REITBull

Ackman Explains Why He's Short REIT Realty Income

Ackman may be trying to play the decline in the lower end of CRE. According to their 10K, Realty Income has "average leasable retail space per property of approximately 8,130 square feet". There seems to be an abundance of small box CRE property on the market. This should put pricing pressure on their rents for the foreseeable future. Also the smaller box tenants tend to have less credit availability.

General Growth: Progressing on Schedule

I hear ya, but if the SPE's stay intact, I'm not sure that the secured lenders on performing properties will have to modify their loans and may opt to foreclose instead.


On Sep 03 09:18 PM Brian McMorris wrote:

> REITBull:
>
> I would counter your argument by making the point that as long as
> GGP is in bankruptcy court, the court will supervise the process
> of loan "workouts" and will put pressure on the lenders to get a
> reasonable deal done. That is the entire point of going into Chapter
> 11. Remember, GGP is cash flow positive and very solvent from an
> operational perspective (they reported profits last Q). They don't
> need charity, just fairness.

General Growth: Progressing on Schedule

Just to play devil's advocate...I think item (B) could be detrimental to GGPs reorg. An improved credit market would increase the lenders' leverage when negotiating with GGP on modifications. There is a greater likelihood that the loan amount could be recaptured in a foreclosure sale later on down the road if financing loosens up.

When GGP filed, they arguably held all the leverage. Credit markets were frozen and there were no potential acquirers for the properties. A lender's best option at the time was to rework the debt. However, now spreads have come in and Simon Property Group been raising cash at a feverish pace. They now have over $3 billion burning a hole on their balance sheet. A lender could view Simon as a potentially able and willing buyer and choose not to rework the debt. If Simon is interested in some of these properties, and they have stated so in the past, the lender could potentially recapture the loan amount and Simon would acquire Class A, infill properites while potentially weakening a rival. This could wipe out a good chunk of GGPs equity. Just this possibility increases the lender's leverage in negotiations. Again, just playing devil's advocate here. Both yourself and Todd Sullivan have been spot on to date. But I get the feeling that Simon could throw a wrench in GGP's revival.

Judge Strikes a Blow to SPE Game

Thanks for the clarification Thurston. With that quote, I was probably getting ahead of the current ruling and looking down the road to when these maturities will be coming due.


On Aug 14 01:04 AM thurston wrote:

> Hello, thanks to the above for their comments. One thing that comes
> to mind from reading GGP pleadings submitted prior to this decision
> is that the following, "the SPE lenders should have the right to
> foreclose and sell to satisfy the loan", this may be correct but
> the lenders were not complaining that GGP was behind on or not making
> its payments.
>
> Rather, the lender's concern was that some of the SPE's were in fact
> making their payments on principle & interest AND had money left
> over.
>
> GGP want to "sweep" the excess funds (beyond what was needed to make
> loan payments) back to the mother ship (as it were) whereas the lenders
> did not want the SPE's to remain in BK so that this would not happen,
> so that any excess income not needed to make P&I payments on
> the loans would remain segregated in the SPE adding to the security
> of the lender to that particular SPE. Under these circumstances,
> the lenders were not that concerned about their right to foreclose
> on the property in the SPE because there was no reason to foreclose,
> the loan was performing, they just wanted the SPE to not be diluted
> as a result of sending excess funds to the corporate parent.
>
> REITBull wrote:

Judge Strikes a Blow to SPE Game

"If the assets and liabilities cannot "be substantively consolidated with those of any other entity," does that not imply that each of the SPE's is, effectively, a stand alone bankruptcy?"

That is a good point Lew and I don't know what the precedent is. My personal feeling is that the SPE lenders should have the right to foreclose and sell to satisfy the loan if reasonable terms cannot but reached. I would be suprised if the judge allowed them to be crammed down to satisfy other creditors outside of the SPE, but again I don't know what the precedent is here. Judging by his statement, he was not ruling on that issue at this point. The lenders could ultimately choose to modify the loans which may benefit both GGP and the lenders if it is determined that the property could not be sold for a reasonable price in foreclosure. But you are correct, the ruling only addressed the motion to dismiss made by the SPE's. The only way they could have been excluded is if GGP was found to have acted in bad faith.

Judge Strikes a Blow to SPE Game

I just had the opportunity to read the ruling and it is much more limited in scope than I originally thought. The ruling was limited to whether or not GGP acted in good faith when including the SPE's in the parent company BK. There is a key quote on page 42: "Nothing in this
Opinion implies that the assets and liabilities of any of the Subject Debtors could properly be substantively consolidated with those of any other entity." The ruling, while not ideal for the SPE lenders, does not appear to adversely effect their lien positions.

Judge Strikes a Blow to SPE Game

Lew-Sorry for rehasing your argument. I didn't see it before I posted.


On Aug 13 09:49 AM Lew Richards wrote:

> Again, I would have to disagree with the author. That the lenders
> relied on the integrity of the structure is definitely relevant.
> Previously, a lender would have instituted other protections in their
> pursuit of balancing their risks...whether that be recourse, guarantees,
> or whatever. In these cases, the borrowers agreed to trade the protections
> the SPE's were to provide so as not to allow the lenders to access
> their other assets. The SPE's not only protected the lenders from
> the issues of the parent, they also would prevent the lenders from
> going after other assets of the borrowers should the project fail
> and the SPE default on their loan. This seems like a fair trade to
> me and nothing at all devious. The Judge in this case chose to ignore
> the basis of the transaction in order to favor the borrower...and,
> by extension, the other creditors of the borrower.

Judge Strikes a Blow to SPE Game

Karl,

I would have to agree with the first two posters on this. I do not agree, in this case, that the entire purpose of the SPE was to set up a fiction. The SPE is used to secure the lender's right to the property it is lending against. In turn, it limits GGP's exposure if they were to default on debt service. Had GGP defaulted on a loan, the lenders would only have a right to the property in the SPE and could not go after GGP's other assets. The SPE was suppose to protect both parties. I do agree that seperate funding paths should have been used and is probably what hurt the lender's argument in this case (I haven't read the ruling yet). But I do not think it should have been enough to overrule the loan covenants. Had the tables been turned and GGP walked away from a property, do you think the judge would have allowed the secured lenders to go after GGPs other assets?

General Growth: 6 Month Extension Is a Big Achievement

6 Moves,

I think this is a very intellectual argument and you support your case well. Also, since you do this for a living, you probably have a leg up on me. However, I would like to raise a few points to think about. The scenario with the $10M property will play out. I believe it will be more common with private landlords with B and C class properties than it will be with publicly traded REITs. A company like Simon has enough unemcumbered properties that they could take a mortgage out on one property to fill the equity gap on another that needs to be refinanced. They could also sell notes, tap their credit facility, or issue additional shares. They have had considerable success doing this in one of the worst credit contractions in history. In addition, they can accerlate amortorization on properties they consider to be troublesome by making additional payments on principal.

The formerly $10 million dollar property dropping to $6 million with a 9% cap rate would in all likelihood be valued at or below replacement cost (this is just a gut feeling and I really have no way of supporting this). In my opinion, properties cannot trade at or below replacement cost for an extended period of time. You may have a period of time where this does occur, but I do not believe it will carry out 3 years into 2013. Also, origination LTV's on anchored retail average around 65%. Some LTVs were higher, but overall they were a smaller %.

I think investors should be careful not to use current statistics and carry them out for years to come (i.e. current LTVs, property values, consumer spending habits, etc). The scenario above is really no different than an investor in 2007 who said current LTVs will continue to be 70%, consumer spending will continue to grow at 3% and therefore I will get x% return on my retail CRE investment. Instead I think investors should look at what factors could change these scenarios and what is the likelihood that they will change. To me, credit conditions cannot continue to remain this tight for 3 years. Markets tend to overcorrect. The pendulum never swings to the middle.

I agree with you on Sam Zell. He has been more successful than I probably ever will be, but he has made some big mistakes as well. If my memory serves me correctly, he called a bottom in Residential RE in Spring 2008.

General Growth: 6 Month Extension Is a Big Achievement

I'd have to disagree with you on Simon. GGP's problems had alot to do with their high percentage of CMBS debt (makes modifications/extensions more difficult) and lack of cash. Only 50% of SPG's secured debt is CMBS (my source on this is DarkSpace at The CRE Review). At the end of Q1, Simon had over $3 billion in cash and availability on its revolver to address upcoming maturities. Prior to its BK, GGP could not access its revolver and had very little cash available. I agree with the majority of your statement, but I believe GGP is the exception, not the rule.



On Jul 29 04:03 PM 6 Moves Ahead wrote:

> Moonfly, I believe you are wrong. An extension in this case provides
> GGP with enormous leverage. GGP exhibits more assets than liabilities,
> and its properties are performing. GGP was a victim of the credit
> freeze, and simply wasn't able to refinance its properties when the
> market fell off a cliff. If you're a GGP creditor, the thought of
> not realizing debt service on a loan for upwards of 12 months doesn't
> work in this environment. If you're a lender, you need your money
> to work for you - not sit at the center of a bankruptcy costing you
> millions. It's cut and dry that the creditors in this case could
> benefit enormously if they simply negotiate new financing terms.
> Obviously, this works for everyone. GGP exits bancruptcy quicker,
> and the lenders are back on their feet with a performing property
> in their portfolio. And, if you think that this type of trouble is
> exclusive to GGP during this downturn - think again. When 2004, '05,
> and '06 loans on substantially inflated values mature in '11, '12,
> and '13, most landlords simply won't have enough cash to refinance
> the deal - particulalry with sinking loan to value ratios designed
> to protect lenders. Owners will be required to take on partners or
> swap equity to simply keep from losing their property. Meanwhile,
> GGP will have long since exited bankruptcy with very favorable financing
> terms, and its progress to becoming a successful company won't be
> impeaded. All I can say is that the market should expect to see similar
> refinance scenarios unfold with other large owners in the coming
> years. It simply cannot be avoided. Watch out Simon Property Group,
> et al.

Ackman's Pershing Square Misleads About General Growth Properties' Equity Value

Hi Tom,

Nice article. I've been doing some research on GGP myself. I just had two quick questions...

1) Does your annualized loss rate take into account overage rents that are typically received in the 4th qtr?

2) If the courts respect the SPE's, would the CMBS lenders have the option to foreclose instead of receiving equity in lieu of payment?

Any clarification you could give me would be appreciated. Thanks

Things Looking Better for General Growth Properties Shareholders

Must have been a very nice week for Mr. Sullivan.