Here is the GGP analysis, 38 pages long, but chocked full of info, analysis, and understanding of the CRE market and GGP in partifcular. Review this report, and compare it to what you recieve from your sell side bank or brokerage. I am anxious to hear your feedback. Blog members can download it here:

pdf  GGP Financial Analysis and Valuation Opinion - Release Candidate 2 (923.66 kB 2008-01-19 02:48:23) .

Excerpted from the Summary:

General Growth Properties (GGP) seems headed for a difficult operating environment in the wake of deteriorating economic fundamentals in US and the company’s huge financial debt liability. We believe that while operating cash flows would get impacted by lowering commercial real estate rentals in the US, increased interest burden off tightening lending standards by large financial institutions amid concerns over incremental exposure of the structured securities to the securitized loan crisis would weigh on the company’s near-to-medium earnings. The problem could get aggravated with rising losses from probable foreclosure of mortgages on some of GGP’s prime but high leveraged properties, in our view.

 Key Points

·   Commercial real estate rentals headed southwards: With US recession looming large and increasingly being pushed by a slowdown in US consumer spending, lower-than-expected US retail sales in 4Q2007 and rising unemployment rate, demand for commercial real estate is expected to slow down, creating downward pressure on the commercial real estate rentals. US retail sales for December 2007 declined 0.4% over November 2007 levels, and unemployment rate rose to 5% in December, the highest level since 4Q2005. The near-to-medium-term outlook doesn’t present a favorable trend in the commercial real estate rentals amid weakening macro-economic indicators in the US.

·   Refinancing challenges for GGP’s huge debt liability amid tightening credit market As of September 30, 2007, GGP had an outstanding debt of approximately $24 billion, of which $2.6 bn and $3.3 bn is due for payment in 2008 and 2009, respectively. By 2011, more than 70% GGP’s debt (approximately $17.6 billion) is scheduled to be repaid, which would be possible only through the refinancing option. Following the US sub-prime meltdown in mid-2007, the credit market has squeezed significantly. With tightening of lending standards in the global credit market, it looks extremely difficult for GGP to refinance its huge debt liabilities. Any further deterioration in the capital market conditions, impairing GGP’s ability to re-finance its debt obligations, could significantly jeopardize the company’s re-development plans. Consequently, GGP could be forced to foreclose mortgages on some of its prime, but highly leveraged properties. Alternately, to avoid foreclosure GGP may be forced to sell assets in a period of tight liquidity, hence lower aggregate sales values for those properties which would have fetched a significantly higher price just a year earlier.

·   Rising interest burden: As the financial performance of large financial institutions including Merrill Lynch, Citigroup and JP Morgan is being impacted by huge sub-prime losses and the market is adjusting their valuation (demonstrated byin the rapid decline in their share price in last one month), these institutions have become more selective in lending funds to consumers and the corporate world. This, in our opinion, would negatively impact GGP’s ability to negotiate with large banks and credit institutions as lenders get more conservative and impose stringent lending conditions such as a low level of loan-to-value (LTV) ratio. We expect the effective interest rate of company’s debt to rise over the present levels as the company starts refinancing its debts due for repayment in next couple of years. With cash flow from operations expected to rise at a moderate level and interest rate soaring to extremely uncomfortable levels, GGP might need a refinance facility to refinance its interest liability. This could result in a very tight operating environment for the company especially in the absence of any near-to-medium-term favorable drivers in the US real estate sector. The company’s management has not exhibited, in our opinion, the ability to outperform in a tight operating environment. The requisite margin for error needed to see this company profitably though the next 8 quarters is just not there.


  • Low cap rates for recently acquired property: GGP purchased a significant part of its portfolio in 2006 and 2007 with a median cap rate of 2.7% and 3.8%, respectively, compared with a median cap rate of 8.2% for the portfolio purchased in the late 1990s and early 2000s. This suggests that the company has made expensive purchases in the recent years, which have impacted its median cap rate at an overall level. With adverse macro-economic conditions and commercial rentals likely to be negatively impacted, these properties seem to have not been appropriately valued in GGP’s financial statements. GGP has over 100 commercial real estate properties with negative equity (present value of future cash flows less mortgage). Of these around 70% were acquired in the past couple of years at the time when credit availability was relatively easy and property prices were at their peak, supporting and reinforcing our findings  that a large number of these properties are significantly overvalued.


·Stock trading at a 52-week low – Owing to an expected slowdown in the commercial real estate sector, coupled with a recent credit crunch crisis, GGP’s stock has witnessed a significant decline over the past six months. GGP’s stock price declined nearly 50% from its peak of $67.4 on March 23, 2007, to $33.6 as on January 17, 2008, after trading at a 52-week low price of $31.43 on January 16, 2008. Notably, the stock witnessed a significant 24.9% decline in past one month from its price of $44.45 as on December 14, 2007.

·Repercussions of US Subprime & loose lending market – As a result of the write-down from sub-prime mortgage related losses stemming from lax underwriting standards, financial companies in US are in distress. According to a Bloomberg survey of analysts, financial companies in the S&P 500 index are expected to report a 69% drop in earnings for 4Q2007, which could drag the earnings for the overall index by 10%. So far 4Q2007 results and the recent macro economic data point to a high probability of recession in US. In 4Q2007, Citigroup had written-down $18 bn relating to mortgage default and reported net loss of $9.83 bn, while. J.P. Morgan Chase recorded $1.3 billion write-down on subprime losses with a 34.3% decline in net profit.  Besides financial institutions, many retailers have downgraded their guidance for 4Q2007 results. Sears Holdings expects a 51% y-o-y decline in net income for 4Q2007 citing concerns over increased competition and the negative impact of unfavorable economic conditions, amid deteriorating residential market and credit market concerns. We believe that a decline in corporate and specifically retail sector profitability, as evident in the recent run-up of events coupled with decreasing consumer spending could result in the faster onset of recession in the US, which will translate into more aggressive downside risk to GGP’s stock price.

·Insider transaction activity draws our attention – Many of GGP’s top executives exercised their stock options over 2007 in anticipation of realizing huge premiums by selling their holdings in the open market at the then prevailing considerably higher prices. The company insiders have been net buyers of GGP stock worth $42.8 million, with purchases of $55.3 million at an average price of $57.95 and sales worth $12.4 million at an average selling price of $46.69. While the average option conversion price in 2007 was around $35.2, the average market price of GGP’s share over the period when these options were exercised was around $63.6, indicating the huge prospective premium that was attached for the company’s top management in exercising their options. However, the conditions reversed speedily and GGP’s share price took a sharp downturn during the later part of 2007, leaving most of the investors including the insiders in a tizzy. While a few of the insiders have shown tendency to make the most of the situation and disposed off their holdings in the recent months, the others are still holding to their stock as of now. Another interesting fact to note is that during 2006 and 2007, GGP’s CFO received an option award of 342,896 shares and 1,37,347 with conversion prices of $50.47 and $65.81, respectively, while GGP COO received an option award of 3,34,317 shares and 1,33,613 shares with conversion prices of $50.47 and $65.81. Both the CFO and COO had an unusual stock option award in 2006, independent of the rest of the management team. Also, while GGP COO sold stock worth $1.4 mn in December 2007, the CFO purchased stock worth $52 mn in 2007 including huge purchases from the open market.