Another Negative Piece on GGP Equity…. My Rebuttal $$

There is another post out this morning that pegs the value of General Growth (GGWPQ) equity in the $5 range. Let’s look at it and talk about what I see as its errors.

The spreadsheet can be found here at Distressed Debt investing. Unlike the Hovde “research” Hunter gives us a range of variables in the spreadsheet and avoids many of the glaring unconscionable errors Hovde made.

That being said, I do disagree with some of his assumption and those disagreements cause his equity valuation of $5 to rise to mine of $21. I also want to say Hunter does great work over there and I am a reader. Even at his current $5 target, if memory serves this is a big jump from the essentially zero value he assumed for the common when Chapter 11 was first announced. If memory is wrong on this, let me know and I will correct.

First:
– I will use all of his data (even though I disagree with some of it) so as to not get bogged down in minutia
– No values/formulas on the spreadsheet have been altered in any way

The first issue I have is with NOI. DD (distressed debt) uses an annual number for their valuation of $2000 in the model. But, based on 9 month results (below/highlighted) GGP is on track to eclipse that at $2,127 :

DD also omits overage rent GGP receives in Q4. That has average approx. $100M the last two years, since this year’s holiday season ought to be better than the catastrophe Q4 was last year, we’ll stick with the $100M. That brings GGP NOI to $2,227 for 2009 which now pushes us to the farthest right side of the NOI portion of the spreadsheet.

CapRates:

DD assumes a 7.5% cap rate for Rouse and 8% for the rest of GGP. Again, I think this wholly overly pessimistic.

Why?

Kimco…..

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.

Why Kimco? It is the most recent large scale transaction so it gives us a decent reference in a rapidly changing market.

So, if a Costco anchored shopping center can get a 7.6% cap rate in the market, with $156 sq.ft. in sales, I have to wonder why we value Class A Regional Malls with $409 sq.ft. in sales at 8%? The argument now switches from “should GGP be valued at 7.6% cap” to “how much below that should it be valued”.

If we break it down further, GGP has 30 (of 196) of these such malls in its portfolio (Kimco like). So the Kimco transaction gives us a “ceiling” for valuing GGP at its 30 lowest class malls cap rate of 7.6%. The remainder of these non Rouse properties are a mix of Class B and Class A that would garner cap rates well below the 7.6%. Because of that, we need to move from Hunter’s 8% assumed cap to the 7% on his chart for these properties.

Rouse. These malls are the class of the industry, I’m not sure there is any dispute over that. If we back out the non Rouse malls from the portfolio, these mall are well in excess of $500 sq.ft. in sales (several $700 -$1000). To assume the same cap rate for these of a Class C mall at $156 as DD does isn’t an accurate valuation, not even close. These malls would garner a materially lower cap rate. Because of that, moving to the 6.5% cap on the chart is not only within reason, but the only really logical thing to do. An legitimate argument can be made for a cap rate below 6.5% but we will stop here so as to not mess with the spreadsheet (see Citi report below).

Here is the issue. It seems that those who think GGP is worth less than today base their cases on “cap rates should not be this low” or are “irrational”. But, cap rates are what they are, right? If that is what the market is valuing certain property at then that is what it is valued at, especially if you are going to be entering into a transaction in that market. Now, if you are not going to do anything for 9 months, then opinion as to where the market and cap rates are going matter.

No buyer or seller in their right mind would enter into a transaction today for a Class A mall at a cap rate a C mall is selling for (well, the buyer would but not the seller). Conversely a buyer of a C mall at a 7.6% cap rate would not then go and sell a Class A mall in their portfolio for a cap rate of 8%.

Witness cap rates for “all malls’ and their decline. As the economy and retails sales continue to improve, these cap rates ought to head a bit lower.

Retail Sales:

One also has to add the competitive nature of what is shaping up for GGP into any valuation. With Simon Properties (SPG), Brookfield Asset (BAM), Westfield and Vornado (VNO), a bidding war is sure to lower cap rates possibly even below my estimates.

Now remember, all these values are a snap shot in time. Debt reduction, equity offering, assets sales all will affect the final outcome in various ways. IMO these are accurate today based in what we know today, after Q4 is in the books and we have a news set of numbers (or there is a transaction of some type), we will have to revisit.

Here it is…….with my data..