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Again, the format and amount of data that I have to present push against the limitations of this HTML blog forum. Tables and charts can be viewed in their full fidelity by downloading the pdf version of the document here:

 icon GGP_Foreclosure (411.79 kB 2008-01-31 10:34:35)

This is the second to the last in the GGP valuation series, detailing the scenario of foreclosure on some of its heavily encumbered properties. The last installment will illustrate the sale of it its best performing properties to raise cash in order to meet loan maturity deadlines.

Summary 

As the macro-economic fundamentals in the United States continue to weaken amid tighter credit market conditions, the real estate sector is being subject to an adverse operating environment with falling property values and shrinking liquidity. We believe that in the midst of such turbulent financing environment, General Growth Properties (GGP) is most likely headed for difficult times ahead in the wake of its huge financial debt liability mostly in the form of property specific mortgages, a major chunk of which is due for repayment over the next few years. While GGP is striving hard to get its near-term debt obligations refinanced, we believe this would not be an easy for the company. Facing such tough credit market conditions and with 23% of its properties having loan to value (LTV) ratios in excess of 100% (based on our internally calculated property values), GGP may have to opt for foreclosure on a few of its highly leveraged properties. Though foreclosures in turn would weaken the company’s chances of raising additional finances for its remaining near-term debt obligations and capital improvement plans, we consider foreclosure to be a distinct possibility given the current state of affairs surrounding the company. The only other probable scenario would be prime asset sales, which I will address in my follow-up analysis. Here I scrutinize how a possible foreclosure would drag down GGP’s valuation from the previously estimated levels mainly owing to the loss of the company’s credibility in the debt markets.

GGP’s valuation summary

A large part of GGP’s current portfolio was acquired during 2004-2007, marked by high property prices (peaking property bubble) and easy credit availability (peaking credit bubble) which resulted in high leverage ratios on many of the company’s properties. However, as the conditions reversed in the later part of 2007 and the commercial real estate property prices started to decline, such properties witnessed their values falling below the outstanding mortgages. Further, since a majority of GGP’s property specific mortgages are on a non-recourse basis, the company stands to gain if it were to choose foreclosure of the properties with LTV greater than 100%. However, foreclosure would drastically hamper the company’s standing in the debt markets and make it extremely difficulty for it to refinance its debts on favorable terms under the already tight credit market conditions. Considering all this, we assume that while the company may choose to foreclose a few of its highly leveraged properties, it may simultaneously also have to sell a few other properties to raise cash for its debt and capital improvement obligations. As s result, I have incorporated the sale of a few of GGP’s properties to partially meet its refinancing requirements. Further, to build in the impact of increased cost of borrowing which the company would have to bear following the negative market sentiments arising from the foreclosures, we have assumed a 200 basis points increase in GGP’s cost of borrowing. Besides the sale of office properties and increased cost of financing, we have also reduced GGP’s planned outlay for re-development and new-development plans as we expect the company to postpone or curtail several of its expansion plans in the wake of expected difficulties in raising additional financing which would in turn put a drag on the company’s earnings going forward.


GGP’s valuation comparison under ‘base case’ and ‘base case assuming foreclosure and sale’

 

GGP valuation Comparison  Base case Base case assuming foreclosure and sale
(All figures in $ bn)
  PV NOI CFAT PV NOI CFAT
Value of GGP properties $29.5 $4.5 $29.5 $4.5
less: New devlopments curtailed     $0.7 $0.3
less :Foreclosed property     $2.3 ($4.1)
less: Sale of property     $3.4 $2.6
Value of GGP properties $29.5 $4.5 $23.0 $5.8
         
Current debt $24.1   $24.1  
less: Foreclosed property related debt     $4.7  
less: Sales proceeds      $2.7  
Debt after foreclosure $24.1   $16.7  
         
Additional interest penalty     $3.4 $3.4
         
GGP's portfolio valuation $5.4 $4.5 $3.0 $2.4
         
PV of other income $2.4 $2.4 $2.4 $2.4
         
GGP valuation $7.8 $6.9 $5.4 $4.8
         
Per Share valuation $32.1 $28.4 $22.3 $19.7
         

As the above table demonstrates, GGP’s valuation under the assumed foreclosure and sale of properties with our base case assumptions falls to approximately $4.8 bn against $6.9 bn under the previous base case scenario (without incorporating foreclosure and sale). On a per share basis, the company’s valuation on CFAT basis falls to $19.7 against $28.4 previously, implying a further downside potential of 45.6% from the current market price of $36.3 (as of January 29, 2007).

Re-financing needs:

 

Re-financing under conditions of foreclosure ($ mn)               2008 2009
Re-financing required (base scenario) $3,850 $5,000
Capital improvements (base scenario) $1,582 $661
Financing re-quired (base scenario) $5,432 $5,661
     
O/S Loan $24,074  
Foreclosed loan (approx. 6% of popreties) $4,748  
 (% of O/S loan) 19.7%  
Balance O/S loan $19,326  
     
Loan re-paymnet (as per amortization scehdule) $2,608 $3,295
Loan re-paymnet (after default) $2,093 $2,645
Reduction in re-financing need due to foreclosure $514 $650
% reduction 13% 13%
     
Financed through sale of assets $1,209 $1,465
% of re-financing required 31% 29%
     
Capital improvemnts curtailed $772 $466
     
Re-financing required $1,900 $2,200
Capital improvements $810 $195
Financing required (revised scenario) $2,710 $2,395
     

Under the foreclosure scenario, we expect GGP to foreclose approximately 6% of its portfolio accounting for approximately 20% of its total outstanding debt resulting in an estimated total debt of $19 bn as at the end of 1Q2008. This would reduce GGP’s loan re-payment obligations by nearly 20% each in 2008 and 2009, to $2.0 bn and $2.6 bn, respectively, from $2.6 bn and $3.3 bn presently.

In addition to foreclosures, we expect GGP to sell some of its un-encumbered properties to finance a portion of its current funds requirements on debt repayments and capital improvements. The properties short-listed for sale in our analysis are based on the premise that sale should meet approximately 30% of the company’s total re-financing needs in 2008 and 2009. Overall, we expect GGP to realize net sales proceeds of $1.2 bn and $1.5 bn in 2008 and 2009, respectively. Further, we have also curtailed GGP’s estimated capital improvement requirements by approximately 50% and 70% in 2008 and 2009, respectively, to $0.8 bn and $0.5 bn from $1.6 bn and $0.7 bn, previously, considering the difficult credit conditions GGP is facing.

Consequently, the assumed foreclosure and sale properties together with estimated curtailment in capital expenditure would bring down GGP’s total financing needs by 50% and 42% in 2008 and 2009, respectively, to $2.7 bn and $2.4 bn versus our previous estimates of $5.4 bn and $5.7 bn.

GGP foreclosure and sale assumptions:

Foreclosures:

We have used following key parameters to identify GGP’s properties that coule be potential candidates for foreclosure:

· Properties with a huge amount of debt maturing over the next 2-3 years

· Properties with high LTV (greater than 100%)

· Properties with low cap rates

Based on the above analysis, we have identified the following properties which are most likely to be foreclosed –

 

Foreclosed properties ($ mn) CFAT Loan O/S Due date LTV
Fashion Show ($386) $361 Jan-08 110%
Providence Place ($196) $367 Mar-10 132%
Park Place ($145) $181 Jan-10 168%
The Streets At Southpoint ($139) $247 Apr-12 174%
Fashion Place ($101) $148 Oct-10 175%
Lakeside Mall ($143) $186 Dec-09 180%
Mall Of Louisiana ($245) $238 Apr-11 182%
Pioneer Place ($61) $167 Aug-08 185%
The Grand Canal Shoppes ($381) $406 May-09 186%
North Star Mall ($200) $240 Jan-10 190%
Westlake Center ($42) $67 Feb-11 190%
Columbia Mall ($223) $153 Jan-08 198%
Beachwood Place ($204) $246 Nov-11 276%
Lynnhaven Mall ($197) $243 Apr-11 281%
Ala Moana Center ($1,480) $1,500 Jul-10 356%
Total ($4,144) $4,748    

 

As a result of foreclosures, GGP’s outstanding debt is expected to reduce by $4.8 bn to $19.3 bn. The estimated market value of these properties is $2.3 bn while the book value net of depreciation stands at $4.8 bn with a corresponding outstanding debt of $4.8 bn. Pursuant to the assumed foreclosure, GGP is expected to record a net loss of $0.08 bn in its books on these properties.

 

Foreclosure of properties ($ mn)  PV NOI   Puchase price   Net of dep   Gain / Loss   Loan O/S 
2008 2,317 6,432 4,828 (80) 4,748

 

Additional cost of financing:

We believe that foreclosure would strongly impact the company’s credit standing owing to which GGP would have to bear increased cost of raising additional funds from the debt markets. We have assumed an approximately 200 basis points increase in the company’s cost of borrowing (on re-financing during 2008-2011) resulting in an additional cash outflow of $47 mn and $70 mn in 2008 and 2009, respectively. GGP’s average cost of financing is expected to increase from 5.8% in 2007 to 6.0% in 2008 and further to 7.1% in 2012. GGP’s present value of interest expense as a result of additional cost of financing is approximately $3.4 bn.

 

  Additional interest cost due to foreclosue 
 Year  Re-financing ($ mn) Additional int cost $ mn (200 bps inc)
2008 $1,900 $47
2009 $2,200 $70
2010 $4,100 $104
2011 $7,100 $164
2012 $3,700 $240
2013 $3,500 $279
2014 $2,400 $315
2015 $2,850 $341
2016 $3,400 $368
2017 $3,800 $394
2018 $4,600 $419
2019 $5,300 $443
2020 $5,200 $466
2021 $4,600 $492
2022 $4,600 $518
2023 $4,800 $545
2024 $4,900 $572
2025 $5,800 $600
2026 $6,200 $631
Net Present Value of add interest $3,363
image012.gif

 

Sales:

In addition to foreclosures, we expect GGP to sell a few of its un-encumbered properties to partly meet its re-financing requirements. We have assumed that GGP could meet approximately 30% of its re-financing needs in 2008 and 2009 through sale of properties. Based on the aforesaid assumptions, we expect GGP to realize net sales proceeds of $1.2 bn and $1.5 bn in 2008 and 2009, respectively. We have identified the following 10 properties that would meet the re-financing needs:

 

Sale of properties in 2008-2009 ($ mn) PV NOI CFAT Selling Price Year of sale Puchase price Net of dep Gain / Loss Cap rate
Market Place Shopping Center $375 $375 $293 2008 $124 $87 $206 17%
South Street Seaport $241 $240 $188 2008 $11 $5 $184 119%
The Mall In Columbia $239 $217 $187 2008 $572 $502 ($315) 2%
Burbank Town Center $692 $666 $541 2009 $480 $408 $133 8%
Fallbrook Center $275 $260 $215 2009 $117 $67 $148 13%
Festival Bay Mall at International Drive $273 $265 $214 2009 $215 $183 $31 7%
Ford City Mall $422 $405 $330 2009 $348 $295 $35 7%
SouthBay Pavilion $453 $443 $354 2009 $243 $206 $148 10%
Queen Ka'ahumanu Center $240 $270 $188 2009 $143 $121 $67 8%
Windward Mall $209 $196 $163 2009 $125 $106 $57 9%
Total $3,419 $2,610 $2,674   $2,377 $1,980 $694  

 

 

Sale of properties ($ mn)  PV NOI   Selling Price   Puchase price   Net of dep   Gain / Loss 
2008                     1,546                        1,209                       1,187                       1,002                          208
2009                     1,873                        1,465                       1,190                          979                          486

 

Owing to the current low level of investment interest in the retail real estate market and the prevailing tight credit market conditions, GGP may face a hard time in realizing appropriate values for its for-sale properties. We assume the company would have to sell these properties at a discount of 15% to our estimated fair values. In addition, we estimate 8% cost of sale expenses on these properties. Overall, we estimate GGP to realize net sales proceeds of $1.2 bn and $1.5 bn in 2008 and 2009, respectively, with a book gain on sale of $0.20 bn and $0.50 bn.

Tight cash now causes GGP’s new development and re-development plans shrink by up to 70%, thus reducing future NOI and FFO: the company is devaluing...

As a result of the likely difficulties in meeting its re-financing needs following foreclosure, we expect GGP to reduce its capital expenditure towards maintenance and development activities. We now expect GGP to spend $1.6 bn and $0.7 bn towards capital expenditure in 2008 and 2009, respectively, which is approx. 50% and 70% below our previous estimates.

GGP detailed valuation summary – under foreclosure and sale

 

Foreclosure analysis

           
   PV NOI   CFAT   Puchase price Net of dep   Loan O/S  Due date Cap rate Leverage LTV
GGP properties $29,487,000,000 $4,520,000,000   $24,073,812,000        
                 
Expansion plans curtailed                
Ala Moana Center                
Augusta Mall                
Mall of Louisiana                
                 
New devlopments curtailed                
Elk Grove Promenade $285,261,768 $6,332,015       5.5%    
Natick Collection $173,965,955 $158,572,135       2.2%    
Park West $81,679,862 ($32,340,233)       4.3%    
The Shops at Fallen Timbers $165,442,740 $158,576,294       3.6%    
GGP Valuation excl new devlopments $28,780,649,677 $4,228,859,790            
                 
Foreclosed properties                
Fashion Show $327,486,824 ($385,797,393) $556,897,000 $360,851,000 Jan-08 1.6% 32% 110%
Providence Place $277,066,741 ($196,112,654) $467,810,000 $366,588,000 Mar-10 3.0% 72% 132%
Park Place $107,951,639 ($144,775,670) $123,235,000 $181,348,000 Jan-10 3.6% 112% 168%
The Streets At Southpoint $142,022,047 ($139,477,702) $387,679,000 $246,648,000 Apr-12 1.8% 57% 174%
Fashion Place $84,466,707 ($100,867,163) $196,499,000 $148,061,000 Oct-10 2.0% 64% 175%
Lakeside Mall $103,389,327 ($143,291,682) $347,691,000 $185,995,000 Dec-09 1.4% 45% 180%
Mall Of Louisiana $130,488,600 ($244,840,866) $255,411,000 $238,000,000 Apr-11 2.4% 80% 182%
Pioneer Place $90,277,243 ($60,790,310) $195,328,000 $167,187,000 Aug-08 0.0% 74% 185%
The Grand Canal Shoppes $218,143,821 ($380,874,778) $725,275,000 $405,521,000 May-09 1.5% 52% 186%
North Star Mall $126,487,167 ($199,732,257) $468,708,000 $239,722,000 Jan-10 1.3% 45% 190%
Westlake Center $34,950,119 ($42,213,943) $107,182,000 $66,561,000 Feb-11 1.4% 48% 190%
Columbia Mall $77,257,803 ($223,402,339) $25,526,000 $152,585,000 Jan-08 7.8% 282% 198%
Beachwood Place $89,032,692 ($204,283,609) $306,190,000 $245,580,000 Nov-11 1.4% 71% 276%
Lynnhaven Mall $86,644,143 ($196,968,263) $212,448,000 $243,248,000 Apr-11 1.8% 91% 281%
Ala Moana Center $420,984,677 ($1,480,168,634) $452,118,000 $1,500,000,000 Jul-10 2.5% 164% 356%
Total $2,316,649,549 ($4,143,597,263) $4,827,997,000 $4,747,895,000        
                 
Sale of properties in 2008-2009              
Market Place Shopping Center $374,644,164 $374,644,164 $87,204,000     16.5% 0% 0%
South Street Seaport $240,638,934 $239,648,851 $4,599,000     119.2% 0% 0%
The Mall In Columbia $238,623,044 $217,451,642 $501,719,000     2.3% 0% 0%
Burbank Town Center $692,446,644 $666,176,454 $408,000,000     7.9% 0% 0%
Fallbrook Center $274,760,989 $259,686,361 $67,171,000     12.8% 0% 0%
Festival Bay Mall at International Drive $273,312,934 $264,874,368 $182,750,000     6.9% 0% 0%
Ford City Mall $422,233,456 $405,038,452 $295,375,000     6.6% 0% 0%
SouthBay Pavilion $453,288,785 $443,112,734 $206,125,000     10.2% 0% 0%
Queen Ka'ahumanu Center $240,203,388 $270,071,351 $121,125,000     8.3% 0% 0%
Windward Mall $209,068,581 $196,407,848 $106,250,000     9.1% 0% 0%
Total $3,419,220,919 $2,609,621,759 $1,980,318,000          
                 
GGP's property (after foreclosue and sale) $23,044,779,209 $5,762,835,294            
                 
Current debt $24,073,812,000              
Less : Foreclosed property related debt $4,747,895,000              
O/S debt $19,325,917,000              
Less : Sales proceeds $2,673,830,759              
Balance Loan O/S $16,652,086,241              
                 
GGP's portfolio valuation before interest penalty $6,392,692,968 $5,762,835,294            
Less: Additional interest expense $3,362,891,977 $3,362,891,977            
Value of GGP's properties $3,029,800,990 $2,399,943,317            
PV of other income $2,412,000,000 $2,412,000,000            
                 
GGP's estimated market cap $5,441,800,990 $4,811,943,317            
Per share valuation assuming foreclosure $22.3 $19.7            
                 
Current price $36.3              
Upside (downside) potential (base case) -38.5% -45.6%            
                 
Previous estimates (base case) $32.1 $28.4            

 

 

GGP’s portfolio analysis

image033.gif

image004.gif

 image006.gif

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Based on our estimates of property values and rental growth, approximately 19% of GGP’s properties have cap rates greater than 10% while more than 51% of the its portfolio has cap rates below 4.5% (in nearly 25% cases the cap rates are even less than the current U.S treasury rate). Most of these properties with low cap rates were purchased during 2003-2007 when the property prices were high and credit to finance these purchases easily available. As property values have declined significantly since then, many of these properties are currently sporting negative equity with their LTVs rising above 100%. We believe that these are the properties that are most vulnerable to foreclosure in case GGP is not able to meet its re-financing requirements in 2008 and 2009 (a distinct and likely possibility).

 

Year of purchase Cap rate No of properties
2007 3.8%                           107
2004 2.7%                             39
2003 4.3%                             17
2002 13.8%                             47
1999 3.8%                                3
1998 7.5%                             13
1997 5.4%                                9

 

Year of purchase Properties with negative equity % of Properties with negative equity
2007                          37 45%  
2004                          21 26%  
2003                          11 13%  
2002                             4 5%  
1999                             2 2%  
1998                             4 5%  
1997                             3 4%  
 Total                           82 100%  

 

 

# of Properties with negative equity and leverage >80%   45
# of Properties with leverage >80%


45
% of properties above with negative equity (based on CFAT after debt service) 100.0%

 

GGP’s properties purchased over the last 3-4 years have lower cap rates (3-4%) owing to higher purchased price. In addition, these properties were purchased with a significant amount of debt. As a result of recent decline in rentals and property prices, properties purchased with high leverage have negative equity which continues to drive down company’s overall valuation. As seen from the table above, around 45% and 26% of properties (these properties were acquired in 2007 and 2004) have negative equity as against only 2-5% properties acquired during 1990’s and early 2000.

GGP’s financing options

As of September 30, 2007, GGP had a total mortgage debt of around $24 bn. GGP’s net investment in real estate on its books (at gross value after adding back depreciation) on that day stood at $26.6 bn while its shareholder’s equity was $1.5 bn. GGP is one of the most highly leveraged REITs in U.S with debt-to-assets of 84.4%.

image009.gif

 

Besides being highly leveraged, GGP has a significant portion of its debt due for maturity over the next few years. Nearly $5.9 bn or 24.7% of GGP’s total debt is due for maturity over 2007-2009, while by 2011, a significant 74% of the company’s outstanding debt is due for maturity. By the end of 2007, GGP was able to refinance only 6.1% (or $359 mn) of debt due to mature over 2008-2009. However, as the company approaches the period of its next debt maturity date, the task of refinancing could only be expected to get more difficult in context of continually tightening credit market conditions. The threat of monoline failures, combined with significant asset write downs by banks and real estate companies aggravated by sharp declines in housing demand and prices, together with an increase in defaults and foreclosures, have created one of the tightest lending environments in the recent history. An environment that will be even tighter for a considerably above average risk, as we see GGP!

Faced with tough times arranging refinancing and amid high expectations of further deterioration in the credit and capital market conditions, at least in the near term, we believe GGP, though reluctantly, might have to opt to foreclose some of its highly leveraged properties to meet its debt obligations in order to preserve its other income-generating properties.

 

( $ mn)     2008 2009 2010 2011 2012 2013 2014 2015
Loan Outstanding at the beg of year     $25,568 $20,727 $19,584 $19,705 $19,727 $19,752 $20,009 $20,315
Principal repaymemt as per schedule     ($2,093) ($2,645) ($3,155) ($5,566) ($2,524) ($1,703) ($206) ($158)
Additional loan for capital improvements and re-devlopments(a) $810 $195 $453 $381 $396 $400 $404 $409
Loan repayment (re-financing and capital improvements)   ($710) ($893) ($1,277) ($1,893) ($1,547) ($1,940) ($2,292) ($2,703)
Loan Outstanding at the end of year (before re-financing)   $18,827 $17,384 $15,605 $12,627 $16,052 $16,509 $17,915 $17,863
Re-fiancing (b)     $1,900 $2,200 $4,100 $7,100 $3,700 $3,500 $2,400 $2,850
Loan O/S at the end of year     20,727 19,584 19,705 19,727 19,752 20,009 20,315 20,713
                     
Total Financing required (a + b)     2,710 2,395 4,553 7,481 4,096 3,900 2,804 3,259

 

As a result of the assumed foreclosure of $4.8 bn worth of loans in 2008 and the assumed the sale of $2.7 bn worth of properties in 2008 and 2009, we believe that GGP would be left with approximately $2.7 bn and $2.4 bn of financing needs in 2008 and 2009, respectively, out of which $1.9 bn and $2.2 bn is related to re-financing debt repayments while $0.8 bn and $0.20 bn in 2008 and 2009, respectively, is related to capital improvements.

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GGP – Peer group analysis and relative valuation

 

Company Market Cap
(US$ mn)
Net Debt              (US$ mn) Current EV
(US$ mn)
EV/EBITDA P/FFO P/B
        2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E
GGP     8,716    24,026   32,742    19.4     24.0      21.0     78.5  141.6   146.5      5.3      9.0  N/A 
Simon Property   19,310    16,876   36,187    13.7     12.7      12.0     15.1    13.6     12.5      4.3      9.7     2.6
Kimco Realty Corp.     8,804      4,371   13,175    17.3     14.4      12.8     13.6    12.7     11.5      1.6      1.6     1.5
Boston Properties    10,693      3,515   14,208    15.8     15.8      14.7     19.9    19.4     18.2      2.8      2.5     3.0
SL Green Realty Corp.     5,199      5,248   10,447    17.9     16.8      16.6     15.6    14.7     13.5      0.6      0.7     0.6
Vonardo Realty Trust   13,471    11,742   25,213    18.2     16.4      15.1     15.1    14.7     13.7      0.7      2.5     2.5
Macerich Co.     4,788      5,082     9,870    18.6     16.2      14.1     14.5    13.1     11.9      1.8      2.7     2.7
Industry Average       16.9 15.4 14.2 15.6 14.7 13.6 2.0 3.3 2.1

 

 
Earnings Approach   
 DCF $29.50 
 CFAT  $19.70
 PV of NOI  $22.30
   
 Relative Valuation
 
 P/B $29.50 
 P/FFO  $3.8
   
 Simple Average

 $20.96 

 

Key charts

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