Mall Titan General Growth Cuts Itself Down

Analysts say that despite General Growth's Chapter 11 filing under a heavy debt load, the shopping mall business as a whole remains sturdy

The nation's second-largest shopping mall operator, General Growth Properties, which filed for Chapter 11 bankruptcy on Apr. 16, fell victim to the credit crunch and overambitious managers. But it is not likely to be followed into ruin by other big mall competitors, analysts and industry insiders say. Indeed, the bankruptcy filing by General Growth, which owns more than 200 malls in 44 states along with residential real estate and master planned communities, could make for an efficient way for rivals to pick up trophy properties.

Simon Property Group (SPG), the Indianapolis-based leader in the industry with 386 mall properties worldwide, has already been in touch with General Growth about snapping up some of the company's holdings. General Growth's properties include the Fashion Show Mall in Las Vegas and Chicago's trendy Water Tower Place, as well as master planned communities in areas in Maryland, Nevada, and Texas. General Growth also has joint ventures in shopping centers in Brazil and Turkey. "They have been marketing a handful of assets over the last several months. They have not sold any to date," says Stephen Sterrett, Simon Property Group's chief financial officer, confirming that contacts between the companies so far haven't led to a sale. He adds that Simon isn't interested in swallowing all of General Growth. "We have regular conversations with all kinds of people in our business."

For their part, managers at General Growth say they plan to hang onto most of the properties and to emerge someday from Chapter 11 reorganization. Thomas H. Nolan Jr., General Growth's president and chief operating officer, told reporters in a midday conference call on Apr. 16 that creditors and company executives alike want to keep the "strategic platform" together. He recognizes buyers might be especially interested in some of the 25 biggest properties—Boston's Faneuil Hall, for instance—but he said selling off the trophy properties or others in toto is not in the company's plans. "Could we sell off one of those, or two? I guess," Nolan said. "As part of a restructuring strategic review, we would consider looking at that."

To industry watchers, Chicago-based General Growth's fall came as no surprise. The real estate investment trust has been in tumult since early last year when the credit crunch began jacking up the cost of refinancing its staggering debt. John Bucksbaum, a son of the company founder, levered up the once cautiously run outfit with splashy purchases from the time he took over as CEO in 1999 until last year. He was forced out in October, as the company tried to negotiate with creditors to ease payments on a debt load that it reported in its bankruptcy filing to total $27.3 billion. General Growth valued its assets at just $29.6 billion, far less than the $40 billion- plus figures analysts had bandied about as recently as last fall. Bucksbaum remains chairman.

Vegas Shopping Spree

Under Bucksbaum, a hard-charging bicycling aficionado who palled around with racer Lance Armstrong and routinely went on rides in Europe's mountain countryside, General Growth was an anomaly in the world of big real estate investment trusts. While the others carefully tended to their balance sheets and kept debt under control, Bucksbaum had no fears about putting his company deep into debt. He rolled the dice heavily in Las Vegas, for instance, picking up shopping arcades in the Venetian and Palazzo casino complexes and buying Rouse, the big developer, in a debt-heavy $14 billion deal in 2004.

He wound up owning parks, lakes, golf courses, and wilderness trails, along with lots of undeveloped real estate, some 18,500 acres of which are still available for sale, according to the bankruptcy papers.

But, as the debt began to come due and the recession hit, General Growth couldn't shoulder the load. Its cash flow off the malls has stayed surprisingly strong, analysts say, but refinancing dried up. "They built a very untenable balance sheet," says Richard C. Moore II, an analyst with RBC Capital Markets. "Their problems in terms of the balance sheet came well before the credit crisis."

Even as retailing is feeling the pinch of hard times, the mall business remains sound, analysts and industry executives argue. Simon, for instance, recently raised $1.25 billion in a public offering after showing a 9.5% rise last year in funds from operations—a key measure for real estate trusts—to $1.85 billion, as total revenues rose from $3.65 billion to $3.78 billion. Indeed, some of its operations—its 40 outlet malls—could post healthy single-digit gains as shoppers trade down from the big stores. "This is not about the fundamentals of the mall business," says analyst Moore. "Believe it or not, it remains sound. Even General Growth's malls are going fine." General Growth, in its bankruptcy filing, reported net cash from operating activities of $555.6 million for 2008, on overall revenue of $3.4 billion.

Episode Could Play Out a While

The problem now for General Growth and would-be acquirers of its properties is access to big money for purchases. Lenders are loath to open their wallets even for top-quality properties. That may make General Growth's Chapter 11 filing a protracted affair, as buyers wait for credit lines to open up again.

While analysts are doubtful, General Growth's chief executive officer, Adam Metz, suggested in a statement that the company could survive the filing in some form. "Our core business remains sound and is performing well with stable cash flows. We believe that Chapter 11 is the best process for restructuring maturing mortgage loans, reducing the company's corporate debt, and establishing a sustainable long-term capital structure," Metz said.

If General Growth does ever emerge, it's likely to be far smaller, and many of the bold additions that the company took on could wind up in the hands of others.

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