Using Veritas to Construct the "Per…

29-04-2017 Hits:85773 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

Read more

The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:80003 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

Read more

What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:79864 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

Read more

Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:84342 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

Read more

This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:80884 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

Read more

What is the Value Proposition For Verita…

01-04-2017 Hits:83130 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

Read more

This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:54140 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

Read more

Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:82264 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

Read more

Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:82117 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

Read more

The Country's First Newly Elected Lame D…

27-03-2017 Hits:81985 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

Read more

Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:88010 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

Read more

The Transformation of Television in Amer…

21-03-2017 Hits:85884 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

Read more


A couple of weeks ago I informed BoomBustBlog.com readers that I was working on a big project concerning commercial real estate short candidates. I stated last year that I was sure CRE was headed down, hard. Well, I am now ready to start releasing the results of my research over the next week or so. Unfortunately, the market has moved against the subject of my research fiercely as I was completing it, but it appears to be far from over. Who is the subject of that research, you ask? General Growth Properties (GGP).  I have actually seen this company pop up in the media and a few discussion groups from time to time, but they have no idea what the management of this company has been up to. First, a little background on how I got here. Those who are not versed in commercial real estate valuation are urged to read my quick and dirty primer on CRE valuation .

I told members of my analytical team to screen the commercial real estate trust, service, and development sector for the usual suspects, starting with the the guys that purchased Sam Zell's flipped properties from Blackstone. I made some of the companies available via blog post and download: icon Commercial Real Estate Cos. (43 kB)icon Forest City Enterprise Peer Comparison (198.98 kB), icon Vonardo Realty Trust (146.49 kB). After and exhaustive screen and resultant short list, we chose GGP. I then instructed the team to canvass local and national brokers (4), databases (5) and data aggregators (several) to get the most precise localized rental and expenses figures possible. This data, as well as purchase dates, prices, management actions, capital improvements, etc. were used to plug into models such as this 33 page illustrative example, icon GGPs Woodlands Village (612.34 kB), to ascertain the true value of GGP's portfolio. We also measured and valued their development operations, joint ventures, CMBS financing, off balance sheet vehicles and master planned communities. Sum total, I now have roughly 2 gigabytes of "REAL" valuation data on my servers covering 260 properties owned or partly owned by GGP. A this point, I may know more about their operations than they do.

What is more telling is the window of understanding this opens into the commercial real estate space in the US. It is my opinion that most are extremely over-optimistic regarding the prospects for this space.

 

An Overview of What I Found

 

  1. Valuing the company - After including the proportionate valuation of the properties in which GGP has minority stakes, we got a total portfolio valuation of around $30 bn based on the NOI stream. Adjusted for the current o/s debt of $24 bn. The net valuation comes to $6.5 bn. Note this is nearly the same as the $6.6 bn. valuation based on CFAT (after debt service) stream as per the aggregation of the 260 individual valuation models, which lends signifcant credence to the numbers. Finally, including an estimated $2.8 bn for the PV of the stream of other income, the total valuation of GGP stands at $8.8 bn which is a 5% downside from the current market cap.
  2. Our present rental growth assumptions are based on reasonable estimates of GDP growth, population growth and household income growth in the company's operating locations. We believe these assumptions represent a best case scenario. We have yet to build the impact of the slowdown over the last few months as reflected in falling retail sales and consumer spending. Incorporating these factors, valuation may decrease 10-15%. The worst case scenario assumptions considering expected recession conditions will drive valuations down to around 20%. This is probably mislabeled as "worst case scenario", since I strongly believe we are already in a recession - one that looks to be rather severe. We would incorporate the different scenarios and work out the precise numbers later on in the week. Keep in mind that I am being conservative here. My gut feeling puts these numbers much lower.
  3. Referring to the Leverage portion of our models, we identified the properties with leverage higher than 80%. It can be observed that around 73% of such properties have negative PV based on CFAT (including debt service), validating the fact that highly leveraged properties are already running into negative values - and this is at the onset of recession - much worse is to come.

  4. The Cap Rate Analysis in the same file shows that the properties purchased over the last 3-4 years are earning lower cap rates (3-4%) than those purchased in late 1990s and early 2000s owing to higher relative purchase prices in the last couple of years. Since a large lot of GGP's portfolio has been added in the last 3-4 years, the overall cap rate of the company is being negatively impacted by the lower cap rates for such properties. Further, with macro-economic conditions turning adverse, such properties may already stand overvalued in GGP's books and may soon turn into losses. Up until this point and as I did with the homebuilders, stated book was pretty much ignored and I went about constructing book value independently. I am now having the mod squad delve into the reported numbers for comparison's sake.

  5. Another important observation is that around 100 properties (38% to 43% depending on how one includes ownership under JVs) have negative equity. Around 70% of those were acquired in the last couple of years (when credit availability was easy and cost of debt low), reiterating the finding that a large amount of these properties may be significantly overvalued in GGP's books.

 

We have also looked for the historical NAV trend for GGP. However, since NAVs are not publicly available (GGP does not report NAV for its portfolio), we haven't had much luck thus far. Specifically, the REIT NAVs computed by Green Trust Advisors, one of the most popular REIT investment advisory concerns, are also not publicly available for the recent periods. The latest NAVs we could find from this source were for early 2007 when GGP stock was trading at around 10% discount to NAV. However, we believe that due to the subsequent difficulties in the credit market, the situation may have reversed of late. I have the Mod Squad continuing to explore this area and will post the findings on the blog.

Other issues of note

 

  1. Rise in Insider Transactions: There has been more than a couple of insider transactions for sale of company shares by senior executives in last 1-2 months. This may indicate GGP management's indirect response to overvaluation of company's share price at current levels of $39.36.
  2. Huge Mortgage Obligations: The company has huge mortgage obligations (approx $24 bn as of Sep 30, 2007), due for payment in next couple of years. In view of the  credit crunch in the global financial markets, the company would be mandated to refinance its financial liabilities at a considerably higher interest rate, thereby adversely impacting its cash flow.
  3. Overvalued Stock: Based on our initial work on valuation of GGP, the company's stock seems overvalued by approx 15% at current level of around $40, indicating a minimum potential downside risk of $6 per share. Again, this is an optimistic scenario, excluding the possibility of recession. GGP is highly reliant on 2nd tier retail shopping centers and to a lesser extent Master Planned Communities. I expect both of these segments to take a bath in the upcoming years.
  4. Property Overvaluation: Our working on individual property valuation indicates a number of instances where the Company's properties seem to be overvalued. These properties have mostly been purchased in late 2006 and 2007. There are also quite a number of such properties which were purchased in 2001 and 2002. This is paradoxical, since the commercial real estate was quite soft during this period. I consider it management's error to overpay for properties during an era when it should have been relatively easy to get the properties at decent prices. This could also be a result of mismanaging the properties as well.
  5. Lower than expected 4Q2007 retail sales: Many US retailers have witnessed lower-than-expected sales in 4Q2007 owing to slow-down in US consumer spending. This may (most likely will) dampen demand for commercial rental space in the US, thereby creating downward pressure on commercial real estate rentals.
  6. Stock Trading at 52 Week Low: The company stock is trading at 52 week low price of $39.36. Despite this, there is still noticeable insider selling.

 

The above observations are based on initial assessment and valuation of GGP properties in different geographies in the US, and we shall come out with some more and refined observations as we advance our research on the company.

 

Cap Rate Analysis

 

Year of purchase

Cap rate

No of properties

Unlevered risk premia received

Mgt performance

2007

3.8%

                  107

0.2%

 Awful 

2004

2.7%

                    39

-1.0%

 Call the LAWYERS!

2003

4.3%

                    17

0.6%

 More awful 

2002

13.8%

                    47

10.2%

 Mo' better 

1999

3.8%

                      3

0.1%

 Mo' awful 

1998

7.5%

                    13

3.8%

 Dull average 

1997

5.4%

                      9

1.7%

 Bad 

  

Equity Summary

Year of purchase No of properties Properties with negative equity % of Properties with negative equity
2007                       107                                              37 45%    
2004                         39                                              21 26%    
2003                         17                                              11 13%    
2002                         47                                                4 5%    
1999                           3                                                2 2%    
1998                         13                                                4 5%    
1997                           9                                                3 4%    
 Total                           235                                               82 100%    

 

Leverage Summary

 

Properties with negative equity and leverage >80%   32
Properties  with leverage >80%     44
% of properties with negative equity (based on CFAT after debt service) 72.7%

 

 

 

 

Summary of GGP Valuation  
  $
   
GGP valuation on NOI basis  
   
Consolidated valuation as per Portfolio Valuation sheet (NOI based) 30,553,483,142
less: Debt outstanding 24,073,812,000
   
Estimated portfolio PV  6,479,671,142
   
Add: PV of the other net income 2,383,540,286
   
Estimated valuation of GGP 8,863,211,429
   
No of shares 243,810,000
   
Estimated share price 36.35
   
Current share price 38.4
   
Upward (Downward) -5.3%
   
   
GGP valuation on CFAT (after debt service) basis  
   
Consolidated valuation based on CFAT (after debt service) 6,605,261,299
Add: PV of the other net income 2,383,540,286
   
GGP's estimated market cap (CFAT basis) 8,988,801,585

 

 

 

Read more on Commercial Real Estate and Residential Real Estate.