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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:
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how hard is it to determine that retail property values are falling? This analysis is like shooting fish in a barrel, zero insight IMO
SPG value from 1994 to 2001: in the 25-30 range
SPG bubble peak value: about 118
SPG current price: 77.85
I know, but I can't afford for real estate to get any worse. I'm short the IYR at $33. If real estate continues to deteriorate at the current pace, the IYR will hit $100 by June and bankrupt me.
Who is really buying this shit in such large amounts, and why? That's the real question.
Look at Motors Liquidation Company (MTLQQ), the stock of the former General Motors. This stock represents a bankrupt company. It is generally considered worth at most 0.02 (that's 2 cents). And yet its last price was 0.575. Since GM went bankrupt it has traded between 0.50 and 1.00. If a bankrupt company can trade at 25 times its value, then there is your answer.
However, don't fool yourself into thinking real estate can't go any higher. People will buy IYR as long as they think they can sell it at a higher price.
I took a long hard look at the IYR vs the S&P this weekend since I had the same question as you (and about the SRS). SPG is the major imbalance problem in the ETF's, even with a 56 P/E. Furthermore, in terms of retracement from the highs, the IYR is at a 50% retracement. SPG on the other hand is breaking out to what I consider a blowoff top and hit a full .618 Fibo retracement from the all time high. The problem is SPG is heavily weighted with market cap and not like Vornado or all the other POS's in the indexes.
So who is buying SPG and why? Well Mom and Pop if you watch in Total View...it's all 200, 300, 500 shares, unless they are doing packets via HFT but it doesn't add up in terms of volume--until you get to the ETF's. Brokers love to sell REITs --and these are all small volume wide spread trades. But in the ETF's--that's where the packet trading is occurring with 200,000 bid/ask size at all times 4 cents up and down for ETF's like the SRS. I haven't watched the IYR but will tomorrow if I get a chance.
You have to break down the IYR. #1. SPG, #2 Vornado, #3. CPI, #4. Thomas Properties, etc, et al. Look them up so you know your index. Since SPG is not dead yet (idiots just bought Prime Outlets--where you never find a bargain) but they are sucking on the tit of the other REITS going under, and the FDIC. So at a 56 P/E with the basic assumption that the consumer is coming back they are hitting 52 week highs. Haven't you heard? All is well in consumer land. Right. But don't stay short when it is killing you.
You need to cut your losses and wait for a better entry point. We are not there yet. There seems to be a consensus that CRE and REITs will be bailed out--which is ludicrous since there is no systemic risk for this bunch. But with overall bullish sentiment at all time highs--you have to set your stop losses since excess liquidity and the bear market rally seem to be sucking in every last person. I might add that a Dow close above 10516 could ensure additional pain...but it might be short lived.
Hope this helps.
Thanks for the analysis. I was curious about your list of IYR components, so I looked it up at http://us.ishares.com/product_info/fund/holdings/IYR.htm. It goes like this:
1. SPG (9%)
2. VNO (5%)
3. ANNALY CAPITAL MANAGEMENT IN (4%)
4. PUBLIC STORAGE (4%)
5. BOSTON PROPERTIES INC (4%)
6. HCP INC (4%)
7. EQUITY RESIDENTIAL (4%)
8. VENTAS INC (3%)
9. HOST HOTELS&RESORTS INC (3%)
10. PROLOGIS (3%)
11. AVALONBAY COMMUNITIES INC (3%)
and so on. My impression was that IYR covered the whole real estate space and from the list, it seems to. SPG is an exceptionally large component because it is peaking right now.
Terrible analysis on this one b/c he's screaming into the wind. All the large mall REITs trade at a 6.5-7.0% cap rate (SPG, TCO, MAC). He can call that crazy, but that's reality. Why? Maybe the REIT stocks are anticipating the massive asset reflation underway and their high level of fixed-rate debt would make them huge beneficiaries? We can debate the prudence of the Fed/gov't policy but its reality and as the old adage goes, "Don't fight the Fed".
In any case, the market is 6.5-7.0% and on that basis GGP stock is worth $20-30/share. That is where the stock will trade when it emerges unless the other REITs fall in value (pushing cap rates back up).
Green Street (REIT-focused firm) just did a big analysis on GGP and pegged the value at $11-$18/share.
How could the author honestly use 4x Q3 NOI for full year and pass it on as professional research? This is very amateur work.
He didn't use 4 X Q3, it was 12 trailing months through Q3, so it has 2008 Q4 in it.
No, he really did use Q3 x 4, lol.
Take a look at slide 30. Then, compare with GGP's most recent 10-Q:
http://www.pinksheets.com/edgar/GetFilingHtml?FilingID=6878291
You're right. I was looking at slide 19 which had trailing 12 months.
Bankruptcy has been a godsend for the equity of this company. GGP's was able to extend all of its debt by 5-6 years with no step up in pricing. It went from having the WORST first lien debt structure to the BEST of all the REITS (defined as longest maturity at lowest cost). SPG or BAM or Westfield will view that first lien capital structure as a big asset when they bid.
GGP bonds (including converts) are all trading at par value, so that tells you that creditors/distressed guys (generally not a "glass half empty" group of chaps) all think there is equity value.
This was written by Richard Murray it seems (see properties on the download). He's a former Raymond James/AG Edwards sell-side analyst. Anyone know him? I'll take Bill Ackman on thsi one.
What's left unsaid on page 11 about the growing share of online retailers is their impact on mall based retailers margins. There is no way that they can compete with Amazon on price. Even if they are able to maintain their sales levels their margins will be destroyed from pricing pressure.
Further declines in their rents and other operating costs are their only viable strategy - not a great scenario for the mall reits.
Hmmm...perhaps trying to unwind a painful money losing short position before year-end that's doubled in the last two weeks? tsk tsk Messrs Hovde and Murray.
Mall Retail is in big trouble.
Wait and see after Christmas to see which retailers are swimming naked.
Buy Mall REITs at 6.5-7.0% cap rates at your own risk.
See any of these traded lately ?
Mall fundamentals will continue to deteriorate.
The consumer is F_ed.
Simon sold equity at $50. What does that tell you ?
Ultimately when interest rates rise all the REIT financial structures will implode.
Try buying a mall w/ negative leverage, assuming you can get any meaningful leverage.
Ackman's recent piece on GGP and mall retail was a bunch of fluff (hey, unemployment just dropped to 10% ! wasn't black friday great ? GGP = SPG. Buy mall reits not treasuries) Puhleeze.
What is going on w GGP is just kicking the can down the road. The Feds know that GGP going under now would completely screw the banks anew as it would trigger massive writedowns. And further screw up securitized debt.
This is a high profile game of chicken. The banks are being strong armed and do it so they can give themselves nice bonuses.
Simon also sold equity at $31.50. What does that tell you??
When will the retailers stop paying $40psf and another $10 in Common Area? That, is my painful question.
Tyler, this analysis is simply wrong. The equity in General Growth has a long way to go. I suggest you do more research as to what is likely to happen to the equity, which is a sharp rise over the next 12 months. Holding long 41,600 shares.
I have a barn full of shinola. special price. just for you.
Sell it to me at $1 and then buy it back at $10.80 about 9 months later and you have a deal.
hope you have some insider knowledge about how this market might be manipulated, because, as said above, eventually fundamentals do bite, housing showed in 2006 and beyond and 2008 showed in stocks. I wouldn't want to short based on bad fundamentals, because short term prices move for a lot of reasons other than fundamentals, but I wouldn't want to stake the rent money on a long-term position against fundamentals.
While not a great trader play, getting out of equities and going all Tbills or rolling CDs in '99 would have been pretty good way to go compared to what vast majority of what individual investors have done in last decade.
OMFG, reits are a sick joke
if you can't see that they've been propped up by the criminal element (the banksters), you are a total moron
play along all you want
but to analyze that shit as if it is legitimately priced is simple idiocy
Well then I guess I'm a total moron. But I'm a moron with an MBA, I'm a CPA candidate, and I'm sitting on 41,600 shares at $1.34 average price which currently trade at $10.80. A moron who has added $393,000 so far to his portfolio.
hahah PWNED! Though at 10.20 this is a pretty good chance for an exit. The bottom line is rents are decreasing and NOI for 2009 will likely be around 2.30b vs the 2.53b that Pershing used for its calculation. Given 28b in total debt and obligations relating to bankruptcy and 319mm outstanding common shares, from supplement materials, a 7.5% cap rate (best case) on 2.30b NOI would yield an equity price of around 8.35. You made an great investment, I'd lock it in right about now. Keep in mind with these assumptions GGP needs to cap at less than 8.2% to have any value left over for equity holders...
A CPA? oooohhhhhhhhhh, very impressive, haha
First, on page 19, Hovde highlights the trailing 12 month EBITDA and coverage ratio as of 9/30/09 and claim that the drop in EBITDA is over 27% year over year.
However, what they fail to mention is that the 'Net (loss) income attributable to controlling interests' of $-678.9M includes the following non-recurring items:
*'Provision for impairment' which is $418.3M more YTD 2009 compared to the same period last year
*'Provision for impairment - Master Planned Communities' which is $68.3M higher during YTD 2009 than YTD 2008
*'Reorganization items' which are related to the bankruptcy totaling $47.5M this year
The total of these non-recurring items is $534.1M (or $534.1M more non-recurring items in 12 month trailing 9/30/09 compared to 12 month trailing 12/31/08) which should be added back to net income arriving at an adjusted EBITDA value of $2,267.6M.
This is only a 4% drop on a trailing 12 month basis!
Similarly, the interest coverage ratio using the non-recurring item adjusted EBITDA is a very solid 1.52x!
Second, page 20 is a particularly candid attempt to arouse fear in investors of GGP.
Hovde claims that new rents are 33% below expiring rents. However, examining the information on the page reveals that GGP's entire portfolio has an average rent of $46.57. The new leases signed at $31.29 were on space that was renting before at $35.43 or a drop of 11.7%, not 33%!
These spaces that were renting for $35.43 are not reflective of the portfolio average of $46.57.
Third, cap rates are falling not rising as Hovde contends.
The MAC sale of an interest in Queen's Center "in the low-7%" cap rate was announced in July. That's over 4 months ago! The pre-imminent GreenStreet Advisors contends that cap rates may have fallen "up to 50bps" since the MAC deals were announced!
Fiddy!!
Finally, the most glaring mistake. . .actually two mistakes here!
Let's start with the smaller discretion first.
NOI is not adjusted for TIs or capex. In fact, these items are not even included in the FFO number! The page 30 NOI calculation should not include those two numbers. Adjusted, NOI in 3Q is $568.6M.
Now, for anyone that follows REITs and regional mall REITs in particular. . .you cannot annualize one quarter's NOI due to 4Q seasonality!!! Net operating income is historically ~15% higher in 4Q compared to 3Q for GGP and most other mall REITs. The expected 4Q NOI is $568.6M x 1.15 = $653.9M.
Therefore, the annual NOI estimate is:
*3Q, 2Q and 1Q = $568.6M
*4Q = $653.9M
Total annual NOI = $2,359.7M
Capping this NOI at 7.5% (it's a waste of time to assume the 8.5% cap rate) and running it through the other items on page 29, we get a per share equity value of $12.40!
By carelessly or intentionally making those two simple mistakes, Hovde has underestimated the equity value of GGP by over 115%.
If you took the track record of Hovde and Ackman and compared them side by side over the last few years many of you would have to change your tune.
True, but this is a highly unique situation. How many BK REITs have either of them had a stake (whether short or long)? There is no track record for either of them in this given situation, so looking at their track record isn't very useful.
Not true, Ackman paid for much of his Harvard MBA by investing in the Alexander's (ALX) bankruptcy in '92.
Score 1 Ackman, 0 Hovde Capital...
Sour grapes if you ask me, Ackman is a huge winner on this trade, and deserves kudos. No question in my mind that US policy will keep rates low enough to enable him to exit at least in the 20's on the equity. FWIW I have lost plent long SRS, no longer going to bother, the US can keep this drunk standing longer than anyone can predict. Astute comment above on converts, hard to argue that the market is smoking anything.
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