Todd - As always, great analysis. A few points I would like to clarify: 1) My post was not to peg GGP's equity value. I have no idea what the value of GGP's equity is worth, hence the reason I can be neither short nor long the name. The only security I have had conviction on in this case was the Rouse bonds when they were trading in the 30s-40s as they offered substantial margin of safety (alas, I sold them way too early). The $5 you reference was essentially the midpoint of the numbers I threw in the mini-valuation grids. If I were less lazy I would of made the grids 10x10 for even more fun
Now that that is out of the way, I thought I would also post Pershing Square's response to Hovde Capital's short thesis. As always, this is an interesting situation. The easy money has been made in my opinion.
I also think the big thing that Pershing/Tilson/Sullivan are failing to appreciate is the sheer leverage through the equity. Even a small change in the cap rate means a large swing in the equity value, so yes it could be $20, but you could easily say $5 as well.
ReplyDeleteAnd what matters in the end is absolute valuation, not relative to Simon. Say Simon launched a formal bid, why would they pay the same cap rate as they currently trade? We all know private market caps are higher, and they would only do a transaction if accretive.
Also, there a lot of bankruptcy/re-org nuances that impact value here that are not being considered (though probably uncertain) that could lower the equity value.
like Anon said cap rates is what make equity worth $40 or 5. However throwing around cap rate in the 6 or 7 % is not grounded in any observable data points. there are no actual portfolio sales occurring in the last 18 months to justify 6 or 7 or 8 cap rate. sales volume simply is anemic to determine any cap rates that is why Ackman uses the implied cap rate value of simon properties as he would not be able to justify the GGP equity value.
ReplyDeletethe best opinion is simply we do not know what value of the equity.
I think Pershing made excellent point on seasonality, however, 25-45 seems like a stretch. He makes the argument that interest coverage is ample because unsecured will convert into equity via the bankruptcy process. However in his price target of 25-45, he leaves current cap str in place. If we convert unsecured (assume 7-7.5 w/ accrued) @ $10 per share, share outstanding explode to 1 bill. IF even use cap rate of 7 (seems like big stretch, especially if risk free spreadenswiden), value of co is 35 bill minus 21 bill of mortgage debt, left with 14 bill, so 14 per share if Cap at 7!! Not much of margin of safety in this one.
ReplyDeleteThere's a version of the Pershing presentation that you can download at http://www.scribd.com/doc/24411287/A-Detailed-Response-to-Hovde-s-Short-Thesis-on-GGP-12-22-2009.
ReplyDeleteZero Hedge is out with a downloadable copy of Hovde's response. I think it's a big improvement over his 1st presentation (and over Hackman's):
ReplyDeletehttp://www.zerohedge.com/article/general-growth-properties-valuation-fight-escalates-hovde-v-ackman-round-2
Can anyone explain why Pershing Square and Hovde are spending all this time trying to publicly discredit the other fund's investment thesis?
ReplyDeleteIt's like they've gone activist on each other.