General Growth blames credit crisis, not shopping slowdown

By Alby Gallun, April 16, 2009

(Crain’s) — The meltdown in financial markets, not the deep slump in the retail industry, brought General Growth Properties Inc. to its knees Thursday.

Unlike many struggling corporations that have been battered by a collapse in sales, the Chicago-based real estate investment trust continues to oversee a relatively stable business collecting rents at its roughly 200 shopping malls, including Water Tower Place on Michigan Avenue and Northbrook Court in north suburban Northbrook.

Related story: General Growth unlikely to sell Water Tower Place, Oakbrook Center

The outlook for its malls is darkening, to be sure, but the company isn’t suffering from the vast overcapacity plaguing other sectors of the economy.

“This isn’t General Motors dealing with a shrinking market for new vehicle sales,” says Andrew Miller, president and CEO of Miller Capital Advisory Inc., a Skokie-based firm and joint venture partner with General Growth in the Oakbrook Center mall in west suburban Oak Brook.

Instead, General Growth finally had to face up to its inability to refinance billions of dollars in loans, some of which are already in default. After several months of speculation, the company filed for Chapter 11 bankruptcy protection Thursday.

The company's loan troubles stem from a debt-fueled acquisition spree earlier this decade, capped by its $7.2 billion buyout of Rouse Co. in 2004.

“The reasons for this are unrelated to the performance of the shopping center industry generally,” General Growth CEO Adam Metz wrote in an affidavit filed in U.S. Bankruptcy Court in New York. “Instead, the problem is that virtually every source of commercial real estate financing has dried up, leaving a vastly inadequate supply of credit to meet the demand created by current and upcoming maturities.”

He pointed out that the company’s net operating income, or NOI, a common performance metric in the real estate industry, actually rose 4.5% to $2.6 billion last year. The company’s business is less cyclical than the retail business, he said, because its tenants are locked into long-term leases and it relies on a diverse mix of tenants and properties.

Still, the prospects for mall owners like General Growth are hardly rosy. NOI — rents minus operating expenses — at General Growth’s comparable properties will fall 1.9% this year, vs. a 2.4% drop for the mall REIT sector, according to a report last month by Green Street Advisors Inc., a California-based research firm. The firm forecasts a 2.6% NOI decline for General Growth in 2010, vs. a 2.8% drop for the sector.

The “terrible economic outlook” and drop in consumer spending “point to a couple of years of tough times on the operating front for mall owners,” the report says. “Management teams will find themselves needing XXXL pads for the grueling blocking and tackling that will be required on both the financing and operating fields.”

Read full coverage of General Growth's bankruptcy filing

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Robert S. wrote:

Common GGP. You blame the credit crisis but wasn't it your decision to load up on debt during the heyday?? How can these companies make blatantly bad decisions in good times and then stand there in amazement when the cycle turns and the market will not bail them out of their problems? Their bad decisions will be a boon to those responsible operators who will now be able to pick up GGP properties for a song.

4/16/2009 3:49:55 PM

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Darth R. wrote:

"The meltdown in financial markets, not the deep slump in the retail industry..."

What in the world is this statement about? By this logic, one might as well say "I got lost when it became dark but not because evening arrived." These two trends/blowouts did not come about independent of each other. Among many other knock-on effects, the implosion of financial markets has also led to a severe contraction in the availability of consumer credit... Even if GGP were able to refinance its huge loan burden, the retail sector (outside of Wal-Mart) is continuing to contract. GGP's lenders know this of course, and it is unrealistic to expect GGP to continue servicing its debt load when rental income is expected to fall.

4/16/2009 4:30:14 PM

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