General Growth Properties Staggers Under Debt Load

Analysts say the owner of 200-plus shopping malls might be forced into sale amid cash crunch, credit crisis, stock declines

General Growth Properties (GGP), the nation's No. 2 shopping mall company, may soon become the next giant felled by the credit crunch. Analysts believe that Chief Executive John Bucksbaum, who put the 54-year-old outfit deep into hock as he bought up retailing real estate across the country, could be forced to sell the company and its more than 200 malls nationwide because he'll be unable to make payments on its staggering $27.4 billion debt load. "GGP is at the end as a going concern," says RBC Capital Markets analyst Richard C. Moore II. "It's time for them to go away."

General Growth has been reeling this week amid the financial crisis. It suspended its dividend, which it had increased 11% last April to 50 cents a share, in a failed bid to woo back shareholders. The company's stock, at nearly 58 a year ago, plunged to just above 7 on Oct. 2 after news broke that its long-serving chief financial officer, Bernard Freibaum, had quit after selling several million shares to meet margin calls. The shares rebounded 27% to finish the week near $10, as analysts have predicted that either the entire company will be sold or it will be broken up and peddled in pieces.

Chicago-based General Growth last month announced that it was considering merging or selling off assets. The company did not return calls for comment on Oct. 3.

Untapped Credit Lines

Analysts say buyers could include such mall giants as the Simon Property Group (SPG), the Indianapolis-based mall titan that leads the mall pack in the U.S. and boasts some 383 malls worldwide, and Westfield Group, whose 118 malls are spread across the U.S., Australia, New Zealand, and Britain. Westfield is based in Sydney, Australia. Even if they assumed General Growth's debt load, both companies could likely afford to buy the outfit, especially since its market value has dipped below $3 billion. Analysts say such buyers could cover the debt service, which includes payments of about $1 billion due next month and an additional $3 billion next year, using untapped credit lines and with cash flow from the mall properties.

General Growth's malls in 44 states, which include such trophy properties as the Fashion Show Mall in Las Vegas and Chicago's trendy Water Tower Place, are faring surprisingly well. Occupancy topped 93.2% in the second quarter this year, the company reported, and net operating income continued to rise. Indeed, analyst Louis Taylor of Deutsche Bank (DB) still expects the company to generate more than $3 a share this year in funds from operations, a key barometer of health in a real estate investment trust. The company last year produced $3.71 a share in such funds.

The company's problem is debt. Bucksbaum, the co-founder's son and a hard-charging amateur cyclist known for tooling up and down the Alps and palling around with champion rider Lance Armstrong, shelled out billions of dollars to thrust General Growth into the real-estate big leagues since he took over as CEO in 1999. He bought Rouse, the planned-community and retail giant, in 2004 in a highly leveraged $14 billion deal, for instance. With that came master-planned communities and land in such slumping areas as Las Vegas. A famous planned community in Columbia, Md., is also among his trophies. He has been hit since then by the double whammy of the real estate market plunge followed by tightened credit. All told, General Growth's assets may be worth more than $40 billion, but frightened by its hefty debt load and the cash crunch, investors have bid its market value down to $2.7 billion.

Plead with Lenders

"The play was they were going to deleverage themselves over time," says analyst Taylor. "The financial markets moved too swiftly against them."

Just how General Growth and its properties may be sold, or parceled out, is unclear. RBC analyst Moore, who speculates that investment bankers are already in talks about a sale, argues that the company could be moved as a single unit to either Simon or Westfield, or to a joint venture of the two prospective purchasers. He says buyers could also include Vornado Realty Trust (VNO), the owner of Toys R Us, and Brookfield Asset Management, based in Toronto. Vornado and Brookfield both declined to comment.

If a sale doesn't pan out, the company could be forced to plead with lenders for extensions on it credit—a tough thing to get nowadays—or to sell off properties piecemeal. "Almost any one of these outcomes is likely," says Taylor.

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