General Growth Properties: Trouble at the Malls?

Commercial real estate continues to be a hot topic among visitors to Research Recap. And while there’s a general consensus that times are bad, there’s disagreement on how bad and whether they are bad enough to prompt widespread downgrades and defaults.

The Chapter 11 bankruptcy filing of General Growth Properties (GGP), which controls many of America’s leading shopping malls, led Fitch to downgrade the outlook for a bunch of related CMBS transactions to negative. Despite the GGP filing, CreditSights reiterated its view that no major REIT is likely to default.

George Soros does not seem to agree. Speaking on The Diane Rehm Show, Soros predicted that many commercial real estate loans would not be renewed. He noted that the typical commercial real estate loan covers 85% of the value, whereas prices have fallen by 30% or more. Moody’s commercial property price index is down about 21% from the peak, but Moody’s also notes that “few CMBS loans maturing in the next two years are from vintages with more than 10% price depreciation.” And as reported in our last Zeitgeist, Fitch says REITs are facing headwinds maintaining adequate liquidity to meet ongoing funding obligations.

Our most popular recent post was Oxford Analytica’s prediction that the global recession could lead to emerging markets countries to trigger a round of currency devaluations. This was followed by Fitch’s analysis of the drastic drop in cigarette sales volumes.

Comments

[helplessobs...:]

I do not know about the Malls, but BAC has big trouble with two large office buildings and associated retail and Condo buildings in the Buckhead section of Atlanta. Already overbuilt BAC funded construction of two of four new buildings. Now it is really overbuilt. WSJ says the Condo projects alone fills Atlanta's needs for the next 10 years. This huge mistake will hard to sidestep in the up coming annual meeting.

Apr 23 10:52 AM

[User 371960:]

the definition of insanity is doing the same thing over again and expecting a different result. GGP needs to completely clean house and bring in "clean" pros to run the company the way it should be run.

Apr 23 03:34 PM

[Brian McMorris:]

GGPs problems are not in its operating management, which is fine, maybe even great. The problems stem from overbuying properties (Rouse) at the peak, using short term instruments (CMBSs and direct loans) on the eve of the greatest credit crisis to hit the world in 80 years.

This deal had to end in tears. Because there are so many different lenders to a myriad of partnerships that constitute GGP, it was impossible to renegotiate the loans individually, or the CMBSs at all. Bankruptcy turns out to be the only option. But with Bill Ackman leading the bankruptcy on behalf of his investment vehicle, Pershing Square, and common shareholders everywhere, this deal may get fixed.

Ackman is consolidating all the loans into the one bankruptcy filing so all the debtors can be dealt with as a class. They will all be told by the court to accept a reduction / writedown in debt in return for common shares. This will dilute existing shareholders, but if you are buying at current prices, you will be happy to be diluted.

The new GGP with 2 or 3 times the number of shares as before, will emerge from bankruptcy with a much healthier balance sheet with debt to equity of around 50%, rather than the current 95%. With a nice balance sheet, GGP will be able to negotiate new longer term loans to cover its malls. It will probably sell some of the malls, when the market improves, to make the balance sheet even stronger.

Apr 29 09:40 PM