Thursday, 24 January 2008 00:00's answer to GGP's latest press release

In its press release on January 8, 2008, GGP released the following statement with respect to the financing of its debt liabilities due in 2008 and 2009 -

"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
2008 2009 2008 2009
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
LTV 50% 50% 50% 50%
Maximum re-fi available $2,433 $2,767 $2,294 $2,460
Debt due at
$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
New Developments $1,040 $466
Total Financing
$2,621 $3,344 $5,063 $5,251
Shortfall from
$188 $577 $2,769 $2,792 Even using the
extremely optimistic numbers of the press release, GGP falls short of the

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.

Last modified on Thursday, 24 January 2008 00:00


  • Comment Link Reggie Middleton Friday, 25 January 2008 07:16 posted by Reggie Middleton

    EMI (Equal Monthly Installment) on prior year refinancing: This represents our assumption of principal repayment on loans refinanced (and to be refinanced) by the company in 2007 and 2008 to meet its debt obligations.

    Capital improvements: Capex for 2008 is maintenance and redevelopment capex. Since we presently don’t have details for re-development activities for 2009 and beyond, we have assumed only maintenance capex for these years. We have assumed maintenance capex for each property after a block of 5 years based on 2%-5% of cost of each property.

    Following table gives our assumption capex for 2008-2012.

    The variability in 2008 and 2009 figures is primarily due to re-development activities in view of the following initiatives expected to be undertaken by the company in 2008 -

    · Expansion & Re-development Projects at Ala Mola centre for $175.1 mn in 1Q2008

    · Lifestyle addition and power center at Mall of Louisiana for $96.3 mn in Q12008

    · Re-development of the former Mervyn's space at The Parks at Arlington for $28.1 mn in Q22008

    · Addition of Whole Foods and other retail space as well as a parking structure at Ward Village Shops for $131.8 mn in Q42008.

    · American Girl and mall shop re-development at Water Tower Place for $35.3 mn in Q42008.

    If you go through the downloadable pdf, you will see where we thoroughly rated and valued each property in the GGP portfolio.

    NOI: Management and other fees, property management and other costs and general and administrative have not been subtracted to compute NOI.

    LTV assumption of 50%: We believe that GGP would be able to secure additional re-financing at approximately 50%-55% of property value for financing purposes. We have presented 50% LTV case based on assumption the refinancing would become more difficult as financial institutions and lenders become more selective and cautious. In addition, if banks were to perform proper due diligence, they should find GGP to be an above average risk. Even based on a 55% LTV assumption and postponement of redevelopment and new development plans, it appears the company may not meet its financing requirements in 2008 and may still need $639 mn additionally in 2009.

  • Comment Link Donald Ruffkin Thursday, 24 January 2008 22:59 posted by Donald Ruffkin

    Great post. I had some questions and comments.
    (1) Technicalities
    --EMI on prior year financing: Where did this come from exactly?
    --Capital improvements: Is this basically maintenance capex? If so, I was wondering where the variability b/w 2008 and 2009 came from. I did some work on just how much cost they throw in to simply maintain their facilities and got a capex figure around 1.1% of their total assets, which at the present time implies around $275M per year. This seems like in the ballpark of the average of your projections, but is there anything to this?
    --NOI: Just confirming on this -- NOI tees up with EBITDA for me when I subtract from NOI the following: property management / other expense, provision for doubtful expenses and G&A expenses. They incidentally also don't mention including these line items in the NOI calculation, though they do explicitly mention excluding G&A. Provision for doubtful expenses is conceivably non-cash (though going forward...), but is the same true for property management and other expenses? If property management expense is indeed a cost then I have full confidence in all figures given below.

    (2) Financing versus Core Operations
    The way I have been viewing GGP has been segmented into financial cash shortfall versus core operational shortfall. --The former is a function of debt coming due, the LTV the debt is refi'd at, property level NOI and the cap rate.
    --The latter is a function of NOI, cash costs not included in NOI, interest payments, taxes, maintenance capex, dividend payments. I leave off new development under the theory that if they really needed to, they would be willing to hold off on new development even if it held down their future NOI potential. Also, by leaving this off we can get a view of how much core cash generation potential the business can have right now, independent of spending for the future.

    (a) FINANCIAL SHORTFALL: I agree with the general logic of the financial cash shortfall -- but just as a clarification, are you fairly confident about that 50% LTV figure, versus something closer to 55%? In any case, when I assumed 0% and 1% NOI growth in 2008 and 2009 relative off of a base of $348M property-level NOI in 2007, and a 55% LTV I'm getting total excess cash needed of $841M.
    (b) CORE OPERATIONAL SHORTFALL: I derived the latter in 2 ways looking at the consolidated financials plus GGP's pro rata interest in the unconsolidated affiliates, driven off of EBITDA and NOI, and using both I'm getting a core operational cash outflow of around $306M and $410M, respectively, assuming cost of financing goes up 30 bps, occupancy drops to 90% and the rental rate drops 2% by 2009.

    In sum this would imply excess cash needs of around $1.6B in total for 2008 and 2009, without even considering new development. Also, if that cost of financing is up 60 bps, the other assumptions can be neutral or fairly optimistic and come to a similar conclusion.
    In this market environment, can they squeeze that much out of their real estate, or get it from the capital markets? I would find that doubtful, which leads me to the conclusion that they won't be able to fund their cash needs. Let me know what you think.

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