General Growth puts malls on the block


Mall giant General Growth Properties will try to use three malls on the Strip to escape the looming shadow of billions of dollars in debt.

On Monday the company announced plans to offer Fashion Show, Grand Canal Shoppes and Shoppes at Palazzo malls for sale, as well as an overhaul of the senior management.

The move looks like a last-ditch effort to save the second-biggest real estate investment trust, or REIT, in the country from an outright takeover or bankruptcy.

But it may be too little, too late, analysts said.

General Growth has $900 million in loans due by the end of November and about $4 billion by the end of 2009.

"I think it is indicative that the end is near and they are going to get sold," said Rich Moore, an analyst with RBC Capital Markets.

Moore says he is doubtful General Growth will find buyers for the Las Vegas properties as individual entities.

It's likely they offered the big-name properties in an effort to slow a crippling slide in stock value that's forced upper management to dump shares by the bushel to meet margin calls and made it even more difficult to refinance loans to remain solvent.

"It keeps (Wall Street) at bay a bit," Moore said.

Deutsche Bank analyst Bill Lerner said the proposed Las Vegas sale could make it easier for General Growth to refinance its most pressing loans. Lerner also said it could be a signal a sale of the entire company is in the works.

"Potential buyers of these three assets are likely to want other assets more strategic to their respective portfolios, as well. With so many assets potentially being marketed, it makes sense for the board to more seriously consider the sale of the entire company," Lerner wrote.

In addition to the sale offerings, General Growth ousted Chief Executive Officer John Bucksbaum, a member of the family that founded the company, and President Robert Michaels from those duties. Bucksbaum remains chairman of the board and Michaels is still chief operating officer.

Moore predicted the changes announced Monday are a harbinger of a sale of the entire company, possibly to Simon Property Group, the nation's biggest REIT. It already owns Forum Shops at Caesars.

"Simon doesn't want them sold off individually," Moore said. "They'd like to jump in and buy the whole thing."

General Growth borrowed to create a massive portfolio of more than 200 properties in 44 states, including a $14 billion deal in 2004 to purchase the Rouse Co., which owned Fashion Show mall, Summerlin Centre and several other Las Vegas properties.

Company stock started slipping several months ago as prospects for consumer spending waned.

Shares went into freefall more recently when investors realized the confluence of the credit crunch with an emerging recession would make it difficult, if not impossible, for General Growth to make good on its debts.

Financial blogger Reggie Middleton, whose detailed criticisms of General Growth were posted online at www.boombustblog.com in January, months before management acknowledged serious problems, said the news Monday wasn't a surprise.

"Of course it could have," been prevented, said Middleton. "They didn't take care of the problems."

He criticized management not only for over-leveraging the company long ago but for compounding the problem through mismanagement.

Middleton said General Growth officials heaped blame on short sellers for forecasting a demise, got the company added to the list of firms protected from short sellers that was created in September to protect banks, then dumped millions of their own shares to meet margin calls.

"The latter part of the share price compression was the management's own making," Middleton said. "They owned a lot (of stock) on margin. They sold more shares than speculators like me ever would."

Wally Brewster, General Growth Properties senior vice president of marketing and communications, said the malls are healthy on an operational level.

But the company has loans coming due on Shoppes at Palazzo and Fashion Show, which made them candidates for sale, and Grand Canal Shoppes is one of the most successful malls in the country, meaning it would likely be attractive for a buyer.

"They are some of the world's highest-quality malls," Brewster said.

As for the notion that General Growth officials would seek a buyer for the entire company, "We always look at all the options."

Brewster also responded to the idea that company officials could have averted the problem by taking action earlier.

"I think we stand on our success of the past 50 years," Brewster said. "We are now dealing with an environment I don't think the U.S. has seen since the Great Depression."

With Bucksbaum and Michaels demoted, General Growth turned to Adam Metz to be interim CEO.

Metz was CFO of mall company Urban Retail Properties, which in 2000 was sold to the Dutch firm Rodamco. In 2002 Rodamco was sold to Rouse, Simon and Westfield, an Australia-based mall company. Metz came to General Growth when the company acquired Rouse in 2004.

Moore agreed with Middleton that the moves on Monday aren't likely to preserve General Growth as a complete entity. He added that current problems could have been averted had management girded the balance sheet before the credit markets went south.

The moral of the story?

"Leverage is very, very dangerous," Moore said.

Contact reporter Benjamin Spillman at bspillman@reviewjournal.com or 702-477-3861.

 

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