Reggie Middleton's Boom Bust Blog

This is an actionable intelligence note for profesional level subscribers.

We have done a sensitivity analysis of Macerich's (MAC) valuation based on different scenarios representing re-financing conditions and sale assumptions.  We have broadly assumed four scenarios loosely based upon the options that were available to GGP (see GGP and the type of investigative analysis you will not get from your brokerage house), which had a vastly superior portfolio:

• Re-financing scenario: Macerich would be able to re-finance all its loans, though at higher interest rate (6.5%, which is slightly conservative considering they just announced 2 loans at 6% and 7.5% in an increasingly adverse environment).
• Sale scenario: Macerich would be able to re-finance its properties at 65% LTV and the balance of re-financing requirement would be met through sale of some of its properties. We expect MAC to sell a few properties at a discount to the current NOI-based valuation (assuming 15% discount, again taking into consideration the success of GGP over the last few months given their significantly superior portfolio).
• Foreclosure scenario: Macerich would be able to refinance its properties at 65% LTV and will have to foreclose some of its properties to meet its re-financing requirements. As a result of foreclosure, we expect MAC's interest rates to increase (by 250 basis points).
• Distressed scenario: Macerich would be able to re-finance at 50% LTV and would have to sell and foreclose some of its properties to meet its re-financing requirements. This is the worst case scenario under which we expect a 20% discount on NOI-based valuation on sale of properties and increase in refinancing costs by 350 basis points. All these conditions may drive the company close to a bankruptcy situation.

The hard core fundamental anlalysis of this blog has been paying off in spades for many subscribers - creating real wealth, preseving significant wealth, and actually creating bonuses for Wall Streeters in a time fluttering pink slips. I simply implore that all who have benefitted from the research make the effort to give back to those who are in need and are less fortunate.

Now that I have my PSA (public service announcement) out of the way, we can move on. Several banks have contacted me over the course of the past year concerning my GGP research. Some of them offered many multiples of the highest level of paid subscription to gain custom access to the content on the blog (at that time I did not sell access). Let me be blunt, this preview of the report to come next week is easily worth several thousand dollars by itself. I used the same methodolgy that I used in finding GGP and analyzing it. Last week I gave a sample comparison of REITS( REIT comparison update - Retail (818 kB 2008-11-07 12:27:49)), and this actionable alert is an early preview of the full forensic analysis to come next week for professional subscribers. Frankly, this company is in trouble, despite the proclamations of management, and can easily see the same fate as GGP.

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We have conducted an initial analysis for SL Green (SLG) in line with other 4 other REIT’s, including the target of our initial REIT actionable update for the quarter which has dropped 66% since the update.  The accompanying spreadsheet offers the statistical data and initial observations on SLG.
 REIT comparison update - Retail (818 kB 2008-11-07 12:27:49)

I have also included a detailed professional spec sheet for the initial retail REIT actionable note that includes properties, LTVs, and encumbrances.

REIT Actionable Item Statistics Spreadsheet - Pro (356 kB 2008-11-07 12:26:19) 

General Growth borrowed to create a massive portfolio of more than 200 properties in 44 states, including a $14 billion deal in 2004 to purchase the Rouse Co., which owned Fashion Show mall, Summerlin Centre and several other Las Vegas properties.

Company stock started slipping several months ago as prospects for consumer spending waned.

Shares went into freefall more recently when investors realized the confluence of the credit crunch with an emerging recession would make it difficult, if not impossible, for General Growth to make good on its debts.

Financial blogger Reggie Middleton, whose detailed criticisms of General Growth were posted online at www.boombustblog.com in January, months before management acknowledged serious problems, said the news Monday wasn't a surprise.

"Of course it could have," been prevented, said Middleton. "They didn't take care of the problems."

He criticized management not only for over-leveraging the company long ago but for compounding the problem through mismanagement.

Middleton said General Growth officials heaped blame on short sellers for forecasting a demise, got the company added to the list of firms protected from short sellers that was created in September to protect banks, then dumped millions of their own shares to meet margin calls.

"The latter part of the share price compression was the management's own making," Middleton said. "They owned a lot (of stock) on margin. They sold more shares than speculators like me ever would."...

... Wally Brewster, General Growth Properties senior vice president of marketing and communications, said the malls are healthy on an operational level...

... As for the notion that General Growth officials would seek a buyer for the entire company, "We always look at all the options."

Brewster also responded to the idea that company officials could have averted the problem by taking action earlier.

"I think we stand on our success of the past 50 years," Brewster said. "We are now dealing with an environment I don't think the U.S. has seen since the Great Depression."...

...  Moore agreed with Middleton that the moves on Monday aren't likely to preserve General Growth as a complete entity. He added that current problems could have been averted had management girded the balance sheet before the credit markets went south.

The moral of the story?

"Leverage is very, very dangerous," Moore said.

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"The Company also announced that it has recently come to the attention of the Board that an affiliate of a Bucksbaum family trust advanced unsecured loans to Mr. Michaels and Bernard Freibaum, the company’s former director and CFO, for the purpose of repaying personal margin debt relating to company stock. The loan to Mr. Michaels, which totaled $10 million, has been repaid in full. The loan to Mr. Freibaum, whose employment was terminated prior to the Board’s knowledge of these loans, totaled $90 million and has $80 million presently outstanding.
A review by the Company’s independent directors concluded that, while the failure to disclose the loans to the Company’s Board of Directors did not follow internal company policy, no company assets or resources were involved in the loans and that no laws or Securities and Exchange Commission rules were violated as a result of the loans."

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