Today we are talking about GGP

I don’t often feature a specific stock in my posts. But when I have a compelling idea that deserves to be shared, there might be an exception. Today is such a special opportunity situation.

I have tracked General Growth Properties for many years. It has a Midwestern origin and flavor and many of its properties are in the heartland of the country, including the Minneapolis area, my home town. GGP as it is known by its ticker, has for most of its existence been conservatively managed. It has grown slowly both organically (developing new malls), through tight operational managemant, and through acquisition or merger (including the Homart deal in 1995 that relocated GGP to Chicago).

After decades of conservatively growing GGP, management made a deal in September 2004 that was bold, but in hindsight, was ill-timed, when they bought Rouse Companies, one of its principal rivals and the holder of some of the most famous retail properties in America, including Fanueil Hall in Boston). This acquisition, along with all the others made in the late 1990s and early 2000s, created debt against GGP of over $25 billion, or more than twice equity in 2007.

That is a lot of debt to hold heading into what has turned into the greatest economic decline of the past 70 years. By late 2007, credit markets were beginning to freeze and by late 2008 when some of the notes resulting from the acquisition spree came due, there was no ability to roll over the debt into new mortgages. There also was no market for the malls against which the debt was due. With inadequate cash on hand going into the contraction (but who could have known in 2007 it would get this bad), and an inability to liquidate the assets, the illiquidity of GGPs debt caused a technical default on the terms of the loans.

Any company in late 2008 that was in technical default on credit terms faced bankruptcy, including Citibank, Wachovia, Washington Mutual, Lehman, and other major and minor banks and businesses. But to the credit of GGP’s management, the mall operations remained in good working order and continued to be cash flow positive in aggregate. This discouraged credit holders from pushing GGP into bankruptcy court where the outcome is less certain than to monitor continued operation of the assets and hope for better times.

As of last week (last week of March 2009), GGP continues in technical default on a number of loans and has been unable to renegotiate the problem loans or extend terms. Many of the loans are held by entities that are currently unable to extend terms on portfolio loans without themselves becoming less solvent or creating a technical default against covenants of their own financing. It is fortunate that GGP’s problems are more of liquidity than of solvency. It takes a confluence of all the strange financial events of current times for a company with operations as strong as GGP’s to have financial problems causing such a liquidity crisis. But then again, couldn’t the same be said for many of the nation’s strongest and largest banks and businesses, such as General Electric, Berkshire Hathaway and Wells Fargo?

Resolution of GGP’s liquidity crisis will be made possible by the continued healing of the national and world financial markets. The fate of GGP is directly linked to the fate of our economy and banking system. I believe the Fed, Treasury, Congress and Administration will continue doing everything possible to improve financial liquidity and thaw the credit markets. I also believe creditors see the same thing I see and are willing to wait out the government efforts to get credit flowing once again. If the outcome is positive and the economy and credit markets show continued improvement, there will come a time in the next six to twelve months where GGP will be able to renegotiate its defaulted credit and fix its liquidity without damage to its common stockholders.

View the full GGP chart at Wikinvest

With the stock price currently around 70 cents a share, the downside is limited by zero. I have just purchased 1000 shares at a total cost of $700. I will purchase more once I, like the creditors, become convinced that liquidity is returning to the economy. The upside for GGP is at least $15 a share and maybe much more. The reason for my enthusiasm is that there has been the liquidation of few properties and less than 10% of the total GGP real estate portfolio. The asset base on which GGP is valued has not been much diminished. The stock price was as high as $67 in March 2007, as you can see from the chart above. It may not get that high for a very long time because the retail environment and personal consumption may not return to 2007 levels for a very long time.

But lets consider the potential for GGP’s stock price to return to $15, a very conservative number considering the earning / cash flow power of GGP. In 2006, the peak cash flow year, GGP generated more than $800 million in operating cash flow (FFO). There are 313M shares outstanding as of today, so that comes to about $2.50 a share in cash flow. Let’s say that cash flow only gets back to $1.50 in the next two years. Applying a multiple of 10 to that cash flow yields a stock price of $15 a share. And as a REIT, most of the cash flow is returned in the form of dividends. So a $1.50 cash flow might result in $1.40 a share in dividends. On a stock price of 70 cents, the dividend alone will yield almost 200% a year. At a price of $15 a share, the capital gain would be over 2000%.

Looking at this in a ratio, the upside / downside ratio is 21:1. A good investment risk might be 3:1 or 4:1. This is clearly a tremendous opportunity but with a high degree of risk. I would recommend only investing what you are willing to lose. But if you can afford to lose $500 or $1000, you may never find a better opportunity for return.

I recommend doing your own research. Here is more detail on GGP Outstanding Speculation

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