Grief at General Growth
It's been one patch of bad road after another for John Bucksbaum, a hard-riding amateur cyclist who tests his mettle in the Alps. At General Growth Properties (GGP), the Chicago real estate trust he runs, Bucksbaum is struggling against stiff headwinds in retailing and housing. What's more, the credit crunch is jacking up the cost of refinancing billions of dollars of debt coming due over the next 18 months. To top it off, General Growth has been socked with punitive damages for the roughshod way it fought a rival shopping-center developer.
Investors are paying the price. General Growth's stock, which closed at 40.74 on May 21, has lost nearly 40% of its value in the past year and trades about where it was three years ago. Meantime, the company's publicly traded debt sells at discounts as steep as 16.5%. "There's no question the world we operate in has changed dramatically," Bucksbaum said on an Apr. 30 conference call. "We recognize the change and we are adapting to it."
For much of this grief, the 51-year-old chief executive may have no one to blame but himself. Like overextended homeowners who wagered that housing prices could only go up, he went into hock to swing some big deals. Now, like those homeowners, he has learned he overpaid. He agreed in 2004 to spend more than $1 billion in Las Vegas, snapping up shopping arcades in the Venetian and the just-opened Palazzo casinos, only to see the glitzy city recently slump. That same year, he also bought Rouse, a planned-community and retail giant, in a debt-heavy $14 billion deal. With it came land in real estate purgatories, such as Vegas, that now lies idle.
To be sure, Bucksbaum's buying spree thrust General Growth into the big leagues. Since taking over as CEO in 1999 from his father, Matthew, the company's now 82-year-old co-founder, John has nearly doubled the number of malls in General Growth's portfolio. Its more than 200 malls in 45 states include Water Tower Place on Michigan Avenue's Magnificent Mile and Northbrook Court in the Chicago suburb. A trendy sort who, in company reports, quotes Beatles songs about changing the world, Bucksbaum also added master-planned communities, such as Columbia, Md., and Summerlin in Las Vegas.
But transforming the company, which traces back to a 1954 shopping center in Cedar Rapids, Iowa, into the nation's second-largest mall company has come at a staggering cost. The $3.26 billion-a-year outfit—run from a 1950s, mausoleum-like headquarters in the West Loop that used to house Morton Salt—labors under $27.3 billion in debt. That's nearly three times its $11 billion market value. "They have way too much debt," concludes analyst Richard Moore II of RBC Capital Markets in Cleveland. "They are struggling under the weight."
A buddy of cycling phenom Lance Armstrong, Bucksbaum is known for pushing himself faster every year on rides in Europe's mountains. At work, he has proven far more aggressive than his rivals at the No. 1 player, Simon Property Group (SPG) in Indianapolis. Simon's $22.6 billion market value more than covers its $18.3 billion in debt. Short-sellers, who bet share prices will decline, have ganged up on Bucksbaum and dumped more than 12% of his stock. By contrast, they've sold only 7.1% of Simon. Analysts expect General Growth's funds from operations—the key income measure for real estate investment trusts—to slip from $3.71 to $3.54 a share, the first slide in at least a decade.
Bucksbaum vows his company will deliver gains, but plenty are skeptical. When critics such as MarketWatch columnist Herb Greenberg raised questions in January about high debt levels, the company lashed out in a press release, insisting it was "absolutely not in any danger" of filing for bankruptcy protection—a prospect that most industry experts agree is far-fetched. Still, just two months later, Standard & Poor's, which, like BW Chicago, is owned by The McGraw-Hill Companies (MHP), downgraded the REIT's credit rating to junk status, warning that borrowing costs could climb. "They are more likely to significantly pare back development," notes S&P Managing Director Lisa Sarajian. Indeed, General Growth has shelved a planned $600 million in developments.
Mauling Other Malls
While taking blows, General Growth has thrown a few, too. Its drawn-out battle with Caruso Affiliated, a Los Angeles developer, is one example. When Caruso proposed an open-air mall in Glendale, Calif., near a mall that General Growth bought in 2002, General Growth orchestrated an election to challenge it. After losing the 2004 vote, it sued the city, claiming the developer-selection process was flawed. Once in court, however, its foe showed how General Growth tried to pressure restaurant operator Cheesecake Factory (CAKE) to stay out of the Caruso center—a legal no-no that last fall led a jury to decide General Growth should pay Caruso $89.2 million, including $15 million in punitive damages.
Caruso's lawyers claimed in court that General Growth's tactics—bare-knuckled even by industry standards—were part of a "corporate plan, practice, and pattern" of thwarting competitors. General Growth is appealing the judgment. But rivals allege it tried to block centers elsewhere, too. In Connecticut, e-mails in one case suggest that General Growth staffers plotted to seek out "dinosaur lovers" who would claim bones or remains could be found on a site where Poag & McEwen, a Memphis developer, planned a mall. Ultimately, that shopping center was built. The Caruso mall went ahead, too.
Just how Bucksbaum will guide his company out of trouble isn't clear. He's trolling for partners to take stakes in some mall properties, and he recently lined up more than $1 billion in loans to put a dent in $10.51 billion worth of debt that matures through 2010. In late March, the company issued 22.8 million new shares to raise $822 million. Showing confidence, Bucksbaum and his father bought 2.4 million shares, or more than 10% of the offering. In April, he boosted the quarterly dividend 11%, to 50¢ a share, hoping to woo back shareholders—but with little immediate effect. "They're probably going to get through this, but it's obviously a higher risk," says Goldman Sachs (GS) analyst Jonathan Habermann.
Once the panic over real estate and credit dies down, General Growth should fare fine, contend longtime Bucksbaum watchers. "A year from now, people will look back and say, 'Wow, we were worried about a lot of things that we were wrong about,' " argues Louis Taylor, an analyst at Deutsche Bank (DB). Still, to get from here to there, Bucksbaum will have to pedal hard—and he may well find the course rougher than the Alps.