The General Growth Short Thesis Lacking, Uses Questionable Data $$
- Posted by ToddSullivan
- on December 15th, 2009
Sorry this is so late, was up until 2am last night working on draft #1 and one click, gone. Would be safer using driveway chalk in the rain than this stupid wordpress for blog posts. Anyway, here it is ….again…….
The shorts have published their “short General Growth” piece. Let’s look
First, here it is:
General Growth Properties
Looks bad for us GGP shareholders, no? The first part of the presentation take us into the death of the US mall. For the record, whenever I read about the “death” of anything, I instantly become skeptical. Hovde shows us how retail and mall metrics have fallen over the past year. Of that there is no dispute. What Hovde does not focus on is that this quarters trends have been increasing gdp and an improving unemployment situation, consumer confidence, housing, credit and income trends. All these are bullish for the sector. Rather, they take a year long look at metrics and focus on the annual decline. Are they at last years levels? No. Are they improving significantly over the past few months? Yes.
Let’s also not forget retail sales continue their strong rebound
Essentially the entire short case here is based on comps from Macerich (MAC). Are they legit comps?
The first question we need to ask is “how are these JV’s priced vs open market transactions”. Since the Hovde “presentation” conveniently omits that, lets let Macerich CEO Art Coppola tell us:
Again, I mentioned that these joint ventures can be tough deals to make because you’re taking an existing asset and you’re bringing a new partner into an asset that you’ve owned for a while. Also, because of the fact that you’re forming a partnership and you’re not selling an asset, you also want to be very careful about who you do business with, you want to make sure that their yield expectations and their vision for the property itself that you’re talking about matches your yield expectations.
As a consequence, when you sit down and you structure a deal, you end up, again, forming a partnership and not running an auction. If we were to run an auction in terms of doing the joint ventures that we’ve been working on, I’m sure that we could have easily achieved 5% to 10% better pricing, but that’s not the way that you conduct a partnership. We see these partnerships, they’re not one-off transactions.
Oh, so had this not been a JV transaction with no other bidders we would have seen a cap rate “easily” near 6.5% given the above ranges. Why didn’t Hovde include that? Hmmm..
Now Hovde also claims the JV property produces over $800 per sq. foot in sales. Well, according to the press release that is true, as of Dec. 2008!!! Is there a mall in the country that has not seen sales fall since December last year? Hovde must think it is important as they were sure to use GGP’s most recent numbers throughout their presentation.
What has the MAC portfolio done over tha past year?
Mall sales per foot for the past 12 months ended September 30th, were 418, that was down 3.3% compared to 428 last quarter, and compared to 463 for the 12 months ended September 30th of ’08.
A roughly 10% drop YOY. One has to wonder why Hovde did not use GGP Faneuil Hall property as a comp as it produces >$700 annually in sales per sq. ft. If we apply that 10% drop to the above property we get a per foot # of $788. Why did they take a premier property in a single portfolio and then extrapolate the whole of GGP must trade at a higher cap rate? Why did they also fail to disclose the Cadillac was only getting a 49% interest in the property? Clearly a company buying a non-controlling interest would demand a higher cap rate than the market as compensation, no?
Cap rates have fallen roughly 10% since this summer for “all malls”. The cap rates for Class A malls have fallen further (flight to quality) but we’ll use “all malls” so as to not get accused of cherry picking data. If we apply that market fall to the above transaction, we get a cap rate near/sub 6% for the same deal taking place today in a auction environment. For a premier property, that sounds about right….
Hmmmmm… lets look at the other “comps”:
The first example (GI) here, if we look at the press release has sales per sq. ft. of $443 at year end 2008. I am not sure why Hovde insists on using year old data to try and make their points vs current data for GGP, but I’ll roll with it. However, if we apply the same 10% sales per sq. ft. drop to this property we come up with a current level of $398. Now Hovde has a bit of a problem because that now makes this a Class B mall, not a Class A. Class B malls trade at higher cap rates than A’s do. This deal was also announced after summer negotiations meaning its cap rate if done today would be default be lower due to market trends.
If we look at the Heitman malls, again they had $500 per sq.ft. in 2008. Today’s numbers would be roughly $450. This makes it a Class A mall. But what Hovde fails to tell us is that Heitman also assumed a pro rated share of debt. Heitman also acquired only a 49% interest in the properties.
What about the “8.5%” cap rate above? Let’s go back to CEO Coppola:
There was nothing. I mean, they were complicated joint ventures. I mean the GI deal was a 75:25 deal. You know, the Heitman deal was 51:49. All in, when you look at the overall real estate cap rates after consideration everything, the cap rates are roughly 7.5%.
So, we have two deals that according to the MAC CEO went for 7.5% cap rates that were negotiated in the summer/early fall when cap rates were still above today for the industry, in JV’s that again according to the MAC CEO were priced 5%-10% higher because of the lack of an auction. One was for a Class B property and the other included the assumption of debt. If we ignore all of the other cap rate rising factors here and focus solely on the JV aspect, we get an auction cap rate of 6.7% to 7.1%.
I would argue including the other factors brings the cap rate down to 6.2% to 6.7% for Class A malls selling in a auction in their entirety. Correct me if I wrong but isn’t the GGP portfolio and its $409 per sq.ft. in sales being looked at by several bidders, um…..exactly that?
But, let’s go back to the presentation. The third comp is a recent transaction that actually uses recent data (a novel approach):
But, then Hovde again falls short. Even though the Simon (SPG) deal for the outlet malls are for Class B (borderline Class C) outlet malls that always sell for a higher cap rate than Class A Regional Malls, Hovde, in order to make this deal look bad for GGP shareholder instead focuses on the assumption that “outlet malls tend to generate higher NOI margins than regional mall format in our view”.
Did you know a ton of bat guano will burn for 3 days? “What does that have to do with anything, Todd” you ask? About as much as Hovde’s assumed NOI margin does on a cap rate on a Class A Regional mall vs a Class B Outlet Mall does. Notice how deafly Hovde ditched sales per sq. ft. as a metric when it no longer fits their case and moves on to “NOI margin”? hmmmm
Rather than looking at a single mall transaction that is not even and outright sale but a JV without any competing bids, why don’t we look at a larger sales of multiple properties? I mean, wouldn’t that actually make more sense? If I am buying something, I want comps that more accurately reflect the situation of what I am buying, but I am just weird that way.
Kimco Acquires Interest in 21 Properties in PL Retail Portfolio
Kimco Realty Corp. (NYSE: KIM) has completed the purchase of the remaining 85 percent interest in PL Retail LLC, an entity comprising 21 shopping centers that the company manages and in which the company previously held a 15 percent interest.
The price for the 85 percent interest of approximately $175 million was based on an enterprise price of $825 million, less the assumption of approximately $564 million in non-recourse mortgage debt and $50 million of perpetual preferred stock. The company funded the acquisition from its existing credit facility. Kimco purchased the remaining 85 percent interest from a fund managed by DRA Advisors LLC. The $825 million enterprise price includes approximately $805 million for existing assets, which represents a 7.6 percent cap rate on underwritten net operating income of approximately $61 million annually, or approximately $156 per square foot, plus $20 million for the development rights.
“This is a new beginning,” Kimco Chairman and CEO Milton Cooper said in a statement. “These are high-quality assets in strong markets which are currently 94 percent leased. Costco is the largest tenant in this portfolio and this transaction continues Kimco`s position as Costco`s largest landlord. Kimco will continue to pursue purchases of shopping centers to leverage our existing infrastructure and enhance shareholder value.”
The 21 shopping centers comprising approximately 5.2 million square feet of gross leasable area are located in California, Florida, Phoenix, metro New Jersey, Long Island, N.Y., metro Washington D.C. and Greenville, S.C.
Let’s not forget Citi (C) predicts several of GGP’s proerties will be valued SUB 6.5% cap rates. Ironically, this new value comes in line with the value I get in example #1 above when we adjust it for current market conditions. It is just that Hovde decided to use 6 month to a year old data to make the situation now look worse when it clearly is not.
Hovde also spends a brief amount of time on sales at GGP malls a leases focusing on lease rate declines. It uses the Q3 supplement but the omits this:
“Although comparable and total tenant sales on a trailing twelve month basis continue to be down, third quarter 2009 comparable tenant sales were only down 4.6% as compared to the third quarter 2008,“ stated Adam Metz, Chief Executive Officer of General Growth. “September 2009 comparable tenant sales actually increased 0.8% as compared to September 2008 comparable tenant sales. While we are hopeful these trends will continue, our outlook remains cautious for the upcoming
Elaborating on leasing spreads and Comparable NOI, Mr. Metz stressed, “We have significantly reduced tenant allowance expenditures on new leases signed such that the face rent amount is not reflective of the true value of our new leases when compared to those expiring. Further, although we have increased certain repairs and maintenance expenses in 2009 because the upkeep of our physical plant is critical to building and maintaining the long-term value of our properties, we have also negotiated reductions in certain janitorial and security contracts with no significant declines in service levels. Finally, a portion of our real estate tax increase in 2009 is a result of certain of such taxes no longer qualifying for capitalization due to decreased development spending.”
What does that mean? Basically the face amount of rent paid by a tenant may have fallen but the required expenses on the part of GGP have fallen also. Because of that, the actual value of the new lease is closer than the reported drop in “rents paid” when compared to expiring leases. In some basic math a $10 lease that required GGP to pay $2 in expenses has a value of $8. If rents drop 10% to $9 but GGP is only required to pay $1 in expenses, the lease value is still $8 but reported rents will have fallen 10%.
I will not make any accusations. BUT, whenever I see anything that uses changing metrics (sales per sq.ft. to NOI margin), data a year old in a rapidly changing industry, omitting some data and comps that are questionable at best due to the deal structure, in virtually every instance it is done so to make the data fit the preconceived outcome, not deriving an outcome based on the data…
The true irony of this short thesis is that in they accuse current GGP investors of using the Pershing presentation from May of this year claiming its data is “outdated”. They say that, and then go on the use even older sales per sq. ft. data from December 2008 for their comps.
What did the pot say to the kettle?
For reference, here is the Q3 GGP update
Ackman’s recent REIT presentation as of 12/7
As a side note. Remember back in May when Ackman first published his GGP thesis? The shorts then said his 8.5% cap rate assumptions were essentially delusional. Turns out he was overly pessimistic.
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Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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