Tuesday, 06 May 2008 01:00

GGP can't afford its current dividend!

As a continuation of my analysis on GGP's recent Q1 results and my research on GGP's overall financial position and the retail CRE sector in general, I bring an explicit illustration depicting GGP's inability to support its current dividend payout from operating cash flows. This is quite significant, and I urge those who have an economic interest in this company to explore my findings.

Dividend financing chart

2Q-2008e 3Q-2008e 4Q-2008e 1Q-2009e 2Q-2009e 3Q-2009e 4Q-2009e
Cash from operating activities 1 76 96 (1) (16) 60 80
Cash from investing activities (395) (395) (395) (165) (165) (165) (165)
Cash from financing activities (excl dividends) 279 491 491 280 280 280 280
Net change in cash before dividends (116) 171 192 114 99 175 195
Dividends (162) (162) (162) (162) (162) (162) (162)
- Dividends financed out of operating activities 0% 47% 59% 0% 0% 37% 49%
- Dividends financed out of financing activities net of capex 0% 53% 41% 71% 71% 63% 51%
- Dividends financed out of previouscash balance 100% 0% 0% 29% 29% 0% 0%

According to our estimates, GGP‘s core operating income is insufficient in regards to meeting its dividends obligations (assuming constant dividend declaration at $0.50 per share) in the coming quarters through operating cash flows. The company would have to draw down its existing cash reserves or finance its dividends through additional re-financing (note that we have increased dividend by $10 mn per quarter to include the impact of additional shares issued by the company - without such an increase the dividend payout will drop by default due to the dilutive effect of management's financing efforts). Such actions are unsustainable, thus it is fair to say that the current dividend is at short term risk unless financed through means other than company operations, and is at long term peril regardless of the company's actions. The table above depicts the 2Q2008 in which GGP would have to finance all of its dividend payment through cash reserves (which stand at a healthy $256 mn at the end of 1Q2008 due to issuance of equity stock of $88 mn and an unsustainable increase in NOI partly due to higher lease termination fee). In 3Q2008 and 4Q2008, company's operating activities would be able to finance only 47% and 59% of its dividend with the balance coming from financing activities.

Sensitivity analysis

We have conducted a sensitivity analysis of GGP's expected cash balance at each period-end based on varying dividend per share amount and re-financing options available to the company. We have also done a separate similar analysis based on varying dividend per share amount and GGP's capex requirements (maintenance as well as development capex). Also for 2Q2008 we have reduced estimated re-financing from our previous estimate to the extent of the company's reported surplus cash in 1Q2008 versus our original estimates ($210 mn including $88 mn from equity issued by the company and over $100 mn from more-than-projected NOI in 1Q2008, see my previous post for the source of this unexpected income). In effect, we have maintained our total refinancing requirements over 1Q2008 through the projected period and have kept other assumptions of the model constant. GGP is, in essence, taking money out of one pocket to put in the other, and reporting an increase in income in the process. This is not how we see it.

Based on the sensitivity analysis, we estimate GGP to fall short of $22 mn in cash liquidity at the end of 2Q2008 if it were able to re-finance $1,146 mn during the quarter while keeping its dividend constant at $0.50 per share. GGP will have to either increase its re-financing requirement by additional $54 mn to $1200 mn or cut its dividend to $35 per share to overcome this cash crunch. Due to the nature of the typical income orientated REIT investor, such a dramatic cut in dividend will result in a drastic sell off and reduction in share price and value. Alternatively, GGP can also reduce its capex requirement by $45 mn in 2Q2008. Any reduction in capex either reduces the future value of existing properties or reduces the future cash streams of projects in the pipeline - both of which reduces the intrinsic value of the company. Since a cut in dividend in the near-term would hamper GGP's image in the current environment the company would most likely take steps to avert it, thus we expect GGP to further destroy corporate value in an effort to take the actions necessary to maintain its dividend "by any means necessary". Given the current real estate scenario, we believe that GGP would find it difficult to execute additional re-financings to fund its dividend payments, and if it should succeed in finding lenders bold (or silly) enough to mortgage dividend payments, investors should be aware GGP that would be simply borrowing off of its extant equity base to issue a dividend. Such dividends would not be the result of profits from the company, but the result of cannibalization of property equity and furthering of GGP's debt woes - which are already quite significant as it is. Needless to say, such an action is unsustainable.

Dividend sensitivity analysis - Dividend per share, re-financing and cash at the end of year

Green cell e quals Current model assumptions

Re-financing in 2Q2008
-22 1,000 1,050 1,100 1,146 1,200 1,250 1,300
Dividend
(2Q2008)
0.20 (88) (38) 12 58 112 162 212
0.35 (128) (78) (28) 18 72 122 172
0.50 (168) (118) (68) (22) 32 82 132
0.65 (208) (158) (108) (62) (8) 42 92
0.80 (248) (198) (148) (102) (48) 2 52
Re-financing in 3Q2008
-13 1,200 1,250 1,300 1,358 1,400 1,450 1,500
Dividend
(3Q2008)
0.20 (91) (41) 9 67 109 159 209
0.35 (131) (81) (31) 27 69 119 169
0.50 (171) (121) (71) (13) 29 79 129
0.65 (211) (161) (111) (53) (11) 39 89
0.80 (251) (201) (151) (93) (51) (1) 49
Re-financing in 4Q2008
17 1,200 1,250 1,300 1,358 1,400 1,450 1,500
Dividend
(4Q2008)
0.20 (61) (11) 39 97 139 189 239
0.35 (101) (51) (1) 57 99 149 199
0.50 (141) (91) (41) 17 59 109 159
0.65 (181) (131) (81) (23) 19 69 119
0.80 (221) (171) (121) (63) (21) 29 79
Re-financing in 2009
-51 5,300 5,400 5,500 5,661 5,700 5,800 5,900
Dividend
(2009)
0.80 (92) 8 108 269 308 408 508
1.40 (252) (152) (52) 109 148 248 348
2.00 (412) (312) (212) (51) (12) 88 188
2.60 (572) (472) (372) (211) (172) (72) 28
3.20 (732) (632) (532) (371) (332) (232) (132)

Dividend sensitivity analysis - Dividend per share, Capex and cash at the end of year

Capital expenditure (2Q2008)
-22 (250) (275) (300) (350) (395) (425) (450)
Dividend
(2Q2008)
0.20 204 179 154 104 59 29 4
0.35 164 139 114 64 19 (11) (36)
0.50 124 99 74 24 (21) (51) (76)
0.65 84 59 34 (16) (61) (91) (116)
0.80 44 19 (6) (56) (101) (131) (156)
Capital expenditure (3Q2008)
-13 (250) (275) (300) (350) (395) (425) (450)
Dividend
(3Q2008)
0.20 213 188 163 113 68 38 13
0.35 173 148 123 73 28 (2) (27)
0.50 133 108 83 33 (12) (42) (67)
0.65 93 68 43 (7) (52) (82) (107)
0.80 53 28 3 (47) (92) (122) (147)
Capital expenditure (4Q2008)
17 (250) (275) (300) (350) (395) (425) (450)
Dividend
(4Q2008)
0.20 242 217 192 142 97 67 42
0.35 202 177 152 102 57 27 2
0.50 162 137 112 62 17 (13) (38)
0.65 122 97 72 22 (23) (53) (78)
0.80 82 57 32 (18) (63) (93) (118)
Capital expenditure (2009)
-51 5,300 5,400 5,500 5,600 5,661 5,700 5,800
Dividend
(2009)
0.80 (92) 8 108 208 269 308 408
1.40 (252) (152) (52) 48 109 148 248
2.00 (412) (312) (212) (112) (51) (12) 88
2.60 (572) (472) (372) (272) (211) (172) (72)
3.20 (732) (632) (532) (432) (371) (332) (232)
Last modified on Tuesday, 06 May 2008 01:00

6 comments

  • Comment Link Reggie Middleton Wednesday, 14 May 2008 07:22 posted by Reggie Middleton

    GGP 10Q - 3-8-2008

    Something doesn't make sense. GGP report that rents increased from $545 mil to $618 mil, including the additional rents from the recently acquired "Homart I" properties. This is only a $73 mil increase. Elsewhere in the report GGP claims that "Homart I" is responsible for $98.5 mil of rental revenue. This means that the same batch of property lost about $25.5 mil of rental revenue.

    Rental revenue from the office buildings they sold could not have been more than $5 mil, so GGP's true year-over-year numbers for the same batch of properties is down $20 mil in rent.

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  • Comment Link Reggie Middleton Wednesday, 14 May 2008 07:22 posted by Reggie Middleton

    Reggie is correct. Padding your FFO with Lease Termination Income is a shady trick...I'm surprised more analyst didn't ding them for that after they released their numbers. I don't these the analysts covering GGP know anything about mall portfolios. That Lease Termination Income overstates FFO by about $15 million.

    Additionall, the $2.8 billion of debt they need to refi is going to reduce FFO by another $50-$60 million. Right now GGP pays about 4.7% interest on their total outstanding debt. This is definitely "interest only" for the most part and will be refinanced under amortizing structures at significantly higher rates.

    All told, GGP with about $60-$75 million behind the eight ball on near-term FFO. They'll never hit their 2008 estimates and will probably be struggling to break $0.50 through 2009.

    I refinance malls for a living. No one seems to understand how difficult this credit market really is. (and sales for discretionary retailers, like the ones that occupy malls, are dropping fast).

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  • Comment Link Reggie Middleton Wednesday, 07 May 2008 17:24 posted by Reggie Middleton

    Thanks. Needless to say, I am heavily short GGP, the investment, regional and commercial banks and the homebuilders. I say this as the necessary disclaimer in case there is someone, somewhere in the blogoshpere who couldn't pick that up in reading the blog. ;)

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  • Comment Link alan dutch Wednesday, 07 May 2008 16:58 posted by alan dutch

    like it...well, i'm still short, and i'll prob add to it this week. keep up the great work.

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  • Comment Link Reggie Middleton Tuesday, 06 May 2008 17:54 posted by Reggie Middleton

    Thanks. Compliments will get you everywhere. Notice how thier share price is rising along with the risk in their operations. They were better off when their stock was in the low 30s.

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  • Comment Link dave aiello Tuesday, 06 May 2008 16:57 posted by dave aiello

    nice work.

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