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GGP’s Emergence From Bankruptcy a Watershed Moment for Industry

General Growth Properties’ emergence from Chapter 11 bankruptcy protection last week likely marked a turning point for the retail real estate industry.

“Our second largest owner of malls has gone through a difficult process and has survived and is going to continue operating,” says Chris Macke, senior real estate strategist with the CoStar Group, a Bethesda, Md.-based research firm. “So it’s very hopeful for the industry.”

The fortunes of the Chicago-based regional mall REIT, the second largest in the country, have closely followed those of the industry itself. The company over-leveraged in the mid-2000s, faced difficulties securing refinancing in the wake of the credit crunch in 2008 and filed for bankruptcy in 2009.

Now that General Growth has successfully reorganized, managing to secure multi-billion dollar equity commitments and to stay an independent entity, its recovery spells hope for other retail real estate owners.

“I think it’s unfortunate that [the bankruptcy] had to happen, but I am just very glad they are out,” says Greg Maloney, CEO of Jones Lang LaSalle Retail, an Atlanta-based third party management provider.

“It’s really great. I think they’ll be a very strong company going forward,” adds Michael P. Glimcher, chairman and CEO of Glimcher Realty Trust, a Columbus, Ohio-based regional mall REIT. “These are good assets—that speaks highly of the sector.”

General Growth marked its emergence by relaunching its company Web site and debuting a new logo.

What should be particularly heartening for other borrowers facing upcoming debt maturities is the fact that General Growth was able to secure $6.8 billion in equity commitments from Brookfield Asset Management, Fairholme Capital Management LLC and Pershing Square Capital Management LP, says Macke. That means both that equity is available, provided the quality of the assets is attractive enough, and that banks are willing to restructure loans if borrowers can put additional cash on the table. As part of its reorganization, General Growth Properties has been able to restructure about $15 billion in property-level debt.

General Growth management also seems to have made the right call by negotiating one large equity commitment instead of trying to sell off assets piecemeal during its reorganization, Macke notes. Trying to sell the malls one by one would likely have taken much longer than a year and might have forced the company to accept deep discounts on its assets, whereas selling non-core properties post-organization will likely be more advantageous, he says.

Of course, the hard work is hardly over for General Growth’s management team. The REIT has been able to spin off its riskier holdings, made up primarily of master-planned communities and development parcels, into a separate company, which will go by the name of the Howard Hughes Corp.

That means it will be able to focus its attention where it has the most expertise—on its 183 regional malls, says Maloney. But General Growth still faces billions of dollars in debt—the debt hasn’t been wiped out, it has only been extended, which means we will likely see the REIT start selling off assets in order to build up its cash reserves and giving some properties back to the lenders, Maloney adds.

Since emerging from bankruptcy protection, General Growth has reportedly already sold its Gateway Overlook Shopping Center in Columbia, Md. to an undisclosed buyer for $90 million.

The REIT will likely step up its disposition activity after the new CEO, Sandeep Mathrani, assumes his new post in January of 2011, Maloney says. He believes that Mathrani is the right man for the job.

“I think the board picked him because he can look at something, figure out the problem and come up with a solution for it,” Maloney says. “The new GGP, as it emerges from bankruptcy, has to take a look at what’s going to be best for it going forward, and a lot of it is going to be about getting rid of the debt. I am not even sure if General Growth knows specifically what they are going to do at this point. I think they are not going to make any major decisions until the new CEO comes in.”

In addition to asset sales, General Growth also plans to raise cash trough share sales. On Nov. 9, the REIT commenced a public offering of 135 million shares of new GGP stock at $14.75 per share, with the additional option for underwriters to purchase 20.25 million shares. The proceeds will be used to repay up to $2.15 billion in equity commitments from Brookfield, Fairholme and Pershing Square, as well as for general corporate purposes. There may be more to come as well. The firm previously filed with U.S. regulators saying stockholders could sell up to 789.6 million shares and issue warrants to purchase up to 120 million shares.

On Nov. 10, Standard & Poor’s Ratings Services assigned General Growth a BB corporate credit rating, to signify that it considers the company “stable.” However, Standard & Poor’s does not expect an upgrade in the rating for at least another year.

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