Lessons From Pershing Square's Ackman

By Eric Jackson, Senior Contributor

03/03/10 - 06:24 AM EST

Stock quotes in this article: GGWPQ.PK , SPG , BAM , VRO , TGT , BGP , MBI

Last week, I got a chance to hear a speech by William Ackman, the CEO and founder of hedge fund Pershing Square Capital Management. If you're not familiar with this activist investor you should be, because his investment approach offers some valuable lessons.

Ackman's been in the news a lot over the past year or so.

Bill Ackman, CEO of Pershing Square Capital Management.

He took a long position in General Growth Properties(GGWPQ.PK Quote) in November 2008 and then watched the stock go from 35 cents to more than $13. The company is now the subject of a bidding war between Simon Property(SPG Quote), Brookfield Asset Management(BAM Quote) and possibly Westfield and Vornado Realty Trust(VRO Quote)

He also ran a high-profile proxy contest against Target(TGT Quote) last year that failed to win him a seat on the retailer's board, although Target's shares are still still up substantially since he launched the contest.

Unlike most funds run by activist investors, Ackman's is not a long-only fund. He typically holds eight to 10 positions, with a couple of those being short. Because of that positioning, he's done well over the last few years and has remained active and outspoken.

Always a good speaker, Ackman has definitely ramped up his media appearances over the past couple of years. Pershing Square now manages more than $6 billion in assets, with a team of six investment professionals including Ackman.

Ackman describes the fund's strategy as "concentrated, fundamental, research-intensive, and long-short." The fund charges investors 1.5% in annual management fees and 20% in incentive fees.

Pershing Square has averaged 24% annualized returns since its founding in 2002. At the moment, the fund is 23% in cash.

It never uses leverage and almost never invests in industries that use a lot of leverage, are highly sensitive to interest-rate shifts or are commodity-related. (According to Ackman, the one investment that violated this rule was Borders(BGP Quote), which has lost 95% of its value since Ackman invested in it, although Ackman says at these levels it's a great value.)

Ackman wouldn't describe his firm's strategy as activist, either on the long side when he's gone to battle with Target or on the short side such as with bond insurer MBIA(MBI Quote), which Pershing Square first shorted in 2002.

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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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The Battle of the Mall Operators

By Eric Jackson

RealMoney Contributor

2/25/2010 9:30 AM EST

It's been interesting watching the emerging battle between Simon Property Group (SPG - commentary -Trade Now) and Brookfield Asset Management (BAM - commentary - Trade Now) over General Growth Properties.

General Growth filed for bankruptcy-court protection last year. Simon Property came out a week ago with an offer for the entire company, which would help it put a stranglehold on the high-end mall business in the U.S. Yesterday, however, word leaked out that Brookfield was helping General Growth to restructure and emerge from bankruptcy as two new companies. Brookfield has the upper hand in this battle, and its investors seem to like what they are hearing.

A year ago, no one wanted to be in the business of running malls. Consumers were in a bunker mentality, dimming the prospects for retailers. Traffic to malls was plummeting. The mall owners were stuck with commercial real estate that was dropping in value from its highs in 2007, and mountains of debt had to be rolled over at some point in the future.

It was this terrible macro environment, plus a coming liquidity crunch, that drove high-end mall operator General Growth into bankruptcy last April. This was a still-solvent company that couldn't roll over its debt.

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[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

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Intellectual Activism's Impact On General Growth

By Eric Jackson

12/23/09 - 06:01 AM EST

Stock quotes in this article: GGWPQ , SPG

NEW YORK (TheStreet) -- It used to be that activism was conducted by poison letters to management from Dan Loeb, or by acerbic rhetoric leaked to the mainstream press from Carl Icahn. But a new kind of activism is being waged by leading hedge funds with positions on both sides of the trade in bankrupt mall owner General Growth Properties(GGWPQ Quote).

Pershing Square Capital Management, Hovde Capital, and T2 Partners are taking turns exchanging their analyses on why they think the stock is under- or over-valued. These intellectual arguments aren't just academic pursuits. They're having large effects on the stock price. Some of the smart money will be right, while others won't look so smart a year from now. Here's what you need to know to take advantage of this new kind of activism.

General Growth started in 1954, when two brothers founded a strip mall in Cedar Rapids, Iowa. The company hit a $20 billion market capitalization in April 2007 and is now one of the top mall owners in the country today. But General Growth took on a lot of debt in the credit expansion and was unable to roll over this debt when the lending markets froze, leading to their bankruptcy in April.

The company entered bankruptcy on April 16 with its common shares trading then at 60 cents each The shares have had quite a run since then, touching $12 two weeks ago.

Back in May of this year, Bill Ackman of Pershing Square profiled the bullish case for General Growth at the Ira Sohn Research Conference. He laid out a convincing case for the unique value embedded within General Growth. Unlike the vast majority of bankruptcies, Ackman argued General Growth's was unusual because its net assets were greater than its net liabilities. The company had a liquidity issue, not a solvency issue, Ackman said. Occupancy rates were still high, net operating income (NOI) was steady, and the company owned some of the more prestigious malls in the country across a wide footprint, he contended.

In the extremely conservative scenario, Ackman suggested that the equity value of General Growth was $10 per share at that time. With more normalized assumptions, giving value to the management company and several undeveloped properties and assets, Ackman said the equity value per share would be above $30. As long as the broad economy didn't sink into a severe recession, Ackman said he expected there would be value for equity holders after creditors were compensated.

[This post is an excerpt of the full article, which available on TheStreet.com by clicking here.]

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