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As we have discussed earlier, in the event of the US economy going into recession, the downside risk to GGP's share price from the current level of US$33.9 would be around 22%, indicating the weakening financial and operating condition for the company.
- 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. However, the recovery would be much slower than the growth assumed (in 2010-12) under the �base' scenario discussed above. We have hence estimated negative growth in rentals for 2008-2010, with near flat growth for 2011 and 2012. Thereafter, we expect conditions to start normalizing, and have hence built in long-term normalized growth in rentals.
- We also expect interest rates in the recession version 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 (see notes on refinancing towards the end).
- We have also expected lower occupancy rates in the �recession' version from the current levels, expecting lowering demand for shopping space in the wake of falling retail sales and consumer demand.
We have built the most �optimistic' case for GGP based on reasonable estimates of GDP growth, population growth and household income growth in the company's operating locations. We believe the following assumptions represent a best case scenario for GGP -
- Under the most �optimistic' scenario we expect GGP's asking rentals to witness a nominal 0.5%, 0.7% and 0.8% growth in 2008, 2009 and 2010, respectively, with occupancy level of 90.9%.
- However even under the most �optimistic' scenario we expect GGP's additional cost of financing to increase moderately to 6.02% as we believe that tight credit to persist owing to spill over effect of sub-prime concerns.
- Despite the fact that GGP's share price has declined 22% over last 9 trading sessions from $43.3 to $33.90 presently, and after considering the most optimistic assumptions, GGP is expected to yield only 3.1% upside from its current share price of 33.90 with an expected valuation of $8,524 mn translating into expected share price of $35.
Caveats and holes to be plugged in the aforementioned analysis.
Point to consider 1: Financing Issues
Due to the current tension in the credit markets, the days of the high and ultra high LTV loans are gone, at least for now. Word on the street is that some 60-65 LTV loans are not even going smoothly and some loans are not getting funded without additional equity, especially on the refinance. I welcome the input of any commercial mortgage broker/banker on this. About 40% of GGPs portfolio consists of properties that are 80 LTV or over, with a substantial amount of those in negative cash flow. This will effectively prohibit a straight refinance on them. The table below illustrates the financing requirement for GGP (based on overall LTV of 60%)
| Value of all GGP's properties base case (A) | $ 29,649,606,770 |
| Value of encumbered GGP's properties (B) | 21,483,005,632 |
| Maximum Loan to Value (60% of A) | 17,789,764,062 |
| Maximum Loan to Value (encumbered properties) (60% of B) | 12,889,803,379 |
| Maximum Loan to Value (unencumbered properties) | 4,899,960,683 |
| Loans o/s (property specific) | 19,541,366,000 |
| Refinanced through encumbered properties | 12,889,803,379 |
| Balance to be financed through | 6,651,562,621 |
| less: Financed through unencumbered properties | 4,899,960,683 |
| To be financed through Cash flows and sale of office properties | 1,751,601,938 |
| Percentage of total GGP properties | 5.9% |
According to our base case scenario, GGP’s properties are valued at approximately $29.7 bn which allows the Company to re-finance a maximum of approx $17.8 bn (assuming 60% loan to value). However GGP has O/S loan of $19.5 bn against $21 bn worth of encumbered properties. Appling a 60% LTV on these properties which comes around $12.9 bn, GGP will have to re-finance additional $6.6 bn through un-encumbered properties or through other internal sources. If the Company encumbers rest of its properties assuming LTV of 60% which comes to approximately $4.9 bn, the company still has to re-finance approximately $1.7 bn through sale of office properties and internal cash flows. We believe that GGP would be able to refinance the requirement based on the following observations -
- GGP has existing debt maturities in 2008 and 2009 worth $2.6 bn and $3.3 bn out of which GGP has already re-financed $359 million. GGP is also currently negotiating the terms of the agreements to refinance debt maturing in 2008. Under the terms of these new long term loans agreement, the company can borrow up to approximately 50%-60% of property value for financing purposes (which are valued at capitalization rates below 7.5%) with an effective interest rates of approximately 5.75%.
- The Company also intends to sell certain office assets upon expiration of tax-related restrictions in 2008, and is presently offering for sale a number of suburban office buildings.
- Further, the Master Planned Community land is substantially unencumbered. The value of GGP's investment Land and Land Held for Development and Sale as on December 31, 2007 stood at $3.3 billion.
Of concern is the selling price GGP will get for retail/office space in suburban areas where pricing is leading the way into soft territory. I will follow up on this with additional analysis next week.
- The full pdf summary version of this post with condensed summary info on ALL of GGP's properties is available for download now (see
GGP Valuation Summary - Release Candidate (719.48 kB 2008-01-09 22:19:32)). It has all of GGP's properties listed with cap rates and performances under the recession sensitivity analysis, as follows...
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