General Growth Properties Inc. Annual Valuation – 2015 $GGP

REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how General Growth Properties Inc. (GGP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): General Growth Properties, Inc. (GGP) is a self-administered and self-managed real estate investment trust (REIT). The Company’s business is to be an owner and operator of retail properties. The Company’s properties are located in the United States. The Company’s business is conducted through GGP Operating Partnership, LP (GGPOP), GGP Nimbus, LP (GGPN) and GGP Limited Partnership (GGPLP), subsidiaries of GGP. The operating partnerships own an interest in the properties of GGP. In addition to holding ownership interests in various joint ventures, the operating partnerships conduct operations through General Growth Management, Inc. (GGMI), General Growth Services, Inc. (GGSI), and GGP REIT Services, LLC (GGPRS). GGMI and GGSI are taxable REIT subsidiaries (TRSs), which provide management, leasing, tenant coordination, business development, marketing, strategic partnership and other services for Real Estate Affiliates and for Consolidated Properties.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
6. Moderate PEmg ratio – PEmg is less than 20 - PASS
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years - FAIL
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Balance Sheet – December 2014

Current Assets	$1,036,000,000
Current Liabilities	$1,090,000,000
Total Debt	$16,204,000,000
Total Assets	$25,336,000,000
Intangible Assets	$0
Total Liabilities	$17,730,000,000
Outstanding Shares	947,100,000

Earnings Per Share

2014	$0.69
2013	$0.31
2012	-$0.52
2011	-$0.37
2010	-$3.09
2009	-$4.11
2008	$0.02
2007	$1.18
2006	$0.24
2005	$0.32
2004	$1.15

Earnings Per Share – ModernGraham

2014	-$0.05
2013	-$0.80
2012	-$1.44
2011	-$1.69
2010	-$1.95
2009	-$1.08

Dividend History

Conclusion:

General Growth Properties Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, lack of earnings stability or growth over the last ten years, and the inconsistent dividend record.  The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of earnings stability.  As a result, value investors following the ModernGraham approach should explore other opportunities at this time.  From a valuation side of things, the company appears to be overvalued despite growing its EPSmg (normalized earnings) from a loss of $1.95 in 2010 to only a loss of $0.05 in 2014.  Due to the negative EPSmg, the company receives a poor valuation out of the ModernGraham model, as one of the most important things is for a company to not lose money, which this company has done over the long-term this company.  As a result, the company is considered to be overvalued at this time.

Be sure to check out previous ModernGraham valuations of General Growth Properties Inc. (GGP) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on General Growth Properties Inc. (GGP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in General Growth Properties Inc. (GGP) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia; this article is not affiliated with the company in any manner.