This week proved a busy one for General Growth Properties (GGP)—the mall REIT secured a $1.5 billion term loan from U.S. Bank and RBC Capital Markets to refinance 16 of its assets and the Blackstone Group, one of its shareholders, revealed plans to sell its 2.5 percent stake in GGP through a secondary offering.
Yet in spite of the activity surrounding it, GGP remains largely in the same place it’s been in for the past year—delivering solid returns to its shareholders, but not outperforming its peers in the mall REIT sector. The reason is that the firm still carriers a relatively high debt load, limiting the possibility of new acquisitions and development projects, according to RBC Capital Markets analyst Rich Moore.
“There are many things that are positive on the operation front—the capital allocation track record has improved nicely. But the balance sheet philosophy is one of higher than average leverage and I don’t see it changing going forward,” says Cedrik Lachance, managing director with Green Street Advisors, a Newport Beach, Calif.-based consulting firm. “It’s a company that’s comfortable operating with more leverage than many of its peers and that [causes] caution on the part of investors.”
In fact, a large portion of GGP’s shares continues to be owned by institutional investors, a legacy of the bankruptcy and reorganization the firm went through in 2009/2010. Less than a year ago, one of the REIT’s largest shareholders, Pershing Square Capital Management, tried to orchestrate a sale of GGP to Simon Property Group, although it dropped the issue after selling warrants for 18,432,855 of the REIT’s shares to Brookfield Asset Management, another major stakeholder. In the past few months, global investment manager Cohen & Steers upped its stake in GGP by 1,826,214 shares, to 37.39 percent.
Solid fundamentals
For the first quarter ended March 31, GGP reported a 5.3 percent year-over-year growth in net operating income (NOI) for its portfolio, to $531 million. Tenant sales went up 6.3 percent, to $558 per sq. ft., while rents for leases beginning in 2013 rose 11.1 percent, to $64.44 per sq. ft., compared to rents on expiring leases.
In addition, the firm reports that 95.8 percent of its portfolio is now leased, an improvement of 210 basis points over last year’s level.
At the same time, however, GGP’s management has been eager to take advantage of today’s low interest rates and availability of capital, resulting in a relatively large debt load, Lachance points out. Year-to-date in 2013, the company closed on $1.5 billion in property level loans, in addition to the $1.5 billion term loan. RBC’s Rich Moore estimates that at the end of the first quarter GGP had a debt-to-total capitalization ratio of 48 percent. The figure marked a 400 basis points improvement from first quarter of 2012, but was still much higher than the 35 percent debt-to-total capitalization ratio of closest peer Simon Property Group.
Given the high quality of GGP’s malls, this has not caused typical over-leverage concerns, but the REIT’s limited equity does put constraints on acquisition and development possibilities, Moore notes. GGP’s planned development portfolio currently totals only $898.5 million, according to Barclays Capital. It is one of the few mall REITs that has not tried to dabble in the outlet center space. And its ability to buy new malls is also curtailed by its focus on class-A product, which has been scarce in this market.
“We’ll be aggressive for high-quality retail properties that are in line with our business strategy, “ GGP CEO Sandeep Mathrani told analysts during an earnings call on Apr. 30. “We truly believe that over the long-term, good things happen to good assets.”
Meanwhile, with the company completing most of its leasing (roughly 85 percent) for this year and up to 30 percent of its leasing goals for 2014, that part of the business will not be a source of great growth in the near term either.
And, according to Moore: “When the valuation frenzy begins to cool, the strongest outperformers in the sector will be those companies with the most significant growth platforms.”