With a pronounced lack of liquidity continuing to plague the commercial real estate industry, property owners with near-term debt maturities are being forced to find new ways to survive until capital markets begin to thaw. Perhaps no company feels a greater sense of urgency to deleverage than General Growth Properties (NYSE: GGP), the giant Chicago-based mall REIT.

The company convinced lenders to extend the forbearance period on $2.6 billion in debt stemming from a senior credit agreement General Growth entered into in 2006 and a $1.5 billion loan secured in 2008. The company could face default on these loans if it fails to pay other debt obligations by an agreed upon date. With General Growth already looking at about $1.2 billion in debt past due, the lenders pushed the original deadline of Jan. 30 to March 15.

While the extension offers a reprieve to the mall owner, which operates a 180 million sq. ft. portfolio in the U.S., General Growth continues to face a high risk of default. It “has massive amounts of debt coming due every year for the foreseeable future and [the latest extension] doesn't change our opinion at all,” says Todd Lukasik, a stock analyst with Morningstar, which forecasts bankruptcy as the most likely outcome.

Overall, General Growth has more than $3.3 billion in debt maturities coming due in 2009, representing 12% of its total long-term debt load of $27.7 billion. The company missed a Feb. 12 deadline to repay approximately $900 million in loans secured by its Fashion Show Mall and the Shops at the Palazzo properties in Las Vegas and was negotiating with lenders for further extensions. General Growth already received two short-term extensions since the loans' original maturity date in November 2008.

Leverage issues will weigh on General Growth much more than on a lot of its competitors, says Michael Magerman, senior vice president with Realpoint LLC, a Horsham, Pa.-based credit rating agency.

“They were pretty heavily loaded with debt even before the Rouse Co. acquisition [in 2004]. It seems like it will make it that much more difficult for them to get through the next year or two.”

It's unlikely that General Growth will be able to refinance all of its debt. Loan origination volume in the retail sector fell 82% in the fourth quarter of 2008 from the fourth quarter of 2007, reports the Mortgage Bankers Association.

Lenders will likely try to keep the company afloat for as long as possible, according to Rich Moore, an analyst with RBC Capital Markets. If they force General Growth into default, they will have to somehow dispose of its assets, a tall order in the current environment. The company's stock price closed at 62 cents per share on Feb. 25, far below its 52-week high of $44.23.

In attempts to secure cash to pay down its debt, General Growth has been trying to sell several of its properties since early fall, but has found no takers.

The difficulty of obtaining acquisition financing drives away potential buyers. In the second half of 2008, there were only eight sales of regional malls in the U.S., according to New York-based research firm Real Capital Analytics.

“I don't think at this point anyone has any desire to force General Growth into bankruptcy, given the lending market,” says Robert McMillan, an analyst with New York-based Standard & Poor's Equity Research Services. “Lenders can't sell the properties anyway because people aren't buying, and those that are buying are buying at a discount.”

The REIT will likely continue to secure debt extensions through most of 2009, says Moore of RBC. But if it doesn't start repaying its loans by 2010, he says that the company might cease to exist as an operating concern.

DELEVERAGING REQUIRED

General Growth is working to avoid default on $900 million in loans in the short term, but with billions of dollars in debt maturing every year through 2013, its long-term debt load also presents challenges.

Year Amount ($billions) Percent of Total Debt Outstanding
2009 $3.3 12.0%
2010 $4.5 16.2%
2011 $8.4 30.4%
2012 $4.6 16.5%
2013 $4.5 16.2%
Source: General Growth Properties