GGP Case Study: How Bill Ackman turned $60 million into $1.6 billion
"The greatest bet of Ackman’s career, and arguably one of the best hedge fund trades of all time, was Pershing Square’s turnaround of troubled mall operator General Growth Properties from the brink of bankruptcy, netted the hedge fund a whopping $1.6 billion return on a $60 million investment." Investopedia
Our takeaways (with potential application to today?):
-- Lack of understanding: Public markets and the media often misunderstand the extent of underlying real estate dynamics. The narrative coming out of the GFC was that consumers were struggling, therefore retail must be falling, therefore retail landlords would suffer.
-- Overreaction: GGP's sinking stock price fed the narrative, but GGP's problem wasn't falling retail sales or property values. GGP's actual problem was two-fold: (i) too much secured debt (mortgages) and (ii) concentrated loan maturities; in short, it had a wave of maturities at exactly the wrong time.
NYT in 2009: "General Growth Properties, one of the largest mall operators in the nation, filed for bankruptcy early Thursday morning in one of the biggest commercial real estate collapses in United States history."
-- Facts and nuance matter: GGP's bankruptcy was a major spectacle, but Bankruptcy doesn't always mean "collapse." GGP filed for BK to gain flexibility, not to pass losses on to creditors.
Bill Ackman's Pershing Square differentiated capital markets challenges from real estate fundamentals, built up a sizable position in GGP as it neared bankruptcy, then pressured potential buyers to push up the value of the entity as the Bankruptcy judge forced lenders to give GGP more time to refinance its properties.
In hindsight, GGP's bankruptcy was a perfect storm for narrative to diverge from reality. Pershing Square exploited it perfectly.
Stay tuned: We've highlighted two of Ackman's biggest wins (GGP and calling the housing market turn) but will also highlight losses in future posts...
PS - Most real estate players don't appreciate the infrequency of equity REIT bankruptcies. In the modern era, only mall operators (GGP, PREIT, CBL) have filed for bankruptcy, with no Chapter 7s.
You can read the entire case study here.
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