As General Growth Properties executives laid out the company's initial restructuring plan last week, they continually emphasized they were not prepared to dismantle the firm's portfolio. General Growth president and COO Tom Nolan stressed that the firm's assets are key to generating NOI and enabling the REIT to emerge from Chapter 11 bankruptcy protection. As a result, the Chicago-based firm has no plans to downsize its holdings and would prefer not to sell its trophy properties as it attempts to bolster its cash position and restructure its debts.

Observers looking from the outside at General Growth's situation, however, think that plan might be a pipe dream. Industry experts believe the firm, faced with more than $27 billion in debt, will be forced to sell some of its best assets to pay down its loans.

"People who have the capacity to buy [in the current market] are not interested in non-strategic assets," says Ross B. Glickman, chairman and CEO of Urban Retail Properties, a Chicago-based retail developer and property manager. "They are interested in fortress centers and I really have to think that sooner or later General Growth is going to be forced to put some of those on the block to generate capital. I think they almost have to."

Speaking at General Growth's conference call with the media last week, Nolan said the REIT would prefer to remain at its current size, with its owned portfolio totaling 182 million square feet. General Growth executives have been combing through the firm's property list to identify non-strategic assets that can be sold to raise some cash, but have no plans to touch the top 25 centers in the portfolio.

"It's our obligation to consider all strategic opportunities, but we look at [our portfolio] as integral for establishing the entire platform for the company," Nolan said.

To avoid asset sales, General Growth would need to get its creditors to agree to restructured or reduced debt and have its plan approved by the bankruptcy court. Under Chapter 11 bankruptcy, General Growth has 120 days to propose its reorganization plan and bankruptcy code calls for firms to emerge from bankruptcy within one year (although extensions are often granted). General Growth needs two-thirds of its secured and unsecured creditors (by dollar amount) and a majority of absolute creditors to approve its plan. General Growth is attempting to buy time to deal with lenders. It was facing continued pressure with billions in debt coming due this year and next. The firm hopes to generate cash as it continues to operate properties while it also works to get its lenders to agree to reduced debt loads. However, if too many of its creditors balk at the delays or don't agree with its proposed reductions, the firm could be forced to raise cash much more quickly, which is where asset sales could enter the picture.

That's a problem because so far, General Growth has not appeared to feel comfortable with the discounts that are currently built into almost every sales transaction. Back in the fall, it tried to remedy its liquidity problems by putting several large assets on the block, including the 1.8-million-square-foot Fashion Show Mall and the 510,285-square-foot Grand Canal Shoppes at the Venetian, both in Las Vegas. By Nolan's, admission, the REIT received a number of bids for the properties, but the firm was not satisfied with the offers and ultimately opted not to sell.

General Growth might be reluctant to agree to discounts because its malls are still performing well. At year-end 2008, its portfolio occupancy was at 92.5 percent. "Their bankruptcy is not reflective of adverse conditions in the retail real estate market," says Stephen Sterrett, CFO of Simon Property Group, the Indianapolis-based REIT with the only retail portfolio larger than General Growth's at 246 million square feet. "This is strictly a situation related to how they financed the company."

Given its deep indebtedness, however, General Growth may not have the luxury of saying no to bidders, according to Glickman. To survive in the current highly illiquid environment, the REIT would have to emerge from Chapter 11 as quickly as possible. Though the firm is considering strategic alternatives, analysts say it's unlikely that another retail REIT would risk acquiring the company wholesale. Simon, the company identified as most likely to make a play for General Growth, declined to discuss the possibility of an acquisition. Furthermore, Simon has focused its efforts in recent months on reducing its debt exposure. So some analysts think it is unlikely that the REIT would want to assume General Growth's debts.

Selling assets in the current sales environment is not an attractive proposition. In February of 2006, mall sales closed at an average price of $167.48 per square foot and an average cap rate of 6.5 percent, according to Real Capital Analytics (RCA), a New York City-based research firm. By February of this year, the average price on mall transactions had fallen by more than 35 percent, to $108.67 per square foot with the cap rate rising 70 basis points, to 7.2 percent.

In fact, with a debt to total assets ratio of approximately 98 percent, virtually any bid General Growth receives in today's environment will be at a discount to the book value of its properties, says Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based research firm. "Obviously the assets are attractive, but as attractive as they are, they are priced to perfection under GGP's structure," Mulvee notes. "[In this market], any transaction price on those assets will be at a discount."

One bit of good news in this scenario is that if General Growth will be forced to put a large number of its centers up for sale, the bids it will receive might help the market value retail assets more accurately. With the recent dearth of investment sales transactions (in February, closed retail sales totaled just $455 million, representing a 78 percent drop from the same month in 2008, according to RCA), real estate appraisers are having difficulty determining pricing on retail properties, Mulvee says. Sales of General Growth's centers might give them a fresh perspective.

"It will give the market a benchmark," Mulvee notes. "It will be an unwelcome benchmark, but it will be a benchmark that will have to be acknowledged."

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