The crux of Kirchner's rebuttal is: NOI will be worse than Ackman expects, Ackman uses a flawed cap rate, Pershing uses faulty assumptions about the likely cost of GGP's debt (if it's successfully extended), and that dilution is likely which Ackman does not account for. Here is Kirchner's statement on Ackman's 7.5% cap rate:
Like most valuations, Pershing Square’s lives and dies with its cap rate assumption. Ackman contends that GGP should trade at a 7.5% cap rate, 100 bps better than Simon Property Group (SPG). 7.5% cap rates are not what malls trade at these days, if they trade at all. SPG itself trades at an implied 8.5% cap rate, and Pershing Square thinks that this cap rate discounts the risk of bankruptcy of SPG. Therefore, reasons Pershing Square, GGP should trade at a lower cap rate, resulting in a higher valuation. The problem with this argument is that it can be applied to GGP as well: if the maturity of the debt is extended by 7 years as proposed, the market will discount a potential liquidity squeeze at the new maturity date of the debt. In addition, we believe that an 8.5% cap rate for SPG only shows that SPG is overvalued. If we apply a more realistic cap rate (9%, in our humble opinion) to GGP, then the upside for the equity looks much less appealing. And we haven’t even mentioned dilution yet, which we will address in a moment. After dilution, the equity looks pretty close to fair value to us.We at TILB think Kirchner was kind not to simply laugh at Pershing's 7.5% cap rate assumption. In fact, to rely on Simon's 8.5% cap in a market in which Simon has issued sub notes that were priced to yield 10.75% is lunacy.
In the end, Kirchner agrees that GGP equity likely has some value, though limited. In the footnote it is disclosed that Kirchner owns "securities" in either or both of GGP and Rouse (a wholly owned GGP subsidiary) which implies that Kirchner is a creditor.
So it seems that at least one creditor is laying the grounds for a battle over who will receive the economics of GGP. Obviously others are like-minded, despite Ackman's wishes that they simply obey his commands. We certainly look forward to an enjoyable fireworks display.
Hat tip: Manual of Ideas
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What do you think? Green shoots for GGP equity or zombie equity?
