When looking at REITs and wondering how to value them, it all comes down to NOI. With that in mind, lets look at Q2 for GGP (GGWPQ.PK):
NOI for the second quarter of 2009 was $615.8 million, a decrease of approximately 2.1% from the $629.1 million reported in the second quarter of 2008. Minimum rents (including temporary tenant revenues), overage rents and other revenues (including sponsorship, vending, parking and advertising) in the second quarter of 2009 declined as compared to the same period of 2008 due to the continued weakness in the economy and occupancy declines. In addition, we sold three office buildings in 2008, as discussed above, which also contributed to the decrease in NOI. Weaknesses in certain of our tenants’ businesses also led to a $3.9 million increase in our provision for doubtful accounts in the second quarter of 2009 as compared to the second quarter of 2008.
Note: For GGP one must ignore the headline numbers for now as they will be skewed heavily by restructuring costs. We are simply looking at the health of the underlying operating businesses, not the final accounting number.
A 2.1% drop in this environment is simply outstanding. If we are talking about a cap rate to value GGP at, taking a look at recent CRE deals we see the current market for grocery anchored strip malls are selling for 8.5%-9% cap rates. Based on that and based on GGP's results, if one would assume a 8% cap rate for GGP, that would be very reasonable. It also would not be unreasonable based on the historical averages to stretch it to 7.5% but we ought to stick with 8% to be conservative.
Using this we will base some assumptions on Pershing's valuation table of GGP common post Chapter 11 under certain dilution scenarios. As we move down the Cap scale we find that the value of the common dramatically increases.
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As GGP continues to post strong results, the assumption has to be that there will be more left for shareholders post Chapter 11. Occupancy, while up slightly was essentially unchanged at 91%, giving credence to the strength and desirability of GGP's locations.
Remember, GGP need not file a reorg plan until April, 2010. So, if you think the economy will continue a steady albeit slow rebound, then the numbers we see now ought to improve even further by then. If that is true, then the prospects for current shareholders will improve with it.
Disclosure: Long GGWPQ.PK