market folly

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.

TTM Cash NOI: $2,478

SPG NOI Calculation

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

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)"