NOT AN ANALYST

Based on the 4Q earnings released few days ago,  we have the following updated information:

2009 full year NOI = 2,417 mm
Total debt = 27,815 mm

Given its current stock price of 13.50, and using FY 2009 NOI, GGP trades at an implied cap rate of 7.50%:

NOI = 2,417 mm
Debt = 27,815 mm
Equity value = 13.50 x 314 mm shares = 4,239 mm
Enterprise value = debt + equity = 27,815 mm + 4,239 mm = 32,054 mm
Implied cap rate = 2,417 mm/ 32,04o mm = 7.54%

SPG, on the other hand, trades at an implied cap rate of 6.75%.

The quality difference between SPG and GGP’s portfolio’s is marginal. SPG’s overall quality is slightly higher but GGP owns higher quality assets. If SPG wants to purchase GGP, then it must bid to an implied cap rate that better reflects the value of an A quality portfolio. Realistically, a 7.00% implied cap rate is a fair value for GGP. Arguably, if you want to purchase it, you must bid a premium; therefore a 6.75% implied cap rate should be warranted.

At a 7.00% implied cap rate:

Enterprise value = NOI / implied cap rate = 2,417 mm / 7.00% = 34,528 mm
Equity Value = Enterprise value – total debt = 34,528 mm – 27,815 mm= 6,713 mm
Stock price = Equity value / total shares = 6,713 mm / 314 mm shares = 21.38

A 10 bps reduction in cap rate, it implies a stock price of 22.97, which means that a 10 bps adjustment in cap rate affects the stock price by 1.60. That’s significant.

The management of the Debtor cannot allow SPG to steal the Company at their initial bid of $9 which corresponds to an implied cap rate of 8.00%. This will be a catastrophe not only for GGP shareholders but for the CRE market as well. It would mean that cap rates based on recent deals have increased, therefore decreasing the value of the stocks in the REIT industry.

20-25 dollars per share is a more plausible bid for GGP’s assets.