We published our evaluation of Bill Ackman's demands for General Growth Properties (NYSE:GGP) to sell itself back in September. We're still glad that GGP rejected Ackman's demands to put itself up for sale because we believe that the company is making steady steps in order to improve its fund flows from operations. We were also pleased that GGP was able to ensure that Brookfield Asset Management (NYSE:BAM) was unable to take over GGP without a deal that will enrich Pershing. Ackman was also able to cash out a portion of Pershing's stake in GGP by selling warrants to Brookfield at a $4.25/unit premium and secured an agreement that limited BAM's stake in GGP to 45%. At the same time, we wonder if GGP's operating performance will catch up to what its largest rival Simon Property Group (NYSE:SPG) is achieving.
Source: Morningstar Direct
Another reason why we're glad GGP didn't try to sell itself again to Simon Property Group was because we're sure it would pass antitrust muster since GGP and Simon are the two largest publicly trading mall REITs. In 2010, Simon had 245M square feet and GGP had 183M square feet. GGP has since reduced its square footage to 134M and Simon still has 242.5M square feet as of the most recent quarter end. When Simon was in talks with GGP in 2010 with regards to acquiring GGP, Simon offered to sell 25-30 malls with up to 10M in sellable square feet and GGP's lawyers responded that Simon would have to sell more than that without specifying how much more. Simon had offered $10B to acquire GGP at $9/share but wanted to walk away from the deal if it was required to sell off malls that averaged annual sales of $450/square foot. Brookfield Asset Management had offered $15/share for a 40% stake in GGP ($6.5B), which included 120M warrants exercisable at $15/share.
According to Ackman, he allegedly met with David Simon of Simon Property Group in October 2011 and Simon was still interested in buying GGP at .1765 Simon shares for each GGP share when GGP was trading at $12.75 and Simon was at $115.23. Brookfield was not supportive of that deal because it expressed an interest in acquiring GGP and was willing to sell 68 of GGP's malls to Simon. Simon rejected that deal because it objected to the malls that Brookfield offered as well as the price for the malls. Brookfield explained that it would seek to acquire GGP on its own and it would consider selling GGP's best 14 malls to Simon or other buyers.
If GGP had accepted Simon's offer of .1765 Simon shares for each GGP share back in October 2011, the deal would have given GGP an implied value of $21/share. GGP's price had reached $18.35 in August 2012 before Ackman issued his demands for a sale so we can see that GGP's efforts to turn itself around are helping to add value to GGP's shareholders and confirms our earlier thesis about GGP offers more sustainable value growth going forward as an independent company rather than selling out. Plus we weren't optimistic that Simon was interested in buying out GGP especially because GGP's valuation had caught up with Simon's.
As of November; Simon's P/B of 8.05 was higher than GGP's P/B of 2.31 but Simon's P/FFO of 20X was comparable to GGP's P/FFO of 18.5. Simon's current P/B of 8.5 is higher than GGP's 2.3 but Simon's P/FFO of 19.45 is still comparable to GGP's P/FFO of We don't see David Simon willing to offer 29X GGP's FFOs especially when we consider the following items of note:
- Simon's bid to acquire GGP has already been rejected once or twice depending on who you talk to
- Simon's sales per square foot in Q1 2013 were 3% higher than GGP's
- We were surprised that GGP's occupancy rate of 95.8% was higher than Simon's 94.7%.
- Simon's operating margin in Q1 2013 was 45.9% versus 31.4% for GGP
- Simon's asset base is 18% higher than GGP's but its revenue is 90% higher than GGP's
- Simon's Interest coverage ratio in Q1 2013 was 1.96X versus 1.025X for GGP
- We were surprised that GGP's weighted average interest expense of 4.72% was lower than the 5.01% that Simon Property Group pays.
Source: Morningstar Direct
GGP and Simon both enjoyed healthy year-over-year growth in FFO/share for Q1 2013. Simon's FFO/share in Q1 2013 was $2.05, up 12.6% from $1.82 in Q1 2012. This was due to a 110bp increase in its occupancy rate, 5.3% increase in its sales per square foot and positive operating leverage with regards to its cash operating costs. GGP's FFO/share in Q1 2013 was $0.25, up 13.6% from $0.22 in Q1 2012. GGP's FFO/share was attributed to a 210bp increase in its occupancy rate, 6.3% increase in its sales per square foot and reduced interest expenses associated with timely refinancing of certain loans that were maturing in FY 2013. GGP also purchased 46 million warrants that are issuable into 27 million shares of common stock, using net share settlement, for approximately $633 million.
Source: Morningstar Direct
In conclusion, we are glad that Brookfield and GGP has declined Bill Ackman's demands that GGP put itself up for sale. We believe that it isn't the right time for GGP to sell itself to Simon Property Group and we believe that GGP has the potential to gain ground against SPG. Although GGP is making progress in improving its operations, GGP is most certainly not yet at the same level of Simon Property Group with regards to performance. GGP most certainly should not be trading at a higher FFO ratio than SPG and we think Bill Ackman was wrong to think otherwise. However GGP has more potential upside than SPG and investors should take advantage of further dips in the market to average into a position in GGP and or SPG.