Wednesday, April 23, 2008

From today's (Wednesday 4/23) Wall Street Journal's Plots and Ploys column:

Sharing the Pain

While the stocks of most real-estate investment trusts have fallen sharply in the past year, few have been clobbered as hard as Phoenix-based Feldman Mall Properties Inc., which owns four malls and holds partial interests in three others.

Feldman's shares have fallen nearly 83% to $2 and weren't helped a bit last week when the company reported disastrous results for its fourth quarter.

It suffered a decline of $2.1 million, or 15 cents a share, in funds from operations for 2007. A key factor was a near doubling of Feldman's operating expenses to $16.5 million, including an extra $1 million provision for missed payments by tenants and $2 million in severance for two departed executives.

But the pain from Feldman's losses isn't limited to its investors. Another victim is Inland American Real Estate Trust, another REIT, which in the past year bought two million preferred shares in Feldman for $25 a share. Starting June 30, 2009, Inland can begin converting its preferred shares to common shares at a ratio of 1.77. Trouble is, Feldman's stock has fallen; if Inland were permitted to convert its shares at today's prices, it would get stock worth only $7.1 million. An Inland spokesman declined to comment.

The loss is 85% of the original $50 million investment. In terms of Inland American's big picture, this is not much more than a blip. It has raised $6 billion in investor equity. It has not released its 10-K yet. Inland American's 10-K will be another interesting read because its whole strategy is to buy shares of REITs rather than individual properties. The decline in REIT prices due should make for interesting valuations and its valuation methods need scrutiny.

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