When we are looking at REIT’s and wondering how to value them it all comes down to NOI. With that in mind, lets look at Q2 for GGP:
NOI for the second quarter of 2009 was $615.8 million, a decrease of approximately 2.1% from the $629.1 million reported in the second quarter of 2008. Minimum rents (including temporary tenant revenues), overage rents and other revenues (including sponsorship, vending, parking and advertising) in the second quarter of 2009 declined as compared to the same period of 2008 due to the continued weakness in the economy and occupancy declines. In addition, we sold three office buildings in 2008, as discussed above, which also contributed to the decrease in NOI. Weaknesses in certain of our tenants’ businesses also led to a $3.9 million increase in our provision for doubtful accounts in the second quarter of 2009 as compared to the second quarter of 2008.
Note: For GGP one must ignore the headline numbers for now as they will be skewed heavily by restructuring costs. We are simply looking at the health of the underlying operating businesses, not the final accounting number.
A 2.1% drop in this environment is simply outstanding. If we are talking about a cap rate to value GGP at, if we take a look at recent CRE deals, we see the current market for grocery anchored strip malls are selling for 8.5%-9% cap rates. Based on that and based on GGP’s results, if one would assume a 8% cap rate for GGP, that would be very reasonable. It also would not be unreasonable based on the historical averages to stretch it to 7.5% but we ought to stick with 8% to be conservative.
Using this we will based some assumptions on Pershing’s valuation table of GGP common post Chapter 11 under certain dilution scenarios. As we move down the Cap scale we find that the value of the common dramatically increases.
As GGP continues to post strong results, the assumption has to be that there will be more left for shareholders post Chapter 11. Occupancy, while up slightly was essentially unchanged at 91% giving credence to the strength and desireability of GGP’s locations.
Remember, GGP need not file a reorg plan until April, 2010. So, if you think the economy will continue a steady albeit slow rebound, then the numbers we see now ought to improve even further by then. If that is true, then the prospects for current shareholfders will improve with it.
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GGP Q2
Disclosure (“none” means no position):
4 replies on “General Growth Properties Reports Strong Q2”
Does GGP have 600 million cash on hand? Or is that from the DIP loan. If its not I have to believe it boads well for the re-org efforts
combination
Thanks for all the great analysis on GGP, I have two questions though.
Why are you looking at NOI instead of FFO?
In this previous post http://valueplays.blogspot.com/2009/02/general-growth-properties-look-at-real.html about ggp you talked about their average value of assets per square foot. based on 200M sqft. but when you look at the 2008 report is states that that number combines both consolidated and unconsolidated ventures. So my question is does that number represent the total square footage in which they have at least some ownership or is the unconsolidated portion of that adjusted for their percentage ownership.
FFO will be affected by charges and NOI is just pure rent-expenses (essentially) for the properties. it also gives us a better indication of how the properties are doing and that weighs on cap rates in chapter 11
i understand the total sq. footage to be total, not a prorated #.