Over the course of this year we've shared various presentations on the potential bullish prospects for mall REIT General Growth Properties (GGWPQ.PK) courtesy of Bill Ackman's hedge fund Pershing Square Capital Management. These have included a recent outlook on the mall REIT industry, an update on the fund's holding via Pershing Square's investor letter, as well as Ackman's previous presentation on General Growth. As one of the largest shareholders, Pershing Square has been at the forefront leading the charge. Today, we want to flip the tables and present the short case for General Growth Properties, courtesy of Hovde Capital Advisors.
Hovde Capital Advisors LLC is an investment manager that runs various hedge funds. Hovde employs a "sector-specific, deep-value, long/short strategy" and utilize a combination of both top-down and bottom-up in its approach. Back in March of this year we actually covered President and CEO Eric Hovde's thoughts on the market as he thought we were in a depression and that commercial real estate defaults would hit as high as 25%.
There are always two sides to a trade and this is the perfect example. Hovde Capital prudently points out that many investors have been using Pershing Square's original GGWPQ presentation as a means for valuing General Growth Properties... a presentation that is now well outdated. In its analysis below, Hovde updates and expands upon Pershing's original model in order to provide a more current look at the situation from a bottom-up level.
Hovde first examines the macro environment just as Pershing Square did in its recent Mall REIT presentation. While Pershing's highlights potential improvement, Hovde takes the other side and highlights how we are by no means out of the woods yet, citing a drop in consumer spending, a decrease in available consumer credit, and non-bullish trends for mall REITs in particular.
Focusing next specifically on General Growth, Hovde believes that that a 7.5% capitalization rate is a far too optimistic assumption given that recent comparables have been higher than 8%. Additionally, Hovde highlights that GGWPQ's cashflow is now more than 20% below the levels in 2008. While the fact that General Growth is extremely leveraged is well known, Hovde points out that rival Simon Property Group (NYSE:SPG) has debt to EBITDA of 6x while GGWPQ is
in excess of 16x and would still be in excess of 12x even if all of the unsecured debt was converted to equity.
Potentially the most alarming to the bulls though is Hovde's focus on net operating income (NOI) sensitivity. Hovde writes:
Applying Q3 annualized NOI to the Pershing Square valuation analysis, the implied equity value per share of the company today is NEGATIVE $5.03 at an 8.5% cap rate and +$5.73 at a 7.5% cap rate.
Needless to say, Hovde is decidedly bearish on GGWPQ. Going forward, one of the focal points in this whole scenario will be cap rates. Hovde feels an 8% cap rate is unrealistic given the reality of the economic situation and it argues that a cap rate of 8.5% or higher would be more appropriate.
Hovde is short shares of GGWPQ and thinks that equity investors will instead be disappointed upon GGWPQ's reorganization. Embedded below is the short case for General Growth entitled "Fool's Gold" in its entirety:
You can download the .pdf here.
So there you have it: "Fool's Gold," the bearish argument for General Growth Properties (GGWPQ.PK). We thought it would be interesting to examine both sides of the trade as we'd previously examined the long case for GGWPQ and then today we shared the short case with you. We'll continue to watch this intriguing situation unfold as hedge funds wager on the impending outcome. As always, don't shoot the messenger.
*Update: Todd over at ValuePlays.net has penned a rebuttal to Hovde's presentation. Ironically, Hovde claims many are using outdated numbers from Pershing's presentation and Todd points out that Hovde itself is also using outdated numbers. Interesting stuff...