Tuesday, November 11, 2008

General Growth Properties (GGP) Looks to Join Some of its Tenants

I have to tell you there are fortunes to be made on the short side - we cannot short individual names but we've long said of all the REITs (Real Estate Investment Trusts), the sub sector I like the most (err, the least) are the mall focused due to our bearish stance on the US consumer and retail. Since we can't do individual names we've been using Ultrashort Real Estate (SRS) which is a mix of all types of REITs, but in our latest entry just 3 weeks ago [Oct 18: CNNMoney: Mall's Demise Could Doom Communities] we did single out General Growth Properties (GGP) which had traded in the $40s this summer and was down to $6.

Today? Down 70%... to 40 cents.

Just yesterday in the Circuit City (CC) piece we wrote

Many many many "small businesses" (job drivers) in America are one off mom and pop retail outlets or restaurants - you won't see those in the newspaper - but just drive around your strip malls and start watching the closures over the coming year. (mall based REITs continue to be among my favorites way to play this from the short side)

Another one bites the dust...
  • General Growth Properties Inc. shares plummeted Tuesday after the mall owner warned it faces solvency trouble and may be forced to file for bankruptcy if it can't refinance or extend nearly $1 billion in debt due next month.
  • The Chicago-based retail property company has $1.13 billion in debt coming due, including $900 million in secured mortgage debt on the two of its Las Vegas shopping centers due on Nov. 28 and $58 million of corporate debt due on Dec. 1.
  • Much of its debt stems from its 2004 acquisition of Rouse Cos, for more than $12 billion including Rouse's debt and they financed it in part with floating rate bonds. The acquisition gave General Growth a collection of high-end shopping malls, as well as, Rouse's master-planned community business, whose value has plummeted as the U.S. housing market has tanked. (ouch)
  • The real estate investment trust, which is whose big-name holdings include Chicago's Water Tower Place and Fashion Show in Las Vegas, also disclosed in a regulatory filing late Monday that it the nation's second-largest mall ownermay default on certain debt obligations.
  • Making matters worse is another $3.07 billion in property and corporate debt slated to come due next year.
  • The company currently operates more than 200 malls in 44 states.
  • If the stock closes below $1.00 for 30 consecutive days, General Growth shares could be delisted from the NYSE, which could trigger a default on some of its debt facilities and also further restrict its ability to attract equity financing.
  • Although Friedman said it's extremely rare for a mall to be shut down, Friedman did warn that falling store occupancies pose a real challenge to mall operators. In some malls, store occupancy rates are falling below 75%. "You can keep a mall open with 60-70% [store] occupancy," Friedman said. "But if it falls to below 40%, then the weakest malls could be forced to close."
This is one scary investing environment where companies from chicken producers to mall operators to insurance companies to just about anything with debt can fall 98%+ in a matter of weeks. If we cannot turn over debt in the U.S. we have issues larger than even this market is pricing in.

That said, the inability to short some of these names - we called out Freddie Mac and Washington Mutual as "going to zero" along with mall REITs/anything retail/restaurant/Las Vegas - is a serious bummer and drag on performance. It feels a lot safer betting against these companies than trying a long side foray that has to have a time line of 2-20 hours at most.

Long Ultrashort Real Estate in fund and personal account

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