General Growth's Offer Provides Further Asset Value Clarity

This situation is getting really fun to watch... It also gives us more clarity into the value of General Growth Properties' (GGP) assets.

Bloomberg Reported Tuesday:

General Growth Properties Inc.,(NYSE:GGP) the mall owner at risk of bankruptcy, received offers of almost $400 million for properties including Boston’s Faneuil Hall and New York’s South Street Seaport, according to a person familiar with the matter.

General Growth, the No. 2 U.S. shopping-mall owner, put the two properties and Harborplace & the Gallery in Baltimore up for sale in December. More than 10 offers were received, including offers for the entire portfolio and for individual properties, said the person, who asked not to be identified because the sales process isn’t public.

So, in 2004 GGP acquired the Rouse Company, who owned the above properties. It included a total of 40 million sq. feet of retail space plus another 9 million of land for $11.3 billion.

From the press release:

The Rouse Company acquisition adds 37 regional shopping malls, four community centers, and six mixed-use projects totaling 40 million square feet to General Growth’s portfolio of owned shopping centers. There is also a portfolio of office, industrial and other commercial properties totaling approximately 9 million square feet and considerable undeveloped land in some of the most successful master planned communities in the country, such as Summerlin, Nevada, Columbia, Maryland and The Woodlands outside Houston.

If we look at it, GGP paid $11.3 billion for 49 million square feet or $230 per square foot. Yet, if the numbers in the Bloomberg article are accurate (no reason to assume otherwise) they are selling just over 1 million square feet of it for $400 million or $389 a square foot.

Remember GGP carries all real estate on its books at cost. This potential transaction gives us more confidence that the $28 billion asset value on the books of GGP is far below the actual value. With $27 billion of debt, there is plenty of value left for shareholders.

Disclosure: Long GGP

Comments

[malach hamo...:]

the subject props are pure urban locations - presumably worth a lot more on a sq ft basis than the multitude of suburban and exurban malls with far lower per sq ft values.

inferring about a prop in Kansas from an offer for the SoSt Seaport is a bit of a stretch.

Mar 05 06:53 AM

[wusseldussel:]

According to bloomberg we are talking about appr. 770.000 sqft and not 1.000.000 sqft, so it is more 520 $ per sqft.

Mar 05 08:59 AM

[User 259493:]

Stop misleading readers and talking up this stock just because you got in at 4 and now its at .4. It worth 300/ft, they paid 500/ft. That means its worth less than they paid for t. How can you possibly sit here and tell readers that a top of the cycle highly leveraged deal is not underwater??!! Maybe there are a couple of trophy that are worth something, but the portfolio as a whole is worth less than the debt..bottom line.

Mar 05 09:37 AM

[TWOfold:]

The conclusion of the opinion piece above is offbase. Those are GGP's prime gems...the best of its property. Frankly, not many properties can be sold in this economic climate. Certainly not many will sell fast or at previously-established market rates.

GGP needs to raise more than $3 Billion by mid-March. $400 Million is just a start.

Also, keep in mind that GGP's debt on those properties is almost that much. GGP isn't going to net $400 Million.

The days of enclosed, suburban shopping malls seems to be over. Maybe people shop online or in more upscale places now. Who knows.

Remember back when drive-in movie theatres all died? The death of outdoor movie theatres came quickly. A once-established industry died almost overnight. Only a few survived for nostalgia. Tens of thousands of those drive-ins just died.

Some of those lots are still vacant today, even after the building boom of the 1990's and 2000's.

Well, the same thing could happen to enclosed shopping malls. Look at the long-vacant Big Box stores around the world. There are vacant Wal-Mart, Circuit City, Toys-R-Us, and Steve&Berry's all over the place.

Once they close, they stay closed...and they close down fast.

GGP has no Plan B. It doesn't know what to do if enclosed shopping malls are obsolete...unlike Wal-Mart who figured out where to move and what to build to continue on even when the smaller, older stores weren't working well enough.

GGP's creditors don't know what to do, either. If they force GGP into bankruptcy (this month?!), then they are stuck with a bunch of greyfields. That reality is so bad that the creditors are reluctant to kill GGP.

That's right...GGP is so toxic that its creditors fear taking over its assets. Many of its properties are negative cash flowing (e.g. Century Plaza in Alabama) and stuck in old neighborhoods that have long-since declined.

But GGP can only lose so much money before it all comes to a screeching halt.

It can't pay its debt service today, and won't be able to pay it tomorrow or next month or next year (as if they'll last that long!), either.

Look at the above deal. Those prime gem properties that will sell for $400 Million (if the buyers can obtain their own funding) are only bringing in $30 Million per year above operating costs and property taxes.

That's a 7.5% return if you pay cash for them. If the buyers have to borrow money, then those properties will just break even (most commercial loans in those amounts are 7.5%...if new loans are even being made).

Corporate bonds are few and far between below 7.5%, too.

So even the best that GGP has to sell can barely hold out hope of returning a profit to an outside buyer.

Mar 05 09:42 AM

[wusseldussel:]

Nobody knows for what prices the assets can be sold. Could be over BV could be below BV oder could be at BV. Fact is the market for such transactions has been dead for several months right now and unless the first transactions show up it is pure speculation what the assets are worth.

Mar 05 10:01 AM

[Iseegoodvalue:]

To "wussledussel" the total square footage including office space is actually 1,025,947 sq. ft. equating to to approx. $389 per sq. ft. using the $400 million amount.

The occupany levels disclosed so far, although not ideal, must not be that horrible given the 10 offers. Per the article they are anywhere in the 77% for office space to the 94% range for retail. With that, they are still receiving approximately $389 per sq. ft., so it tells me there must be enough margin in their cash flows. The majority of the mall purchases we executed prior to 2004, so they should still be cash flowing even if the occpancy suffers more through the next two years. It comes down to how many of those longer term leases, involved tenants that could possible file bankruptcy to terminate their leases. I personally do not think a very high percentage will occur due to the fact many of their tenants are large chains.

Tenants asking for consessions are another concern, but again, that goes back to the strength of the lease and tenant. There is definitely some risk there also if a lease term is close to expiring with an anchor tenant.

Aside from two very important issues I've addressed above, I do think there is a very positive issue of the replacement value of the structures. If you take the Rouse purchase of $11.3 billion for the 40 million sq. ft. of office and retail, and put a value of "0" on the land, just for argument sake. That equates to an average per sq. ft. purchase price of approximately $230. (They just recieved $389 per sq. ft. for three properties in this portfolio, so obviously the question is could the remaing properties in this part of the portfolio bring sale prices greater than $230 per sq. ft cost average.) So if you deduct this square footage and attribute only $8.5 billion of debt to that purchase, leaving remaing debt of $18.5 billion of debt against the remaining 151 million sq. ft. of retail/office space, that equates to $123 per sq. ft. average for the debt. At $123 per sq. ft., it would cost much more to replace those properties, even with the economy where it is. I would think at a worse case, there is $45 per sq. ft. in equity for GGP. If you play it very, very, very conservative and used the $25 per sq. ft. average in equity for all 200 million sq. ft., that equates to $5 billion in equity.

The only concerns I have is if the lenders see value and figure they can captialize on foreclosing. Although it does not make sense for the banks not to extend considering their fragile state, anything can happen. Then a Chapter 11 would be the only alternative. As a share holder, I do not know what would happen in this event, and it does concern me. For disclosure, I am a developer of some commercial and mostly residential properties. I have vast experience in costs to build and development financing, but on a much smaller scale.

Mar 05 10:25 AM

[Iseegoodvalue:]

I had a typo in the previous post. The $11.3 billion purchse was for "49" million sq. ft., which equates to the amount of $230 per sq. ft.

Mar 05 10:30 AM

[wusseldussel:]

According to bloomberg it is more like 766,177 sqft:

".......
The Chicago-based company is likely to choose a buyer for Faneuil Hall, South Street Seaport and Harborplace & the Gallery in the next several weeks, the person familiar with the sale said. The person wouldn’t identify the bidders, which included private groups, buyers from overseas and real-estate developers. The highest bids total almost $400 million for all three properties, the person said
..........
Biggest Property

Harborplace & the Gallery, located on Baltimore’s Inner Harbor, is the biggest of the three properties, with 284,683 square feet of retail space and 259,770 feet of office space. The retail portion is 85.6 percent occupied and has sales per square foot of $522, and the office space is 77.3 percent occupied, according to the sales brochure.

Faneuil Hall Marketplace, which dates to 1742 and also is known as Quincy Market, has 195,647 square feet of retail space with sales per square foot of $719 and an 89.9 percent occupancy rate. The office portion is 88.8 percent occupied.

South Street Seaport, a center near the Brooklyn Bridge that General Growth has been trying to redevelop, has 285,847 square feet of retail space that is 94.3 percent occupied. It has sales per square foot of $598, according to the brochure.
......"

www.bloomberg.com/apps...

Mar 05 10:39 AM

[mcrem51:]

REGARDING SF: We broke the story of GGP selling these assets. If you want to see a pdf of the offering, which confirms Square Footage from GGP, click here: www.citybizlist.com/ls...

The problem with these particular assets is that they mirror the assets General Growth owns in its suburban portfolio. In other words, the properties are located in tourist-heavy CBDs, but each of them are tenanted with exact same retail options those tourists have in their suburban hometown mall. Certainly, at one point, this increased the value of these malls because the tenants were considered credit-worthy. But NOW, it's clear the opportunity for these assets is to localize them and once again make them relevant to the areas where they reside. Their locations are GREAT, no doubt, but I don't think their value has been maximized by GGP's portfolio profile.

Mar 05 10:44 AM

[Reggie Midd...:]

I think it is safe to assume that I know GGP better than most (see boombustblog.com/index... and www.forbes.com/2009/03...). I tracked this company and shorted it from $60 all the way down.

I live in NYC and am very familiar with a few of their properties. You are being very inaccurate in your assumptions. The Seaport is embroiled in tenant litigation, and may very well have zoning issues and problems getting funds from the city in this environment in the case of any redevlopment.

It is a very valuable property, so much so that it would be near useless to consider a pool of properties to have similar values as their crown jewel. I considered going after the Seaport, but I feel that there will be better opportunities at a later point. I believe I am better than real and financial asset valuation than most - then again I could just be full of myself.

Mar 05 03:30 PM

[Iseegoodvalue:]

So Reggie, since you have indepth knowlege about GGP, do you think their debt exceeds the total value of the properties from a cash flow basis and replacement value?


On Mar 05 03:30 PM Reggie Middleton wrote:

> I think it is safe to assume that I know GGP better than most (see
> boombustblog.com/index...
> and www.forbes.com/2009/03...).
> I tracked this company and shorted it from $60 all the way down.
>
>
> I live in NYC and am very familiar with a few of their properties.
> You are being very inaccurate in your assumptions. The Seaport is
> embroiled in tenant litigation, and may very well have zoning issues
> and problems getting funds from the city in this environment in the
> case of any redevlopment.
>
> It is a very valuable property, so much so that it would be near
> useless to consider a pool of properties to have similar values as
> their crown jewel. I considered going after the Seaport, but I feel
> that there will be better opportunities at a later point. I believe
> I am better than real and financial asset valuation than most - then
> again I could just be full of myself.

Mar 05 05:02 PM

[mcrem51:]

GREAT question!


On Mar 05 05:02 PM Iseegoodvalue wrote:

> So Reggie, since you have indepth knowlege about GGP, do you think
> their debt exceeds the total value of the properties from a cash
> flow basis and replacement value?

Mar 05 09:18 PM