General Growth Properties (GGP) is an unusual story, delivering profits to pre-bankruptcy shareholders and featuring several investing luminaries among its shareholders. It has now completed its second spinoff in a little more than a year, as Rouse Properties (RSE) begins trading regular way tomorrow. Rouse completes trading on a when-issued basis at $11.30.
Rouse, which we previously wrote about here and here, owns 30 malls comprising 21 million square feet in 19 states. In its press release today, the company stated
Today, Rouse Properties, Inc. (Rouse) becomes an independent regional mall company that will formally commence “regular way” trading under the symbol RSE when the New York Stock Exchange opens January 13, 2012.
Rouse is a publicly traded real estate investment trust (REIT) focused on the management, redevelopment, repositioning and acquisition of Class B regional malls. Initially, the Rouse portfolio consists of 30 geographically diverse enclosed malls, encompassing more than 21 million square feet in 19 states.
“The formation of a new REIT solely focused on Class B regional malls is a unique opportunity and Rouse is well positioned to not only achieve success, but continue building on its platform over time to further strengthen its market position,” said Andrew Silberfein, president and CEO of Rouse. “Rouse has the scale, capital and talent, as well as the flexibility and creativity to innovate and deliver the quality that Rouse is committed to achieving. This is an exciting day for Rouse and for our entire team of outstanding professionals.”
Executives with Rouse Properties, Inc. rang The Closing Bell® of the New York Stock Exchange today to commemorate the company’s entry on the NYSE.
General Growth Properties, Inc. completed the spin-off of Rouse through the distribution of shares of Rouse common stock to holders of GGP common stock. Under the terms of the spin-off, GGP stockholders received approximately 0.0375 shares of Rouse common stock for every share of GGP common stock owned as of the record date of December 30, 2011. Rouse is being advised on the spin-off by Wells Fargo Securities/Eastdil Secured, RBC Capital Markets, Deutsche Bank Securities Inc. and Goldman, Sachs & Co.
All information previously made public about Rouse can be found at rouseproperties.com.
According to Bloomberg:
General Growth, based in Chicago, divested itself of the malls to concentrate on properties with higher rents and tenant sales and to reduce debt. Rouse’s malls are either the main shopping center in smaller U.S. cities or are second-tier properties in major markets.
“It’s not a troubled portfolio,” Craig Guttenplan, an analyst at CreditSights Inc. in London, said in a telephone interview before the spinoff was completed. “It’s just properties with less growth potential.”
Rouse’s 30 malls are 88 percent occupied and generate sales of about $280 per square foot, Nathan Isbee, an analyst at Stifel Nicolaus & Co., wrote in a Nov. 11 report. General Growth had tenant sales of $471 a square foot on a trailing 12-month basis as of Sept. 30, and a 92.7 percent occupancy rate for its regional malls, the company said on Nov. 9.
Rouse plans to spend $200 million on property redevelopment by the end of 2015 to boost net operating income, the company said in a regulatory filing last month.
Rouse was expected to have about $1.16 billion of debt with a weighted average interest rate of about 5.6 percent at the time of the spinoff, General Growth said on Dec. 20.
Andrew Silberfein took over as chief executive officer of Rouse on Jan. 2, according to a regulatory filing. Silberfein previously was executive vice president of retail and finance at Forest City Ratner Cos., where he worked since 1995.
Rouse has filed an S-11 to conduct a Rights Offering of 13,333,333 shares at $15, well above the current price. Brookfield Asset Management (BAM), which through its shares of GGP will already own 37.2% of the company, is contractually obligated to purchase any shares not acquired by other shareholders. As a result, Rouse will receive the $200 million regardless of the interest in the offering. The company has not yet announced a date for the offering. The filing details how the $15 price was set:
The subscription price per share for the rights offering was determined by the disinterested members of GGP’s board of directors who are not affiliated with, and do not have a financial interest in, Brookfield. This price was determined in connection with the negotiation of the backstop agreement we entered into with Brookfield, which occured prior to the spin-off and, therefore, prior to the appointment of our post spin-off board of directors. In evaluating the subscription price, the disinterested members of GGP’s board of directors considered a number of factors, including, the estimated value of our mall portfolio, including an analysis of the same by an independent valuation firm, our anticipated net asset and gross enterprise value, which take into account our anticipated net working capital, our capital structure and the amount of debt we expect to have upon completion of the spin-off, and the price at which Brookfield was willing to backstop the rights offering. In considering the terms of the Brookfield backstop agreement, the disinterested directors of GGP’s board of directors also took into account advice of financial advisors and counsel in concluding that the subscription price is in our and GGP’s best interests. Based on these considerations, GGP’s board of directors determined that the $15.00 subscription price per share represented an appropriate subscription price.
The subscription price does not necessarily bear any relationship to the book value of our assets or our past operations, cash flows, losses, financial condition, net worth or any other established criteria used to value securities. You should not consider the subscription price to necessarily be an indication of the fair value of the common stock to be offered in this offering. After the date of this prospectus, our common stock may trade at prices above or below the subscription price.
Brookfield will receive $6 million for acting as a backstop, so its real cost will be between $13.80 and $14.55 per share, depending on how many shares it must buy. After the offering, the company will have approximately 49 million shares outstanding. We project the company to have had Funds From Operations (FFO) in 2011 of $45 million, and with the infusion of $200 million in capital and improved efficiency in 2012, we project $53 million in FFO. Assuming 49 million shares, this comes out to $.92 per share in 2011 and $1.08 in 2012. Applying a 15-17 multiple, which is well below GGP’s 24 multiple, , we see a fair value of $13.80-$18.36. Combined with Brookfield’s willingness to buy shares at $14.55 (as we presume they will be the only subscriber with the common stock trading well below $15), we believe the stock is undervalued at yesterday’s close of $11.30. Further, we expect the stock to drop in the short term as shareholders who have received small stakes (the distribution ratio was only 0.0375), or who are not interested in the company’s Class B assets, sell their shares in the coming days. We believe this will create an exciting opportunity for investors to profit.
Disclosure: The author holds no position in any stock mentioned.
