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Published: June 22, 2010
The word "bankruptcy" is anathema to most investors. Holding
shares of a company in this position means investors are likely
to be wiped out. Sometimes, however, a bankruptcy can be exactly
the right thing for both the company and investors, if handled
properly.
If the company has enough assets, and creditors can be swayed to
lower their interest rate or make a swap for equity, then the
company might survive. And if the reason for bankruptcy is just
a temporary slowdown in revenue due to overall the economy, then
the company may even prosper.
General Growth Properties (NYSE: GGP) is exactly in this
position. The company is a
real estate investment trust (REIT) that invests, owns,
develops and manages shopping malls, shopping centers,
residential communities and office and commercial space. The
company has been in business since 1954.
Like most other companies involved in real estate, General
Growth found itself in a bad position as a result of the
economic crisis. General Growth voluntarily entered bankruptcy,
however. The company wasn't forced by a creditor foreclosing and
demanding repayment. During the bankruptcy process, General
Growth managed to pull all the debtors together and extend $15
billion of debt coming due so that the weighted average duration
of debt repayment is now in 6.5 years. In addition, the weighted
average interest rate dropped down to 5.07% from 7.7%. In the
process, General Growth avoided the death knell of other
companies in this position -- a fire sale of assets.
Why did the debtors agree to all this? For starters, mall
traffic has been improving. Tenant bankruptcies are decreasing
because, if mall traffic improves, then the retailers make more
money, and that means rents can be paid in full, enhancing
General Growth's equity value. The mall REIT sector itself is
also improving as a whole, driving up real estate prices and
further enhancing equity value.
These factors play into some secular trends that are extremely
favorable to General Growth, and the creditors obviously saw
merit in that. Retail construction is at a 20-year low. This is
not unexpected. Who wants to be building retail stores and malls
when the economic outlook is still uncertain? With construction
grinding to a near-halt, that means there will be less
competition to General Growth's malls. This enhances the
company's already prescient strategy of placing half of their
200 malls into markets with no competition, creating a regional
monopoly. If people in those areas want to shop, they'll be
shopping with General Growth.
All of these factors create yet another advantageous situation
for General Growth -- more access to capital. As the company's
financials improve, capital will be more easily accessible,
allowing them to grow.
All of these reasons are why hedge fund
manager Bill Ackman, who runs Pershing Square Capital, invested
heavily in General Growth. He now owns almost 15% of the
company. Everyone called him crazy when he made the investment
at about $1 a share, but he's laughing last -- the stock now
goes for $14. In a recent investment presentation, he noted the
company will emerge from bankruptcy as two entities: General
Growth Properties, which will hold income-producing properties,
and General Growth Opportunities, which will hold real estate
development assets.
Ackman put the icing on the cake for investors by reminding us
that General Growth was removed from the REIT indices because of
the bankruptcy. But it will be added back after the company
emerges, generating natural buyers required to purchase index
holdings (such as mutual funds).
Action to Take --> Buy
General Growth. The stock trades at $14 per share, and Ackman
values the two new entities at $20, believing they could double
during the next few years. Ackman rarely makes a mistake buying
distressed assets, and having already made 14 times his
investment on this stock, I think it's wise to follow his lead.
-- Frederick Steier
Contributor
StreetAuthority |
