GGP Suspends Dividend in Attempt to Address Liquidity Concerns

On Thursday, there was an article by shareholder advisory firm Glass, Lewis & Co., which contributed to the 50% selloff in REIT General Growth Properties (GGP) stock on Friday. Essentially, the complaint was that company insiders were selling GGP stock while there was a ban on short selling by the SEC, implying that it was inappropriate.  What it failed to note was that those same insiders sold stock not because they wanted to, but because they were forced to due to a margin call attributed to the stock declines.

Historically General Growth has been a well managed company with a tremendous percentage of insider ownership by its management team, respected by its peers for its success in acquiring and managing a portfolio of mall properties.

The company's management believed and executed successfully their growth strategy leading to their confidence in increasing their shareholder ownership.

As you can see from the chart below, the insiders purchased shares much higher than the current stock prices. Therefore, to imply that there is impropriety in the forced sales does not accurately reflect the facts.

As anyone who has experienced a margin call can tell you, it is extremely unpleasant to have a forced sell due to a decline in equity price.

There is no doubt that companies with financial leverage are experiencing difficulties due to the credit crunch facing the economy. Companies with pristine credit who just 18 months ago could borrow billions, now find it difficult to even raise $500mm to cover their immediate cash needs. As long as credit lending remains scarce, companies will find it difficult to maintain their business operations.

These problems are not unique to GGP and do not reflect the pristine assets they own in their mall portfolio. Any further analysis of GGP should focus on the valuation of their portfolio and not the block of insider sells sold recently.

On Friday, the company took steps to address their financial liquidity by suspending the dividend for the balance of 2008.

click to enlarge

Disclosure: Author does not own shares of GGP.

Comments

[crankyinvestor:]

GGP was doing quite well as long as it could finance long-term assets with short-term paper; now that the credit markets have frozen, that doesn't seem like the best of strategies.
Their executives, particularly Bernie the super-CFO, showed excessive fiscal irresponsibility by taking an already leveraged situation and loading up additional shares personally with short-term margin borrowing. Whatever bets they placed on financing long-term assets with short term financing (sorry for repeating but it's the "original sin" of finance and deserves multiple repetitions) have come back to bite them in the as.

2008 Oct 06 07:25 AM

[crankyinvestor:]

in the ass (corr)

2008 Oct 06 07:26 AM

[helplessobs...:]

I wonder if these wonderkind MBAs ever learned that "borrowing short to lend long" is the technique for financial disaster. God knows the Savings and Loans industry found out it was untenable even with stable deposit capital at their disposal.

2008 Oct 06 10:34 AM

[prescient11:]

Way to go Reggie Middleton. Great call.

2008 Oct 06 12:27 PM