As
my readers should have gathered from my previous posts, I believe GGP
is running into a cash shortfall over the next three operating years.
Roughly 5% of their properties are candidates for foreclosure, due to
LTVs in excess of 100% (basically, underwater) or sparse to negative
cash flows. To further illustrate this point, I have carried out a GGP
valuation under the additional two scenarios - 'Foreclosure' and 'Sale
of unencumbered properties to meet financing requirements'.

Foreclosure of properties

Since
most of the GGP property specific mortgages are on a non-recourse
basis, it actually stands to gain on foreclosure of its highly
leveraged properties as the value of these loans are considerably
higher than the value of the properties. Since these highly leveraged
properties are primarily a drag on company’s overall valuation, the
company’s valuation stands to gain on foreclosure of these properties
despite taking into consideration additional cost of borrowing (even
assuming a 300 basis point increase in the interest cost on
refinancing). In view of the fact that GGP would still have to raise
additional finance after allowing foreclosure, GGP may opt not to
foreclose its properties and instead may sell some of its properties to
re-pay its upcoming debt obligations.

The
following is an extract from GGP’s 3Q2007 earnings release highlighting
that GGP itself considers the foreclosure option under its non-recourse
mortgages as a valuable benefit:

“But yet, the fact that we use primarily non-recourse mortgage debt,
which is a different tack than some of the larger REITs who use
unsecured debt as their principal source of debt capital, is in our
view something that has always been undervalued or underappreciated in
terms of its significance. We don't expect ever to default on a loan,
but that is the benefit of the bargain you make with the lender. That's
the definition of non-recourse. And if there was a property with a loan
maturing that was worth substantially less than the loan amount, it
would certainly be something that we would have the option to do
without doing anything that's inconsistent with the arrangement that we
made. So as I said, I don't expect we'll ever do it, we don't
anticipate ever doing it. But I think the fact that you could do it if
there was a serious problem with a particular asset is a valuable
benefit.” Bernard Freibaum - General Growth Properties Inc - EVP, CFO

Sale of unencumbered properties

In
case the company sells a few of its office properties to re-pay its
debt, there is no impact on valuation since the benefit from interest
savings will be more or less offset by loss of present value of
properties sold. Moreover, since re-paying debt through re-financing
additional debt or through sale of its properties is more of a
financing decision (and not an operating decision) there will be no
significant impact on the company’s valuation as such.