Simon Property Group (SPG)

Simon Property Group owns 25% of a $141.1 million loan on a Maryland mall thats about to be defaulted on by its owners. Default of this loan could mean substantial losses for SPG.

SPG is a highly-leveraged mall REIT with total exposure to consumer spending. Their debt/equity ratio is an eye-popping 5.5x. They have $770 million in cash as of 12/31/08, with total on-balance sheet debt of $18 billion, plus another $6 billion off-balance sheet from their joint-ventures (it’s on page 83 of that 10-k, and is non-recourse).

They have $19b in assets, which consist of shopping malls and centers. These assets seem likely to be written down from their current values, which would further hurt their capital ratios. There’s also a large investment in Liberty, a UK REIT, that has soured and not been written down. Yet I keep hearing about their strong balance sheet from some analysts.

The economy couldn’t be much worse for a Mall-REIT like Simon. Unemployment is still on the rise, and prior months are quietly being revised upwards. Consumer spending is plummeting, cost of capital is soaring, and retail vacancies are increasing as more stores go belly up. Inflation may eventually benefit Simon, but that’s still a good way off.

They have some great retail properties, but it's just an ugly time for them. And their debt load is a huge monkey on their back.

Note: Most #s are from 4/17/08, when I originally posted this as part of a larger article. Simon has since raised cash through more debt and share offerings.

Disclosure: I am short Simon Property Group.

On Jan. 30, 2009 SPG declared a dividend of 10% cash and 90% common stock. Owners still face 100% tax liability. Information from this page: [1]