"The debt maturing in 2008 includes $1.816 billion of mortgage and other secured debt, $722 million of remaining bridge acquisition debt, and $83 million of notes. The Company estimates that property-level income, a measure used by lenders for financing purposes, will be approximately $365 million in the twelve months following the maturity date of the debt maturing in 2008. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $4.867 billion. Accordingly, the maturing 2008 mortgage debt of $1.816 billion represents approximately 37.3% of the financing value of the properties.
The debt maturing in 2009 includes $2.744 billion of mortgage and other secured debt and $600 million of notes. The Company estimates that property-level income will be approximately $415 million in the twelve months following the maturity date of the debt maturing in 2009. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $5.533 billion. Accordingly, the maturing 2009 mortgage debt of $2.744 billion represents approximately 49.6% of the financing value of the properties"
We analyzed GGP's financial position and its expected funds from operations (FFO) to check the company's ability to meet its debt obligations -
With GGP's optimistic assumptions of a cap rate of 7.5% and NOI of $365 mn and $415 mn for 2008 and 2009, respectively, (based on its historical growth rate of 5%) valuation for GGP's specific properties (on which debt is due for repayment in 2008 and 2009) comes to around $4.9 bn and $5.5 bn for 2008 and 2009, respectively. Based on LTV of 50% (which looks quite reasonable amid the current turbulence in the global credit markets) GGP should be able to raise $2.4 bn and $2.8 bn in 2008 and 2009, respectively. However, GGP's debt due for repayment in 2008 and 2009, respectively, is approximately $2.6 bn and $3.3 bn, translating into respective short-falls of about $188 mn and $577 mn (as shown below), even under the over-optimistic case presented by the company. Surprisingly, the company's financing requirement (as included in its press release) totally ignores the funding requirement for capital improvement and redevelopment programs required for sustained and long-term growth.
|$ million||GGP's Assumptions||Reggie's Assumptions|
|Property specific NOI||$365||$415||$244||$369|
|Cap Rate||7.50%||7.50%||7.50%||7.50%||Overly optimistic Cap Rate, but I'l give them this to prove a point|
|Value of Properties||$4,867||$5,533||$4,589||$4,919|
|Maximum re-fi available||$2,433||$2,767||$2,294||$2,460|
|Debt due at maturity||$2,621||$3,344||$2,621||$3,344|
|EMI on prior year financing||$861||$1,246|
|Capital Improvements||$542||$195||GGP's press release failed to allocate any funds for growth, development, and expansion|
|Total Financing Required||$2,621||$3,344||$5,063||$5,251|
|Shortfall from Re-financing||$188||$577||$2,769||$2,792||Even using the extremely optimistic numbers of the press release, GGP falls short of the mark!!!|
However, we believe that GGP's assumption of NOI growth of 5% for 2008 and 2009 is unrealistic in view of the softness in the U.S commercial real estate market, which has already started to experience the ripple impacts of sub-prime crisis. The (now) highly probable US recession, along with deteriorating macro-economic conditions, would make operating environment extremely difficult for commercial real estate companies like GGP.
Based on our research and detailed analysis of macro economic factors like retail space demand, household and population growth, consumer spending, etc we expect rentals to decline 1.0% and 0.9% in 2008 and 2009. If we assume a 1% and 0.9% decline in rentals for 2008 and 2009, and capitalization rate of 7.5% (same as that assumed by the company), GGP's valuation for these properties comes to approximately $4.5 bn and $4.9 bn in 2008 and 2009, respectively. This would enable GGP to avail itself of a re-financing facility of $2.3 bn and $2.5 bn (based on 50% LTV) against $2.6 bn and $3.3 bn due for maturity, translating into a shortfall of $0.3 bn and $0.8 bn for 2008 and 2009. This excludes the financing that GGP would require for capital improvement and new developments programs. GGP's total funding requirement, including re-financing, capital improvement and development plans would be approximately $5.0 bn and $5.2 bn for 2008 and 2009, respectively, which would require additional financing of $2.8 bn in 2008 and 2009.