I have a fairly deep well of CRE research on the blog now, and a focus on General Growth Properties (GGP) in particular. This mirrors my investment style. I will concentrate on a few well researched ideas and ride them out. Here is a synopsis of the CRE ideas:
Initially, I gave an introduction to my thoughts on CRE:
- Will the commercial real estate market fall? Of course it will.
- Do you remember when I said Commercial Real Estate was sure to fall?
I then noticed how the mainstream media and blogs started to catch on...
Then I decided to share my proprietary research on a particular REIT and its market, since the topic was getting pop media play...
- The Commercial Real Estate Crash Cometh, and I know who is leading the way!
- Generally Negative Growth in General Growth Properties - GGP Part II
- General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
- More on GGP: A Granular View of Insider Selling and Lease Rate Growth
- GGP part 5 - The Comprehensive Analysis is finally here
- My Response to the GGP Press Release, which seems to respond to blogs...
- For those who were wondering what sparked that silly press release from GGP...
- GGP: Foreclosure vs Asset Sale
- GGP Refinancing Sensitvity Analysis
- GGP part 7 - Share value under the foreclosure analysis
- GGP part 8 - The Final Anaysis: fire sale of prime properties
I also shared internal communications on an anonymous basis:
GGP then came out with a press release announcing new equity financing - something that I didn't explicitly model in my own analysis, but after reviewing information without the benefit of official documentation, there were no surprises nonetheless...
We then got the opportunity to get a good look at some of the preliminary filings for the offering, and we did find some surprises. My blog readers chimed in with their expertise and opinions... and now we are all caught up. So, my news reader just shoved this across my desktop WSJ: General Growth Shops for Partners:
General Growth Properties Inc., the second-largest U.S. mall owner and operator by market value, is shopping its portfolio to potential joint-venture partners as it scrounges for capital to pay off $18.7 billion of debt coming due over the next four years...
Bernie Freibaum, General Growth's chief financial officer, said in an interview that the company is approaching pension funds and life-insurance companies to first determine if they are interested in a deal before hashing out which properties would be involved. "It's not going to be that people can cherry-pick and just ask for the best assets," Mr. Freibaum said. "If it's multiple assets [in a deal], it will be a good cross-section of our portfolio."
In addition to seeking joint-venture partners, General Growth said it is considering other ways to whittle down its debt load -- which totals $27 billion -- including mortgaging some shopping malls and divesting itself of office buildings. "We're telling the market that we're going to reduce our leverage," Mr. Freibaum said. But, he added, "there are no distress sales going on." Yeah, right! Who needs a danger sign to be hung on the tip of a charging rhinoceros horn? No need to illustrate the obvious. I suggest potential GGP partners read the links listed above in this posting, in order. I forecasted this move by GGP last year. I even dedicated two entire reports and analyses to this very topic and included the most likely candidates to be put up for sale. See GGP: Foreclosure vs Asset Sale then see GGP part 8 - The Final Anaysis: fire sale of prime properties (these links give the most benefit when the entire series is read in order).
The moves come as the market for commercial mortgage-backed securities, which General Growth used to fuel its growth in recent years, has all but closed because of the credit crunch. CMBS are pools of debt sliced up by investment bankers and sold to investors as bonds.
At the height of its buying binge in 2004, General Growth financed nearly all of its $12 billion purchase of fellow real-estate investment trust Rouse Co. with debt. General Growth's debt binge has left it with a debt-to-capitalization ratio of 66%, well above those of its peers Simon Properties Group (SPG) (38%), Taubman Centers Inc. (TCO) (39%) and Macerich Co. (MAC) (48%). Indianapolis-based Simon is the largest U.S. mall owner and operator by market value.
With CMBS as a funding source gone for now, General Growth faces the tricky task of finding other sources of capital to refinance its debt as it matures. The few remaining lenders are institutions such as banks, pension funds and life-insurance companies.
In the current environment, however, this isn't an opportune time to find capital; many banks, for instance, are sitting on capital as the credit crisis plays out. The slowing economy has crimped consumer spending and led to rising bankruptcies of retailers. That, in turn, has reduced investor demand for retail real estate. In March, sales of U.S. shopping malls and centers totaled $1.9 billion, down 85% compared with a year earlier, according to preliminary data from market-research firm Real Capital Analytics.
General Growth's assets are considered more attractive than some others' in part because many of its properties have been improved and attract stable, popular retailers. "General Growth's portfolio is pretty good stuff. I think they would fare better than others" in luring investors, said Bernard Haddigan, a managing director for property broker Marcus & Millichap Real Estate Investment Services...
"Management's aggressive balance-sheet tactics have put the company in an unenviable bind," wrote Jim Sullivan, an analyst with investment-advisory firm Green Street Advisors, about General Growth in a March 28 research report distributed to the firm's clients. Yet he added that the prognosis isn't terminal: "There is clearly enough equity value in the company to take the prospect of bankruptcy out of the discussion even under a dire scenario."
On March 19, General Growth said it had secured $1.3 billion in new mortgages on six malls during the first quarter. The financing came from life-insurance companies and banks. Six days later, with General Growth's stock up 25% on the news, the REIT sold $822 million in equity -- roughly 7% of the company -- at $36 a share. That price, while higher than the value of General Growth's shares earlier last month, was well below last fall's price in the high $40s and low $50s. General Growth plans to raise an additional $1.75 billion, partly through asset sales.
While General Growth is quietly marketing a handful of two-story office buildings, the bigger haul is expected to come from joint-venture deals involving malls. General Growth declines to say which buyers it has approached. General Growth previously has teamed up with institutional investors including Metropolitan Life Insurance Co. and teachers' pension fund TIAA-CREF.
Now, if you recall, GGP indirectly attacked me and the blog for my calling them out on the need to raise capital through asset sales - or face foreclosures. It appears that I was poopoo-ed, then. Who's your Daddy now?! From My Response to the GGP Press Release, which seems to respond to blogs...
Conservative loan-to-property-value mortgage loans are in fact currently available to the Company for its income-producing commercial properties. There is no doubt about that. It is the properties that don't produce income or are underwater that have our attention. See the charts below. As previously set forth in the Company’s press releases on January 8th and 17th, because of the strong property income for financing purposes on these properties, the Company will be able to obtain mortgage loans at conservative loan-to-property-value ratios of 50%-60%.
Newspaper stories and blogs have compared GGP to other companies or individuals that recently utilized multi-billion dollar short term acquisition loans that are coming due in February of 2008. The Company has no such multi-billion dollar loans. Let's get our semantics straight. There are no multi-billion dollar loans, are no multi-billion dollar "short term loans", coming due in 2008. My research shows you have a pretty big tab to refinance over the next three years, starting in this year. The last material acquisition made by the Company was the purchase of The Rouse Company, which closed in November of 2004. At that time, an $8 billion four-year acquisition loan was obtained to complete the approximately $14 billion purchase. By early 2006, almost two years before it was due, the acquisition loan was repaid in full.
The Company also owns unencumbered income producing and development in progress properties that the Company believes have a value for financing purposes of at least $2.5 billion. These assets can be used through a variety of means to raise substantially more capital than could be required, even under the most “doomsday” of future possible scenarios for how the current commercial retail real estate markets might evolve over the next two years.
Despite current indications of softening specialty retail sales, our malls are well occupied pursuant to long-term leases. Taking into account actual 2007 Comparable NOI growth, and even assuming a weaker overall economy, the Company continues to expect Comparable NOI growth will average at least 5% for 2007-2009. So, you will defy the local, regional, national and global economies? My research shows your rents are probably softening already, despite the fact you state otherwise. Now, I can be wrong, of course, but the evidence does point to the contrary.
Bernie Freibaum, Chief Financial Officer of General Growth, said, “we do not like to publicly respond to unwarranted and untrue allegations, but we must do it in order to protect the interests of our Company’s constituents. We wholeheartedly agree with Barry Vinocur's reaction to this situation, which he published in his newsletter today. Mr. Vinocur is the highly regarded editor and publisher of REIT WRAP, a daily subscription service that is purchased by virtually all institutional investors in REIT stocks. Mr. Vinocur said that 'raising the possibility' that a company might file bankruptcy, especially in today's environment, is very serious stuff. Moreover, is there any knowledgeable individual who would suggest there's even a remote possibility that GGP might file bankruptcy?"
Finally, continued Bernie Freibaum, Mr. Vinocur adds that "the editors signing off on this crap should have their press passes yanked." Well, we don't have press passes at this blog. We are investors and analysts, not reporters and editors. If we get it wrong, we lose money, not press passes. This is a new paradigm, Mr. Vinocur. It's not media, it's NEW MEDIA!!!
Now, for an official response...
It appears that the company has presented the most optimistic scenario that it can look for under the current deteriorating credit market conditions and softening commercial real estate market. This is, in itself, something that runs to the contrary of what I put out into the public domain. I am very, very conservative in my assumptions, unless visibly noted otherwise. GGP has reported $15 bn in excess equity over debt, translating into $39 bn valuation of the company (after adding back total debt of $24 bn as of September 30, 2007) compared to our valuation of $29.5 bn (under the base case).
The valuation primarily differs on the following grounds:
- The effective annual cap rate of 6.5% (assumed by the company based on annualized 3Q2007 NOI) seems to be on the higher side in the medium-to-long term period, particularly in the wake of softening retail sales and lowering GDP and economic growth forecasts. This is yielding into a higher GGP valuation compared to our valuation based on a cap rate of 4.75%. If the recession scenario turns into reality (a statement which exemplifies my conservative approach - the reality is that we are already in recession/hard landing territory and have officially entered an equity and real asset bear market), the lower or negative growth in rentals in the coming years (2008-2010) will certainly impact the valuation.
- The company seems to have factored in a growth of 5% in NOI (in the near-to-medium) in contrast to our assumption of only 1-1.5% growth in rentals over a longer period and negative growth in 2008 and 2009 (in the base case scenario, again negating the glaring evidence of a hard landing/recession). The company has based its estimates for NOI (rental) increase on historical growth (in 2007) which ignores the current commercial real estate market and credit market conditions which have changed drastically in the second half of 2007. The conditions are expected to turn only negative from here onwards. Financial analysis is forward looking, and not historical.
- Although the occupancy levels in the company’s malls have not been impacted significantly till now, the situation may change in the wake of an expected fall in commercial rentals with its existing tenants (even on long-term lease) starting to explore other facilities available with lower rentals, or actually facing contraction and/or issues of solvency.
- Like the company, our model and valuation (as of now, we are running a default/foreclosure scenario that will be posted soon) assumes that GGP will be able to refinance its existing debt liabilities. However, it is to be noted that the additional finance would come at a higher rate of interest and the interest expense would adversely impact its bottom line in view of lower expected growth in net operating income off expected softening of the commercial real estate market.
This should explain our analysis which takes into consideration much more realistic assumptions of estimates of rental growth, cap rate, occupancy levels, interest rates, etc under the current conditions.
The downloadable pdf report actually got published sans some of its more illustrative graphs. I will post them here to clear the air, and then update the pdf.
[click to enlarge images]