Things Not All That Bad at General Growth Properties

A closer look reveals things are far better than the market assumes and for those who enjoy irony, the "worse case scenario", may actually be the best....

General Growth (GGP) currently has ownership interest in, or management responsibility for, over 200 regional shopping malls in 44 states, as well as ownership in master planned community developments and commercial office buildings. The Company’s portfolio totals approximately 200 million square feet of retail space and includes over 24,000 retail stores nationwide.

Results from the Press Release:

Chicago, Illinois, February 23, 2009 — General Growth Properties, Inc. (NYSE: GGP) (the Company) announced today its results of operations for the fourth quarter of 2008. Core Funds From Operations (Core FFO) per fully diluted share for the fourth quarter of 2008 were $0.72, Funds From Operations (FFO) per fully diluted share were $0.70 and Earnings per share — diluted (EPS) were zero. For the full year 2008 Core FFO was $2.83, FFO was $2.72 and EPS was $0.10. Although FFO per fully diluted share for the fourth quarter of 2008 increased from the $0.64 of FFO per fully diluted share for the fourth quarter of 2007, both Core FFO and EPS declined in the fourth quarter of 2008, as compared to the fourth quarter of 2007. Both the quarterly and annual 2008 and 2007 comparable periods had significant items that affected FFO comparability, including provisions for impairment, tax restructuring benefit and strategic review costs. A supplemental schedule showing such items and their impact on 2008 and 2007 FFO is provided with this release.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

• Core FFO is defined as Funds From Operations excluding the Real Estate Property Net Operating Income (NOI) from the Master Planned Communities segment and the (provision for) benefit from income taxes. Core FFO for the fourth quarter of 2008 was $231.0 million, or $0.72 per fully diluted share, as compared to $271.2 million, or $0.92 per fully diluted share, for the fourth quarter of 2007. While the aggregate of minimum rents and tenant recoveries remained essentially flat for the quarter, overall declines in the general economy, and the retail market specifically, impacted our retail properties causing revenue reductions in overage rents, and other income (for items including promotion, sponsorship, and parking income). Cost reductions in marketing, repairs and maintenance, supplies, contracted services, security, landscaping, and personnel costs, did not fully offset our revenue declines.

• FFO was $222.2 million in the fourth quarter of 2008 as compared to $190.4 million in the fourth quarter of 2007, an increase of approximately $31.8 million. FFO was significantly impacted by items as detailed in the attached supplemental schedule. Excluding such items, FFO declined in the fourth quarter of 2008 as compared to the fourth quarter of 2007 as a result of lower comparable NOI in the retail and other segment and higher interest expense.

• EPS were zero in the fourth quarter of 2008 compared to $0.24 in the fourth quarter of 2007, substantially all of which was due to the items listed in the attached supplemental schedule and the matters affecting Core FFO and FFO described above.

2009 Maturing debt and liquidity concerns

We are primarily focused on our near and intermediate term loan maturities. The refinancing market remains at a standstill. We are considering all strategic alternatives and are continuing our discussions with our lenders. In addition, we have suspended our cash dividend, halted or slowed nearly all of our development and redevelopment projects, systematically engaged in certain cost reduction or efficiency programs, reduced our workforce by over 20% and sold certain non-mall assets. We currently have approximately $1.179 billion of past due debt and approximately $4.09 billion of debt that could be accelerated. However, our lenders have not yet exercised any of their remedy rights with respect to such debt. In addition, we have $1.44 billion of consolidated mortgage debt and approximately $595 million of unsecured bonds scheduled to mature in the balance of 2009 that remains to be refinanced, repaid or extended. In the event that we are unable to extend or refinance our near and intermediate term loan maturities, we may be required to seek legal protection from our creditors.

Given the uncertainties concerning our ability to refinance maturing loans and the impact of potential strategic alternatives, we will not provide Core FFO guidance for 2009 at this time.

Here is the debt maturity schedule:

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Debt Covenant Ratios:

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SEGMENT RESULTS

Retail and Other Segment
• NOI declined 2.4% from the $718.9 million reported for the fourth quarter of 2007 to $701.8 million for the fourth quarter of 2008. This reduction in NOI is primarily due to decreased revenue primarily due to declines in overage rents and other income.

• Comparable NOI from consolidated properties decreased 4.1% in the fourth quarter of 2008 versus the fourth quarter of 2007.

• Comparable NOI from unconsolidated properties at the Company’s ownership share for the fourth quarter of 2008 declined by approximately 10.0% compared to the fourth quarter of 2007. Declines in termination income in 2008 (due to certain individually large terminations in 2007) and foreign currency translation rate differences between periods caused the comparable NOI decline for unconsolidated properties to be significantly larger than that of the comparable consolidated properties.

• Revenues from consolidated properties declined approximately 3.2% for the fourth quarter of 2008, or approximately $27.5 million, to $840.5 million as compared to $868.0 million for the same period in 2007 primarily due to declines in overage rent and other income.

• Revenues from unconsolidated properties at the Company’s ownership share declined slightly for the fourth quarter 2008 as compared to the fourth quarter of 2007, to $162.2 million from $163.2 million, as increased minimum rents from certain expansions and renovations opened since late 2007 and certain ownership increases in properties owned through our international joint ventures were more than offset by overage and other income declines across the segment.

• Comparable tenant sales, on a trailing twelve month basis, decreased 3.8% compared to the same period last year.

• Sales per square foot, on a trailing twelve month basis, decreased 4.2% compared to the same period last year.

• Retail Center occupancy decreased to 92.5% at December 31, 2008 from 93.8% at December 31, 2007.

Now much has been said about the property that GGP holds and how it has deteriorated in value. BUT, if we look at recent land sales from its planned communities, we see the opposite is happening:

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Here are the top ten tenants in Retail Operations:

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None of these large tenants are in danger of leaving unless the company is in a Chapter 11 proceeding. GGP derives 60% of rents from anchor stores and 40% from the remainder.

Breakdown by region:

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So, no two ways around it. The debt is crushing the company but operations are performing just fine, very well actually given the current climate. Also, the value of the real estate on the books is clearly below its actual value. The more one looks at it, one has to hope the company files Chapter 11, clear its debt and starts over.

The opportunity here is really impressive...

FULL 8-K

Disclosure: Long GGP

Comments

[Mad Hedge F...:]

With many analysts expecting commercial real estate to be the next shoe to fall in the financial crisis, there is already maneuvering to get a bail out in place before the sushi hits the fan. “Ghost malls” now widespread around Michigan are spreading to the coasts like a highly contagious plague. Simon Properties (SPG) and Westfield have gone to the extremes of shortening hours to save money on staffing costs and electricity. The trigger will be impending failed rollovers of the debt of a couple of big REITs, of which over a $1 trillion are coming due. The Treasury’s TALF program will be expanded from CDO’s backed by student loans, car loans, and credit cards to include commercial real estate loans, giving the industry the safety net, and the breather it needs.

Feb 25 07:56 AM

[Chris of NH:]

Yes, they are doing great. Malls are booming. Imports are strong. Consumers are buying. No, wait, this was the report for YE 123106. Opps.

If you want to see a joke of General Growth's look at their Natick Collection (they built a couple hundred condos on top of a mall in Natick MA... no one is buying them... a combination of poor timing and a really dumb idea in a middle class bedroom community anyhow).

They are in deep doggie-do.

Feb 25 08:41 AM

[James Wilson:]

Chinesse sheetrock! Chemicals in it causing problems across the USA.


On Feb 25 07:56 AM The Mad Hedge Fund Trader wrote:

> With many analysts expecting commercial real estate to be the next
> shoe to fall in the financial crisis, there is already maneuvering
> to get a bail out in place before the sushi hits the fan. “Ghost
> malls” now widespread around Michigan are spreading to the coasts
> like a highly contagious plague. Simon Properties (seekingalpha.com/symbo...)
> and Westfield have gone to the extremes of shortening hours to save
> money on staffing costs and electricity. The trigger will be impending
> failed rollovers of the debt of a couple of big REITs, of which over
> a $1 trillion are coming due. The Treasury’s TALF program will be
> expanded from CDO’s backed by student loans, car loans, and credit
> cards to include commercial real estate loans, giving the industry
> the safety net, and the breather it needs.

Feb 25 08:44 AM

[YoYoMama:]

Morningstar now has their Fair Market Value at $0.00. So yeah, they must be doing great.

Feb 25 09:05 AM

[mcrem51:]

I think his point is simply that the whole is worth way too much less than the sum of its parts. I've been watching this company thinking it would go bankrupt everyday for three months now. But the second generation family that sits on its board will seemingly do anything - everything - to avoid bankruptcy. On top of that, I'm not so sure the federal government will allow the nation's second largest mall owner to fail. It can't get extensions on its loans, it hasn't been able to sell its assets, but the banks don't appear especially interested in taking it over, which they've been able to do since the company violated its forbearance agreements last week. What’s next for this company?

Feb 25 09:23 AM

[Market Folly:]

Bill Ackman's Pershing Square bought a bunch of GGP as he feels the shares are worth something assuming they file bankruptcy since their assets would be greater than their liabilities. This, of course, somewhat depends on their ability to sell properties off at prices that aren't ridiculously lowballed. The rest of Ackman's portfolio: www.marketfolly.com/20...

Feb 25 09:32 AM

[Ken_SF:]

I'm no stock expert, but I do know GGP as a neighbor; I own some commercial real estate near one of their malls (in Frisco Texas). My impression is they do an excellent job and know what they are doing. I'm happy to have them as a neighbor. True they may have borrowed differently if their crystal ball had been more accurate regarding the current markets for money, but nevertheless, they know how to develop and run quality retail properties.

Feb 25 09:33 AM

[viewfromnyc:]

GGP common stock is simply a call option on a game of chicken between the company and its lenders. The lenders don't want to take back the malls and the company doesn't have the NOI to support a refinancing. As long as the company is a going concern there will be some option value but if and when the lenders declare default the company will file Chap. 11 and the option (equity) value will disappear. The only way the equity has any value is if the current group of lenders agree to extend the current amounts due. If they don't extend, there is no way the lenders will let equity holders keep $167 million (the current market cap.) of value in bankruptcy proceedings. The misperception in one posting is that Chap. 11 means that the company fails and closes, it only means that the control of the company shifts from the current equity holders to the debtholders. No malls will close, no jobs are at risk, so the government has no compelling interest to save the equity holders. While the government may make capital available to banks to suport an extension of the loans, the banks may be loathe to grant credit to GGP at the current LTV ratio.

Feb 25 11:56 AM

[Augustus:]

The judge in the bankruptcy court determines how the liabilities are treated and settled. There are adequate assets and adequate income to service the debt. They have no capability of repaying it all in the immediate future. In such cases the judges can cause the lenders to accept different repayment terms so that the maturities are extended. It would be pretty unlikely that there will be any auctions of properties as a result of a bankruptcy.


On Feb 25 11:56 AM ViewfromNYC wrote:

> GGP common stock is simply a call option on a game of chicken between
> the company and its lenders. The lenders don't want to take back
> the malls and the company doesn't have the NOI to support a refinancing.
> As long as the company is a going concern there will be some option
> value but if and when the lenders declare default the company will
> file Chap. 11 and the option (equity) value will disappear. The only
> way the equity has any value is if the current group of lenders agree
> to extend the current amounts due. If they don't extend, there is
> no way the lenders will let equity holders keep $167 million (the
> current market cap.) of value in bankruptcy proceedings. The misperception
> in one posting is that Chap. 11 means that the company fails and
> closes, it only means that the control of the company shifts from
> the current equity holders to the debtholders. No malls will close,
> no jobs are at risk, so the government has no compelling interest
> to save the equity holders. While the government may make capital
> available to banks to suport an extension of the loans, the banks
> may be loathe to grant credit to GGP at the current LTV ratio.

Feb 25 12:20 PM

[the_raven_35:]

I think Mr. Sullivan doesn't have a clue about real estate, how it is valued, how to analyze REITs, etc. Yet, somehow, this completely pointless re-print of a press release and a few completely misguided points about a company that is TOAST and whose equity holders will be wiped out (but MAY get something in bankruptcy, assuming there is any equity value left) somehow makes its way onto Yahoo News.

Perhaps the larger problem here is that Mr. Sullivan's views should never have been broadcast in the first place, because Mr. Sullivan doesn't have a clue. Yet here I am, commenting on an article that might slightly influence someone's investment action on this stock, and wondering how it is that someone decided to let Mr. Sullivan actually make a recommendation on something (REITs, real estate) he knows ABSOLUTELY NOTHING ABOUT.

The Raven

Feb 25 03:13 PM

[Tim Hannon:]

Sorry Mr Sullivan, GGP will fail - it has nothing to do with the fundamentals of their business, they are great at what they do, shopping centre ownership and management - and even in shocking down cycles this type of asset actually holds up relatively well (though will still have income falls). GGP's demise is coming from their capital structure; they simply owe too much money and cannot pay it back. Forget talk of revenues, sales per square foot, FFO, etc - it means nothing.

Feb 25 05:37 PM

[malach hamo...:]

sure they have great properties; but unless you can unfreeze the credit markets, a bankruptcy will result in the entire portfolio going to the unsecured creditors except to the extent that they can't roll specific mortgages; those properties will be owned by the groups of cmbs investors.

all of thise was avoidable if prior mangement weren't so irresponsible and had addressed the maturity issue back in the summer of 07 when credit markets started showing stress.

thanks, bernie!!

Feb 25 07:48 PM

[Lester Bones:]

This corporation ran me out of business this year after 10 years of success at Faneuil Hall Marketplace in Boston. They are greedy greedy
amateurs!


On Feb 25 07:48 PM malach hamovess wrote:

> sure they have great properties; but unless you can unfreeze the
> credit markets, a bankruptcy will result in the entire portfolio
> going to the unsecured creditors except to the extent that they can't
> roll specific mortgages; those properties will be owned by the groups
> of cmbs investors.
>
> all of thise was avoidable if prior mangement weren't so irresponsible
> and had addressed the maturity issue back in the summer of 07 when
> credit markets started showing stress.
>
> thanks, bernie!!

Feb 26 12:33 AM

[John N:]

Toddo: You are in way over your head here. First, you have no idea what GGP's real estate is worth. You index proxy is too general to be of any use. All real estate is local. Second, even if you use that index it is possible that the value you ascribe is way too optimistic. Finally, if these guys file, it will likely be a long, contentious Ch11 process with plenty of twists and turns and a decent probability that existing common holders end up with ZERO. Your thesis is really: a position in an out of the money call option buoyed by hopes that maybe Ackman has a plan. Granted, Ackman may have ideas, but they are his and not yours. I'm guessing you don't know them and "opportunity" here is akin to a lottery ticket.

Feb 26 02:29 PM