Using Veritas to Construct the "Per…

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The Veritas 2017 Token Offering Summary …

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This is final installment of my rather in depth analysis of GGP. This project represents a lot of work and analysis, and I am quite open to feedback, particularly from the company itself. The numbers are realistic, and pessmistic and optimistic scenarios were given and were branched out further into base case, recession and rosy economic scenarios. Everything was calculated by hand, and each property was valued individually with local, independently gathered data for inputs. A total of 2 GB of data and analysis resides on my servers - that is a lot of backup documentation. GGP has moved sharply higher with the surge in the broad market, and sharply away from its intrinsic value, whether measured by Cash Flow after Taxes, Present Value of Net Operating Income, Capitalization Rates or Comparable Book Value. To be blunt, GGP is grossly overvalued and distressed in terms of cash flow and liquidity - having significant refinancing events coming up quickly that it will be hard pressed to meet.
Before we get started, let's recap this lengthy GGP saga:
 
  1. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
  2. Generally Negative Growth in General Growth Properties - GGP Part II
  3. General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
  4. More on GGP: A Granular View of Insider Selling and Lease Rate Growth
  5. GGP part 5 - The Comprehensive Analysis is finally here
  6. My Response to the GGP Press Release, which seems to respond to blogs...
  7. For those who were wondering what sparked that silly press release from GGP...
  8. GGP: Foreclosure vs Asset Sale
  9. GGP Refinancing Sensitvity Analysis
  10. GGP part 7 - Share value under the foreclosure analysis

Even I hadn't realized this series had 11 parts, two of which stemmed from the GGP press release directed at "the media" and "blogs," issued at 9 pm Saturday evening, apparently at least partly driven by more emotion than PR strategy. I will probably release this entire series to the press to demonstrate how series good blogging can be in financial circles. As usual, there is a full fidelity version of this report available for download, complete with pro forma financials: icon GGP Fire Sale (786.44 kB)

Now, on to the final (I think) chapter...

Summary

As of late, credit markets have become dysfunctional, or put more accurately, “functional” in the prudent pricing of risk in the wake of losses incurred by financial institutions and lenders owing to the OPM (other people’s money) methodology of writing loans destined for sale through market securitization. The resultant problem of ‘shrinking liquidity’ is aggravating the operations, to say the least, of many real asset and related financial concerns. In particular, this has considerably impacted the ability of commercial real estate companies including GGP, which has huge debt obligations payable in next few years, to refinance its loans and capital expenditure (capex) requirements.

In the event of GGP not being able to meet the requisite financing/refinancing needs as we have forecast, it is likely to find itself faced with either of the following two options – 'foreclose some of their existing loans or “sell few of their unencumbered properties”. Yesterday, we had discussed the impact of foreclosure and sale of some of its properties on GGP’s valuation. We are now presenting our analysis on its valuation in case GGP elects to only sell some of its unencumbered properties – the ‘sale of properties’ scenario.

GGP’s valuation summary

In our base case scenario (without assuming sale or foreclosure), we arrived at GGP’s valuation of approximately $6.9 bn or $28.4 per share (under the CFAT approach – please refer table below). Our underlying assumption in the above valuation was that GGP would be able to arrange the requisite financing for its loan repayment and capex requirements.

However considering the tight liquidity condition in the current capital market scenario, GGP might have to sell some of its prime and unencumbered properties. Accordingly, we have assumed that GGP would sell its properties to arrange for $1.2 bn and $1.5 bn, respectively, in 2008 and 2009, representing approximately 30% of its total refinancing needs in these years. We expect GGP to sell these properties at a significant discount to their current valuation (arrived at using net present value approach) due to subdued demand for commercial real estate amid a liquidity crunch in the credit market. Additionally, we expect GGP to postpone its re-development and new development plans, which would put a strain on the GGP’s future revenue streams. Incorporating the above assumptions, we expect GGP’s valuation under ‘sale of properties’ scenario of $6.0 bn, translating into a per share value of $24.5. This represents a downside risk of 38.7% from the current market price of $40 (as of February 1, 2008)

 

GGP’s valuation comparison under ‘base case’ and ‘sale of properties’

GGP's valuation - comparison Base case Sale of properties

(All figures in $ bn except per share data) PV NOI CFAT PV NOI CFAT
Value of GGP properties $29.5 $4.5 $29.5 $4.5
less: New developments curtailed

$0.7 $0.3
less: Sale of property

$3.4 $3.3
Value of GGP properties

$25.4 $0.9





Current debt $24.1
$24.1
less: Sales proceeds

$2.7 $2.7
Debt net of sales proceeds $24.1
$21.4 ($2.7)










GGP's portfolio valuation $5.4 $4.5 $4.0 $3.6





PV of other income $2.4 $2.4 $2.4 $2.4





GGP valuation $7.8 $6.9 $6.4 $6.0





Per Share valuation $32.1 $28.4 $26.1 $24.5






Re-financing needs

Re-financing under conditions of sale ($ 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



Financed through sale of asstes $1,209 $1,465
% of re-financing required 31% 29%



Capital improvemnts curtailed $772 $466



Re-financing required 2,641 3,535
Capital improvemnts 810 195
Financing re-quired (revised scenario) 3,450 3,731

As compared to...

Re-financing under conditions of foreclosure ($ mn) 2,008 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 our ‘foreclosure and sale’ scenario (posted yesterday), we expect GGP to foreclose approximately 6% of its property portfolio which would reduce GGP’s re-payment obligations by nearly 20% each in 2008 and 2009, to $2.0 bn and $2.6 bn, respectively. In addition, we expect GGP to sell some of its un-encumbered properties and curtail capital improvement requirements. Consequently, the assumed foreclosure and sale of 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. However as a result of foreclosure, GGP’s credit standing would take a severe beating. Consequentially increased penalties in form of increased cost of financing and additional difficulty in raising finance for future projects would restraint GGP from foreclosing its mortgaged properties. Also since re-financing and maintaining credit standing is one of the prime business drivers for REIT’s unless the situation aggravates steeply from here, GGP may opt not to go the foreclosure route.

Since both the scenarios - ‘base case scenario’ (without assuming sale or foreclosure) with entire debt re-financed through additional loans and ‘foreclosure and sale’ – may seem extreme (the first being too optimistic and the other being too pessimist), we believe that GGP might alternatively sell a few of its unencumbered properties to partly meet its re-financing requirements. We expect GGP to re-finance approx. 30% of its re-financing needs each in 2008 and 2009 through sale proceeds of $1.2 bn and $1.5 bn from properties. In addition, we expect GGP to reduce its capital expenditure towards re-developments and new developments by 50% and 70% to $0.8 bn and $0.20 bn in 2008 and 2009, respectively. As a result of sale and reduction in capital expenditure, we expect GGP to reduce its financing requirements by 36% and 34% in 2008 and 2009, respectively to $3.5 bn and $3.7 bn.

We have identified the following properties which would enable the company to meet above 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 16.5%
South Street Seaport $241 $240 $188 2008 $11 $5 $184 119.2%
The Mall In Columbia $239 $217 $187 2008 $572 $502 ($315) 2.3%
Burbank Town Center $692 $666 $541 2008 $480 $408 $133 7.9%
Fallbrook Center $275 $260 $215 2009 $117 $67 $148 12.8%
Festival Bay Mall at International Drive $273 $265 $214 2009 $215 $183 $31 6.9%
Ford City Mall $422 $405 $330 2009 $348 $295 $35 6.6%
SouthBay Pavilion $453 $443 $354 2009 $243 $206 $148 10.2%
Queen Ka'ahumanu Center $240 $270 $188 2009 $143 $121 $67 8.3%
Windward Mall $209 $196 $163 2009 $125 $106 $57 9.1%
Total $3,419 $3,337 $2,674
$2,377 $1,980 $694

We expect GGP to realize approximately $2.7 bn from sale of above mentioned properties (in 2008 and 2009) having a book value of $2.0 bn. As a result of above sale, GGP is expected to record profit of $0.7 bn over the next couple of years. Although GGP would be able to record gain on sale for the above transaction, it would actually drag down the company’s valuation as the current valuation (arrived at using net present value approach) of these properties is noticeably higher than the sale proceeds (see table above). This assumption is based on the hypothesis that GGP would be able to sell these properties only at a discount (15% assumed by us) due to fewer buyers for commercial real estate properties in a down trending market with diminishing liquidity – basically, the typical buyer’s market. In addition, we have assumed 8% cost on sale of transaction.

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


GGP detailed valuation summary – under sale

Sale of office properties






PV NOI CFAT Puchase price Net of dep Gain / Loss Cap rate
GGP properties $29,487,000,000 $4,520,000,000










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%
Total $706,350,323 $291,140,210



GGP Valuation excl new devlopments $28,780,649,677 $4,228,859,790










Sale of properties in 2008-2009




Market Place Shopping Center $374,644,164 $374,644,164 $123,800,000 $87,204,000 $205,767,736 16.5%
South Street Seaport $240,638,934 $239,648,851 $10,985,000 $4,599,000 $183,580,646 119.2%
The Mall In Columbia $238,623,044 $217,451,642 $571,949,000 $501,719,000 ($315,115,780) 2.3%
Burbank Town Center $692,446,644 $666,176,454 $480,000,000 $408,000,000 $133,493,276 7.9%
Fallbrook Center $274,760,989 $259,686,361 $117,463,000 $67,171,000 $147,692,094 12.8%
Festival Bay Mall at International Drive $273,312,934 $264,874,368 $215,000,000 $182,750,000 $30,980,714 6.9%
Ford City Mall $422,233,456 $405,038,452 $347,500,000 $295,375,000 $34,811,562 6.6%
SouthBay Pavilion $453,288,785 $443,112,734 $242,500,000 $206,125,000 $148,346,830 10.2%
Queen Ka'ahumanu Center $240,203,388 $270,071,351 $142,500,000 $121,125,000 $66,714,050 8.3%
Windward Mall $209,068,581 $196,407,848 $125,000,000 $106,250,000 $57,241,630 9.1%

$3,419,220,919 $3,337,112,224 $2,376,697,000 $1,980,318,000 $693,512,759







GGP's properties portfolio after sale $25,361,428,758 $891,747,566



less : Loan O/S net of proceeds $24,073,812,000




Add : Net Proceeds 2,673,830,759 2,673,830,759



Value of GGP's properties $3,961,447,516 $3,565,578,325



PV of other income $2,412,000,000 $2,412,000,000










GGP's estimated market cap $6,373,447,516 $5,977,578,325



Balance Loan O/S $21,661,812,000











Per share valuation assuming sale $26.1 $24.5



Current price $40.0




Upside (downside) potential (base case) -34.6% -38.7%










Previous estimates $32.1 $28.4

















2008 $1,209,247,879
$1,186,734,000 $1,001,522,000 $207,725,879 $185,212,000
2009 $1,464,582,880
$1,189,963,000 $978,796,000 $485,786,880 $211,167,000

GGP's Comparative Valuation


Price(USD) FFO per share BPS NAV Operating Profit

2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009
GGP 36.51 1.1 0.5 0.3 0.25 6.8 4.1 -1.6 -7.0 23006 27166 28748 29409 1188 1013 631 815
Simon Property 89.38 5.3 5.8 6.5 7.0 20.2 9.0 34.3 NA NA 2880 3116 3352 2045 2599 2837 3044
Kimco Realty Corp. 35.85 2.2 2.6 2.8 3.1 22.3 22.1 23.3 14.8 3508 3666 2608 2230 92970 599 725 804
Boston Properties 91.71 4.2 4.6 4.7 5.0 32.8 36.7 30.7 31.4 3834 4406 4641 4814 778 784 822 829
SL Green Realty Corp. 92.66 4.6 5.8 6.1 6.7 139.8 137.4 139.5 154.7 2174 3379 3385 3445 193 488 600 644
Vonardo Realty Trust 90.30 5.5 5.9 6.1 6.5 125.7 35.6 36.2 36.8 4837 6206 6206 6271 1036 1131 1251 1210
Macerich Co. 68.25 4.4 4.6 5.1 5.7 38.0 24.6 24.9 16.1 1461 1326 1326 1326 101229 562 607 603
Source: Bloomberg Consensus Estimates











Company Market Cap
(US$ mn)
Net Debt (US$ mn) Current EV
(US$ mn)
P/FFO P/B




2007E 2008E 2009E 2007E 2008E 2009E
GGP 9,752 24,026 33,778 78.7 142.0 146.8 5.4 9.0 N/A
Simon Property 21,297 16,876 38,174 15.3 13.8 12.7 4.4 9.9 2.6
Kimco Realty Corp. 9,444 4,371 13,815 13.8 13.0 11.8 1.6 1.6 1.5
Boston Properties 11,483 3,515 14,998 19.9 19.4 18.2 2.8 2.5 3.0
SL Green Realty Corp. 5,804 5,248 11,052 16.1 15.1 13.9 0.7 0.7 0.7
Vonardo Realty Trust 14,313 11,742 26,055 15.2 14.7 13.8 0.7 2.5 2.5
Macerich Co. 5,231 5,082 10,312 14.7 13.3 12.1 1.8 2.8 2.7
Industry Average


15.8 14.9 13.7 2.0 3.3 2.2

 

Relative P/B Valuation
GGP 2008
Book value per share 8.98
Industry P/B 3.34
Target Stock Price (US$) 29.94

Valuation Based on Various Earnings Measurment

 

Summary Valuation
Earnings Approach  
-DCF $26.6
-CFAT $24.5
- NOI $26.1

 
Average Earnings Valuation
$25.7
Share Price as of 2/2/2008
Probable price movement to reach CFAT Value
-38.70%

 

 

 

GGP’s portfolio analysis

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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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