General Growth Properties (GGP)
In the first quarter we sold our position in Rouse Properties, the spinoff of GGP’s lower-productivity mall portfolio. At ~$40mm of capital, the market value of our stake in Rouse would have represented a ~35bp position in our portfolio, well below our target investment size. We also believe that lower quality malls face significant challenges. These risks are somewhat mitigated by Brookfield Asset Management, the controlling shareholder of Rouse, who has a superb track record in the real estate business, but the small size of our holding overwhelmed the track record of the sponsor.
GGP continues to post strong first quarter results with greater tenant sales, higher occupancy, and improved leasing spreads. GGP’s mall segment reported 4.1% same-store NOI growth, putting the company on pace to exceed management’s full-year guidance of 2.8% growth for2012 by a healthy margin. As below-market leases that were negotiated in bankruptcy continue to expire and are replaced at significant rent premiums, we expect GGP’s earnings momentum to continue.
Despite GGP’s stock price’s substantial increase over the last six months, the company remains attractively valued at a 5.3% earnings yield. By comparison, Simon Properties, GGP’s direct competitor, trades at more than a 15% higher multiple. While GGP trades at a lower valuation than its Class A mall peers, we think it has meaningfully more cash-flow growth potential. In a world in which there are few opportunities to earn safe cash yields, we believe that Class A malls at mid 5% and growing yields offer both a relative and absolute value.