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I had my analysts take a closer look at the GGP financing and, quite frankly, there are a lot of unanswered questions. I figured I would throw some of it out into the public domain to see what the readers make of it.

Offer of sale of shares

On March 24, 2008 General Growth Properties announced the sale of 22.9 mn shares at $36 per share with total proceeds of $821.9 mn to repay its revolving credit facility and other debt, and for general corporate purposes. The above offer which was closed on March 28, 2008 included sale of 2.4 mn shares sold for total proceeds of $88 mn to MB Capital Partners III, an affiliate of and John Bucksbaum, CEO of GGP, and Matthew Bucksbaum, the company’s Chairman Emeritus. See GGP's filing:

icon GENERALGROWTHPRSC13DA


# of shares Price Total value
Total Shares available for sale 22.8 36.0 821.9
- MB Capital Partners III 2.4 36.0 88.0
- Other undisclosed parties 20.4 36.0 733.8

 

Upon the issue of stock, GGP’s shares outstanding increased to 266.8 mn shares from 243.9 mn shares as of February 22, 2008.

Redemption of interest in trusts

Just a day before MB Capital acquired additional stake in GGP, on March 27, 2008 Matthew Bucksbaum Revocable Trust (MBRT) and General Growth Companies (GGC) redeemed a part of their interest in MB Capital. MBRT and GGP received 1.5 mn units (out if which 0.136 mn units are convertible into GGP shares) and 24,957 units (fully convertible into GGP shares) in GGP Limited Partnership, respectively, in return of their stake in MB Capital. The timing of redemption in MB Capital by MBRT and GGP, which was just before MB Capital received additional 2.4 mn shares of GGP, poses questions regarding the intention behind the redemption of interest.

Financing deal between Citigroup and MB Capital

On November 9, 2004, MB Capital Partners III entered into a loan agreement with Citigroup Global Markets to provide credit facility of up to $500 mn. Although initially the loan agreement was to finance the exercise of warrants for financing the acquisition of The Rouse Company, it was subsequently amended to finance purchase of shares by MB Capital. On October 31, 2007 Citigroup extended the loan to MB Capital, collateralized by certain shares held by M.B. Capital, at a very nominal rate of interest (LIBOR plus 50 basis points) payable on November 9, 2009. Although the loan is being collateralized by shares held by MB Capital, the interest rate charged of LIBOR plus 50 basis points is quite low, particularly considering today's lending environment, and in particular Citibank's current financial and asset/liability problems. Using the funds borrowed, MB Capital had purchased 10.09 mn GGP shares in open market between August 3, 2007 and August 20, 2007. Subsequently in March 2008, MB Capital used the loan to finance the purchase of $88 mn worth of GGP shares. In addition to the abnormally low rate of interest being charged for the transaction, the loan agreement was amended subsequently terminating the third party pledge of shares of common stock held by John Bucksbaum and Matthew Bucksbaum - further raising concerns about the entire financing deal between Citigroup and MB Capital.

As I follow it, and I may be wrong: Citi signed a first agreement in August 2007 for a $500M loan to the MB Capital Partners III entity ('MBCP'), which was collateralized by the stock within MBCP and a 3rd party pledge of the stock owned by John and Matt Bucksbaum. In August 2007 though, before MBCP put the $500M to work, Matt divided the trust into 2 parts, with his part (Division B - the trusts where he is the executive or trustee) not participating in the lender-related buying spree that ensued. Matt then stepped down as Chairman 12 days later. In March 2008, MBCP signed another agreement with Citi, this time for $88M to co-invest alongside the mystery other investor. Here, Matt took his Division B trusts OUT of MBPC, in a one-for-one exchange for the same shares in the same trusts, OUTSIDE of MBCP. I will have to look into this further for verification, so for now it should be considered speculation.

These are factors that should be taken into consideration:

  • Dividends flow through the trust to the beneficiaries of the trust (my assumption).
  • Citigroup has lent MBCP $500M+, and the first time MBCP used leverage is August 2007 (approximately when Matt Bucksbaum stepped down and divided his trusts).
  • The Bucksbaums appear to be indemnified against everything except gross negligence and willful misconduct.
  • The August 2007 $500M loan was also secured by a pledge of Matt and John Bucksbaum's stockholdings -- however in the March 2008 amendment, they terminated the pledge. Thus we now have an unsecured, non-recourse loan at below secured, recourse market rates issued by a lender that is having the most volatile period of its existence - this has a scent of what the paranoid conspiracist type may consider suspicious timing.
  • Not disclosing the "mystery" lender in the March 2008 equity raise causes big red flags to be thrown in the air. I wasn't even aware this was allowable under SEC reporting rules - after all there were only two buyers of the stock, the mystery guest and the trust mentioned above with the funny non-recourse, "give the farm away" financing.

Issuest that reflect negatively on core operations from a "qualitative" perspectuve:

  • Necessity to do an April 2007 offering of convertible debt for $1.55B with a strike of 88.
  • The fact that John Bucksbaum is raising the $88M through non-recourse debt in a family trust - this can be considered a vote of confidence in the potential of the stock, but the unconventional aspects of it raises many questions. Think about it. A management owned family trust invested alongside a "mystery" investor who has not been named at the same time GGP is closing on a Vegas luxury retail mall property while GGP is undergoing what must be the most refinance risk of its existence, just coming off of a CRE bubble burst in one of the three worst "bubblized" markets in the country as we are entering a recession. While everybody else is running away due to falling prices and murky credit financing, they are buying! Normally, this could be considered prudent investing, but GGP does not have a very strong record at contrarian value plays, as is exemplified by my GGP inventory analyses, wherein they have a lot of property underwater from purchasing at times like this one. It makes one wonder if the mysterious buyer has any economic relationship with the Vegas purchase or an incentive to see the deal go through. I don't know, but it does make one wonder.
  • The fact that GGP won't let anyone know who participated in the March 2008 equity raise (the mystery stock buyer).
  • Matt Bucksbaum's stepping down as chairman when the initial $500M loan was made, and then redeeming "his" trusts from MBCP when the incremental $88M loan was made.
  • GGP representative speaking anonymously to news sources when Las Vegas Sands underpayment was announced, saying that it was NOT related to demand, but to a construction delay. This was despite the fact we are undeniably in recession! Wouldn't a Las Vegas mall near the strip be very susceptible to lowered demand in a recession? Or is it just me? This also goes to timing as mentioned in the previous bullet list as well. From the linked article, "when the deal closes, General Growth will have spent more than $1 billion buying malls from Las Vegas Sands. In 2004, the Chicago-based company agreed to buy the Grand Canal Shoppes at The Venetian. It would end up paying about $776 million for the approximately 400,000 square-foot mall." They bought the mall and all of this real estate at the HEIGHT of the real estate and credit bubble and subsequent crash, right before a recession!
  • GGP putting out a press release on a Saturday night at 9pm (extremely unusual), the day after a Friday WSJ article by Herb Greenberg, citing not only Greenberg, but blogs (this blog, actually) (unprecedented), and blaming short sellers (presumably, this short seller).

The following is a draft summary of the equity financing (I, of course am not responsible for errors since I am doing this at 4 am with no sleep, consider the disclaimer offered).

Summary       $ Value  
  2007 Purchased shares 496.6 [This was after they missed guidance.]
  2008 Purchased shares 88.0 [Trust purchase, possibly arranged, as part of an agreement with whoever the "mystery" guest is who bought the rest of this offering.]
  Total Purchased shares 584.6  
           
  Total MBCP shares owned 66.7  
  * Current Price   43.0  
  = Market Value   2869.5  
  Debt / Capitalization 20%  
           
           
  Break-even price   8.76 [ as long as the stock is above this price, Citigroup should be able to get its money back.]
           
Detailed Breakout of 2007 Purchased Shares  
  Date Shares Price Cost ($M)  
  08/03/07 1.2 46.94 57.7  
  08/06/07 0.6 47.05 27.3  
  08/07/07 0.1 47.5 4.7  
  08/08/07 0.5 50.11 25.1  
  08/09/07 0.7 50.9 36.6  
  08/10/07 1.0 51.03 51.0  
  08/13/07 1.0 51 51.0  
  08/14/07 0.6 50.22 28.9  
  08/15/07 1.6 49.49 79.2  
  08/16/07 1.3 48.91 63.7  
  08/17/07 1.3 50.27 65.4  
  08/20/07 0.1 51.12 6.0  
  Total 10.0 49.5 496.6 [ GGP spent the entire $500M from the original August 2007 loan agreement between August 3rd and August 20th. ]

 

Potential dilution due to conversion of trust units

GGP had 266.8 mn shares outstanding as of March 28, 2008. Of this, three trusts: GTC, MB Capital Partners III and MB Capital Units, together hold nearly 26.8 mn shares taking their aggregate voting rights to 10% of outstanding shares. In addition, these trusts collectively own 45.2 mn units which are fully convertible into GGP common shares on one-for-one basis taking their aggregate potential voting rights to 71.9 mn shares or 23.1% of outstanding shares post conversion. GGP had 243.9 mn shares during last quarter.

 

Beneficiary owner # of shares (mn) % of shares o/s
Previous shares o/s 243.9 91.4%
Sahres issued 22.8 8.6%
Current shares o/s (a) 266.8 100.0%

 
GTC 0.1 0.1%
GTC and MB Capital 23.8 8.9%
GTC and MBRT 2.8 1.0%
Voting rights of trusts before conversion (b) 26.8 10.0%

 
Voting rights after conversion  
GTC, M.B. Capital and Units LLC (c) 45.2

 
Total shares o/s after conversion (a+c) 311.9
Voting rights of trusts after conversion (b+c) 71.9 23.1%

 

Controlling interest by Bucksbaum family

In addition to the 26.8 mn shares beneficially owned by GTC, MB Capital Partners III and MB Capital Units, Matthew Bucksbaum and John Bucksbaum also own 3.8 mn and 0.9 mn GGP shares, respectively, as of March 3, 2008. Their respective spouses have 17,547 shares and 19,820 shares. Besides these, there are 0.80 mn shares owned by the Matthew and Carolyn Bucksbaum Family Foundation, in which Matthew Bucksbaum disclaims beneficial ownership. Bucksbaum family and its trusts together own 12.1% shares outstanding of GGP without conversion of units held by trusts. However after considering conversion of these units into shares, Bucksbaum family and the trusts together control 24.8% of company’s voting shares.

 

Beneficiary owner # of shares (mn) % of shares o/s
Matthew Bucksbaum 3.8 1.4%
John Bucksbaum 0.9 0.3%
Matthew Bucksbaum spouse 0.0 0.0%
John Bucksbaum spouse 0.0 0.0%
Matthew and Carolyn Bucksbaum Family Foundation 0.8 0.3%
Bucksbaum family 5.6 2.1%

 
Bucksbaum family and trusts (before conversion) 32.3 12.1%

 
Bucksbaum family and trusts (after conversion) 77.5 24.8%

 

There are additional issues which raise questions, but I need to verify them before making my concerns public.