Summary
As a result of a Goldman Sachs presentation in late September which featured a close comparison to Simon Properties implies cap rate of 7%, the author is stronglyugly suggesting that GGP is starting to look like a bargain.
Analysis
With due respect to whatever expertise Mr. Todd Sullivan brings to his writing on this topic and considering Goldman Sach's track record in the mall REIT industry, I respectfully disagree with both of them.
For one thing, neither of them take into consideration the coming debacle resulting from the 100's of department store closings I am predicting will take place in early spring 2010. Those of us in the industry are well aware of how many Sears, Bon-Ton and Dillard's stores are struggling to stay afloat until after the Christmas season. Without some sort of "Christmas miracle" many of their under performing stores in "C" level malls will disappear. This will start a whole new media blitz about "The End Of The Malls" which in turn will impact the stocks of all mall REITS, even those with very little exposure to "C" level malls or the specific department stores.
For another thing, both Goldman and Mr. Sullivan (as well as Mr. Bill Ackman who had previously made a major presentation with similar predictions) make certain assumptions that require a great leap of faith to accept. They all assume "no systemic shocks to the ECONOMY and that the current economic trends essentially continue".
Without commenting on the exact definition of "economy and economic trends", they are both in trouble from the first day of their predictions. The "economic trends" in the mall REIT industry continue downward as we speak and if my predictions are correct, the downward slide will accelerate in Spring.
I also would question all three prognosticators blind eye towards the vast differences between mall REIT's exposure levels to malls that are either already "under water" or those under performing malls that have been allowed to deteriorate to the point that they are in need of tens of millions of dollars of renovation and remodeling costs. In recent weeks I have been asked to appraise certain GGP malls for private clients. In several instances I was surprised to find "C" level malls that had occupancy and rent levels that would seem to justify an 8% cap rate until I dug deeper and learned of very expensive renovation plans that had been delayed for years. If the costs of these much needed repairs and replacement items were factored into the value, the implied cap rate would have risen to roughly 9% or 10%. I just wonder how aware Goldman or Ackman or Sullivan were about these looming issues.
Finally, after all is said and done about the proper cap rates to use on all the GGP malls, using whatever comparisons to Simon or other mall REITs these analysts wishes to use, the fact remains that none of them have taken into consideration the single most unique aspect of GGP's real estate portfolio. Naturally I am referring to the single biggest anchor to GGP's profit potential, namely their vast over priced residential land holdings in Las vegas and elsewhere. Once these are factored into the mix I doubt that there is ANY EQUITY LEFT OVER FOR THE VULTURE FUNDS CURRENTLY CIRCLING AROUND THE GGP STOCK.
Kenneth Leonard consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
