Three Reasons To Own General Growth Properties

By Will Ashworth | June 17, 2011 AAA

On November 9, 2010, General Growth Properties (NYSE:GGP), the nation's second-largest owner of shopping malls, emerged from bankruptcy. It was the largest real estate bankruptcy in U.S. history. As part of the slimming-down process, it spun off its master-planned communities into a separate company, Howard Hughes Corp. (NYSE:HHC). In the seven months since emerging from bankruptcy, much has happened to give investors renewed enthusiasm for the recently floundering company. Here are three reasons I believe now is a good time to buy.

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Ownership Pedigree

General Growth's rescue came at the hands of some of the finest investors in the country. It recapitalized its business with $2.5 billion in equity from Brookfield Asset Management (NYSE:BAM), $2.8 billion from Fairholme Capital and another $1.1 billion from Pershing Square Capital. The three investors alone manage approximately $180 billion in assets. In other words, they know what they're doing. In January, Brookfield bought Fairholme's remaining $1.7 billion stake in the company for $804 million in cash and 27.5 million of the Canadian asset manager's Class A shares. As a result, Brookfield now owns 41.3% of the mall owner while Fairholme owns 4.5% of Brookfield.

They aren't the only interesting shareholders, however. Ken Heebner's CGM Realty Fund (CGMRX) owns 5.6 million shares of General Growth. Heebner, famous for making large, focused bets on certain industries, has even more money invested in Simon Property Group (NYSE:SPG), the nation's largest mall owner. In case you doubt Heebner's acumen, $10,000 invested in the CGM Realty Fund a decade ago was worth $57,000 at the end of 2010, compared to $11,500 for the S&P 500. It's a convincing group.

Operations Improving

While you shouldn't invest in a stock solely because of its largest investors, it certainly helps. So, too, does improving financials. However, any time a company accumulates $27 billion in debt, albeit prior to bankruptcy, it's better to err on the side of caution. General Growth's second quarter results were steady, if not spectacular. CEO Sandeep Mathrani, a veteran real estate executive from Vornado Realty Trust (NYSE:VNO), has only been in the job since mid-January; more time needs to pass before making judgment. Only recently did Mathrani hire two key executives to help him remake the mall operator.

Positive signs indicate the company is moving in the right direction. Probably the most important is that comparable tenant sales for the trailing twelve months (TTM) increased by 7.3% year-over-year to $457 a square foot. That's a good sign the economy is slowly healing itself. Things are improving fast enough that Standard & Poor's is considering raising its credit rating. The rating service would like to see higher rents, higher occupancy rates, the sale of non-core assets and the elimination of $1 billion in debt.

In the second quarter, General Growth signed 2.2 million square feet of permanent leasing space, increased its overall regional mall occupancy rate by 40 basis points to 92.4% and refinanced $1.7 billion in shopping mall mortgages, generating $400 million in cash for the company. Most importantly, it intends to spin off 35 non-core assets into its own real estate investment trust. By the end of Mathrani's five-year, $1.5 billion makeover, General Growth Properties could be down to 125 malls generating greater revenues than today. That's music to Standard & Poor's ears.

Company P/S P/B P/Cash
General Growth Properties (NYSE:GGP) 5.4 1.5 14.7
Simon Property Group (NYSE:SPG) 8.1 6.8 51.4
Kimco Realty (NYSE:KIM) 8.3 1.4 48.0
SL Green Realty (NYSE:SLG) 5.7 1.3 28.6
Macerich (NYSE:MAC) 8.4 2.3 34.3

Stock Cheap

For three months prior to emerging from bankruptcy, General Growth went on a bit of a tear, gaining 60%. Since then, it's traded in a narrow range, gaining 14.8% from November 9, 2010 to June 15, 2011, outperforming the S&P 500 by 1,050 basis points. That's certainly acceptable, but not the returns Brookfield is looking for. To realize its investment, the points discussed in the previous paragraph will have to come to fruition. In the meantime, without any additional positive information, you could make a case that its stock is cheap. When compared to its nearest rivals, it's clear that it still has a post-bankruptcy discount hanging about. That needs to go. And it should. General Growth is a different company today than it was two years ago when it entered bankruptcy. Five years from now, investors will have a hard time recognizing it, especially if it starts investing in street-level real estate. Urban retail is getting hotter by the day.

Bottom Line

Aggressive investors should buy General Growth directly. Conservative investors ought to buy Brookfield instead. Either way, you'll likely win. (For related reading, also see How To Assess A Real Estate Investment Trust.)

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