 2nd TD’s on rental properties they’ll never see again?). We will, unfortunately, see a lot of “blood in the streets” in the commercial arena this coming year. I just printed a graph 2 days ago and it portrayed the hospitality sector(HS) of the commercial market. The graph measured investment in that market as a percentage of GDP. On average the HS was running 0.25% over a… Read more »
advantedges
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December 11, 2008 4:22 pm

Travis….
A suggestion for those who want to make a trade related to this information:
SRS,,,,,the ultra short real estate ETF.

Good luck to anyone who plays this area. If the market rebounds, be sure to have a tight stop.
Loren

Michael
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Michael
December 11, 2008 6:23 pm

Travis,
Very insightful article – – I think your service is FANTASTIC!!! I’m going to become an “Irregular”.

JonathanH
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JonathanH
December 12, 2008 8:58 am

On a side note, anybody heard anything lately about healthcare REITs, specifically Nationwide Health Properties (NHP)?

Gukdorak
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Gukdorak
December 12, 2008 10:06 am

Well they got their refinancing so much for bankrutpcy today.

Gravity Switch
Admin
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December 12, 2008 2:07 pm
Today might provide a nice reminder of the danger in betting on bankruptcy — even if you’re right, you could easily take a big haircut on any given day if you misjudge the near-term prospects or the shorts decide to cover and get out. GGP and ProLogis, both of whom are believed to be in a lot of trouble by many investors, are among the top gaining stocks today. Doesn’t mean they won’t go bankrupt, or that this is anything but short covering (I don’t know — just saw that their prices spiked today), but it’s hard to see a… Read more »
Bob Fleming
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Bob Fleming
December 12, 2008 4:53 pm

Any word on Well REIT? Are they going bankfupt??

Bob Fleming
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Bob Fleming
December 12, 2008 4:53 pm

Wells REIT. A good investment?

stefano
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stefano
December 13, 2008 4:49 am

i read in a press release from the company that ddr have 275 m debt in 2009 and 500 m in 2010
are them an ohio company?
i don’t know
only reit i have is aht
i hope they survive
i like them but
i havent totaly clear their situation
somebody knows where and if i’m wrong?
i’m from europe so how really bad thing’s are getting in usa?
i hope better than it seem
by by guys

stefano
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stefano
December 13, 2008 4:51 am

the press release i read for ddr is the 20 october one

Mike Clee
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December 14, 2008 2:12 pm

Any idea what Patrick Cox is talking about in his “Three Generations of Wealth from four Breakthrough companies?”

Jackal
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Jackal
November 18, 2009 10:13 am

Sounds like a not so Merry Christmas will break the malls, their occupants and likely the “trickle up” companies that supply these businesses. When considering these events it seems the entire game has been lost. Somebody please explain to me where I am wrong in my assumptions?

Gravity Switch
Admin
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December 11, 2008 10:56 am

Good point — I meant to mention that. He clearly doesn’t think bankruptcy will be coming tomorrow, either that or he believes that a liquidation or reorganization will realize more value than most investors expect.

Gravity Switch
Admin
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December 11, 2008 10:59 am

Oops, yes — sorry, you’re right, another omission from writing too quickly in the morning. I’ll fix that.

Gukdorak
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Gukdorak
December 11, 2008 10:59 am

You are correct.

Gravity Switch
Admin
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December 11, 2008 11:18 am

You may well be right — certainly there are plenty of candidates, and the chorus of doomsayers about commercial real estate in general is getting louder by the day. There is certainly an awful lot of leverage out there, and probably a lot of those companies have pretty ill-timed debt expirations since debt is typically pretty short term for these operators.

Gravity Switch
Admin
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December 11, 2008 11:34 am

Steven, I like the optimism! Many folks think we’re just in the first phase of the problems with commercial real estate, so there might not be a rush to invest if this is your thesis, but there will undoubtedly be survivors. Maybe there are some lower-debt non-REIT companies who have the flexibility to go shopping, and there are certainly some REITs that are stronger than others, it would be interesting to hear what other folks still like in this sector (I don’t own any REITs except for Rayonier at the moment, and that’s largely a timber investment).

SundayGirl
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SundayGirl
December 11, 2008 12:35 pm

That’s a question I’ve been wondering about as well!

Gravity Switch
Admin
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December 11, 2008 11:35 am

Maybe so, that’s certainly another one that has fallen far and fast (and another one that I owned years ago — I remember back in 2004 or so the only reits I owned were GGP and PLD. I didn’t foresee the cataclysm that befell them, but I am awfully glad that I didn’t hold them for long)

SRS
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SRS
December 11, 2008 12:10 pm
Travis, Ackman can’t be expecting that bankruptcy will occur, since his equity will likely get zeroed out in pretty much any such proceeding. Either he is himself (through Pershing Square Partners) going to participate in a re-financing, or he must have some inside knowledge that the mortgage re-financing will come through. Thinking out loud … A straddle (buying a put and a call) on GGP at a strike of $2.5 expiring next week goes for $1.4. If the company goes bankrupt, this should be worth $2.5. If it survives, it will be worth something only if the stock shoots past… Read more »
Gary
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Gary
December 11, 2008 2:06 pm

Dear Whit,
The creation of an Option takes a buyer and a seller. One profits, one looses and one is paid by the other.
Gary

SageNot
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SageNot
December 11, 2008 2:27 pm

Whit, I think the money your talking about is both the premium demanded by the Option’s Exchange plus the $$ lost on the falling stock price when the contract is closed.

I’m sure that Travis can explain it even better.

Gravity Switch
Admin
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December 11, 2008 2:43 pm
Hi Whit — I’m not sure I understand the question, but options are all contracts between two parties, which are broken in half and traded separately with a clearinghouse in the middle so you don’t have to worry about who’s on the other side of your trade. Money is “created” or “lost” when each side of that contract moves up or down in value. It’s true that people will always say that the “smart money” is on one side, and they’re just raking in money from the “dumb” small investors, but the fact that “they” say it doesn’t mean it’s… Read more »
Gravity Switch
Admin
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December 11, 2008 2:33 pm

My head hurts just considering all the spread or straddle permutations, but it might just work, who can tell in these crazy markets?

And you left one out: Ackman could be participating in a refinancing, he could have inside knowledge … or he could just be wrong. Not saying he is, but it would be hard for me to have certainty about anything in this market.

Gravity Switch
Admin
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December 11, 2008 2:45 pm

We’re all just getting used to the idea that there’s a piper to be paid — I imagine those LBO borrowers are praying for some serious inflation.

jimbo
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jimbo
December 12, 2008 9:02 am

With the Fed and it’s printing presses, their inflaton wish may come true…albiet a bit late for them perhaps.

Did you catch the article online where the Fed is thinking of offering its own securities instead of awaiting the Treasury to create debt and pass along.
Hopefully a erronious article, or erronious author.

SteverJ
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SteverJ
December 12, 2008 7:36 pm

All except the politicians and those who count on them.

Gravity Switch
Admin
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December 12, 2008 10:19 am

Careful — they got their refinancing for a smaller bit of debt that was due yesterday, and for some mortgage debt due next year. The big $900 million in mortgages that are due today have not yet been refinanced, at least as far as they have announced.

They are still trying to extend or renegotiate, apparently, but no news yet:

http://biz.yahoo.com/ap/081212
/general_growth_debt.html?.v=2

The stock is up significantly this morning on the good news, perhaps folks are taking this as a sign that they might be able to renegotiate today’s debt, too.

SteverJ
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SteverJ
December 12, 2008 8:25 pm

Not nearly so dramitic now is it.

Gukdorak
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Gukdorak
December 12, 2008 12:28 pm

Yeah you are right. Sorry for the misinformation. Was a bit rushed with the Madoff thing going on that I did not read the fine print.

Gravity Switch
Admin
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December 12, 2008 12:44 pm

Will probably be a hectic afternoon and evening for GGP’s execs — the two malls that have the outstanding mortgages for $900 million due today are both, I think, in Las Vegas, not anyone’s favorite market for retail right now.

Mark
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Mark
June 8, 2009 2:31 pm

Not only the service is great, but so are the readers’ comments.

Feel lucky to have stumbled upon this site.

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