Pershing Square 2nd Quarter 2009 Letter

Thanks to Jay at MarketFolly for posting this.

Pershing Square Q2 Letter

Some quick points an analysis, from my perspective:

• I actually saw Bill Ackman speak last year and was thoroughly impressed with the work he did with FSA - a bond insurer. Interestingly, we were already short FSA at the time. Strong analysis and presentation.
• I analyzed EMCsometime in June, and unfortunately, missed the opportunity. Error of not pulling the trigger.
• McDonald's is probably quite cheap here. 13x earnings for that sort of business makes no sense to me - especially when the general market is trading around 20+x forward earnings. They have not participated in the rally as the opposite of the Walmart effect has been occuring in the stock market.

GGP gets its own paragraph. I just don't know with this one and am not thoroughly convinced. My analysis is still coming up with 50-60ish on the Rouse bonds (discounted back two years at 20%...i.e basically where it is trading today), and it has been that way for nearly a year now. Maybe I am suffering from some kind of anchoring mechanism. I have seen all the sell-side models out there: At a 9% cap rate, and call it $850M on NOI, then add in some love for land and JV value you get $10-$11B value for Rouse less $7.4B of secured debt leaves a recovery for the Rouse bonds well in excess of par.

Do I think the 9% cap rate is correct? That is a broad statement. I think some malls could go for 7% and other malls could go for 15%. I would say it is close to correct. Do I think the $850M of NOI is correct? Frankly, I think it is lower. I also think that ascribing a billion dollars to the ancillary assets only makes sense if someone will actually buy them at that level. Also - And this is more a theoretical question: But are CRE lenders just going to extend the maturity on the mall loans? Won't some of them want more security / rate to compensate them? Some of the GGP and Rouse malls were financed at a 3-4% cap rate. These lenders are significantly underwater. In a number of stressed CRE's situations this year, borrowers have added collateral and upped rate to make lenders happy. How does that factor into the equation?

Here is the Pershing Square GGP Presentation. It is well thought out. I suggest everyone interested read.

GGP Presentation 5.27.2009