Whitney Tilson's Response Re - General Growth Properties (GGWPQ) Market Folly434

1/4/2015
Whitney Tilson's Response Re: General Growth Properties (GGWPQ) ~ market folly
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Wednesday, December 30, 2009

Whitney Tilson's Response Re: General
Growth Properties (GGWPQ)
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We can't highlight enough how much we've enjoyed the back and forth between various
hedge funds as it pertains to the equity valuation of General Growth Properties (GGWPQ).
Yesterday, we posted up hedge fund Hovde Capital's latest presentation on GGP. Today, we
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present you with follow-up thoughts from T2 Partners hedge fund manager Whitney Tilson.
Here are his thoughts:
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Hovde Capital yesterday released its response

(www.marketfolly.com/2009/12/hedge-fund-hovdes-general-growth.html)
to Pershing Squares rebuttal (http://www.scribd.com/doc/24411287/ADetailed-Response-to-Hovde-s-Short-Thesis-on-GGP-12-22-2009) (and,
to a minor extent, and our rebuttal (http://seekingalpha.com/
article/178502-general-growth-properties-rebutting-the-bears)) of Hovdes
initial report on GGP (www.scribd.com/doc/24097404/General-GrowthProperties).
Our quick take is that its more of the same like Hovdes first report,
there are a few good points (nothing we hadnt already considered)
mixed in with many arguments that are either factually incorrect or
misleading, or with which we simply disagree. In short, theres nothing
new that changes our view regarding the attractiveness of GGP (it
remains by far our largest position).
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Before proceeding, we want to make clear how much we enjoy the debate
and think our markets would be much healthier if there were a similarly
detailed exchange of viewpoints for EVERY stock!
To some extent, the debate is now about different views of the future:
Hovde believes that consumer spending will be terrible for an extended
period and that bankruptcies among mall-based retailers will continue or
worsen, which will translate into severely declining NOI for GGP over
time. Pershing believes that the worst is behind us: that unemployment
has peaked, consumer spending has stabilized and may even be picking
up a bit, and that retailers are in remarkably good shape in light of what
theyve been through over the past 18 months, all of which will translate
into approximately stable NOI. Whether Hovde or Pershing is right about
GGP over time will, to some extent, depend on future macro factors,
which are obviously impossible to predict with certainty.
http://www.marketfolly.com/2009/12/whitney-tilsons-response-re-general.html
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That said, good analysis matters and we think Hovdes is sorely lacking,
primarily in the following areas:
1) Hovdes most serious mistake is misunderstanding (or
misrepresenting) what will likely happen to GGPs unsecured debt.
Hovde assumes that it either remains outstanding (throughout its
presentation, Hovde calculates GGPs leverage and interest payments
assuming that the debt remains outstanding, which is the main reason its
analysis differs from Pershings and ours see page 63, for example) or
that it converts to equity, which will result in significant dilution (page
72). Hovde makes explicit this assumption when it claims that Pershing
does not use consistent assumptions regarding what happens to the
unsecured debt on page 35 of its report.
Hovde doesnt appear to understand bankruptcy law and what will likely
happen to the unsecured debt. There is almost no chance that it will
remain outstanding: it will either be refinanced or, more likely, be
converted into equity (this is what Pershing assumes there is no
inconsistency). But heres the key: it will NOT BE DILUTIVE because it
will convert AT FAIR VALUE, as determined by the bankruptcy judge.
Of course, if the judge determines that fair value is $1/share, then it would
be massively dilutive, but thats not going to happen. The judge has a
great deal of discretion in determining fair value, but will certainly take
into consideration the current stock price, comps and the price of any
equity offering(s) GGP might do.
For example, as soon as GGP exits bankruptcy and its stock is relisted
(it currently trades on the pink sheets, which means most institutional
investors cant own it), it will be a must-own stock for every REIT fund
(a big catalyst Hovde misses). To meet this demand and pay down some
debt, GGP might issue equity and the negotiated price at which this
stock is sold would likely weigh heavily on the judges determination of
fair value (and would not be dilutive). Of course, if someone like Simon
were to buy GGP at, say, $20, the debt would convert at this price and
again, it wouldnt be dilutive.
2) Hovde takes seven pages (6-12) arguing for its definition of NOI, but
theres no right answer here. NOI is like free cash flow: different people
calculate it in different ways. But however one calculates it, its important
to be consistent which Hovde is not. It uses the most conservative
assumptions to minimize GGPs NOI, but then fails to do so for Simon,
making its comp analysis deeply flawed.
3) Speaking of comps, Hovde writes: to suggest GGP should trade at
the LOWER cap rate than SPG is LAUGHABLE in our view (pages 2223). Hovde can laugh all it wants, but there are very good arguments for
why Simon is, in fact, the best comp for GGP. For starter, both have
very similar mall portfolios with a national footprint (unlike Macerich,
which Hovde cites as a better comp on page 63; MAC also has debt
issues that are more significant than what GGP will likely have postbankruptcy). In addition, GGP will likely have a BETTER liability profile
post-bankruptcy, with no maturities until January 2014. Finally and most
importantly, GGP is for sale and Simon isnt, so there should be a
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premium for GGP reflecting a possible sale of this strategic asset.

4) Hovdes analysis treats GGP as a collection of assets, but its more
than that. The fact that GGP is in bankruptcy has put it into play, so there
is a once-in- a-lifetime opportunity for Simon, Brookfield or someone
else to acquire a national platform, as highlighted in this quote from the
WSJ (http://online.wsj.com/article/SB1000142405274870453840457454
1923917766450.html):
The opportunity is a potentially transformational event that doesnt come
along very often, says Steve Sakwa, an analyst with International Strategy
and Investment Group Inc.
5) Hovde dismisses the likelihood that GGP might be acquired (pages 5155), focusing only on Simon and not even mentioning Brookfield, which
may in fact be the more likely acquirer due to fewer anti-trust concerns
and the need for a national platform (which Simon already has). As noted
above, Hovde misses the value of GGP as a strategic asset no doubt,
theres lots of distressed inventory out there, but only one national
platform for sale like GGP.
11/29 - 12/06 (16)

11/22 - 11/29 (11)
11/15 - 11/22 (17)
11/08 - 11/15 (16)
11/01 - 11/08 (20)
10/25 - 11/01 (17)
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09/27 - 10/04 (21)
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09/06 - 09/13 (17)
08/30 - 09/06 (19)
08/23 - 08/30 (22)
08/16 - 08/23 (13)
08/09 - 08/16 (16)
Finally, Hovde finds it telling that Simon and Brookfield bought GGPs
unsecured debt, but not the equity, even when the equity was at a much
lower price. But its not as telling as Hovde thinks for a number of
reasons. First, its possible that Simon and/or Brookfield do in fact own
the equity if either bought less than 5% of GGP, it wouldnt have to file
(in any case, for anti-trust reasons, they couldnt acquire more than
7.5%). Also, at the time they bought GGPs debt it was very cheap and
they might have reasonably concluded that it represented a better riskreward than the equity.
08/02 - 08/09 (16)

07/26 - 08/02 (11)
07/19 - 07/26 (15)
07/12 - 07/19 (8)
07/05 - 07/12 (15)
06/28 - 07/05 (16)
06/21 - 06/28 (19)
06/14 - 06/21 (18)
6) Hovde argues that GGPs rental rates and leasing spreads are very
poor and will likely get worse (pages 15-18). They have indeed been
under pressure, but Hovde is making the classic investing mistake of
projecting the immediate past indefinitely into the future. What Hovde is
missing is that GGP over the past year, knowing that it was in a poor
negotiating position due to the macro environment and its own
bankruptcy, has been renewing leases mainly on a short-term basis.
These renewals have indeed been done at low rates, but this isnt likely to
be a permanent state of affairs. The macro environment has at least
stabilized and may be improving and GGP will soon either be acquired or
exit bankruptcy, so its negotiating position will strengthen and therefore
rental rates and leasing spreads will likely improve.
7) On pages 28 and 33, Hovde repeats the charts from its first
presentation (pages 33-34), showing that Commercial Real Estate Prices
Have Dropped 43% Since the Peak and that cap rates are moving higher
under the heading: Despite Speculation to the Contrary, Cap Rates for
All Property Types Are Moving Higher, Not Lower. Does Pershing
Square Believe These Transactions Did Not Happen? But the CRE chart
doesnt include mall real estate and the cap rate chart, while showing cap
rates for virtually every other type of commercial real estate, is MISSING
data for malls! (The cap rate for mall REITs has fallen dramatically from
earlier this year.)
06/07 - 06/14 (22)

05/31 - 06/07 (17)
05/24 - 05/31 (12)
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04/19 - 04/26 (14)
04/12 - 04/19 (16)
04/05 - 04/12 (11)
03/29 - 04/05 (14)
03/22 - 03/29 (20)
03/15 - 03/22 (18)
03/08 - 03/15 (21)
03/01 - 03/08 (16)
02/22 - 03/01 (17)
02/15 - 02/22 (21)
02/08 - 02/15 (22)
02/01 - 02/08 (16)
3/8
1/4/2015
8) Hovde paints a very bearish picture of retail sales (page 61), but the
latest data contradicts this for example, an article in the NYT earlier this
week www.nytimes.com/2009/12/28/business/28shop.html) noted:
01/25 - 02/01 (15)

01/18 - 01/25 (14)
01/11 - 01/18 (24)
Over all, retail sales from November through Dec. 24 rose 3.6 percent from
last year, according to SpendingPulse, an information service of MasterCard
Advisors that estimates sales for all forms of payment, including cash,
01/04 - 01/11 (11)

2008 (364)
checks and credit cards.

That number which does not include sales of automobiles and gasoline
was helped this year by an extra shopping day between Thanksgiving and
Christmas. Adjusting the results for that extra day cuts the retailing
industrys sales increase to about 1 percent, in line with what many retailing
professionals expected.
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Footnoted
While the numbers do not suggest a turnaround for the industry, they signal
an improvement over last years 2.3 percent sales decline
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Pragmatic Capitalism
Last year was just a storm and retail was all about dropping prices to get
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rid of inventory, said Mr. Katz of AlixPartners. This year it was much
Hedge Fund Blogger.com
more of a planned strategy: low inventories and tight expenses. And

controlled promotions.
That means most stores did not erode their profit margins the way they did
in 2008, though in the days before Christmas, Mr. Katz said, some chains
discounted more deeply than they should have.
Perhaps the best news is that the double-digit declines that plagued nearly
every retailing category last year are gone.
9) Hovde spends many pages (38-43) questioning whether GGPs Master

Planned Community Segment has any value but Pershing already
assigns no value to it so its not clear who Hovde is disagreeing with.
Another note: on page 39, Hovde makes this ominous statement: The
heirs of the Hughes estate hold a contingent claim related to the valuation
of these assets. If there is significant value in these assets, the resolution
of this claim could result in a substantial unfunded liability, which
Pershing Square has failed to include in its analysis. This is a red herring:
the only claim by the Hughes estate is for half of any profits. Thus, the
only way there could be a claim, leading to a substantial unfunded
liability, is if there are profits, which would be wonderful for GGP (even
if GGP only received half of the profits, this is more than zero, which is
what both Hovde and Pershing expect).
This is a great debate and it will be very interesting to see how this
plays out.
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Posted by market folly at 12:25 PM

Labels: general growth properties, ggwpq, hedge fund portfolios, t2 partners, whitney
tilson
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9 Comments
Market Folly
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commmonwealth
5 years ago
The dilution debate really is the big issue but its not clear to me that anyone
involved gets this debate right. The unsecured obviously dilute the equity
even IF they convert to equity as their claim will be recognized in whole
senior to the equity. The mat goes like this. If the cos is worth 30BB and the
senior debt is 20BB the residual 10BB first goes to to the unsecured (8BB)
and the balance goes to the equity. If the unsecured converts it means they
own 80% of the company. Which means the shares outstanding increase
by a factor of 4X and thereby the per share price gets reduced. Where T2 is
confused is they assume that this is like a new issuance at whatever the
10BB value equates to given the existing share base. On the rest of their
pts i believe t2 is correct but the aforementioned issue is so dominant that
they miss the big picture here.
Reply Share
marketfolly
Mod
> commmonwealth 5 years ago
Exactly, the dilution debate is the crux of the entire situation.

Everyone knows it will happen but it just depends on how and what
prices. I know it's been reported that GGWPQ has considered new
equity offerings etc as well. Ackman is on the board so he obviously
has a better picture of what is going on.
This whole thing is fascinating though and there will be a lot of "told
you so" from the winning side of the argument once it is all said and
done. It seems to me though that the unsecureds are the more
'cautious' play while the equity could be construed as a coinflip in
terms of where shares head from current levels. Easy money has
been made.
Reply Share
Value Guy > marketfolly
5 years ago
"Easy money has been made." ...... I wouldn't be so sure. It's

very likely that the easy money (equity gains) will be lost in
the not-to-distant future. As noted above, the crux of the
situation is how much will the equity holders get diluted by
converting the unsecured debt to equity, and short of a
cramdown plan, the unsecured holders are not going to
agree to Ackman's lofty valuations. They are simply unreal
and every unsecured holder knows it. Without two-thirds of
the unsecured holders voting to give Ackman a huge stake in
the company based on unrealistic valuation assumptions,
the debtor's plan cannot be approved (unless of course the
judge rules that a cramdown is in order...which is also very
unlikely). So when the unsecured holders object to receiving
less than 90% of the company, the common stock will settle
in at a more realistic level... probably under $2.00 per share.
Reply Share
g > Value Guy
5 years ago
In a normal situation, you could assume that

unsecured debt holders would be fighting for as
much equity as possible (i.e not agreeing with
Ackman's loft valuations). However, one of the things
5/8
1/4/2015
that make this situation unique/interesting is the

involvement of Brookfield Asset Management and
Simon Property Group (and I have heard some
rumors of Westfield's involvement as well).
Since Simon and BAM bought the unsecured debt,
they will have a large say in the outcome, and it could
very well be in their best interests not to convert debt
into equity. In one possible scenario, BAM might
prefer less equity (or no equity at all) in order to
prevent its competitors (Simon, Westfield) from
becoming a large stakeholder in the company. BAM
could have bought the debt not because they want to
buy GGP, but because they want to ensure that
Simon is unable to buy GGP cheaply. In this
situation, the unsecured debt holders could make
decisions that do not necessarily maximize the
payout to debt holders
Reply Share
Value Guy > g
5 years ago
Interesting thoughts, but far from any realm of

possibilities. Trust me, Simon and BAM are looking
out for their own best interests...period, end of story.
BAM bought GGP debt because it was cheap and
they figured they would either get paid out at par plus
accrued or end up owning a large chunk of the equity
and wipe out the common. BAM could care less if
Simon or Westfield ended up owning GGP. When
BAM was trying to buy Mills on the cheap a few years
ago, it did not get into a bidding war with Simon. They
let them have it. The thought that the unsecured debt
holders would make decisions that would
intentionally reduce the value of their investment
seems ludicrous.

Value Guy
Reply Share
5 years ago
Mr. Tilson seems to be Ackman's biggest cheerleader. Unfortunately, he's

wrong too. Unless the judge approves a cramdown plan, there is no way
the unsecured creditors are going to approve a plan that gives one-third (or
substantially more if you believe Ackman's valuation) to the existing
shareholders. All it takes is one-third of the unsecured creditors to vote
against the plan and there is no approval. It is very clear that Ackman and
Tilson are simply pumping the common stock to give the appearance of
substantial value...but it won't hold up in court. The only way Ackman's
valuation has a possibility of standing up is if the debtor's plan includes a
rights offering to raise about $6 billion of new equity to payoff the unsecured
creditors at par plus accrued interest. The unsecured creditors will fight
tooth and nail to argue that the equity value is almost ZERO and that the
equity holders deserve nothing more than a "tip" of maybe 5% to 10% of the
company.
Reply Share
marketfolly
Mod
> Value Guy 5 years ago
It is always a sticky situation when results are in other people's

hands (judges, unsecureds). I believe there has been a lot of
guessing that a new offering would be probable as well, so that's
something to toss into the mix.
I think it is telling that a bunch of investors have bought unsecureds
6/8
1/4/2015
rather than equity over the course of the last year though.

Tdawg
Reply Share
5 years ago
The value of General Growth equity will come down to two key things:
1) At what price/terms does the unsecured debt get converted to equity?
2) How will NOI/cash flow develop over the next several quarters and
years?
With regards to #1, I don't believe it's very likely that the unsecured debt will
get reinstated on new terms given the level of leverage and who holds
much of the debt. Some equity holders may argue for a high valuation to get
the debt reinstated, but the preference of the company and unsecured debt
holders will probably be conversion to equity. The question then becomes,
at what price? This will likely pit equity holders against unsecured debt
holders with the courts largely determining the outcome. One strategy the
equity holders could employ is to backstop an equity offering at some floor
price to make sure that unsecured debt holders do not overly dilute them.
This would force them to put more skin in the game to protect what they
already have at stake. All in all, it's pretty simple to understand that the
terms of debt conversion will greatly affect equity holders' share of the
General Growth pie.
see more
Reply Share
marketfolly
Mod
> Tdawg 5 years ago
Thanks for the comment. Definitely agree with your last paragraph
and honestly that's the scenario I most likely see playing out. There
will be dilution but the degree of such dilution is unknown and will
largely peg where the valuation lies. Should continue to be a volatile
next few months in the stock as right now you can only ballpark
ranges at which the shares should trade given there are so many
factors at play.
Reply Share
WHAT'S THIS?
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Renowned Sushi Chef: Jiro
1 comment 6 months ago
5 comments 8 months ago
crzyhun I saw this man at IMCA a
marketfolly Definitely. I think he
few years ago, and it was among

the best exp there.
even had a quote saying "it's not

about the money." Thought
Marcato Capital's Presentation on

Sotheby's & Dillard's
Carlo Cannell Cavco Industries &

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1 comment 9 months ago
HubbaBuba Preparing the
santa Two stocks that would
"Dillards Men's Vs Women's stores

Ghost Mall Tennis
have been worth while a year ago. I

think we missed the boat
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Updates on what top hedge funds are investing in

Hedge Fund Wisdom Newsletter

Wednesday, December 30, 2009

Get MarketFolly's free updates via Email

Discounts For Our Readers

Wall Street Journal Discount

Hovde Capital yesterday released its response

Free Sample Of Our Hedge

Recommended Reading Lists

Technical Analysis & Charts

@herbgreenberg congrats, best of luck with

@ToddWenning great post and congrats!

premium for GGP reflecting a possible sale of this strategic asset.

11/29 - 12/06 (16)

08/02 - 08/09 (16)

06/07 - 06/14 (22)

01/25 - 02/01 (15)

01/04 - 01/11 (11)

checks and credit cards.

Distressed Debt Investing

Hedge Fund Blogger.com

more of a planned strategy: low inventories and tight expenses. And

9) Hovde spends many pages (38-43) questioning whether GGPs Master

Posted by market folly at 12:25 PM

Join the discussion

> commmonwealth 5 years ago

Exactly, the dilution debate is the crux of the entire situation.

Value Guy > marketfolly

"Easy money has been made." ...... I wouldn't be so sure. It's

g > Value Guy

In a normal situation, you could assume that

that make this situation unique/interesting is the

Value Guy > g

Interesting thoughts, but far from any realm of

Mr. Tilson seems to be Ackman's biggest cheerleader. Unfortunately, he's

> Value Guy 5 years ago

It is always a sticky situation when results are in other people's

> Tdawg 5 years ago

ALSO ON MARKET FOLLY

Michael Mauboussin on Skill

Parallels Between Investors and a

1 comment 6 months ago

5 comments 8 months ago

crzyhun I saw this man at IMCA a

marketfolly Definitely. I think he

few years ago, and it was among

even had a quote saying "it's not

Marcato Capital's Presentation on

Carlo Cannell Cavco Industries &

4 comments 8 months ago

1 comment 9 months ago

HubbaBuba Preparing the

santa Two stocks that would

"Dillards Men's Vs Women's stores

have been worth while a year ago. I

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