Ackman Needs a Real Estate Recovery

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Not every hedge fund star is bullish on real estate or retail; Bill Ackman of Pershing Square has backed away from his efforts to force ailing mall operator General Growth Properties (NYSE: GGP) to sell out. Reuters reported that Ackman lost his interest in General Growth after its competitor, Simon Property Group (NYSE: SPG), showed no interest in buying the mall company.

Ackman had been working to get Simon to buy General in an attempt to boost its share value. Pershing Square reportedly owns 8 percent of General Growth. Instead of totally bowing out, Ackman is retaining the majority of his position which will enable him to profit if retail real estate recovers.

Ackman’s decision to move to a hands off approach caused its share price to fall by over $1. On December 10, 2012, General Growth traded at $20.27 a share; by January 10, 2013, GGP’s price had fallen to $19.04 a share.

The company owns 143 shopping malls and centers throughout the United States. General Growth has a lot of prime real estate as well as many redevelopment opportunities. Some of its flagship properties include Ala Moana Center in Honolulu, the largest open air shopping mall in the U.S., the Glendale Galleria in Los Angeles, Tysons Galleria in Washington, D.C., and the Water Tower Plaza in downtown Chicago.

A major redeveloper of old malls, the Howard Hughes Corporation has shown substantial gains in share prices and revenue in the last year. HHC have increased by 52% in the last year while its revenue has increased by 17%.  Is General Growth capable of duplicating Howard Hughes Corp’s success? If you take a look at the company’s numbers, the answer is probably no.

Dying malls = negative income

General Growth reported a negative income of -$881.27 million on September 30, 2012. The chart indicates that General Growth has not been able to make any income since 2009. The reports that malls are a dying business appear to be correct in General Growth’s case. Yet some other mall operators are making money; Simon Property Group reported a net income of $1.479 billion on September 30, 2012, and Macerich Co. (NYSE: MAC) reported a net income of $326.51 million on September 30.  Macerich’s net income is actually up 240% over the past year.  Much of Macerich’s success is due to its massive 28% profit margin which other REITs like General Growth do not have.

General Growth has been able to improve some of its figures though. The company’s revenue has been slowly rising over the past year. The financials reveal a very modest gain in revenue from $2.609 billion in June 2011 to $2.772 billion on September 30, 2012. The company’s revenues are going up, but not fast enough to cover those massive losses.

The biggest gain at General Growth in the last year has been in cash from operations. The amount of cash the company took in from its malls increased from $467.62 million in September 2011 to $714.26 million on September 30, 2012. This might indicate the beginning of a retail recovery that will turn General Growth around.

Retail real estate recovery slow in coming

The only real hope for General Growth is a recovery in retail sales and retail real estate in the next few years. The most recent figures indicate that such a recovery is beginning, but it is extremely sluggish. Realtor CBRE Group reported that the amount of empty retail space in Los Angeles fell slightly in the last quarter of 2012. CBRE also had some bad news for mall owners like General Growth: around 12.8% of the retail space in LA was still sitting empty in the fourth quarter.

The amount of empty retail space in most U.S. metropolitan areas was at about the same level in Fourth Quarter 2012 as it was in Fourth Quarter 2011. Although the same survey found that demand for retail space was higher in a few cities, including Denver, Kansas City, Minneapolis, Fort Worth, and, surprisingly, Cincinnati. That indicates a limited recovery concentrated in a few areas. That doesn’t bode well for a company with operations as extensive as General Growth.

General Growth is one of those wait and see stocks. It will only see real growth if we have an across the board retail recovery. Unfortunately, it looks like we will see a limited retail recovery only in certain areas. The stock might be a bargain if retail real estate prices make a large comeback in 2013.

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