This represents the latest piece of the puzzle on the GGP story. Ackman sees GGP priced around $15 and GGO at around $5 upon emergency from Bankruptcy. Currently, the market is valuing GGO at -$1, obviously a mispricing according to Ackman. Enjoy.
Tag: General Growth Properties
Some thoughts over GGP 4Q earnings
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.
Some thoughts on the offer to buy GGP
SPG offered $6 per share in cash to GGWPQ shareholders and par plus accrued interest to all unsecured note holders for a total offer of $10,000 m. This implies a 9% cap rate to value the entity, assuming NOI around 2,400 m and without accounting for the Master Planned Community Business. Every 10 bps change in cap rate (or 9.8 bps to be more accurate) equates to a $1 per share increase/decrease to GGP shareholders.
NOI=2,400
Total Secured Debt=18,000
Bank Debt=3,000
Bonds=4,000
Total Unsecured=7,000
Total Debt=25,000
Equity @ $6/share=1,885
EV=26,885
Implied cap rate=8.92%
Assuming a price of $3 per share to the Master Planned Community Business, the implied cap rate is reduced by 30 bps only. The deal failed to materialize.
Based on the press releases, GGP is pursuing a dual track process: soliciting offers for the whole company and attempting to emerge from bankruptcy as a standalone company through a large capital raise to de-lever and have the capital to payback the unsecured creditors. This may cause large dilution to shareholders, but it’s a less likely process, as the Company will look for potential bidders first. The sales process is expected to get underway in early March. The press release also indicated that they held discussion with “other interested parties” in coming to the conclusion to not preempt a full process with multiple bidders. Brookfield Asset Management (BAM) is likely Simon’s biggest competitor in a bid, though Simon still has the upper hand given their ability to drive greater synergies. Other interested parties are Westfield and Vornado.
Here is Simon’s offer made on Feb 16:
Dear Glenn and Adam:
We are prepared to acquire General Growth Properties, Inc. (“GGP”) in an all-cash transaction which will result in a favorable outcome for all of GGP’s creditors and shareholders, and a prompt conclusion to GGP’s reorganization proceedings. This letter is intended to provide you with the specifics of our proposal which are outlined below.
Consideration. Simon Property Group, L.P. (“Simon”) would provide a full cash recovery (par plus accrued interest and dividends) to GGP’s unsecured creditors, the holders of its trust preferred securities, the lenders under the GGP credit facility, and the holders of Exchangeable Senior Notes. Simon would also pay the holders of GGP common stock $6.00 per share in cash, and distribute to them all of GGP’s ownership interests in the MPC assets. We are willing to discuss consideration consisting (in whole or in part) of Simon common equity in lieu of the cash portion of the consideration to GGP’s stockholders, and perhaps certain of its unsecured creditors, for those who would prefer to participate in the upside associated with owning Simon stock.
We believe the current trading value of GGP’s common already includes a takeover premium, and given its high percentage of insider ownership and the fact that the stock trades in an over-the-counter securities market, reflects a price that cannot be realized in a stand alone reorganization. Any reorganization has a highly uncertain outcome which can be achieved only after an extended period of time, while incurring considerable additional expense, and may result in significant dilution of the current equity holders to the extent creditor claims are satisfied through the issuance of additional equity and/or GGP is recapitalized with proceeds from the issuance of new equity.
No Financing Contingency. We have, or have access to, all of the financial resources required to consummate this transaction, and the transaction would not be subject to any financing contingency or condition.
Due Diligence. The terms described above are based on publicly available information and subject to confirmatory due diligence. We and our team of advisors have thoroughly analyzed GGP, its assets and the ongoing bankruptcy proceedings, based upon publicly available information, and we are prepared to proceed immediately to undertake and complete confirmatory due diligence and to enter into and consummate this transaction as promptly as possible. Simon has an unmatched track record of completing large and successful acquisitions, and we are prepared to commit the resources necessary to address all issues and finalize a mutually beneficial transaction between our two companies.
We are convinced that a transaction with Simon is superior to any proposal you may be contemplating. We trust that when considering our proposal, you will take into account the many benefits of having GGP’s equity holders receive full and fair compensation for their interest versus the uncertain value in any other scenario. The fact that the proposal is all cash and pays unsecured creditors in full will bring certainty to the reorganization process and accelerate its completion which will have the added benefit of eliminating GGP’s significant bankruptcy related expenses.
Our proposal is not open-ended, particularly given the uncertain economic environment that exists today. We look forward to hearing from you soon and working together to consummate a transaction.
Very truly yours,
David Simon
And here is the response from GGP management:
Dear David:
Thank you for your letters dated February 8 and 16, 2010 in which you indicated Simon’s interest in acquiring General Growth Properties, Inc. (the “Company”). We appreciate that you took the time to meet in person with management, UBS and Miller Buckfire to explain your indication of interest, as well as provide your view on the timing and diligence process you require in order to convert your indication of interest into a fully documented definitive proposal. We have been discussing your letter with your financial advisors during this past week. Our advisors have also discussed our position with you as recently as yesterday. We and our board of directors have given considerable thought to your indication of interest and have concluded based on discussions with other interested parties that it is not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the Company’s stakeholders.
As we indicated during our meeting, we are about to commence a process to explore several potential options for the Company’s emergence from Chapter 11, including a sale of the entire Company as you have proposed as well as a capital raise. The Company and its advisors have been working over the past several months to prepare the Company to launch this process. We will be providing detailed information on the Company, including a confidential information memorandum, financial projections, and asset level information to participants. We will also provide access to an electronic data room. As we are committed to fully exploring all potential options available to the Company, we would like to include Simon as part of this process. We believe the information we would provide to you as part of this process will enable you to better understand the Company, get to a higher valuation, and provide a fully documented offer.
We understand from our meeting with you and the press release you issued this morning that time is of the essence. We feel the same, and intend to run our process in an efficient and expeditious manner. We are currently finalizing the information memorandum and plan to send materials to participants in the process by the beginning of March. We would expect to receive indications of interest within 4 weeks of the launch of the process. In order to expedite your participation and evaluation of due diligence information, we will be sending to you shortly a markup of the NDA you provided to us during our meeting in Chicago.
Again, we appreciate your interest and we recognize the potential value that Simon could bring as an option for the Company to emerge from Chapter 11. The Company intends to pursue the process described above and we look forward to your participation. However, we reserve the right to pursue any proposals that we receive prior to or after formally launching the process so that we can maximize value for all stakeholders of the Company, and we reserve the right to change the process at any time we determine appropriate and without notice.
We would be happy to discuss this response further. To that end, you should feel free to contact either UBS or Miller Buckfire.
Sincerely,
Adam Metz
The battle over GGP valuation
Recent turmoil In the past few weeks, there have been a number of reports from different individuals trying to value GGP and unfold how much equity will be created through reorganization. There are a lot of uncertainties over how much GGP is worth and we might see a valuation battle between the creditors and the owners. It’s clear that the Committees representing each side have different views: the Unsecured Creditors will want a lower valuation so they can have a higher equity stake and the shareholders will want a higher valuation so they can retain a higher residual stake.
For those who have not been following the GGP bankruptcy story, I will offer a brief synopsis:
- As of January 25, the restructuring of 74 secured mortgage loans aggregating approximately 9.4 billion has been completed. As a result, 180 GGP subsidiary debtors owning 96 properties are no longer in bankruptcy.
- The restructuring of the remaining 16 loans aggregating approximately 2.1 billion was approved by the Bankruptcy Court in December 2009 and January 2010 and is expected to be completed in the next few weeks.
- GGP has recently engaged UBS Investment Bank to assist the Company with exit strategies and Miller Buckfire & Co., LLC as a financial advisor and investment banker.
Now it all boils down to a restructuring plan for the remaining 2,590 mm in Bank Debt and 4,000 mm in Unsecured Debt. Valuation is rarely litigated in court; usually the Creditors and Equity Committee will submit a plan of reorganization which implies a valuation of the Debtor they both agreed upon. But in the case of GGP, there might be large discrepancies between Creditors and Owner, and we might see a valuation battle between the two. The Company is contractually obligated to de-lever its balance sheet based on the loan extension agreements with the Secured Mortgage Loans. Also, the fact that all the 6,590 mm remaining liabilities could be potentially reinstated at par and still have substantial equity left, it doesn’t mean that the Bankruptcy Court will allow it, as the Judge has to make sure that the Debtor will be able to survive as a going concern through another financial downturn.
Key ingredients Let’s look at some key elements that will play a pivotal role in the valuation process:
Ownership: There is a strong bias towards generating a high equity value. The Company is held by insiders, the Bucksbaum family has a 25% ownership and William Ackman, which is Director and a member of the Board, has a 20% ownership.
Equity Committee: An honorable member is Luis A. Bucksbaum, ex-CEO of the Company, which will push for a high valuation, given the large equity interest by his family.
UBS compensation: The Investment Bank charges several fees, but the discretionary fee that caught my attention. There is a completion fee comprised of the greater of 17,500 mm and 0.33% on any amount by which the equity recovery exceeds 1,000 mm. UBS will be indifferent between the two if the residual equity is 5,300 mm or 16.6 dollars a share. This is an incentive for UBS to maximize shareholders’ value.
A Valuation Expert: If the creditors and owner cannot agree on a valuation, the Court will consider the opinion of a third party independent and credible expert. This could be good news for GGP as the positive report from William Ackman, which value the Debtor between 42 and 24 dollars a share, is highly valued and recognized by other institutions and Hedge Funds.
Hovde Capital: The Hedge Fund that highly criticized Pershing Square Capital valuation and rates the Company at 5 dollars a share will have no weight in Court. The Hedge Fund is not a member of any committee, doesn’t own any equity or debt and it’s not a valuation expert.
De-leveraging How will de-leveraging be achieved? Two of the Rouse Bonds were due in 2009, and the Company will probably repay them at par plus post petition accrued interest. The 1,990 mm Term Loan under the 2006 Credit Facility will be refinanced with an Exit Facility and the 590 mm Revolver will be repaid in full. Eurohypo AG is the only creditor under the 2006 Facility and it’s a member of the Creditor Committee. How will the Debtor come up with the cash to pay off the bonds and Revolver ? With proceeds from equity issuance. If the three remaining Rouse bonds and the GGP LP notes, amounting to 1,650 mm and 1,550 mm respectively, are converted into new common, leverage will significantly decrease and equity will increase by 3,200 mm. That would mean that shareholders will face substantial dilution, probably around 40%. Let’s assume that the residual equity is valued at 5,000 mm, an addition 3,200 mm in equity will mean a 39% dilution for shareholders.
Overview of the restructuring we discussed
This is an overview of the restructuring businesses discussed on the Blog, to update investors on recent developments. I would be glad to give my feedback, or receive yours, on the on any bankruptcy proceedings discussed here.
CIT Group – It emerged from Bankruptcy on December 10 and it’s now trading under “CIT” on the NYSE. As you remember, the Company cancelled the old equity and issued 200 mm of new common shares. The implementation of the Company’s strategy unfolds around CIT Banks; the subsidiary will be the focal point for the origination of middle market loans, bank deposits and other businesses like Vendor Finance (which provides leasing solutions) and Trade Finance (factoring and ABS). That is currently on hold; waiting regulatory approval from the FDIC. On July 2009, the FDIC imposed a “Cease and Desist Order” on CIT Bank, which prevents the subsidiary to grow deposits given the weakness of the institution at the time.
General Growth Properties – The Debtor is expecting to emerge from bankruptcy by the end of June 2010. There are still 3,000 mm in Secured Mortgage debt that need to be reorganized before a plan of reorganization for the Unsecured (Rouse Bonds, GGP LP Notes and TRUPS) and Secured Notes (2008 Credit Facility, 2006 Term Loan and Revolving Credit Facility) is implemented. Most likely maturities for the remaining Mortgage Debt will be postpones at higher rates and a debt-to-equity conversion will be implemented for all or part of the Unsecured Notes. Worth noting is the dividend of 0.19 dollars a share that the Bankruptcy Court authorized the Debtor to pay to common shareholders in order to maintain the REIT tax status and avoid tax penalties.
Chemtura Corp – The December MOR (Monthly Operating Report) reported EBITDA of 54 mm, which brings the 2009 EBITDA to 251 mm, well above my expectations of 220 mm. We might be able to see some equity value up to 2 dollars a share even before a POR is unfolded. The Equity Committee was appointed on December 29 and I am under the impression that the current shares will continue to trade post bankruptcy and reinstated on the NYSE, but shareholders will experience dilution (probably around 50%) due to debt-to-equity conversion and/or new offering. Read my last post on Chemtura Corp for more details on that.
Idearc Corp – The Restructuring process was completed on January 4 and the business emerged under the name of Supermedia Inc which symbolizes a new line of business that the Company launched. The pre-emergence common stock of Idearc Inc. (which has traded under the symbol “IDARQ.PK “) was cancelled effective December 31, 2009 and the Company now trades on the NASDAQ under “SPMD”. The new name symbolizes the continuity of the old business and the implementation of new products. More details on the different business segments are highlighted in the presentation attached.
Accuride Corp – A third amendment to the Plan of Reorganization was filed with the Bankruptcy Court on December 21. The last date to vote on the Plan is January 29 and the confirmation hearing is scheduled for February 10 2010. The Equity Committee has urged shareholders to strongly reject the plan, arguing that a 2% share of the reorganized Company (which will become 0.6% after dilution) is far too little. The Committee plans to object the Plan at the Confirmation Hearing, and might be able to get away with more, maybe 5% of the reorganized equity. The Committee is not wrong, given the fact that creditors are expected to get no more that 100% recovery plus accrued interest through bankruptcy, but because the proposed Plan offers a significant equity interest to creditors, the upside will be more that 100%. Look at my previous post on Accuride Corp on December 9 for more details about the POR and dilution.
I like to call William Ackman a genius
After days of valuation chaos, William Ackman, the founder of Pershing Square Capital Management, released a detailed report on General Growth Properties, highlighting the upside potential of the REIT and responding with vigor to the misleading valuation from Hovde Capital Advisors. What’s genius about it is the timing. Few days ago, the Court approved a dividend the payment of 0.19 dollars a share for holders of record December 28, in order for the REIT to maintain its tax status. Today was the last day to buy the stock and still get the dividend in January 28 2010, as it will trades ex-dividend tomorrow. Realizing this, the shorts had to cover and longs had to buy, which magnified the effect of the report. It was just genius. I hope you can appreciate this reading as much as I did.
Unlocking General Growth Properties equity value
GGWPQ Distressed Investment Just a few weeks ago I introduced General Growth Properties as a great opportunity to capitalize on distressed investing. The following analysis will unlock the equity value hidden behind the mall giant currently operating under the guidelines of Chapter 11.
Debtors vs. non-debtors General Growth Properties has been releasing a monthly operating report; an 8K filing required by US Bankruptcy Laws, indicating the debtors’ operating performance, working capital and assets/liabilities levels. It’s a very useful report and it shows how much profit the Company has generated post-petition. The report excludes operating performance, assets and liabilities of non-debtors; as such entities are operating outside of the provision of Chapter 11. However, the debtors’ ownership in such entities is disclosed and it’s reported as “investment in controlled non-debtors” on the balance sheet and earnings/losses from such entities are reported under “income/loss of unconsolidated real estate affiliates” on the income statement.
| General Growth Property Recovery Waterfall | |||||||
| 2010 | 2010 | 2010 | |||||
| NOI | 1,700 | 1,870 | 2,040 | ||||
| Cap Rate | 10.0% | 10.0% | 10.0% | ||||
| Debtors EV | 17,000 | 18,700 | 20,400 | ||||
| Non-Debtors EV | 900 | 990 | 1,080 | ||||
| Total EV | 17,900 | 19,690 | 21,480 | ||||
| Cash at Filing | 168 | 168 | 168 | ||||
| Plus Cash Flow | 2,172 | 2,172 | 2,172 | ||||
| Less DIP and Financial Expenses | 1,097 | 1,097 | 1,097 | ||||
| Less Working Capital | 661 | 661 | 661 | ||||
| Less Restructuring Expenses | 156 | 156 | 156 | ||||
| Net Cash | 426 | 426 | 426 | ||||
| Distribution Value | 18,326 | 20,116 | 21,906 | ||||
| DIP Facility Repay | 400 | 400 | 400 | ||||
| Residual Value | 17,926 | 19,716 | 21,506 | ||||
| Investments in non-debtor etities | 12,936 | 12,936 | 12,936 | ||||
| Value to secured creditors | 30,862 | 32,652 | 34,442 | ||||
| Secured Debt | 15,234 | 15,234 | 15,234 | ||||
| Recovery Rate | 100% | 100% | 100% | ||||
| Value to unsecured creditors | 15,628 | 17,418 | 19,208 | ||||
| Unsecured creditors | 6,588 | 6,588 | 6,588 | ||||
| Recovery rate | 100% | 100% | 100% | ||||
| Equity Vales | 9,040 | 10,830 | 12,620 | ||||
| Shares Outstanding | 313 | 313 | 313 | ||||
| Price | 29 | 35 | 40 | ||||
Valuation With the information provided on the post-petition monthly operating report along with the cash flow forecast released on May 22, I was able to come up with a model that estimates General Growth Properties’ price upon emergence in June 2010. From the filing date up to October 31st, the debtors generated 960 mm in NOI, which is calculated as total revenue minus real estate taxes minus repairs and maintenance minus property operating costs. At emergence, the Company will have produced 1,700 mm in NOI in the worst case scenario and 2,040 mm or 20% more, in the best case scenario. I used a 10% capitalization rate to arrive at the EV, which is conservative considering that Simon Property Group (SPG) is currently trading with a 9.00% cap rate and that’s expected to drop to 8.50% in 2010 and 8.00% in 2011 based on projected NOI and EV. Remember that just a couple of years ago, REITs used to be valued with a 7.50%-8.00% cap rate. The total EV, including non-debtors, will be 17,900 mm in the worst case scenario and 21,480 mm on the best case scenario. I estimated that non-debtors will contribute from 90 mm to108 mm in NOI.
Post-petition cash flow The 8K released on May 22, 2009 provides a nice cash flow forecast on a consolidated basis, which includes debtors and non-debtors. The Company will generate 2,172 mm in cash from operations which includes revenue from mall/offices, Master Planned Communities and property management fees. Financing related expenses will amount to 1,097 mm, which include a cash inflow from the DIP loan of 400 mm and DIP related expenses like a commitment fee of 15 mm, a 3.00% exit fee and interest charges. Inclusive is a charge of 213 mm related to the repayment of the Goldman Loan and various interest charges and principal amortizations. Other expenses are working capital and restructuring fees that will amount to 661 mm and 156 mm. The net cash flow balance from petition date up to emergence on June 2010 will be 426 mm.
Equity Value The total EV available to secured creditors is the sum of the debtors’ residual value and investments in non-debtors, which are assets that operate outside of the provision of Chapter 11. Secured creditors are mortgages secured by properties and unsecured creditors represent outstanding notes like the 2,245 mm of Rouse Bonds, 1,550 mm of GGP LP Notes, 206 mm TRUPS and 2,577.5 mm in revolver and term loan. The Junior Sub notes were repurchased with the proceeds from the sale of TRUPS. The residual equity value ranges from 9,040 mm to 12,620 mm, which is enormous given the fact that the Company is in financial distress. But this is a unique case of bankruptcy, where non-debtors’ assets account for a large part of the company, which is why the equity is trading at almost 10 dollars a share. But I believe there is more upside from the current level, and in the worst case scenario, the Company will be trading at 29 dollars per share, an annualized IRR of 43% from today’s closing price of 9.50 dollars a share.
Related Posts on this Blog:
Undervalued equity: General Growth Properties (GGWPQ)
Undervalued equity: General Growth Properties (GGWPQ)
General Growth Properties Overview General Growth Property’s primary business is the ownership and management of over 200 malls and shopping centers. Operations are divided in two segments: retail, the primary source of income, which includes management of shopping centers, and Master Planned Communication, which includes the development and sale of land.
GGP Structure GGP Group is organized as a REIT and is the general partner of GGP Limited Partnership (GGP LP) which is the entity through which operations are conducted. In turn, GGP LP owns and control GGP LP LLC, The Rouse Company LP and General Growth Management Inc (GGMI) which is excluded from the filing.
GGP Bankruptcy The Company wasn’t able to refinance its mortgage debt in the second half of 2008 because credit markets were locked and sought protection under Chapter 11 on April 2009 to restructure its debt. Pershing Square provided 375 mm DIP financing at LIBOR + 12% for 18 months from filing date. GGP has until April 2010 to submit a reorganization plan but it has an extension until October 2010. What’s very interesting about GGP is that the NOI has been rising over time, which means that malls and shopping centers are generating significant profits despite challenges in the CRE market and Bankruptcy. I am under the impression that GGP still has a lot of value and if the Company can defer maturities and reduce its debt levels, it’s going to be in good shape again as operating performance has been strong. As of December 31 2008, there are 24,850 mm of consolidated par debt outstanding, which includes 18,270 mm of secured debt and 6,580 mm of unsecured debt. Total liabilities account to 27,300 mm and total assets are 29,600 mm. Net Operating performance (NOI) for 2008 was reported at 2,590mm a 4.5% increase from the previous year. In the next few weeks I am going to post a more detailed analysis on the bankruptcy and I will try to unlock the Company’s equity value, which I think it’s substantial.
Recent News There has been a couple of significant articles lately and the stock started to soar. The Company announced on November 19 that it reached an agreement with lenders to postpone loan maturities and it expects to emerge from bankruptcy by the end of the calendar year. Also there are rumors that Simon Properties Group might put some capital into the company.