April 16, 2009

General Growth Properties Bankruptcy 

This is one of the biggest bankruptcies in commercial real estate history; Olympia & York is close second. This is also one of the most complex as well. The company is operating relatively well but is being crushed by a mountain of debt that can't be refinanced. Their operating metrics are not stellar but they are not bad either. 

Bill Ackman, the famed hedge fund manager, have bough into all levels of the capital structure. His fund not only bought sizable portion of the common but only some senior debt and he is the Debtor In Position financier. Many retail investors have been following him by buying the common. The question is: is there value in owning the common shares? 

Examining the most recent supplemental and 10K, we find 2008 total NOI (Net Operating Income) of $2,576.51M. Assuming a 5% decline in NOI in 2009, our NOI estimate is $2,447.2M. The 5% is realistic for two reasons: 
  1. their more recent quarter have seen their NOI drop by 4% from 2007 quarter and 
  2. The retail environment have gotten worse since the Q4 of 2008 with sever retail sales declines in Q1 2009  

To calculate the value of GGP we use potential cap rates that are appropriate in this environment. I think a range between 8-10% is appropriate. The value of commercial real estate is simply NOI/ Cap rate. Under the different cap rate the potential value for GGP is as follows:

Add: Other Assets3,8333,8333,833
Less Liabilities 30,50030,50030,500
Value per share $122-7

So unless market cap rates go up beyond 9.5% then there is value in the common equity. However there are many other considerations:
  • The bankruptcy will be a long process which most retail investor do not have the attention span for.
  • complex and not transparent process.
  • GGP's debt is owned by many CMBS holders that might not play ball like large lenders and could negatively affect the outcome of restructuring. 
  • Equity holders have no voice and no ownership in CH 11, so GGP's bond holders can strike deals that may wipe out equity regardless of value.
  • Legal fees and other bankruptcy fees will eat a lot of the cash generated from restructuring. Lehman Lawyers so far have reaped over $ 150 million. The fees alone can wipe out any value for the commons. Some other bankruptcies like Enron costs more than $250 million. 
  • Bill Acman can make good return on his debt even if the equity is wiped out so he is different from you and I owning only equity.
  • The game of distressed investing is a different ball game and require set of skills and legal expertise that many of us do not have.

So GGP may have value but the margin of safety and parameters are out of the scope of my competence. And if this is the same for you you should stay away.


Hunter said...

Hi Sami - When analyzing GGP I do not believe it best to aggregatate the value of the debt and compare it to the valuation of the assets on a NOI / Cap Rate basis. That is because the bonds of Rouse are not guaranteed by GGPLP LLC and GGPLP LLC's unsecured term loan is not guaranteed by Rouse. Therefore you have to split the entities into two distinct parts to calculate the recovery value to the various claimants. You can find Rouse's financials as an exhibit in GGP's most recent 10k. Now your valuation would work if you assume substantive consolidation, but I doubt that will actually happen given how distinct the assets are in the case. Further, the Rouse malls have historically performed better on a sales / sq ft basis as well as occupancy trends and therefore using one cap rate across the GGP spectrum is probably ill advised...especially considering some assets are Class B - C office properties whos cap rate is certainly above 10% in this market. Hope this helps. I am going to outlay a very detailed valuation soon on my blog. Best of luck.

Sami said...

Thanks Hunter.

Appreciate the advice. I will get back to the drawing board given your pointers.

I look forward to your post on that.