The Logic Behind Bill Ackman's Purchase of General Growth Properties

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Includes: DDR, GGP
by: TraderMark

Found this story via Marketfolly, via Todd Sullivan's Value Plays, via Reuters... whew!

Bill Ackman (previous post) at Pershing Capital is a noted hedge fund manager who is generally well respected; he has been purchasing bushels of General Growth Properties (GGP) a mall based REIT we've pointed out in the past with ire. The stock is now down to $1.50ish and seems to be flat lining. So why the purchases that on the surface seem to make no sense? Ackman actually wants the company to go bankrupt. This is generally a terrible thing for common shareholders as they are last in line to get proceeds from a bankruptcy. But maybe not in this case...

  • Hedge fund Pershing Square Capital Management, one of General Growth Properties Inc's GGP.N biggest shareholders, is betting the No. 2 U.S. mall owner will file for bankruptcy -- and equity investors will end up big winners, a person familiar with the firm's thinking said.
  • Bankruptcy usually leaves stock investors with plenty of nothing, but General Growth is an unusual case. It has almost $30 billion of assets on its books, and just about $27 billion of debt. But most of the company's real estate assets are recorded on its books at their historical value, and many were bought years ago, meaning their value now is likely substantially higher. The company's problems are not with its assets, but with refinancing maturing debt in frozen markets.
  • Historically, companies whose assets are worth much more than their liabilities have gone through bankruptcy in a way that leaves shareholders intact, which is what Pershing Square is banking on, the person familiar with the firm's thinking said.
  • Pershing Square owns or has exposure to more than a quarter of General Growth's shares.
  • In real estate circles, Chicago-based General Growth is admired for its ability to manage its properties well, boosting their value in the process. But the credit crisis has hit the company hard, sending its stock price down more than 97 percent, and leading to the firing of its chief financial officer. The company is trying to raise cash by selling off some malls but has yet to do so.
  • In Pershing Square's estimation, General Growth's real problem is its maturing debt, in particular two loans totaling $900 million. Those loans were set to mature at the beginning of December. Lenders extended that deadline to February, adding to the $2.49 billion of other debt due next year.

There is precedent for a "winning" outcome in a bankruptcy for shareholders....

  • General Growth is not the first company to find itself in this bind. Amerco Inc (UHAL.O), parent of moving truck rental company U-Haul International Inc, filed for bankruptcy in 2003 after a dispute with its former auditor and multiple accounting restatements left it unable to refinance debt.
  • The company listed $1.04 billion of assets and $884 million of liabilities in its bankruptcy filing, and had considerably more assets off its balance sheet as well. Its shares tripled during bankruptcy, and rose more than fourfold after it emerged from bankruptcy in 2004.
  • Pershing Square sees parallels between Amerco and General Growth. The founding families of both companies own substantial blocks of stock, giving them a real incentive to refrain from diluting shareholders' stakes during bankruptcy.
  • And General Growth is still generating more than enough cash flow to service its debt and meet other day-to-day obligations, just as Amerco was. In other words, General Growth has problems with liquidity rather than solvency, the person added.
  • Pershing either bought or gained exposure to the shares at prices ranging from 35 cents to $1.58 per share,

So if Ackman is right, this is exactly why he is smarter than the average bear... or blogger.

Meanwhile a reader pointed out a similar name to GGP in terms of a mall based REIT - Developers Diversified Realty (DDR).

Developers Diversified Realty Corporation (NYSE:DDR) operates as a real estate investment trust (REIT) in the United States. The company engages in acquiring, developing, redeveloping, owning, leasing, and managing shopping centers, mini-malls, and lifestyle centers. As of February 5, 2007, it owned or managed approximately 461 shopping centers and 7 business centers, as well as 1,170 acres of undeveloped land.

There is about $6 Billion in debt - the company claims they can service it.

  • Developers Diversified Realty Corp, which owns and builds shopping centers, is ending the year with enough liquidity from property sales and financings to meet its near-term debt obligations, the real estate investment trust said on Wednesday.
  • The company, whose shopping centers are usually anchored by big-box stores, said that in 2008 it raised $1.2 billion from new mortgage financing, generated $136 million in proceeds from asset sales, and netted $43 million from stock sales to reduce its debt.
  • In the 2008 fourth quarter, it bought at a discount $71 million of its outstanding senior notes. The outstanding principal balance of its Jan. 30, 2009, senior notes is $227 million.
  • To shore up its balance sheet, the Ohio-based REIT earlier this year canceled new U.S. development projects and expansion plans in Russia and slashed its dividend. It suffered a setback earlier this month when a deal to sell 13 assets failed to close.

This is where an analyst who specializes in REITs would be helpful - I'd love to see a list of REITs with the most debt needing to be rolled over in 2009 as a % of total debt.

The danger in this arena is the government interference (see previous blog entry), bailouts (aka lack of free markets), and the fact some of these stocks now whip around like penny stocks (or like our biggest banks): +/- 15 to 20% a day. But it does look like a promising short idea as it's hitting resistance...


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