General Growth Properties: A Speculative Play with Favorable Risk / Reward

General Growth Properties (GGP) could not have worse news. GGP’s largest equity investor, hedgie Bill Ackman’s Pershing Square, is actually stumping for its bankruptcy (here). From Reuters:

"Bankruptcy is not just designed for companies that are insolvent," Ackman told a packed room of real estate investors, owners, analysts and bankers attending the New York University Schack Institute of Real Estate 14th Annual REIT Symposium. "Bankruptcy is also designed for companies that are solvent, but have liquidity problems that are due to events outside of their control."

All of this is setting up GGP as a high-risk, high-reward play. From $41 one year ago, to its lowly 68 cents today, GGP knows downdraft. GGP’s quarterly net income and cash flows are dreadful, and news is only going to get worse. Bankruptcy is a likely option.

However, as a stock, there may be a path up. At 68 cents, GGP stock is worth $212 million. This $212 million manages an asset book value of $29.6 Billion–levered to the hilt, of course, with liabilities of $27.8 Billion.

But a Drexel Burnham truism, the old “F-U principle”, may figure in. It’s unlikely that GGP’s lenders want to run–or are in any state to take title to–GGP’s sprawling portfolio.

Ackman’s bucking for a bankruptcy works to GGP’s advantage… the knowledge and expertise (such as it is) of GGP’s staff and organization is worth a few bare percent of GGP’s assets managed (say 2% of $29.6 Billion being $592 million, or a 2.7x premium to GGP’s valuation today).

I’ve had a fair share of experience of real estate workouts, both on the debt side and the “equity” side. And the truth is: there is no “power” side. The lender doesn’t want to own or manage the asset. Ergo, the equity side is worth something, if only as an incentive for day-to-day management.

With Ackman’s bankruptcy play, the workout is the thing. At 68 cents per share, GGP is only for gamers who want speculation. If you buy here, you buy knowing your 68 can go to nil. But the quicker you get to bankruptcy, I think that Ackman’s idea goes, the quicker the courts award GGP equity some minimum value.

Above all, GGP at this level doesn’t favor shorts. Their day is past; there’s not enough “give” left for it to be attractive; you may even see a short squeeze. Further downs from ProShares Ultra Short Real Estate (SRS) are not likely–GGP is not big enough to weigh in size anymore.

With a totally speculative view, I accumulate a bit of GGP today, a bit more every 5 cents down. If I get 30% in a day or a week, I’m gone. If I lose 25%, I’m stopped out. This is not fundamentals talking, or capitalist principles. It’s just an assessment of what Ackman is promoting, and how real estate endgames often end.

As ever, I wish you good luck, and good fortune. Thank you for your participation.

Disclosure: No position in GGP. Will accumulate and sell as discussed above.

Comments

[User 388225:]

This strikes me as a more responsible bull argument on GGP common stock than most I've seen lately. I agree wholeheartedly with the assertion that the banks don't want to own the assets. But I'm sure you realize, it's not as black and white as either the lenders get the assets or the equity gets a recovery. The middle ground, and the most likely outcome, in my view, is that the bonds get the equity and the existing stock is canceled. What is missing from most analysis of this name is that everyone focuses on abstract valuation analysis, forgetting that sources and uses of cash are important too. GGP can't get out of bankruptcy until it cures defaults on a $2.6 billion unsecured term loan, $2.3 billion of Rouse bonds, and a $1.55 billion convertible bond. It has no means of doing so. Holders of these instruments aren't likely to take new notes up to the full amount they are owed. They are likely, therefore, to get all the new equity when GGP comes out of Ch 11. REITs have never really been bankrupt before, so all the REIT bulls out there can be excused for lacking understanding about Chapter 11, but it might be time for you all to brush up.

Apr 03 11:06 AM

[j_remington:]

Loan defaults have been held off the books. GGP lenders actually have defaulted loans but they won't label them as such in order to preserve their balance sheets. Construction loans are about to default. Shopping centers are losing tenants to bankruptcy. Casinos are barely making payments. MGM running out of cash and about to be diluted if they take on a partner. etc.

REIT leverage implies that an increase above 3% in defaults basically trigger insolvency, We are getting there shortly.

Apr 03 03:49 PM

[johngonole:]

One thing I've never liked about reits in general is this. They must pay out 95% of their funds from operations. Leaving them with hardly any cash flow to make up for those Ooops moments. All the time they are leveraged to the hilt

Apr 04 03:38 AM

[User 84603:]

But the biggest key is that too many investors are still projecting historical responses to current events. The fact is that the odds are not good that equity investors will get anything. The equity will go to the bond investors and the "sympathy" or "outsmarting the others" shares that have been left to the equity investors will most likely not be there. We are into a much much harsher world going forward - also one where there are many more capable and smart investors to take each side of every bet - thus less likely to leave much behind.


On Apr 03 11:06 AM User 388225 wrote:

> This strikes me as a more responsible bull argument on GGP common
> stock than most I've seen lately. I agree wholeheartedly with the
> assertion that the banks don't want to own the assets. But I'm sure
> you realize, it's not as black and white as either the lenders get
> the assets or the equity gets a recovery. The middle ground, and
> the most likely outcome, in my view, is that the bonds get the equity
> and the existing stock is canceled. What is missing from most analysis
> of this name is that everyone focuses on abstract valuation analysis,
> forgetting that sources and uses of cash are important too. GGP can't
> get out of bankruptcy until it cures defaults on a $2.6 billion unsecured
> term loan, $2.3 billion of Rouse bonds, and a $1.55 billion convertible
> bond. It has no means of doing so. Holders of these instruments aren't
> likely to take new notes up to the full amount they are owed. They
> are likely, therefore, to get all the new equity when GGP comes out
> of Ch 11. REITs have never really been bankrupt before, so all the
> REIT bulls out there can be excused for lacking understanding about
> Chapter 11, but it might be time for you all to brush up.

Apr 04 08:20 AM

[throbulator:]

"But a Drexel Burnham truism, the old “F-U principle”, may figure in. It’s unlikely that GGP’s lenders want to run–or are in any state to take title to–GGP’s sprawling portfolio.

Ackman’s bucking for a bankruptcy works to GGP’s advantage… the knowledge and expertise (such as it is) of GGP’s staff and organization is worth a few bare percent of GGP’s assets managed (say 2% of $29.6 Billion being $592 million, or a 2.7x premium to GGP’s valuation today).

I’ve had a fair share of experience of real estate workouts, both on the debt side and the “equity” side. And the truth is: there is no “power” side. The lender doesn’t want to own or manage the asset. Ergo, the equity side is worth something, if only as an incentive for day-to-day management."

The flaw in this argument is that the "FU" principal will benefit you, a non-management common shareholder. When (not if) GGP goes into bankruptcy, the existing common shareholders will get wiped out. The existing debtholders will become holders of newly issued common shares, and whatever tip they need to keep management from "F'ing Them", will be allocated out of that pool of newly issued common shares. You will get doodly-squat.

Apr 06 07:34 AM

[Patrick Garot:]

Author's Final Word: When I wrote this, GGP was at 68 cents.
It closed today (April 7, 2009) at $1.05.
I suggest that whoever might have followed this advice sell most of their GGP and book their 69% gains right now.

Apr 07 06:14 PM

[PeteK:]

Mr. Garot;
I will keep all my shares.
Won't sell a single share.

Apr 08 12:08 AM