RSE - Rouse

[Olmsted]

GGP is spinning off a bunch of its less-desirable “B” malls in a new entity called Rouse.  These malls generate lower rents per square foot than the rest of GGP.  I think the idea is that by spinning these off, GGP’s metrics and valuation will go up, and the less-desirable malls will be valued as they are.  Also, management challenges for these malls may be different than the “A” malls that dominate its portfolio, and separate teams would be better equipped to manage the two companies.  Whatever the reason, here are the numbers:

 

$160m core net operating income for the real estate, $200m cash against $1.13b debt.  One metric to value commercial space is cap rate (basically, yield in NOI per value of the real estate).  A cap rate of 8% implies a value of their real estate of $2.0b, for an equity value of $22.13/share.  A cap rate of 9% gets equity to $17.70/share.  Shares closed yesterday at $11.27, which is stupid cheap.  $11.27 implies a cap rate of 11%, which is really in distressed territory and far too high.  For comparison, GGP and SPG have bounced around cap rates from 5%-7% over the last year or so.

 

And what makes me more confident is the rights offering.  That $200m cash I included in the valuation is actually from an upcoming rights offering at $15/share.  Brookfield Asset Management has agreed to backstop the offering, purchasing any shares not exercised.  Since they already own ~35% of GGP, that means they will own 35% of Rouse, exercise their own rights, and are looking to expand their stake by exercising any unused rights of other shareholders.  Brookfield is not known as dumb money, which tells me that $15 is attractive.  $11-$12 is even better.

 

Someone tell me what I'm missing!

 

#spinoff

#specialsituation

#rightsoffering

[hyten1]

i have been following ggp, hhc and now rse

 

my numbers are similar but not quite the same

 

i use ffo (for 2011) of around 50mil, at 35.5mil shares (pre warrant) with cap rate of 9% i get about $15.6 per share

 

 

[Olmsted]

My apologies for leaving out some important details.

 

The spinoff has not yet happened; shares will be distributed on 12 Jan to shareholders of record at the end of 30 Dec.  However, the shares have started trading on a when-issued basis.  The symbol probably varies based on your trading system, but it will be some variation of RSE-WI.  I've updated the name of the thread accordingly.

 

GGP shareholders will get .0375 shares of Rouse for every GGP share.  It looks like the new Rouse shareholders will get one transferable right for every 2.6 Rouse shares they have.  I am not sure whether someone buying Rouse when-issueds now gets the rights, or whether they are being distributed to GGP shareholders.

 

Disclosure: I'm long as of today.

 

Writeup on Stock Spinoffs:

 

http://www.stockspinoffs.com/2011/12/general-growth-properties-rouses-rouse-from-its-slumber/

 

Spinoff Presentation:

 

http://investor.ggp.com/common/download/download.cfm?companyid=GGP&fileid=487603&filekey=AD06CB00-0231-4F25-8F8C-D41A5A88460B&filename=Document2.pdf

 

Form 10:

 

http://investor.ggp.com/common/download/download.cfm?companyid=GGP&fileid=494836&filekey=DF0450B6-157E-408D-9077-24738DB925FF&filename=Rouse_Form_10_--_General_Form_for_Registration_of_Securities_August_29_2011_.pdf

 

[Olmsted]

i have been following ggp, hhc and now rse

 

my numbers are similar but not quite the same

 

i use ffo (for 2011) of around 50mil, at 35.5mil shares (pre warrant) with cap rate of 9% i get about $15.6 per share

 

Thanks Hyten, you're right, I read the FFO number incorrectly.  $50m looks correct.  And the NOI number of $161.5m for 2010 is actually "Core NOI."  Reconciliation of the two metrics is on p. 9 of the Form 10.  Still figuring out which is more relevant.

[BargainValueHunter]

http://www.businessweek.com/news/2012-01-13/general-growth-completes-spinoff-of-30-retail-centers-into-rouse.html

 

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.

[thomcapital]

Are there any good public comps you would recommend?

[Baoxiaodao]

GGP is spinning off a bunch of its less-desirable “B” malls in a new entity called Rouse.  These malls generate lower rents per square foot than the rest of GGP.  I think the idea is that by spinning these off, GGP’s metrics and valuation will go up, and the less-desirable malls will be valued as they are.  Also, management challenges for these malls may be different than the “A” malls that dominate its portfolio, and separate teams would be better equipped to manage the two companies.  Whatever the reason, here are the numbers:

 

$160m core net operating income for the real estate, $200m cash against $1.13b debt.  One metric to value commercial space is cap rate (basically, yield in NOI per value of the real estate).  A cap rate of 8% implies a value of their real estate of $2.0b, for an equity value of $22.13/share.  A cap rate of 9% gets equity to $17.70/share.  Shares closed yesterday at $11.27, which is stupid cheap.  $11.27 implies a cap rate of 11%, which is really in distressed territory and far too high.  For comparison, GGP and SPG have bounced around cap rates from 5%-7% over the last year or so.

 

And what makes me more confident is the rights offering.  That $200m cash I included in the valuation is actually from an upcoming rights offering at $15/share.  Brookfield Asset Management has agreed to backstop the offering, purchasing any shares not exercised.  Since they already own ~35% of GGP, that means they will own 35% of Rouse, exercise their own rights, and are looking to expand their stake by exercising any unused rights of other shareholders.  Brookfield is not known as dumb money, which tells me that $15 is attractive.  $11-$12 is even better.

 

Someone tell me what I'm missing!

 

Olmstea, I bought into this one. Thank you so much for sharing this idea.

[Olmsted]

Nice bump today.

 

As far as comps: SPG, GGP, and Taubman have higher-end properties, so they're out.  ROIC comes to mind.  So does Glimcher, but checking one of their presentations actually shows that only a small proportion of their malls have sales/sf similar to Rouse - most are better.  CBL, PEI, and MAC are candidates, but I haven't done the sales/sf comparison with Rouse.

[Evolveus]

Anyone here plan to exercise their RSE rights if common passes exercise price?  I know that Brookfield Asset Management is backstopping the offering.  Additionally, if a rights owner exercises their entire rights allotment, they are qualified to participate in the Over-Subscription if total rights issued are not exercised. 

 

That is all fine and dandy, but as of now, the rights are worthless with RSE @ $14.81.  Their filing did state that they could extend the expiration date of the rights.  Is that a common occurrence? 

 

In regard to the RSE common, since they intend to convert to a REIT at their first tax filing, it could provide a substantial boost for all those yield seekers.  I know its somewhat apples to oranges, but the high yielding trust spin-offs from CHK and SD have appreciated nicely upon going public.