America's second largest shopping-mall owner, General Growth Properties (GGP), rejected a demand by its second biggest shareholder, Bill Ackman, to put the company up for sale. Through a letter in late August, Bill Ackman, owner of the hedge fund Pershing Square Capital Management, urged the board of directors of General Growth Properties to consider a sale proposal (made by Simon Property Group), before Brookfield Asset Management (BAM) purchased enough shares to take control of the company. Brookfield Asset Management happens to be the biggest shareholder in General Growth, holding 42.2% of the shares. Earlier, we concluded that the sale proposal made by Simon Property Group (SPG), General Growth's largest competitor, would be a win-win situation for both companies.
Ackman was of the view that if Brookfield continued to increase its holdings, it would only be a matter of time before the largest shareholder had enough shares to influence control over the company, depriving the rest of the shareholders from the additional control premium.
In response to the demands made by Ackman, the board of General Growth unanimously decided that the best value for its shareholders would be if the company continued to remain an independent entity. The board believes the company will experience growth in the coming future. At General Growth, occupancies and tenant sales are experiencing upwards trends. Earlier, when the company reported its second quarter results for the current year, its revenues and funds from operations (FFO) increased 3.5% and 10%, respectively, over the previous year. Overall, mall rents and occupancies increased in the second quarter of the current year. The company has raised its forecasts for funds from operations for the year end by 133bps to $7.6 per share.
Before responding to the demands made by Ackman, General Growth was reported to be looking for a financial advisor. We believe the board is feeling some pressure, which is why in order to evaluate alternatives, bankers have been presenting to the board.
Retail Market Outlook
Besides the presence in the U.S., the company owns retail malls in Europe, Canada and Asia, including Japan, Malaysia and Korea. Much of the growth in emerging markets will be driven by strong demand for retail space in China. Despite a slowdown in China, growth in rentals is expected to be in the range of 1% to 3.5% in the third quarter, as compared to the second quarter of the current year. Rents are expected to grow in the South East Asian region, with the exception of Singapore.
The outlook for American retail markets is not favorable. In the second quarter of the current year, rentals experienced a downwards pressure, while vacancy rates remained steady. Given the macroeconomic headwinds, we expect retail markets to remain sluggish for the remainder of the year.
The situation in Europe is even worse. With the continent having been hit by the prolonged debt crisis, consumers are refraining from spending on non-essential items. A decline of 0.3% over the remaining 2012 is expected in total retail sales in the European Union.
We believe that growth in emerging markets will drive any improvement in the operating results in the coming quarters for general growth.
Approximately 11.11 million shares of the company are currently short, which is 1.4% of the entire free float. The short interest ratio for the stock is 3 days. Short shares increased 14.5% over the first 15 days of August. The Put-Call Ratio (PC Ratio) increased from the one year low of 0.07 to 0.38. Even though the increase was not significant, there is a shift in investor sentiment from bullish to bearish.
General Growth's stock, which has seen 37% price appreciation since the beginning of the year, is trading at 2.46 times its book value. Compared to this, the stock of Simon Property Group, which has P/E of 31.4x, trades at 8.18 times its book value.
In conclusion, we believe, after the board's rejection of the sale call made by Ackman, it is in the best interest of the shareholders of General Growth to expand its operations in emerging markets, which offer the most growth in the coming quarters.