Using Veritas to Construct the "Per…

29-04-2017 Hits:87211 BoomBustBlog Reggie Middleton

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:81129 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.

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10-04-2017 Hits:80971 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

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07-04-2017 Hits:85445 BoomBustBlog Reggie Middleton

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:81943 BoomBustBlog Reggie Middleton

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

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01-04-2017 Hits:84131 BoomBustBlog Reggie Middleton

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

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28-03-2017 Hits:55194 BoomBustBlog Reggie Middleton

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

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28-03-2017 Hits:83389 BoomBustBlog Reggie Middleton

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

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27-03-2017 Hits:83130 BoomBustBlog Reggie Middleton

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

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27-03-2017 Hits:83019 BoomBustBlog Reggie Middleton

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

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22-03-2017 Hits:89278 BoomBustBlog Reggie Middleton

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21-03-2017 Hits:86993 BoomBustBlog Reggie Middleton

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As a continuation of my analysis on GGP's recent Q1 results and my research on GGP's overall financial position and the retail CRE sector in general, I bring an explicit illustration depicting GGP's inability to support its current dividend payout from operating cash flows. This is quite significant, and I urge those who have an economic interest in this company to explore my findings. 

Dividend financing chart

  2Q-2008e 3Q-2008e 4Q-2008e 1Q-2009e 2Q-2009e 3Q-2009e 4Q-2009e
Cash from operating activities                 1              76              96               (1)             (16)              60              80
Cash from investing activities          (395)          (395)          (395)          (165)          (165)          (165)          (165)
Cash from financing activities (excl dividends)            279            491            491            280            280            280            280
Net change in cash before dividends          (116)            171            192            114              99            175            195
Dividends          (162)          (162)          (162)          (162)          (162)          (162)          (162)
               
   - Dividends financed out of operating activities 0% 47% 59% 0% 0% 37% 49%
   - Dividends financed out of financing activities net of capex 0% 53% 41% 71% 71% 63% 51%
  - Dividends financed out of previouscash balance 100% 0% 0% 29% 29% 0% 0%
               

 

According to our estimates, GGP‘s core operating income is insufficient in regards to meeting its dividends obligations (assuming constant dividend declaration at $0.50 per share) in the coming quarters through operating cash flows. The company would have to draw down its existing cash reserves or finance its dividends through additional re-financing (note that we have increased dividend by $10 mn per quarter to include the impact of additional shares issued by the company - without such an increase the dividend payout will drop by default due to the dilutive effect of management's financing efforts). Such actions are unsustainable, thus it is fair to say that the current dividend is at short term risk unless financed through means other than company operations, and is at long term peril regardless of the company's actions. The table above depicts the 2Q2008 in which GGP would have to finance all of its dividend payment through cash reserves (which stand at a healthy $256 mn at the end of 1Q2008 due to issuance of equity stock of $88 mn and an unsustainable increase in NOI partly due to higher lease termination fee). In 3Q2008 and 4Q2008, company's operating activities would be able to finance only 47% and 59% of its dividend with the balance coming from financing activities.

 

Sensitivity analysis

We have conducted a sensitivity analysis of GGP's expected cash balance at each period-end based on varying dividend per share amount and re-financing options available to the company. We have also done a separate similar analysis based on varying dividend per share amount and GGP's capex requirements (maintenance as well as development capex). Also for 2Q2008 we have reduced estimated re-financing from our previous estimate to the extent of the company's reported surplus cash in 1Q2008 versus our original estimates ($210 mn including $88 mn from equity issued by the company and over $100 mn from more-than-projected NOI in 1Q2008, see my previous post for the source of this unexpected income). In effect, we have maintained our total refinancing requirements over 1Q2008 through the projected period and have kept other assumptions of the model constant. GGP is, in essence, taking money out of one pocket to put in the other, and reporting an increase in income in the process. This is not how we see it.

Based on the sensitivity analysis, we estimate GGP to fall short of $22 mn in cash liquidity at the end of 2Q2008 if it were able to re-finance $1,146 mn during the quarter while keeping its dividend constant at $0.50 per share. GGP will have to either increase its re-financing requirement by additional $54 mn to $1200 mn or cut its dividend to $35 per share to overcome this cash crunch. Due to the nature of the typical income orientated REIT investor, such a dramatic cut in dividend will result in a drastic sell off and reduction in share price and value. Alternatively, GGP can also reduce its capex requirement by $45 mn in 2Q2008. Any reduction in capex either reduces the future value of existing properties or reduces the future cash streams of projects in the pipeline - both of which reduces the intrinsic value of the company. Since a cut in dividend in the near-term would hamper GGP's image in the current environment the company would most likely take steps to avert it, thus we expect GGP to further destroy corporate value in an effort to take the actions necessary to maintain its dividend "by any means necessary". Given the current real estate scenario, we believe that GGP would find it difficult to execute additional re-financings to fund its dividend payments, and if it should succeed in finding lenders bold (or silly) enough to mortgage dividend payments, investors should be aware GGP that would be simply borrowing off of its extant equity base to issue a dividend. Such dividends would not be the result of profits from the company, but the result of cannibalization of property equity and furthering of GGP's debt woes - which are already quite significant as it is. Needless to say, such an action is unsustainable.

Dividend sensitivity analysis - Dividend per share, re-financing and cash at the end of year

 

 Green cell e quals  Current model assumptions

 

 

 

    Re-financing in 2Q2008
  -22           1,000           1,050           1,100           1,146           1,200           1,250           1,300
   Dividend
 
 (2Q2008)
0.20               (88)               (38)                12                58              112              162              212
0.35             (128)               (78)               (28)                18                72              122              172
0.50             (168)             (118)               (68)               (22)                32                82              132
0.65             (208)             (158)             (108)               (62)                 (8)                42                92
0.80             (248)             (198)             (148)             (102)               (48)                  2                52
                 
    Re-financing in 3Q2008
  -13           1,200           1,250           1,300           1,358           1,400           1,450           1,500
   Dividend
 
 (3Q2008)
0.20               (91)               (41)                  9                67              109              159              209
0.35             (131)               (81)               (31)                27                69              119              169
0.50             (171)             (121)               (71)               (13)                29                79              129
0.65             (211)             (161)             (111)               (53)               (11)                39                89
0.80             (251)             (201)             (151)               (93)               (51)                 (1)                49
                 
    Re-financing in 4Q2008
  17           1,200           1,250           1,300           1,358           1,400           1,450           1,500
   Dividend
 
 (4Q2008)
0.20               (61)               (11)                39                97              139              189              239
0.35             (101)               (51)                 (1)                57                99              149              199
0.50             (141)               (91)               (41)                17                59              109              159
0.65             (181)             (131)               (81)               (23)                19                69              119
0.80             (221)             (171)             (121)               (63)               (21)                29                79
                 
    Re-financing in 2009
  -51           5,300           5,400           5,500           5,661           5,700           5,800           5,900
   Dividend
   
 (2009)
0.80               (92)                  8              108              269              308              408              508
1.40             (252)             (152)               (52)              109              148              248              348
2.00             (412)             (312)             (212)               (51)               (12)                88              188
2.60             (572)             (472)             (372)             (211)             (172)               (72)                28
3.20             (732)             (632)             (532)             (371)             (332)             (232)             (132)

 

 

Dividend sensitivity analysis - Dividend per share, Capex and cash at the end of year

 

    Capital expenditure (2Q2008)
  -22            (250)            (275)            (300)            (350)            (395)            (425)            (450)
   Dividend
 
 (2Q2008)
0.20             204             179             154             104               59               29                 4
0.35             164             139             114               64               19              (11)              (36)
0.50             124               99               74               24              (21)              (51)              (76)
0.65               84               59               34              (16)              (61)              (91)            (116)
0.80               44               19                (6)              (56)            (101)            (131)            (156)
                 
    Capital expenditure (3Q2008)
  -13            (250)            (275)            (300)            (350)            (395)            (425)            (450)
   Dividend
 
 (3Q2008)
0.20             213             188             163             113               68               38               13
0.35             173             148             123               73               28                (2)              (27)
0.50             133             108               83               33              (12)              (42)              (67)
0.65               93               68               43                (7)              (52)              (82)            (107)
0.80               53               28                 3              (47)              (92)            (122)            (147)
                 
    Capital expenditure (4Q2008)
  17            (250)            (275)            (300)            (350)            (395)            (425)            (450)
   Dividend
 
 (4Q2008)
0.20             242             217             192             142               97               67               42
0.35             202             177             152             102               57               27                 2
0.50             162             137             112               62               17              (13)              (38)
0.65             122               97               72               22              (23)              (53)              (78)
0.80               82               57               32              (18)              (63)              (93)            (118)
                 
    Capital expenditure (2009)
  -51          5,300          5,400          5,500          5,600          5,661          5,700          5,800
   Dividend
 
 (2009)
0.80              (92)                 8             108             208             269             308             408
1.40            (252)            (152)              (52)               48             109             148             248
2.00            (412)            (312)            (212)            (112)              (51)              (12)               88
2.60            (572)            (472)            (372)            (272)            (211)            (172)              (72)
3.20            (732)            (632)            (532)            (432)            (371)            (332)            (232)