From the shareholder letter
General Growth
Background:
Two years ago, prior to General Growth entering bankruptcy in the U.S., we approached General Growth to complete a “pre-packaged” recapitalization plan with us. Events overtook us but we were fortunate to have completed extensive due diligence on General Growth in order to understand the assets, and the
management platform that they had. During early 2009, this led us to both acquire a significant debt position in the company, and more importantly, to educate a number of our institutional clients on our thesis that General Growth was a company which fit the profile of the perfect restructuring candidate.These actions led us to an agreement with General Growth in the first quarter of 2010 on our sponsorship, with a number of our Real Estate Turnaround Fund partners, of a recapitalization plan for General Growth, that was shortly thereafter supplemented with investments alongside us by two best-inclass investors, Pershing Square Capital and Fairholme Capital, all of whom have been exceptional partners.
Our view of General Growth was and is very simple. General Growth is a great company, which has excellent assets and whose scale, quality and platform would be impossible to replicate other than possibly by paying substantial premiums to tangible value for assets over a very long period of time.
Other than a few events conspiring to cause the company a number of issues (too much short-term debt, the total shut-down of the capital markets, and a consumer-led U.S. recession), this opportunity would never have been available.
Too often we see companies with broken operating models in bankruptcy. Restructuring these companies is very hard work and sometimes the price at which you acquire your debt does not justify the risk taken. We try to avoid these situations. On the other hand, the great restructurings involve a company which is experiencing temporary issues due to market conditions or one which is overleveraged, causing stock market investors to value it at liquidation value instead of as a going concern.
General Growth has outstanding assets, great people, and a business which we believe will continue to grow. Seldom have premier retail shopping malls sold at capitalization rates above 6.5%. We believe that General Growth’s portfolio, with appropriate sponsorship, has the potential to trade at lower capitalization rates (i.e., higher values) than this as the going-in cash flows are unduly suppressed because of what they have had to endure for the last two years. As a result, growth rates should be far greater than comparable portfolios and overall returns higher.
Our Plan:
Our plan will result in new General Growth (“GGP”) emerging from bankruptcy on a standalone basis with one of the largest premier quality portfolios of retail shopping malls in the U.S. GGP will emerge with strong cash flows, a restructured balance sheet, and predominantly long-term non-recourse debt. On emergence, existing shareholders will own approximately 34% of GGP, which will be one of the largest, high quality publicly traded real estate entities in the U.S., and the second-largest retail shopping mall company in the U.S. GGP will have a prudently capitalized balance sheet, and extended maturities on virtually all of its property financings, and no corporate debt, other than a $1.5 billion newly structured
corporate facility.We believe that the Brookfield sponsored stand-alone recapitalization plan agreed to with General Growth provides an exceptional investment opportunity for existing shareholders as compared to selling the company today. Our plan is to assist GGP to grow, including re-establishing capital markets credibility, lowering the company’s cost of capital, redeveloping existing properties and expanding internationally.
The Alternative Plans:
General Growth’s largest competitor has made proposals to buy the company and alternative proposals to become a large investor in the company. We are very pleased with the support for our vision of the value of the General Growth franchise through our recapitalization plan which enables shareholders to participate in the future of General Growth. In our view, this is the wrong time to sell the company. A General Growth shareholder who would like to sell their shares has access to liquidity in cash today in the stock market, and the alternative of receiving a competitors’ stock at valuations much higher than that of the current multiple of General Growth makes no sense. Should any shareholder wish to buy these shares, they have ready access to this in the open market today.
In regards to the other alternative plan, in very simple terms, the idea of an investment in General Growth by its largest competitor is absurd. They suggested our plan should be rejected because we are receiving warrants as consideration for our commitment and sponsorship. No doubt, should they try to buy the
company again in the future, the warrants will make them pay a little more.However, the amount is irrelevant to long-term returns for shareholders and the opportunity presented by the Brookfield sponsored plan is much more substantial. To put this into perspective, the value of the warrants is less than 2% of enterprise value, and therefore not meaningful to the long-term value proposition of a $30 billion company.
Summary:
With our plan, we have $2.6 billion reasons, and no conflicts, to assist General Growth to enhance the value of their company for the benefit of all shareholders. On the other hand, if the largest competitor is able to acquire a negative control block (they may not technically control General Growth with their investment, but nobody else can ever buy the company and they will never have an incentive to sell it should an appropriate opportunity arise) they have every reason to frustrate the ongoing success of General Growth to the benefit of themselves.
The business conflicts which will inevitably arise are insurmountable. This includes employee retention issues, potential corporate opportunity conflicts, issues with retailers and most importantly the anti-trust issues, which would result from this type of situation on a day-to-day basis. The story is as simple as, if given the choice, would any company willingly sell 25% of its shares to its major competitor. Think about this in the context of Wells Fargo and JP Morgan, Pepsi
and Coke, Apple and Microsoft, or Target and Walmart.