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General Growth's Growing Pains

As the credit crisis drags on, debt-ladened General Growth Properties, the nation's second largest regional mall REIT, may have no other choice than to sell the company. That move, according to some observers, could even happen before the end of the year.

In late September, the Chicago-based firm announced it was exploring financial and strategic alternatives, including possible sale of the company, as it races to retire all its 2008 loan maturities, which total $2.8 billion. Beyond that, as of Aug. 29, the company had a total long-term debt load of about $27 billion. Standard & Poor's, Moody's and Fitch have all downgraded General Growth's corporate credit rating.

General Growth has already adopted several extraordinary measures as it tries to work with debtors and calm investors. On Sept. 2, it added seven of its properties to the collateral pool to repay $391 million in near-term mortgage maturities. On Sept. 17, it increased the initial repayment guarantee to 50 percent of its outstanding $1.5 billion credit facility. On Sept. 20, two days after the company's stock plummeted to a then-52-week low of $19.50, General Growth was added to the short-sell ban list by the Securities and Exchange Commission (SEC). It has also doubled its recourse levels with lenders to 50 percent.

Furthermore, in September and October company executives have had other problems to deal with, namely, margin calls. According to SEC filings, company executives sold nine million shares for roughly $141 million since early August. The margin sales resulted in long-time General Growth CFO Bernie Freibaum's resignation.

This proved to be too much for investors. In the weeks since, General Growth's stock has crashed and hit a new low of $2.05 per share on Oct. 24 and is down 97 percent from its all-time high of $67.00 per share in March 2007.

All the measures General Growth is taking may not prove to be enough to stave off asset sales or a sale of the company because of the lockdown in commercial real estate lending. Traditional lenders, including commercial banks and insurance companies, have become strict in their underwriting criteria, demanding recourse, high debt service coverage ratios and equity contributions of at least 35 percent. All that means General Growth's chances of securing refinancing agreements or getting deadline extensions are slim.

The question is what happens next? Selling assets piecemeal from its 180-million-square-foot portfolio could prove difficult, since mall acquisitions usually require buyers to take on a significant amount of debt and not many investors have access to debt right now, notes David J. Lynn, managing director of research and investment strategy with ING Real Estate Investment Management. If General Growth attempts to sell its properties on an individual basis, it might have to accept cap rate discounts of up to 60 basis points.

The company's best bet might be to put itself up for sale to another REIT operator in a stock-to-stock transaction, which would allow the buyer to safely absorb its mountain of debt, says Rich Moore, an analyst with RBC Capital Markets. “I think they'd rather stay independent, but at some point, you put the company at risk if you don't start having the conversations with the big players. The most logical scenario at this point is they will be bought by Simon or Westfield.”

Westfield Group, based in Sydney, has $6.5 billion in available credit facilities and $800 million in cash for possible acquisitions, according to Macquarie Research Equities. Indianapolis-based Simon Property Group has access to $2.7 billion in available credit and approximately $500 million in annual cash flow revenues to provide it with “significant ‘dry powder’ to make acquisitions,” according to a Sept. 16 note from Oppenheimer analyst Mark Biffert.

General Growth declined to comment, as did Simon. Westfield did not return calls in time for the publication of this article.

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