Tuesday, 08 January 2008 00:00

Generally Negative Growth in General Growth Properties - GGP Part II

This is the General Growth Properties summary valuation under a mild US recession scenario. A much more in depth analysis and presentation is on its way next week. Please see the original summary analysis for the non-recessionary outlook and if you are not versed in commercial real estate, see my quick and dirty CRE valuation primer. Remember, it is my opinion that many in this space are underestimating the potential downside to be had here. This summary analysis is based on the following assumptions:

  1. We expect recession to impact GGP's NOI primarily in 2008 and 2009 post which we expect the US economy to drift back to recovery though gradually. Thus negative growth in rentals is estimated in 2008 and 2009 and near flat growth for 2010 and 2011. Thereafter, we expect conditions to start normalizing, and have hence built in long-term normalized growth in rentals. This is a conservative showing, and my gut (empirically calculated, but investors gut feeling) says that we are in for a much harder landing than presented here. I don't have the resources to run full macro scenarios, thus I stay on the conservative side unless extremely obvious that I should do otherwise. If you have been a regular reader of my blog from the days of typepad.com, you will probably realize that my conservative estimates are the equivalent of the consensus "doomsday" scenario. I believe that I am more realistic, but then again I would, wouldn't I?

  2. We also expect interest rates in the recession scenario to be higher than in the base case as the company treads through highly difficult credit conditions in the next few years, particularly when that a large chunk of its debt is due for repayment/refinancing. I made it clear to the mod squad (my analytical team) that I wanted them to be conservative in their expectations. In my opinion, we are already several months into a recession, but we will not know for sure 'til the near future.

  3. We have also lowered the occupancy rates in the recession version expecting lowering demand for shopping space in the wake of falling retail sales and consumer demand
    Giving effect to the above assumptions, we expect GGP’s consolidated valuation to be around $6.6 bn on CFAT basis converting into a share price of $27. This is a 25% downside to the current share price of $36. Please note (again) that we have taken a realistic/conservative approach while assuming the duration and extent of the recessionary conditions. However, if the recession were to prolong beyond 2009 or the economy were to take longer to normalize, the impact on GGP’s valuation could be worse (probably another 5-7% downside to the valuation could be expected in case the recession were to continue into 2010 or beyond).

Due to the extent of the research performed and the quantity and quality of data gathered and analyzed, the time lapse from analysis inception to completion has allowed for GGP’s share price to register a fall of 11% over the last week indicating a portion of the expected downside since we started building our analysis could already have been registered. This could also mean that given the high prospects of recession setting in over the next few months, GGP valuation could be expected to worsen going forward now that market has strongly reacted to the company's performance.

The team is hard at work consolidating the Base assumption files and I expect the valuation under that case could be nearly $6 per share or 17% down from the current share price of $36. I will probably post the Base case output together with a comparison of all the three scenarios tomorrow. Till I post it, I urge my blog readers to download and read a sample of the supporting calculations for the valuation model that is yet to come (caution: this stuff is probably only for hard core real estate junkies or someone with a real interest in GGP). It is also the methodology that will be used in future commercial real estate analysis and represents an awful lot of work. Keep in mind that this is the driver for 260 individual custom property valuation models, an aggregate portfolio valuation model, and a corporate model for the GGP entity itself. I may have found a few more companies that are deserving of my attention. See icon GGP advanced mini-sample (877.07 kB).

If I get the chance, I will continue my Brokers, Banks and Bullsh1+ series with numbers, my opinions and findings on Bear Stearns some time after the market closes.

Scenario analysis Assumptions
Rental growth rates Interest rate Occupancy rate
2007 2008 2009 2010 2011 2012
Worst Case (Recession ) 6.3% 89.9%
- California 1.1% -1.5% -1.3% -1.1% 0.2% 0.6%
- Florida 1.3% -1.8% -1.5% -1.3% 0.3% 0.7%
-Texas 1.5% -2.1% -1.8% -1.5% 0.3% 0.8%
Overall GGP

PV (CFAT) PV (NOI) Share Price (CFAT) Share Price (NOI) NOI ($ bn) Cash Flow before tax($ bn)
$ bn $ bn 2008 2009 2008 2009
$6.59 $7.28 $27.04 $29.85 $1,483 $1,528 ($2,325) ($1,685)

Summary of GGP Valuation (Base case assuming recession)
NOI Basis
Consolidated valuation as per Portfolio Valuation sheet $28,886,725,819
less: Debt $24,073,812,000
Estimated value using PV of NOI basis $ 4,812,913,819
Add: PV of other income $ 2,462,669,720
GGP's estimated market cap (NOI basis) $ 7,275,583,539
No of shares 243,775,000
Estimated share price ( PV NOI basis) $ 29.8
Current share price $ 36.0
Upward (Downward) - NOI basis (17.07%)
Cash Flow After Tax basis
Estimated Value using Cash flow basis 4,129,853,902
Add: PV of other income 2,462,669,720
GGP's estimated market cap (CFAT basis) 6,592,523,622
No of shares 243,775,000
Estimated share price (PV CFAT basis) $ 27.0
Current share price $ 36.0
Upward (Downward) - CFAT basis (24.86%)

Last modified on Tuesday, 08 January 2008 00:00


  • Comment Link Reggie Middleton Wednesday, 09 January 2008 23:33 posted by Reggie Middleton

    You may always digress if you are going to call me brilliant ;D

  • Comment Link Mark Edmunds Wednesday, 09 January 2008 23:20 posted by Mark Edmunds

    This has nothing to do with GGP (apologies about the digression), but recent market developments are making you look quite brilliant (LEN, CFC, MBI, ABK, etc.).

    And you keep pumping this stuff out faster than I can keep up. Damn this is a good blog.

  • Comment Link Reggie Middleton Wednesday, 09 January 2008 22:36 posted by Reggie Middleton

    Hey, I love money and wine as much as the next man, but those damn rules...

    Read my Banks, Brokers and Bullsh1 series. It will clue you in to where I am headed with some of the banks. The markets are actually starting to catch up with me. Price movement is acually happening before I get to post findings to the board.

  • Comment Link M M Wednesday, 09 January 2008 22:20 posted by M M

    Will spread the word, however my sphere of influence in regards to investing (financial derivatives) is not big.

    As for the SEC, I was just trying to input some humor.

    I actually ran into your blog when researching data to short Mortgage Insurers. At the time, PMI, etc. were on my mind, but chose to play ABK/MBI. Has worked out quite well even though was late to the party from the $60 level, especially with BRK.A coming into the mix kinda out of the blue. When it got down to $15.80, I had to close those out today plus got scared by talks of them being bought by BRK.A or partnered? Strange to me, why he would do that? Get in, then buy them when I thought the reason he created was to avoid buying them? Still giddy/amazed it went down under $16 intraday. Good thing for limits.

    I have BSC in play already (glad you have it on your radar) and am swinging for the fences on this one even though it was slightly out of my "pull the trigger" criteria, but look forward to seeing your analysis of these guys. BSC keeps on raising the bar of amazement or lack of. Funny how Cayne is still Chairman and having the new guy say the "worst may be over". LOL. He must be puffing the la la with Cayne.

  • Comment Link Reggie Middleton Wednesday, 09 January 2008 19:51 posted by Reggie Middleton

    Unfortunately, thanks to the SEC, I cannot accept payments from the public or put together deals in the public domain The best way to help me out is to tell everybody you know how much you like the blog and spread the word. You can use the invite tools in the users menu (after you register) which makes it much easier.

    @ Giganto
    GGP may very well be akin to TOA. I am being conservative with my opinions. I will post some more opinion on GGP and Bear Stearns tonight and you will begin to see just how conservative I am being.

  • Comment Link sadasivam eniasivam Wednesday, 09 January 2008 18:40 posted by sadasivam eniasivam

    Hi Reggie,
    Very good analysis. Frankly some of it is over my head. I have a particular interest and want to know your position after reading your Bio. I am a Florida Realtor and CCIM candidate. I was acting as a financial intermediary for a PE firm (Infinite India) and an alternate opportunity fund RREEF for their RE interests in India as FDI route. I wonder whether you would have interest in investing in India or you know of PE funds that we can put the deal togather. I appreciate your input. In case you need to reach me, you can reach me at 954-341-9346. Let me hear from you. Thanks.
    Sivam Eniasivam

  • Comment Link Test Tuesday, 08 January 2008 22:54 posted by Test

    How come there is no TOA type CRE. TOA real esate company tanked to the nader.
    Your estimate of 25% downside is the most that CRE is going to experience. I doubt that.
    I think there are quite a few out there in REIT that are going to go belly up.
    What say ?

  • Comment Link M M Tuesday, 08 January 2008 22:35 posted by M M

    Found your blog about a month ago and check it daily as a resource/tool (along with two others). Simply put, awesome! Love the details and conservative assumptions. Anyways, where do I send the donations/bottle of..? Anybody that helps the cause gets paid. ;) ITM. Keep up the EXCELLENT work. Thanks.

  • Comment Link Reggie Middleton Tuesday, 08 January 2008 19:00 posted by Reggie Middleton

    I have no free time >:(
    Let's put it this way. If I did run a fund, I would not be able to discuss it on this public forum. I do have a financial laboratory where I can cook up all types of interesting concoctions. What you have seen on the site thus far is just a taste.

  • Comment Link shaun noll Tuesday, 08 January 2008 17:38 posted by shaun noll

    do you run a fund or something reggie? that is an amazing amount of work to do in your free time....


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