As the credit crisis drags on, debt-ladened General Growth Properties, the nation’s second largest regional mall REIT, may have no other choice than to sell the company. That move, according to some observers, could even happen before the end of the year.

Last week, the Chicago-based firm announced it was exploring financial and strategic alternatives, including possible sale of the company, as it races to retire all of its 2008 loan maturities, which total $2.8 billion. Beyond that, as of Aug. 29, the company had a total long-term debt load of about $27 billion, according to Columbia Capital Services, Inc. Its long-term debt to capitalization ratio is at 72 percent, according to a report from Wachovia Capital Markets. On Monday, Standard & Poor’s downgraded General Growth’s corporate credit rating to BB from BB+ and put the company on the watch list for further downgrades.

General Growth has already adopted several extraordinary measures as it tries to work with debtors and calm investors. On Sept. 2, it added seven of its properties to the collateral pool to repay $391 million in near term mortgage maturities. On Sept. 17, it increased the initial repayment guarantee to 50 percent of its outstanding $1.5 billion credit facility. On Sept. 20, two days after the company’s stock plummeted to a 52-week low of $19.50, General Growth was added to the short sell ban list by the Securities and Exchange Commission (SEC). It has also doubled its recourse levels with lenders to 50 percent.

Furthermore, in recent weeks company executives have had other problems to deal with: margin calls. According to SEC filings, company executives sold 5.6 million shares for roughly $113 million since early August. Of that, executives sold 3 million shares for $61 million explicitly to pay back margin loans.

All of the measures General Growth is taking may not prove to be enough to stave off asset sales or a sale of the company because of the lockdown in commercial real estate lending. In the three months between July and September, CMBS issuance in the U.S. was $0. Overall, in the second quarter, the amount of commercial real estate debt outstanding grew 1.5 percent, or $51.3 billion, according to the Mortgage Bankers Association, and stands at more than $3.4 trillion in total. Traditional lenders, including commercial banks and insurance companies, have also become strict in their underwriting criteria, demanding recourse, high debt service coverage ratios and equity contributions of at least 35 percent. All of that means General Growth’s chances of securing refinancing agreements or getting deadline extensions are slim.

“We remain concerned about the deepening concessions GGP is making to access financing, particularly when we are several chapters [away] from the conclusion of this tale,” wrote Wachovia analyst Jeffrey J. Donnelly in a Sept. 18 note.

The question is what happens next? Selling assets piecemeal from its 180-million-square-foot portfolio could prove difficult, since mall acquisitions usually require buyers to take on a significant amount of debt and not many investors have access to debt right now, notes David J. Lynn, managing director of research and investment strategy with ING Real Estate Investment Management. If General Growth attempts to sell its properties on an individual basis, it might have to accept cap rate discounts of up to 60 basis points.

The company’s best bet might be to put itself up for sale to another REIT operator in a stock-to-stock transaction, which would allow the buyer to safely absorb its mountain of debt, says Rich Moore, an analyst with RBC Capital Markets. “I think they’d rather stay independent, but at some point, you put the company at risk if you don’t start having the conversations with the big players. The most logical scenario at this point is they will be bought by Simon or Westfield.”

Westfield Group, based in Sydney, operates a 63-million-square-foot portfolio in the U.S., and has $6.5 billion in available credit facilities and $800 million in cash for possible acquisitions, according to Macquarie Research Equities.

Indianapolis-based Simon Property Group, the country’s largest regional mall operator at 242 million square feet, has access to $2.7 billion in available credit and approximately $500 million in annual cash flow revenues to provide it with “significant ‘dry powder’ to make acquisitions,” according to a Sept. 16 note from Oppenheimer analyst Mark Biffert.

General Growth declined to comment, as did Simon. Westfield did not return calls for comment in time for the publication of this article.

Meanwhile, there are a few other REIT players out there who might be heading for General Growth’s fate, according to Moore. He declined to give any names, noting only he was referring to smaller firms.

“I think there were a lot of companies that took the attitude that they can lever up and it will be okay,” he says. “I am not sure some of these guys ever left the private market” in their approach to risk.

--Elaine Misonzhnik