General Growth Properties (GGP) Files for Bankruptcy

I am at a loss to write about now since all news is good news. I am sure I can find a way to twist the 2nd largest mall REIT going bankrupt into a "positive" for the rest of the sector. My working thesis is this bankruptcy will put pressure on the Federal Reserve to make an even larger commitment to bail out all the other REITs. Yep, that works. It will also allow the banks to offload more of their commercial property loans onto the Federal Reserve balance sheet, since it's now a clearly a threat to them making billions.

I am not sure how we can say that REITs are "too big too fail" but we will find a way - the lobbyists have been working very very hard [Dec 22, 2008: Wall Street Journal - Property Developers Ask for Government Bailouts] [Jan 13, 2009: Bailout Nation Continues in Commercial Real Estate Land - "Lemme In on that Money"] and now we are hearing rumblings that the Federal Reserve which is supposed to only have short term loans (months long!) on their balance sheet but are making an exception with TALF loans (up to 3 years) now are succumbing to pressure by financiers in commercial real estate to support their loans for at least 5 years [Feb 23, 2009: Fed May Need to Recast TALF on Commercial Real Estate]

So again, this is not bad news - it is good news. Because it will bring government even deeper into the "free markets". Therefore please take as much risk as possible in the future as whatever the mess, the government will fix it. My brain has incorrectly been working in a capitalist mind frame; it's taking me a while to switch over to central command economy.

The story with General Growth Properties (GGP) was no surprise [Nov 11, 2008: General Growth Properties Looks to Join Its Tenants] and now we will see if Bill Ackman's bet works out. [Jan 13: Logic Behind Bill Ackman's Purchase of General Growth Properties]

Via Bloomberg

• General Growth Properties Inc. filed the biggest real estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree that turned it into the second-largest shopping mall owner.
• The company listed $29.5 billion in assets and debts of about $27.3 billion in the Chapter 11 filing. General Growth will continue operating its more than 200 properties.
• “We intend to emerge as a leaner company,” General Growth President Thomas Nolan said in an interview today. “We want to come out as a less leveraged company. Our business model remains strong.”
• General Growth collapsed after spending $11.3 billion to buy commercial-property developer Rouse Co. in 2004 only to get caught in the credit crunch and a U.S. recession that has cut spending and property values. Banks have reduced lending amid mortgage-related writedowns. Commercial real estate prices in the U.S. dropped 15 percent last year, according to Moody’s Investors Service.
• Hedge fund manager William Ackman’s Pershing Square Pershing Square Capital Management LP will provide General Growth with $375 million in financing to help run the company during the Chapter 11 process, today’s statement said. Ackman is likely to play a key role in the reorganization since Pershing is the third-largest shareholder, according to Bloomberg data.
• Much of the company’s debt can be traced to its purchase of Rouse Co. in 2004, which owned malls including South Street Seaport. As Chicago-based General Growth struggled to meet debt deadlines, it lost 81 percent of its market value in the last six months after saying repeatedly it may have to file for bankruptcy.
• Nolan said General Growth, the largest mall owner after Simon Property Group Inc., was a victim of “a broken capital market.” No one could have predicted the severity of e “the credit markets shutting down,” he said.
• “It was a disaster waiting to happen,” said Patrick Sumner, head of real estate securities at Henderson Global Investors in London. “They didn’t realize the market was going to get like this and that they were going to be in the front line when the guns went off.”

Via WSJ

• The long-anticipated Chapter 11 filing might wipe out what remains of the Chicago company's stock, but it won't result in mall closures. Many analysts suspect General Growth will survive a lengthy bankruptcy intact, but perhaps smaller after selling properties, without resorting to liquidation.
• The bankruptcy will have far-reaching implications for the mall industry, including putting pressure on already declining property values of U.S. malls, and subsequently mall mortgages, if General Growth dumps property to pay creditors. (not a problem, the Federal Reserve will take care of it)
• The collapse points to an underlying concern for the commercial real estate industry, too. Developers and property owners that loaded up on debt during the past real-estate boom now face mountains of that debt coming due. But some of those borrowers, like General Growth, lack the cash or the borrowing capacity to refinance or pay those debts. Many lenders are granting cash-strapped borrowers extensions of their payment deadlines, but that only postpones rather than resolves the issue. This year alone, an estimated $248 billion of commercial mortgages will come due. Meanwhile, commercial-property values have sunk, hampering the ability of owners to refinance or sell their properties. Real estate research company Green Street Advisors predicts a 40% overall decline in U.S. commercial property values in this recession.
• Some say that, even if General Growth's equity value slightly exceeds its debt, that surplus will be gobbled up by the many fees and costs of the bankruptcy process. Others are betting that shareholders will salvage something if creditors are willing to forego a fire sale and allow a lengthy and orderly process to restructure General Growth's debt.
• Many analysts suspect that, rather than liquidating, General Growth will restructure in bankruptcy court and emerge as a smaller company after shedding several malls to satisfy creditors. If not, a fire-sale liquidation of General Growth's malls would flood the already weak market for mall sales and hammer the value of those and other malls. "If even 10% of those 200 [General Growth] malls are sold, it will represent a deluge of regional malls on the market," says Victor Calanog, Reis' director of research. "Any increase in supply without a pickup in demand will depress prices."

No position