General Growth Properties originated as a small family run business about 50 years ago. The REIT grew through numerous acquisitions, including the $13 billion purchase of the Rouse Company. As the empire expanded, reigning family members were replaced by corporate executives, more experienced in managing rapidly expanding businesses, and complicated financial instruments. Like many other REITs, General Growth Properties became over leveraged, driven by excessive acquisition and speculation. In 2008, when heretofore runaway home prices collapsed, a mammoth credit crisis emerged, and bankers were unwilling to refinance debt, particularly for real estate assets. As a result, General Growth Properties sought bankruptcy protection in April 2009, making it the biggest failure of its kind in the United States.
General Growth Properties currently has an ownership stake in about 200 mall properties, representing about 14% of the total in the United States. The REIT is currently exploring its avenues, and aims to emerge from bankruptcy sometime in 2010. In late December 2009, a judge approved a reorganization plan for 103 properties owned by General Growth Properties, which represents a significant portion of its property debt. Additional progress is being made on other properties, as well.
The reorganization will likely be accompanied by some rightsizing actions. This could include the spinoff of the REIT’s subsidiaries, or an equity offering to raise capital. Moreover, the sharks have started circling the waters. The Simon Property Group (SPG), which owns a sizable amount of mall properties, and has proven adept at making accretive acquisitions, has been buying the debt of General Growth, in an attempt to gain influence in the board room. It has also retained a well-known mergers and acquisitions firm in an effort to bid on some assets. Brookfield Asset Management (BAM) has taken similar measures to benefit from General Growth’s distress.
Clearly, the outcome for the company, and its large portfolio of assets, remains unknown for the retail and commercial real estate markets. The eventual resolution could affect the amount of commercial real estate supply available in the marketplace, as well as create pricing confusion for buyers and sellers. There’s no doubt, however, that it will influence investors’ outlook for the retail REIT sector.