A CRE Deal: Implications for General Growth Properties

 |  Includes: GGP, REG
by: Todd Sullivan

From the WSJ:

Macquarie CountryWide Trust (MCW.AU) said Friday that it has agreed to sell its 75% stake in a portfolio of U.S. shopping malls for US$1.3 billion (A$1.61 billion) to help cut debt, sending its shares sharply higher.

The price for the portfolio of 86 properties, owned in partnership with shopping mall owner Regency Centers Corp. (NYSE:REG), reflected a capitalization rate of 9.1% (emphasis mine), based on Sydney-based Macquarie CountryWide's estimated net operating income for calendar year 2009.

It valued the whole portfolio at US$1.73 billion, the Australian property trust said in a statement.

Macquarie CountryWide has been selling assets to refinance maturing debt and enhance its liquidity as the trust - which specializes in retail properties - refocuses on its Australia and New Zealand portfolio.

How does this possibly affect General Growth Properties (GGWPQ.PK)?
The question is "what kind of properties were these"? There are no details listed but their partner, Regency according to their website:

Regency Centers is a national developer, owner and operator of grocery-anchored and community shopping centers. We have spent more than 40 years, building a legacy of success evidenced by 440 centers, 21 regional offices and properties in nearly every major market. Our highly-focused commitment to quality and innovation has made Regency an industry leader and premier shopping center company.

I think it is pretty safe to assume that the properties sold were the strip mall shopping center type and they went for a 9.1% cap rate. Here is the list of Macquaries' US properties.

Now most of GGP's Mall's are classified as "A" properties due to the type and diversity of tenants. A local shopping center will sell for a higher cap rate simply because if the one large tenant (grocery store) pulls out, the property is highly adversely affected.

In this vein, I checked with reader Micheal working in the CRE field who said:

Before 2002 and the run up of CMBS financing average cap rates on strip centers were around 9% vs. roughly 7% on class A malls. This is a very rough estimate as class A in suburbs of Cleveland will go for a higher cap rate than class A in the suburbs of New York. Also cap rates have historically moved with interest rates. Investors need a yield spread above their cost of debt in order for a deal to make economic sense.

The thing to note right now is that cap rates are basically unknown because the market is so illiquid. This is especially true for class A malls because there are only a few groups who operate in the space (Simon, Taubman, GGP, Macerich). These assets are simply too expensive to have a large pool of bidders. In the strip center space you have many more players therefore a relatively (though still not very liquid) more liquid market. Right now Publix anchored centers in Florida are trading at around a 9% cap rate in comparison to low 7's or high 6's two years ago. The bidders on these assets are local buyers who use local bank debt with recourse.

No, I am not alluding to GGP garnering a 7% cap rate now (same time next year when they plan to file a reorg plan is a possibility though). I do not think it is that out of the realm to say Boston's Fanuel Hall and Baltimore's Inner Harbor would garner cap rates much less that a grocery anchored strip mall in Alameda California.

Now let's look at come cap rates / dilution percentages for GGP:
Because of that the 9.4% cap rate in the example looks to be high in relation to a valuation of GGP (it was intended to be that way). Let's use the 9% cap rate. Simply put, if the common shareholders get diluted 95%, it gives them a per share value of $1.69 (remember, not all of GGP is in Chapter 11). If you believe they deserve a lower cap, that minimal value rises. For instance if we split the historical cap rate gap of 7% to 9% and take the middle, 8%, even if shareholders are diluted 95%, the equity is still worth over $2 a share (this being as close to "wiped out" without actually being so as it could get).

If you think the cap rate is about right but the dilution will run 50%, the value for current shareholders is double digits. Basically the lower you run on the cap rate and the dilution scale, the potential equity gains are exponential. I am in the "some dilution" but nowhere near 95% camp. I am of the opinion we get some sort of "cramdown" (discussed here and here) with some sort of debt maturity extensions /debt to equity conversion scenarios.

The key to it all is the markets as Micheal alluded to above. How they are / aren't functioning and what are they providing for pricing guidance determines much of the value data. Deals like this one start to give us a picture of what could be happening...

Here is the whole presentation from Pershing Square:
GGP Ackman

Hat tip to reader Mark for finding this for me.

Disclosure: Long GGWPQ