In a largely anticipated move, giant mall REIT General Growth Properties filed for Chapter 11 bankruptcy this morning. The REIT had been struggling for more than a year to secure extensions or line up refinancing for the more than $27.3 billion in debt the firm had amassed in rising to become the second largest owner of regional malls in the country. Most recently, the failure to win enough bondholders to agree to forbearance seems to have tipped the firm finally into bankruptcy.

These are uncharted waters for the REIT industry. With $29.6 billion in assets, General Growth's filing represents the largest real estate bankruptcy ever and the 11th largest bankruptcy in U.S. history, according to Reuters.

However, this is not likely to be the end of the road for firm, according to analysts. With the real estate investment sales market at a standstill, lenders will not risk forcing the Chicago-based REIT into liquidation, they say. Such a forced sale would not raise enough equity to pay off creditors. However, to build up much-needed cash reserves, General Growth might have to sell some of its best assets at steep discounts. And bankruptcy could make it easier for one of the stronger REIT players to acquire the troubled company wholesale—that is, if the other REITs could come up with enough cash to fund an acquisition.

For its part, General Growth executives are stressing that they want to focus on simplifying its convoluted debt structure, which includes mortgages secured on individual properties and corporate lines of credit and bonds. It hopes to secure extensions now that it has filed for Chapter 11. It also would like to raise equity by converting bondholders into shareholders and potentially issuing new shares. Through these measures, it hopes to avoid large-scale property sales. Also, importantly, while General Growth has some issues with bondholders. It remains current on substantially all of its mortgages. As part of its Chapter 11 filing, it has asked the bankruptcy court to allow the REIT to remain current on those mortgages while it reorganizes.

Early Thursday morning, General Growth issued a statement saying it was voluntarily seeking Chapter 11 protection for itself and for 158 retail properties owned by General Growth and its subsidiaries. (About 60 other properties are not included in the bankruptcy). During a media conference call a few hours later, company president and COO Tom Nolan blamed the filing on the ongoing credit crisis and the REIT's inability to secure refinancing for its mortgages and corporate debt. "We made extensive efforts to modify or refinance maturing debt, but given the credit crisis, we were unable to complete the task," Nolan said. He added that properties with no near-term debt maturities were not included in the filing. The REIT's third party management business and its joint ventures also remain unaffected.

The filing comes after General Growth failed to convince the bondholders on its corporate debt to defer loan payments. As of Dec. 31, the REIT had $29.6 billion in total assets and $27.3 billion in total debt. By March, it had $1.2 billion in past due debt and was facing another $3.3 billion in near term debt maturities. The company's largest unsecured claimholders include Eurohypo AG, at $2.6 billion; Wilmington Trust, at $2.3 billion and Bank of New York Mellon Corp., at $1.4 billion.

The company plans to work with its creditors to extend debt maturities and reduce overall leverage, while its properties continue to operate in the normal course of business. On Apr. 15, the day before the filing, General Growth secured a $375 million debtor-in-possession (DIP) loan from Pershing Square Capital Management, L.P., a New York City-based hedge fund. Pershing Square already owns 7.4 percent of the voting shares in the company and its founder, William A. Ackman, has publicly called for General Growth to enter bankruptcy protection. He has also expressed interest in joining the REIT's board of directors.

According to an SEC filing from General Growth this morning, the DIP agreement provides financing with an interest an an annual rate of LIBOR (with a minimum LIBOR floor of 3 percent) plus 12 percent. Further, the agreement states that upon the effective date of a plan of reorganization, General Growth will issue warrants to Pershing and its designees to acquire 4.9 percent, on a fully diluted basis, of each class or series of equity securities of the company and 4.9 percent, on a fully diluted bases, of the securities of such subsidaries issued in respect of certain claims in connection with the Chapter 11 filings.

To some industry insiders, Ackman's backing indicates that General Growth has a good chance to reorganize and emerge from Chapter 11. "If Bill Ackman has faith in the company to the tune of $375 million, I think there will be a very strong attempt to reorganize," says Steve Ifshin, chairman of DLC Management Corp., a Tarrytown, N.Y.-based shopping center owner and manager.

During the conference call this afternoon, Nolan expressed a desire to keep General Growth's trophy properties in the company's hands. The REIT has been considering selling non-strategic assets from its 182-million-square-foot portfolio, but wants to leave its top 25 properties untouched. "Could we sell one or two of those? Certainly, that's part of restructuring," Nolan noted. "But we think it's not going to be an integral component" of the reorganization.

But the reorganization is likely to prove longer and more painful than company executives currently realize, according to Sam Chandan, president of Real Estate Economics LLC, a New York City-based research firm. General Growth is filing for bankruptcy in a market that is still suffering from a severe credit shortage and deteriorating property fundamentals, says Chandan. Its bondholders will likely want to get some of their cash back and to build up capital, the REIT might have to sell some of its assets. Since today's investors have low appetite for risk, they will likely be most interested in the firm's best assets in urban markets. What's worse, everyone knows General Growth needs the money, so any sales will likely feature steep discounts, Chandan notes.

Another scenario that remains possible is that a rival retail REIT would attempt to acquire the company wholesale. General Growth's portfolio, made up largely of regional and superregional malls, might attract Simon Property Group or the Westfield Group, says Joel Bloomer, a REIT analyst with Morningstar. The main problem would be coming up with enough funds to pay for the acquisition. Simon, for example, of late has been raising a cash cushion to pay down its own debt.

"Liquidation just does not seem feasible. An acquisition is possible, but it would be very difficult and it would complicate things for Simon," Bloomer notes. "If an acquisition takes place it would be mostly, if not exclusively, a stock deal because I don't think Simon has the liquidity to handle it."

In any case, General Growth's filing is likely to have limited effects on the U.S. retail real estate market in the near future. Given their existing problems, lenders are not likely to attempt to take away the REITs holdings until market conditions improve, analysts say. In the interim, General Growth will continue to operate.

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