* Mall operator's shares nearly worthless, Hovde says
* More optimistic analysis used outdated cash flows
(Adds analyst estimate, closing share price)
BOSTON, Dec 15 Just when it appeared the optimists had been proven correct about bankrupt mall owner General Growth Properties Inc GGWPQ.PK, a new investor has emerged arguing the company's shares are likely worthless.
Hedge fund manager Eric Hovde, who oversees about $1 billion of financial and real estate investments, disclosed this week he is shorting General Growth, after the stock more than doubled in the past month.
General Growth shares gave back some of the recent gains on Tuesday as investors digested Hovde's analysis. The stock lost 9 percent to close at $9.83.
Because of the dramatic decline in consumer spending and plummeting prices for commercial properties, the 200 malls and other properties owned by General Growth are worth less than the associated debt, Hovde argued in a 38-page analysis entitled "Fool's Gold."
"Due to highly leveraged acquisitions near the peak of the cycle, a decline in the overall economy, and insufficient capital spending, we believe the assets of General Growth no longer support the current capital structure," Hovde wrote.
Hovde's firm, based in Washington, D.C. did not immediately return a call for comment.
General Growth's net operating income for the 12 months ended Sept. 30 was $1.73 billion, down from $2.36 billion in calendar 2008, Hovde noted. The most recent figures included impairment charges of $455 million and other costs associated with the bankruptcy.
Hovde also noted that new and renewed leases in the third quarter were struck at $31.29 per square foot compared with a rate of $46.57 for all of General Growth's leases, a 33 percent decline. Prior leases on the same properties covered by new and renewed renters paid $35.43, indicating a 12 percent drop.
A critical element of the debate revolves around capitalization rates, a valuation metric used to assess real estate investment trusts such as General Growth. The cap rate establishes a REIT's value by setting the annual return an investor requires on the REIT's net operating income.
During the height of the real estate bubble, some mall REITs were valued at cap rates of 5 percent or less. Today, most are above 7 percent. Higher cap rates translate into lower stock prices.
At an 8.5 percent cap rate, Hovde estimates that General Growth shares are worthless. At a 7.5 percent rate, the shares are worth $5.73, or about 40 percent below the current price.
A spokesman for General Growth had no immediate comment.
After General Growth announced a partial debt restructuring last month, analysts at Green Street Advisors, one of the leading REIT research firms, pegged the value of General Growth's shares in the mid-teens in a possible acquisition deal.
Some of General Growth's competitors, including Simon Property Group Inc (SPG.N), have been buying up its debt and could make a play for some or all of its assets.
The company was back in bankruptcy court on Tuesday obtaining approval for its plan to restructure $10 billion of debt secured by some of its vast property holdings [ID:nN15214237]. The mall operator must still come up with a plan to revise another $5 billion of secured debt and $7 billion of unsecured debt.
Hovde's presentation took aim at the investment case for General Growth written by William Ackman, manager of Pershing Square Capital. Ackman, who now sits on General Growth's board, declined to comment.
General Growth, the second-largest U.S. mall operator, filed for bankruptcy in April after it was unable to refinance some of its maturing debt. The stock, which traded as high as $67 in 2007, hit a low of 32 cents after the filing.
But the stock moved up to the range of $3 to $4 a share after Ackman released a presentation in May touting the company's value. The shares then skyrocketed to more than $10 last month on news of the partial restructuring deal. (Reporting by Aaron Pressman; editing by Andre Grenon)