Generally Negative Growth in General Growth Properties - GGP Part II

By: Reggie Middleton | Wed, Jan 9, 2008
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This is the General Growth Properties summary valuation under a mild US recession scenario. A much more in depth analysis and presentation is on its way next week. Please see the original summary analysis for the non-recessionary outlook and if you are not versed in commercial real estate, see my quick and dirty CRE valuation primer. Remember, it is my opinion that many in this space are underestimating the potential downside to be had here. This summary analysis is based on the following assumptions:

  1. 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. Thus negative growth in rentals is estimated in 2008 and 2009 and near flat growth for 2010 and 2011. Thereafter, we expect conditions to start normalizing, and have hence built in long-term normalized growth in rentals. This is a conservative showing, and my gut (empirically calculated, but investors gut feeling) says that we are in for a much harder landing than presented here. I don't have the resources to run full macro scenarios, thus I stay on the conservative side unless extremely obvious that I should do otherwise. If you have been a regular reader of my blog from the days of typepad.com, you will probably realize that my conservative estimates are the equivalent of the consensus "doomsday" scenario. I believe that I am more realistic, but then again I would, wouldn't I?

  2. We also expect interest rates in the recession scenario 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. I made it clear to the mod squad (my analytical team) that I wanted them to be conservative in their expectations. In my opinion, we are already several months into a recession, but we will not know for sure 'til the near future.

  3. We have also lowered the occupancy rates in the recession version expecting lowering demand for shopping space in the wake of falling retail sales and consumer demand

    Giving effect to the above assumptions, we expect GGP's consolidated valuation to be around $6.6 bn on CFAT basis converting into a share price of $27. This is a 25% downside to the current share price of $36. Please note (again) that we have taken a realistic/conservative approach while assuming the duration and extent of the recessionary conditions. However, if the recession were to prolong beyond 2009 or the economy were to take longer to normalize, the impact on GGP's valuation could be worse (probably another 5-7% downside to the valuation could be expected in case the recession were to continue into 2010 or beyond).

Due to the extent of the research performed and the quantity and quality of data gathered and analyzed, the time lapse from analysis inception to completion has allowed for GGP's share price to register a fall of 11% over the last week indicating a portion of the expected downside since we started building our analysis could already have been registered. This could also mean that given the high prospects of recession setting in over the next few months, GGP valuation could be expected to worsen going forward now that market has strongly reacted to the company's performance.

The team is hard at work consolidating the Base assumption files and I expect the valuation under that case could be nearly $6 per share or 17% down from the current share price of $36. I will probably post the Base case output together with a comparison of all the three scenarios tomorrow. Till I post it, I urge my blog readers to download and read a sample of the supporting calculations for the valuation model that is yet to come (caution: this stuff is probably only for hard core real estate junkies or someone with a real interest in GGP). It is also the methodology that will be used in future commercial real estate analysis and represents an awful lot of work. Keep in mind that this is the driver for 260 individual custom property valuation models, an aggregate portfolio valuation model, and a corporate model for the GGP entity itself. I may have found a few more companies that are deserving of my attention. See GGP advanced mini-sample (877.07 kB).

If I get the chance, I will continue my Brokers, Banks and Bullsh1+ series with numbers, my opinions and findings on Bear Stearns some time after the market closes.

Scenario analysis Assumptions
  Rental growth rates Interest
rate
Occupancy
rate
  2007 2008 2009 2010 2011 2012
Worst Case
(Recession)
  6.3% 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

 

Valuation
PV (CFAT) PV (NOI) Share Price Share Price NOI ($ bn) Cash Flow before tax($ bn)
$ bn $ bn (CFAT) (NOI) 2008 2009 2008 2009
$6.59 $7.28 $27.04 $29.85 $1,483 $1,528 ($2,325) ($1,685)

 

Summary of GGP Valuation (Base case assuming recession)
  $
NOI Basis
Consolidated valuation as per Portfolio Valuation sheet $28,886,725,819
less: Debt $24,073,812,000
Estimated value using PV of NOI basis $ 4,812,913,819
Add: PV of other income $ 2,462,669,720
GGP's estimated market cap (NOI basis) $ 7,275,583,539
 
No of shares 243,775,000
Estimated share price ( PV NOI basis) $ 29.8
 
Current share price $ 36.0
Upward (Downward) - NOI basis (17.07%)
 
Cash Flow After Tax basis  
Estimated Value using Cash flow basis 4,129,853,902
Add: PV of other income 2,462,669,720
GGP's estimated market cap (CFAT basis) 6,592,523,622
 
No of shares 243,775,000
Estimated share price (PV CFAT basis) $ 27.0
 
Current share price $ 36.0
Upward (Downward) - CFAT basis (24.86%)

 


 

Reggie Middleton

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