Since 2010, General Growth Properties Inc (NYSE:GGP) has successfully emerged from bankruptcy to become the second biggest mall operator in the world. In the past 12 months its share price has advanced nearly 22%. The company has recently announced impressive fourth quarter earnings that beat analysts’ estimates. Many investors might wonder whether or not General Growth is a decent buy at its current price. Let’s find out.
General Growth owns around 129 regional malls in the US, generating more than $541 in tenant sales per square foot. Around 70% of the total net operating income was generated from 69 Class A malls. General Growth is considered the world’s second largest mall operator, just after Simon Property Group, Inc (NYSE:SPG), which owns and has interests in 333 retail real estate properties with total 242 million square feet in North America in Asia. In 2011, General Growth had a high occupancy rate of 95.5%, including 87% permanent occupancy. It’s expected to grow its occupancy rate to 97% in 2014, with 92%-93% permanent occupancy.
Three Reasons Why Ackman Liked General Growth
Bill Ackman, the famous hedge fund manager, has made a 77-fold return on his investment in General Growth in only 3 years. Ackman liked General Growth for three main reasons. First, it had a stable free cash flow. General Growth had a diversified its customer base, with the largest tenants representing less than 3% of the total revenue. During the Great Recession and the company’s bankruptcy, same-store NOI decreased less than 10%. Second, General Growth had growth annuity. The company had long-term lease contracts of around 8 years on average. The percentage rent was inflation protected, with the rollover of 10%-15% of leases per annum while the fixed-rate debt was around 90% of the total debt. Third, because of the minimal new supply and the extreme difficulty of acquiring new high quality locations for construction, the barriers to entry were significantly high.
The Business Keeps Growing
In the fourth quarter 2012, General Growth’s funds from operations (FFO) experienced a significant increase of 23.3% to $312 million, or $0.31 per share, beating analysts’ expectation of $0.29 per share. For the full year 2012, the company’s FFO rose to $994 million, a 13.7% growth compared to the FFO last year. Its full-year EBITDA and NOI also experienced a decent growth of 7% and 5.3%, respectively. In terms of operating performance, the tenant sales reached $545 per square foot, a growth of 6.6% on a trailing 12-month basis. The leased percentage of US mall portfolio was 96.1%, 60 basis points higher than the leased percentage last year. Compared to General Growth, Simon Property had a lower occupancy rate of 95.3% but a higher sale per square foot of $568. As of September 2012, General Growth recorded $7.7 billion in total equity, $15.97 billion in mortgages, notes and loans payable, and $624.8 million in cash.
Peers Comparison
At the current trading price of $20.20 per share, the total market cap is nearly $19 billion. The market is valuing General Growth at around 15.95x EV/EBITDA. Simon Property is a much bigger company with more than $50.1 billion in market cap. It is also valued at a much higher valuation, at 21.1x EV/EBITDA. One of their peers, Macerich Co (NYSE:MAC), with a $8.2 billion market cap, is valued at 15.35x EV/EBITDA. Macerich owns and has interests in around 65 regional shopping centers and 14 community shopping centers, with around 66 million leasable square feet. It has the lowest occupancy rate (93%) and the lowest tenant sales per square foot ($511) among the three. However, Macerich is paying the highest dividend yield at 3.7%, while General Growth’s dividend yield is the lowest at 2.1%. Simon Property is paying 2.5% dividend yield.
My Foolish Take
General Growth has long-term lease contracts with inflation protected percentage rent. It also has a cheaper valuation than the world’s biggest mall operator, Simon Property. At the current price, I personally think General Growth is a decent buy for long-term investors.
The article This Mall Operator is for the Long Term originally appeared on Fool.com and is written by Anh HOANG.
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