Posted on 06/25/2002 3:41:04 PM PDT by Brian Mosely
CNBC: Massive fraud at WorldCom -- Earnings inflated
So what you're saying is, if there's shenanigans going on, ALL the numbers are going to be false on their face, no matter which way you slice them?
All MCI Worldcom's numbers, based on this article, will have to be restated any which way you slice them.
Hope you are hungry....
I'm not trying to put words in your mouth, you just have me thinking.
Also previously announced is a 20% layoff which inside sources say will begin Friday of this week.
Many things going on in the Worldcom camp. I doubt this story is false, although the charge of fraud could potentially wind MSNBC up in court. I have absolutely no doubt whatsoever that Bernie Ebbers is up to his hips in this one.
He was a bag of wind.
In after-hours trading on the Island network, WCOM is currently at 27 cents. MCIT is around 80 cents.
Island's 50 after-hours volume leaders look pretty dismal.
Why am I not surprised???
Actually, I'm betting that the new accountants uncovered a whole can o' worms when they took over from Andersen. The next few months will seem like living under a Centipede, as one shoe ,er, corporation drops after another!!
This story is reprinted from the May 28, 2002 edition of SNL Real Estate Securities Weekly.
Does Pinnacle bankruptcy signify wider ills?
A rare thing happened on May 21—a REIT filed for bankruptcy protection. Pinnacle Holdings Inc., which had been suffering for some time, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. While bankruptcies in the REIT world are not unknown, they are unlikely, and the Pinnacle filing is not something to worry REIT investors in general. Rather, the question is whether REIT investors should associate the problems at Pinnacle with the rest of the specialty REITs.
How clear is your crystal ball?
Simply put, Pinnacle invested in paging towers, which turned out to be the wrong sort of communications tower. Paging, thought to be a major growth arena in the early 1990s, failed to compete with cell phones and other more sophisticated devices such as Palm Pilots. To be sure, the REIT recognized its error a few years back and began retrofitting its facilities with cellular-capable equipment, but it could never get out from under the burden of paging tenant bankruptcies. The only lesson to be drawn from the Pinnacle debacle is that one would do well to be clairvoyant. And as this gift is rare, there is very little to be drawn from Pinnacle’s experience. Except…
From time to time, there are flutters of concern about specialty REITs. To begin with, most of these companies did not come public until late in the REIT boom of the 1990s. Where most of today’s REITs came public between 1992 and 1996, most specialty REITs date from 1997 and 1998. When the mini-bubble in REIT share prices burst in 1998, the recently minted specialty REITs were (unfairly) castigated as part of the froth at the top of the market. To be sure, there were some silly-sounding proposals afloat at the time (we have yet to witness the IPO of a graveyard REIT, for example), but for the most part, there is no logical reason for not extending the REIT concept to non-traditional property types, although there are risks.
How to diversify with REITs?
There are several schools of thought on REITs and portfolio diversification. On the one hand, REITs can be thought of as performing the function of a mutual fund manager—REIT shareholders hire their managements to come up with a diversified property portfolio.
Companies like Washington REIT and Colonial Properties Trust exemplify this model. On the other hand, REITs can stick to what they know best—office owners know the office market and should stay out of apartments, in this view. SL Green Realty Corp. is an instance of both property type and geographical specialization. Yet even with offices and apartments, to name two of the most traditional REIT property types, tenant diversification remains a key analytical point. An owner of CBD offices is likely to have tenants engaged in all manner of industries, and the aggregate safety of its rental income benefits from the economic diversity of its tenant base, even though its property type per se is quite uniform.
Questions to ask about specialty REITs
Specialty REITs that deal with single property types within one industry—car dealerships, movie theaters, and so forth—face the additional risk of depending directly on the health of fundamentals in their tenants’ industries. Even though a specialty REIT may be diversified in terms of tenant names, it may still face difficulty if the industry within which its tenants operate experiences a lull or, as we saw with Pinnacle, a devastating fundamental shift in its markets.
For example, Entertainment Properties Trust’s tenants may enjoy robust box office receipts this year, but its reliance on its major tenant, AMC Entertainment, is something to bear in mind. In particular, it is necessary to drill down one’s analysis further to determine AMC’s prospects and Entertainment Properties’ ability to weather any downturn in AMC’s fundamentals. Similarly, Capital Automotive REIT incorporates the risk inherent in the health of the automotive industry.
Opportunities arise as well. Specialty REITs may have, depending on the nature of their properties, certain unique competencies that they can exploit. For example, if a given location becomes unsuitable for car dealers, might it be useful for some other purpose? In Capital Automotive’s case, yes. Several acres of land in the middle of Fairfax County, Virginia, can be used any number of ways.
Such items of note underscore the need for detailed information about these companies and the properties they own. The answer is not to run from specialty REITs simply because Pinnacle went bankrupt. It is important, however, to realize the risks attendant upon investing in these companies.
Specialty REITs aid diversity; Pinnacle not a blemish
Specialty REITs belong in a diversified portfolio. They give investors the opportunity to participate directly in specialty real estate finance, providing the kinds of upside that might not be available in a portfolio of national office properties, where the good, the bad and the ugly are intermingled. Yet, they require more analytical work and present a rather higher risk profile than might a nationally diversified portfolio.
As for Pinnacle, it is in a class by itself, both as a REIT and as a bankruptcy filer. There is no reason to see its experience as a blemish on the REIT industry.
I'm waiting for these stocks to actually become negative.
That is, you owe money if you own them.
I'm glad I'm in gold.
No, that could only happen to my stocks.
;-)
That is at current earnings. If the earnings plummet because consumers are spooked by a market in free-fall, it could settle much lower.
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