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For those that don't know, GGP represents one of my most
comprehensive research projects. Click here for a list of my work and here for reader commentary on potential shenanigans. For
everybody else, let's go through this and see if they did as well as
management preached...
FINANCIAL AND OPERATIONAL HIGHLIGHTS
- Core FFO
is defined as Funds From Operations excluding the Real Estate Property
Net Operating Income (NOI) from the Master Planned Communities segment
(and WHY are we stripping this out???)and the (provision for) benefit from income taxes. Core FFO for the
first quarter of 2008 was $226.6 million or $0.76 per fully diluted
share as compared to $192.4 million or $0.65 per fully diluted share
for the first quarter of 2007. Certain non-cash revenues and expenses
included in Core FFO (This always raises suspicions. Instead of telling us what it is, they say "certain" items, and the fact that they were reduced compared to last year makes me even more curious) resulted in approximately $15.8 million or $0.05
of Core FFO per fully diluted share in the first quarter of 2008 as
compared to $29.0 million or $0.10, respectively, for the same period
of 2007, representing a decrease of approximately $0.05 of Core FFO per
fully diluted share. Minimum rent in the first quarter of 2008 includes
approximately $21.0 million of lease termination income compared to
approximately $3.7 million of lease termination income for the first
quarter of 2007, representing an increase of approximately $0.06 of
Core FFO per fully diluted share. Lease termination fees are not an ordinary income item in my book, hence they really cannot be replicated without volatlity for any length of time and should be stripped out as extraordinary or non-operating items, particularly when they are at these levels. More telling is the fact that they were actually included in the first place. The fact that you have a lease termination means that tenants are leaving, and they are leaving before lease maturity and willing to pay a fee for the pleasure. This screams bad macro scene to me. Take a look at the numbers and do the simple math - GGP is encountering a 568% increase in lease terminations, not expiries, but terminations. Should the prudent investor really expect such a significant jump in terminated retail shopping mall leases to be replaced by equal or greater revenue in the midst of a consumer led recession? As a matter of fact, would they be able to replace this income at all?
- FFO per
share was $0.75 in the first quarter of 2008. FFO for the quarter
declined to $223.2 million from $491.7 million in the first quarter of
2007. The significant decline in FFO is primarily due to the
approximately $298 million, or $1.00 per share, total tax benefit
recognized in the first quarter of 2007 attributable to the tax
restructuring of certain of our operating subsidiaries. Excluding the
effect of such tax benefit, 2008 FFO increased approximately $29.5
million, or approximately 15.2%, from 2007 FFO. Now,if you strip away the extraordinary/non-operating items (at least at these levels) called lease termination fees of $21 million, you will get a $8.5 million dollar gain. This $8.5 million gain came from several hundred million dollars of investment, such as the acquisition of the Homart properties mentioned below, among others. Hmmm. It doesn't look good here. I don't see how any banker could justify refinancing GGP loans when their real cash flow is on the fritz. In addition, the lease termination fees speak for themselves. The leases are terminating at a 568% y-o-y clip, which means vacanies will be rising quickly and significantly. Even if GGP were able to fill these vacancies quickly in a recession with retailers pulling back on all expenses (doubtful), they would be doing so in a much weaker leasing and rental market. Bad news no matter how pretty you try and paint it.
- EPS
for the first quarter of 2008 were $0.03 per share versus $0.94 in the
first quarter of 2007. Our first quarter 2007 EPS were significantly
impacted by the tax restructuring, which increased net earnings, net of
minority interest, by approximately $245 million or approximately $1.00
per share.
- Core FFO per share guidance
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Core FFO per share for the full year 2008 is currently expected to be
in the range of $3.52 to $3.58 per share. Our Core FFO per share for
the full year 2007 was approximately $2.97 per share. As previously
reported, full year 2007 Core FFO per share was reduced by certain
other significant earnings charges incurred in the fourth quarter of
2007. The increase in full year 2008 Core FFO per share reflects the
exclusion of such 2007 items. Full year 2008 Core FFO guidance also
reflects the issuance of an additional 23 million shares of common
stock sold in the first quarter of 2008. |
SEGMENT RESULTS
Retail and Other Segment
- NOI
for the first quarter of 2008 was $632.6 million, an increase of
approximately 13.2% over the $558.7 million reported in the first
quarter of 2007.
- Revenues from consolidated properties
were $798.3 million for the first quarter of 2008, an increase of 18.3%
compared to $674.6 million for the same period in 2007. The majority of
this increase is due to the acquisition of our venture partner’s
interest in the Homart I properties in July 2007, which resulted in the
consolidation of 20 of the 23 properties in that portfolio that were
previously reported as unconsolidated in our operating results.
Excluding such acquisition, consolidated revenues would have increased
by approximately $23.1 million or 3.4%. And if you strip out non-operating income such as the lease termination fees, revenue was flat year over year, and potentially negative if were to find out what those "certain" items are that were mentioned above.
- Revenues from unconsolidated properties, at the Company’s
ownership share, declined to $146.6 million or 19.2% compared to $181.4
million in the first quarter of 2007. The decline was due to the
acquisition of our venture partner’s interest in the Homart I properties.
- Total tenant sales
increased 0.2% and comparable tenant sales increased 0.9% in 2008, both
on a trailing 12 month basis, compared to the same period last year. This figure would not encompass the effect of the recesionary slowdown
- Comparable NOI from consolidated properties in the first quarter of 2008 increased by 5.1% compared to the first quarter of 2007. Again, this is misleading because the amount of consolidated properties went up considerably. The properties performance seems to have the implication of deteriorating performance. You can't say I bought XXX% more in porperties but my NOI went up by X% and expect me to believe that all is rosy.
- Comparable NOI from unconsolidated properties at the Company’s
ownership share in the first quarter of 2008 increased by approximately
7.3% compared to the first quarter of 2007. This sounds good, but as you may have gathered, I am not a believer. Seeing is believing.
- Retail Center occupancy decreased slightly to 92.7% at March 31, 2008, compared to 92.9% at March 31, 2007. Wait until the effect of the 568% increase in lease terminations kicks in. If that trend continues in any meaningful fashion, the next few quarters will be ugly, whether they cure their financing problems or not.
- Sales per square foot for first quarter 2008 (on a trailing twelve month basis) were $460 versus $459 in the first quarter of 2007. Again this is a trailing indicator, and will not reflect what has happened recently.
Master Planned Communities Segment
- NOI in the first quarter of 2008 for
the Master Planned Communities segment was a loss of $0.9 million for
consolidated properties and income of $7.7 million for unconsolidated
properties as compared to income of $3.6 million and $5.7 million,
respectively, in the first quarter of 2007. The NOI loss in the first
quarter of 2008 is due primarily to certain operating expenses which
cannot be completely eliminated despite the significant reduction in
current sales revenues. Oh, this is why they utilized the "Core FFO" nomenclature, to minimize the impact of this drop and loss. Unfortunately, you really cannot chop the unprofitable portion of your company off of the financial statement and call only the part that makes money "Core". Otherwise, my "Core" investment returns are 1,200 percent per year!!!
- Land sale revenues in the first quarter of 2008 were
approximately $9.1 million for consolidated properties and
approximately $23.1 million for unconsolidated properties, compared to
$23.8 million and $13.4 million, respectively, in the first quarter of
2007. Land sales continue to be at a very slow rate in 2008, a trend
that is expected to continue into 2009. This is a big problem area for them. Think of the damage it has done to the homebuilders! Raw land is quite illiquid.
Alas, the conference call and the the 10Q should have more detailed information for us to sink our teeth into. I am under the impression that I am not welcome on the conference call, but I do know quite a few analysts follow this blog - so you guys know the pertinent questions to ask, ie. non-recurring revenue in lease termination fees, the family trust thing which looks very suspicious, and how GGP can post positive numbers in a recession with everybodey else posting negative. You may also want to inquire about their success in finding funding. I have had more than one set of potential GGP financiers and funding sources approach me about my opinions.
- Comparable NOI from consolidated properties in the first quarter of 2008 increased by 5.1% compared to the first quarter of 2007. Again,
this is misleading because the amount of consolidated properties went
up considerably. The properties performance seems to have the
implication of deteriorating performance.
- Comparable NOI from unconsolidated properties at the Company’s
ownership share in the first quarter of 2008 increased by approximately
7.3% compared to the first quarter of 2007. This sounds good, but as you may have gathered, I am not a believer. Seeing is believing.
- Retail Center occupancy decreased slightly to 92.7% at March 31, 2008, compared to 92.9% at March 31, 2007. Wait
until the effect of the 558% increase in lease terminations kicks in.
If that trend continues in any meaningful fashion, the next few
quarters will be ugly, whether they cure their financing problems or
not.
- Sales per square foot for first quarter 2008 (on a trailing twelve month basis) were $460 versus $459 in the first quarter of 2007. Again this is a trailing indicator, and will not reflect what has happened recently.
Master Planned Communities Segment
- NOI in the first quarter of 2008 for
the Master Planned Communities segment was a loss of $0.9 million for
consolidated properties and income of $7.7 million for unconsolidated
properties as compared to income of $3.6 million and $5.7 million,
respectively, in the first quarter of 2007. The NOI loss in the first
quarter of 2008 is due primarily to certain operating expenses which
cannot be completely eliminated despite the significant reduction in
current sales revenues. Oh,
this is why they created the "Core FFO" nomenclature, to minimize the
impact of this drop and loss. Unfortunately, you really cannot chop the
unprofitable portion of your company off of the financial statement and
call only the part that makes money "Core". Otherwise, my "Core"
investment returns are 1,200 percent per year!!!
- Land sale revenues in the first quarter of 2008 were
approximately $9.1 million for consolidated properties and
approximately $23.1 million for unconsolidated properties, compared to
$23.8 million and $13.4 million, respectively, in the first quarter of
2007. Land sales continue to be at a very slow rate in 2008, a trend
that is expected to continue into 2009. This is a big problem area for them. Think of the damage it has done to the homebuilders!
Unfortunately, I am reviewing their press release on practically no sleep and without my model in front of me so will have to review what I wrote in the morning when my brain is not mush. Alas, the conference call and the the 10Q should have more detailed information for us to sink our teeth into.
I am under the impression that I am not welcome on the conference call,
but I do know quite a few analysts follow this blog - so you guys know
the pertinent questions to ask, ie. non-recurring revenue in lease
termination fees, the family trust thing which looks very suspicious,
and how GGP can post positive numbers in a recession with everybodey
else posting negative. You may also want to inquire about their success
in finding funding. I have had more than one set of potential GGP
financiers and funding sources approach me about my opinions.
And... this just in from one of my astute blog readers who admittedely gave this more time and attention than I did but came to the exact same conclusions, only better articulated...
Q1 2008 Highlights
The lease termination income thing is really, really
peculiar and interesting. This goes through a bunch of stuff on the Q,
but the biggest thing appears to be the lease termination element. It
doesn't bode well. The change in occupancy is also amazingly steadily
declining - so while it is also interesting that we are finally showing y/y
drops in occupancy, the very linear trend (plus the really high lease
termination income) implies that future might not be too bright either.
Also, a calculation below fairly convingly shows that GGP burned $30M of cash
on a normalized basis in this Q. If you do a reasonable normalization for
the lease termination income, GGP missed guidance by a healthy margin.
Finally, it is notable that both TCO and SPG reported lower lease termination
income in Q1 2008 - GGP was the only to report higher, and boy was it way
higher.
A UBS analyst said the results were solid (attached) - they
go into no depth, and basically infer strength off of the FFO figure, and
rationalize it by saying this means the redevelopment activity from 2006 and
2007 must have been very helpful. Needless to say, it seems very clear to
me that it was actually due to lease termination income.
From our standpoint,
- Change in occupancy is
trending downwards,
- People are breaking their
leases at an incredible rate which doesn't bode well for future income
(less occupancy, no fee income from lease breakage),
- No mention of financing news
implies nothing has happened on that front,
- No mention of co-participator
in equity offering or the Citigroup situation supports notion that our
askance view of this is justified
On the flip side, normalized NOI and normalized Core
FFO were still up 2% and 9% respectively, implying the core operations still
seem to be improving somehow. I assume it is due to rental rates
improving, but that information is not yet available.
On balance, I think this is negative for GGP. Core
operations by a couple metrics appear to be truly deteriorating for the first
time, and the financing situation must not have improved at all. If
occupancy continues to trend down and the termination income trends work
themselves out, while the lending market remains tight, GGP will have a
liquidity crunch.
Lease Termination Income - Extremely high absolutely,
relative to past and relative to comps - needs to be normalized for!
As was mentioned previously, lease termination was something
to keep an eye on because it skyrocketed in Q3 and Q4 2007. It appears to
be accelerating, and is also way larger than what we're seeing at SPG.
Below is GGP's historical data on this:
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Q1 08
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Q4 07
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Q3 07
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Q2 07
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Q1 07
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Q4 06
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Q3 06
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Q2 06
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Q1 06
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Lease
Term. Inc.
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21.0
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17.2
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10.9
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3.5
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3.7
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3.8
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3.0
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2.0
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22.4
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Revenues
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988.9
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1,075.5
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1,015.3
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920.8
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894.0
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1,165.2
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909.0
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875.6
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993.1
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% of
Sales
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2.1%
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1.6%
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1.1%
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0.4%
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0.4%
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0.3%
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0.3%
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0.2%
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2.3%
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%
Growth
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462.1%
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357.4%
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264.8%
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72.1%
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-83.3%
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These figures are extremely large and growing at an
accelerating pace but were not really mentioned at all, just as they weren't in
the last call. To put this in comparison we can compare this to SPG
(who accounts for this as 'lease settlement income'):
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Q1 08
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Q4 07
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Q3 07
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Q2 07
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Q1 07
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Q4 06
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Q3 06
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Q2 06
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Lease
Termination Income
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7.88
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5.00
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4.19
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2.19
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22.76
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1.86
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1.67
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4.08
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Total
Revenue
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1190.3
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1361.4
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1187.8
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1130.1
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1042.5
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% of
Sales
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0.7%
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0.4%
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0.4%
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0.2%
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2.2%
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%
Growth
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-65.4%
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168.4%
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150.4%
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-46.3%
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TCO also reported a decline in lease termination income in
Q1 2008, which makes GGP even more peculiar given its large size. Also,
note just how much larger lease termination income is as a % of revenues for
GGP relative to SPG. It is way, way larger.
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Change in Occupancy Has Been Declining in a Very Steady,
Predictable Way and Dropped for the First Time
The pro rata data makes this very clear. I show it
below:
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Q1 08
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Q4 07
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Q3 07
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Q2 07
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Q1 07
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Q4 06
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Q3 06
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Q2 06
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Q1 06
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Occupancy
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92.7%
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93.6%
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93.1%
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92.8%
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92.9%
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93.6%
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92.3%
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91.2%
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90.9%
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Change in
Occ.
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(0.2%)
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0.1%
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0.9%
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1.6%
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2.0%
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The attached graph shows a clear trend here - if this
persists, by the end of the year, GGP will see its occupancy dropping by over 1
percentage point.
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It is probably fair to assume lease termination income is
a sign that occupancy will continue to fall
GGP has made no mention of these alarming trends in
occupancy or lease termination income. Lease termination income
represents the fee GGP takes when a tenant breaks its lease before expiry. The
only logical conclusion, upon seeing these abnormally high figures, is that
tenants are breaking leases and leaving. Naturally, this would imply
future occupancy will decline.
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FFO ended up strangely close to "analyst
expectations", but without lease termination income, it was well below
We can take a stab at normalizing profitability to see how
GGP been doing when stripping out one-time items. I assumed a
"normal" lease termination income for GGP of 0.5%, which is the
average for GGP in 2005 and 2006. Based on this, we get the following
results:
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Q1 08
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Q4 07
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Q3 07
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Q2 07
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Q1 07
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Q4 06
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Q3 06
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Q2 06
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Q1 06
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Comp NOI
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560.0
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644.4
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615.6
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546.6
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532.9
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619.6
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557.2
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527.2
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530.8
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- Excess
Lease Term.
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(15.6)
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(11.3)
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(5.3)
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1.5
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1.2
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2.6
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2.0
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2.8
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(16.9)
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= Norm'd
Comp NOI
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544.5
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633.1
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610.3
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548.1
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534.0
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622.3
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559.2
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530.0
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513.9
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Growth
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2.0%
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1.7%
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9.1%
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3.4%
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3.9%
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Headline figures are made to appear a lot stronger than they
actually are.
Analysts were expecting 74 cents of FFO this quarter while
we ended up seeing 75 cents at GGP, and 76 cents in the retail division.
Using the above normalization process we can also adjust FFO to see what it is
on a normalized basis, relative to what analysts were expecting. As we
can see below, it puts us well below "expectations":
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Q1 08
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Core FFO
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226.6
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- Excess
Lease Term Inc
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(15.6)
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= Norm'd
Core FFO
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211.0
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Implied Core FFO / Share : 0.71
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FFO versus payout ratio - Operation Is Not Funding Itself
As noted in the 8K, the dividend payout ratio was 67%.
This sounds fairly high, but it actually implies that GGP paid out more
cash than what it took in on 2 levels. (1) It doesn't incorporate maintenance
capex. (2) It doesn't incorporate the really high level of lease
termination income. We can work out the impact below.
Dividend cash outflows in Q1 2008:
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Op Units
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26.0
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Preferred
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2.7
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Common
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122.4
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Total
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151.1
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FFO
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223.2
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-
Dividends
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(151.1)
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- Maint
Capex
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(88.0)
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= Cash
Flow
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(15.9)
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- Excess
Term Inc
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(15.6)
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= Norm'd
Cash Flow
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(31.5)
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Q1 and Q2 are indeed seasonally weak quarters, but they
aren't that much weaker. This does not support their ability to maintain
the dividend at its current level.
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Thank Ralph