General Growth Properties: Leverage Claims Another Victim

Wise investors have traditionally headed for real estate investment trusts (REITs) for their regular, sizeable dividends. Over the past two years, we have grown accustomed to bi-annual payments of 6%, 8% or even 10% of share price.

What if I could tell you one REIT is currently paying over 350%? You would think it is too good to be true.

Of course, you would be right. General Growth Properties (NYSE:GGP), with its $0.43 share price and last dividend payment of $2 per share, may pop up on the screens of investors looking for a big dividend, but there is absolutely no way you should expect to see any dividend from this REIT, let alone anything close to a double-digit payout.

Desperate for cash

General Growth is the latest company to announce it is on the verge of bankruptcy due its tremendous debt load. Like so many other now-defunct companies, General Growth used all the leverage it could muster over the past few years to boost its profits.

Now that the market has headed south, the leverage (to the tune of nearly $27 billion in debt) is magnifying the company’s financial pain. With over 200 malls in its real estate portfolio, General Growth has been dramatically hurt by the devastation in the nation’s retail industry.

The trust has nearly a billion dollars in debt payments due at the end of this month. If it does not find the money, its chances of survival are nearly nothing.

General Growth has a few options. Its best bet is to entice its creditors to extend or refinance the company’s short-term debt. That would at the very least, extend the trust’s operating period and give it a chance to create more financing opportunities.

If that does not work, the company must sell some of its properties to pay its debt burden. But with just over two weeks until the cash is due and few investors willing to take a plunge into the retail market, this is not a likely scenario.

Into the history books

Most likely, General Growth will have to seek bankruptcy protection. With such a huge debt load, the trust may find a solution for this month’s problems, but it will only add to next month’s dilemma. Over the next year, the trust has over $3 billion in debt coming due.

Shares of the REIT are down by over 60% today. That is on top of the more than 95% investors were forced to swallow over the last year. Shares are still worth about fifty cents, but I would not expect even that figure to hang around much longer.

The good news is, the lower share price goes, the higher the dividend yield will soar. Unfortunately, when this company is liquidated, there will not be a penny left over for shareholders.

Unless you already have a short position in this trust, stay away. It is like a burning barn filled with hay. All you can do is stand back and watch it burn to the foundation.

Disclosure: no positions

Comments

[User 68127:]

Reggie is da man! He called this one all the way!

2008 Nov 11 02:10 PM

[Bruce B648:]

Don't fret too much over your short sale restriction on GGP. Unless you were planning to short it 4 to 6 weeks ago, it probably would have been impossible to borrow. I have been trading SRS successfully for 6 months now. It provides enough volatility to be worth following closely.

2008 Nov 12 05:10 AM

[Bruce B648:]

The flip side of SRS is URE. I use this to trade counter-trend rallies in the REIT index. Both EFTs trade a couple million shares per day. Use profits in these vehicles to help you make the hard but correct decision to get rid of stocks that you didn't sell quick enough. (The commodity stocks for instance).

2008 Nov 12 05:16 AM

[lynda514:]

What are the chances that GGP will parcel out properties and some of the MD properties will be picked up by Donald Trump?
Our slots question passed in the general election. I think addictions to slots are recession proof.....
thought I'd throw out that question....
[e-mail]

2008 Nov 13 12:34 AM

[NavySeal3:]

I worked for GGP in Ohio. They have let almost everyone go, at this time they are in the process of doing away with IPC Security and the housekeeping co. to gain back money. If they were smart and wanted Security and Housekeeping then they should hire employees themselves with the knowledge and pay them per hour. IPC Security makes a mint off of GGP, EXAMPLE: IPC gets paid over $15.00 per hour for each employee by GGP BUT the IPC Security Officers only get $9.00per hour. The difference goes into IPC's pockets. This is why the need to get rid of matters like this and use their own trained people for a per hour pay.

2008 Nov 23 11:17 PM