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