Tracking Bill Ackman's Thesis on his Two Largest Holdings: JCP and GGP
JC Penney Co. Inc. (JCP)
Ackman began purchasing JC Penney at just over $20 a share in late August of 2010. On October 8, 2010, Pershing Square disclosed a 16.5% stake in JC Penney, representing 39.1 million shares of the company purchased at an average price of $25.28. Initially, JC Penney responded by hiring Goldman Sachs as an advisor to prepare for a potential fight despite Ackman's intentions to help the company realize its value. On October 15, 2010, the Board of Directors authorized the adoption of the Rights Agreement to prevent any person or group from acquiring more than a 10% interest in the outstanding common stock as a potential poison pill.
However, management reversed track the following year when it announced on January 24, 2011 that Ackman would be named on the Board of Directors. Under Ackman's influence, JC Penney has decided to cease its catalog and outlet operations to focus on store-to-store sales and retail mall stores. According to GuruFocus's portfolio tracker, JC Penney currently represents more than 20.87% of Ackman's equity portfolio at 38.7 million total shares. It closed today at $27.27 a share.
JC Penney Company, Inc. is a major department stores operator, selling family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings. It also provides various services, such as styling salon, optical, portrait photography, and custom decorating. The company also sells its products through its Internet Web site, jcp.com.
In his 2010 third quarter newsletter, Ackman stated that he believed JC Penney was heavily undervalued with high potential for operational improvements in an economic recovery. He writes that "Trailing earnings are at cyclically depressed levels; margins have been squeezed and sales productivity is low." In analyzing the company's financials, he added that "2010 adjusted EBITDA is approximately 30% below its 2007 peak and EBIT margins have deteriorated by about 45%. As a result, there should be substantial operating leverage in a sales recovery, which should come from an improved economy and operational improvements if they can be achieved." As well, Ackman believed JC Penney has "strong brand name and assets" and "high quality systems."
At Pershing Square's investor dinner slideshow, Ackman reiterated his belief that JC Penney represented "an opportunity to invest in a cyclically depressed national retailer at a significant discount to fair value." The company trades at 4.9x 2010 EBITDAP with sales per square foot having come down to 2002 levels. The company's reported pension expense "masks true cash flow," and the company owns "substantial core and non-core fee and long-term leasehold real estate interests." It is assumed that Vornado Realty Trust, a company that bought a 9.9% interest in JC Penney in conjunction with Pershing Square's interest, will help unlock both the retail and real estate value in the company.
According to JC Penney's second quarter report, net sales declined over last year by 0.8%, from $3.94 billion to $3.91 billion as a result of the company's exit from its catalog business. However, the company is seeing customer growth from its exclusive and private brands including Liz Claiborne, Modern Bride, Arizona, and St. John's Bay as well as its expansion of Sephora inside its stores. On the strength of these brands, comparable store sales rose 1.5%, and internet sales increased 2.8 %. Gross margins decreased approximately 110 basis points to 38.3% of sales, but the company managed to cut operating expenses, with SG&A down 2.5% over last year. Net income for the quarter was $14 million, flat over last year, while diluted earnings per share actually increased from $0.06 to $0.07.
JC Penney has a market cap of $5.9 billion. The stock trades with a P/E ratio of 16.1, roughly in line with its six-year average. Its P/S ratio is 0.32, below that of Kohl's (KSS) 0.69 and Macy's (M) 0.41. Its P/B ratio is 1.21, well below its six-year average. The company has a debt-to-equity ratio of .659, and it generated a free cash flow loss of $215 million, up from its free cash flow loss of $306 million last year. The company also completed a $900 million share repurchase program in the second quarter.
General Growth Properties Inc. (GGP)
On January 9, 2009, Ackman disclosed a 24.1% stake in GGP, with 22.9 million common shares and approximately 52 million Common Shares under certain cash-settled total return swaps that he purchased for prices ranging from $0.35-$1.58 per share. In the fourth quarter of 2010, Ackman more than doubled his holdings at an average price of $16.00, giving him nearly 70 million shares of GGP. He currently holds 72.2 million shares of GGP, making up 18.82% of his equity portfolio. It closed today at $13.82 per share.
General Growth Properties, Inc. operates as a real estate investment trust in the United States. It operates in two segments, Retail and Other, and Master Planned Communities. The Retail and Other segment involves in the operation, development, and management of retail and other rental property comprising retail centers, office and industrial buildings, and mixed-use and other properties. The Master Planned Communities segment develops and sells land to builders and other developers for residential, commercial, and other uses.
When he disclosed his stake in the company in early 2009, Ackman originally wanted the company to go bankrupt. Typically, this means that common shareholders would be left with nothing as they are last in line to be paid, but Ackman thought GGP was an exception. The company's recorded real estate assets were listed at historical valuations, meaning that their current value should have been much higher. Historically, when a company going through bankruptcy has assets worth much more than their liabilities, shareholders have emerged relatively untouched. Ackman believed the real problem was in the company's debt, which would need to be restructured , and the credit crisis was squeezing the company's stock price.
At the 2009 Ira Sohn Conference in May, Ackman discussed in-depth his investment thesis on GGP, which had filed for bankruptcy due to its near-term debt maturities and disruptions in the credit markets. He described GGP as having high quality assets, a diversified geographical footprint , a diverse tenant mix, inflation protection due to 82% of its debt being fixed rate, and long term leases that insulate the company from cyclical pressures and promote growth. It had high occupancy relatively to its peer group and growing operating income. Since GGP's bankruptcy was from liquidity issues rather than insolvency, and since its underlying business was still strong, Ackman believed the stock would easily raise in value from its late 2008 and early 2009 lows. When the stock resumed trading in 2010, it was valued at $14 a share, netting Ackman tremendous returns.
Ackman remains bullish on GGP, believing that malls continue to have staying power in American consumerism. He stated in his 2010 third quarter newsletter that the company was "underearning its potential" as "a substantial amount of its space is currently leased on a shortterm basis at below-market terms... particularly for its best assets, are meaningfully lower than its competitors’, providing the potential for significant increases in net operating income." With increasing U.S. consumer confidence and increased mall traffic, the company has sustainable growth prospects. Meanwhile, as retail mall construction projects are at a standstill due to the large amounts of capital required, GGP holds substantial advantages in its commercial real estate position.
According to GGP's second quarter report, total revenues were down 3.2% year-over-year, from $684.8 million last year to $663.2 million this year. However, comparable tenant sales increased 8.4% to $465 per sq. ft., and regional mall percentage leased increased 90 basis points to 92.5%. The average rental rate on leases signed was 9.1% higher than rents expiring during the same period, and the average rental rate on leases commencing was 2.0% higher than rents expiring. Core Funds from Operations was $199.6 million or $0.20 per diluted share, compared to $206.1 million or $0.63 per diluted share last year. The company attributed the change to lower lease termination income and other adjustments in the current and prior year period. Net loss in the quarter was $203.0 million, or $0.22 per diluted share, compared to last year's net loss of $117.5 million, or $0.37 per diluted share, partially as a result of the $58.9 million charge recorded this quarter due to finalization of default interest on certain restructured loans.
GGP has a market cap of $13.4 billion. The stock trades with a P/S ratio of 4.5 and a P/B ratio of 1.3. The company technically has no long-term debt, although it has more than $17.5 billion in mortgages, notes and loans payable versus its $9.4 billion in equity. During the quarter, the company sold its 1/3 ownership interests in Arrowhead Towne Center and Superstition Springs Mall for six big-box anchor locations and $75 million in net cash proceeds to GGP. It also sold its Gateway Crossing asset for $22.5 million.
On August 1, 2011, the company announced that it will spin off a 30-mall portfolio, totaling 21.1 million square feet, to holders of GGP common stock in the form of a taxable special dividend comprised of common stock in Rouse Properties.
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