After a hotly contested hearing at the U.S. Bankruptcy Court in New York, Judge Allan Gropper granted Chicago-based REIT General Growth Properties a four-month extension on its exclusivity period to file a reorganization plan, with the right to request another extension if needed.
In handing out his decision, Gropper cited the need for the REIT to create the highest value for all stakeholders—including both shareholders and unsecured creditors—and expressed his belief that the debtor would be the only party to keep everyone’s interest in mind as it proceeds with the reorganization. The extension to July 15 fell short of the six-month period General Growth initially requested, but was also longer than the 45-day period proposed by the unsecured creditors’ committee, which favors rival Simon Property Group’s $10 billion bid to acquire the company.
The court also approved investment bank UBS as an additional financial advisor to General Growth. The REIT, which has already been using the restructuring services of Miller Buckfire & Co., argued that UBS’ extensive experience as a book manager in REIT equity offerings would help it effectively run a capital raising campaign.
Going forward, General Growth will pursue two tracks simultaneously. It will seek to find ways to recapitalize the company as well as field acquisition bids from suitors.
In spite of obvious disagreements between the parties involved, Judge Gropper expressed a high degree of satisfaction with the progress in the REIT’s bankruptcy case, including the nearly completed restructuring of up to $12 billion in secured debt and the increase in equity value to $4 billion.
Even before General Growth President and COO Tom Nolan revealed the firm had signed up to five non-disclosure agreements with potential investors, the judge noted that the high level of interest the REIT was attracting was a positive sign for its long-term prospects.
Simon and Westfield Group have confirmed that they've signed agreements. Vornado Realty Trust is rumored as another potential bidder. In order to create a level playing field for all interested parties, General Growth has created a virtual data room for potential suitors that gives them access to the REIT’s books.
"We do have to be mindful of the fact that both in terms of general economic trends and in terms of credit markets for real estate specifically, conditions remain fragile," says Sam Chandan, global chief economist and executive vice president with Real Capital Analytics. "The recovery in the economy and in the capital markets is still in its nascence and there is still some degree of uncertainty about the nature, the degree, and the pace of this recovery.”
Yet there appeared to be more at stake at the hearing than merely an exclusivity extension, as representatives from General Growth’ unsecured creditors’ committee and Simon Property Group kept bringing up the topic of Brookfield Asset Management’s investment bid for the company and its purported lack of merit compared to the Simon bid. At one point in the day, Simon’s legal representative attempted to cross-examine Nolan as he provided testimony on behalf of General Growth, and was shot down by the judge, who informed him he had no legal standing in the matter.
Throughout the day, Judge Gropper repeatedly said the hearing was not about weighing the merits of one bid over another. This occurred as representatives from General Growth, Simon and the unsecured creditor’s committee traded barbs. General Growth accused Simon of deliberately pushing a low-ball offer. Simon accused General Growth of making unreasonable demands in its non-disclosure agreement. And the unsecured creditors’ committee accused General Growth of not giving the committee enough time to review and discuss the Brookfield proposal.
In several instances, Pershing Square Capital Management founder and one of General Growth Properties’ largest shareholders Bill Ackman, who was in the room, was accused of having a conflict of interest, as he has agreed to pay Brookfield a multi-million dollar fee if it ended up not winning the bid. In another instance, in what was reportedly an unprecedented occurrence, one of General Growth witnesses, Miller Buckfire founder Ken Buckfire, had to leave the room at the request of opposing counsel in order to avoid hearing the testimony of preceding witnesses.
Yet even among all the back-biting, the mood among those at the hearing remained jovial as it became clear that a REIT that was facing a real prospect of extinction less than a year ago has become a highly desirable target for investors. Noting he was aware the unsecured creditors’ committee was unhappy with the Brookfield bid, Judge Gropper urged General Growth and the committee to enter into discussions outside of bankruptcy court and try to keep in perspective that the nature of their dispute meant the company was in a good place.
"It reflects that we are talking about a portfolio of assets that in terms of fundamentals have weathered the downturn very well," Chandan says. "Investors are willing to pay a premium for occupancy and high quality tenants."