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CHICAGO-Bank of America Securities analyst Russ Nussbaum has downgraded locally based General Growth Properties Inc. from buy to neutral. While Nussbaum called the REIT's core mall business "healthy" in a newly released report, he expressed uncertainty about the company's anticipated cash flow from land sales it acquired in connection with its 2004 buy of Rouse Co.
The land tracts are in the Summerlin area of Las Vegas, Woodlands TX and Columbia, MD, and the report indicates that the Las Vegas-area holdings pose the greatest potential risk. Referring to BofA's homebuilding analyst, Dan Oppenheim, Nussbaum says homebuyer traffic in Las Vegas "has trended well below expectations the last few months." According to housetracker.net, the median asking home prices are down 4.3% in the Las Vegas market over the past 12 months, and inventories of homes on the market have risen 44.2%.
GGP sells off land parcels to homebuilders and generates gains on the sale. Nussbaum acknowledges that this business drives only about 5% of GGP's funds from operations. Yet, he suggests that some of the land deals GGP expects to close this year "could be delayed into 2007 and/or margins could be squeezed as builders attempt to negotiate prices.
"(GGP) management's guidance is based on contracts and handshake deals with homebuilders," Nussbaum adds, noting, "homebuilders have recently shown no hesitation to delay land purchases and negotiate lower price on land in weaker markets." As a result, Nussbaum says, "we see the potential for another reduction in guidance over the next few months if the in-place deals with the homebuilders in Summerlin do not materialize in Q4. This would not help sentiment toward the stock, as the company has missed consensus estimates in two of the last three quarters and reduced guidance in Q2."
The report concludes, however, a belief in the potential for upside to GGP shares "at some point." The BofA model for GGP shows that the REIT is capable of producing double-digit growth over the next few years, driven by internal growth of between 4% and 5% and a $2.4-billion development pipeline. "Interest rate risk will be in the past, and Rouse integration benefits should be more apparent," Nussbaum concludes. "Forecasts for the land business will be low, allowing the focus in 2007 to shift to the core mall business."
Shares of GGP opened on the NYSE on Monday, Sept. 18 at $48.11 a share, exceeding BofA's $47-a-share target. The 52-week high is $52.32 a share, reached on Feb. 21 this year, while the 52-week low of $39.60 a share occurred on Oct. 13, 2005.
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