Table of Contents

• Near term debt situationg: How has their near term debt maturity situation evolved? Not well
• Net debt position: What can we learn from the evolution of their net debt position? Rapidly growing without any improvement in near term maturities
• Bond by bond debt analysis: What can we learn from a bond by bond view of their debt? It appears they made zero progress in Q2
• The CFO lied left open the potential to for extreme misunderstanding by shareholders and analysts: GGP’s CFO *Lied* Made Potentially and /or Materially Misleading Claims in Q1 2008’s Conference Call, so it would be of questionable prudence to trust their statements about their debt position
• Revolver: Did the revolver come back? - Yes, and is now larger than before
• Development capex: They cut by $600M last Q to $1.5B through 2012, or $316M per year. Any more or less? — They are cutting back as much as they can
• Lease termination income: How does lease termination income compare? Still well above where they should be!
• Asset sales: Selling any assets? Any “fire sale”? — Backing off from asset sale comments
• No comment from John Bucksbaum in the PR announcement for the Q
• Life insurance comments: Any change in tone about help from life insurance companies? - Yes, there was little commentary about them
• Sales metrics: How were occupancy, comp sales and rental rates? - Up, and yet not profitable
• Miscellaneous factors: Were there any loans from unconsolidated affiliates and retained debt? How is the collateral position? Any note from the IRS on the tax restructuring? — Waiting for the call
• Income statement profitability: How is the profitability when we plug it into the financial cash flow model? - Inclusive of dividend, lost $37M

Summary

This was a very, very bad quarter. They have an unmanageable amount of debt coming due in 2008 still, and the new facility is clearly not enough. They blatantly lied on the progress they had made last quarter, and have lost most of their credibility by repeatedly making lofty, tabloid-ish claims and then not following through.  They have cut their development capex an additional $500M but it appears that the spending on the projects that are currently active has actually gone up, which doesn’t help their cash flow situation much on balance (See http://www.reviewjournal.com/media/video/echelon.html). Lease termination income and artificial inflation of the book value of their land continues to be a major source of (artificial) “profitability”, even though the land and residential divisions continues to bleed cash and shed value. They cut their guidance from last Q and offered no rationale other than a weak environment. John Bucksbaum had nothing to say about the results, unlike the past 2 Q’s. Their net debt-load continues to climb by hundreds of millions, even in the face of the $822M cash infusion from the equity offering. They simply cannot manage their debt load.

How has their near term debt maturity situation evolved? Not well

The debt situation here is horrendous.

They *didn’t* do well at all on the debt front as of June 30 2008. This is plain to see in the figures above, even with their claim of $325M of refinancing subsequent to the end of Q1 08 (this claim is challenged claim below). Notice how the maroon colored bar has remained relatively stable up until the H208, signaling the likelihood that there is a significant risk the 2008 debt will not get paid off. The pay down trend is actually negative Q3 to Q407 and H107. This validates the concerns previously mentioned about their debt load. They closed on $875M and are *trying* to get another $875M, but even with that, they still have quite a long road to travel - and it looks like there is some additional debt which got pulled forward.

And to cap things off, they have another $4.5B due in 2010. Things just get worse the further out we look.

GGP’s debt position remains weak and despite company’s efforts to tap sources of additional financing, its huge debt liabilities (maturating during 2008-2011) make these efforts minuscule. At the end of 2007, GGP had total debt outstanding of $2.62 bn due in 2008. However after six months its debt due for 2008 stood at $2.55 bn, showing GGP’s little progress with regards to refinancing. Since January 2008 the company had repaid only $107 mn of total debt due in 2008 or just 4% of total debt due, and the CRE financing markets are now worse than ever. Looking at the progress outlined above, it seems highly improbable that GGP would be able to refinance $2.555 bn or remaining 96% of loan due in 2H2008.

In its March 2008 press release GGP had stated that it planned to close $1.5 bn of loan to produce $1 bn of excess proceeds which would be used to repay to repay a $722 mn acquisition loan. However there was no such visible progress made on this regard as well.

What can we learn from the evolution of their net debt position? Rapidly growing without any improvement in near term maturities

Taking a closer look at their debt, we can see that things are only getting worse. Consider the following data:

GGP’s total debt continues to witness an increasing trend as the company is making efforts to refinance its existing debt through higher loans to generate excess cash at the expense of prudency in terms of outstanding debt to equity and cash flows. For instance in 1Q2008, GGP had re-financed six mortgage properties worth $1.3 bn while the existing debt on these properties stood at $0.55 bn generating excess cash proceeds of $0.75 bn. In addition, GGP is also encumbering previously unencumbered properties resulting in more debt burden for the company. GGP, which had relied heavily on use of debt to finance its operations when credit conditions were at ease, will now find it difficult to not only to repay its debt but also to re-finance the same.

Also, it looks highly probable that the Company might have to stop dividend payment in view of the distressed liquidity position. I had anticipated this months ago when I declared “GGP Can’t Afford It’s Dividend” (see the GGP Summary of Analysis). The logic of maintaining the same dividend percentage in view of mounting debt liability and the corresponding interest expense increase is imprudent to say the least, and borderline incompetent unless viewed in the light of the amount of highly leveraged stock holdings upper management has, whose dividend payments actually (and significantly) outweigh the corporate compensation via salary, bonus and deferred comp plans.

Even with the rise in the number of shares from the $822M equity raise in March, the net debt still grew by $347M this past Q, $13M in Q1 08, $184M in Q4 07, and $2.1B in Q3 07. They are simply not able to fund themselves. This seems awfully clear to any lay person, and should be undeniable to anyone well versed in financial statements or real estate finance or operations. They need to do more than simply cancel the common dividend in order to just tread water, which alone was $134M, $122M and $121 the past few Q’s, for example.

What is more, it would be one thing if their debt went up but they were at least able to mitigate their near term debt problems as a result. However their debt due in 2008 (near term) has been growing, not shrinking.

What can we learn from a bond by bond view of their debt? It appears they made zero progress in Q2 (Click image to expand - 1 meg)

I sounded off a similar concern in Q1 2008, that for all that was said and done by the management team, there was little in the way of tangible results. The same was true in this Q. They tapped their revolver for $452M, they had the principal reduction on their Senior Bridge Loan of $150M, they appear to have levered up the Altamonte property by an additional $12M, but that appears to be it, literally. Perhaps some later term properties were tapped, but nothing changed on their corporate debt.

GGP’s CFO Made Materially False Claims and Misleading Statements (they call this a *LIE* in my neighborhood, but I am going to be conservative) in Q1 2008’s Conference Call.

Once bitten, twice shy - so I would not trust their statements about their debt position

In the July 11, 2008 press release, GGP had stated that they raised $875 mn on unencumbered properties to repay all but one loan due for maturity in 3Q2008 and they plan to raise another $875 mn. However, in the company’s conference call (held on July 30, 2008), GGP had stated that they had closed $1.7 bn of loan on July 11, 2008 while the company press release clearly stated GGP had closed only $875 mn of loan and plan to close another $875 mn. Based on the fact that there was no press release subsequent to July 11, 2008, GGP’s CFO’s statement could be misleading the investors in its 2Q2008 earnings release as well.

GGP has a shortfall of around $750M in 2008 and $3.3B in 2009 which it now says it intends to plug with a few alternative financing mechanisms. One is to raise $1-2B from mortgage backed bondsn - a feat that I find to be very, very unlikely without destroying significant shareholder value - this market is horrendous and it’s rough out there. GGP says it anticipates selling at least $1B of CMBS by mid-October (yep, I believe ya fellasJ). Alternatively, they could fund it through the sale of non-recourse assets, preferred equity on malls, or JV’s - all again unlikely to happen without destroying significant shareholder value (ex. Getting raped by a JV partner or funding source, all anyone needs to do is read my series of analyses on this company to realize that they have very little bargaining power).

My belief:
They lower their credibility each time they make a claim that they have not been able to live up to or bring to fruition. Examples of this include:

• JV partners interested in doing business,
• not facing any financing or cash shortfalls,
• rental markets very strong,
• interest for their bonds in the CMBS market (totally negating the fact that the CMBS market just crashed and is getting worse by the month),
• we have paid down XYZ loans (when they actually did not),
• or, we have closed on XYZ funding (when they actually closed on only XY funding), and
• alternative funding sources showing interest, etc.

As you can see, I feel that there are now numerous examples of credibility sapping statements such as the ones above.

And two examples of a flat out *lies* by the CFO. These were material lies too, which I think are worthy of investigation. What this means for GGP stakeholders - they smake lofty claims that they do not make good on, and they state things have happened that did not actually happen. This should eliminate their credibility.

Topics of the lies confusion - $375M of refinancings, paying off the bridge loan, office properties sale: In Q1 2008’s April 30th 2008 GGP conference call, Bernie Freibaum said this: “Since March 31, we closed on $375 million of new mortgages on unencumbered properties. With these mortgages plus cash and credit on hand, we repaid and refinanced the $522 million outstanding balance of the $750 million short-term bridge loan that we utilized to purchase 50% of Homart I in July of 2007. In addition, we closed on the sale of the two Maryland office buildings that we announced last January when they were put under contract.”

• • • I am not trying to be rude, but it appears they flat out LIED made a potential mistake in this conference call about the Senior Bridge Loan. In Q1 2008, they had $522M due on the senior bridge loan. Subsequently, as was stated clearly in their Q1 2008 10Q, they got the principal on the loan reduced by the lender to $375M from $522M: “In April 2008, we refinanced and amended the terms of the Senior Bridge Facility to reduce the principal amount to approximately $375 million, substitute certain previously unsecured properties for the pledge within the collateral pool, and to acquire an option to extend the maturity date up to an additional seven months (to January 31, 2009).” Go to their debt breakdown in Q2 2008 though — the Senior Bridge Loan they said they knocked out some time before April 20 2008 is *still there*, as of *June 30 2008*. But they said above that they “refinanced ” the full $522M balance to reduce the principal amount to $375! As we can see from a scan of their docs, it appears as if they actually did nothing. One can come to the conclusion that they didn’t pay anything on this - they just got the principal reduced, after which it *remained on their books* without additional payment.
      • Bernie even reiterated this later in the call: “As I said in my remarks, this month, we got new mortgages on — $375 million of new mortgages on unencumbered assets, and we used those funds in addition to cash that we had to pay off what was left of the $750 million bridge loan that we took out last July to buy Homart. That was a significant maturity that was coming up and we have now repaid that.” Again, it appears as if they did not repay it. Once again though, he clearly states that GGP paid off the entire Senior Bridge Loan. That conference call was on April 20th 2008, when they showed $375M remained due as of June 30th 2008. Hey, I could be wrong, but I just don’t see where the money was explicitly repaid. There is a possible explanation, which I will get into below, but it still doesn’t bode well for the perception of management clarity in communication and transparency.
      • Later, when Michael at Citi asks Bernie for more detail on the Senior Bridge Loan paydown, Bernie lies potentially misleads again. “MICHAEL BILERMAN, ANALYST, CITI: It’s Michael Bilerman here with Ambika as well. Bernie, can you just go over – you had Fashion Show and Palazzo, which have a maturity date later this year. I’m not sure if you have extension options there. Can you just go over those loans as well? What proceeds did you use to repay the $522 million on the bridge? BERNIE FREIBAUM: I can answer the latter part first. As I said, we got $375 million of new mortgages, so that was $375 million out of the $522 million. The other $147 million was the combination of cash that we had left over from the equity offering that we did at the end of March plus a small amount of draw on our revolving credit facility.” Those 3 mortgages did not take place apparently (or from the public documentation can give the appearance of such), because even though they got the principal reduced, the remaining $375M is still there as of June 30th 2008. Yet Bernie states with perfect matter of factness that they got those mortgage refinancings. He says that this already happened. Just a complete lie potential misleading of investors and analysts.
    • What happened to that $375M of refinanced properties generating excess cash? Even with a voluntary debt reduction by their lender of $170M and additional cash from the equity offering, the total amount remaining due in 2008 went to $2.6B from $2.8B, and their cash position went *down*. Where is this excess cash? Where did it go?

How can anyone trust a management team that is LYING potentially misleading? There are more examples of very bold claims made by management that seem to be overly lofty. In a March press release, they said they anticipated doing $1.5B in refinancing by the end of Q2 with $1B of excess proceeds. They didn’t do that, to my knowledge. They have now lowered their FFO guidance for 2008 twice. They have backed away from their NOI goal from 2007-2009. Now I am taking note - they have said they intend to raise $1.5B through mortgage backed securities by October. I would like to see if they are able to do this on anything approaching good terms.

Now, let me play the Angel’s Advocate (cause lord knows GGP needs one)

Indeed in 1Q-2008 conference call and earnings release the company had mentioned that it “re-paid and re-financed” its $522 mn senior bridge facility and received an extended maturity date option for its senior bridge facility by additional seven months to January 31, 2009.

At the end of 1Q-2008, GGP’s outstanding debt on its senior bridge facility stood at $522 mn with maturity date of July 6, 2008 and an effective interest rate of 4.17%. However at the end of 2Q-2008, GGP had outstanding debt of $375 mn on its senior bride facility with a maturity date of July 6, 2008 and interest rate of 3.92%.

Although GGP had in its earlier conference call claimed to have re-paid $522 mn (through $375 of new mortgages and $147 mn of cash and equity offerings), the current outstanding of $375 mn at the end of 2Q-2008 could have been as a result of re-financing of its senior bridge facility under new terms. However GGP had also claimed in the conference call that it had attained an option to extend the maturity by additional seven months. But looking at the maturity date it seems that GGP had not amended the agreement to extend the maturity date of its loan, and in addition we have found no evidence of the existence of an option to extend such a date. If there is such an option, the only evidence of it that we have found is a statement in a conference call - which essentially is no evidence at all in my opinion.

Based on the careful analysis of the wording of GGP’s statement during its conference call - “re-paid and re-financed” prima facie, it may be difficult to allege that the company has not paid its loan since any balance outstanding could be as a result of re-financing the same loan. However GGP’s statement regarding extension of maturity date remains questionable due to the fact that they are still reporting an early maturity date and there is no evidence of said option to extend the date.

Did the revolver come back? - Yes, and is now larger than before

Yes, the revolver appears to be back. After paying it down to $0 in Q1 2008 from $430M, they have brought it back in force, tapping it for $450M.

As we can see, they had $275M of cash outflows on their properties, but tapped the revolver for $453M to make up for it. All this, with the revolver due in 2011, and yet *still* GGP had $2.6B due in 2008?

No explanation as to why it was fully paid down, and now no explanation as to why it is back.
Fact: At the end of 2Q2008 GGP had credit agreement revolver of $453 mn due on February 24, 2011 with an interest rate of $3.89% for which GGP did not released a press release.

Development capex - they cut by $600M last Q to $1.5B through 2012, or $316M per year. Any more or less? — They are cutting back as much as they can, which is perfectly understandable, but has the market discounted the fact that capex is the value engine for real estate?

Yes, it appears they are trying to cut back even further. They had this to say:

Last Q, they said they cut their plans back by $600M to $1.5B through 2012. It looks like as of Q2 2008, they have cut this down to $1B of future development spending (not known how much they spent during the Q). It looks like their development spending is grinding to a halt.

That being said, what is notable is how much they have due on active projects. In Q1 08, they showed $740M. In Q2 08, they show $870M. These are probably projects that are in the process of being completed. So at least in the short term, one cannot be completely sure that their spending plans are going down all that much.

This helps their likelihood of avoiding the “B” word to the extent that they are going to spend less and appear to be scared. However it is their current operations which are expected to do the bulk of the damage - they brought this upon themselves by seeding the seeds for real damage when credit was easy over the past 4 years.

In 1Q2008 GGP had announced reduction of aggregate future development spending by $600 mn while in 2Q2008 GGP had deferred development expenditure of $500 mn by additional 18 months. As the conditions worsen GGP would be forced to reduce its development capex and cut back its future dividends.

At the end of 2Q2008 GGP had total future development spending pipeline declined to $1.9 bn from $2.2 bn at the end of 1Q2008. The reduction in development spending was primarily on account of reduction in new project development spending which declined to $0.94 bn in 2Q2008 from $1.3 bn while expansion & re-development projects stood nearly at the same levels.

Additionally it’s worth mentioning that GGP is witnessing cost escalation on its development pipeline (which is to be expected with the spiking cost of construction, and spiking commodity and energy prices). GGP had increased its expected costs on re-development projects by $193 mn in 1Q2008 (24%) and a further $156 mn in 2Q2008 (19%) while on new development projects it stated cost escalation of $119 mn (10%) and $86 mn (10%) in 1Q2008 and 2Q2008, respectively.

How does lease termination income compare? Still well above where they should be!

Although GGP’s lease termination income declined to $7.5 mn (or 0.8% of sales) compared to $21.0 mn (or 2.1% of sales) 1Q2008, it is still 100% higher than its corresponding quarter last year and significantly higher than long-term historical average of nearly 0.3% of total sales. Lease termination income, which represents amount collected from tenants for termination of leases prior to its scheduled termination date, could be a source of potential problems for GGP in generating future NOI if these leases are not renewed or are renewed at significantly lower levels. In the wake of slowdown in consumer spending retailer’s demand for rental space is expected to be muted which means that GGP very well may have to forgo rental income on these terminated leases.

Selling any assets? Any “fire sale”? — Backing off from asset sale comments

There was markedly less talk about selling assets to raise cash. GGP’s message focused primarily on other forms of capital - mortgage backed securities, preferred equity, JV’s, and things of that sort. I guess they got stung by the “fire sale” commentary mentioned the last couple of times I brought this up.

No comment from John Bucksbaum in the PR announcement for the Q

This is what John Bucksbaum has said in the PR announcement for the past 3 Q’s:

• Q4 2007: “Our core retail real estate business continues to deliver solid operating results,” said John Bucksbaum, the Chief Executive Officer of General Growth. “We are prepared to handle the expected weaker economic environment and will be well positioned to benefit when the economy begins to show improvement.”
• Q1 2008: “Strong comparable operating results at our malls demonstrate that our business prospects remain positive,” said Chief Executive Officer of GGP John Bucksbaum. “Despite the challenging economic environment, our malls remain a very attractive venue for our customers to shop, for our retailers to do business, and for our lenders to lend. We remain confident as we look to the future.”
• Q2 2008: “ “… Nothing!

From a signaling perspective, this says something about how things have changed in the past few months.

Any change in tone about help from life insurance companies? - Yes, there was little commentary about them

In the last conference call, life insurance companies were mentioned multiple times as a potential source of capital, assuaging concerns over the failed CMBS market. Below are some references:

• Bernie Freibaum: “In January when that mortgage came due, we had offers from groups of life companies. We could have done a five-year or a ten-year mortgage at the same proceeds level, but given the things we want to change there and the outside growth in NOI, we didn’t want to commit to a long-term mortgage there either.”
• Bob Michaels: “You know, we have read that notion and stories and we’ve asked all the life companies that we deal with whether or not they are going to be out of money or we shouldn’t ask them if they are interested in making loans on our properties; and not a single one has discouraged us from doing that. Some of the loans we are paying off are from life insurance companies, and a lot of them want to maintain or grow their exposure to General Growth.