Posted by: Aaron Pressman on April 16, 2009
Apropos of one of my colleagues’ posts yesterday on the future of retail, now comes news that mall giant General Growth Properties (GGP) has filed for bankruptcy protection. The company’s shares, already down 97% from their late-bubble heights, are taking it on the chin today, down 15% in pre-market trading to about 89 cents.
The real estate investment trust and its largest shareholder, hedge fund manager Bill Ackman, maintain that this is just a liquidity problem. General Growth had debt that matured and it couldn’t refinance because the credit markets remain in tatters. Ackman, who has bought up a large position in General Growth stock, maintains that the company’s assets are worth far more than its $27 billion of debt so his shares and those of other equity holders will not be wiped out as they would in a typical Chapter 11 reorganization. But I can’t remotely suggest following Bill or other bulls like Todd Sullivan of the ValuePlays blog — not by a mile (though I do thank Todd for posting links to all the key bankruptcy documents).
It almost goes without saying that Bill Ackman is a very smart guy, maybe even a very, very smart guy, but I think he’s fallen in love with his position here and he can’t see that the world has radically shifted over the past few months.
Maybe an analogy can help clarify the situation. Let’s say that in 2006 I borrowed $1 million on a three-year, interest-only loan to buy a house for $1.1 million at the height of the real estate bubble. I planned to pay off the principal with a big bonus I expected to receive. But now that the loan is due, I don’t have the bonus and I owe $1 million to the bank right now. The bank has since realized that lending 90%+ of the value of overvalued properties was a big mistake. So I guess I have to sell my house. No biggie. Whoops — the realtor says if I put it on the market, it’s only worth $750,000 now.
So do I have a liquidity problem? The bank won’t lend me the money I need. Obviously not — the true, current value of my house is considerably less than the value of my assets. To suggest that the problem is that lenders won’t lend on the same old irresponsible, crazy terms that caused this whole mess is to suggest black is white, up is down or the Tampa Bay Rays are the best team in the American League East. Well, maybe scratch that last one — the Rays do look solid.
So what about the $29.5 billion of “assets,” aka malls, that General Growth Properties and Ackman point to as being worth more than the company’s $27 billion of debt? Does anyone honestly believe that at today’s prices (and with today’s stricter lending standards constraining buyers) those malls are worth what General Growth paid for them? As the Wall Street Journal notes in this morning’s story, Green Street Advisors, one of the top investor research outfits on REITs, is predicting that commercial property values will decline 40% in the current downturn. And I’d argue retail properties will probably get hit even harder than the average given the consumer’s increasingly dire financial position and the changes we alluded to yesterday. Green Street says probably 60 of General Growth’s 200 malls carry mortgages that exceed their current value. So even at 89 cents a share, it still looks pretty bleak out there for remaining GGP shareholders.
As a final aside, I’ll note that either I am a victim of a little regional bias or the management of General Growth Properties may not be as savvy as some believe. They own one of the biggest malls in New England, the Natick Collection, not far from my house and we shop there often. A few years ago, they loaded up with debt to expand the mall with a massive ultra-high-end luxury wing and million dollar condos. It seemed like folly at the time, seems even dumber today with most of the condos unsold and the lux wing deserted most of the time. For more, see coverage at the Paper Money blog.
UPDATE: The Distressed Debt Blog has already be rifling through the filings and sees just a 50 to 60 cent recovery for Rouse bondholders (GGP acquired Rouse in 2004 and assumed the debt). That’s great if you bought the bonds recently for less but I don’t think that implies there will be much left for equityholders.