Special Issue Monday Report
General Growth - Cottonwood & Fashion Place Malls October 16, 2008

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General Growth, Mall Owner, May Be Facing a Sale


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New York Times piece on the possible sale of General Growth - owner of Cottonwood and Fashion Place Malls

Bob Springmeyer

Bonneville Research

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  • General Growth, Mall Owner, May Be Facing a Sale
    • It took only six weeks of negotiations for General Growth Properties, the nation's second- largest shopping mall owner and operator, to agree to buy the Rouse Company in 2004 for $12.6 billion, a breathtaking price at the time.
    • Now that hasty decision, which drew immediate fire from Wall Street analysts, has come back to haunt General Growth and may lead to the sale of the 54- year-old company, whose widely known properties include Ala Moana Center in Honolulu, Water Tower Place in Chicago and the Grand Canal Shoppes at the Venetian in Las Vegas, The New York Times's Terry Pristin reported.
    • General Growth's acquisition of Rouse, which was known for its innovative planned communities like Columbia, Md., and its "festival marketplaces" like Faneuil Hall in Boston and the South Street Seaport in Manhattan, was financed almost entirely with short- term mortgage debt. This financing strategy, with debt equal to more than 70 percent of its capitalization, raised fears that General Growth, a real estate investment trust based in Chicago with more than 200 shopping centers, had become overleveraged - fears that have now been borne out. The deal included $5.4 billion of Rouse's debt.
    • "They believed that credit markets would continue to be friendly and they would have ample opportunities to restructure their debt," Keven S. Lindemann, the director of real estate for SNL Financial, a research company in Charlottesville, Va., told The Times. "But the capital markets turned against them."
    • Earlier this month, the company dismissed its longtime chief financial officer and suspended its dividend. Moody's Investors Service, Fitch and Standard & Poor's have reduced the company's credit ratings.
    • John Bucksbaum, chief executive since 1999 of the company founded by his father, Matthew, and an uncle, Martin, who died in 1995, declined to be interviewed, The Times said. But in a recent statement, General Growth said it was exploring a variety of options, including the sales of individual properties and partnerships with other companies, to "align the market value of the company's common stock more closely with the intrinsic value" of its shopping malls.
    • The company has also postponed $1.1 billion of projects, according to Green Street Advisors, a research company in Newport Beach, Calif., including an open-air retail and office development with 1.5 million square feet in Summerlin, Nev., the vast planned community near Las Vegas that it acquired in the Rouse merger.
    • Despite these efforts, Rich Moore, a retail REIT analyst at RBC Capital Markets, predicted that another large shopping mall operator, or a combination of rival companies, would end up buying General Growth. "The reality is, given this credit crunch, they're up against the wall," Mr. Moore told The Times. Possible suitors for all or parts of the company include the Simon Property Group, the Westfield Group and Vornado Realty Trust.
    • Giving up the company would be a humiliating blow for Mr. Bucksbaum, a cycling enthusiast whose family ranked No. 205 on Forbes magazine's most recent list of the 400 richest Americans. The company traces its roots to a family grocery business in Marshalltown, Iowa, which Mr. Bucksbaum's father and uncle expanded into one of the Midwest's earliest shopping centers, the Town and Country Center in Cedar Rapids, in 1954. The company moved its headquarters to Chicago in 1997.
    • Like most REITs, General Growth grew by acquiring other companies. Jim Sullivan, a senior analyst at Green Street Advisors, said John Bucksbaum's biggest mistake was giving Bernard Freibaum, the chief financial officer for 15 years, an unusual degree of autonomy. "He was the architect of a financial strategy that did not provide for flexibility when things got tough," Mr. Sullivan said.
    • Analysts say that General Growth is considered a strong mall operator whose woes are not a reflection of its performance. In more ways than not, General Growth resembles the industry leader, the Simon Property Group. Like Simon, General Growth has a mixture of highly successful shopping centers and others that are less productive. "The overwhelming share of their growth and income comes from their top 50 to 70 malls," said Paul Morgan, a REIT analyst at Friedman, Billings, Ramsey & Company, referring to both companies. But the ratio of Simon's debt to its market capitalization is only 40 percent, he said.
    • In a conference call with analysts on July 31, Mr. Bucksbaum said that mall occupancy during the second quarter was 93.2 percent, a record. The company has remained largely unaffected by the wave of recent retail bankruptcies, with store closings amounting to fewer than 1 percent. And though sales per square foot did not increase since last year, they averaged a healthy $459 a square foot, with the strongest 50 malls generating an average of $648 a square foot, he said.
    • But the company has $8.5 billion in debt coming due before the end of 2010, most of it in the form of maturing mortgage loans. Refinancing the debt is considered highly unlikely because of the credit squeeze and the decline in retail real estate values stemming from the economic downturn.
    • And General Growth has made other mistakes as well. It already had a presence in Las Vegas with the Meadows, Boulevard and Grand Canal malls when it bought Rouse, the owner of the Fashion Show mall as well as Summerlin. The $1 billion in debt coming due this year includes loans on the Fashion Show and the Shoppes at the Palazzo, the new mall that General Growth recently acquired from the Las Vegas Sands. "They put a lot of eggs in a basket that was already pretty full," Mr. Sullivan told The Times.
    • The Las Vegas area has been hit especially hard by the housing crisis, and tourism is also feeling the effects of the downturn. From August 2007 to August 2008, the number of visitors to the city declined by 4.3 percent and gambling revenue was down by 9.4 percent, the Las Vegas Convention and Visitors Authority reported.
    • In an embarrassing legal defeat, General Growth was ordered last November to pay $74.2 million in compensatory damages to a private developer, Caruso Affiliated Holdings, after a jury found that it had tried to block the Cheesecake Factory restaurant chain from opening in a new shopping center adjacent to its own Glendale Galleria in California.
    • Shares of General Growth, already battered by its debt problems, recently plummeted further as executives, including Mr. Freibaum, were forced to sell millions of dollars worth of stock to satisfy margin calls. (The Bucksbaum family did not sell any shares, the company said.)
    • General Growth's struggles have not stopped the company from pursuing development opportunities. In June, the company announced an ambitious redevelopment plan for the South Street Seaport that would include a 42-story apartment and hotel tower. Last week, Mayor Michael R. Bloomberg of New York designated General Growth as one of the developers of a 1.7-million-square-foot development between Second and Third Avenues and 125th and 127th Streets in East Harlem.
    • General Growth is hardly the only shopping center company in trouble these days. The Centro Properties Group, a strip center company based in Melbourne, Australia, has faced similar short-term debt problems since its acquisition last year of New Plan Excel Realty Trust, a United States REIT. Feldman Mall Properties of Great Neck, N.Y., which owns seven shopping centers across the country, disclosed last month that it might go out of business by the end of the year.
    • But those companies were never in General Growth's league.
    • "This is a blue-chip, incredibly well-respected company with a founding family that helped build the mall business in this country," Mr. Sullivan said.

    Source: The New York Times 12/15/08

    http://dealbook.blogs.nytimes.com/2008/10/15/gen eral-growth-mall-owner-may-be-facing-a-sale/? scp=1&sq=General%20Growth&st=cse

    New York Times - General Growth, Mall Owner, May Be Facing a Sale
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