Hedge Fund Hovde Capital Still Bearish On General Growth Properties (GGWPQ)

Our apologies for not posting this up earlier, but we've been out of pocket. Eric Hovde's hedge fund firm Hovde Capital Advisors sent us their latest thoughts on mall REIT operator General Growth Properties (GGWPQ) and we wanted to post it up because we've detailed the 'back and forth' between various hedge funds in this very public debate over equity valuation.

For full disclosure: Hovde is still short GGWPQ and is also short another REIT operator mentioned in the presentation. Fellow hedgies Bill Ackman of Pershing Square Capital Management and Whitney Tilson of T2 Partners have been long GGWPQ equity and have taken issue with Hovde's previous analyses. Todd Sullivan over at ValuePlays.net has also been long and disputes Hovde's research.

We've covered the entire gamut of presentations and have assembled a timeline as such for those who may be new to the situation:

Here's the timeline:

- May 27, 2009: Bill Ackman's hedge fund Pershing Square Capital initially presents a bullish case for GGWPQ

- October 7, 2009: Pershing Square later issues a macro look at the mall REIT industry

- December 15h, 2009: Hedge fund Hovde Capital Advisors issues their case for a short position in GGWPQ, entitled "Fool's Gold"

- December 15, 2009: Todd Sullivan of Valueplays.net issues a rebuttal to Hovde

- December 16, 2009: Whitney Tilson of hedge fund T2 Partners also issues a Hovde rebuttal

- December 22, 2009: Bill Ackman's Pershing Square issues a follow-up presentation as well

- December 29, 2009: Hovde Capital issues a second presentation

- December 30, 2009: Whitney Tilson (T2 Partners) refutes Hovde's work

- Today, January 21, 2010: Hovde comes out with another slide-deck



Embedded below is Hovde's third presentation on GGWPQ where they take issue with some of Pershing Square's research (RSS & Email readers come to the site to view it).






You can also download the .pdf here.

So, the analytical battle wages on. We haven't heard from Pershing Square on this subject in a little while, but Ackman did briefly touch on their GGWPQ position in his recent television interview. Ackman of course is limited in the information he conveys given that he is on General Growth's board. Not to mention, Pershing Square has been busy with other portfolio endeavors as their new stake in Kraft is now their largest position.

The battle over General Growth's equity valuation continues...

Hedge Fund Hovde's General Growth Properties Response (GGWPQ)

In what is turning into a public analytical clash, hedge fund firm Hovde Capital Advisors has issued a counter-argument to the recent rebuttals. If you're just now jumping in on this, here's a timeline with links to the various presentations on the bullish and bearish cases on emerging-out-of-bankruptcy mall operator General Growth Properties (GGWPQ). No matter which part of the argument you side with, you have to agree that a public debate like this is a great thing to see. This is THE definition of 'two sides to any trade.'

Here's the timeline:

- May 27, 2009: Bill Ackman's hedge fund Pershing Square Capital initially presents a bullish case for GGWPQ

- October 7, 2009: Pershing Square later issues a macro look at the mall REIT industry

- December 15h, 2009: Hedge fund Hovde Capital Advisors issues their case for a short position in GGWPQ, entitled "Fool's Gold"

- December 15, 2009: Todd Sullivan of Valueplays.net issues a rebuttal to Hovde

- December 16, 2009: Whitney Tilson of hedge fund T2 Partners also issues a Hovde rebuttal

- December 22, 2009: Bill Ackman's Pershing Square issues a follow-up presentation as well


Now, that brings us to today's presentation (December 29th): Hovde's new piece on the short case for General Growth Properties, entitled "Setting the Record Straight." Below you'll find their 70-slide counter-argument against all of the claims made by the aforementioned hedge funds and investors:




You can download the .pdf here.

Will another wave of rebuttals emerge from the bulls? We'll have to wait and see. Right now though, it seems that Hovde is alone in presenting the short case for GGWPQ (publicly at least). We'll see if any other bears start to come out of the woodwork.

This is escalating into quite the analytical battle and we can only hope that more healthy debates amongst hedge funds emerge in the future. After all, analytical evaluations like all of the above ensure that investors are constantly keeping their theses in check.

The Short Case For General Growth Properties (GGWPQ)

Over the course of this year we've shared various presentations on the potential bullish prospects for mall REIT General Growth Properties (GGWPQ) courtesy of Bill Ackman's hedge fund Pershing Square Capital Management. These have included a recent outlook on the mall REIT industry, an update on their holding via Pershing Square's investor letter, as well as their previous presentation on General Growth. As one of the largest shareholders, Pershing Square has been at the forefront leading the charge. Today, we want to flip the tables and present the short case for General Growth Properties, courtesy of Hovde Capital Advisors.

Hovde Capital Advisors LLC is an investment manager that runs various hedge funds. They employ a "sector-specific, deep-value, long/short strategy" and utilize a combination of both top-down and bottom-up in their approach. Back in March of this year we actually covered President and CEO Eric Hovde's thoughts on the market as he thought we were in a depression and that commercial real estate defaults would hit as high as 25%.

There are always two sides to a trade and this is the perfect example. Hovde Capital prudently points out that many investors have been using Pershing Square's original GGWPQ presentation as a means for valuing General Growth Properties... a presentation that is now well outdated. In their analysis below, they update and expand upon Pershing's original model in order to provide a more current look at the situation from a bottom-up level.

They first examine the macro environment just as Pershing Square did in their recent Mall REIT presentation. While Pershing's highlights potential improvement, Hovde takes the other side and highlights how we are by no means out of the woods yet, citing a drop in consumer spending, a decrease in available consumer credit, and non-bullish trends for mall REITs in particular. Focusing next specifically on General Growth, Hovde believes that that a 7.5% capitalization rate is a far too optimistic assumption given that recent comparables have been higher than 8%. Additionally, they highlight that GGWPQ's cashflow is now more than 20% below the levels in 2008. While the fact that General Growth is extremely leveraged is well known, Hovde points out that rival Simon Property Group (SPG) has debt to EBITDA of 6x while GGWPQ is "in excess of 16x and would still be in excess of 12x even if all of the unsecured debt was converted to equity."

Potentially the most alarming to the bulls though is Hovde's focus on net operating income (NOI) sensitivity. They write, "applying Q3 annualized NOI to the Pershing Square valuation analysis, the implied equity value per share of the company today is NEGATIVE $5.03 at an 8.5% cap rate and +$5.73 at a 7.5% cap rate." Needless to say, they are decidedly bearish on GGWPQ. Going forward, one of the focal points in this whole scenario will be cap rates. Hovde feels an 8% cap rate is unrealistic given the reality of the economic situation and they argue that a cap rate of 8.5% or higher would be more appropriate.

Hovde are short shares of GGWPQ and think that equity investors will instead be disappointed upon GGWPQ's reorganization. Embedded below is the short case for General Growth entitled "Fool's Gold" in its entirety:




You can download the .pdf here. So there you have it: "Fool's Gold," the bearish argument for General Growth Properties (GGWPQ). We thought it would be interesting to examine both sides of the trade as we'd previously examined the long case for GGWPQ and then today we shared the short case with you. We'll continue to watch this intriguing situation unfold as hedge funds wager on the impending outcome. As always, don't shoot the messenger.

Since circulation of this presentation, Todd over at ValuePlays.net has penned a rebuttal to Hovde's presentation. Ironically, Hovde claims many are using outdated numbers from Pershing's presentation and Todd points out that Hovde themselves are also using outdated numbers. Interesting stuff. Secondly, hedge fund manager Whitney Tilson of T2 Partners has also penned a rebuttal as it seems Hovde has been called out on their conclusions. The battle of bulls versus bears continues on...

Eric Hovde Says We're in a Depression

Eric Hovde of $1 billion long/short Hovde Capital says we're in a depression. He sees commercial real estate defaults hitting as high as 25%. His commentary on the CNBC video below: