Pershing Square's Bill Ackman On GGP - May 2010 Update

Bill Ackman of Pershing Square presented at the May 26, 2010 Ira Sohn Conference. In addition to opining on the ratings industry (see here), he spent 90 slides briefing the audience on why GGP is an attractive long investment. Long time TILB readers know that we have extensively covered Ackman, Hovde and Tilson's views on GGP and the resulting back and forth (and back and forth...and back...and forth...). Ackman lays out here why he thinks GGP still has a lot of value for shareholders.

Enjoy.
GGP - Ackman Presentation at Ira Sohn Monference - May 2010

Tilson's Response To Hovde's Response To Pershing Square's Response To Hovde's Response To Pershing Square's Views On Mall REITS And GGP Specifically

Whitney Tilson (T2 Partners) re-inserts himself into the Pershing Square vs. Hovde debate on GGP. To be fair, Hovde did take a shot at Tilson's GGP analysis on page 63of its Dec. 29th presentation. For those wondering, T2's analysis is largely a derivation of Pershing Sqaure's, which is not surprising given the two firms' histories of sharing research and investment ideas (and Tilson and Ackman's long friendship).

Tilson emailed the following to his regular distribution list:

Hovde Capital yesterday released its response (link here) to Pershing Square’s rebuttal (link here) (and, to a minor extent, and our rebuttal (link here)) of Hovde’s initial report on GGP (link here).

Our quick take is that it’s more of the same – like Hovde’s first report, there are a few good points (nothing we hadn’t already considered) mixed in with many arguments that are either factually incorrect or misleading, or with which we simply disagree. In short, there’s nothing new that changes our view regarding the attractiveness of GGP (it remains by far our largest position).

Before proceeding, we want to make clear how much we enjoy the debate and think our markets would be much healthier if there were a similarly detailed exchange of viewpoints for EVERY stock!

To some extent, the debate is now about different views of the future: Hovde believes that consumer spending will be terrible for an extended period and that bankruptcies among mall-based retailers will continue or worsen, which will translate into severely declining NOI for GGP over time. Pershing believes that the worst is behind us: that unemployment has peaked, consumer spending has stabilized and may even be picking up a bit, and that retailers are in remarkably good shape in light of what they’ve been through over the past 18 months, all of which will translate into approximately stable NOI. Whether Hovde or Pershing is right about GGP over time will, to some extent, depend on future macro factors, which are obviously impossible to predict with certainty.

That said, good analysis matters and we think Hovde’s is sorely lacking, primarily in the following areas:

1) Hovde’s most serious mistake is misunderstanding (or misrepresenting) what will likely happen to GGP’s unsecured debt. Hovde assumes that it either remains outstanding (throughout its presentation, Hovde calculates GGP’s leverage and interest payments assuming that the debt remains outstanding, which is the main reason its analysis differs from Pershing’s and ours – see page 63, for example) or that it converts to equity, which will result in “significant dilution” (page 72). Hovde makes explicit this assumption when it claims that Pershing “does not use consistent assumptions” regarding what happens to the unsecured debt on page 35 of its report.

Hovde doesn’t appear to understand bankruptcy law and what will likely happen to the unsecured debt. There is almost no chance that it will remain outstanding: it will either be refinanced or, more likely, be converted into equity (this is what Pershing assumes – there is no inconsistency). But here’s the key: it will NOT BE DILUTIVE because it will convert AT FAIR VALUE, as determined by the bankruptcy judge. Of course, if the judge determines that fair value is $1/share, then it would be massively dilutive, but that’s not going to happen. The judge has a great deal of discretion in determining fair value, but will certainly take into consideration the current stock price, comps and the price of any equity offering(s) GGP might do.

For example, as soon as GGP exits bankruptcy and its stock is relisted (it currently trades on the pink sheets, which means most institutional investors can’t own it), it will be a must-own stock for every REIT fund (a big catalyst Hovde misses). To meet this demand and pay down some debt, GGP might issue equity – and the negotiated price at which this stock is sold would likely weigh heavily on the judge’s determination of fair value (and would not be dilutive). Of course, if someone like Simon were to buy GGP at, say, $20, the debt would convert at this price – and again, it wouldn’t be dilutive.

2) Hovde takes seven pages (6-12) arguing for its definition of NOI, but there’s no right answer here. NOI is like free cash flow: different people calculate it in different ways. But however one calculates it, it’s important to be consistent – which Hovde is not. It uses the most conservative assumptions to minimize GGP’s NOI, but then fails to do so for Simon, making its comp analysis deeply flawed.

3) Speaking of comps, Hovde writes: “to suggest GGP should trade at the LOWER cap rate than SPG is LAUGHABLE in our view” (pages 22-23). Hovde can laugh all it wants, but there are very good arguments for why Simon is, in fact, the best comp for GGP. For starter, both have very similar mall portfolios with a national footprint (unlike Macerich, which Hovde cites as a better comp on page 63; MAC also has debt issues that are more significant than what GGP will likely have post-bankruptcy). In addition, GGP will likely have a BETTER liability profile post-bankruptcy, with no maturities until January 2014. Finally and most importantly, GGP is for sale and Simon isn’t, so there should be a premium for GGP reflecting a possible sale of this strategic asset.

4) Hovde’s analysis treats GGP as a collection of assets, but it’s more than that. The fact that GGP is in bankruptcy has put it into play, so there is a once-in- a-lifetime opportunity for Simon, Brookfield or someone else to acquire a national platform, as highlighted in this quote from the WSJ:
The opportunity “is a potentially transformational event that doesn’t come along very often,” says Steve Sakwa, an analyst with International Strategy and Investment Group Inc.

5) Hovde dismisses the likelihood that GGP might be acquired (pages 51-55), focusing only on Simon and not even mentioning Brookfield, which may in fact be the more likely acquirer due to fewer anti-trust concerns and the need for a national platform (which Simon already has). As noted above, Hovde misses the value of GGP as a strategic asset – no doubt, there’s lots of distressed inventory out there, but only one national platform for sale like GGP.

Finally, Hovde finds it “telling” that Simon and Brookfield bought GGP’s unsecured debt, but not the equity, even when the equity was at a much lower price. But it’s not as telling as Hovde thinks for a number of reasons. First, it’s possible that Simon and/or Brookfield do in fact own the equity – if either bought less than 5% of GGP, it wouldn’t have to file (in any case, for anti-trust reasons, they couldn’t acquire more than 7.5%). Also, at the time they bought GGP’s debt it was very cheap and they might have reasonably concluded that it represented a better risk-reward than the equity.

6) Hovde argues that GGP’s rental rates and leasing spreads are very poor and will likely get worse (pages 15-18). They have indeed been under pressure, but Hovde is making the classic investing mistake of projecting the immediate past indefinitely into the future. What Hovde is missing is that GGP over the past year, knowing that it was in a poor negotiating position due to the macro environment and its own bankruptcy, has been renewing leases mainly on a short-term basis. These renewals have indeed been done at low rates, but this isn’t likely to be a permanent state of affairs. The macro environment has at least stabilized and may be improving and GGP will soon either be acquired or exit bankruptcy, so its negotiating position will strengthen and therefore rental rates and leasing spreads will likely improve.

7) On pages 28 and 33, Hovde repeats the charts from its first presentation (pages 33-34), showing that “Commercial Real Estate Prices Have Dropped 43% Since the Peak” and that cap rates are moving higher under the heading: “Despite Speculation to the Contrary, Cap Rates for All Property Types Are Moving Higher, Not Lower. Does Pershing Square Believe These Transactions Did Not Happen?” But the CRE chart doesn’t include mall real estate and the cap rate chart, while showing cap rates for virtually every other type of commercial real estate, is MISSING data for malls! (The cap rate for mall REITs has fallen dramatically from earlier this year.)

8) Hovde paints a very bearish picture of retail sales (page 61), but the latest data contradicts this – for example, an article in the NYT earlier this week www.nytimes.com/2009/12/28/business/28shop.html) noted:
Over all, retail sales from November through Dec. 24 rose 3.6 percent from last year, according to SpendingPulse, an information service of MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards.
That number — which does not include sales of automobiles and gasoline — was helped this year by an extra shopping day between Thanksgiving and Christmas. Adjusting the results for that extra day cuts the retailing industry’s sales increase to about 1 percent, in line with what many retailing professionals expected.
While the numbers do not suggest a turnaround for the industry, they signal an improvement over last year’s 2.3 percent sales decline…
… “Last year was just a storm and retail was all about dropping prices to get rid of inventory,” said Mr. Katz of AlixPartners. “This year it was much more of a planned strategy: low inventories and tight expenses. And controlled promotions.”
That means most stores did not erode their profit margins the way they did in 2008, though in the days before Christmas, Mr. Katz said, some chains discounted more deeply than they should have.
Perhaps the best news is that the double-digit declines that plagued nearly every retailing category last year are gone.

9) Hovde spends many pages (38-43) questioning whether GGP’s Master Planned Community Segment has any value – but Pershing already assigns no value to it so it’s not clear who Hovde is disagreeing with. Another note: on page 39, Hovde makes this ominous statement: “The heirs of the Hughes estate hold a contingent claim related to the valuation of these assets. If there is significant value in these assets, the resolution of this claim could result in a substantial unfunded liability, which Pershing Square has failed to include in its analysis.” This is a red herring: the only claim by the Hughes estate is for half of any profits. Thus, the only way there could be a claim, leading to a “substantial unfunded liability”, is if there are profits, which would be wonderful for GGP (even if GGP only received half of the profits, this is more than zero, which is what both Hovde and Pershing expect).
This is a great debate and it will be very interesting to see how this plays out.

Happy new year to all!

TILB is on record as saying we love to see the debate. It's healthy for markets and educational.

Hovde's Response To Pershing Square's Response To Hovde's Response To Pershing Square's Views On Mall REITS And GGP Specifically

Well, Hovde seems to be enjoying the publicity that Bill Ackman's Pershing Square is providing them. They have crafted a response to Ackman's response to Hovde's response to Ackman's views (Ackman's prior response linked here).

Whew.

In any case, we think this is one of the healthier debates that exists. Two thoughtful participants going back and forth in a public forum on their in depth views on a business. We honestly look forward to the next volley in the debate - Pershing Square, it's your turn.

Enjoy. [HatTip: BobBob]

General Growth Properties - 2 - Hovde

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Updated with this Hat Tip video pick from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?

Bill Ackman's Pershing Square Rebuts Hovde's Short GGP Thesis

Many of you know that we are fans of Bill Ackman and his firm Pershing Square. We brought you his prior presentation on the attractive economic merits of mall REITS. In response to that presentation and Ackman's prior discourse on why Pershing Square is long General Growth Properties (GGP), Hovde published a bearish response.

Today, we bring you Pershing Square's dismantling of Hovde's response. Enjoy.

As an aside, this has all the makings of a classic cat fight. Purrrrrrr.

A Detailed Response to Hovde's Short Thesis on GGP (12!22!2009)

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Updated with this Hat Tip from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?

Bill Ackman Of Pershing Square Presents His Bullish View On Mall REITS To The ICSC

Below is a presentation from December 7th, 2009 by Pershing Square's Bill Ackman to the International Counsel of Shopping Centers (ICSC) on the current state of mall REITs. Suffice it to say, he's bullish across the board: GGP, Simon, Macerich.

As always, brought to you first by TILB. Please spread the good work. As you know, we are big Ackman fans and always have respect for his views. The man can produce Powerpoint like nobody's business.

ICSC Mall REIT Presentation 12-7-2009

GGP And The End Of Securitization; Threats Of Substantive Consolidation Gain Momentum

We have been watching the GGP bankruptcy evolve from a distance over the past several months for a variety of reasons. Prior posts have laid out Bill Ackman's long thesis on the bankrupt equity and Thomas Kirchner's rebuttal. Also lurking for several months have been the threat of substantive consolidation of GGP related entities. For those that have never heard of "substantive consolidation" and thus assume it is part of legal esoterica, you should understand it is the basis for the entire securitization market.

In essence, a securitization has historically been "bankruptcy remote" from its owner. This works in both directions, so to speak. In direction one (such as GGP's case), if the owner goes bankrupt, the remote entity's securitized lenders are protected and the bankruptcy has no impact on their ability to collect payments or takeover the underlying assets if the securitization began trigger relevant covenants. However, if the remote entity turned out not to be remote and were instead "substantively consolidated" with its bankrupt parent, the bankruptcy judge would have the ability to dictate terms and otherwise change the deal within the securitization, making it hard for the ABS lenders to get comfort they'll receive full value.

In the second direction of remoteness, the parent is protected from a default of the securitization. Basically, if TILB & Co. were to sponsor/create a mortgage securitization in which it owns the equity tranche (say, the bottom 5% of the structure) and fund the balance of the securitization with 95% debt (ABS), TILB & Co. stands to lose the money it put in the securitization and no more (making it "bankruptcy remote" from TILB's other assets). Substantive consolidation would change that and put TILB & Co's other assets that are outside that securitization at risk (e.g., if the collateral in the securitization did not cover the securitization's liabilities, the ABS lenders could come after TILB & Co's assets that are outside the securitization structure). In essence, substantive consolidation would take away the limited liability nature of securitizations.

This would of course end private securitizations forever and obliterate the balance sheets of most large banks and insurance companies.

An article from Reuters yesterday addresses the issue and GGP's attempts to utilize substantive consolidation in its bankruptcy proceedings.

General Growth keeps securities markets on edge
Mon Aug 3, 2009 2:45pm EDT
By Al Yoon

NEW YORK, Aug 3 (Reuters) - General Growth Properties last week, possibly in a shrewd negotiating tactic, said it may yet pursue a controversial strategy in its bankruptcy that could upset the legal basis for thousands of asset securitizations.

The second-largest U.S. shopping mall owner at a hearing said it was considering ways to treat some of its subsidiaries as a single debtor and override their status as separate companies, according to a transcript of the hearing.

Potential for such a move is raising concern among investors because borrowing against commercial real estate and other assets is tied to the notion that borrowers are isolated from external events at a parent or other units. It is enough to sound alarms over the credibility of billions of dollars in bond agreements, even though a "substantive consolidation" is tough to achieve, analysts said.

"This was a surprising development that was probably saber-rattling on General Growth's part," said Daniel Rubock, a senior vice president at Moody's, who attended the hearing.

Chicago-based General Growth (GGWPQ.PK: Quote, Profile, Research, Stock Buzz) filed for bankruptcy in April after the credit crunch choked off financing for commercial property mortgages, challenging the company as it confronted maturities on billions of dollars in loans. It shocked analysts by naming some three-quarters of its 200-plus shopping malls in its filing, even though many of the corporate subsidiaries are in good shape.

Consolidating the special-purpose entities (SPEs) would hit at the heart of asset securitizations, which helped fund more than $600 billion for office buildings, apartments and shopping malls in 2005 and 2006. The threat comes as Federal Reserve and Treasury officials have focused on restarting lending to commercial properties in a bid to reduce the sector's drag on the U.S. economy.

Addressing concerns at a hearing last week, General Growth attorney Marcia Goldstein affirmed the judge's understanding that consolidation was not in court papers but noted the company needs to assess "inter-relationships" of the debtors.

"And one of the things we're looking at is whether there are some subgroups that should be appropriately substantively consolidated," Goldstein said at the hearing, and confirmed to Reuters on Monday. "We have not reached any conclusions on that at this point."

General Growth may be looking to negotiate a "global settlement" that rewrites all loans to easier terms with its creditors, said Richard Jones, co-chair of Dechert LLP's finance and real estate group.

What is more, getting a judge's approval for a substantive consolidation would be extremely difficult. Jones said. And the judge has "gone out of his way" to say that he does not expect proceedings to move in that direction, Jones added.

"It makes sense for the GGP counsel to mutter the words periodically to keep it at a low boil," Jones said. "It keeps the risk very clearly on the table." (Editing by Andrea Ricci)

As the author of Directive 10-289 (the best named blog in the blogosphere) said to us via email, "Novel bk strategies have been envogue lately but the Fed/Treas etc. do not want this Scud going off in the oil field. Talk about a credit crunch lingering a lot longer. whoa. If judge doesnt want to end up in Peoples Court he had better stick to his guns"

Kirchner Rebuts Bill Ackman Of Pershing Square Re: GGP (General Growth Properties)

Thomas Kirchner of Pennsylvania Avenue Event-Driven Fund (PAEDX) has written a rebuttal to Bill Ackman's presentation on the merits of GGP that he gave at the recent Ira Sohn charity conference.

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?

Long GGP: Bill Ackman's Ira Sohn Presentation

Bill Ackman of Pershing Square presented at the Ira Sohn Conference on why GGP is a great probabalistic investment.

I have no idea how the man pumps out 70 page Powerpoints like this so easily, but it never ceases to amaze me. Every time I read/see one, I want to obey its message.

By far, his most convincing presentation ever was "Is MBIA AAA?" at last year's Ira Sohn. While I'd seen his arguments against MBIA over the years, adding in the step by step tutotial on the insured structured finance assets and the mortgage reset waves were phenomenally descriptive. I went home and shorted it and ABK the next day.

The first time I met Ackman, just prior to publicly launching Pershing Square, I walked away thinking he was one of the best investors I'd ever met. While he's made some mistakes, I stand by that initial impression.

In any case, here is his presentation on why GGP may be a multi-bagger. He presented this a few days ago at Ira Sohn.

GGP Presentation 5.27.2009

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