Sunday, 15 June 2008 01:00

GGP and the type of investigative analysis you will not get from your brokerage house

This missive is more than probably any outside investor in GGP knows about GGP, plus some. The accuracy of the contents below is not guaranteed nor warranteed in any form or fashion. I try my best to be accurate and exact, but things do happen - thus all
contents in this post is based upon information and belief. Thus, I invite all to roll your sleeves up, and dig in to do some research for yourselves. This is the type of research that I expect to come from my local brokerage houses. It doesn't happen, thus I must do it myself. Please be aware that I have a bearish position in GGP stock. Read this complete missive, and it will be easy to understand why.

Table of Contents

  • Short
    summary of the 3 elements of this report
  • Background
    Information on the founding Bucksbaum Family
  • Background
    Description of General Growth Properties’ Business
  • Item
    1- Clear evidence that GGP is heading into a refinancing-induced liquidity
    crunch
  • Item
    2- One-time items are holding up deteriorating core operational
    performance
  • Item
    3- Evidence that GGP is potentially misrepresenting itself

 

 


Must read content
tie-ins

  • GGP
    analyses

Short summary of the 3 elements of this report

1.
There is very clear evidence that GGP is heading
into a refinancing-induced liquidity crunch.

2.
One-time items are holding up deteriorating core
operational performance.

3.
There is evidence that GGP is misrepresenting
itself and breaking securities laws.

Many themes currently
broadcast in the news directly apply to GGP – its situation is one of high
leverage in the face of a weakening consumer and an evaporating debt
market.It’s a family-run business that
tripled its size through a major acquisition when the debt markets were
healthy, and is now left scrambling.
There appears to be dissension between the founding father and his
now-CEO son over some of the tactics that they have resorted to recently, which
appear to be questionable.If the core
operations continue to deteriorate in the continued absence of a functional
debt market, the 2nd largest mall REIT in the US will simply run out
of cash and no amount of accounting or financial gimmickry will be able to hide
that fact.

Background Information on the founding Bucksbaum Family

The Bucksbaum family
founded and has run General Growth, in various legal forms, since 1964.Martin and Matthew Bucksbaum were the
original founders, forming the General Growth Properties REIT in 1964.In 1972, General Growth was listed on the
NYSE.In 1984, General Growth sold its 19
malls to another company and liquidated the REIT, but continued to manage
subsequently.A large acquisition in
1989 made General Growth the second largest mall manager in the US,
and in 1993, General Growth did an IPO to form GGP, the legal entity we see
today.In 1999, Matthew Bucksbaum
stepped down as CEO and John Bucksbaum (‘JB’), Matthew’s son, replaced
him.In November 2004 (mid-point of the
real estate and credit bubble), GGP completed the $14 billion Rouse
acquisition, which established GGP as the 2nd largest mall
REIT.In August 2007, MB stepped down as
Chairman of GGP, and was replaced by JB.

Background Description of General Growth Properties’ Business

General Growth
Properties is the 2nd largest mall REIT in the US.
It buys malls, financing the purchases with equity and a combination of
secured and unsecured debt.On May 14th
2008, GGP had $27B of net debt after adjusting for pro rata joint venture debt
and $11.3B of equity, implying a total debt to capitalization of 70.6%.Along most metrics, GGP is the most highly
levered publicly traded mall REIT. Malls are typically put in 3 categories –
Tier 1, Tier 2 and Tier 3 – based on the average sales per square footage of
the mall.As of early 2006, GGP
controlled approximately 18.3% of the regional mall market, with 5% of the Tier
1 market, 6.8% of the Tier 2 market, and 6.5% in sub-Tier 2 properties.

Unlike most of the
major mall REITs, 70% of GGP’s debt is in the form of traditional secured
mortgage debt.Most of the secured debt
comes from commercial banks, who extend commercial loans and then feed those
loans through into the CMBS market.Life
insurance companies also have been known to participate in mortgage financing,
but have traditionally been a small player due to the high amount of
administration required, cumbersome capital allocation process, and small
financing capacity.GGP’s average
interest rate is currently 5.46%, even though its senior debt ratings from
Moody’s and S&P are BB- and Ba2 – below investment grade.

GGP leases out space to
retailers, who primarily pay GGP in the form of base minimum rent.The historical relationship between tenant
sales and occupancy costs charged by GGP is shown below.

     

Q1 08

2007

2006

2005

2004

2003

Trailing 12 month tenant sales

442.0

402.0

443.0

428.0

402.0

337.0

Occupancy Cost % of sales

12.8%

12.5%

12.6%

12.1%

12.5%

11.4%

image001.gif

There is some
maintenance cost associated with existing mall properties.Based on an analysis of GGP and its primary
mall competitors, it appears this maintenance cost is approximately $1.9 per
square foot of ‘GLA’ (gross leasable area). While tenant contracts are
typically long term (7 to 10 years), contracts can be broken at the cost of a
lease termination fee, which tends to be around 2 years worth of rental income
up front.For accounting purposes, this
income is treated as revenue.Due to the
lack of cost associated with such revenue, it is pure profit when generated,
though non-recurring.

The trend towards rise in occupancy cost as % of sales is
expected to strengthen off declining retail sales and consumer expenditure. The
macro-economic factors clearly stand to point out that the situation is going
to worsen from the present levels. Consumer credit and retail sales have
softened due to decline in consumer spending.
As US economy continues to slowdown, many retailers are expected to
revisit their growth plans and curtail some of their existing operations
forcing further lease terminations. Also as retailer’s occupancy costs increase
steadily as % of tenant sales, rentals could face downward pressure. GGP has
witnessed higher lease terminations in the last quarter as manifested by
increase in non-recurring termination fee income to $21.0 mn in 1Q2008 from
$3.7 mn in 1Q2007, resulting in one- time non-recurring revenue for the company
in 1Q2008 at the expense of future core operating earnings. As a result the
company’s average occupancy level has declined to 92.7% in 1Q2008 from 92.9% in
1Q2007. GGP’s reported revenues from consolidated property increased 18.3% to
$798.3 bn in 1Q2008. However revenues excluding Homart acquisition and lease
termination fee increased by a marginal 0.3% to $682 mn. The rentals have
already started to witness a sign of slowdown and an increase in lease
terminations could imply lower rentals for the company going forward for the
same property under a renewed lease agreement.

{mospagebreak}

Item 1-There is very clear evidence that GGP is heading into a
refinancing-induced liquidity crunch

Summary

At the end of Q1 2008, GGP had $2.6B and $3.3B of debt
coming due in 2008 and 2009, respectively.
The refinancing “progress” that it stated it had made in Q1 was almost
entirely short term high rate debt coming due in November 2008, though they did
not state as much.They also did not
state that despite raising over $880M of equity capital in Q1 2008, their total
debt maturities in 2008 and 2009 have actually gone up.

GGP has paid off its $492M revolver due in 2011 while it
has $350M due in July 2008 which was still outstanding at the end of Q1 2008 – this is highly
suspect.
An unsecured lender
reduced the principal owed by GGP by $172M, an action which is typically only
taken in bankruptcy – also highly suspect.
Finally, the magnitude of guarantees has risen materially over the past
quarter, indicative of rising lender concerns.

The primary mechanism through which they have historically
financed their operation, the CMBS market, is almost entirely shut down.Some of the biggest participants in the CMBS
market have announced they are scaling
away from the CMBS market
, which does not bode well for their ability to
fund themselves through the CMBS market in the future.Prudential, Wells Fargo, Morgan Stanley
andCapmark Financial Group are examples
of large institutions that are exiting or reducing their exposure to the CMBS
market.

Life insurance companies, which GGP has mentioned recently
as a potential source of replacement capital, have been called a “cumbersome”
and highly difficult source of capital by major competitors.They are also the same companies that are now
scaling away from the CMBS market, and are in the process of announcing large write-offs
and capital raises
of their own.

GGP has turned to up front lease termination income as a
source of capital it seems, based on the highly abnormal rise in lease
termination income the past few quarters.
GGP is also now turning to loans from its JV subsidiaries.GGP has repeatedly stressed that it will not
do a “fire sale” of assets, while healthy companies would never state as much.

 

image002.jpg

Although GGP had
closed its CMBS operations earlier, it is now seeking to explore CMBS deals (in
addition to bank financing) which it believes would re-finance its existing
debt maturities for the remainder of 2008 and nearly 30% of debt maturities of
2009. Although CMBS market is facing drying liquidity and being scaled away by
other market participants in the light of high uncertainty in the current
credit environment, GGP plans to raise between $1.5 bn and $3.0 bn through CMBS
bonds.So far in 2008 (5 months of 2008),
the entire CMBS market has witnessed only $10.9 bn of activity compared to CMBS
issuance of $230 bn in 2007. To put this plainly, GGP is telling us that it plans
on representing roughly 7% to 35% of the entire CMBS market in the refinancing
of its debt. Looking at the CMBS market activity to date, GGP’s claim to raise between $1.5 bn-$3 bn remains highly suspect.
In addition to this, GGP is also negotiating a $1.75 bn term loan. With total
maturities of $2.8 bn and $3.3 bn in 2008 and 2009, respectively, GGP will face
some testing times ahead to re-finance its mammoth debt.

Further to the detriment
of this companies financial position, GGP is also planning to raise funds by
encumbering its existing unencumbered properties at a point of time when financial
institutions have strengthened their standards for having lower LTVs on
properties. Also the company is considering reducing its stake in joint
ventures and using the proceeds to re-pay debt. Such actions under the current
deteriorating capital market conditions might result in under realization of its
investments, or to put it plainly the sacrificing of shareholder value by
selling into an unfavorable market.

 

Wait and see
approach of big lenders, probably Citigroup, only extending January 2008
maturities out to November 2008.

In a March 2008 press
release
, GGP stated that it had raised $1.3B, generating $658M of excess
proceeds for GGP.However looking in
detail at GGP’s loan activities, it appears that the most important debt
maturity in Q1 2008, $650M of debt on the Fashion Show mall, was merely
extended 10 months to November 2008, and at a rate 180 basis points higher than
its old interest rate no less.This is
hardly a vote of confidence, and it does not remove the near term credit risk
associated with such debt.

Similarly, $250M of new debt was raised on GGP’s recent
$290M initial payment on the Palazzo.
Like the $650M of Fashion Show debt, this $250M is high cost debt which
matures in November 2008.Thus, in
November 2008 alone, GGP now has $900M of debt which is coming due.This is probably the lender taking a wait and
see approach – if conditions improve over the next few months, and the markets
clear up, then maybe the lender will put his feet back in the water.If not, the lender will call his loans. If
one has followed my comments on the banking sector via Reggie
Middleton on the Asset Securitization Crisis
, it is plain to see that the
banks are fearing insolvency and would rather not take in additional real
assets if they have to, but have few choices as customers are having severe
solvency problems of their own, ala GGP.

 

Amount

Maturity

Interest Rate

Fixed or Variable?

Debt

Q4 07

Q1 08

Q4 07

Q1 08

Q4 07

Q1 08

Q4 07

Q1 08

Fashion Show

359.0

650

1/1/2008

11/28/2008

3.88%

5.66%

Fixed

Variable

Palazzo

n/a

250

n/a

11/28/2008

n/a

5.80%

Fixed

Variable

This
lists in detail all recent and upcoming debt maturities on consolidated and
unconsolidated properties.It also lists
other notable debt.It lends further
credence to the view that lenders are taking a wait and see approach.

image003.jpg

Only 2
consolidated malls, Provo Mall and Spokane Valley Mall, were successfully
refinanced with more than their prior debt balance.One unconsolidated mall, Altamonte, was also
successful in this regard.However these
malls are very small relative to total debt coming due, and negligibly small
relative to the Palazzo and Fashion Show data points above.

 

Wait and see
approach of the senior bridge facility lender seems more like a desperation
move on a failing investment than anything else
.

GGP had a serious problem with their Senior Bridge
Facility.In Q1 2008, after an $882M
equity offering and presumably a concerted refinancing effort, GGP still had
$522M due on the Senior Bridge Facility alone, coming due in July 2008. (Click to enlarge)

image004.jpg According to GGP’s
Q1 2008 note on their Senior Bridge Facility
, GGP was able to amend the
terms on the bridge facility to reduce the principal from $522M to $350M,
"substitute previously unsecured properties for the pledge within the
collateral pool", and acquire the right to extend the maturity date for
another 7 months, to January 31 2009. Why is this lender simply accepting a
materially worse loan agreement at a time when GGP is obviously in a financing
bind?

Whatever the case may be, this activity appears very
peculiar, and is very much out of the ordinary – what lender reduces the
principal on a very large loan? Typically,
principal is lowered in distressed/workout/bankruptcy situations in which the
lender is attempting to salvage what could be partial or total loss, not while
the company is still very much alive, trading at a relatively high multiple off
of its normalized free cash flow.
Needless to say, reducing principal is something we see only at
companies with very weak balance sheets, and supports the notion that GGP’s
balance sheet is in dire straits.

{mospagebreak}

What we do know is that Citigroup appears to be entangled
with GGP on multiple levels already – they loaned the Bucksbaum family $88M to
buy stock in the recent equity offering, then removed the third party pledge on
the Bucksbaums' shares as collateral.
Whatever is prompting Citigroup to accept a weaker position there could
be prompting Citigroup to accept a weaker position here – lowering the
principal amount on a bridge facility by $172M, AND providing a debt extension
of 7 months.My belief is Citigroup has
a lot to lose, economically and reputationally, if GGP were to fall into
bankruptcy.Citi was 1 of 2 companies who
bought into the $1.5B convertible debt offering, and is probably earning large
fees off of banking relationships and fees associated with GGP’s debt
issuances.Citi may own a substantial
portion of GGP’s secured loan portfolio, but this information is not readily
available.Citigroup clearly would lose
economically, and get bad press for being associated with another failed
institution.

On
November 9, 2004, MB Capital Partners III entered into a loan agreement with
Citigroup Global Markets to provide credit facility of up to $500 mn. Although
initially the loan agreement was to finance the exercise of warrants for
financing the acquisition of The Rouse Company, it was subsequently amended to
finance purchase of shares by MB Capital. On October 31, 2007, Citigroup
extended the loan to MB Capital at a very nominal rate of interest of LIBOR
plus 50 basis points suggesting the possibility that Citigroup might be helping
MB Capital finance purchase of GGP’s shares. In addition to abnormally low rate
of interest being charged for the transaction, the loan agreement was amended
subsequently terminating third party pledge of shares of common stock held by
John Bucksbaum and Matthew Bucksbaum further raising concerns about the entire
financing deal between Citigroup and MB Capital.

 

Another peculiarity is the lack of mention of this very
important detail.GGP had $522M coming
due in a mere 4 months, and was able to reduce that principal payment by $172M,
but gave no mention to this fact in the conference call or press release.And no rationale for this was stated in the
10Q.This is a very material lack of
disclosure which GGP needs to clear up.

 

Apparently, though
GGP has not stated as much, their revolver got effectively pulled.

GGP had $429.2M drawn on its revolver as of Q4 2007.Even though the revolver expires in February
2011, GGP paid it down to $0 this Q for an unannounced reason (look to the
bottom of this
table
for data on the revolver).

image005.jpg

Given
that the interest rate was a fairly reasonable 6.6%, the only logical rationale
is that GGP had to – that it had effectively gotten pulled.Again, this is not a vote of confidence, and
further constrains GGP’s already strained balance sheet.

This further complicates the issue regarding the Senior
Bridge Facility.Why would GGP pay down
the revolver by $429M and leave the $522M Senior Bridge Facility untouched,
when the revolver matures in 2011 and the Senior Bridge Facility matures in
July 2008?There are clear red flags
here which have not been explained, but have been given zero disclosure.

 

GGP in its last
press release on March 21, 2008 related to financing activity had promised investors
to provide an update of its major financing transactions as and when they occur.
However, the company has not come out with any press release since then
suggesting it has not negotiated any financing deals. As per the company’s last
press release, it had raised a debt of $1.3 bn towards properties which had
existing debt of $0.6 bn thus generating excess proceeds of $0.7 bn to purchase
The Shoppes at Palazzo, to make contributions to JV’s, to repay existing debt
and for general operating expense leaving the company to raise additional
financing of $2.2 bn and $3.3 bn in 2008 and 2009, respectively.

 

It appears that
someone got nervous enough to force GGP to post a lot of additional guarantees

 

image006.jpg

This
graph
unambiguously implies that something happened in Q1 2008 which
prompted counterparties with GGP to force additional collateral and guarantees to
be posted.Exactly what has not been
stated.

Below is a table which provides historical perspective:

   

Q1
2008

2007

2006

2005

2004

2003

2002

LOC's
+ Surety Bonds

496.6

235.0

220.0

210.0

194.0

11.8

12.1

-
Appellate Bond

(134.1)

0.0

0.0

0.0

0.0

0.0

0.0

=
Non-Appellate LOC+SB's

362.5

235.0

220.0

210.0

194.0

11.8

12.1

GGP mentioned having to post an appellate bond of $134M in
Q1 2008, which is basically the money they had to set aside because they lost a
lawsuit which requires them to pay $90M.
As a side note, they had to put up cash of $67M as collateral. Even when
adjusting for the appellate bond though, we clearly see additional forces are
at work which have prompted a 54% increase net of the appellate bond.

Once again, little disclosure.Reading between the lines though, it is clear
that counterparties are tightening standards with GGP.

{mospagebreak}

For all that GGP has
said it has done, there is MORE debt due in 2008 this quarter than there was
last quarter.

At the end of Q4 2007, GGP had $2.6B of debt maturing in
2008.At the end of Q1 2008, GGP had
$2.8B due. Debt due in 2009 was $3.3B at the end of Q4 2007 and Q1 2008.Even though GGP spoke highly of the progress
it has made on the refinancing front, and even though it raised $821 in equity
capital in the Q, there was literally negative progress during Q1 2008.

This table allows us to see the evolution of debt due in
2007, 2008 and 2009.It also allows us
to compare how the debt due in the following 2 years considerably more
difficult now than it was a year ago:

 

Q1
08

Q4
07

Q3
07

Q2
07

Q1
07

Q4
06

Q3
06

Due 2007

0

0

963

1105

1,174

1,208

1,250

Due 2008

2,767

2,622

2816

2,067

2,100

2,117

2,130

Due 2009

3,335

3,344

3,540

3,403

3,514

3,525

3,424

 

This
link
extends these figures backwards to Q3 2005, and further substantiates
these views (numbers above have been adjusted as reported by GGP, the numbers
below are from a 3rd party and are unsubstantiated – but then again
so are the reported numbers!).

 

image007.jpg

GGP has since then stated that it raised $325M in mortgage
refinancing.This leaves a lot of short
term debt still on the table, primarily due to the large amount of debt which
was extended to November 2008.

GGP was funneled
$64M in “loans” from unconsolidated affiliates this Q, and now has $164M of
“retained debt” which is in excess of GGP’s pro rata share, but doesn’t show up
on GGP’s balance sheet
.

GGP is liable for $163M of debt in its unconsolidated
affiliates in excess of GGP’s pro rata share through the normal course of
business. This debt is labeled "Retained Debt" and is indeed real
debt for GGP, but is instead recorded on GGP's balance sheet as a reduction in
the net carrying value of the unconsolidated affiliates. Thus, the balance
sheet under-represents the debt that GGP has.

As stated in GGP’s Q1 2008 10Q:

‘In certain
circumstances, we have debt obligations in excess of our pro rata share of the
debt of our Unconsolidated Real Estate Affiliates (“Retained Debt”). This
Retained Debt represents distributed debt proceeds of the Unconsolidated Real
Estate Affiliates in excess of our pro rata share of the non-recourse mortgage
indebtedness of such Unconsolidated Real Estate Affiliates. The proceeds of the
Retained Debt which are distributed to us are included as a reduction in our
investment in Unconsolidated Real Estate Affiliates. In the event that the
Unconsolidated Real Estate Affiliates do not generate sufficient cash flow to
pay debt service, by agreement with our partners, our distributions may be
reduced or we may be required to contribute funds in an amount equal to the
debt service on Retained Debt. Such Retained Debt totaled $162.7 million
as of March 31, 2008 and $163.3 million as of December 31, 2007, and
has been reflected as a reduction in our investment in Unconsolidated Real
Estate Affiliates.’

Somehow, Retained Debt remained flat in Q1 2008 while GGP
received $64.4M in loans from its subsidiaries in this Q alone.Whatever the case may be, GGP is receiving
liquidity from its own subsidiaries, which is not something a healthy company
would do.

 

Cutting its
development expenditures but already very fully exposed to construction loans
risk.

GGP cut its future development expenditures by $600M – a
very considerable sum of money – and will be spending a revised $1.5B through
2012.GGP is now trying to conserve as
much cash as it can.

As a result of likely difficulties
in meeting its re-financing needs, we expect GGP to slowdown on its capital
expenditure towards maintenance and development activities which could result
in loss of future expected revenue stream. This is serious in view of the fact
that future revenue stream is being sacrificed due to current liquidity problem
the company is facing. And this is only going to prolong the recovery process
for the company, if one is to sound a little optimistic under the current
scenario.

GGP has $1.35B in loans for numerous projects in
development right now. Bernie Freibaum says “we
currently anticipate that during the fourth quarter of this year, and
continuing into the beginning of 2009, we will obtain construction financing.”
However it has been made abundantly clear in
the press and by the FDIC that construction loans will come under heavy
pressure as commercial banks scale away from this lending. If that doesn’t
convince you, then just remember that Reggie Middleton sounded the alarm on
construction lending. Here's a few snippets from the Asset Securitization Series on my blog .

 


image006.png

Large exposure in Construction and Development (C&D) loans: Of
its total loans of $386 bn, Wells Fargo (WFC) had $19 bn exposure in
construction and development loans in 1Q2008. WFC’s exposure was the
fourth largest among all US banks in absolute amount after Bank of
America, Wachovia and BB&T, comprising nearly 36% of its
shareholder’s equity (this is unadjusted for bullsh1t).
In
1Q2008, C&D loans witnessed the highest stress with NPA to loan
ratio of 2.32%, followed by real estate 1-4 family first mortgage with
NPAs to loan ratio of 1.91%. C&D NPAs (Non-performing or dead
assets) witnessed a 114% increase over 1Q2007 and 38% increase over
4Q2007. In Wells Fargo loan portfolio, as of December 31, 2007
California represented nearly 32% of total C&D loans, Florida
represents 5%. These areas are experiencing extreme stress due to thier
high (the highest in the country) residential delinquency, foreclosure
and REO rates.

We can compare WFC to Popular Bank:

  Wells Fargo Popular Inc  
  WFC US Equity BPOP US Equity  
       
(3Q-2007)      
Home Equity Loans 83,860    
Construction and devlopment loans 17,228 1,996 These high risk loans are present, though
Commercial Real Estate Loans 29,310 5,939 The same for these
Total Loans ($ mn) 393,632 33,321  
       
% of Total Loans      
Home Equity Loans 21%    
Construction and devlopment loans 4% 6% Small capital base, less cushion for loss
Commercial Real Estate Loans 7% 18% This concentration could be problem
       
% of Shareholders' equity (based on 3Q Loans)    
Home Equity Loans 178% 49% This is potentially a big problem
Construction and devlopment loans 36% 56% This is potentially a big problem
Commercial Real Estate Loans 62% 166% This is potential problem, high concentration
Total Loans 826% 930% Popular has nearly 10x its equity in loans, 270% of which is extremely
risky in one of the worst down-markets this country has ever seen.
       
Core Capital ratio / Tier 1 risk-based capital 7.6 10.1 This ration is not that bad
Total risk-based capital ratio 10.7 11.4 Neither is this, could be worse
Leverage ratio 6.8 7.3  
NPA -to- Total Loan 1.01% 3.04% This is very bad!
NPA / Shareholder's equity 8.1% 23.8% This is even worse! Nearly a quarter of shareholder equity is dead
weight and worth zilch! Adjust for tangible equity and this number goes
higher.
       
Net Chare-off's / Loans 0.93% 1.51% This is pretty high for all loans!
Net Charge offs / Shareholder's Equity 7.43% 11.81% Shareholders should revolt!
       
Provision for loans to Total Loans 1.41% 1.87%  
Reerve for loans to Total Loans 1.39% 1.96%  
       
Cushion for losses 0.38% -1.08% Take note, there is a negative cushion for losses here. This bank will probably announce the need for capital very soon!

{mospagebreak}

This is the nitty gritty on Sun Trust Bank:

Increasing NPAs and charge-offs are on a very strong uptrend in
just the one past year, one that cannot and should not be ignored:

STI's nonperforming assets (NPAs)
as a percent of loans have been increasing consistently over the last
few quarters, having gone up to 1.88% in 1Q08 from 0.64% in 1Q07 - considerable 294% increase.

image007.png

Non-performing loans in real estate construction category have
recorded the most significant upward movement from 0.39% of total real
estate construction loans in 1Q07 to 4.01% in 1Q08 - a NIGH UNBELIEVEABLE 1,028% increase!

Basically, every regional lender with significant exposre to C&D thoroughly regrets it. Banks such as Corus look even worse. This segment went into OVERKILL mode to communicate the point that the aforementioned statement rings false. Let's replay it for the sake of effect: GGP has $1.35B in loans for numerous projects in
development right now. Bernie Freibaum says “we
currently anticipate that during the fourth quarter of this year, and
continuing into the beginning of 2009, we will obtain construction financing.”

Exactly who will they be getting these construction loans from????!!!

The head of the OCC and the FDIC have both basically said
there will be rising failures in the industry. Says Dugan, the head of
the OCC: "There will be more frequent interaction between supervisors and banks with concentrations in CRE loans that are declining
in quality," he said. "There will be more criticized assets;
increases to loan loss reserves; and more problem banks.
And yes, there will be an increase in bank failures (link).”He has also said
that US
bank failures could rise above “historical norms” due to a weakening economy
and poorly underwritten loans.Sheila
Bair, the Chairwomen of the FDIC, says these construction and development
(‘C&D’) loans are “one of the chief risks to the banking industry” (link).Commercial real estate (‘CRE’) loans have
risen rapidly as a percentage of bank Tier 1 capital, especially for mid-sized
banks.Dugan himself states some of the more
startling loan exposure statistics –

·
Over 33% of community banks have CRE
concentrations exceeding 300%+ of capital.

·
More than 60% of Florida banks have CRE exposure exceeding
300% of capital.

·
50% of Florida
banks have C&D loans alone which are over 100% of their capital.

Even David Simon, CEO of Simon Property Group, has said “there are a
lot of broken projects out there,” and that “the floodgates … are just going to
begin to open… we’re going to end up dealing with the construction
lender.”

According to Taubman Centers, these commercial banks have
been the primary source of funding for mall REIT’s.Taubman is glad that they don’t have to tap
the market at this time because it is almost completely frozen.

According to the FDIC, the number of insured institutions where
construction loans exceed total capital has more than doubled from 1,179 in 1Q
03 to 2,368 in 4Q 07.
This indicates that financial institutions have
relied on external finance to achieve the level of growth in lending, which
multiplied the concerns at the time of the crisis.

image011.gif

 

 

Source: FDIC

Increased loan charge-off and
rising NPAs of commercial losses is indicating at increasing squeezing
liquidity conditions in the credit market. The problem appears to only aggravate
from the present level given that even consumer and construction loans, once
considered to be untouchable by subprime and financial crisis, have been
confirmed to come under the scanner of current financial market turmoil. Many
commercial banks, which have not witnessed increases in their net interest
margin over the last few months of declining Fed interest rate, could face
testing times if Fed decides to raise interest rate to combat inflation.
Insolvency could become a real scenario for banks facing declining asset value and
rising charge-offs on their loans.

Bernanke comes to the rescue that doesn't, and it bodes ill for C&D banks, and even worse for GGP!

Federal Reserve chairman Ben Bernanke has spearheaded the most
aggressive rate cutting and monetary policy action in the history of
this country. He has reduced the effective federal funds rate by nearly
50% in just 5 calendar quarters, from an already relatively low 5.3% to
2.6%.

History's most aggressive rate cutting does nothing to help sick
banks. As a matter of fact, some of the banks got sicker after the rate
cuts.
Click any graph to enlarge to a full page, print quality presentation.

image192.png

The primary reason why the Fed's lowering of the interest rates is not
helping the banks is because monetary stimulus via discount windows and
low interest rates can solve liquidity issues, which the banks have -
but the banks liquidity issues stem from INSOLVENCY,
and illiquidity. Thus, all the Fed is doing is taking a pricey, risky
(inflation and weakening currency that pisses off our trading partners)
and volatile band aid and applying it to deep and gushing wound. Those
band aids with the pretty colors do indeed tend to make Mama's baby's
little boo-boo feel better, but from a scientific perspective do very
little in regards to addressing deep puncture wounds. Hopefully, the message has been conveyed that there are no intelligent bankers currently giving C&D loans at a level that will satisfy GGP's needs. If banks are insolvent, and GGP is overleveraged and choking on debt coming due, who will come to the aid of GGP?!

{mospagebreak}

Generating all the
cash it can from lease termination income.

Lease termination has been accelerating rapidly the past 3
quarters in a row.This
table details the evolution of lease termination income.Note that back in 2006 there was 1 quarter
which matched the current high level of LTI.
Back then, GGP was proud that they were boosting income and churning the
portfolio.Now, we have seen 3
consecutive quarters of increasing LTI, with no commentary until Q1 2008.

lti.jpg

In Q1 2008, LTI was $21M, up 462%.In Q4 2007 it was $17.2M, up 360%.In Q3 2007 it was $10.9M, up 265%.All figures are healthily larger than the
comparable fees at TCO and at SPG.
Moreover, fees went down for TCO and SPG in Q1 2008 while they went
dramatically up for GGP.If GGP did
indeed have a liquidity crunch on its mind, it would make sense for GGP to push
as hard as it could on lease termination income, because these fees are large
up-front payments that typically represent 2 years worth of rent.

While lease termination income
could contribute to ease liquidity problems for GGP in the short-term, it would
also mean lower recurring rental income in the future. Further, new lease
arrangements, which are most likely to be entered at lower rentals amid
declining consumer spending and lower retail sales, would only lead to decelerating
rental income growth which is its core income and primary value driver (read lower equity valuations). Put simply, GGP is robbing Paul to pay Peter.

Peculiar repetition
from the CFO about GGP’s “not doing a fire sale.”

Bernie Freibaum has now stated 3 times that GGP will not do
the equivalent of a fire sale.In the Q1
2008 conference call he said:
“There is no fire sale being conducted,
there is no need to do a fire sale.”

In a recent interview in the Wall Street Journal, he said "there are no distress sales going on”
when referencing a potential de-leveraging deal.However, why would GGP specifically state
that it is not doing a fire sale if it truly had no fears about a fire sale?Here are my team's analyses of GGP in an asset sale scenario and foreclosure scenario:

This talk of fire sales and distress sales follows on the
heels of a press release put out by GGP on Saturday January 19th
2008 at 9:19pm titled “General Growth Responds to Recent Statements in the
Press and Blogs”, in which GGP states: “The
Company is absolutely not in any danger of having to contemplate a bankruptcy
filing, and the Company unequivocally has no intention of doing so.”
A company which is in a healthy financial
condition would not say something like this.

The press mentioned in the late night weekend release referred to the
journalist Hank Greenberg and the blog reference was aimed at the most
handsome, the most knowledgeable, yours truly:

GGP’s specific use of the phrase ‘fire sale’ is
interesting.On April 7th
2008, Centro Property Group was mentioned a similar phrase in a Wall Street
Journal article:“At least
five suitors have submitted preliminary bids to purchase the entirety of Centro
Properties Group, but the cash-strapped retail-property concern isn't resigned
to selling itself at a fire-sale
price, according to people familiar with the situation.”
This does not put GGP in good company.

The CMBS market,
GGP’s primary source of capital, has completely shut down.

Much has been written about the complete shut-down of the
CMBS market.This
provides a summary of some of the many market participants that have reduced
their CMBS exposure (including companies that have been featured in here, particularly Wells Fargo and the Street's Riskiest Bank - both of which I stated have outsized CRE exposure).Prudential has
stated that they have left the conduit-related CMBS business. Wells Fargo
suspended originating commercial real estate loans for securitization until the
market improves. Morgan Stanley has been actively reducing its CMBS and
commercial real estate exposure.As this WSJ article
notes, the inability of commercial banks to sell into the CMBS market at a
reasonable price has forced the banks to simply hold these loans on their
books.

Problems in the CMBS market have been
deeply aggravated over the past 4-5 months. Although the company has announced
its plan to fund its debt refinancing needs from CMBS issuances, one can only raise
more doubts than gather assurance over the plan.

 

GGP’s focusing on
life insurance companies, which, according to TCO, are not a capital source you
want to be relying on.

Taubman Centers, a competitor to GGP, has called life
insurance companies a cumbersome source of capital with fixed capacities for
real estate deals.It has also been said
that anything north of $100M is simply too large for life insurance
companies.In these market conditions, it
may be a little bit of a stretch to expect life insurance companies to expand
their allocation to real estate, implying GGP would have to muscle its way into
the market by grabbing market share.

AIG on May 8th 2008 announced that it would take
an $8B writedown and do a $12B capital raise.
They are clearly not on sound financial footing, so are we to expect
them to dramatically increase their activity in CRE?

Again, Prudential
Financial
is exiting the conduit-related CMBS market – they are moving away
from the market, not towards it.Wells
Fargo suspended originating CRE loans for securitization.Merrill sold its CRE lending business.Morgan Stanley is actively reducing its CMBS
and CRE exposures, with Lehman facing a near run on the bank and Bear Stearns has already collapsed!The funding
environment is evaporating - quickly!

 

GGP co-invested $88M
using money borrowed from Citigroup, potentially to compel others to participate in an $880M
equity offering.

While the mechanics and legality behind this transaction
are discussed in further length later in this analysis, this act is peculiar
purely from a fundamental business standpoint.
It is often the case that executives co-participate in offerings to
signal confidence in the stock at the time of the offering.That being said, why would GGP’s management
term borrow $88M, from Citigroup in relatively short term debt no less, to
co-participate in a rights offering?

On March
24, 2008 GGP announced the sale of 22.9 mn shares at $36 per share with total
proceeds of $821.9 mn to repay its revolving credit facility and other debt,
and for general corporate purposes. The above offer which was closed on March
28, 2008 included sale of 2.4 mn shares sold for total proceeds of $88 mn to MB
Capital Partners III, an affiliate of and John Bucksbaum, CEO of GGP, and
Matthew Bucksbaum, the company’s Chairman Emeritus. Using the credit facility
provided by Citigroup, MB Capital had purchased 10.09 mn GGP shares
in open market between August 3, 2007 and August 20, 2007. Subsequently in
March 2008, MB Capital used the loan to finance the purchase of $88 mn worth of
GGP shares, bringing into serious questioning the motives of Citi group's financing of the share
purchase agreement.

GGP’s operations
were not self funding in Q1 2008.

GGP generated FFO of $223M.
It spent $151M on dividends, and another $88M on maintenance capital
expenditures.Reversing out $16M of
excess lease termination income and we are left with negative $32M.It is only fair to reverse out $3M of excess
bad debt expense relative to historical averages in 2005 and 2006, which puts
GGP’s normalized cash outflow at $35M per quarter right now, without any
further possible deterioration in operating fundamentals or interest rates.

It is also apparent that GGP will have a run on its income orientated investors, for GGP Can't Afford its Dividend! The divident is currently being financed, and cannot be paid out of insufficient operating capital.

{mospagebreak}

Item 2 - One-time
items are holding up deteriorating core operational performance
.

Summary

From a number of standpoints, it appears clear that GGP’s
core operations are deteriorating.

The Rouse Company, which GGP acquired in 2004, is far less
profitable than it was last year at the operating level.Occupancy costs as a percentage of its
tenants’ trailing twelve months sales are trending upwards, which will
increasingly exert downward pressure on rates.
Lease termination income, peculiar land assessments and fluctuations in
bad debt expense artificially propped up profitability in Q1 2008, but FFO
growth will slow to 0% in Q2 2008.This
does not bode well for the future.
Finally, the business model of shopping malls is getting attacked on
multiple fronts.

The Rouse Company,
which tripled GGP’s size in 2004, is far less profitable than it was last year
at the operating level.

At the end of the Q1 2008 10Q, GGP provides the performance
of The Rouse Company ('TRC'). As we can see, revenue decreased from $354M to
$348M. Operating income was slightly up, from $102M to $120M, but because the
operation is not self funding (like GGP as a whole), TRC was forced to borrow
more. Total debt in this Q alone rose from $9.5B to $9.7B, prompting interest
expense to rise from $108M to $124M. As a result, net income dropped from $295M
to a mere $5M.

REIT investors may scoff at actually reading the balance
sheet and income statement, but even adjusting for D&A, this was still awful
performance. Net income plus D&A plummeted from $394M in Q1 2007 to $91M in
Q1 2008.

This is the asset that tripled the size of the company in
2004? What is especially peculiar is that this entity has total assets of
$15.9B and total revenues in the Q of $348M, while GGP as a whole has total
assets of $29.5B and total revenues in the Q of $830M. TRC, then, is
responsible for 54% of GGP's assets, but 42% of its revenues. This is clearly a textbook example of investors binging during an asset bubble on cheap and easily available credit, only to find they grossly overpaid and made a strategic mis-step.

 

Artificial benefits
from land value assessments, lease termination income and bad debt expense
.

It just so happens that lease termination income was up
$17M year on year, bad debt expense was down $3M year on year, and the value of
GGP’s land was revised upwards by approximately $21M in the quarter.All helped boost GGP’s stated financial
performance in the Q, but were extraordinary in nature.

The peculiar upward revision of the value of GGP’s land
position, which includes a heavy chunk of business in Las Vegas, was cited in the Q1
2008 conference call
.This
explanation does not appear to be particularly convincing, given its heavy
reliance on “long term projections”, even if they are at the expense of the
current weakening operating environment.

Michael
Gorman - Credit Suisse

Thank you. Bernie, actually, I had a
question on the NPC business. Could you just walk me through some of the
adjustments in the estimated value of the assets there? I guess I was a little
bit surprised to see it go up given the impairment charge that you took at Columbia last year. Can
you just talk about, was that entirely offset by Texas? What is your view on Vegas at this
point? Was that flattened evaluation? And I guess where are the numbers are
going there?

Bernard Freibaum - Executive Vice President
and Chief Financial Officer

The valuation of land that's being
developed over 30 years is very different process than valuing unsold homes for
example, if you're a builder or even lots owned by a builder who has obviously
got them in inventory. So the valuation process involves a long-term cash flow
model with numerous assumptions (think level III accounting for REITs), and this is what we use both for this annual
evaluation as well as a re-valuation and effect every quarter to determine how
much of our cost is attributable to land that it sold for booking profit. We
did have a write down in Columbia
and Fairwood fairly significant one but the total holdings there and the book
value attributable to that land is low. So, the land in Vegas and Houston did
make up for the reduction in the value of Columbia
and Fairwood. Houston,
the Woodlands and Bridgeland are two of the best projects in the city… And, the
way the model works, if you do a 20 or 30 year long-term projection and you
consider the net price of value of all that activity, you get a number and
despite the soft current environment for housing including in Summerlin because
builders have excess inventory.

Reggie's take: This is Bullsh1t, to the sh1tieth degree! I am flabbergasted that no analysts took them to term on this. I guess I will have to attend the next conference call in person! Think about this... You buy up a bumch of property in the desert at record prices that was dirt cheap (no pun intended!) just last decade, then as the market totally collapses you decide to use long term forecasting and subjective assumptions in an attempt to wring "theoretical" value out of "real" land losses. Tell, me, why can't the home builders do this with their rental, condo and community properties? All they need to do is say they are going to sit on it long enough and hope the market turns around hard enough and long enough to recoup their losses. The banks have tried this with their MBS and CDOs, and it just didn't work. Land is a lot less complex than theoretical math model based CDOs and derivatives, hence the bullsh1t should be easier to smell.

Occupancy is
trending downwards, while comparable sales were almost flat
.

For the first time in at least the last 4 quarters, year on
year occupancy decreased while tenant sales have remained flat.As a result, occupancy cost ascended as a %
of sales to the highest levels GGP has ever recorded, at 12.8%.This table provides historical context:

     

Q1 08

2007

2006

2005

2004

2003

Occupancy Cost % of sales

12.8%

12.5%

12.6%

12.1%

12.5%

11.4%

The outlook on retail sales for the remainder of 2008 does
not appear to be good as we are heading into a recession, if not already in one. This does not bode
well for GGP’s ability to raise rents further, or even hold them steady for there is already tangible evidence of weakening rents in both the stronger and weaker markets.

 

FFO growth will slow
to 0% in Q2 2008
.

GGP has stated that they expect Q2 2008 FFO to be flat
relative to Q2 2007.As Bernie Freibum
stated: ‘Please note that in the first
quarter of 2008, we produced $0.11 of the total estimated range of $0.55 to
$0.61 of full-year 2008 core FFO per share improvement. Due to timing
differences, we currently expect a flat second quarter.
’Bernie doesn’t elaborate into what these
timing differences actually are, leading me to believe that this flat sales performance
is not extraordinary in nature.This
lends further support to the one-time nature of the growth that we saw in Q1
2008, and is not reflective of core fundamental strength.

Mall REITs are
pulling back on development plans

As stated in recent
articles
, the long lead time involved in the construction of malls has
created a large amount of supply which will be hitting the market in 2008.This may prove to be untimely, and does not
bode well for absorption of the space.

At the same time, executives at some major mall REITs have
become markedly more cautious in their guidance and outlook.At a recent conference, the CEO of Glimcher
Realty Trust was quoted saying "I'm not afraid for '08 [results], … Where
you get nervous is thinking about '09. Retailers are clearly opening fewer
stores, and they're being more aggressive" in negotiations with landlords.

Current economic
realities will challenge the shopping mall business model

Consumer spending in shopping malls has a few pre-requisites:

  1. ·
    It often requires individuals to drive long
    distances for the sole purpose of going to the mall
  2. ·
    It requires discretionary income, given how
    large apparel sales are as a percentage of total mall sales
  3. ·
    It requires consumers to pay a premium for the
    mall experience and the enclosure itself, as goods in shopping malls command a
    premium to comparable goods that can be purchased through other distribution
    channels
  4. ·
    It is predicated on retailers being able to
    source their goods, often manufactured overseas in countries like China,
    cheaply

This business model is coming under attack on multiple
fronts.

  1. ·
    The high price of gas makes it a lot more
    expensive to take that trip to the mall, especially if the sole original
    purpose was mall shopping
  2. ·
    Discretionary income is getting hit on multiple
    fronts – labor wages aren’t keeping up with inflation in the price of necessity
    goods, unemployment as defined by total hours worked is on the decline, the financial
    system is in the process of de-levering itself and tightening its ability to
    fund consumer borrowing
  3. ·
    Consumers may have been more willing to pay a
    premium for the mall experience when times where good, but that proclivity is
    attenuating as discretionary income shrinks
  4. ·
    Weakness of the dollar relative to our major
    trade partners, and inflation in the cost of goods for our trade partners, is
    causing the price of the goods they export to the US to rise

On top of this, as noted above, the un-levered returns
associated with mall properties is such that large amounts of leverage are
required for a reasonable return on equity.
As the CMBS market has shut down and credit tightens, the ability to tap
the debt markets also lessens.

On multiple fronts, the shopping mall business model is
coming under attack.

{mospagebreak}
Item 3 - Evidence
that GGP is misrepresenting itself and breaking securities laws

The analysis below
supports the conclusion that GGP may have misrepresented itself.

 

Abstract

General Growth
Properties (‘GGP’), the 2nd largest mall REIT in the United States,
appears to have withheld very material, necessary financial information from the public
while engaging in a number of peculiar or financially aggressive
transactions.This apparent lack of disclosure is in direct contravention to conservative securities practices, to say the least and there may even be even serious violations
which have been masked by non-disclosure.
The incentive structure in its current state encourages risky behavior.

As an outsider, one can not know for sure, but it is plausible to assumet that the primary goal behind
the alleged non-disclosure and financial aggressiveness is to inspire artificial
confidence within the capital markets, to aid their capital raising needs over
the next 2 years.GGP has been the subject of 4 prior SEC
comments1, so this would
not be the first time GGP has been questioned over its accounting
disclosures.

The primary questionable
or aggressive financial actions are as follows:

 

(1)
Beginning
in August 2007, the family which founded and has run GGP started borrowing
heavily against tax-advantaged family trusts with non-recourse debt from
Citigroup Global Markets (CGM) to directly purchase GGP stock
.

As of March 2008, total borrowings by the family trusts in question
amount to $588 million, implying a debt to capitalization of approximately 22%
at current non-distressed price levels.

This very aggressive behavior has been a red flag in the past –
precedents include WorldCom, Global Crossing, Safeguard Scientific, Benton Oil
and Stamps.com2.
The founder, the Chairman, the CEO, and the
20% majority owner of GGP all originate from this one family, which makes this
leverage all the more troubling
due to its high level of concentration.

GGP had 266.8 mn
shares outstanding as of March 28, 2008. Of this the three trusts, GTC, MB
Capital Partners III and MB Capital Units, together hold nearly 26.8 mn shares
taking their aggregate voting rights to 10% of outstanding shares. In aggregate
Bucksbaum Family along with its trust own 12.1% of GGP’s common stock. In
addition, above trusts collectively own 45.2 mn units fully convertible units
for one-for-one basis taking their aggregate potential voting rights to 24.8%.

(2)
Matthew
Bucksbaum (‘MB’) – GGP’s Chairman Emeritus, founder and ex-CEO – appears to
have legally distanced himself from this financial arrangement
.
He divided the trusts which name him as the
President or Trustee from all other trusts when GGP borrowed its first $500
million to buy GGP stock in August 2007.

He stepped down from the Chairman position 2 weeks later.
In March 2008, when MBCP borrowed an additional
$88 million to buy more GGP stock in an equity offering, he pulled these
entities directly associated with him completely out of the trust structure
doing the borrowing on a one-for-one basis.

It is unclear why he would distance himself in this fashion, and appears
to be a red flag.


(3)
CGM
appears to be engaging in non-arms length transactions with GGP
. The
original $500 million loan that CGM extended to GGP in August 2007 was at an
interest rate of LIBOR plus 50 basis points, which itself seems cheap given the
debt to capitalization, the lack of diversification of the underlying
portfolio, and the lack of collateral.

The terms got substantially laxer when MBCP borrowed an additional $88
million 7 months later.
Given the higher
risk associated with the additional loans in addition to the extreme financial straits that Citibank itself is in, it is very peculiar that CGM would
materially ease the lending terms, implying there are undisclosed complicating
factors.


 

The primary material items which
have not been disclosed are as follows:

(1)
Omitted
loan agreement in their April 1st 2008 13D/A, which was supposed to
be filed as an exhibit.
GGP states
in the 13D/A itself that it will include the revised Loan Agreement as an
exhibit.That exhibit was not included
in their filing with the SEC.Without
this information, public shareholders are left in the dark on a transaction
with has materially diluted their residual claim on GGP’s cash flow.

(2)
Very
opaque information regarding the counterparties that bought 6.9% of the diluted
shares outstanding in an equity offering completed in March 2008.
It is extremely unusual for a company to
be so opaque regarding participants in an equity offering, which leads one to
question why they have chosen the path of non-disclosure.

(3)
In GGP’s
press release over the March 2008 equity financing, GGP’s CEO emphasized his
co-participation in the offering but did not disclose the low-cost loan from CGM
mentioned above
.

(4)
Bernie
Freibaum (‘BF’), GGP’s CFO, and his wife have bought an unexplainably large
amount of GGP stock personally since December 2001, at $82.3 million
.Purchases of this size are unexplainable
through a reasonable look at Bernie Freibaum’s historical income streams, implying a
material lack of disclosure of the vehicle or method through which he financed
the purchases.

Below each of
these points in are supported in further detail.

Background Information – Summary of Events and Facts Around the Time of
the Claims Made Above

The Bucksbaum family
owns substantial amounts of GGP stock within a series of trusts, most of which
collectively fall under MB Capital Partners III (‘MBCP’).On April 1st 2008, this share
ownership totaled 69M shares, or 22% of the outstanding stock.

In early August 2007,
GGP had received an SEC comment inquiring about line items in GGP’s latest
10K.GGP had also missed guidance in its
latest earnings release.On August 2nd
2007, GGP’s management amended a prior agreement with CGM so that it could
borrow $500 million and invest it directly in GGP’s stock.This debt carried an interest rate of LIBOR
plus 50 basis points, and was collateralized with GGP stock and a third party
pledge on Matthew and John Bucksbaum’s (co-founder and Chairman Emeritus of
GGP, and CEO, respectively) share ownership, maturing in November 2009.The loan had no recourse to Matthew and John
Bucksbaum’s other assets.

At that time, the
family trusts were divided into 2 divisions – Division A and Division B.The President and Trustee of the Division B
entities was Matthew Bucksbaum (‘MB’), while Division A represented trusts that
did not have MB in an executive capacity.
15 days later, MB stepped down as Chairman of GGP.

By early 2008, articles
began circulating regarding GGP’s large debt load.In response to the allegations that GGP could
end up like the recently defaulted Centro Properties Group, GGP put out a press
release on Saturday, January 19th 2008 at 9pm, titled “General
Growth Responds to Recent Statements in the Press and Blogs”.Subsequent to this press release, GGP
re-doubled its efforts on de-leveraging itself3.On March 19th
2008, it put out a press release stating it had refinanced $1.3 billion of
mortgage notes and was in discussions on alternative methods of financing.On March 25th 2008, GGP announced
an $822 million equity offering with an unnamed counterparty, representing 7.7%
of the then-current common shares outstanding.
GGP announced that John Bucksbaum (‘JB’) would co-participate in the
equity offering, contributing $88 million of his own funds.Without mention in the press release, JB
amended the terms to the expanded loan agreement with CGM.The March 2008 amendment allowed MBCP to
borrow another $88 million at LIBOR plus 50 basis points from CGM.The third party pledge of MB and JB’s shares
was terminated, even though the credit risk of the position presumably was
going up.Even though 6.9% of the
diluted outstanding stock was sold to a counterparty, there have been no
subsequent filings revealing the identity of that counterparty.MB also removed the Division B entities from
the trust collateralizing the CGM loans, MBCP, in a one-for-one stock swap for
the same shares outside the trust.

1- Aggressive financial action – Borrowing against MBCP

Background Information on Credit Received from CGM

MBCP originally
received a loan from CGM to finance the exercise of warrants issued in
connection with the financing of GGP’s $14 billion acquisition of The Rouse
Company in November 20044.MBCP received $500 million through an
amendment on August 2nd 2008.
It then borrowed an additional $88 million through an amendment on March
24th 2008.MBCP now has 69
million shares, as of April 1st 2008.Based on GGP’s stock price at market close on
April 21st 2008 of 39.69, this implies a market value of $2.74
billion.Thus, MBCP now has a debt to
capitalization ratio of 21.5%.

 

Large Borrowings, Coupled with Large Acquisitions and Symbiotic
Relationships have been Problematic for Large Companies in the Past!

In the past, borrowing
heavily with stockholdings as collateral has been a red flag for corporate
malfeasance.

Bernard Ebbers, CEO of
WorldCom, borrowed heavily against his stockholdings.He ended up borrowing over $1 billion in
mortgage notes from Travelers, a subsidiary of Citigroup, and $183 million in
margin loans from Bank of America to finance the purchase of 500,000 acres of
timberland, a ranch, WorldCom stock, and other hard assets5.These loans
were secured against the assets themselves, in addition to Ebbers’
stockholdings6.Citigroup and Ebbers had a symbiotic
relationship, with Citigroup making large amounts of money off of fee income
generated by deal flow at WorldCom.Off
of the WorldCom / MCI deal alone, Citigroup earned $32.5 million in advisory
fees.Mr. Ebbers, in turn, was given
preferential access to profitable IPO allotments.Both parties had a vested interest in keeping
WorldCom’s stock price up.When the tech
bubble burst, Bank of America lost confidence in Ebbers’ ability to make good
on his margin debt.It issued a margin
call which forced immediate repayment of the outstanding debt.Ebbers’ position in the company was
substantial enough that selling the shares necessary to pay back the loan would
have inflicted additional damage to WorldCom’s stock price, creating a negative
feedback loop.This prompted him to
instead take out corporate loans from WorldCom, which led to the creation of
Section 402 of Sarbanes Oxley, prohibiting the use of corporate loans to
executives.
{mospagebreak}

There are a few
parallels between GGP and WorldCom.

-
GGP now,
like WorldCom then, is a mature, well established company within its industry
.GGP is now the 2nd largest mall
REIT in the US.WorldCom , after their takeover of MCI, was
the 2nd largest US
long distance company.

-
Both
companies rose to prominence through acquisitions
– GGP’s total assets went
up by a factor of 3.5x, from $7.3 billion in 2002 to $25.4 billion in
2004.A $14 billion acquisition in 2004
drove most of the growth.Similarly,
WorldCom’s $37 billion takeover of MCI (a company 3 times WorldCom’s size) was
the largest takeover in history.Both
companies clearly rose to prominence through acquisitions.

-
Both companies
made major acquisitions near the peak of the market cycle of their respective
markets
(ex. at the top of the bubble).WorldCom’s major
acquisition was made in 1997, 3 years before the tech market popped.GGP’s major acquisition occurred in 2004, 2
years before the market popped.

-
Like Mr.
Ebbers, the Bucksbaum family is well established at the helms of their
respective companies
.

-
Both
CEO’s borrowed very heavily against their stock holdings
.

-
Citigroup
has a symbiotic relationship with GGP now as it did then with WorldCom
.As can be seen on Citigroup’s conflict of
interest webpage, CGM has investment banking-related, securities-related, and
non-banking / non-securities-related business with GGP7.CGM was 1 of
the 2 Initial Purchasers associated with GGP’s $1.55 billion convertible
offering on April 16 20078.As noted in the S-3 GGP filed on August 15th
2007 when the convertibles were registered for resale, GGP noted that it had
ongoing relationships with some of the convertible holders - some are lenders,
and some provide commercial banking services on mortgage loans.It is fair to believe they were primarily
referring to CGM, who was generating fees off of GGP’s mortgage note deal flow,
fees from offerings like the convertible offering done in April 2007, and
interest income from mortgage notes it has directly extended to GGP.

Large personal
borrowings and large acquisitions, coupled with a symbiotic relationship with a
large financial institution skews the incentive structure of management
teams.GGP suffers from this combination,
as WorldCom did then.

2- Questionable financial action – MB distances himself from this
financial arrangement

Background Information on the Bucksbaum Family

The Bucksbaum family
founded and has run General Growth, in various legal forms, since 1964.Martin and Matthew Bucksbaum were the
original founders, forming the General Growth Properties REIT in 1964.In 1972, General Growth was listed on the
NYSE.By 1984, General Growth fell into
a financially disadvantageous position.
It sold 19 malls to another company and liquidated the REIT, but
continued to manage subsequently.A
large acquisition in 1989 made General Growth the second largest mall manager
in the US,
and in 1993, General Growth did an IPO to form GGP, the legal entity we see today.In 1999, Matthew Bucksbaum stepped down as
CEO and John Bucksbaum (‘JB’), Matthew’s son, replaced him.In November 2004, GGP completed the $14
billion Rouse acquisition, which established GGP as the 2nd largest
mall REIT.In August 2007, MB stepped
down as Chairman of GGP, and was replaced by JB.

Background Information on MBCP

MBCP is a general
partnership with three primary general partners – (1) trusts for which the
General Trust Company (‘GTC’) is the trustee, whose president is Marshall Eisenberg;
(2) Matthew Bucksbaum Revocable Trust (‘MBRT’), whose trustee is Matthew
Bucksbaum (‘MB’); (3) General Growth Companies (‘GGC’), whose president is
Matthew Bucksbaum.MBCP represents a
collection of 21 individual trusts through which the Bucksbaum family has
partial ownership in GGP.

Details of the Separation of Interests within MBCP

On August 1st
2007, the MB Capital Agreement was formed.
Through this agreement, MB Capital was divided into 2 parts – Division A
and Division B.Division A represented
the trusts which had the General Trust Company as the trustee. Division B
represented MBRT and GGC.It was agreed
that Division A was entitled to 97.375% of the assets and liabilities as of
August 1st 2007, and 100% of the assets and liabilities thereafter9.By removing any pecuniary interest in the
assets associated with the August 2007 borrowings, MB’s Division B entities
took one step away from the lending agreements.

On March 1st
2008, in conjunction with the $88 million of additional loans from CGM, a
Redemption Agreement was formed.Through
this agreement, MB removed the Division B assets from MBCP.Each share owned within MBCP was swapped for
the same amount of shares outside of MBCP.
This completed the separation of interest.

Rationale Behind the Separation

Given there was no
substantive change in share ownership and no shares were monetized or taken out
of a trust, its plausible and seems fair to believe the trusts were taken out because of
another confounding factor.One
reasonable confounding factor is that this financial arrangement exposes its
trustees to legal liability and ‘headline risk’.Another is the creation of credit risk within
the family trusts due to excessive leverage and concentration.Yet another is a
differential risk proclivity between the older Matthew Bucksbaum, who is now
retired, and his younger, more ambitious son John.It seems fair to believe that some
combination of all of these reasons may have played a part in this decision.

3- Questionable financial action – CGM engaging in non-arms length
transactions with GGP

Original Loan Terms

The original $500
million loan that CGM extended to GGP in August 2007 was at an interest rate of
LIBOR plus 50 basis points with expiry in November 2009.The loan was collateralized by MBCP’s
stockholdings, in addition to a third party pledge of the shareholdings of MB
and JB.

Compared to the
approximately 6% effective interest rate GGP itself is getting, the 3.4% rate
MBCP is currently getting is quite favorable. One would think that if managment could arrange this level of financing for concentrated collateral on a non-recourse basis for their trusts, it would be able to do so for the overall corporation, unless there are other factors involved.

Revised Loan Terms

MBCP had to revise the
original loan agreement to increase its borrowing capacity.Yet the revised credit terms got weaker, not
stronger - despite the fact that the overall credit market was much worse, the overall equity markets (collatera) got much worse, the overall CRE market was much worse (the assets behind the collateral), and the financial condition and headline risks to the lender (Citibank) was much worse off than when the first terms were negotiated. Something smells more than fishy!When MBCP went to borrow
another $88 million from CGM, the third party pledge of MB’s and JB’s shares
was terminated.Also, as noted in a
summary of the agreement, not even the entire stockholding of MBCP is held as
collateral: “Advances under the Loan
Agreement for the Purchased Shares are collateralized by certain Common Stock held by M.B. Capital, including the 2007
Purchased Shares.
” [emphasis mine]
Finally, 1.5 million shares were removed from MBCP altogether as a
result of the above-mentioned redemption of Division B.Taken together, CGM (Citigroup Global Markets) has accepted a
substantially worse deal at a time when it appears they should be much, much more stringent with their lending and terms.

Note further that the
stock price performance, CRE outlook and macro environment over that time period had deteriorated, not improved,
implying that this change of terms had little to do with a change in the
fundamental outlook for GGP.The
dividend-adjusted stock price at the time of the original loan on August 2nd
2007 was 45.27, but that the stock had dropped to 40.46 by the time of the
March 2008 offering.

A 3.4% interest rate
loan when the collateral is 1 stock, at a debt-to-capitalization of 21.5% off
of a non-distressed stock price appears to be below-market.Given that the underlying stock has the
highest leverage of all publicly traded mall REITs reinforces the perception
that this is a below-market rate.

Conclusion

Based upon this data,
it appears clear that this March 2008 transaction was not done at arm’s length,
for undisclosed reasons.This supports
the view that there is a symbiotic relationship between CGM and GGP, prompting
financial decisions which are not explainable purely through fundamental supply
and demand.

{mospagebreak}

 

1- Nondisclosure of required material information: Revised Loan
Agreement, April 1st 2008

As is noted from the
13D/A: “This summary of the terms of the
Loan Agreement is not intended to be complete and is qualified in its entirety
by reference to the Loan Agreement attached as an exhibit to the
Schedule 13D.”
There were 3
exhibits filed with the SEC – (1) MBCP’s Amended Partnership Agreement, (2)
MB’s Redemption Agreement, and (3) the Purchase and Sale Agreement.I have discussed at length the former 2.The latter exhibit discloses the details
driving MBCP’s purchase of 2.445 million shares of GGP stock at $36.The Loan Agreement is simply not disclosed,
even though GGP clearly states it was supposed to be disclosed.

This agreement is
important.Among other things, it fully
discloses the revised terms between CGM and GGP, including the details of the
revised collateral.This is material
information which is supposed to be available to the public, but is not.

 

2- Nondisclosure of required material information: Opacity on offering
counterparty

Based on news released
to the public, the counterparties in GGP’s equity offering bought 7% of the
diluted shares outstanding.Yet for some
reason, the buyers were not disclosed in the original press release.Subsequently, there were two mentions of the
counterparties – (1) in the Q1 2008 10Q, GGP stated that one of the
counterparties was FMR; (2) in the Q1
2008 conference call
, GGP stated that they did the deal with ‘large
existing shareholders’, without naming names.

The equity offering as
a whole diluted the existing shareholders by 8% at a discount to the then
current price, so this was a very material transaction.I personally cannot think of any company
which has been so intentionally indirect with an equity offering.

Two questions that come
to mind are (1) why would GGP have such a policy of non-disclosure? (2) What
might have happened?At this point it is
hard to say exactly, but this does cause one to wonder.

 

3- Nondisclosure of required material information: Unmentioned
borrowing to fund co-participation

In GGP’s March 24th
2008 press release over their equity financing, GGP’s CEO heavily emphasized
his co-participation in the offering: “This offering includes 2,445,000 shares
of Common Stock that are being sold to MB Capital Partners III, which is an
affiliate of Matthew Bucksbaum, our Chairman Emeritus, and John Bucksbaum, the
Chairman of the Board of Directors and our Chief Executive Officer.10

No mention was made of
the borrowings used to fund the purchase until 1 week later, in a 13D filing
for the General Trust Company.Once
again, very important information is put in the footnotes, if at all.

4- Nondisclosure of required material information: Bernard Freibaum’s
large stock purchases

Background

$82 million of stock
were purchased by BF and his wife since December 2001.$53.9 million were purchased since August
2006.Given a reasonable view of BF’s
historical income streams, it appears that BF has in all likelihood used large
amounts of borrowed funds to purchase stock.
If true, this presents two problems.

(1)There
has been no disclosure of any borrowings made by BF, even though this is
material information.

(2)For
the same reason that borrowed funds skews the incentive structure for the CEO,
it would also skew the incentive structure for the CFO.

Historical Insider Buying

BF’s historical
purchases can be found in the Form 4’s that he has filed with the SEC.

Filer
Name

Title

Trans Type

Dollar
Value

Shares
Traded

Trans
Date

Trans
Price

Total Holdings

Owned

FREIBAUM, BERNARD

CFO

B

$72,620

2,000

2/14/2008

$36.31

47,000

I

FREIBAUM, BERNARD

CFO

B

$1,019,430

28,200

2/14/2008

$36.15

7,541,015

D

FREIBAUM, BERNARD

CFO

B

$206,500

5,000

12/19/2007

$41.30

45,000

I

FREIBAUM, BERNARD

CFO

B

$412,300

10,000

12/19/2007

$41.23

7,512,815

D

FREIBAUM, BERNARD

CFO

B

$34,965

700

11/7/2007

$49.95

7,502,815

D

FREIBAUM, BERNARD

CFO

B

$2,236,780

45,500

9/17/2007

$49.16

7,502,115

D

FREIBAUM, BERNARD

CFO

B

$636,350

13,000

9/14/2007

$48.95

7,456,615

D

FREIBAUM, BERNARD

CFO

B

$1,355,750

29,000

8/6/2007

$46.75

7,443,615

D

FREIBAUM, BERNARD

CFO

B

$5,255,630

113,000

8/3/2007

$46.51

7,414,615

D

FREIBAUM, BERNARD

CFO

B

$1,092,985

23,500

8/3/2007

$46.51

40,000

I

FREIBAUM, BERNARD

CFO

B

$544,500

10,000

6/8/2007

$54.45

7,301,137

D

FREIBAUM, BERNARD

CFO

B

$1,368,750

25,000

6/7/2007

$54.75

7,291,137

D

FREIBAUM, BERNARD

CFO

B

$681,600

12,000

5/18/2007

$56.80

7,266,137

D

FREIBAUM, BERNARD

CFO

B

$579,500

10,000

5/17/2007

$57.95

7,254,137

D

FREIBAUM, BERNARD

CFO

B

$1,357,000

23,000

5/16/2007

$59.00

7,244,137

D

FREIBAUM, BERNARD

CFO

B

$3,274,752

53,300

5/11/2007

$61.44

7,221,137

D

FREIBAUM, BERNARD

CFO

B

$1,330,427

21,700

5/10/2007

$61.31

7,167,837

D

FREIBAUM, BERNARD

CFO

B

$15,476,406

249,700

5/4/2007

$61.98

7,146,137

D

FREIBAUM, BERNARD

CFO

B

$10,986,051

175,300

5/3/2007

$62.67

6,896,437

D

FREIBAUM, BERNARD

CFO

B

$1,603,500

25,000

3/16/2007

$64.14

6,721,137

D

FREIBAUM, BERNARD

CFO

B

$3,294,500

50,000

2/22/2007

$65.89

6,336,137

D

FREIBAUM, BERNARD

CFO

B

$1,090,000

25,000

8/11/2006

$43.60

5,948,951

D

FREIBAUM, BERNARD

CFO

B

$56,030

1,300

5/19/2006

$43.10

5,903,434

D

FREIBAUM, BERNARD

CFO

B

$417,145

9,500

5/18/2006

$43.91

5,902,134

D

FREIBAUM, BERNARD

CFO

B

$461,055

10,500

5/17/2006

$43.91

5,892,634

D

FREIBAUM, BERNARD

CFO

B

$1,898,000

40,000

3/8/2006

$47.45

5,882,134

D

FREIBAUM, BERNARD

DIR

B

$340,217

8,300

11/7/2005

$40.99

5,582,134

D

FREIBAUM, BERNARD

DIR

B

$888,181

21,700

11/4/2005

$40.93

5,582,134

D

FREIBAUM, BERNARD

CFO

B

$835,000

20,000

8/8/2005

$41.75

5,448,708

D

FREIBAUM, BERNARD

CFO

B

$806,520

28,200

6/14/2004

$28.60

4,444,455

D

FREIBAUM, BERNARD

CFO

B

$1,302,488

45,100

5/28/2004

$28.88

4,416,255

D

FREIBAUM, BERNARD

CFO

B

$1,752,750

61,500

5/27/2004

$28.50

4,416,255

D

FREIBAUM, BERNARD

CFO

B

$267,100

10,000

5/5/2004

$26.71

4,309,655

D

FREIBAUM, BERNARD

CFO

B

$268,500

10,000

5/3/2004

$26.85

4,299,655

D

FREIBAUM, BERNARD

CFO

B

$993,000

30,000

3/16/2004

$33.10

4,229,655

D

FREIBAUM, BERNARD

CFO

B

$3,862,500

150,000

12/16/2003

$25.75

4,001,655

D

FREIBAUM, BERNARD

CFO

B

$468,175

6,100

11/21/2003

$76.75

1,283,885

D

FREIBAUM, BERNARD

CFO

PB

$2,018,250

30,000

8/29/2003

$67.28

1,244,602

D

FREIBAUM, BERNARD

CFO

B

$197,850

3,000

8/4/2003

$65.95

1,214,602

D

FREIBAUM, BERNARD

EX
VP

B

$11,574,750

305,000

12/18/2001

$37.95

932,294

D

FREIBAUM, BERNARD

EX
VP

B

$21,229

695

6/29/2001

$30.55

547,294

D

FREIBAUM, BERNARD

EX
VP

B

$21,229

894

6/30/2000

$23.75

451,599

D

{mospagebreak}

Historical Income Streams

We can get a fairly
reasonable view of BF’s earnings by looking at his past jobs and his
compensation history at GGP.

 

Compensation at GGP

All compensation back
to 1995 is publicly available in GGP’s proxy statements.It is reproduced below:

Year

Base

Bonus

Other
Cash

Total

2007

1,100,000

1,000,000

559,895

2,659,895

2006

1,000,000

1,000,000

551,696

2,551,696

2005

1,000,000

0

536,001

1,536,001

2004

900,000

0

464,672

1,364,672

2003

850,000

0

350,814

1,200,814

2002

800,000

0

352,860

1,152,860

2001

750,000

0

361,494

1,111,494

2000

500,000

0

328,968

828,968

1999

450,000

0

361,363

811,363

1998

450,000

0

315,256

765,256

1997

400,000

0

200,000

600,000

1996

300,000

0

200,000

500,000

1995

225,000

0

200,000

425,000

 

Dividends at GGP

Based on BF’s stock
ownership records, we can also approximate the dividend payments he has
received over the past 8 years.These
figures are presented below:

 

2000

2001

2002

2003

2004

2005

2006

2007

GGP
Dividends/share

0.69

0.8

0.92

0.78

1.26

1.49

1.68

1.85

BF
Shares owned (k)

452

499

932

1,778

4,391

4,980

5,921

7,259

Dividend Inflow ($k)

312

400

858

1,387

5,532

7,420

9,947

13,430

For the last 4 years, the CFO's dividend income from his financial transactions outside running the company has easily outstripped the income receieved from direct corporate comensation. Earlier in this missive, I claimed that GGP can't afford its current dividend! The continuation of the dividend despite the fact that it must be financed through internal sources can now be sourced to a potential conflict of interest posed by the compensatory income streams of the CFO. Do we do what's best for the company or do what's best for my brokerage accounts.

Prior Jobs

We also know BF’s prior
jobs, dating back to when he was at the beginning of his career.

-
From age 40 to the present, BF has been at GGP
as the CFO.

-
From age 39 to age 40, BF was at Ernst and Young
as a consultant.

-
From age 32 to age 39, BF was the CFO and
General Counsel of Stein and Company, a real estate development and service
company.

-
From BF’s early 20’s to age 32, BF was in
various positions at Ernst and Young, American Invesco Corporation and Coopers
and Lybrand LLP.

While serving as the
CFO and General Counsel of Stein and Company, BF received an equity stake in
the company.This, plus his cash
compensation at each of these jobs, can be conservatively estimated.A conservative assumption is that his equity stake
in Stein and Company was sold for $5 million after-tax.

Summing up BF’s Compensation

Based on the above
information, in conjunction with conservative assumptions on his pay at earlier
firms, his tax rate, and his average consumption per year, it is extremely
unlikely that BF has generated more than $32 million in post-tax,
post-consumption income.And yet he
appears to have bought $82 million worth of stock at an average cost of
47.3.There is a $50 million difference
between these two figures.While
individual assumptions may very well vary, this differential is inexplicably large.

$50 million is
substantial relative to his cash on hand.
It is also very large relative to his total net worth, even when
factoring in the value of his current share ownership in GGP.It implies that he has borrowed at least 20%
of his net worth, and probably more, to buy GGP stock.BF will be in dire financial straits if
anything was to happen to GGP’s stock, and he is already underwater on his
purchases. Thus, even if there is no nefarious plans underfoot, the CFO is under immense pressure to maintain the auspices of a healthy stock, even at the expense of true shareholder value. If there is a true lack of disclosure regarding funding sources, well then that is a totally different story with a plethora of additional and probably negative consequences.

Lack of Disclosure is a Problem

It is clearly very
material information for the public shareholders if BF has indeed borrowed 20%
of his liquid net worth to buy GGP stock.
Yet no disclosures have been made.
It is also unknown how BF has structured his ownership of GGP stock –
whether it is in a trust, or in some other vehicle.That information would be helpful to better
understand the recourse nature of any debt obligations BF may have.While the Bucksbaums have disclosed both the
vehicle through which they own their stock, as well as the leverage they have
employed (unless they have omitted other loans), BF has done neither.This is a very material lack of disclosure
which the investing public deserves to know more about.

References:

1.
SEC comments are listed below:

a.Steven
Jacobs: http://sec.gov/Archives/edgar/data/895648/000000000006031014/filename1.pdf

b.Linda
van Doom: http://sec.gov/Archives/edgar/data/895648/000095013707000165/filename1.htm

c.Robert
Telewicz:http://sec.gov/Archives/edgar/data/895648/000000000007031093/filename1.pdf

d.Pam
Howell: http://www.sec.gov/Archives/edgar/data/895648/000000000007041058/filename1.pdf

2.
‘Uneasy Money – What’s Wrong?’ Wall Street
Journal, August 1st 2002: http://www.pulitzer.org/year/2003/explanatory-reporting/works/wsj2.html

3.
‘General Growth Shops for Partners’ – Wall
Street Journal, April 16 2008: http://online.wsj.com/article/SB120831674586718783.html.“We’re telling the market that we’re going to
reduce our leverage.”

4.
Reference Link from 13D/A filed 4/1/2008: http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=5841123-1487-50552&type=sect&TabIndex=2&companyid=5306&ppu=%252fdefault.aspx%253fcik%253d895648

5.
Timeline of events at WorldCom: http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/wcom/cron.html

6.
Description of problem loan from Bank of
America: http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/wcom/players.html

7.
Citi Investment Research Disclosures – General
Growth Properties: https://www.citigroupgeo.com/geopublic/Disclosures/GGP.html

8.
On April 16, 2007, GGPLP issued $1.55 billion
aggregate principal amount of Notes pursuant
to a purchase agreement (the "Purchase Agreement") with Citigroup
Global Markets Inc. and Morgan Stanley & Co. Incorporated (collectively,
the "Initial Purchasers")
under which GGPLP agreed to sell the
$1.55 billion principal amount of Notes (plus up to an additional $200 million
principal amount of Notes at the option of the Initial Purchasers) in private
offerings exempt from registration in reliance on Section 4(2) of the
Securities Act. The Purchase Agreement contemplates the resale by the Initial
Purchasers of the Notes to qualified institutional buyers in reliance on Rule
144A under the Securities Act, at a price equal to 98% of the principal amount
of the Notes.
” – 8K, filed 4/17/2007
[emphasis mine]

9.
M.B. Capital
invests in the Common Stock and Units pursuant to the Second Amended and
Restated Agreement of Partnership of M.B. Capital Partners III dated as of August
1, 2007 (the “M.B. Capital Agreement”). The M.B. Capital Agreement provides for
two divisions of M.B. Capital. Division
A, which consists of trusts of which GTC is the trustee, is entitled to 97.375%
of the assets and liabilities of M.B. Capital as of August 1, 2007 and 100% of
the assets and related liabilities acquired by M.B. Capital from and after
August 1, 2007
. Division B, which consists of the Matthew Bucksbaum
Revocable Trust and GGC is, entitled to 2.625% of all assets and liabilities of
M.B. Capital as of
August 1, 2007.
-
13D, filed 8/22/2007 [emphasis mine]

10.
“General Growth Prices Offering of Common
Stock”, March 24th 2008.
Link: http://www.ggp.com/Company/Pressreleases.aspx?prid=410

 


[r1]The reported figure is $1105

 

[r2]The
reported figure is $2816

 

[r3]The reported figure is $2067

 

[r4]The
reported figure is $3540

 

[r5]The reported figure is $3403

Last modified on Wednesday, 21 December 2011 03:12

15 comments

  • Comment Link Donald Ruffkin Wednesday, 09 July 2008 12:55 posted by Donald Ruffkin

    That was the point - he borrowed a ton of money to buy stock and are now in over their heads. Leverage doesn't change how large GGP stock is now as a percentage of the CFO's net worth.

    Quote:
    "$50 million is substantial relative to his cash on hand. It is also very large relative to his total net worth, even when factoring in the value of his current share ownership in GGP. It implies that he has borrowed at least 20% of his net worth, and probably more, to buy GGP stock. BF will be in dire financial straits if anything was to happen to GGP’s stock, and he is already underwater on his purchases. Thus, even if there is no nefarious plans underfoot, the CFO is under immense pressure to maintain the auspices of a healthy stock, even at the expense of true shareholder value. If there is a true lack of disclosure regarding funding sources, well then that is a totally different story with a plethora of additional and probably negative consequences."

    I would take this a step further and once again draw a parallel to our friends at Centro: http://www.theaustralian.news.com.au/story/0,25197,23644519-643,00.html

    "Andrew Scott, the former chief executive of the Group, spruiked margin loans to his senior staff and heavily promoted the benefits of the stock to employees.

    Six to eight senior executives have had to sell or are selling their investment properties after the margin loans were called in when Centro's share price plummeted 76 per cent on December 17, according to a former Centro executive. "

    The "point" is that he has completely shackled himself and his family to the performance of this stock, which creates the incentive to keep the stock up however possible.

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  • Comment Link Socrates Tuesday, 08 July 2008 23:36 posted by Socrates

    Your analysis of the CFO's stock purchase is laughably inept. Have you even considered how
    execs make these purchases in the real world - with loans/on margin, not with 100% cash!

    Stock market 101 tells you that you don't need $10M to buy $10M in stock. You combine
    that with the fact that the average purchase price on the first $20M of stock was at an
    average price

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  • Comment Link a b Friday, 04 July 2008 06:07 posted by a b

    http://georgiaretailmemories.blogspot.com/2007/03/century-plaza-mall.html

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  • Comment Link a b Friday, 04 July 2008 06:05 posted by a b

    Birmingham ghost mall
    http://georgiaretailmemories.blogspot.com/2007/03/century-plaza-mall.html
    yikes

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  • Comment Link a b Friday, 04 July 2008 05:30 posted by a b

    Interesting story about delay in CA project http://www.sacbee.com/elkgrove/story/1037325.html
    GGP denies problems leasing... was scheduled to open 2008, now fall 2009...

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  • Comment Link Reggie Middleton Monday, 30 June 2008 11:32 posted by Reggie Middleton

    @dbruton:
    I noticed this in their call as well. I am appalled that the analysts present did not take them to task on this. They have literally created a reality in which they can generate revenues and profits. Since not one can accurately predict what will happen 28 years into the future, and they have failed to give us a scenario for 29 months into the future, we should expect the worst.

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  • Comment Link dale brunton Sunday, 29 June 2008 02:52 posted by dale brunton

    Please note first paragraph of above comment attributed to me. The rest is from 2008 1st Qtr conf call Q&A...

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  • Comment Link dale brunton Sunday, 29 June 2008 02:50 posted by dale brunton

    Bernard Freibaum - Executive Vice President and Chief Financial Officer

    Increase in land value in Las Vegas and Houston used to create write-ups to offset write-downs in other markets. How can Las Vegas property be increasing in value? Projected cash flow from their strip property must be more than offsetting the suburban properties. It's not what you project for the next couple year that matters, its the next 28 that count. Long term thinking for a company in need of shorter-term cash.


    The valuation of land that's being developed over 30 years is very different process than valuing unsold homes for example, if you're a builder or even lots owned by a builder who has obviously got them in inventory. So the valuation process involves a long-term cash flow model with numerous assumptions, and this is what we use both for this annual evaluation as well as a re-valuation and effect every quarter to determine how much of our cost is attributable to land that it sold for booking profit. We did have a write down in Columbia and Fairwood fairly significant one but the total holdings there and the book value attributable to that land is low. So, the land in Vegas and Huston did make up for the reduction in the value of Columbia and Fairwood. Huston, the Woodlands and Bridgeland are two of the best projects in the city.

    The city remains very strong, very strong employment, the energy economy there is keeping things well balanced. There never was a bubble there, and in Las Vegas it's difficult to explain this, but never the less because of the limited availability of land in the valley and in particular in Summerlin. I know, Summerlin is just a section of the valley in the west, but if you look at the Summerlin submarket there isn't any additional land available and our company owns literally all the undeveloped land in Summerlin. The rest is owned by the Bureau of Land Management.

    And, the way the model works, if you do a 20 or 30 year long-term projection and you consider the net price of value of all that activity, you get a number and despite the soft current environment for housing including in Summerlin because builders have excess inventory. Yes, it has an impact on the land valuation in Summerlin, because the shorter-term cash flow has been reduced because of the lack of demand for land, but when you factor in the intermediate in the longer-term, and also I mentioned last quarter that after adjusting the estimate of salable acres during the last couple of quarters there, which hadn't been really visited for 5 or 10 years because of the nature of the way the land is developed in sections, would determine that we had a greater number of salable acres as well. So, that's another factor that when you take it into consideration despite the write down in Columbian Fairwood, the overall valuation of the entire portfolio remains where it was at the end of last year.

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  • Comment Link Jason Bohmann Tuesday, 24 June 2008 21:56 posted by Jason Bohmann

    I have been approached by two real estate development groups locally to invest and find private equity for 4 deals in the Houston area. Both of the groups know that my clients have money and an appetite for these types of deals.....
    I find it funny though because I've been wondering how long it would be before these groups come (are forced) to find alternative pools of capital.
    Both sets of developers are very successful and have great 5 to 10 year track records, but they have both stated that bank financing is completely dried up for r.e. projects..... even here in Houston where things are slowing, but still booming.
    Secondly, I heard today that Amegy (Zions owned) won't do jumbo loans because they can't get rid of them. They told this to a large corporate client for his personal home---he has big dollars on deposit.
    I can only imagine how it is in regions where thinks are in a meltdown.

    Also, just for grins, run a mortgage quote request at bankrate.com
    If you've done this previously (3 or 4 years ago) you would have seen 50 to 70 offers even if you put 5% down. I recently ran one on a 30 YR, 20% down, $300K loan and a total of 3 offers for quotes came in ..... there was a 75bps spread between them (BAC was the highest at 7%).
    If you think the housing market is going to turn around soon, you might want to tell the banks that they have to lend so people can buy.....

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  • Comment Link Reggie Middleton Tuesday, 24 June 2008 21:14 posted by Reggie Middleton

    You know, that I know, that you know there probably will not be any announcement. The commercial RE finance arena is getting rougher by the month, and GGP's situation is ornery for anyone who bother's to take a real look at what is going on.

    I am curious to see what will come of it. I'm sure you've noticed their share price is starting to break.

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  • Comment Link Donald Ruffkin Tuesday, 24 June 2008 10:55 posted by Donald Ruffkin

    No announcement "at or near the end of June"?
    "Just as we did last quarter, *at or near the end of June*, we expect to provide you with a summary of all the debt and/or other capital transactions that were completed or will close during the second quarter of 2008." from the Q1 08 CC: http://seekingalpha.com/article/74999-general-growth-properties-inc-q1-2008-earnings-call-transcript?source=yahoo&page=2

    Or earlier?
    "The Company will separately announce major financing transactions, if any, as they occur." from http://biz.yahoo.com/bw/080319/20080319006319.html?.v=1


    GGP has talked a big game on its financing options thus far, with no actual results. I think they are already undperforming relative to their claims thus far, but in another few days, they will miss their financing guideline provided in the Q1 08 call.


    In the meanwhile, the news on Steve & Barry doesn't bode well for the leasing environment. It's looking for rescue funding of $30M, and has hired GS and a bankruptcy lawyer. Yikes. They have 270 stores right now. The malls were paying S&B to open stores that would have been "barely profitable": "Much of the company's earnings came in the form of one-time, up-front payments from mall owners. Those payments were designed to lure the retailer to take over vacated sites, say several people familiar with the company."

    The malls are paying a marginal player like S&B with great one time payments just to keep their stores full. This is the sort of thing you typically see before a downturn, as attempts to throttle demand artificially on the margin start to backfire.
    http://online.wsj.com/article/SB121401142593693967.html

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  • Comment Link daan everts Tuesday, 17 June 2008 19:15 posted by daan everts

    During NAREIT the company mentioned they are issuing a private CMBS that could generate between 1.5bn - 3bn cash,, in order to meet their upcoming obligations. The deal was originally supposed to be for less, so aparantly they are seeing demand for their assets. I am concerned about that, otherwise I like it in a pair trade in which the long is DDR. thanks for the research.

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  • Comment Link a b Tuesday, 17 June 2008 16:42 posted by a b

    Independent Nashville researcher David Trainer says GGP, HIW "vastly overpriced".
    --Marketwatch.

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  • Comment Link Reggie Middleton Sunday, 15 June 2008 21:09 posted by Reggie Middleton

    Thanks but this was a collaborative effort and much of the content came from somewhere else. Ryland has done the same thing, swapped, long term debt for short term, and similarly their stock price is floating on water as well. hmmm!

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  • Comment Link James Perry Sunday, 15 June 2008 20:40 posted by James Perry

    Thanks for the update. This is a brilliant article - possibly your best yet (which is really saying something!) given the level of detailed explanation.

    Like you, I was really surprised that they paid down the revolver. It makes no sense unless, as you said, the banks are becoming much less willing to lend to them.

    Whatever's going on, it doesn't look good.

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