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GGP part 8 - The Final Anaysis: fire sale of prime properties |
| Written by Reggie Middleton | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 02 February 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This is final installment of my rather in depth analysis of GGP. This project represents a lot of work and analysis, and I am quite open to feedback, particularly from the company itself. The numbers are realistic, and pessmistic and optimistic scenarios were given and were branched out further into base case, recession and rosy economic scenarios. Everything was calculated by hand, and each property was valued individually with local, independently gathered data for inputs. A total of 2 GB of data and analysis resides on my servers - that is a lot of backup documentation. GGP has moved sharply higher with the surge in the broad market, and sharply away from its intrinsic value, whether measured by Cash Flow after Taxes, Present Value of Net Operating Income, Capitalization Rates or Comparable Book Value. To be blunt, GGP is grossly overvalued and distressed in terms of cash flow and liquidity - having significant refinancing events coming up quickly that it will be hard pressed to meet.
Before we get started, let's recap this lengthy GGP saga:
Even I hadn't realized this series had 11 parts, two of which stemmed from the GGP press release directed at "the media" and "blogs," issued at 9 pm Saturday evening, apparently at least partly driven by more emotion than PR strategy. I will probably release this entire series to the press to demonstrate how series good blogging can be in financial circles. As usual, there is a full fidelity version of this report available for download, complete with pro forma financials: Now, on to the final (I think) chapter... SummaryAs of late, credit markets have become dysfunctional, or put more accurately, “functional” in the prudent pricing of risk in the wake of losses incurred by financial institutions and lenders owing to the OPM (other people’s money) methodology of writing loans destined for sale through market securitization. The resultant problem of ‘shrinking liquidity’ is aggravating the operations, to say the least, of many real asset and related financial concerns. In particular, this has considerably impacted the ability of commercial real estate companies including GGP, which has huge debt obligations payable in next few years, to refinance its loans and capital expenditure (capex) requirements. In the event of GGP not being able to meet the requisite financing/refinancing needs as we have forecast, it is likely to find itself faced with either of the following two options – 'foreclose some of their existing loans’ or “sell few of their unencumbered properties”. Yesterday, we had discussed the impact of foreclosure and sale of some of its properties on GGP’s valuation. We are now presenting our analysis on its valuation in case GGP elects to only sell some of its unencumbered properties – the ‘sale of properties’ scenario. GGP’s valuation summaryIn our base case scenario (without assuming sale or foreclosure), we arrived at GGP’s valuation of approximately $6.9 bn or $28.4 per share (under the CFAT approach – please refer table below). Our underlying assumption in the above valuation was that GGP would be able to arrange the requisite financing for its loan repayment and capex requirements. However considering the tight liquidity condition in the current capital market scenario, GGP might have to sell some of its prime and unencumbered properties. Accordingly, we have assumed that GGP would sell its properties to arrange for $1.2 bn and $1.5 bn, respectively, in 2008 and 2009, representing approximately 30% of its total refinancing needs in these years. We expect GGP to sell these properties at a significant discount to their current valuation (arrived at using net present value approach) due to subdued demand for commercial real estate amid a liquidity crunch in the credit market. Additionally, we expect GGP to postpone its re-development and new development plans, which would put a strain on the GGP’s future revenue streams. Incorporating the above assumptions, we expect GGP’s valuation under ‘sale of properties’ scenario of $6.0 bn, translating into a per share value of $24.5. This represents a downside risk of 38.7% from the current market price of $40 (as of February 1, 2008)
GGP’s valuation comparison under ‘base case’ and ‘sale of properties’
Re-financing needs
As compared to...
Under our ‘foreclosure and sale’ scenario (posted yesterday), we expect GGP to foreclose approximately 6% of its property portfolio which would reduce GGP’s re-payment obligations by nearly 20% each in 2008 and 2009, to $2.0 bn and $2.6 bn, respectively. In addition, we expect GGP to sell some of its un-encumbered properties and curtail capital improvement requirements. Consequently, the assumed foreclosure and sale of properties together with estimated curtailment in capital expenditure would bring down GGP’s total financing needs by 50% and 42% in 2008 and 2009, respectively, to $2.7 bn and $2.4 bn. However as a result of foreclosure, GGP’s credit standing would take a severe beating. Consequentially increased penalties in form of increased cost of financing and additional difficulty in raising finance for future projects would restraint GGP from foreclosing its mortgaged properties. Also since re-financing and maintaining credit standing is one of the prime business drivers for REIT’s unless the situation aggravates steeply from here, GGP may opt not to go the foreclosure route.
Since both the scenarios - ‘base case scenario’ (without assuming sale or foreclosure) with entire debt re-financed through additional loans and ‘foreclosure and sale’ – may seem extreme (the first being too optimistic and the other being too pessimist), we believe that GGP might alternatively sell a few of its unencumbered properties to partly meet its re-financing requirements. We expect GGP to re-finance approx. 30% of its re-financing needs each in 2008 and 2009 through sale proceeds of $1.2 bn and $1.5 bn from properties. In addition, we expect GGP to reduce its capital expenditure towards re-developments and new developments by 50% and 70% to $0.8 bn and $0.20 bn in 2008 and 2009, respectively. As a result of sale and reduction in capital expenditure, we expect GGP to reduce its financing requirements by 36% and 34% in 2008 and 2009, respectively to $3.5 bn and $3.7 bn. We have identified the following properties which would enable the company to meet above re-financing needs.
We expect GGP to realize approximately $2.7 bn from sale of above mentioned properties (in 2008 and 2009) having a book value of $2.0 bn. As a result of above sale, GGP is expected to record profit of $0.7 bn over the next couple of years. Although GGP would be able to record gain on sale for the above transaction, it would actually drag down the company’s valuation as the current valuation (arrived at using net present value approach) of these properties is noticeably higher than the sale proceeds (see table above). This assumption is based on the hypothesis that GGP would be able to sell these properties only at a discount (15% assumed by us) due to fewer buyers for commercial real estate properties in a down trending market with diminishing liquidity – basically, the typical buyer’s market. In addition, we have assumed 8% cost on sale of transaction.
GGP detailed valuation summary – under sale
GGP's Comparative Valuation
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GGP Fire Sale (