05/04/2016
Entreprenurial tool or excuse? Thoughts?
Bankruptcy Was Just A Tool In The Toolbox
May. 4, 2016 6:45 AM • GGP
Summary
Through bankruptcy, a debtor has the legal right to obtain a new start by either restructuring and/or extinguishing debts.
I knew owning a stake in the highly leveraged casino was a “sucker bet”.
GGP took full advantage of bankruptcy to retool its balance sheet and forge a new strategy focused on higher-quality Class A malls.
As many of you know, I have been working on a book for over three years on the real estate developer and presidential hopeful, Donald J. Trump.
The primary reason that I decided to write the book was to essentially demystify the business dealings related to Trump and his various holdings. As I explain in my book, bankruptcy is simply a tool that allows debtor relief when the creditor is unable to pay back the debt.
Through bankruptcy, a debtor has the legal right to obtain a new start by either restructuring and/or extinguishing debts.
As I explain in my book, Trump never filed personal bankruptcy. Instead, he opted to avoid risking his personal fortune by diversifying his investments in hundreds of entities in which he was either a shareholder, investor, partner, or trustee.
Accordingly, one of Trump's entities - a public company at the time known as Trump Hotels and Casino Resorts - filed for Chapter 11 bankruptcy as a result of financial problems. As in most restructuring maneuvers, leverage was certainly a catalyst, but it was also the volatility of the gaming sector.
I did not write this article to provide details on Trump's various bankruptcy filings (a total of four BK actions over the course of 18 years), instead, I simply wanted to point out that bankruptcy is a tool that every person or company has at their disposal.
I was a shareholder myself (see my framed share below) and while I knew owning a stake in the highly leveraged casino was a "sucker bet," I was fully aware of the risks and returns. Trump makes no apologies for having much of the casino debt wiped out as he explained at a debate earlier this year:
These lenders aren't babies. These are total killers. These are not the nice, sweet little people.
General Growth: Bankruptcy Was Just A Tool In the Toolbox
In April 2009, General Growth Properties (NYSE:GGP) filed for Chapter 11 bankruptcy protection, the largest real estate bankruptcy ever at that time.
As one of the biggest real estate companies in the world, GGP buckled by a combination of collapsing credit markets, high overall leverage, and inflexible credit structures. Despite this massive bankruptcy, GGP was able to successfully reorganize and maintain substantial value for its common stockholders.
The events leading up to and during the bankruptcy would have long-standing effects on the company, including a complete overhaul of top management and the division of the company's assets into two separate companies.
In a research paper prepared by The University of Chicago Booth School of Business, the students put together an in-depth analysis of the circumstances that forced GGP to seek bankruptcy protection and reemerge as a leading Mall-based REIT.
As the authors wrote:
"one of the most important characteristics at GGP was its emphasis on consistently growing the company. This took a number of different forms: growing net operating income (or NOI) at existing locations, expanding through de novo developments, acquiring existing operations and maximizing the use of leverage."
By all appearances, GGP was focused on "empire building," and as the Chicago Booth students suggested:
"many people consider the $12.7 billion acquisition of the Rouse Company in 2004 as an inflection point. The company had to outbid several key rivals to complete the purchase, paying a premium to do so. As would ultimately prove imprudent, GGP provided only $500 million in equity to fund the acquisition, less than 4% of the total deal price."
In hindsight, it came down to bad timing as "GGP had almost doubled in size overnight, and issued de minimis equity to do so. The company's leverage ratio spiked from 54% to 71%."
To add fuel to the fire, GGP kept the growth engines going - all part of the "go go" days - as the company's "thirst for growth and leverage was satiated by the lending community's loose underwriting standards prevalent in the mid-2000s. Ultimately, precarious levels of leverage are what placed the company at the mercy of the credit markets in 2008."
Despite these last-ditch efforts to raise liquidity and stave off bankruptcy, GGP's board of directors voted to seek voluntary protection under Chapter 11 of the U.S. Bankruptcy Code on April 16, 2009. As of the filing date, GGP reported assets of $29.6 billion, liabilities of $27.3 billion, and had $18.4 billion of debt maturing by the end of 2012. All in all, 388 GGP-affiliated debtor entities filed for protection in April 2009. This case would represent the single largest real estate bankruptcy case in U.S. history.
Huge Failure, Makes For Huge Success
That's my mantra. As I have learned throughout my lifetime, what makes me weak will only make me stronger.
We've all made mistakes - that's part of the reason we are investors. If you are batting 400, you need to be writing articles instead of reading this one.
A big part of the reason I decided to write my Trump book was to educate investors on his failures and successes. If you tell me that you know of a billionaire that has never failed, then he is really not a billionaire. I have spent three years researching the secrets behind the Trump empire and I can assure that the blueprint to Trump's billions is not one with a smoothly paved surface, there were plenty of bumps in the road.
That's also true for GGP. As the legendary investor, Benjamin Graham, once said:
Adversity is bitter, but its uses may be sweet…in the end we could count great compensations.
In the 18 months it took GGP to emerge from Chapter 11, the saga surrounding the control of GGP's assets would take many twists and turns. Simon Property Group (NYSE:SPG) started a 3-month bidding war in February 2010 against a team of investors led by Brookfield Asset Management.
Despite's Simon's overtures, GGP ultimately entered into an agreement with Brookfield, Fairholme Capital and Pershing Square Capital Management, to recapitalize the company and exit bankruptcy.
In 2010, GGP owned 238 properties, and as of Q1-16, the portfolio consists of 131 properties located coast-to-coast (30 states) with total enterprise value of around $44 billion. GGP owns 92 of the top 464 high-quality malls in the U.S.
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In the US, there are around 1,100 regional malls and around 464 of these are considered high-quality (Class B+ and above). Of these high-quality malls, GGP owns around 25%.
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After GGP's bankruptcy, the Board of Directors brought in the top guns, led by Sandeep Mathrani (GGP's CEO) who was hired in around January 2011 and was formerly the President of Retail for Vornado Realty (NYSE: VNO). The new GGP management team began transforming the company by disposing of a number of non-core assets (i.e., office, shopping centers, master-planned communities, C malls, etc.).
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The Evolution Continues
Since the BK, GGP has evolved into a higher-quality company, now the 2nd largest retail property REIT by market capitalization and solely focused on the U.S.
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GGP has been much more prudent with its capital allocation strategies - as evidenced by the continued deleveraging of the balance sheet:
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The company's financing policies are based on property-level secured debt structures with minimal corporate recourse and (minimum) cross-collateralization. However, GGP mitigates the secured risk by laddering maturities, that mitigates refinancing risk and earnings volatility. GGP's weighted average interest rate is 4.14% and around 85% of debt is fixed rate. The average weighted remaining term to maturity is around 6.1 years.
GGP's portfolio comprises nearly 20% of the high-quality malls in the U.S. National scale provides tenants with access to retail, dining and entertainment hubs in some of the best trade areas in the U.S. Unlike some of the "B" and "C" Mall REITs, GGP's top tenant list does not include the troubled department store chains Sears (NASDAQ:SHLD) and J.C. Penney (NYSE:JCP).
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Retailers are constantly evolving, using brick and mortar and internet together to maximize revenues. As illustrated below, traffic across the GGP portfolio is steady, with YoY increases across all classes of assets.
As you can see below, GGP owns a number of high-quality "Irreplaceable Retail Properties" in the U.S.
The evolution of GGP's tenant model is now comprised of many best-in-class companies:
Investors should recognize the bifurcation of Class "A" and Class "B" or below Malls. GGP outpaces U.S. retail growth nearly 2-to-1 with "A" centers driving the majority of growth.
On the recent earnings call, GGP's CEO, Sandeep Mathrani, explains:
As the footprint of lower quality shopping centers shrink, then the winners will continue to be the A-malls that become larger and more productive. A malls have experienced double-digit sales growth since 2012.
A Much Improved Balance Sheet
As noted above, leverage was a big part of GGP's failure and it's obvious that the new management team has become much more risk averse. As mentioned, debt maturities are laddered over a long period of time and the company is working to make the balance sheet even stronger.
The pursuit of selling JV interest in a couple of malls is in process, and the primary proceeds will be used to pay down debt. GGP is strategically focused on the long-term cash flow growth potential of the business in which the company targets 4% to 5% EBITDA growth and high single-digit FFO per share growth.
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GGP recently extended its $1.4 billion term loan to 2019, plus two one-year extensions. Also the company reduced recourse on the loan from 100% to 50% and maintained pricing.
As previously referenced, GGP is in the process of looking at asset sales and sales of joint venture interests. The goal is to continue to de-leverage the balance sheet and take net debt to EBITDA from a range of 8x to 8.5x and down 7.5x to 8x by year-end 2016.
During the first quarter, GGP's same-store NOI growth came in at 5.2%, company NOI increased nearly 13.9% and EBITDA and FFO growth were each up over 20%.
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Here's a snapshot of GGP's AFFO per share history:
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On Feb. 1, GGP declared a first-quarter common stock dividend of $.19 per share, payable April 29 to stockholders of record April 15. The dividend represents an increase of 12% year over year. Here's a snapshot of GGP's dividend history:
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GGP has maintained a healthy payout ratio as illustrated below:
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Bankruptcy Was Just A Tool
As I finish typing this article this evening, it's now clear that Donald Trump is the presumptive Republican presidential nominee following a decisive victory in the Indiana primary and the decision by Ted Cruz to drop out of the race.
As I explain in my book, which by the way is a business book, Donald Trump has evolved into a disciplined real estate investor. While filing corporate bankruptcy was not part of the original plan for Trump's casino blueprint, he used the legal loophole to restructure the balance sheet and allow the company to stay in business.
Similarly, GGP used its bankruptcy filing - as a tool - to guide the company into a better financial condition. As evidenced by the snapshot below, GGP has clawed back considerable shareholder equity since the dark days in 2009.
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Is GGP a BUY today? Here's how the current dividend yield compares with the peer group:
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Obviously the 2.6% dividend yield is not appealing - let's take a look at the P/FFO multiple:
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As you can see, the REITs shaded in yellow are the Class "A" Mall REITs. GGP is the cheapest of the 4 in this high-quality basket. As you can see below, there is no "margin of safety" as it relates to GGP - I would recommend another REIT in the retail sector (based on valuation).
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The Lesson: Donald Trump has increased his personal net worth substantially since one of his businesses filed bankruptcy. By keeping his corporate creditors at bay, he was able to restructure his investment portfolio allowing him to de-leverage his balance sheet and focus on enhancing his most profitable businesses.
Similarly, GGP took full advantage of bankruptcy to retool its balance sheet and forge a new strategy focused on higher-quality Class A malls. Both Trump and GGP have continued to increase in value, in large part because they learned from the failures of the past. Coming Soon: The Trump Factor.
Author's Note: I'm a Wall Street writer, and that means that I am not always right with my predictions or recommendations. That also applies to my grammar. Please excuse any typos, and I assure you that I will do my best to correct any errors if they are overlooked.
Finally, this article is free, and my sole purpose for writing it is to assist with my research (I am the editor of a newsletter, Forbes Real Estate Investor) while also providing a forum for second-level thinking. If you have not followed me, please take five seconds and click my name above (top of the page).
The only guarantee that I will give you is that I will uncover each and every rock I can, in an effort to find satisfactory investments that "upon thorough analysis promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative." (Ben Graham).
Sources: SNL Financial, FAST Graphs, and GGP Filings.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned.
