General Growth Properties Files for Bankruptcy 32 comments
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The biggest real estate bankruptcy is now a fact. To all those who have been buying equities in REITs in the past two weeks, congratulations. Once the liquidations start, those dreaded "market tests" will become a reality and will reprice the entire CRE market. Rouse and 165 other units are also included in the bankruptcy, but several properties that are part of JVs are not included.
In the meantime, Ackman is getting even more entrenched in one side bets in real estate, providing a $375 million DIP loan to the company. His thesis that the company is worth more in bankruptcy than out, will be tested as early as today.
As an aside, only Simon Property Group (SPG), which yesterday made Goldman Sachs' conviction buy list, owns more U.S. malls than GGP.
Advisory vultures for the company include the dynamic trio of Kirkland and Ellis, Miller Buckfire and AlixPartners, the former two located conveniently floors apart in the CitiCenter, yet again demonstrating the synergies of love between a bankruptcy's financial and legal advisors.
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This article has 32 comments:
Commercial Real Estate needs a good flushing of all the people who don't have a clue. Look for CBL and Kimco to continue to suffer.
Why? Because lenders are unwilling to refinance mortgages on CRE at levels at or near current market values at a point in time when vacancy rates are surging because tenant are going out of business or closing marginal outlets.
This is just the beginning of the fall in CRE. Business bankruptcies are up 24% in the 1st Quarter over 2008 and are expected to increase over the remainder of the year. Banks are just trying to be more conservative in their lending practices, finally. But the timing could not be worse for our economy.
The fall of CRE, increased rate of bankruptcies, consumers retrenching and starting to save more, higher unemployment, and rising consumer credit defaults are problems the economy must still work through. Those problems, when added to the continued downward pressure on residential real estate values are going to make 2009 a very difficult year for the banking industry.
But, what does all of this mean? It doesn't mean that the world is coming to an end. It simply means that the end of the recession is more likely to come in 2010 than 2009. It may also affect consumer habits and make the come back a bit slower than we have experienced in any other recession since WWII.
That, IMHO, would indicate that our economy will develop a foundation at a level significantly lower (certainly not 30-50% lower, but more likely 5-10% lower) from where we were when this whole thing started. The economy will then begin to show signs of health and strength and begin to grow with consistency. I would expect unemployment to remain relatively high as it will take longer to absorb out-of-work job seekers from a lowered output base. But time will heal all wounds.
Unfortunately, the government is not planning for such a scenario. They expect everything to bounce back to pre-bubble levels and continue growing from there. With federal debt levels where they are and growing rapidly, we will have a much harder time climbing out of the trench we have dug. This is because the government will have to compete for funding against other forms of borrowing that create jobs: mortgages, capital improvements by businesses, and equiptment/durable goods purchases. This will cause interest rates for borrowers to rise and squeeze some potential consumption/investment out of the private sector. This will slow the rate of growth going forward. A rise in taxes is in the future to pay for all that debt and that will take a bite out of business growth as well as it keeps a lid on consumption.
In the end, we will recover. But this will take longer than the eternal optimists expect unless...
If the government and financial institutions have their way we are at the beginning of another bubble. If they can actuallly recreate the bubble culture, we could have a sharp slope to the recovery. However, it will again burst at some point in the not too distant furture and then the fall will have no safety net. The goverment, including the Fed have no parachutes left. If they are successful, I would expect the next downturn to be far more severe and the recovery a more difficult path to navigate.
On Apr 16 10:22 AM Mark Bern wrote:
> Yes, Tyler, the first major CRE owner to file for bankruptcy is in
> the books. It's unfortunate, though, that the reason for failure
> was due to a lack of liquidity in the credit markets. Operationally,
> this company is doing fine and holds many excellent properties. It's
> cash flow is ample enough to make debt payments and meet expenses.
> They were just unable to refinance mortgages on properties that were
> coming due.
>
> Why? Because lenders are unwilling to refinance mortgages on CRE
> at levels at or near current market values at a point in time when
> vacancy rates are surging because tenant are going out of business
> or closing marginal outlets.
>
> This is just the beginning of the fall in CRE. Business bankruptcies
> are up 24% in the 1st Quarter over 2008 and are expected to increase
> over the remainder of the year. Banks are just trying to be more
> conservative in their lending practices, finally. But the timing
> could not be worse for our economy.
>
> The fall of CRE, increased rate of bankruptcies, consumers retrenching
> and starting to save more, higher unemployment, and rising consumer
> credit defaults are problems the economy must still work through.
> Those problems, when added to the continued downward pressure on
> residential real estate values are going to make 2009 a very difficult
> year for the banking industry.
>
> But, what does all of this mean? It doesn't mean that the world is
> coming to an end. It simply means that the end of the recession is
> more likely to come in 2010 than 2009. It may also affect consumer
> habits and make the come back a bit slower than we have experienced
> in any other recession since WWII.
>
> That, IMHO, would indicate that our economy will develop a foundation
> at a level significantly lower (certainly not 30-50% lower, but more
> likely 5-10% lower) from where we were when this whole thing started.
> The economy will then begin to show signs of health and strength
> and begin to grow with consistency. I would expect unemployment to
> remain relatively high as it will take longer to absorb out-of-work
> job seekers from a lowered output base. But time will heal all wounds.
>
>
> Unfortunately, the government is not planning for such a scenario.
> They expect everything to bounce back to pre-bubble levels and continue
> growing from there. With federal debt levels where they are and growing
> rapidly, we will have a much harder time climbing out of the trench
> we have dug. This is because the government will have to compete
> for funding against other forms of borrowing that create jobs: mortgages,
> capital improvements by businesses, and equiptment/durable goods
> purchases. This will cause interest rates for borrowers to rise and
> squeeze some potential consumption/investment out of the private
> sector. This will slow the rate of growth going forward. A rise in
> taxes is in the future to pay for all that debt and that will take
> a bite out of business growth as well as it keeps a lid on consumption.
>
>
> In the end, we will recover. But this will take longer than the eternal
> optimists expect unless...
>
> If the government and financial institutions have their way we are
> at the beginning of another bubble. If they can actuallly recreate
> the bubble culture, we could have a sharp slope to the recovery.
> However, it will again burst at some point in the not too distant
> furture and then the fall will have no safety net. The goverment,
> including the Fed have no parachutes left. If they are successful,
> I would expect the next downturn to be far more severe and the recovery
> a more difficult path to navigate.
Short's are getting squeezed!! Time to get on board or be left at the station! The CRE boom is just starting!!
That about right?
As Tyler has pointed out, volume since the WFC announcement has been atrocious. They're just hoping they can draw in enough new suckers to push this thing to 8500-9000 and then dump all the junk they've bought to keep this thing afloat. Unfortunately, the suckers are all broke. TESTIFY!
On Apr 16 10:34 AM jeandit75 wrote:
> Tyler, I couldn't agree more. Thanks for providing truthful articles.
> This rally is almost all being based on hope. Hope does not make
> people a lot of money unfortunately. Not I am waiting for Cetin's
> response. Let's just wait and laugh.
Looking at the monthly charts of CBL, MAC and SPG, they still signify further run down to lower lows with CBL and MAC needed two more legs down to complete the sell-off while SPG will need just one big selloff after a prolonged consolidation period.
I don't see full recovery rally in the monthly charts of CBL, MAC, and SPG, and SPF for the years ahead that may take decades.
These companies suffered the same fate as that of Nasdaq or the Tech Sector which never recover from it's own "depression" after the Tech Meltdown of 2000 to 2000. Likewise, they have the same price structure on the monthly charts as the Nasdaq before the selloff.
Still Nasdaq was able to retrace in 2007 more than 27.2% and almost 32.8% of the total loss from years 2000 to 2002. That is only expected on such as an excessive rally and the equally "punitive" selloff.
This is another bottom picking excercise for medium-term traders. Nasdaq was able to appreciate 183% from it's low of Oct 2002 to Oct 2007. While Dow Jones which did not suffer less than half as Nasdaq was able to rally from 7,200 of Oct 2002 to 14,200 of Oct 2007 for a price appreciation of only 63.2%. Nasdaq made almost 300% price appreciation for the same period. More profit commensurate to the risk taken. SnP was able to recover 100% of the sell-off from 2000 to 2002 for a price appreciation of 102%. Not bad at all for a follower. Dow Jones was the leader in the 2002 to 2007 "bear rally".
The harder part of buying these distressed companies depends more on which companies will have greater chance of survival. That will require a lot of attention to fundamental analysis as these companiese finalize their next sell-off in order to complete the 1-2-3-4-5 pattern on the monthly charts.
Irrational exuberance comes to mind.
On Apr 16 10:29 AM dcb wrote:
> I would agree, but something keeps pushing this market up
Disclosure: long URE
On Apr 16 11:49 AM dawase@gmail.com wrote:
> Can someone ... ANYONE ... explain to me why GGP, the second largest
> mall operator in the US, is declaring bankruptcy and SRS is within
> spitting distance of an all-time low on the same day?
I hope he is OK
Let's face reality. Unless the economy has a strong rebound by 4Q09/1Q10 and these leverage junkies can refi after proving their cash flows are back to bubble levels, they're all toast. Or the government is planning on becoming the largest mall operator in the world.
You know why they can't refi? Because the banks finally woke up and saw what they had created... it's called Default City.
I expect a lot of this premature enthusiasm will be met by multiple bankruptcies over the next 5 years... some potentially by the same REITs.
Bill "The Target" Ackman thinks there's value on the other side of BK for some of these REITs? Maybe there is, but it ain't in the equity. Somewhere in the Mezz, there might be a play, but I'd guess it's probably somewhere even more senior in the cap structure.
The above led to a lengthy impasse that has lasted more than 6 months. The company couldn't issue new bonds to pay off maturing ones and short-term lenders didn't want to roll over their loans. But the lenders did not want to push the company into bankruptcy and force them to sell assets--malls--at a time when the credit markets were illiquid and a buyer of the malls might be unable to borrow enough to pay a fair or good price. If the assets were dumped into the illiquid market, they would go for distressed prices and the lenders would lose a lot of money, because the cash provided by the asset sales would be inadequate to pay back all the loans. So while the lenders could have pushed GGP into bankruptcy at any time since last fall, they chose not to do so. GGP understood this situation and tried to push the lenders to roll their loans. They argued that they could service the loans since the company remained profitable. Neither got very far in these negotiations and it was never clear when this impasse might end.
I thought the situation would be resolved only when credit market conditions improved, although someone might have gotten fed up with the impasse at any time, thereby triggering a bankruptcy filing. The lenders might hope to get full value for asset sales in a bankruptcy or GGP could sell assets and pay off loans at full value. This leaves open the question as to who makes all the decisions. By going into bankruptcy, GGP bought itself time to make these decisions and it puts off the lenders. However, bankruptcy gives the company far more negotiating power than before, I think. It may be able to use the courts to issue new bonds in the "new" restructured GGP to lenders. Since the company is profitable, they may be able to get away with issuing new bonds dollar for dollar for old bonds, since the lenders would not lose any money, just at higher interest rates. And the sweetener may be adding some equity into the pot for the bond owners. The company has stated it hopes to keep the entire mall business intact. So, it clearly hopes that it will not need to sell any properties. And the court may be very sympathetic, since it could "protect" the interests of the bondholders by giving full value back, just with longer term debt than the short maturities of the original loans, and it preserves all the jobs of the employees, which the court will like very much.
From the above, you can see that this GGP situation is atypical of most bankruptcies when a company is losing money and can't pay its debts. This bankruptcy was caused by a bad decision--relying excessively on low cost short term debt--and a bad environment--where the credit markets froze and the company could not do even routine refinancing.
The lessons or implications for the rest of the industry are fairly limited, I think. GGP's mistake was atypical. Most companies rely on a mixture of short and long term debt and most rely predominantly on long term debt, especially when they have a lot of debt. The primary lesson, an old one, is lock up your financing for the long-term, but most companies already do that. A corollary is do refinancing before your long-term debt matures. Firms are doing that in droves now. If you read Street reports, they talk about debt maturing through 2011 or 2012. That's a long ways off. But firms are already trying to get finance done early. And with the credit markets now improving by the day, this is becoming easier and easier and also less costly. The industry is not out of the woods quite yet. But the situation is clearly now getting better. Risks are greatest for those with debt maturing in the immediate future, i.e. 2009 and where the company is highly leveraged. But these companies understood their vulnerability and have been most aggressive in cutting costs and pledging unencumbered buildings to get deals done. As they make some progress, deals become easier to do, especially since the credit markets are getting better. A quantum improvement will occur, if the Treasury/Federal Reserve start buying commercial real estate loans, as they have indicated they plan to do.
By the way, sophisticated investors have been playing GGP, sometimes in surprising ways. Bill Ackman of Pershing Square bought a ton of GGP common!! I was shocked at that. But he likely paid less than $1 per share and clearly expected the value to soar after a bankruptcy, since he was presuming the shares would not be wiped out. That strikes me as a reasonable bet, but still risky compared to buying a ton of the firm's bonds. If I controlled as much capital as Ackman, I would have bought the bonds, which traded at a small fraction of their par value. In fact, he could/should have bought a majority of the bonds. Best of all, buy ALL the bonds. Then he puts the company into bankruptcy himself, wipes out the shareholders and owns the entire company for a fraction of its asset value, so doubling or tripling his money in the investment with minimal or negligible risk. That would have been a grand slam home run. But as a hedge fund manager, he cares about leverage and maximum return per dollar invested, so he bought the common and surely hopes to make 10 times, or 20 times or more his investment. But, that's a tougher road.
On Apr 16 03:54 PM Charles Lieberman wrote:
> GGP screwed up by expanding via acquisition and funding all the acquisitions
> with short-term debt. That was the cheapest way to do the deals,
> but also risky, because they became highly leveraged and mostly with
> short-term debt. We owned GGP in client income with growth accounts
> as this was happening and I watched the developments with more than
> casual interest. By depending so much on short-term debt, the company
> kept its costs down and profits rose very rapidly as it absorbed
> the malls and cut costs. So, the stock performed very, very well.
> The risk they accepted was that if interest rate rose, their financing
> costs would rise proportionately and crush profits because they were
> so highly leveraged. When rates were low, I expected them to lock
> those costs in by refinancing with longer term debt, even though
> it would have reduced their profits. They did not do so and when
> the stock kept going up and got a bit expensive; the combination
> of the two was an easy justification to sell out of our holdings.
> Oddly, they got into trouble not because of a rise in interest rates,
> but rather because of their dependence on short term finance. As
> the credit markets seized up, lenders were reluctant to continue
> lending to highly leveraged companies. The company was and still
> is profitable even today and enjoys very good free cash flow. They
> are not insolvent. Rather, they are not liquid and don't have enough
> cash to pay off maturing debt. And the cross default clauses made
> all of their long term due immediately, too.
>
> The above led to a lengthy impasse that has lasted more than 6 months.
> The company couldn't issue new bonds to pay off maturing ones and
> short-term lenders didn't want to roll over their loans. But the
> lenders did not want to push the company into bankruptcy and force
> them to sell assets--malls--at a time when the credit markets were
> illiquid and a buyer of the malls might be unable to borrow enough
> to pay a fair or good price. If the assets were dumped into the
> illiquid market, they would go for distressed prices and the lenders
> would lose a lot of money, because the cash provided by the asset
> sales would be inadequate to pay back all the loans. So while the
> lenders could have pushed GGP into bankruptcy at any time since last
> fall, they chose not to do so. GGP understood this situation and
> tried to push the lenders to roll their loans. They argued that
> they could service the loans since the company remained profitable.
> Neither got very far in these negotiations and it was never clear
> when this impasse might end.
>
> I thought the situation would be resolved only when credit market
> conditions improved, although someone might have gotten fed up with
> the impasse at any time, thereby triggering a bankruptcy filing.
> The lenders might hope to get full value for asset sales in a bankruptcy
> or GGP could sell assets and pay off loans at full value. This leaves
> open the question as to who makes all the decisions. By going into
> bankruptcy, GGP bought itself time to make these decisions and it
> puts off the lenders. However, bankruptcy gives the company far
> more negotiating power than before, I think. It may be able to use
> the courts to issue new bonds in the "new" restructured GGP to lenders.
> Since the company is profitable, they may be able to get away with
> issuing new bonds dollar for dollar for old bonds, since the lenders
> would not lose any money, just at higher interest rates. And the
> sweetener may be adding some equity into the pot for the bond owners.
> The company has stated it hopes to keep the entire mall business
> intact. So, it clearly hopes that it will not need to sell any properties.
> And the court may be very sympathetic, since it could "protect" the
> interests of the bondholders by giving full value back, just with
> longer term debt than the short maturities of the original loans,
> and it preserves all the jobs of the employees, which the court will
> like very much.
>
> From the above, you can see that this GGP situation is atypical of
> most bankruptcies when a company is losing money and can't pay its
> debts. This bankruptcy was caused by a bad decision--relying excessively
> on low cost short term debt--and a bad environment--where the credit
> markets froze and the company could not do even routine refinancing.
>
>
> The lessons or implications for the rest of the industry are fairly
> limited, I think. GGP's mistake was atypical. Most companies rely
> on a mixture of short and long term debt and most rely predominantly
> on long term debt, especially when they have a lot of debt. The
> primary lesson, an old one, is lock up your financing for the long-term,
> but most companies already do that. A corollary is do refinancing
> before your long-term debt matures. Firms are doing that in droves
> now. If you read Street reports, they talk about debt maturing through
> 2011 or 2012. That's a long ways off. But firms are already trying
> to get finance done early. And with the credit markets now improving
> by the day, this is becoming easier and easier and also less costly.
> The industry is not out of the woods quite yet. But the situation
> is clearly now getting better. Risks are greatest for those with
> debt maturing in the immediate future, i.e. 2009 and where the company
> is highly leveraged. But these companies understood their vulnerability
> and have been most aggressive in cutting costs and pledging unencumbered
> buildings to get deals done. As they make some progress, deals become
> easier to do, especially since the credit markets are getting better.
> A quantum improvement will occur, if the Treasury/Federal Reserve
> start buying commercial real estate loans, as they have indicated
> they plan to do.
>
> By the way, sophisticated investors have been playing GGP, sometimes
> in surprising ways. Bill Ackman of Pershing Square bought a ton
> of GGP common!! I was shocked at that. But he likely paid less
> than $1 per share and clearly expected the value to soar after a
> bankruptcy, since he was presuming the shares would not be wiped
> out. That strikes me as a reasonable bet, but still risky compared
> to buying a ton of the firm's bonds. If I controlled as much capital
> as Ackman, I would have bought the bonds, which traded at a small
> fraction of their par value. In fact, he could/should have bought
> a majority of the bonds. Best of all, buy ALL the bonds. Then he
> puts the company into bankruptcy himself, wipes out the shareholders
> and owns the entire company for a fraction of its asset value, so
> doubling or tripling his money in the investment with minimal or
> negligible risk. That would have been a grand slam home run. But
> as a hedge fund manager, he cares about leverage and maximum return
> per dollar invested, so he bought the common and surely hopes to
> make 10 times, or 20 times or more his investment. But, that's a
> tougher road.
NAV data is there. SRS closed yesterday at a .62 premium to NAV. I think the issue is more a matter of what drives NAV, not the premium/discount.
Anecdotally, the Fed announced it is considering adding CMBS to the TALF program. So I guess when I sarcastically commented the US government would have to become the largest mall owner in the country... I was really only half-kidding. Seems there's a duration mismatch problem for them though. More to come on this. At the end of the day, that paper is worth less than par. Full stop.
Why the Fed wants stupid retail American investors or taxpayers (if the PPIP works) to eat the losses instead of stupid institutional/sovereign Chinese investors is beyond... oh, wait...
On Apr 16 04:28 PM Thomas J. Gordon wrote:
> Dawase: you bring up an interesting point. srs can do all it's
> internal trades but does market psychology/trading strategies drive
> it to a discount or premium to net asset value (like a closed end
> fund). Does anybody know if srs trades at huge discount or premium
> to net asset value (the actual holdings of the etf?)
On Apr 16 04:38 PM Deepv wrote:
> The problem is all of you want to make money betting a long in the
> tooth consensus view which is the fundamentals of CRE are not good.
> Guess what? Half these things are already down 85-90% + over the
> past two years, many of which are match funded and well operated.
> The market is not that easier. Sure some will blow up and you will
> make money, but some will survive and kill you. Real estate is and
> always will be a valuable thing if you have holding power, expecially
> into the coming re-flation. Residentail housing is/was much worse
> than CRE yet many homebuilding related stocks are very decent performers
> vs market over past 2 years. In order to make money you need to
> be counterconsensus and correct or earlier in your insights.
Bill Ackman- he had also invested in GGP equity (at some low prices) - betting that the company will not go bankrupt. Now he is getting into DIP financing - who knows where it will go. Ackman made similar bad bets on Target too finally to sell out at the bottom - losing several Billion dollars.
Fed is getting into the act - will refinance commercial loans now. Lets see where this goes.
Breaking news from WSJ is:
Icahn, Oaktree Push for MGM Mirage Bankruptcy Filing .
So likely MGM will be next. Many more super large bankruptcies to come in the commercial space.
Err. No. Google "bear market rally" and see the consensus view. Also: do you see anyone saying buy CRE? First time I've seen it is today: Ken Heebner.
See here that commercial REIT holdings are still below 2007 levels.
stockcharts.com/charts...?$DJR
This means that when the "recovery in this sector is supported by self-perpetuating stock rally, SRS will move up very, very fast...maybe around the $60. I'd look more seriously into SRS at that level. In the meantime, sit tight and let the rally ride itself out on low volume and fueled by government bailout funds.