Use access key #2 to skip to page content.

Possible Fraud on Kimco Realty's recent dilution and subsequent 20% gain in one day!



April 04, 2009 – Comments (12) | RELATED TICKERS: SRS , URE , KIM

And guess who the biggest beneficiary of this whole game is...Merrill Lynch!!! Zero Hedge has a great article uncovering what looks like, smells like, feels like, tastes like, and sounds like FRAUD! Not that anyone would be surprised that this continues to go on!!! Here's the link and a few excerpts:

Wall Street Back To Its Criminal Ways? Posted by Tyler Durden at 2:12 PM There was a time on Wall Street when insider trading was rampant, when sellside analysts would pump stocks under the guidance of their superiors only to have their corporate finance colleagues do an equity offer shortly after, when the amount of money a bank's corporate clients paid would determine its rating, and when analysts said in internal emails a company is worthless, only to issue reports claiming the company was the next sliced bread. Then things changed for the better briefly, when Spitzer came on the stage. However, with his thunderous fall from grace in an act of utter hypocrisy, the behavior he fought so hard to curb started gradually coming back.

Yesterday, Wall Street's shadiness came back with a vengeance.
As Zero Hedge disclosed yesterday, mall REIT Kimco decided to dilute its equityholders by issuing over $700 million (including the green shoe) in new shares which would be used to buy back the company's debt, as KIM has $735 million in debt maturities over the next 3 years, and a $707 million currently drawn on its secured credit facility. One look at the company's equity prospectus reveals that the lead underwriter is non other than "scandal-central" investment bank Merrill Lynch...

Let's walk through the sequence of events:
1) First Merrill Lynch/BofA gets clients to subscribe to a massively diluting equity offering (105 million new shares out of 271 million pre-offering shares, or 39% dilution). The offering prices at $7.10/share, a 6% discount to the previous day closing price of $7.49. In the process Merrill pockets an underwriting fee likely equal to 3% of the offering or around $20 million.
2) Minutes after the offering Merrill REIT analyst Schmidt comes out with a report, changing the recommendation on the stock from a Sell to a Buy, thereby getting the vanilla money which makes critical fiduciary decisions merely based on what some sell-side analyst will recommend. As a result Kimco stock rises throughout the day and closes at $9.40, a 25% premium to the closing price, and a 30% premium to offering price of $7.10, which closed that very same day.
3) Notable here is that Schmidt had come out with a Sell (aka Underperform) report on the company less than two months ago, on February 5, titled "Write-downs drove the miss." Among Schmidt's concerns were the following very salient points:
Write downs, not Q4 operating metrics, are the issue

KIM’s Q4 operating metrics took a back seat to write downs in the quarter as the company reported a sharp drop in FFO as it booked $111.8mn in non-cash impairment charges. These write-downs included $83.1mn for securities investments, $22.2mn for the equity investment in JVs with Prudential and $6.5mn for development projects in addition to $4mn of severance charges due to a reduction in headcount. While Kimco’s shopping center operations held up reasonably well in Q4 (rent spreads remained positive and same-store NOI was +1.4%), the company expects far weaker results in 2009 which is common theme running through the REIT industry.

Transaction income non-existent; lowering estimates

With the extensive write-downs, KIM’s reported 4Q08 FFO of $0.04 was $0.21 below our estimate. Looking to ’09, we expect NOI to decline 3% which includes a 300bp decline in vacancy by YE09. Given the impact of deteriorating operating metrics combined with a sharp reduction in transaction activity, we are reducing our ’09 FFO estimate from $2.15 to $1.74 while our ’10 estimate drops from $2.14 to $1.60.

Lowering PO to $12.50

Due to lower projected NOI growth for ‘09, we reduced our forward NAV for KIM from $17.04 to $14.13 and as a result our PO falls from $15.50 to $12.50 which is roughly a 10% discount to forward NAV. Given the weakness in retail spending and cautious leasing environment combined with a sharp erosion in Kimco’s noncore business segments we are maintaining our Underperform rating until we gain better visibility on the retail landscape.4) Even assuming Merrill's Chinese Wall is fully operational, it would be curious to see how the company managed to "sell" to its clients a stock offering in which its very own analyst had a Sell rating: the cynics among us would presume these very clients would have no problem buying into the offering if they knew or anticipated a change in recommendation (especially one from a Sell to a Buy), and knew they could flip the stock they bought through the offering for a 30% gain in one day!
5) And now for the piece de resistance. The company said in its prospectus it would use the offering proceeds to pay down its revolver. "We intend to use the net proceeds from this offering for debt repayment and for general corporate purposes. Our U.S. revolving credit facility is scheduled to mature in October 2011 and accrues interest at LIBOR plus 0.425% per annum. Affiliates of certain of the underwriters are lenders under our U.S. revolving credit facility and will receive their pro rata share of repayments thereunder from the net proceeds of this offering." That last bit is critical. The company's $1.5 billion credit facility, on which it had $707 million outstanding as of December 31, will be the direct beneficiary of the offering as the entire $707 million amount would be paid down with the proceeds. And what entity benefits from this paydown: none other than Bank Of America, otherwise known as Merrill Lynch!
Ah, good old circular conflicts of interest. To summarize: i) Merrill, which is probably not too happy with having lent out Kimco $707 million on its credit facility, underwrites a $720 (including a 15% overallotment) stock offering for which it gets $20 million, ii) Merrill's analyst changes the stock from a Sell to a Buy, causing it to pop 30% in one day, and allegedly allowing participants in the offering to sell their shares at a 30% gain in a day, a mindblowing annualized return, iii) Kimco uses to proceeds to repay Merrill's credit facility, cleaning out any credit risk exposure Merrill might have with respect to Kimco's underperforming properties and operations...

In conclusion - to those that managed to get in on the stock offering: congratulations. The 30% return in one day is nothing to sneeze at. To all those other retail and institutional accounts, who piggybacked, and all day were buying the shares sold by the follow-on participants (likely using Merrill's brokerage desk as an intermediary, thereby generating even more profits for the company), hopefully you see something about the dreary mall REIT space that Zero Hedge is missing. Then again, as these purchasers are likely the very same people who are convinced that all the bad news in this market are lagging indicators, with all the seasonally adjusted "good" news are leading, the fair price of KIM to them is likely much, much higher. We hope they are right: in the meantime it never hurts to look at a cash flow or FFO model, and determine just how much cash a 38% equity-diluted KIM will be generating in the future as the bulk of its mall tenants either go bankrupt or decide they simply can not afford the rising rents that retail REIT operators hope to charge.

12 Comments – Post Your Own

#1) On April 05, 2009 at 12:06 AM, JGus (28.21) wrote:

Here's another look at this issue:

REIT'S Rally??? I have been scratching my head wondering how in the world REIT's rose so much today. Then I found this link.

I am sorry, but by diluting shares, that causes a stock to go up over 25%???? Who is kidding who. Kimco was on its way to bankruptcy when it pulled this rabbit out of the hat. Kimco sold off over 90M shares meaning it basically printed up 90M more common shares on top of its current 271M common shares. Thats right. It went from 271M common shares to over 360M shares in one day. AND THE STOCK PRICE SKYROCKETTED???? SAY WHAT???? A 33% DILUTION OF SHARES???

...Another fact. KIM's debt is $4.5B. That's B for billion. The net proceeds from todays 33% dilution of their common shares raised about $717M to pay off debt. That means they still have a debt of $3.8b after the 33% dilution of common stock equity.

...It makes no sense at all how a stock goes up 25% after a 33% dilution of their shares. This is pure and utter manipulation. All the execs are doing is raising cash so they can cash out before the company goes bankrupt.

Now PAY ATTENTION! Keep in mind these shares were offered at $7.10 a share. 90M shares at $7.10. And then the stock shot up to $9.40. That means these investment firms somehow got their hands on these shares at $7.10 and turned around and sold them for over $9 a share to some suckers out there.

This my friends is a true ponzi scheme. Make no mistake. Print up more shares to make cash which does not come close to handling the overwhelming debt. Watch for these REIT's to be on an episode of American Greed coming to a television screen near you.


Report this comment
#2) On April 05, 2009 at 12:07 AM, JGus (28.21) wrote:

Full disclosure: I bought 200 shares of SRS at the close on Friday.

Report this comment
#3) On April 05, 2009 at 6:48 AM, cbwang888 (25.62) wrote:


Not only that, read this:

After the close of the market, the company said its underwriters exercised an option to sell an additional 13.725 million shares, up from the previously planned 10.5 million over-allotment,


Beaware that this government admin is cheating like bankers. They told us the economy has been better by reporting better # in Feb while revise Jan's # down (up for unemployment).

We are brewing another equity bubble, coporate bond, T-bond bubble (Fed the biggest net buyer). Companies can no longer fail so lousy jobs can be saved. This is a really bad news for companies with good fiscal principles, they cannot profit much from this credit bubble mess.

For KIM, this is a ponzi. Question is how long it will last? I would long commodity stocks to match REIT shorts, Who knows? Banks may use TARP money to pump stocks...

Report this comment
#4) On April 05, 2009 at 8:42 AM, JGus (28.21) wrote:


You've described my strategy perfectly. I am currently long commodity stocks and short REITS (with a slight leaning to the long side). I use fairly tight stops with SRS, so my downside is limited. It may continue to head lower, but at some point it will make a turn back up. When it does, I intend on owning shares and enjoying the ride. As Statsgeek says, many of these REITs are going to ZERO!

Report this comment
#5) On April 05, 2009 at 6:16 PM, GeneralDemon (26.23) wrote:

Business now is like making sausages - all kinds of scum is incorporated into the whole (if you want to eat). The only way these players (KIM) can survive is for the holders to sell out now (get something) and have the new suckers hold the old bag until she croaks.

What REIT are you going to jump on when the market turns and is it for its low current debt or ?

Report this comment
#6) On April 05, 2009 at 7:31 PM, RVAspeculator (28.36) wrote:

As someone who tried to bottom fish SRS with about 20 minutes to go in the session on Friday only to watch it drop another 8% in the last 20 minutes, I agree with this article!   :)

Report this comment
#7) On April 05, 2009 at 8:25 PM, ragnarpirate (< 20) wrote:

Completely agree with everything said here , just want to add something unrelated to REITS , but related to Wall Street Frauds going on for years.

Look at the case of silver price manipulation by naked short selling mainly JPMorgan Chase.

The good thing about it is that we can own physical silver ( I do) not to be worry much about those manipulations because sooner rather than later , they'll get burn to asches .

BTW , I bought 40 shares of SRS on friday , I drive car through the city , see the signs for sale and lease , empty malls..etc.

This thing ( commercial real estate) will crash so hard that the fools getting on the train now will be puking blood.

Good luck everybody

Report this comment
#8) On April 05, 2009 at 9:10 PM, JGus (28.21) wrote:

lastupendas wrote a blog tonight with a GREAT interview about how widespread the FRAUD is!

An Eye Opener: The REAL state of our economy Report this comment
#9) On April 05, 2009 at 10:29 PM, OldEnglish (27.52) wrote:

Tremendous post JGus. I hope this story gets some traction in the main stream media. Buying 200 shares of SRS in the near future.

Report this comment
#10) On April 07, 2009 at 8:23 PM, BravoBevo (99.97) wrote:

JGus:  Based upon your article, I "red-thumbed" KIM today. I'm surprised that you haven't done so already.

Report this comment
#11) On April 08, 2009 at 3:08 PM, JGus (28.21) wrote:

BravoBevo - I actually spend a lot more time looking for good information to share with the community through my blog than I do playing the game. However, your nudge inspired me to go and give KIM my red-thumb today!

Report this comment
#12) On April 20, 2009 at 6:33 PM, BravoBevo (99.97) wrote:

JGus:  Best wishes to both of us on this pick.

Report this comment

Featured Broker Partners