Tag: ggp

Given today’s action in General Growth Properties (GGWPQ), this was an opportune show. Also discussed was oil (USO), natural gas (UNG) and value investing in general.

More video at Wall St. Media

Disclosure (“none” means no position):long GGWPQ, UNG, USO

Much of this is due to the recent decision from the FED to make CMBS eligable to TALF backing. Whatever the reason, the CMBS market has made a stunning reversal from the end of 2008

From Markit:

Markit, a financial service firm, is described as a leading provider of industry data and pricing products and services that are used globally by more than 250 asset management firms to help them monitor risk, mark-to-market, develop accurate forecasting models and asset class benchmarks.

Markit released the following chart of their AAA(Triple A) Commercial Mortgage Backed Securities Index that had been previously issued at 100(par). These securities are representative of those on which market professionals have expressed great concern regarding the lack of available refinancing options in the current credit environment. This concern was recently underlined by the declaration of bankruptcy of General Growth Properties (GGWPQ) which was viewed by many as having adequate cash flow with which to fund the interest payments on current debt, but could not find a lender to refinance the debt that it needed to roll over. Farralon recently provided Debtor in Possession (DIP) financing.

It may be the fact that Farralon and Pershing Square competed to offer financing with the net effect that General Growth Properties was acknowledged to have received a better agreement that had been previously expected that has begun to shift expectations regarding CMBSs. It is too early to offer an explanation for the dramatic improvements in market sentiment as seen in the chart below for these securities. But, certainly a positive shift has occurred since early March 2009.

This is one piece of information in a sea of swirling bits and pieces and one observation does not make a trend. Even the multiple observations that have been evident since December 2008 which appear to reflect a strong trend of economic recovery do not permit one to forecast with certainty that the trend will continue. Such, has been the impact of unforeseen events of the magnitude of 9/11. What can be said is that there is historical precedent that this trend which appears quite similar to previous recoveries has a high likelihood of continuing.

The typical pattern is:

First, there is a psychological recovery as reflected in stock and bond markets as investors are willing to buy into risk in anticipation of recovery. During this period many continue to bemoan the lack of fundamentals to support investment activity and the media continues to provide time to those whose forecasts continue to be bearish. If markets continue to improve, the costs of financing are reduced by lower bond yields and higher stock prices and businesses and market participants eventually resume activities that eventually result in profits.

For business recoveries no one rings a bell, it is a process. The pattern is psychology first, fundamentals second. This chart reflects improved psychology. If so, then the refinancing risk for existing commercial debt is diminishing.

The trend begun December 2008 continues.

The importance of this on the GGPWQ Chapter 11 cannot be understated. Anything that causes the CMBS market the strengthen does two things. It enables lenders to more easily sell refinanced debt & in essence encourages them the do just that rather than having them position themselves to replace said debt with equity. It also places a floor on CRE prices and by default, properties that General Growth may decide to sell. The more money received from any asset sales increases the odds of equity survivability.

The Fed said in announcing the facility “”The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties,”. Emphasis mine..

It is not a big leap to then say that those properties of General Growth that were commercially viable at the time of the filing (the vast majority) would then stand a chance of TALF backed refinancing in Chapter 11. If this is then true, the outlook for the equity then increases. Now, a lot can happen between now ans next year when this stuff start getting taken care of. Properties that are performing today may just as well see performance deteriorate as they may see it improve and their lies the $27B question.

Remember, it was not the operating performance of General Growth that drove int into Chapter 11, but the lending markets. In December of 2008, then Treasury Secretary Paulson was told in a letter from a dozen commercial real estate trade groups “Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans,”.

My thought has been and still is General Growth’s operations will be performing better and there will be plenty left for shareholders.

Usual disclaimer. This is a highly speculative bet that depends greatly on the whims of the US legal system. You must be prepared to lose 100% (or close to it) in this investment before you invest. BUT, if we are right (I think we are)……..wow will it be good…

Disclosure (“none” means no position):Long GGWPQ

General Growth Properties (GGWPQ) today filed an 8-K (below) for its estimates cash flows for 2009-2010, the estimated bankruptcy period.

A Few Notable figures:
Unrestricted cash balance end 2009= $381 million
Unrestricted cash balance end 2010= $570 million
Cash flow from operations 2009= $1.2 billion
Cash flow from operations 2010= $1.9 billion

The filing backs the claim that General Growth is not a company that cannot function on a day to day basis ie. GM (GM). It is in Chapter 11 not because it cannot pay its bills but because credit markets have frozen and it debt cannot be refinanced.

General Growth 8-K BK Cash Flow

Disclosure (“none” means no position):Long GGWPQ

If the ruling goes as indicated by the judge, his is bad for bondholders, very good for General Growth and then good for shareholders as anything that strengthens the holding company is by default good for them.

Also, tomorrow a ruling is expected on the DIP financing General Growth will present to the judge. We may find out today whom they have selected.

From the WSJ

(Dow Jones)–A final ruling is expected Wednesday on whether General Growth Properties Inc. (GGP) would be allowed to tap into the cash flow from its properties, and overturn what was believed to be a basic tenet of commercial mortgage securities.

At a hearing last Friday, the bankruptcy judge postponed the decision, but indicated he was likely to side with the company.

He pointed out investors in commercial bonds would continue to receive their interest payments, and General Growth is only looking to sweep the excess cash into a centralized account that would pay for its general expenses.

Investors and lenders had believed pools of mortgage collateral that back commercial bonds would be cocooned in these special-purpose entities, and steady cash flow to investors would be protected even when the parent company files for bankruptcy.

So when General Growth dragged 166 of its properties into the bankruptcy filing and sought to consolidate the income from these properties, more than a dozen investors and industry groups rallied to protest strongly against such a move.

The Commercial Mortgage Securities Association and the Mortgage Bankers Association filed a brief stating such a move would hurt the $1 trillion commercial mortgage market.

However, the bankruptcy judge called such statements “hyperbole.”

“I am not surprised,” said Richard Zeigler, counsel in Mayer Brown’s bankruptcy and restructuring group.

“Bankruptcy remote doesn’t mean bankruptcy proof, and that’s what investors are finding out,” he said. Zeigler isn’t representing any of the interested parties in the bankruptcy.

Disclosure (“none” means no position):

There is a lot here so I will try to make it easy.

Here is the basics:

General Growth Properties, Inc. (the Company) released today its first quarter 2009 operating results. For the first quarter of 2009, Core Funds From Operations (Core FFO) per fully diluted share were a loss of $0.38, Funds From Operations (FFO) per fully diluted share were a loss of $0.52 and Earnings per share – diluted (EPS) were a loss of $1.27. In the comparable 2008 period, Core FFO per fully diluted share were $0.74, FFO per fully diluted share were $0.73 and EPS were $0.01. The declines in Core FFO and FFO are primarily attributable to provisions for impairment, termination income and restructuring costs related to the development of alternatives to address our current liquidity and financing situations.

Got it? Good, now ignore it, all of it. I included it so as to not be accused of glossing over the reported numbers. Ignore it.

What do we really want to know? What is the health of the malls looking like? Earnings from here on out are going to be impacted negatively by various restructuring costs so they are not going to accurately reflect the health of the business. For that we need to go to the NOI or “net operating income” section.

Here it is:

Retail and Other Segment

NOI for the first quarter of 2009 was $608.6 million, a decrease of approximately 4.1% from the $634.5 million reported in the first quarter of 2008. Minimum rents in the first quarter of 2009 declined approximately $2.7 million as compared to the same period of 2008 due to the 2008 sale of three office buildings and two office parks. Temporary tenant revenues, other revenues (including sponsorship, vending, parking and advertising) and overage rents declined in 2009 due to decreases in occupancy and the overall weakness of the retail economy. Weaknesses in certain of our tenants’ businesses also led to an $8.6 million increase in our provision for doubtful accounts in 2009 as compared to 2008.

In addition, other revenues declined in 2009 due to a loss on sale of outparcel land of $3.9 million whereas 2008 had outparcel sales gains of approximately $4.3 million.

• Revenues from consolidated properties were $ 757.6 million for the first quarter of 2009, a decline of 5.1% compared to $798.3 million for the same period in 2008. The majority of this decline is due to the items impacting FFO discussed above.
• Revenues from unconsolidated properties, at the Company’s ownership share, increased to $152.1 million or 3.8% compared to $146.6 million in the first quarter of 2008. This increase was primarily due to the completion and commencement of operations at the Natick Collection in 2008.
• Total tenant sales declined 6.1% and comparable tenant sales declined 6.7% in 2009, both on a trailing 12 month basis, compared to the same period last year.
• Comparable NOI from consolidated properties in the first quarter of 2009 declined by 4.4% compared to the first quarter of 2008. Comparable NOI from unconsolidated properties at the Company’s ownership share in the first quarter of 2009 increased by approximately 3.7% compared to the first quarter of 2008. In the aggregate, comparable segment NOI decreased 3.3% as compared to the first quarter of 2008.
• Retail Center occupancy decreased to 90.9% at March 31, 2009, compared to 92.5% at December 31, 2008 and 92.7% at March 31, 2008.
• Sales per square foot for first quarter 2009 (on a trailing twelve month basis) were $427 versus $438 for the fourth quarter 2008 and $460 in the first quarter of 2008.

Results here have deteriorated a bit as one would expect given current economic conditions. But, the declines were in the 3%-5% range, occupancy rates are still 91% and sales per square foot have fallen just 7% from last year, a much smalled number than would be expected given the economic carnage that has happened since last spring.

In short, operations are holding up well.

Disclosure (“none” means no position):Long GGWPQ

Based on the verbiage coming out of General Growth (GGWPQ), this seems to be the way this is headed.

So, what is a Chapter 11 “Cram Down“?

If all of the legal requirements of a reorganization plan are met, with the exception of a successful confirmation vote by creditors, the plan may still be confirmed over the objection of a dissenting class. If the plan does not discriminate unfairly and is fair and equitable to the dissenting class, it can be crammed down on the impaired class that votes against the plan.167 In a cramdown, the debtor may (1) reduce the principal amount of the secured claim to the value of the collateral; (2) reduce the interest rate; (3) extend the maturity date; or (4) alter the repayment schedule.168 The debtor may also make a minimal payment on the unsecured claim. Under the Bankruptcy Code a cramdown is permissible when the plan provides a dissenting secured class with consideration equal to the amount of its claim or when no class below the dissenting unsecured class participates under the plan, the plan.169

Feasibility Requirements of a Cramdown Plan

Before a court confirms a cramdown plan, the court must, among other things, determine whether the plan is feasible. In other words the court must believe that the plan probably will not be followed by an unproposed liquidation or a need for further financial reorganization.188 According to the United States Supreme Court, “[h]owever honest in its efforts the debtor may be, and however sincere its motives, the District Court is not bound to clog its docket with visionary or impractical schemes for resuscitation.”189 Although the feasibility requirement does not guarantee the success of the reorganized debtor, it does require that the plan enable the reorganized debtor to emerge solvent and with reasonable prospects of financial stability and success.190 The burden is on the debtor to prove that the plan is feasible.191

Generally, the factors that the court considers in determining feasibility include: (1) the earning power of the business; (2) the sufficiency of the capital structure; (3) the condition of the collateral and any deterioration that may have occurred throughout the bankruptcy process; (4) economic conditions; (5) management efficiency; (6) the availability of credit, if needed; and (7) the debtor’s ability to meet capital expenditures.192 The court is obligated to evaluate past earnings to determine if they are a reliable criterion of future performance and, if not, to make an estimate of future performance by inquiring into foreseeable factors that may affect future prospects. To enable the court to evaluate past earnings and to estimate future earnings, the debtor must present competent, concrete, and reliable evidence.193

Therefore, although debtors may propose to restructure their debts, debtors have a significant burden to establish that they will be able to satisfy the payments proposed in their plans. In a single asset real estate case, the court will deny confirmation if the debtor cannot demonstrate the plan’s feasibility based upon realistic and verifiable projections establishing the existence of adequate cash flow.

Important note: Under a cram down plan, if all senior credit classes are made whole, then the equity is permitted to remain in tact.

Now, even if all senior creditors are not made whole equity can remain in tact under the “new value exception”. It was set forth in dicta in a 1939 United States Supreme Court case, Case v. Los Angeles Lumber Products Co.175 This exception allows equity holders to keep their ownership interests even though unsecured creditors do not receive full payment of their claims, provided that equity holders contribute new capital to the reorganized debtor in an amount reasonably equivalent to their retained interest in the debtor.176 The new value exception requires that the equity holders’ infusion of capital be (1) substantial, (2) new, (3) reasonably equivalent to the interest being retained, (4) in the form of money or money’s worth that constitutes more than a promise by the equity holders to make future payments,177 and (5) necessary to a reorganization.

So, right now the equity of General Growth is worth $190 million. That would be the interest to be retained, a pittance given the potential value of the equity in a cram down scenario.

Now, let’s talk about “secured creditors”. General Growth has its malls in separate entities, each (for the most part) with its own mortgage (some properties are grouped together). The secured creditors in this case have their loans secured by those properties. Does this mean that the value of the loan is what is secured? No.

The US Supreme Court has held that there is a “disposition value” to the claim. The actual value of the property on the market (or what the creditor would receive in a liquidation) is treated as secured and anything over that, now becomes unsecured.

This simply means that the current fall in CRW prices gives GGP huge leverage over the creditors in this case. Any reorganization that gives creditors more than they would see in a liquidation (it can be reasonably argued that liquidation prices are far below even current ones) will be looked at favorably by both the court and creditors in terms of the “fairness” test. It also allows an easy debt restructure guide as the new loan amount would be the present value of the property with the balance being repaid as equity or, an additional loan with a longer dated maturity because an unsecured creditor in this case can elect to have its claims treated as secure with a:

1111(b)(2) election: (1) the undersecured creditor loses the right to vote regarding the previously unsecured claim; and (2) the unsecured creditor must make the election before the conclusion of the hearing on the disclosure statement. Often, this second requirement forces the undersecured creditor to elect before adequate disclosure has been made concerning the plan and the proponent’s intentions. By making a section 1111(b)(2) election, a creditor may significantly affect whether the amount of deferred cash payments proposed under a plan and the present value of those payments satisfy the cramdown confirmation standards of section 1129(b)

Based on statements from management, one can only assume this is the direction they plan on heading. Should they be successful, it is not only good but fantastic for the equity.

Disclosure (“none” means no position):Long GGPWQ