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In Defense of General Growth

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General Growth Properties issued an extremely interesting press release over the weekend. It seems that among sections of the financial press and some blogs, the idea that General Growth is somehow in danger of a Centro Properties-style meltdown has spread. Aside from the fact that this is a watershed moment for financial blogs, (Can you think of a company ever issuing a statement responding to a blog entry before?) it's become vogue now to try and find the next real estate related blowup. General Growth seemingly has become a popular target for that, largely because it is carrying a high debt load. According to stats from Deutsche Bank that we ran in our January issue, the company has $26.9 billion in debt. This has become more of an issue at a time when General Growth--like most other REITs has seen its stock price plummet over the past six months. That means its debt-to-market cap ratio has been rising.

GGP-One Year

The funny thing is that amid all of this rising speculation of troubles, General Growth's stock climbed nearly 5 percent yesterday, even when the broader market fell.

GGP-Tuesday

Anyway, General Growth's response to these reports was strongly worded and fairly thorough. Here are some choice excerpts from its weekend statement:

# The Company is absolutely not in any danger of having to contemplate a bankruptcy filing, and the Company unequivocally has no intention of doing so.

# Since its formation over 50 years ago, the Company has borrowed and repaid billions of dollars of loans and has never failed to pay any loan upon maturity.

...

# Conservative loan-to-property-value mortgage loans are in fact currently available to the Company for its income producing commercial properties. As previously set forth in the Company's press releases on January 8th and 17th, because of the strong property income for financing purposes on these properties, the Company will be able to obtain mortgage loans at conservative loan-to-property-value ratios of 50%-60%.

# Newspaper stories and blogs have compared GGP to other companies or individuals that recently utilized multi-billion dollar short term acquisition loans that are coming due in February of 2008. The Company has no such multi-billion dollar loans. The last material acquisition made by the Company was the purchase of The Rouse Company, which closed in November of 2004. At that time, an $8 billion four-year acquisition loan was obtained to complete the approximately $14 billion purchase. By early 2006, almost two years before it was due, the acquisition loan was repaid in full.

The statement also goes to the unusual step of having GGP CFO Bernie Freibaum quote Barry Vinocur, editor and publisher of REIT WRAP:

Mr. Vinocur said that ‘raising the possibility… that a company might file bankruptcy—especially in today's environment—is very serious stuff. Moreover, is there any knowledgeable individual who would suggest there's even a remote possibility that GGP might file bankruptcy?' ”

“Finally,” continued Bernie Freibaum, “Mr. Vinocur adds ‘that the editors signing off on this crap should have their press passes yanked.' ”

I poked around and think I found some of the articles and blog posts that have really irked General Growth. (For a short version of the saga, check out this Chicago Tribune piece.)

Financial blog Seeking Alpha, for example, wrote not just one but two lengthy posts speculating that General Growth was overvalued and that it would be one of the worst-hit REITs by a continued slump or a recession. Reggie Middleton's Boom Bust Blog has also given GGP some attention. And that blog also responded to the GGP release.

The Wall Street Journal got into the act as well, carrying an article on January 19 raising concerns about General Growth's debt levels. (On Tuesday, Marketwatch reprinted the piece and so did Fox Business.)

Keep reading after the jump.

Here's an excerpt from that piece:

Among large, actively traded real-estate investment trusts, General Growth's debt relative to assets and capitalization is higher than most. And most of its debt, which at last count topped $25 billion, isn't just any debt. Unlike most of its peers, such as Simon Property Group, which rely on the public debt markets and run more conservative balance sheets, most of General Growth's debt is in the form of good old-fashioned mortgages and construction loans that are secured against specific malls. In those recent freewheeling days of easy money, General Growth would from time to time dip into the once-thriving mortgage-backed-securities market.

The company's approach to financing made General Growth, which has more than 200 properties in 45 states, "more risky than its peers," says Steven Marks, managing director of the REIT group at Fitch Ratings, which rates the company's debt as "junk."

I'm not sure I buy this narrative.

The comparisons with Centro, as General Growth points out, fall flat. For one, General Growth's indebtedness level--while higher than some of its peers--is not in Centro territory. And the level appears high in part because REIT share prices have dropped so much in recent months. If retail REIT stocks rebound, suddenly the ratio won't look so bad. Yesterday, for example, REIT stocks had a strong rally. General Growth in particular went up 4.78 percent.

Secondly, of its debt, only about $2.8 billion is set to expire during 2008. It's not like its dealing with a huge pile of short-term acquisition debt in the same way Centro is. And it's not like General Growth is taking on more debt while this is going on. Nor has it talked of having any issues with its lenders.

More importantly, General Growth doesn't seem to be having problems paying this debt down and refinancing when necessary. On Dec. 18, it provided a rundown of its fourth quarter financing activity.

General Growth Properties, Inc. announced today that it has completed approximately $1.4 billion of mortgage financings since the end of the third quarter, including approximately $366 million of 2008 maturities. In addition, the company has obtained binding commitments for secured mortgage financing of certain properties scheduled to close in January 2008 totaling $900 million.

On January 8, the company announced a capital roadmap for all of 2008 and 2009, including a detailed PDF.

The debt maturing in 2008 includes $1.816 billion of mortgage and other secured debt, $722 million of remaining bridge acquisition debt, and $83 million of notes. The Company estimates that property-level income, a measure used by lenders for financing purposes, will be approximately $365 million in the twelve months following the maturity date of the debt maturing in 2008. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $4.867 billion. Accordingly, the maturing 2008 mortgage debt of $1.816 billion represents approximately 37.3% of the financing value of the properties.

The debt maturing in 2009 includes $2.744 billion of mortgage and other secured debt and $600 million of notes. The Company estimates that property-level income will be approximately $415 million in the twelve months following the maturity date of the debt maturing in 2009. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $5.533 billion. Accordingly, the maturing 2009 mortgage debt of $2.744 billion represents approximately 49.6% of the financing value of the properties.

We are currently negotiating the terms of the agreements to refinance debt maturing in 2008. The terms of these new long term fixed rate mortgage loans include expected loan amounts equal to approximately 50%-60% of property value for financing purposes, capitalization rates well below 7.5%, and interest rates of approximately 5.75%. As a result, although agreements to refinance debt maturing in 2008 and 2009 have not been reached, we currently believe that over the next two years the Company will generate significant excess proceeds from the refinancing of the $4.56 billion of maturing mortgage debt.

Most recently, the firm announced new mortgage loans and the sale of a couple of office buildings.

So, it seems to me there's a lot of speculation going on. Sure, General Growth debt levels may be high. But unless it starts talking defaults and or we see banks declining to rework its debt, I don't see a problem.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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