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BEHIND THE NEWS: Firms with debt in check starting to reap rewards

October 6, 2008

Managing the balance sheet. The very phrase is s l e e p - i n d u c i n g . But in times like these, doing it well is what separates the winners from the losers.

In the winners' column is Simon Property Group Inc., which finds itself on the offensive as competitors, including Chicago-based General Growth Properties Inc., lean back on their heels.

In the losers' column is Emmis Communications Corp., which is saddled with more than $400 million in debt-a whopping sum for a business that's lost money the last three quarters.

No wonder investors have fled the stock. The company's shares traded for as little as 89 cents in recent days before inching up to 98 cents.

In contrast, Simon this year is bucking the market downdraft. Its shares fetch about $93 apiece, up 7 percent in 2008.

And the company-unlike many in this tumultuous economic climate-isn't in batten-downthe-hatches mode.

It entered the downturn last year with less leverage than rivals, and it fortified its financial position in May by selling $1.5 billion in bonds, just before market conditions eroded further. It now has $2.8 billion untapped on a line of credit as well as $500 million in cash.

"The company's conservative balance sheet is among the best ... and provides sufficient dry powder to fund the development pipeline and future acquisitions," investment firm Raymond James said in an Aug. 26 report.

Simon didn't get there by happenstance. Way back in February, CEO David Simon told analysts that management had positioned the company to capitalize on the market tumult.

"I'd rather have no bankruptcies. I'd rather have no leases turn over. But on the other hand, that's where you can make some hay, and that's where great wealth has been created in our industry-either through development or buying [properties] at the right price. And you tend to be able to buy at the right price when few can buy."

Which brings us back to General Growth Properties, a quality company by all accounts, but one with a higher debt-to-asset ratio than Simon.

And that's making all the difference. General Growth's stock tumbled 45 percent last month and is off 65 percent for the year, largely because of investor angst over more than $1 billion in debt the company has coming due by year end.

General Growth on Sept. 22 said it is "developing a comprehensive strategic plan to generate capital from a variety of potential sources."

Simon declined to comment, but you can be sure it would be more than happy to help out, perhaps by scooping up some of its ritziest malls. About onequarter of the nation's top 100 malls are owned by General Growth, according to a report from the investment firm Friedman Billings Ramsey.

Many companies are navigating the financial storm with more success than General Growth but less than Simon. Locally based Duke Realty Corp., for instance, last month had its credit ratings affirmed by New York-based Moody's Investors Service. But at the same time, Moody's scaled back Duke's outlook from stable to negative, citing its "strained credit metrics."

Many executives who thought their firms had ample financial breathing room now aren't so sure. No doubt, some are tossing and turning at night.

But others are sleeping just fine. Conservative investors like Warren Buffett, already an icon, are looking even smarter for their cautious approach to leverage.

As Buffett noted at Berkshire Hathaway Inc.'s annual meeting this year, companies that need to tap credit markets to keep themselves going are beholden to their lenders.

"If you are dependent on borrowed money, every day you hope the world thinks well of you," he said.

Tuchman fetches $793,000

The U.S. dry cleaning industry is ailing these days, which helps explain why the vaunted Tuchman Cleaners chain in Indianapolis is changing hands for less than $1 million.

Newport Beach, Calif.-based US Dry Cleaning said on Oct. 1 that it paid $793,000 in cash for 25 Indianapolisarea Tuchman locations. The stores have annual revenue of $7.8 million.

The chain went on the auction block over the summer after its parent, Phoenix-based National Dry Cleaners, filed for bankruptcy court protection. National had owned chains across the country.

The new owner of Tuchman isn't exactly a financial powerhouse, either. Publicly traded US Dry Cleaning lost $6.6 million on $10.4 million in revenue in the nine months ended June 30, and its shares trade for a mere 43 cents apiece.

Consumers are cutting back on dry cleaning because of the sluggish economy. At the same time, high gas prices are boosting operating costs for cleaners, many of which provide pickup and delivery service.
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