Chartering A New Course

You could say that the wedding and subsequent month off has really knocked me out of my rhythm since getting back. That has certainly been a really good thing, as there is nothing worse than letting life's undercurrents pull you along in whatever direction it chooses.

I have taken the title of my last entry (time to reassess) to heart and have been taking a long, hard look at what I want to do next both professionally, not to mention spending all of yesterday looking at houses, as I think 2010 will be the year I finally pick up a place at last.  Buying your own house (as opposed to properties to rent) are a total waste of money, and should never be viewed as investment.  

Their 'return' is largely an illusion given the multitude of hidden costs, not to mention the opportunity cost from what returns all that money tied up in a property could yield elsewhere.

Anyway, It was over drinks with a number of former colleagues that I got into some serious banker-beer analytics on why I find my current job at the bank so utterly dull these days. I think it is easy to explain: ever since the work become reactive (the Time Wasting Insolvency Initiative, which was panic fuelled by the events of October 2008), the work is not remotely analytical based.  As such my role has increased in responsibility but decreased in actual interest.

So it was that on my fifth pint with a good friend of mine, who has moved over to one of the other banks, concluded I ought to get out of what I am doing and become an investment analyst with a view to eventually trying to climb the greasy pole into full asset/portfolio management.  It was the sort of matter-of-fact statement that makes it sound like the easiest thing in the world.

Despite that, it was a bit of a lightbulb moment, as I had not seriously considered the prospect of a complete move out of my area until now.  However I am certainly never one to rule out ideas as 'impossible' simply because they might be difficult. So despite my inebriated state I filed that and mulled over it at work for the next week, eventually concluding that doing something I have been meaning to for the last 5 years would be a useful first step.  

As such I signed up for the CFA (Chartered Financial Analyst) programme a couple of weeks ago, and that is naturally going to take up a great deal of time over the next 6 months alone.

To anybody who has taken the time to read some of my previous entries, it probably won't come as a great surprise to realise that I have a passionate interest in investing, not to mention an unusual willingness (and bizarre enjoyment) in carrying out the associated due diligence and analysis required to make sure the important decisions are the right ones.  The CFA course itself looks to be largely areas I know a lot about anyway, so this should just be useful in really ensuring I fill in the knowledge gaps as I go along.

The benefit for all of you guys, is that I will start producing far more concise, better quality research and analysis over the coming months as I go forwards.  Unlike the hoards of people blogging and making recommendations ultimately to make money, I'd rather help in my own small way in the development we all undergo as investors from those first, emotion-driven small dips in the water, through to spending hundreds of thousands based on a cold, worked analysis thesis.

And on that subject, we can celebrate the first anniversary of my initial position that I took in General Growth Properties.  I have obviously been following developments with the company with a great degree of interest over the past fortnight regarding GGP's lender blueprint that it has fast-tracked with many of its major secured lenders, and of course the news the day before from Simon Property Group that they have hired Lazard Frères with a now open interest in acquiring some or all of GGP.

All excellent news for the share price of course, which has rightly repriced upward sharply into the $6 territory, and will almost certainly continue rising over the coming months as further news regarding lender settlements and takeover rumours begin to gather pace.

To anybody sitting on the sidelines, now remains a very good time to look at General Growth Properties as an investment.  Despite concerns regarding the impact of share dilution from many, this is becoming an increasingly less important factor as the company market capitalisation increases.  Limited asset sales to raise a couple of billion could easily be agreed with SPG or rivals to reduce that $6.5bn figure further, so I see this as a minor downside on the upward direction of the stock price over the next two years, as risk perceptions reduce and the market continues to reprice the stock accordingly. 

Oh, and on a final note, the job market here in the City of London has bounced back hugely in the last few months.  After screwing up the global economy, there is no irony that the sector is the first to be firmly out of recession.  The major banks are all haemorrhaging good people now - people who are generally fucked off after the last two years of being treated badly and overworked by employers that are now making plenty of money (courtesy of cheap and easy government money).

As such, the already understaffed banks are now desperately hiring - my own being no exception.  Naturally I am never one to turn down an opportunity, so have already had a couple of interviews in the last week and could take jobs with them now if I wanted based on the feedback.  It is the best market I have seen since 2005/6, and so despite the longer term aim, I shall probably use this as a moment to cash in on the prestige/name of where I work and up my earnings by 30-40%.  It would be rude not to...

Business Valuation In Chapter 11

Pershing Square's much anticipated second quarter letter finally leaked onto Dealbreaker recently, and it was interesting getting some perspective from Bill Ackman on the fund's performance, successes and candid admission of mistakes and missed opportunities during that period.

I won't reiterate the various comments made in the section around General Growth Properties beyond two quotes. Firstly the final comment:

"..GGP is a highly leveraged company and there continues to be substantial uncertainty about the potential outcomes for GGP security holders." Pershing Square Q2 2009 Shareholder Letter

It was good to see an appropriately cautionary note raised around General Growth Properties share valuation, and to make sure that those currently looking at recent returns remember that this remains a risky investment. However that is also why in theory despite large rises to date, it still remains potentially excellent value.

The headline $40/share figure that everybody has latched onto comes from Ackman making a very high level statement that the REIT most comparable to GGP is Simon Properties. That is definitely true in terms of size, portfolio quality and overall market position, although obviously not in terms of risk. Ackman uses this purely to demonstrate that assuming GGP risk reduces as Chapter 11 negotiations proceed, and clarity is gained relating to shareholder dilution, then we should look at General Growth eventually trading at an equivalent cap rate.

That gives a $40/share figure based on the current portfolio and capital structure, but crucially assumes a best case scenario of zero dilution for shareholders. It merely highlights potential, and is not intended to be some sort of predication of future value. Anybody reading the report and assuming otherwise would be wise to consider further this comment:

"The balance of GGP's value should inure to the benefit of the company's shareholders. As a result, the company's valuation will likely play an important role in determining recoveries for shareholders." Pershing Square Q2 2009 Shareholder Letter

Determining Value In Chapter 11
So what are the crucial factors that will determine GGP company valuation within Chapter 11, and how is this process going to work?

This e-zine article on determining value within Chapter 11 does make a number of interesting points about factors that could impact GGP. To my mind the key factors are as follows:

1. Valuation Experts
There will be various external specialists within the commercial real estate sector able to provide an accurate market assessment of the current asset valuations of General Growth Properties. Representatives will be put forwards behalf of the creditors and debtor (GGP).

2. Valuation Methodologies
Methodologies will need to be applied, and will be scrutinised by the Court in detail to ensure impartiality and accuracy. These typically consider a wide number of factors: potential competitors available to purchase assets (i.e. market demand), industry trends (i.e. falling property values, occupancy rates and profitability) and general valuations of comparable rivals - this goes back to SPG.

3. Assumptions
Any disagreements will be submitted to the Court for resolution. One example in the article is a case where valuation cited by the creditors applied a 'bankruptcy taint' impairment if the company remained whole - presumably due to reputational damage. In GGP's case I do not think this will apply due to market conditions and the business continue to operate meantime.

4. Asset Liquidation vs Going Concern
Here valuation experts will give an assessment on which scenario maximises value, and will account for extenuating factors such as exceptional market conditions. It may be within this that some sell off of assets is agreed and included in the plan to reduce leverage.

"The premise of value utilized in the valuation process assumes either a 'going concern' or 'liquidation' of the subject. The Bankruptcy court utilizes the outcomes of these different assumptions-based approaches to make its determination."

Company specific risk will be the main consideration here, and in the case of GGP, there is a particularly strong case for its viability as a going concern: i) positive cashflow generation, ii) ability to raise DIP financing in a distressed market, and iii) voluntary servicing of creditors despite an automatic stay.

The coming months will see some interesting discussions around the above points, and it will be this determination of value and willingness to extend maturities that will ultimately decide how much or little equity value is retained by common shareholders.

Tax Is A Four Letter Word

Golden Exuberance
Gold prices have surged in recent days, with the price pushing up above $1000 per troy ounce, and close to its all time high. I have expected strength throughout 2009 and so have been looking for a rise like this, which is why I took a fairly signficant position back in January. Additionally it has served as a useful hedge against both inflation and my substantial US dollar holdings.

As of this morning I took the decision to realise my gains - a fairly modest 12% but not bad over 9 months. I am not alone in believing the recent rises are unsustainable, as this article on gold prices from the Daily Telegraph outlines.

"London's leading gold forecaster has advised clients to liquidate holdings of gold and silver until the latest speculative fever abates."

I still adamantly believe that inflation is a near certainty in 2010 and beyond, as this is the easy way for politicians to offset the enormous debt that all the government support has lead to over the last year. As such I will be watching the gold price carefully over the coming months, with an aim of buying in once there is a fall back. On that note, I have continued to be surprised by the strength of the wider market recovery since March - it seems to have gone beyond rational, and a correction is necessary.

Investors seem to have become inebriated on the 6 month returns, a classic sign a bubble is forming that will surely deflate once institutions take a cold look at the economic fundamentals in the coming dark months of autumn.

Addendum: just logged back in today (Sep 18) and noticed this video linked to the right under CNBC: Commodities also discussing gold stocks losing their lustre which is worth a watch.

Capital Gains
Inevitably a significant question for any investor is when to realise profit (or loss - the latter is equally important). Like all investment decisions, that should never be taken rashly and certainly never based on emotion.

With GGP up around 600% now since bankruptcy, and for me around 300%, I am sitting on an unrealised profit of around £250,000 (approx $400,000) at present. You might think I would also contemplate cashing in, however I consider this investment between 6 and 24 months away from reaching fair value. Additionally realising a gain of that level requires careful planning, so I am beginning to look at ways of reducing the tax level payable. Sorry Gordon, I am already 'contributing' enough to the UK's recovery.

On the subject of GGP, its spectacular rises in recent days will also likely see a correction back soon enough, although the upward trend should continue. It has been fuelled partly by the wider market reassessing the firm as a value prospect, institutional buyers returning and crucially the belief that existing shares have a significant chance of retaining value.

That has been helped by further comments on Bloomberg by David Simon of Simon Property Group yesterday, describing SPG as a "logical buyer" of General Growth Properties assets. Limited asset sales at the right price are in everybody's interests here so a deal with some of the major REIT's is looking increasingly likely to be announced over the coming months.

Deleveraging GGP is important, and is rather like selling a holiday home to reduce the mortgage on a main house: it might seem a shame, but ultimately is the route to being financially healthier in years to come through lower debt. Of greater significance to me however is this news that the US Treasury has taken on board the significant criticisms of the tax rules that penalised those seeking to manage distressed debt.

Of course, this was cited as a major factor in the inevitability of General Growth Properties needing to restructure within Chapter 11. The removal of this sends a powerful message to the credit markets that renegotiating in these times is not just possible but expected. That benefits all REIT's, but also GGP for those loans in the joint venture SPE's that are outside bankruptcy.

It also benefits General Growth by providing further evidence that equivalent extension deals will be being agreed on the wider market when included in the restructuring plan and submission to the court. I would be surprised if we did not see GGP's share price at $8/share or higher by next spring based on the current news and developments.

How Much Extra To Move Jobs?

That's the conundrum I have been faced with this morning, following another headhunter call. Of course, the salary levels they claim are usually best-case and designed to hook you into taking it further. This one dangled the prospect of an extra £50,000 increase in my base salary if I moved.

However after about 5mins deliberation, the answer is going to be 'no'. It is certainly tempting from one perspective, but one problem is that the bank in question is terrible: without naming names, one of those suffering from merger pains, combined with being incompetently run for years - hence is on government life support and has made huge losses.

Most of all though, there is more to this than just money. Let me just reassure you that there is no loyalty for the bank, or love for the 'unique team culture' - every bank spouts waffle about it being a giant family and that they are the best. Unfortunately the brutal culling of staff in the last year merely illustrated the fallacy to those corporate clones too stupid to see it before.

Working for yourself is the only place to aim for in life. So yes, an extra £50k now would be nice, but the cost is all of the hassle and risk of a new job. When I factor in work on my business ahead of the launch later this year, I realised what is much more important to me. At present I have got time to work on this almost daily, but that could easily change with a new boss on my shoulder, and needing to forge a reputation at a new place.

Anyway it's an interesting question, and highlights to me how my priorities have changed so significantly since I mentally made the jump towards my aspirations being out of the sector.

Although not yet announced, Pershing Square are about to submit a counter-offer on the DIP financing. It is unsurprising because without the innovative equity conversion option they had included as the DIP financier, they lose a valuable hedge against their significant existing holdings. This will be good news for GGP again, as any competition around terms of financing benefits the firm - I am just hoping to see the equity conversion option dropped, but matching the other loan terms with a lower interest rate is a more likely sweetener.

Otherwise Reuters reported last week that Simon Property Group have raised more capital in another significant stock offering. They cite the reason being for "general corporate purposes", but pointedly there is no longer a denial of interest in future acquisitions, just citing timing.

Due to the market saturation (in the US) of mall owners, all of the REIT's need to expand their market shares through acquisitions. As such, and despite denials, Westfield are also lining up to compete with Simon and Vornado (who have openly admitted interest) for any asset sales that GGP decide to put out there.

As with DIP financing, it is much better to have competition in a sale like this. On an unrelated rumour, the Court will reconvene tomorrow to review the DIP financing options and progress further. For now this is a side show to the bigger issue relating to creditors and the SPE inclusions discussed in my last post.