GGP Valuation
Total Page：16
File Type：pdf, Size：1020Kb
Disclaimer Reggie Middleton, LLC’s Boom Bust Blog analysis and conclusions in this presentation are based on publicly available information. Reggie Middleton, LLC recognizes that there may be confidential information in the possession of the Companies discussed in the presentation that could lead these Companies to disagree with Reggie Middleton LLC’s conclusions. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the Companies. Such statements, estimates, and projections reflect various assumptions by Reggie Middleton, LLC concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. Reggie Middleton, LLC and its affiliates may own investments that are bullish or bearish on the subject entity in this material. These investments may include credit-default swaps, equity put options and short sales of common stock. Reggie Middleton, LLC is in the business of trading - buying and selling - public and private securities. It is possible that there will be developments in the future that cause Reggie Middleton, LLC to change its position regarding the Companies and possibly increase, reduce, dispose of, or change the form of its investment in the Companies. This information is copyrighted, but you may use this information freely, but must attribute the boombustblog.com as the source, and whenever possible, provide a live hyperlink back to the site, or if in printed material, plainly exhibit the hyperlink as the source. 1 Reggie Middleton's BoomBustBlog.com 01/10/2008 General Growth Properties Pt III – The Story gets worse The majority of work on GGP is now done, and I will (as my time permits) start disseminating the non‐ proprietary research to the public domain through my blog. This is an extended summary with a supplemental download that will list the profitability and cap rate of each of the 260 properties that GGP has ownership rights in. Next week, I will actually post the a 30 page valuation model for each of the 260 properties and will make them available to “serious” followers of the blog upon request. I need to do this to conserve bandwidth, for having 2,000 people spull 2 gig off of my servers daily will cause congestion and expense – plus I want to know who my researched opinion goes out to. The numbers presented here are not final, for there are some issues that need to be ironed out. I am going to try something new here, and allow the constituency participate in the research and report back with an opinion, in lieu of me and my team doing all of the work on a proprietary basis. Consider it open source analysis. Valuation I have summarized GGP’s valuation under the three scenarios of ‘Recession’, ‘Base Case’ and the most ‘Optimistic case’. From the table below, one can clearly witness that amid current conditions of weakening fundamental in the US, as being increasing confirmed by declining employment data, softening trend in consumer spending, rising risk, adverse liquidity condition and the deteriorating residential sector, General Growth Properties (GGP), a pure real estate investment trust, doesn’t command a healthy premium over its current price even in the most optimistic scenario of growth in commercial rentals over the longer-term. In the ‘base’ scenario, assuming a moderate decline in commercial rentals over the next couple of years (owing primarily to expected slow-down in consumer spending and in particular reference to lower-than-expected retail sales in 4Q2007) and thereafter expecting the rentals to witness a nominal growth of 0.2%, 0.5% and 0.8% in 2010, 2011 and 2012, respectively, we expect GGP’s valuation to be approximately $7,254 mn, translating into an expected share price of $29.8, a 12.2% lower from its current price of $33.9 per share (see valuation below under the ‘Cash Flow After Tax’ basis). This is over and above the 17% decline the stock has already witnessed over the past week. Among other assumptions, the most important include the following: • An occupancy rate of 89.7%, lower than the current rate, expecting softness in demand for commercial rental space amid weakening fundamentals • GGP’s cost of financing to increase to 6.14% as the company refinances its existing debt and borrows additionally to meet its capital expenditure amid tight credit market situation 2 Reggie Middleton's BoomBustBlog.com 01/10/2008 Summary of GGP Valuation (Base case assuming recession) $ mn except per share data Recession Base Case Optimistic Case NOI Basis Consolidated valuation as per Portfolio Valuation $28,965 $29,650 $30,737 less: Debt $24,074 ($24,074) $24,074 Estimated value using PV of NOI basis $4,891 $5,576 $6,663 Add: PV of other income $2,463 $2,563 $2,463 GGP's estimated market cap (NOI basis) $7,354 $8,139 $9,126 No of shares 243.8 243.8 243.8 Estimated share price ( PV NOI basis) $30.2 $33.4 $37.4 Current share price $33.9 $33.9 $33.9 Upward (Downward) - NOI basis -11.0% -1.5% 10.4% Cash Flow After Tax basis Estimated Value using Cash flow basis $3,982 $4,691 $6,061 Add: PV of other income $2,463 $2,563 $2,463 GGP's estimated market cap (CFAT basis) $6,444 $7,254 $8,524 Estimated share price (PV CFAT basis) $26.4 $29.8 $35.0 Upward (Downward) - CFAT basis -22.0% -12.2% 3.1% As we have discussed earlier, in the event of the US economy going into recession, the downside risk to GGP’s share price from the current level of US$33.9 would be around 22%, indicating the weakening financial and operating condition for the company. • We expect recession to impact GGP's NOI primarily in 2008 and 2009 post which we expect the US economy to drift back to recovery though gradually. However, the recovery would be much slower than the growth assumed (in 2010-12) under the ‘base’ scenario discussed above. We have hence estimated negative growth in rentals for 2008- 2010, with near flat growth for 2011 and 2012. Thereafter, we expect conditions to start normalizing, and have hence built in long-term normalized growth in rentals. • We also expect interest rates in the recession version to be higher than in the ‘base’ case as the company treads through highly difficult credit conditions in the next few years, particularly when that a large chunk of its debt is due for repayment/refinancing (see notes on refinancing towards the end). • We have also expected lower occupancy rates in the ‘recession’ version from the current levels, expecting lowering demand for shopping space in the wake of falling retail sales and consumer demand. We have built the most ‘optimistic’ case for GGP based on reasonable estimates of GDP growth, population growth and household income growth in the company’s operating locations. We believe the following assumptions represent a best case scenario for GGP - 3 Reggie Middleton's BoomBustBlog.com 01/10/2008 • Under the most ‘optimistic’ scenario we expect GGP’s asking rentals to witness a nominal 0.5%, 0.7% and 0.8% growth in 2008, 2009 and 2010, respectively, with occupancy level of 90.9%. • However even under the most ‘optimistic’ scenario we expect GGP’s additional cost of financing to increase moderately to 6.02% as we believe that tight credit to persist owing to spill over effect of sub-prime concerns. • Despite the fact that GGP’s share price has declined 22% over last 9 trading sessions from $43.3 to $33.90 presently, and after considering the most optimistic assumptions, GGP is expected to yield only 3.1% upside from its current share price of 33.90 with an expected valuation of $8,524 mn translating into expected share price of $35. Assumptions Rental growth rates Interest Occupancy Scenario 2007 2008 2009 2010 2011 2012 rate rate Worst Case (Recession ) 6.27% 89.9% - California 1.1% -1.5% -1.3% -1.1% 0.2% 0.6% - Florida 1.3% -1.8% -1.5% -1.3% 0.3% 0.7% -Texas 1.5% -2.1% -1.8% -1.5% 0.3% 0.8% Overall GGP 1.0% -1.4% -1.2% -1.0% 0.2% 0.6% Base case (Soft landing) 6.14% 89.7% - California 1.2% -1.1% -0.9% 0.2% 0.6% 0.8% - Florida 1.4% -1.3% -1.1% 0.3% 0.7% 1.0% -Texas 1.6% -1.5% -1.3% 0.3% 0.8% 1.2% Overall GGP 1.1% -1.0% -0.9% 0.2% 0.5% 0.8% Best Case 6.02% 90.9% - California 1.2% 0.6% 0.7% 0.8% 0.9% 1.1% - Florida 1.4% 0.7% 0.8% 1.0% 1.1% 1.3% -Texas 1.6% 0.8% 1.0% 1.2% 1.3% 1.5% Overall GGP 1.1% 0.5% 0.7% 0.8% 0.9% 1.0% Caveats and holes to be plugged in the aforementioned analysis. Point to consider 1: Financing Issues Due to the current tension in the credit markets, the days of 80 to 90 LTV loans are gone, at least for now. Word on the street is that some 60-65 LTV loans are not even going smoothly, and the standard 75 LTV loans are no longer standard and many are not getting funded without additional equity, especially on the refinance.