Although the threat of bankruptcy continues to hang over Chicago-based REIT General Growth Properties and Melbourne-based listed property trust Centro Properties Group, both embattled firms have managed to dodge that fate thanks to recent moves.

On Sunday, General Growth was granted a two week extension, until Dec. 12, to repay $900 million in loans. And, Centro, which is facing a Dec. 15 deadline to repay $1.3 billion to its U.S. lenders, said at a special shareholder meeting last Friday that it is attempting to work out further extensions with its lenders.

Both firms are hampered by massive amounts of debt they took on for acquisitions during the height of the real estate boom. General Growth’s long term debt load currently stands at about $24.6 billion. As of June 2008, Centro and its controlled entities had $10.6 billion in total liabilities. As the credit crisis has continued, both have been unable to pay off or refinance that debt. For now, the companies have been able to arrange extensions while exploring other options, including sale of assets and filing for bankruptcy protection.

However, despite the recent maneuvers, Bernard J. Haddigan, managing director for the national retail group with Encino, Calif-based brokerage firm Marcus & Millichap Real Estate Investment Services, thinks it is unlikely either firm will be able to avoid filing for bankruptcy given the situation in the credit markets and the expected prolonged downturn in commercial real estate. Meanwhile, Joel Bloomer, an analyst with Morningstar says of General Growth, “The loan extension is good, but [General Growth] has so much debt coming due over the next few years that they won’t be able to get extensions on all of it.… Our take is that bankruptcy is still the most likely scenario.”

General Growth was under major scrutiny last week as it faced down a Nov. 28 deadline to deal with a $650 million mortgage on the 1.8-million-square-foot Fashion Show Mall and a $250 million mortgage on the 450,000-square-foot Shoppes at the Palazzo in Las Vegas. The day came and went with no announcement. On Monday, General Growth issued a statement saying it had arranged for an extension with its lenders. Also on Monday, General Growth announced an interim agreement to extend the maturity date to Dec. 11 on $58 million in notes related to its 2004 acquisition of the Rouse Co.

“We are working towards a mutually satisfying outcome during the next two weeks. We are not going to discuss the details at this time,” says Timothy Goebel, director of investor relations with General Growth.

As of 11:30 a.m. on Wednesday, General Growth stock was trading at $1.30 per share, up from a 52-week low of $0.24 per share. Despite the gain, the stock is still down 98 percent from its all-time high of $67.00 per share.

In addition to the $900 million that came due last week, General Growth also faces another $1.6 billion in debt maturities coming due between February and May 2009. As it stands, the company’s more than 180 million square feet in assets and its extensive debt load would make an outright purchase by another REIT prohibitive, adds Bloomer. More likely, Bloomer thinks the firm will dismantle piece by piece as it tries to stave off bankruptcy.

General Growth did get a small boost of confidence on Nov. 25 when Pershing Square Capital Management LP, a New York City-based hedge fund sponsor, revealed it had amassed 7.5 percent of its outstanding common stock, or 20,080,690 shares. Pershing also has exposure to 33,438,221 common shares of General Growth under some cash-settled total return swaps, bringing its potential total stake in the company to 19.9 percent. Pershing Square might attempt to help the REIT bring down its debt in exchange for a bigger stake in the underlying business, says Haddigan, but turning around the floundering firm in this environment would be extremely difficult. Also, on Dec. 3, Morgan Stanley revealed it had built up a 5.1 percent stake in the company, with approximately 13,600,000 shares.

Meanwhile in Australia, during Centro’s Nov. 28 general meeting, chairman, Paul Cooper said the company is trying to forgo a short-term extension from lenders and focus instead on a longer-term solution for its debt problems. (A transcript of Cooper’s presentation has been posted on the company’s Web site). As part of these efforts, Centro has proposed converting part of its debt into a “hybrid security.” A Centro spokesperson would not elaborate on the way the security would function, other than noting that it would lower the firm’s interest payments and free up liquidity. At the close of the day on Dec. 2, Centro’s stock was trading at A$0.07 per share, or U.S.$0.05 per share, up from a 52-week low of A$0.04 per share (U.S.$0.03). The stock has lost 99 percent of its value since hitting a peak of A$9.89 per share in February 2007.

“This would achieve a recapitalization of the Centro group and a platform from which to move forward,” said Cooper, who added that “it would not be without significant dilution to the existing shareholders’ investments.”

Overall, Centro may have a harder time than General Growth in extricating itself from its problems, according to Haddigan. The assets in its 104-million-square-foot U.S. portfolio are of lower quality than General Growth’s, he says. And although it’s gotten some bids on its properties, most of those have been from opportunistic buyers looking for steep discounts the company is not prepared to offer, says a Centro spokesperson. In addition, Centro’s cumbersome structure —it invests in various managed funds throughout the U.S., Australia and New Zealand in addition to receiving fees for property management, leasing and development —would make a takeover a complex undertaking, says Haddigan. Add the fact the two most likely suitors for Centro, Kimco Realty Corp. and Developers Diversified Realty, are getting hammered in the stock market and bankruptcy seems even more inevitable, he adds.

In a worst case scenario, Bloomer says, if General Growth and Centro go down they might deepen the downturn in the retail real estate sector by exerting further downward pressure on property valuations. “Our worry is that you have these very large players in distressed situations where they are going to have to sell assets at any price they can get. That can really weigh on the commercial real estate market.”

--Elaine Misonzhnik