My Response to the GGP Press Release, which seems to respond to blogs...

An interesting press release that was posted in this blog's user groups (you can click here for more on the source )... 

General Growth Responds to Recent Statements in the Press and Blogs
Saturday January 19, 9:19 pm ET


CHICAGO--(BUSINESS WIRE)--General Growth Properties, Inc. (NYSE:GGP - News) announced today that it is required to respond to recent inaccurate statements and irresponsible suggestions that the Company might default on its debt obligations or file a petition for bankruptcy. Irresponsible! I hope they weren't referring to my blog. The Company would ordinarily not respond to these types of statements and suggestions, but in light of the current fragile condition of the real estate capital markets, it believes that it is now both imperative and in the best interests of its creditors, stockholders and employees to do so immediately. The Company responds with the following factual statements:
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. Well, this blog never mentioned the "B" word.
Since its formation over 50 years ago, the Company has borrowed and repaid billions of dollars of loans and has never failed to pay any loan upon maturity. Past performance is not necessarily an indication of future results.
Using conservative third party views of the current private market value of our real estate, there is currently at least $15 billion of equity value in excess of all of our debt and liabilities. I don't agree with this being very "conservative." More on this later... With approximately 300 million outstanding shares and equivalent operating partnership units, this $15 billion of equity value in excess of debt and liabilities translates into a value of $50 per share, more than 50% above our closing price of $32.86 on Friday, January 18, 2008. This means that management should be mortgaging thier houses in order to guy as much as this cheap stock as possible. Hmmm... Strange, our GGP Insider Trading Analysis - 2007 doesn't show this. I wonder why not?? After all, according to management, one can buy these interests in real estate for a mere 66 cents on the dollar, or less. Other experts place the value of our real estate above our debt considerably higher than $50 per share. Well then those other "experts" should be jumping the GGP share buying spree bandwagon as well. It is always most credible to put your money where your mouth is. Hey, I do it.

Conservative loan-to-property-value mortgage loans are in fact currently available to the Company for its income producing commercial properties. There is no doubt about that. It is the properties that don't produce income or are underwater that has out attention. See the charts below. As previously set forth in the Company’s press releases on January 8th and 17th, because of the strong property income for financing purposes on these properties, the Company will be able to obtain mortgage loans at conservative loan-to-property-value ratios of 50%-60%.
Newspaper stories and blogs have compared GGP to other companies or individuals that recently utilized multi-billion dollar short term acquisition loans that are coming due in February of 2008. The Company has no such multi-billion dollar loans. Let's get our semantics straight. There are no multi-billion dollar loans, are no multi-billion dollar "short term: loans, coming due in 2008. My research shows you have a pretty big tab to refinance over the next three years, starting in this year. The last material acquisition made by the Company was the purchase of The Rouse Company, which closed in November of 2004. At that time, an $8 billion four-year acquisition loan was obtained to complete the approximately $14 billion purchase. By early 2006, almost two years before it was due, the acquisition loan was repaid in full.
The Company also owns unencumbered income producing and development in progress properties that the Company believes have a value for financing purposes of at least $2.5 billion. These assets can be used through a variety of means to raise substantially more capital than could be required, even under the most “doomsday” of future possible scenarios for how the current commercial retail real estate markets might evolve over the next two years.
Despite current indications of softening specialty retail sales, our malls are well occupied pursuant to long-term leases. Taking into account actual 2007 Comparable NOI growth, and even assuming a weaker overall economy, the Company continues to expect Comparable NOI growth will average at least 5% for 2007-2009. So, you will defy the local, regional, national and global economies??? My research shows your rents are probably softening already, despite the fact you state otherwise. Now, I can be wrong, of course, but the evidence does point to the contrary.
Bernie Freibaum, Chief Financial Officer of General Growth, said, “we do not like to publicly respond to unwarranted and untrue allegations, but we must do it in order to protect the interests of our Company’s constituents. We wholeheartedly agree with Barry Vinocur?s reaction to this situation, which he published in his newsletter today. Mr. Vinocur is the highly regarded editor and publisher of REIT WRAP, a daily subscription service that is purchased by virtually all institutional investors in REIT stocks. Mr. Vinocur said that "raising the possibility" that a company might file bankruptcy, especially in today's environment, is very serious stuff. Moreover, is there any knowledgeable individual who would suggest there?s even a remote possibility that GGP might file bankruptcy?? 

Finally, continued Bernie Freibaum, Mr. Vinocur adds that "the editors signing off on this crap should have their press passes yanked." Well, we don't have press passes at this blog. We are investos and analysts, not reporters an editors. If we get it wrong, we lose money, not press passes. This is a new paradigm, Mr. Vinocur. It's not media, it's NEW MEDIA!!!

Now, for an official response...

It appears that the company has presented the most optimistic scenario that it can look for under the current deteriorating credit market conditions and softening commercial real estate market. This is, in itself, something that runs to the contrary of what I put out into the public domain. I am very, very conservative in my assumptions, unless visibly noted otherwise. GGP has reported $15 bn in excess equity over debt, translating into $39 bn valuation of the company (after adding back total debt of $24 bn as of September 30, 2007) compared to our valuation of $29.5 bn (under the base case).

The valuation primarily differs on the following grounds:

• The effective annual cap rate of 6.5% (assumed by the company based on annualized 3Q2007 NOI) seems to be on the higher side in the medium-to-long term period, paticularly in in the wake of softening retail sales and lowering GDP and economic growth forecasts. This is yielding into higher a GGP valuation compared to our valuation based on a cap rate of 4.75%. If the recession scenario turns into reality (a statement which exemplfies my conservative approach - the reality is that we are already in recession/hard landing territory and have officially entered an equity and real asset bear market), the lower or negative growth in rentals in the coming years (2008-2010) will certainly impact the valuation
• The company seems to have factored in a growth of 5% in NOI (in the near-to-medium) in contrast to our assumption of only 1-1.5% growth in rentals over a longer period and negative growth in 2008 and 2009 (in the base case scenario, again negating the glaring evidence of a hard landing/recession). The company has based its estimates for NOI (rental) increase on historical growth (in 2007) which ignores the current commercial real estate market and credit market conditions which have changed drastically in the second half of 2007. The conditions are expected to turn only negative from here onwards. Financial analysis is forward looking, and not historical.
• Although the occupancy levels in the company’s malls have not been impacted significantly till now, the situation may change in the wake of expected fall in commercial rentals with its existing tenants (even on long-term lease) starting to explore other facilities available with lower rentals, or actually facing contraction and/or issues of solvency.
• Like the company, our model and valuation (as of now, we are running a default/foreclosure scenario that will be posted soon) assumes that GGP will be able to refinance its existing debt liabilities. However, it is to be noted that the additional finance would come at higher rate of interest and the interest expense would adversely impact its bottom line in view of lower expected growth in net operating income off expected softening of commercial real estate market.

This should explain our analysis which takes into consideration much more realistic assumptions of estimates rental growth, cap rate, occupancy levels, interest rates, etc under the current conditions.

The downloadable pdf report actually got published sans some of its more illustrative graphs. I will post them here to clear the air, and then update the pdf.

GGP Debt due? It loos like 2008 will be a year with multi-billion dollar loans due. So will 2009, 2010, and 2011

A bit more realistic than the press release above, in my opinion

Yes, they have unencumbered properties, but they have super encumbered properties as well. Excluding this information impairs credibility, in my humble opinion

They were a little over optimistic on that cap rate thing as well

We feel they have been a little optimistic on rental spreads as well

Study there debt maturities for yourself. Don't take our word for it...

Comments (9)

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GS751: ... http://thevolatilitysoma.blogspot.com

they are going to get slaughtered I like the line about "put your money where your mouth is."

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January 21, 2008
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Rob Dawg: Fiduciary Responsibility

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.
It is the fiduciary responsibility of any company in the distressed market conditions GGP finds itself to have contemplated every possible scenario. That the Company says in no uncertain terms that it has no intention of contemplating the possibility is in itself an abrogation.

IMO this press release is going to haunt them. Any plans or communications that come out in the future showing they were performing their duty and studying all contingencies prior to this date damns them. Any conclusions that they were telling the absolute truth damns them. Catch-22.

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January 21, 2008
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Reggie Middleton: From an anonymous poster...

The company I work for is currently a tenant of one of GGP's properties (in the top 100 of the
list above), and will be vacating when the lease expires this April, as negotiations were unsuccessful at moving GGP from their position of a nearly 100% increase in rental rate. Several other tenants are said to be leaving as well, and signs have recently gone up advertising
vacancies.

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January 21, 2008
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kyzrsoulsay: ...

i think if you look at the cfo's purchases from the insider trading - who must have been the cowboy calling the shots on sending out this deranged rambling press release over the weekend - he actually has been buying the stock from what i can tell and has lsot some real money..probably bought on margin and now he is going to get a margin call if it dips much lower.
Me thnks they protesteth too much - if they dont have a problem just stay mum refi and make everyone that sold too low look like a fool...but dont send out a weak releas like this...probably will attract short sellers who sense weakness...

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January 22, 2008
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Reggie Middleton: The 50 years of performance in never failing to pay a mortgage apparently includes a liquidation held in 1984!

General Growth, Equitable Life In Property Pact --- Trust to Sell Shopping Areas For $425 Million as Part Of Its Liquidation Plan
By Matt O'Connor
21 March 1984
The Wall Street Journal

DES MOINES, Iowa -- General Growth Properties said it signed a letter of intent to sell 19 shopping centers to Equitable Life Assurance Society of the U.S. for more than $425 million.

The agreement marks the first step in the real estate investment trust's proposed liquidation, General Growth said.

The trust said Equitable also will assume more than $280 million in long-term mortgages owed by General Growth. The insurer would pay as much as an additional $55 million depending on the earnings growth of some of the shopping centers next year and in 1986.

General Growth said it will continue to manage the shopping centers.

Martin Bucksbaum, chairman of the trust's management companies, said he and his brother, Matthew, president, plan to continue their nationwide real estate development activities after General Growth is liquidated. Family holdings in General Growth total about 2.6 million, or 24.7%, of the trust's shares outstanding, Martin Bucksbaum said.

Under the proposed sale, the trust's holders would receive early next year between $25 a

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January 22, 2008
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willydog66: ...

Great job Reggie! Just reinforces my belief that these guys are completely inept and clueless. I mean seriously, what kind of multi billion dollar corporation actually has a press release on what is being discussed in blogs? They need to get their heads out of the noise and figure out what they can do to save their company and grow shareholder value.

GGP should be changed to GGG (going, going, gone).

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January 22, 2008
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Reggie Middleton: Vacancy rates at regional malls climbed to their highest point in three years during the fourth quarter

Regional Mall Vacancy Rates
Reach Highest Level in 3 Years
From WSJ.com
By KRIS HUDSON
January 11, 2008 12:10 p.m.

DALLAS -- Vacancy rates at regional malls climbed to their highest point in three years during the fourth quarter, while vacancies at U.S. strip malls and neighborhood shopping centers also continued to rise.

Vacancies at regional malls rose to 5.8% last quarter, up from 5.5% in the previous period. The latest result marks the highest point for mall vacancy rates since early 2004, according to real-estate research firm Reis Inc., and indicated that the faltering economy is now dogging even the most stable of retail-property categories.

Meanwhile, strip malls -- smaller centers with fewer big, anchor tenants -- registered an increase in vacancy to 7.5% last quarter, up from 7.3% in the third quarter.

Average rents declined at regional malls in the fourth quarter for the first time since early 2005, dipping to $40.37 per square foot last quarter from $40.55 in the third period. Asking rents at strip malls in the top 76 U.S. markets rose slightly to $19.49 per square foot from $19.37 in the previous quarter.

"Typically, what we see with regional malls is the vacancy won't begin to creep up until things really begin to slow," said Sam Chandan, chief economist at New York-based Reis.

Many real-estate watchers predict a difficult 2008 for the retail-property market as consumers troubled by falling home values, escalating mortgage payments and mounting home-loan defaults curtail their spending. Analysts expect that bankruptcies will increase among second-tier retailers this year and that some national retailers will rein in their expansion plans.

By many accounts, sales increases during the past holiday season were anemic. Research firm Retail Metrics Inc. reported Thursday that the 43 retailers it tracks posted a gain in sales at established stores of just 1.7% for the November-December period, the lowest gain for the two-month span since 2002. Two-thirds of those retailers fell short of their own forecasts for holiday-sales gains.

Those factors bode poorly for regional malls in this year's first half. "In 2008, as the economy weakens further and consumer spending slows, there will be further deterioration in the regional mall occupancy rate," Mr. Chandan said.

Despite the economic jitters, large shopping-center owners remain optimistic about their ability to ride out any downturn or recession. Many of those real-estate investment trusts have adequate liquidity and diverse tenant bases in their properties. "You look at the big tenants, and you just don't see any wrecks on the side of the road," said Stephen Sterrett, chief financial officer of mall REIT Simon Property Group Inc., at a Deutsche Bank investors conference in New York on Thursday. "I do think there will be some smaller bankruptcies, and there will be some tenants who want to close stores outside of bankruptcies."

Daniel Hurwitz, president and chief operating officer of strip-mall operator Developers Diversified Realty Corp., said his company has seen some slowdown in leasing to smaller apparel retailers but not from grocery or big-box retailers. "We are seeing some resistance ? from some of the ready-to-wear tenants who are rethinking their strategies in some markets," he said at the Deutsche Bank conference. "In our core business, which is the large community centers and power centers, we're seeing little or no difference."

On a local-market basis, Reis noted increases in strip-mall vacancy rates in markets including Fort Lauderdale, up 0.9% to end last quarter at 7%; San Diego, up 0.7% to end at 3.8%; and Detroit, up 0.4% to end at 9.4%. Vacancy rates remained stable in previous trouble spots Las Vegas, Orange County and San Bernardino, Calif.

"Southern California and the Inland Empire area have probably had more foreclosures than many areas of the country. [Retail] sales are flat in that area," said Robert Michaels, president and chief operating officer of mall REIT General Growth Properties Inc., at the conference. "In Florida, we have a couple of centers in Miami that are doing very well, and in Orlando. Where we've seen some slowdown in Florida is in the suburban markets. Michigan is slower than the rest of the Midwest. The balance of the Midwest ? has been very strong."

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January 22, 2008
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Reggie Middleton: Housing Drop Saps Retail Landlords' Strength

See WSJ.com for full article
By KRIS HUDSON
January 9, 2008; Page B1

A common real estate maxim states that retail development follows new housing. These days, though, retail real estate may be following the home market off a cliff.

Sparked by the housing boom across the country, shopping-center and mall developers have gone on a tear in recent years, delivering millions of square feet of new space in Phoenix, San Antonio, Cleveland, Tampa, Fla., and numerous other markets. Since 2005, developers in the U.S. have produced more retail space than office space, rental apartments, warehouse space or any other commercial real estate category.

But just as that new space is hitting the market, demand is declining. Mounting home foreclosures have sapped the strength of previously hot markets like Phoenix and California's Inland Empire near Los Angeles, leaving retail-property owners with rising vacancies and slower leasing rates for new space. And anemic sales gains in the just-completed holiday season fell short even of the retail industry's tepid preseason forecast.

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January 22, 2008
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Reggie Middleton: General Growth's Indebtedness Raises Fears Among REIT Investors

Excerptd from http://online.wsj.com/article/...=wsjcrmain

General Growth's Indebtedness Raises Fears Among REIT Investors
By HERB GREENBERG
January 19, 2008; Page B3

"Our substantial indebtedness could adversely affect our financial health and operating flexibility." Such boilerplate "risk factor" disclosures, such as that one from recent annual reports of Chicago-based mall developer General Growth Properties, are usually overlooked by investors as standard warnings for anything and everything that could go wrong.


But after default worries in recent weeks nearly wiped out the stock price of Centro Properties Group, an Australian shopping-center operator with large holdings in the U.S., investors in General Growth Properties started taking notice.

For good reason: Among large, actively traded real-estate investment trusts, General Growth's debt relative to assets and capitalization is higher than most. And most of its debt, which at last count topped $25 billion, isn't just any debt. Unlike most of its peers, such as Simon Property Group, which rely on the public debt markets and run more conservative balance sheets, most of General Growth's debt is in the form of good old-fashioned mortgages and construction loans that are secured against specific malls. In those recent freewheeling days of easy money, General Growth would from time to time dip into the once-thriving mortgage-backed-securities market.

The company's approach to financing made General Growth, which has more than 200 properties in 45 states, "more risky than its peers," says Steven Marks, managing director of the REIT group at Fitch Ratings, which rates the company's debt as "junk." While Fitch hasn't made any changes to General Growth's "stable" outlook, and doesn't believe that the REIT is another Centro in the making, Mr. Marks acknowledges that General Growth is "next on the list" after Centro, with $6 billion of debt that needs to be refinanced over the next two years.

General Growth didn't respond to calls for comment.

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January 22, 2008
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