by Travis Johnson, Stock Gumshoe | April 16, 2009 3:35 am
If you’ve been biding your time with us here in Gumshoe Nation for a while now, you might remember Porter Stansberry’s prediction that General Growth Properties was about to go bankrupt as they faced a debt repayment deadline that they couldn’t meet.
Well, he’s at it again. Which isn’t to say he was wrong the first time (that was back in mid-December) — technically I guess he was wrong, since GGP got a series of extensions on various loans and mortgages and remained a going concern until this morning, when they finally did file for Chapter 11 bankruptcy protection from their creditors.
But really, I wouldn’t blame him for that prediction that GGP would be bankrupt by mid-December — they probably should have been. I suppose they might have been able to stave it off by selling a lot of assets if the Chinese suddenly decided that they want to own a bunch of suburban shopping malls, but it seemed a wild bet to expect any improvement in the stock price.
Of course, the stock price was already down to a dollar yesterday — right about where it was when Porter was warning us of bankruptcy five months ago, so there’s not a long way yet to go down. (You could look at it another way, I suppose, in that the potential loss for shareholders is the same as it always was: 100%.) As of now, with the bankruptcy filing, it looks like the shares are now officially worthless — though as I type this trading hasn’t opened, and it looks like some poor soul actually bought shares in the premarket for 89 cents. Oops. There’s certainly no reason to expect equity shareholders to get anything out of this bankruptcy, even the bondholders are probably going to suffer tremendously (which is why they kept extending the loans and trying to keep GGP out of bankruptcy), so hopefully not many folks are thinking about bottom fishing in this rancid pool.
So with these new ads Porter’s telling us again that he’s certain that GGP and several of its competitors will go bankrupt, and that we can profit by betting against those companies. Since yesterday was one of those rare days of good performance for many real estate stocks (and a spectacularly good day for most of the companies below, just to tease you a bit), and GGP’s bankruptcy will probably throw everyone into a tizzy even though most have expected it for months, now seemed like a good time to take a look. General Growth’s malls will keep operating since they’re trying to do Chapter 11 and reorganize, not liquidate and put all of their malls on the market at a time when no one wants to buy them, so there may or may not be a full-on fire sale of shopping malls — but it will certainly impact the share prices of similar companies.
The ad letter is long and hype-tastic, as usual, with lots of personal anecdotes from folks who have used Porter’s advice to bet against stocks, and a lot of talk about how he put so much time into this research and met with the greatest real estate investors in the process — not much about his overall performance, but that’s not unusual. You can see it here if you’d like to read all the foofaraw.
The newsletter Porter is selling with this ad is his Porter Stansberry’s Investment Advisory, the flagship service of his publishing company, and one that (like the man himself) often inspires a reaction from readers — it’s among the top ten newsletters ranked by subscribers on the Stock Gumshoe Reviews site, and the reviews tend to be very hot and cold, as much because of his political brashness as his stock picks. Apparently you either love him or hate him — your call.
But if you don’t want to subscribe just to figure out which stocks Porter teases us about today (they’re all stocks he thinks you should short or buy puts on this time, though the newsletter makes long recommendations, too), I don’t blame you. Read on and we’ll try to illuminate all the dark corners …
Porter does say he thinks you should short General Growth Properties (or buy puts on it, I can’t often tell which specific approach he’s hinting at). But that’s now off the table with the bankrutpcy. He also thinks you should do the same with four other similar mall-owning companies, and he provides a few teaser clues as to who they are. We’ll keep this short today, but I can at least tell you the names of the companies:
“** California-based mall owner: These guys own around 100 regional and community shopping centers. But they owe more than $6 BILLION to bankers, and can barely cover even half the interest payments on this debt. Yet, insiders have been paying themselves millions of dollars every year.”
That sounds like it would have to be Macerich (MAC).
“** Indiana-based mall owner: They own 320 malls and shopping centers across 41 states, but owe more than $18 BILLION to bankers. These guys can also barely cover half the interest on their debt every year. But incredibly, one insider wire transferred $25 million into his bank account last September – during the worst week in recent stock market history.”
That’s the biggest US mall owner, Simon Property Group (SPG). That “wire transfer” of $25 million was actually David Bloom (former board member, he had been CEO of a company SPG acquired a while back) exercising all his options and selling those shares when the stock was right around a hundred bucks (it’s down to about $44 now).
“** Michigan-based mall owner: These guys own shopping centers in 11 states. They owe $3 BILLION to bankers. But get this… they can’t pay any interest on it – because they made a $80 million loss last year.”
That pretty well has to be Taubman Centers
“** Ohio-based mall owner: This company owns 460 shopping centers. They owe $6 BILLION to bankers… and also have no hope of every repaying it, considering they made a $100 million loss last year. But once again, insiders recently wire transferred more than $25 million into their personal accounts within the span of one week.”
This one is Developers Diversified Realty Corp. (DDR). That’s the smallest one of the group, just FYI, at least in terms of equity value (they do have plenty of debt that puts them in the same league as a couple of the others). The $25 million+ in insider sales on this one was actually across a couple weeks back in October, if I’m reading my numbers correctly. Interestingly, Circuit City and Mervyn’s were two of their top ten tenants (both bankrupt last year) — and that 460 number is an old bit of info from their basic profile on financial websites, they actually claim 710 properties now.
So … should you and I be betting against these owners of retail real estate? I have absolutely no idea — I certainly appreciate the logic that many of them should face bankruptcy as their debt comes due (REITs and commercial developers don’t get those nice 30-year mortgages, unfortunately, the usually have much shorter terms and have to roll the debt over ever few years … so if they have a lot of debt rolling over this year, bad news).
Then again, lots of folks are already betting against them — the short interest is very high for Macerich, around 37% recently, and pretty high for the others at around 10% or so (short interest is the percentage of the traded shares that are sold short). And they might not go bankrupt — remember, the thing that would push these kinds of companies into bankruptcy would be a collapsing business, which most of them may well have, but also an inability to renegotiate their debt that may be coming due.
And that second part may not be as predictable as the plain logic would dictate — after all, if the owner of a half-empty shopping mall in exurban Toledo can’t pay you the money he owes, would you rather go through bankruptcy and see if you can get something out of a mall that no one will buy at auction, or renegotiate, extend the debt repayment schedule, and hope the economy improves in a few years to fill those empty storefronts? That, on a grander scale and in much more complex circumstances, might be what a bunch of bankers and investors are thinking about right now.
And as to the “should I sell short or buy puts” debate for stocks like these that you might be convinced will go down, I won’t go into too much detail — but for the example of General Growth Properties, here’s what you could have possibly done (as of yesterday — won’t work today):
The shares closed at $1.05 yesterday. You could buy puts for May at $2.50, meaning you get the right to sell the shares for $2.50 anytime before the expiration date (by May 15, in this case). Those puts would cost you probably about $1.50 (bid is $1.40, ask is $1.60 as I type this), plus commission. So those options sellers apparently don’t think GGP will fall that much further — if the shares drop to 75 cents, the put would be exercisable for a profit of $1.75, so you’d get a profit of about 17% from a 25% drop in the shares, maximum profit is about 60% if the shares go to zero in the next month (which it now appears they will do). Roughly.
If you shorted the shares (and many of the old shorters have apparently already covered, only about 12% of the shares are sold short right now), you’ll have to have some collateral put up to cover the short sale but you might profit all the way down from $1.05 to $0 if they do really go bankrupt and shareholders get wiped out, given the collateral typically required you’d get a profit on the money you risked of about 100%, though that could vary widely depending on margin rates, commissions, and other stuff that’s different for different brokers.
The benefit of shorting instead of buying puts is that you get a cleaner exposure to all the downside, and you can hold the shares short pretty much as long as you want (if you don’t get a margin call and your broker doesn’t force you to cover if the shares climb rapidly) — so you don’t necessarily have to predict the exact month when the company will go bankrupt.
One of the problems with shorting is that your risk can be very high — if some surprise debt deal gets done or the government bails out the shopping malls, and the shares suddenly spike up 300%, you’ll probably have to buy those shares back to cover your short at a huge loss, losing much more than you initially banked by selling the shares short — and while most short sellers try to keep stops in place to prevent big losses, you can’t protect yourself if huge news comes out while the market’s closed and the shares open hugely different than they closed the day before. Buying puts, though they come with an expiration date, is usually considered a lot safer because you know that the most you could possibly lose is whatever you paid for the put option.
So … I promised not to be too long-winded today, but that shouldn’t stop you — do you feel like shorting some shopping malls? Did you actually short (or own) General Growth Properties? Like or loathe any of these stocks? Prefer shorting or put buying in general? Let us know with a comment below.
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