T2 Partners Presentation: General Growth Properties (GGWPQ), Iridium (IRDM) & Berkshire Hathaway (BRK.A)

Recently, Whitney Tilson and Glenn Tongue's hedge fund T2 Partners gave a presentation at the Boys and Girls Harbor Investment Conference that took place on February 3rd, 2010. Their presentation included a look at the macro situation and three stock picks: Berkshire Hathaway (BRK.A), General Growth Properties (GGWPQ), and Iridium (IRDM). When we covered T2's investor letter, we saw that they had large long positions in all three names.

Embedded below is T2's recent presentation on all three stocks:




You can download the .pdf here.


Additionally, last week we posted Whitney Tilson & T2 Partners' analysis of Berkshire Hathaway (BRK.A / BRK.B). Below you will find their revised slide-deck:




You can download the Berkshire presentation via .pdf here.

In a separate post this morning we'll also be covering Bill Ackman & Pershing Square's presentation on Kraft (KFT) from the same investment event, so stay tuned.

T2 Partners' Whitney Tilson Rebuts Hovde Capital's General Growth Properties Presentation

We recently posted up hedge fund Hovde Capital's third negative presentation on mall operator General Growth Properties. Whitney Tilson of hedge fund T2 Partners just cranked out another rebuttal to Hovde's piece and you'll find it below:

"Hovde Capital, after writing at the end of its Dec. 29^th report that “We have no interest in continuing a public dialogue on this company,” published yet another critique of Pershing Square’s analysis of General Growth Properties on January 21^st (see www.docstoc.com/docs/22973163/General-Growth-Properties---3).

It’s getting very tiring rebutting Hovde’s flawed (and constantly changing) “analyses” over and over again, but since it remains a very large position for us, we feel compelled to set the record straight.

Calculation of NOI

Hovde makes numerous arguments in its latest missive, none more important than the claim that “Pershing Square calculate[s] NOI differently when comparing GGP and SPG.” (pages 4-10) We believe that Hovde’s analysis is incorrect and that Pershing Square's analysis is consistent and accurate.

The confusion appears to come from the different definitions (and therefore calculations) of NOI that exist in the industry. We believe the only way to fairly compare NOIs is to use a tightly defined definition and then apply that definition consistently. Since companies don’t do this, it is left to the investor to create an apples-to-apples comparison using source documents. Below we calculate NOI for GGP and SGP, using a consistent definition, which shows that Pershing Square’s numbers are correct: GGP’s trailing-12-month cash NOI is $2.478 billion and SPG’s is $3.244 billion.

GGP NOI Calculation

First, here is GGP's TTM NOI from the company's operating supplements. We then calculate cash TTM NOI by incorporating non-cash adjustments.

	4Q08	1Q09	2Q09	3Q09
Minimum rent	$639	$596	$596	$584
Tenant recoveries	273	274	263	257
Overage rents	38	11	7	12
Other	52	28	35	32
Total Property Revenues	$1,003	$910	$901	$884
Less: Real estate taxes	(80)	(84)	(81)	(82)
Less: Repairs & maintenance	(68)	(64)	(58)	(65)
Less: Marketing	(15)	(9)	(8)	(9)
Less: Other property operating costs	(134)	(132)	(127)	(136)
Less: Provision for doubtful accounts	(4)	(12)	(11)	(7)
NOI	$702	$609	$616	$585
Less: Straight-line rent adj.	6	(12)	(13)	(11)
Less: FAS 141 adj. (lease mark to mkt)	(5)	(3)	(4)	(3)
Plus: Non-cash ground rent expense	2	2	2	2
Plus: Real estate tax stabilization adj.	1	1	1	1
Cash NOI	$706	$596	$602	$573

TTM Cash NOI: $2,478

SPG NOI Calculation

Using the identical methodology, we present SPG's NOI and Cash NOI:

	4Q08	1Q09	2Q09	3Q09
Minimum rent	$807	$746	$754	$754
Overage rent	63	21	26	33
Tenant reimbursements	393	345	345	356
Other income	92	68	56	57
Less: Interest income	(15)	(9)	(9)	(10)
Less: Gains on land sales	(5)	(0)	(3)	(0)
Total Revenue	$1,334	$1,171	$1,168	$1,191
Less: Property operating	(172)	(161)	(168)	(180)
Less: Real estate taxes	(106)	(112)	(106)	(99)
Less: Repairs & maintenance	(47)	(33)	(30)	(29)
Less: Advertising & promotion	(42)	(24)	(25)	(29)
Less: Provision for credit losses	(10)	(17)	(9)	(0)
Less: Other	(41)	(35)	(40)	(36)
NOI	$916	$789	$791	$817
Less: Straight-line rent adj.	(9)	(11)	(7)	(8)
Less: FAS 141 adj. (lease mark to mkt)	(9)	(7)	(13)	(6)
Cash NOI	$899	$772	$770	$803

TTM Cash NOI: $3,244

Hovde’s Basic Error

Hovde makes a basic error when it challenges Pershing Square’s valuation of Development Pipeline Assets (page 23), Cash (page 27), and Other Assets (page 29). In each case, Hovde fails to realize that GGP reports two balance sheets (see its latest 10-Q at: www.ggp.com/Investment): a consolidated one (page 3) and an unconsolidated one (page 24). Hovde’s calculations only refer to the former – a glaring oversight that it compounds by arrogantly mocking Pershing Square’s analysis (which is correct) with phrases like “Was this a calculator malfunction?” and “Everyone makes mistakes sometimes?” Indeed, everyone does – and in this case, it’s Hovde.

First some background: like most mall companies, GGP has numerous joint ventures with other parties to develop malls. The terms of the joint ventures vary, but on average GGP has a 50% interest. Some companies (like Simon) consolidate their share of joint ventures in their financial statements, while others (like GGP) break it out separately. To do an apples-to-apples comparison, one must be consistent, which in this case means including 50% of GGP’s unconsolidated balance sheet. This is exactly what Pershing Square does, which it discloses in footnote 2 of each page Hovde includes in its presentation (pages 23-25, 27 and 29), which reads: “Applies 50% to metrics in GGP’s unconsolidated balance sheet. Source: pages 3 and 24 of GGP’s Q3 10-Q.” In other words, despite Pershing Square telling Hovde exactly which pages to look at, Hovde says it can’t understand Pershing Square’s math. Did Hovde really publicly mock Pershing Square’s numbers without bothering to read the footnotes of Pershing Square’s presentation, even on the pages it copied and pasted into its own presentation???

Here’s the correct math, which in each case is precisely what Pershing Square presented:

1) Calculation of GGP’s Development Pipeline Assets

Development in Progress (consolidated balance sheet): $902,000

Development in Progress (unconsolidated balance sheet): $593,948 x GGP’s 50% stake = $296,974

TOTAL: $1,198,974

Pershing Square then discounts this by 35% (which it discloses in footnote 7), reflecting the risk and uncertainty surrounding development projects (note that it only discounts SPG’s development assets by 20%) to arrive at $779,333, which is the number in its presentation.

(Note: On pages 23, 24 & 25, Hovde makes another mistake when it uses $1.05 billion for GGP’s development pipeline. Hovde’s figure comes from pages 34-35 of GGP’s latest Supplemental Financial Information (www.ggp.com/Investment), but is incorrect because it only includes “significant” projects and excludes international projects. The correct number, $1,198,974, is derived above from GGP’s consolidated and unconsolidated balance sheets.)

2) Calculation of GGP’s Cash

Cash (consolidated balance sheet): $691,765

Cash (unconsolidated balance sheet): $198,724 x GGP’s 50% stake = $99,362

TOTAL: $791,127

3) Calculation of GGP’s Other Assets

Other assets (consolidated balance sheet): $1,447,609

Other assets (unconsolidated balance sheet): $687,803 x GGP’s 50% stake = $343,902

TOTAL: $1,791,511

Conclusion

We continue to believe that GGP is very likely in the near future to either exit bankruptcy or be acquired – in either case, the stock should be north of $20. Our view is reinforced by today’s announcement that GGP “has engaged UBS Investment Bank, a leading global full service financial firm, to assist the Company in evaluating potential financial transactions for emergence from Chapter 11, raising exit capital and with such other matters as may be required by the Board of Directors.” (http://finance.yahoo.com/news/General-Growth-Properties-bw-2228451010.html?x=0&.v=1)"

The above was a rebuttal by T2 Partners' Whitney Tilson.

For the rest of the timeline of this back and forth between various hedge funds as it pertains to GGP's equity valuation, head to our recent post.

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...

Whitney Tilson's Response Re: General Growth Properties (GGWPQ)

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 present you with follow-up thoughts from T2 Partners hedge fund manager Whitney Tilson. Here are his thoughts:

Hovde Capital yesterday released its response (www.marketfolly.com/2009/12/hedge-fund-hovdes-general-growth.html) to Pershing Square’s rebuttal (http://www.scribd.com/doc/24411287/A-Detailed-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 Hovde’s initial report on GGP (www.scribd.com/doc/24097404/General-Growth-Properties).

Our quick take is that it’s more of the same – like Hovde’s first report, there are a few good points (nothing we hadn’t already considered) mixed in with many arguments that are either factually incorrect or misleading, or with which we simply disagree. In short, there’s nothing new that changes our view regarding the attractiveness of GGP (it remains by far our largest position).

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 they’ve 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.

That said, good analysis matters and we think Hovde’s is sorely lacking, primarily in the following areas:

1) Hovde’s most serious mistake is misunderstanding (or misrepresenting) what will likely happen to GGP’s unsecured debt. Hovde assumes that it either remains outstanding (throughout its presentation, Hovde calculates GGP’s leverage and interest payments assuming that the debt remains outstanding, which is the main reason its analysis differs from Pershing’s 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 doesn’t 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 here’s 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 that’s 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 can’t 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 judge’s 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 wouldn’t be dilutive.

2) Hovde takes seven pages (6-12) arguing for its definition of NOI, but there’s no right answer here. NOI is like free cash flow: different people calculate it in different ways. But however one calculates it, it’s important to be consistent – which Hovde is not. It uses the most conservative assumptions to minimize GGP’s 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 22-23). 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 post-bankruptcy). 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 isn’t, so there should be a premium for GGP reflecting a possible sale of this strategic asset.

4) Hovde’s analysis treats GGP as a collection of assets, but it’s 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/SB10001424052748704538404574541923917766450.html):

The opportunity “is a potentially transformational event that doesn’t 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 51-55), 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, there’s lots of distressed inventory out there, but only one national platform for sale like GGP.

Finally, Hovde finds it “telling” that Simon and Brookfield bought GGP’s unsecured debt, but not the equity, even when the equity was at a much lower price. But it’s not as telling as Hovde thinks for a number of reasons. First, it’s possible that Simon and/or Brookfield do in fact own the equity – if either bought less than 5% of GGP, it wouldn’t have to file (in any case, for anti-trust reasons, they couldn’t acquire more than 7.5%). Also, at the time they bought GGP’s debt it was very cheap and they might have reasonably concluded that it represented a better risk-reward than the equity.

6) Hovde argues that GGP’s 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 isn’t 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 doesn’t 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.)

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:

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, 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 industry’s sales increase to about 1 percent, in line with what many retailing professionals expected.

While the numbers do not suggest a turnaround for the industry, they signal an improvement over last year’s 2.3 percent sales decline…

… “Last year was just a storm and retail was all about dropping prices to get rid of inventory,” said Mr. Katz of AlixPartners. “This year it was much 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 GGP’s Master Planned Community Segment has any value – but Pershing already assigns no value to it so it’s 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.

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.

Bill Ackman's General Growth Properties Rebuttal: A Detailed Response To Hovde's Short Thesis

A week or so ago we posted up hedge fund Hovde Capital's short thesis on General Growth Properties (GGWPQ). Immediately following that, we saw Todd Sullivan over at ValuePlays.net issue a rebuttal. Hedge fund manager Whitney Tilson of T2 Partners also issued a rebuttal. And finally, you now have one of the largest shareholders in Bill Ackman issuing a rebuttal on behalf of his hedge fund Pershing Square Capital Management.

In summary, Ackman has provided a wide range of GGWPQ's equity value based upon fellow REIT valuations. He comes up with a price target of $24-43 per share which excludes the MPC segment of General Growth. He feels that high quality US malls will continue to do well and he even recently laid out an entire presentation on the US mall REIT industry. Ackman and Pershing Square are obviously refuting Hovde's presentation since they have been long the equity and unsecured debt of General Growth since back when the stock was trading below $0.40 per share. You can see Pershing Square's original GGWPQ presentation from when they first entered the name.

General Growth has been evaluating all options to reduce leverage and have been considering "all indications of interest in the company." Ackman sits on the board of General Growth and obviously has been very close to this entire situation.

Entitled 'A Detailed Response To Hovde's Short Thesis on General Growth Properties,' below you will find Pershing Square's entire presentation, with a big hat tip to Todd Sullivan's ValuePlays for posting it up first:




You can download the .pdf here. It is clear the bulls are protective of this name, especially given that some of Hovde's analysis was labeled as questionable. Since hedge fund Hovde's short thesis presentation hit the internet, we've now seen three in-depth responses arguing against them.

The bulls clearly believe they've found a winner in GGWPQ. And, you can't fault them. Shares have risen from under $1 now to above $10. As General Growth Properties emerges from bankruptcy, the one question on everyone's mind is: how much is GGWPQ equity worth? We'll have to wait and see, but there have been plenty of educated guesses, that's for sure. For more on their bullish stance on GGWPQ, check out hedge fund Pershing Square's entire presentation on the US mall REIT industry. And of course, here's their original GGWPQ presentation.

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...

Bill Ackman's Pershing Square: Mall REIT Presentation

Today we have the recent ICSC Mall REIT presentation from Bill Ackman's hedge fund Pershing Square Capital Management. The slideshow is entitled 'If You Wait For The Robins, Spring Will Be Over' and it addresses the macro environment as it pertains to real estate investment trusts, and in particular, mall operators. If you're unfamiliar with Ackman and Pershing, check out our profile/background post on them.

Those of you who have been reading Market Folly for a while know that Bill Ackman bought into equity and unsecured debt of General Growth Properties (GGWPQ) back when the equity was trading below $0.40 per share. Today, shares are up above $10.70 per share and the unsecured debt is trading near par. Needless to say, he has already won big time on this play. But, he's not done yet. Ackman recently detailed more in-depth thoughts about GGWPQ in his investor letter. Given that GGWPQ is emerging from bankruptcy, he believes that GGWPQ can either emerge as a standalone company and that the equity will still be valuable (even if the unsecured converts over) or it can serve as a prime takeover target. If you've been paying attention recently, you already know that Brookfield Asset Management (BAM) and Simon Property Group (SPG) have been buying GGWPQ's debt so things are getting interesting on a possible takeover or some other strategy.

Ackman has already presented his case specifically for GGWPQ in a previous presentation, so now Pershing Square has shifted to a more top-down look at the US economy, the US consumer, and REIT mall operators. Embedded below is Pershing Square's entire 68-slide presentation from the latest ICSC event. RSS & Email readers will have to come to the blog to view their presentation.



You can download the .pdf here. While the above presentation details an overview of the industry, make sure to check out Ackman's original presentation on GGWPQ as well for more detailed specifics. Pershing certainly has painted a bullish picture for mall REIT operators. Their conclusions are that mall REITs and their tenants have not only survived, but have been resilient in a time of trouble. In order for REITs to outperform going forward, Pershing argues that you don't need to see consumer spending at 2007 levels either. They believe that the closure of underperforming stores is a long-term benefit for these operators as it weeds out the weak (our words, not theirs). Lastly, their bullishness can also be attributed to the fact that tenant cash flows (and as such their balance sheets) are much improved over a year ago and that many retailers have substantial growth plans.

For more resources on Bill Ackman's hedge fund Pershing Square, check out their latest investor letter where they talk in-depth about GGWPQ and their other positions. Additionally, we've also covered Pershing Square's portfolio recently as well. Lastly, you can also check out previous presentations from Bill Ackman's hedge fund as they presented the case for a long of Corrections Corp of America (CXW), as well as their case for a short of Realty Income (O).