Mizuho Analyst Takes Exception to Bloomberg Story on General Growth (GGP) Lakeside Mall 'Strategic Default'
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Mizuho Securities analyst Haendel St. Juste has taken exception to a Bloomberg story discussing how General Growth Properties (NYSE: GGP) defaulted on a secured loan on its Lakeside Mall asset in suburban Detroit and that lenders are making negotiating loan extensions or refinancing more difficult as unease around the future of shopping centers grows. St. Juste addressed misperceptions regarding the article, as well as implications for GGP and financing availability for higher quality malls. In addition, they said they not received official confirmation from GGP that they intend to hand back the keys, so suggestions that this may be a negotiating tactic can not be dismissed as out of hand...yet.
A Bloomberg article this morning (article link here) reported that GGP has defaulted on a secured loan on its Lakeside Mall asset in suburban Detroit (https://www.shop-lakesidemall.com) and suggested that “(mall) lenders are making negotiating loan extensions or refinancing more difficult as unease around the future of shopping centers grows, given bleak earnings forecasts from many major retailers”. While we do not make a habit out of commenting on news articles, we think it is important to address misperceptions regarding this article, as well as implications for GGP and financing availability for higher quality malls. In addition, we have not received official confirmation from GGP that they intend to hand back the keys, so suggestions that this may be a negotiating tactic can not be dismissed as out of hand...yet.
The analyst commented:
First, GGP is handing back the keys on a weak mall that faces a bleak future – plain and simple. Lakeside has seen its market share erode in recent years with NOI declining from $23M in FY2005 to $15M for FY15, while occupancy has declined from 92% to 79% over the same time frame; nearby competition includes TCO’s Partridge Creek less than 3 miles away as well as a multitude of shopping / power centers. So we think handing back the keys for an asset with a $144M current loan amount, $100 – 125M market value (assuming 12-15% cap rate) and a bleak future makes strategic sense; we assume 12-15% given 10.5% debt yield on asset and sales psf in high $200s. And GGP is not and will not be alone in pursuing this strategy. SPG, WPG, CBL and MAC have all handed back keys to weaker malls in recent years and we expect to see more keys handed back over the next few years as more loans come due; Bloomberg article highlights $47.5B in loans backed by retail properties mature in the next 18 months.
Second, the generic suggestion that mall financing is difficult is off base. We have seen increased lending bank appetite for mall lending as they seek to regain market share and help fill the CMBS gap. Over the past couple quarters, we’ve seen several examples of ‘A’ mall financings including TCO’s Short Hills (3.50%), Cherry Creek (3.85%) and Country Club (3.88%), as well as ‘B’ mall financings including CBL’s Fremaux Town Center (3.70%) and Hamilton Place (4.36%). We also hear insurance companies are looking to step up lending to ‘A’ and to solid ‘B’ malls ( similar pricing). However, lower tier ‘B / C’ malls will continue to be subject to the whims of the CMBS market, which has seen meaningful issuance declines YOY and in recent years - 1Q16 issuance was $18B vs $26B in 1Q15 and FY16 is expected to be $60-75B, according to market observers, down from ~$100B in 2015 and the ~$200B levels in the 2005-07, when many of the loans coming due over the next 18 months were originated.
Third, the assertion that the buyer pool for lower tier malls is shallow is accurate. But we note that mall REIT portfolios are in much better shape today vs 2010 having sold a significant amount of lower tier assets in recent years (e.g., TCO sold a $1.4B portfolio in 2014, MAC sold >$3B from 2013-15, SPG spun off $6B of lower tier malls into a separate company, WPG, in 2014), and will opportunistically look to sell additional lower tier assets given the stiffer headwinds those assets face, including greater amount of anchor / store closures, e-commerce threat and power center competition. We also note that buyers of lower tier malls tend to be more local, leverage driven investors who have had more difficulty obtaining financing compared to mall REITs – they face tighter terms, lower LTVs (and are often unable / unwilling to write the “equity check”) and are increasingly concerned with exit cap rates against the backdrop of a slowing economy, slowing retail sales, growing e-commerce sales and likely higher interest rates.
Lastly, this all serves to reinforce our bias towards higher-productivity landlords, given superior positioning / attributes in this choppy macro / retail environment, better access to capital and attractive prevailing valuations. Our Buy-rated mall REITs remain GGP, SPG and TCO.
Buy price target of $35.00
Shares of General Growth Properties closed at $27.99 yesterday.
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