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Is General Growth Properties an Outstanding Speculation?

|Includes: GGP, Inc. (GGP)

I don't often feature a specific stock in my posts. But when I have a compelling idea that deserves to be shared, there might be an exception. Today is such a special opportunity situation.

I have tracked General Growth Properties for many years. It has a Midwestern origin and flavor and many of its properties are in the heartland of the country, including the Minneapolis area, my home town. GGP as it is known by its ticker, has for most of its existence been conservatively managed. It has grown slowly both organically (developing new malls), through tight operational manag... through acquisition or merger (including the Homart deal in 1995 that relocated GGP to Chicago).

After decades of conservatively growing GGP, management made a deal in September 2004 that was bold, but in hindsight, was ill-timed, when they bought Rouse Companies, one of its principal rivals and the holder of some of the most famous retail properties in America, including Fanueil Hall in Boston). This acquisition, along with all the others made in the late 1990s and early 2000s, created debt against GGP of over $25 billion, or more than twice equity in 2007.

That is a lot of debt to hold heading into what has turned into the greatest economic decline of the past 70 years. By late 2007, credit markets were beginning to freeze and by late 2008 when some of the notes resulting from the acquisition spree came due, there was no ability to roll over the debt into new mortgages. There also was no market for the malls against which the debt was due. With inadequate cash on hand going into the contraction (but who could have known in 2007 it would get this bad), and an inability to liquidate the assets, the illiquidity of GGPs debt caused a technical default on the terms of the loans.

Any company in late 2008 that was in technical default on credit terms faced bankruptcy, including Citibank, Wachovia, Washington Mutual, Lehman, and other major and minor banks and businesses. But to the credit of GGP's management, the mall operations remained in good working order and continued to be cash flow positive in aggregate. This discouraged credit holders from pushing GGP into bankruptcy court where the outcome is less certain than to monitor continued operation of the assets and hope for better times.

As of last week (last week of March 2009), GGP continues in technical default on a number of loans and has been unable to renegotiate the problem loans or extend terms. Many of the loans are held by entities that are currently unable to extend terms on portfolio loans without themselves becoming less solvent or creating a technical default against covenants of their own financing. It is fortunate that GGP's problems are more of liquidity than of solvency. It takes a confluence of all the strange financial events of current times for a company with operations as strong as GGP's to have financial problems causing such a liquidity crisis. But then again, couldn't the same be said for many of the nation's strongest and largest banks and businesses, such as General Electric, Berkshire Hathaway and Wells Fargo?

Resolution of GGP's liquidity crisis will be made possible by the continued healing of the national and world financial markets. The fate of GGP is directly linked to the fate of our economy and banking system. I believe the Fed, Treasury, Congress and Administration will continue doing everything possible to improve financial liquidity and thaw the credit markets. I also believe creditors see the same thing I see and are willing to wait out the government efforts to get credit flowing once again. If the outcome is positive and the economy and credit markets show continued improvement, there will come a time in the next six to twelve months where GGP will be able to renegotiate its defaulted credit and fix its liquidity without damage to its common stockholders.




With the stock price currently around 70 cents a share, the downside is limited by zero. I have just purchased 1000 shares at a total cost of $700. I will purchase more once I, like the creditors, become convinced that liquidity is returning to the economy. The upside for GGP is at least $15 a share and maybe much more. The reason for my enthusiasm is that there has been the liquidation of few properties and less than 10% of the total GGP real estate portfolio.  The asset base on which GGP is valued has not been much diminished. The stock price was as high as $67 in March 2007, as you can see from the chart above. It may not get that high for a very long time because the retail environment and personal consumption may not return to 2007 levels for a very long time.

But lets consider&amp... potential for GGP's stock price to return to $15, a very conservative number considering the earning / cash flow power of GGP. In 2006, the peak cash flow year, GGP generated more than $800 million in operating cash flow (FFO). There are 313M shares outstanding as of today, so that comes to about $2.50 a share in cash flow. Let's say that cash flow only gets back to $1.50 in the next two years. Applying a multiple of 10 to that cash flow yields a stock price of $15 a share. And as a REIT, most of the cash flow is returned in the form of dividends.  So a $1.50 cash flow might result in $1.40 a share in dividends. On a stock price of 70 cents, the dividend alone will yield almost 200% a year. At a price of $15 a share, the capital gain would be over 2000%.



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Looking at this in a ratio, the upside / downside ratio is 21:1. A good investment risk might be 3:1 or 4:1. This is clearly a tremendous opportunity but with a high degree of risk. I would recommend only investing what you are willing to lose. But if you can afford to lose $500 or $1000, you may never find a better opportunity for return.

I recommend doing your own research. Here is more detail on GGP taken from Guru Focus blog:

General Growth Properties' Debtholders Trying to Avoid Chapter 11

Todd Sullivan

This is the most backwards thing you'll ever see. It also gives more confidence of the equity of GGP surviving even should they be forced to file.

From the WSJ:

But a bankruptcy filing isn't imminent for the mall giant, according to people familiar with the matter, and General Growth's (NYSE:GGP) ability to remain out of bankruptcy shows the unusual dynamic between lenders and distressed companies in the recession-ravaged commercial-real-estate market.

Bondholders have refrained from forcing mall owner General Growth Properties into bankruptcy court, despite lack of a deal on a debt extension.

Under normal circumstances a company with as much past-due debt as General Growth would have been forced into Chapter 11 bankruptcy protection by now. Creditors so far have been willing to let deadlines pass because they believe there is little to be gained and much to be lost through a bankruptcy. General Growth's mall operations are stable and many bondholders hope for a greater recovery outside of bankruptcy court.

"This is really rare," said Kevin Starke, an analyst at CRT Capital Group LLC, a research company that tracks distressed securities. "It is corporate-bond limbo like I've never seen before."

This piggybacks on the thesis laid out here recently that lenders want to avoid a Chapter 11 here at almost all costs.

It continues:

Many creditors say that General Growth's management is doing a good job running the company. Its 200 U.S. malls, a portfolio second in size only to Simon Property Group Inc., generate enough cash to cover interest on the debt. But its properties are overleveraged and it lacks the borrowing capacity to retire those debts as their principal comes due.

"There's no question that General Growth is a liquidity issue," said Jeff Spector, an analyst with UBS AG. "The properties, for the most part, aren't broken."

General Growth, based in Chicago, isn't the only real-estate borrower that is getting a reprieve from its lenders these days. Hundreds of property owners have had loans come due without a repayment made in recent months. But most lenders have agreed to extend loan terms, hoping that the credit market will improve.

For those who did not see it previously, here is the legal basis should it go into bankruptcy for the equity staying in tact. The point that cannot be forgotten here is the company is technically solvent and that alone separates this Chapter 11, should it occur, from 99% of all other Chapter 11's when the companies entering them are insolvent.

It continues:

A person familiar with the bondholder talks said that, while some creditors are angry, none appears ready to insist on an involuntary bankruptcy petition yet. It is possible that bondholders didn't go along with the consent solicitation primarily because they feared that making such a pledge would reduce the value of their bonds.

General Growth has told lenders that they'll have more influence over the outcome if it restructures outside of bankruptcy court, according to people familiar with the talks. A bankruptcy filing could force the company to liquidate its assets for less than the whole company would be worth if it remained a single entity for the long term, these people said.

Another deterrent to an involuntary petition is that bankruptcy wouldn't bring immediate payment of General Growth's debts. "It's such a large company that the bankruptcy would definitely last at least a couple of years," said Heidi Sorvino, a lawyer leading the bankruptcy practice of law firm Smith, Gambrell & Russell LLP.

The timeframe could be shorter if General Growth did a prepackaged bankruptcy in which the creditors agree to terms prior to the company entering bankruptcy, Ms. Sorvino added. But wrangling so many creditors without the threat of a judge making and enforcing decisions is "almost impossible," she said.

This is the classic "everyone wins" or "everyone loses"scenario. Banks facing liquidity issues cannot have billions tied up in a Chapter 11 proceeding for years. The viability of common equity, while in my opinion is safe in an 11, can never be assured once the courts get involved. By restructuring out of court and now, everyone wins...

Here is another relevant article filed on April 2, 2009 by CNBC.  It has quotations from Bill Ackman, 25% equity owner of GGP common stock.  I don't know if his position advocating a bankruptcy is real or a smoke screen.  He is a notorious hedge fund manager and may be talking up bankruptcy to draw out the case against it from creditors that would rather be made whole by waiting for the economy to improve, rather than negotiating down the face value of their debt.  But either way, Ackman makes a case for the common stock:

Ackman stumps for General Growth bankruptcy
02 Apr 2009 | 06:24 PM ET

By Ilaina Jonas NEW YORK, April 2 (Reuters) - Hedge fund manager William Ackman, who controls 25 percent of General Growth Properties Inc shares, said bankruptcy was the best option for the second largest U.S. mall operator, which is facing billions in loans it cannot refinance. "Bankruptcy is not just designed for companies that are insolvent," Ackman told a packed room of real estate investors, owners, analysts and bankers attending the New York University Schack Institute of Real Estate 14th Annual REIT Symposium. "Bankruptcy is also designed for companies that are solvent, but have liquidity problems that are due to events outside of their control," said Ackman, head of New York-based Pershing Square Capital Management LP. General Growth, the Chicago-based real estate investment trust (REIT) faces more than $27 billion in debt that comes due over the next several years and has already defaulted on many mortgage loans and corporate bonds. A spokesman for the mall owner and operator said it was continuing discussions with "our lenders as it pertains to our current debt situation." It has repeatedly said that, if it cannot obtain refinancing or loan extensions, it may seek Chapter 11 bankruptcy protection. At the same time, it has been trying to assuage mortgage and bond holders, fighting not to file. The company owns more than 200 U.S malls in 44 states. Among its holdings are some of the most profitable malls in the country. "I think it's a great company," Ackman said. "It's got phenomenal assets." Ackman began buying up General Growth shares after the company's market capitalization fell to $104 million from $9.4 billion in the 60 days after Lehman Brothers Holdings Inc filed for bankruptcy and the credit markets shut down. Ackman said that, without the debt problems, it could easily retain its value through the economic downturn because of the high-quality malls its has in its portfolio. "It's one of the most interesting investment opportunities I've seen in my career," he said. Ackman, is pursuing another challenge on the real estate front. He controls 7.8 percent of Target Corp and is pushing for five seats on its board.

Ackman wants the retailer to sell its credit card operations and spin off the land under its stores as a REIT to boost its stock price.  A General Growth bankruptcy could be a boon for shareholders, he said. He compared its plight to that of Alexander's Inc, the failed department store. Real estate titan Steve Roth, chairman of Vornado Realty Trust, bought the shares and put the company into bankruptcy in 1992. He closed the department store and developed the property. The stock soared past $450 a share and closed on Thursday at $169.24. General Growth shares closed at 68 cents. "I've learned that, when a solvent company files for bankruptcy and you have a lead equity holder, you can marshal it thorough the bankruptcy process," Ackman said. "If you've got a situation where you have a small equity cap and you can sell 90 percent of your stock and de-equitize yourself or you can file and retain equity value for shareholders, you should look at that very, very seriously." Real Estate mogul Sam Zell, who sold Equity Office, the giant U.S. office owner, at what is now seen as the top of the market, said General Growth would likely file for bankruptcy protection. "I do not believe GGP will be liquidated," Zell said, speaking at the same conference. "I expect the company to file bankruptcy. It will do a prepackaged. It will be reorganized and it will be taken public."

Disclosure: No&nb...