Fool's Gold - Hovde Capital Bursts The GGP Equity Bubble, Refutes Bill Ackman's Long GGP Thesis
Six months ago, Bill Ackman's Pershing Square came out with a research piece called "The Buck's Rebound Begins Here" in which he concluded a fair equiy value for bankrupt REIT General Growth Properties is between $10.40 and $30.08 per share. While since May the liquidity bubble has lifted all dodgy commercial REITs to unbelievable valuations, courtesy of round upon round of diluting capital raises, GGP being among them, the question of whether the tide has moved too far too fast is once again relevant, both for the broader REIT segment as well as for GGP in particular. Today we present the opposite view courtesy of Hovde Capital Advisors, and their report "General Growth Properties - Fool's Gold: We Think Current Equity Investors Will Be Disappointed in the Company’s Reorganization."
The fund's summary thesis (which discloses its short position in GGQPQ for what it's worth) is as follows:
- Due to highly leveraged acquisitions near the peak of the cycle, a decline in the overall economy, and insufficient capital spending, we believe the assets of General Growth no longer support the current capital structure.
- In our view:
- The company’s cash flows are insufficient to service the debt and pay for maintenance capital at its malls; and
- The bankruptcy is not just the result of a liquidity problem; it is a cash flow and loan?to?value problem.
- We believe the value of the assets no longer exceed the value of the debt, in contrast to several recent analyses.
- Despite recent upward move in the GGWPQ share price, we believe current equity investors are likely to be left with little in the restructured entity.
And in terms of valuation, Hovde sternly refutes Ackman's analysis, concluding that "the assets are worth less than the liabilities" (i.e., there is no equity value). Putting some numbers to the valuation indicates an stock price range of $5.73 at the somewhat optimistic 7.5% cap rate to -$5.03 at the far more realistic 8.5% capitalization rate.
It has long been Zero Hedge's contention that in the current environment of overabundant excess liquidity and an unprecedentedly generous Federal Reserve, fundamentals matter little, yet at the end of the day, are all that matters. And for as long as liquidity may be easy to come by and the risk free rate is as close to zero as possible, GGP may indeed continue its upward trajectory, even the hint of liquidity removal or an increase in Fed Fund rates, will promptly reacquaint GGP and fellow REITs with gravity. The flip side, of course, is that should the Fed lose control of the Ponzi equity market bubble it has created, the subsequent collapse of GGP's stock price will be the least of investors' concerns.
Full Hovde Capital report: