Bankrupt General Growth Properties Says It Will Be Fine--Maybe

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.

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Reader Comments

Dan

April 16, 2009 06:04 PM

Aaron,

Your analogy is not fair in that GGP is not waiting for a bonus to pay off the debt. The issue here is that the debt is mostly short term financing with a balloon payment at the end. The lack of available refinancing is largely due to the credit crunch and not the value of the mall properties. If these were all financed with long term mortgages, GGP would have no trouble paying off the principle and interest over the life of the mortgage debt term. I believe that Mr. Ackman may have a valid point in his belief that GGP stock may have value because of this situation.

Mike

April 16, 2009 07:09 PM

I was going to make the same comment as Dan. You stop short with your analogy about paying off the house with an expected bonus that failed to materialize.

Take it further...

If you still have a healthy income and can make your interest payments (as in GGP's case), would the creditors prefer to receive 75 cents on the dollar now or work with you to restructure your loan so that they are made whole later?

In the case of GGP creditors, Ackman is betting that they'll want to avoid a fire sale liquidation of GGP assets, because (a) the proceeds realized will not be anywhere near enough to make creditors whole, and (b) banks will want to avoid such a scenario because it would also mean having to mark down the value of GGP loans/debt on their books, which would further erode their capital ratios and inhibit their ability to lend.

Ackman doesn't dispute that the equity would be wiped out in a liquidation. He's just betting that no one is irrational enough to try to force one to occur.

Mike

April 16, 2009 10:57 PM

This is a simple case of not saving for a rainy day and getting way out of line with expansion. The Rouse deal definitely was a huge risk that didn't pay off (obviously), but they should have taken a more conservative approach and socked some of that money away. I think they would be in much better shape if they hadn't been chasing Simon for all this time.

dick

April 16, 2009 11:54 PM

They(ggp) operated with a line of credit that let THEM(ggp) down. THEY (ggp) were doing their part.

brian

April 17, 2009 01:28 AM

so what our our shares of GGP worth that we are holding right now,will it be trding again soon?

arthur

April 17, 2009 10:02 AM

put john bucksbaum and his cohorts in jail

Peter

April 17, 2009 01:57 PM

This is so ironic. I live in Malaysia and a shareholder of GGP. I will be taking a vacation in Vegas next week and will be staying at the Palazzo at Venetian and probably would shop at the resort, which happened to be owned by GGP. I don't really care what others say, but the bottom line... should I hold it or should I dump it?

Dustin Johnston

April 17, 2009 05:11 PM

GGP and stockholders stands to come out of this with flying colors if they play their cards right. Friends of mine proposed to their management a practical way to work with hedgefund investors on portions of their real estate portfolios. There is also a green-side to the story as well. For more information, contact
Dustin Johnston
Keller Williams Commercial
dbgroup@kw.com
619 469 0700

P.S. Please have Bill Ackman give me a call!

neil

April 18, 2009 06:29 AM

Aaron, your error is in not appreciating how old some of those purchases are. That 29.5 Bn is the purchase price.

Some of those purchases were made many years ago and could eaily withstand a 40% drop because they're up 100% or more in the last 10-20 years.

Furthermore some of the more recent purchases are none-recourse so they can simply walk away from the debt.

I haven't invested because I can't quantify these numbers but you haven't fairly represented the bullish case.

Wynn

April 19, 2009 11:06 PM

Looking at Rouse bond price might be wrong. There is a theory that the Rouse bonds are only secured by the Rouse assets.

Stripnomics

April 22, 2009 07:13 PM

This is just the first REIT to go BK. I expect PLD, ARE, ACC, KRC, HCP and VTR to follow.

For real analysis of the REITs:

www.stripnomics.com

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