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This is part four of what was a four part series on GGP (see one, two, and three), but I think I will extend it a little just to make sure we have covered all the bases, so expect the next big comprehensive report to come down the pike some time late next week. I will dedicate this article to insider trading and what I see as Financial Shenanigans with reported lease rates. To keep the lawyers at bay, I'm going to keep most of my more stringent opinions to myself and simply portray the facts as I have encountered them.

I have analyzed GGP’s insider trading transactions for the last year. Backup documentation for the analysis is attached in the GGP Insider Trading Analysis - 2007. In short, the top management of GGP has exercised a large chunk of its exercisable options during early and mid 2007 while a few C-level executives have disposed of their holdings in the recent months. I have also noticed unusual purchasing patterns, but since I am still investigating them, it is nothing but conjecture at this point. I rarely rely on reported book numbers from the companies that I examine. Simply put, I just don't trust the numbers often put out in the public domain. The home builders, monoline insurers and GGP being perfect examples of why. Individual retail investors and institutional buy-siders can and often do get burned attempting to run an analysis based upon reported book value that strays significantly from real economic or market value. This has been exemplified beyond doubt in the case of Lennar (see Lennar Fully Consolidated Analysis) and Ambac (see Ambac Valuation Model 03 December 2007 Ver1.0, Ambac Auto Receivables, and Ambac Portfolio Analysis: Etrade mini app). I will run down leasing in their books that just don't add up, at least they don't add up to me. Maybe someone can explain it to me.

GGP’s Insider Trading Analysis

Over the past year insiders have been net buyers of the stock worth $42.8 million with total purchases of $55.3 million at an average price of $57.95 and total sales worth $12.4 million at an average selling price of $46.69.

Notably, most of these purchases were during March-May when the stock price was hovering around $60. It’s also worth mentioning that although the stock has nearly halved from $65.8 in Feb 2007 to $34 presently, insiders have not exploited this opportunity to buy the shares of the company.

Insider Trading Chart

Besides these open market operations, insiders have also exercised their stock options totaling 1,302,847 shares at an average conversion price of $35.29 (while the average market price was $63.63). Considering the gap between conversion price during the time of exercise ($35.23) and average market price at the time of conversion ($63.63), and given the fact that most of these options had expiration date in 2010-2013, in our opinion most of these stock option (exercised by the management) could have been to exploit the opportunity by exercising their stock options and selling them in the open market at a huge premium. However the speed and intensity at which the market has reacted against GGP, the insiders have not been able to sell the stocks at a considerable profit. Interestingly, GGP’s CIO has exercised 420,000 stock options at an average conversion price of $30.83 during February 2007, and he sold 188,667 shares during December 2007 at an average price of $41.51.




During 2007, GGPs’ CFO has exercised stock options worth $23.2 million with an average conversion price of $39.53. Besides exercise of stock options GGP’S CFO has bought shares worth $52.3 million through open market purchase at an average price of $58.2. Out of these open market purchases, $40.8 million worth of shares in the open market when the GGP’s price was above $55.0. However we believe that subsequent purchases (during August-December 2007) worth $11.3 million at an average price of $46.9 was primarily to average-out his portfolio. Currently GGP’s CFO has investment in GGP valued at $51,369,536 with a notional loss of $25.2 million. Of note, I cannot find where a significant amount of this came from the companies qualified and/or employee stock purchase plans. This could simply be indicative of significant independant wealth on the part of the CFO, but I can find no pattern of him exercising this kind of purchasing power in the past.

A sample of what awaits in the Insider Trading Analysis for download...


Reported lease rates are just too optimistic for my tastes! I rarely use company's published book numbers

In regards to the growth in average rental, GGP’s reported rentals on new/renewed leases have gone up in 3Q2007 (even though market rentals have shown a distinctively contrary trend) from the previous quarter which has caused the overall average "reported" rental to go up marginally. Management, from what I have found reviewing their performance, do not have a history of outperforming the market, so I find it unlikely that they will start to do so now. As a matter of fact, I find that they have made market underperforming moves (see GGP advanced mini-sample). However, since our valuation and analysis of GGP’s portfolio is not based on the company reported rentals but rather on the prevailing rentals, we have duly covered the prospect of rental price decline, independently from any and publicly stated records. Remember, in the first installment of this series I explained how I independently verified leasing rates, lease markets, comparable sales, macro economic conditions, and modeled each and every of GGP's 260 properties individually based upon inputs from the findings above. See GGPs Woodlands Village for an example of the property reports and GGP Valuation Summary - Release Candidate for a valuation sample. My analysists were initially guffawed by what appeared to be a unnecessary amount of grass roots work, but by the end of the day all we could all say was, "Wow, what clarity and insight a little elbow grease hath bestowed." Based on our analysis, the average Base Case 2008 rental is around $24 vis-à-vis $44 for 3Q2007 for GGP’s consolidated properties.

  3Q2007 % change (3Q over 2Q) 2Q2007 % change (2Q over 1Q) 1Q2007

Consol. Unconsol (100% basis) Consol. Unconsol (100% basis) Consol. Unconsol (100% basis) Consol. Unconsol (100% basis) Consol. Unconsol (100% basis)

Average annualized in place sum of rent and recoverable common area costs per sq. ft. (e)

$44.06 $52.39 0.4% 5.5% $43.87 $49.67 0.6% 2.2% $43.63 $48.58
Average sum of rent and recoverable common area costs per sq. ft. for new/renewal leases (e) $39.43 $50.41 1.1% 10.9% $39.02 $45.45 5.8% 1.8% $36.87 $44.64 (YTD)
Average sum of rent and recoverable common area cost per sq. ft. for leases expiring in 2007 (e) $31.38 $37.95

$31.38 $37.95

$31.38 $37.95
Three month percentage change in comparable real estate property net operating income (versus prior year comparable period) (f) 4.90% 10.10%

3.30% 5.10%

0.50% -0.30%

Rent spread $8.05 $12.46

$7.64 $7.50

$5.49 $6.69