SeekingAlpha  Jul 31  Comment 
Motley Fool  Apr 12  Comment 
Late last month, GGP agreed to be acquired for less than its net asset value. However, this may not mean much for shareholders of other high-quality mall REITs.


General Growth Properties is the 2nd largest Real Estate Investment Trust ("REIT") in the United States by revenue. GGP's primary business is managing shopping malls, and it owns properties in 44 states. As of 12/31/08, GGP has ownership interest in, or management responsibility for, over 200 regional shopping malls in 44 states, as well as ownership in master planned communities and commercial office buildings. GGP's properties are usually major shopping centers with at least one large "anchor" department store to draw customers and attract additional tenants.[1] Mall tenants rent store space and pay rent to GGP; these rental fees, along with management fees received from third party owners who manage the malls themselves, are the source of GGP's revenues.

General Growth Properties is larger than most of its competitors, excluding Simon Property Group. It is one of the few retail REITs to own international assets, with projects underway in Brazil, Costa Rica, and Turkey as of December 31, 2007.[2] Within the US it also has a more diversified geographic scope than many of its competitors, operating in 44 of the 50 states.[3] As of February 20, 2009, the company had approximately 3,500 employees. [4]

This diversity did not save the firm from the volatile U.S. Housing Market in 2007, which led to approximately $130M in asset writedowns for the company. As discussed below, GGP owns approximately 18,000 acres of land in preplanned residential communities that it holds for sale to residents and developers. Because of the recent drop in home prices, GGP was forced to write down the value of that land. A large debt balance, one of the largest in the industry and a source of risk for the company, is forcing GGP to focus on developing its existing properties rather than aggressively expanding earnings through acquisitions.[5] The company is exposed to shifts in national economic conditions, and a macroeconomic downturn hurts GGP's Mall business by lowering its tenants' revenues, decreasing demand for its properties and perhaps causing some tenants to become insolvent.

Economic Downturn

During 2008, the global economy entered into a significant downturn. For the domestic retail market, the recession resulted in sales declines, reduced margins and cash flows and, bankruptcies for some tenants. Consequently, revenue and occupancy declines have occurred on GGP's properties, as a function of terminations, reduced demand for rental space, and reductions in rents that can be charged and collected. Additionally, the commercial lending market has came to a standstill. Accordingly, GGP has been unable to refinance or repay a number of their existing loans which had scheduled 2008 maturities, triggering certain cross-default provisions on certain other financing arrangements. To temporarily forestall foreclosure or bankruptcy proceedings, they have entered into a number of short-term extension and forbearance agreements with various lender groups. Such agreements have imposed lender operational oversight on their operations and, with respect to certain properties, have resulted in lender control of operational cash receipts. Reduced cash flows, increased borrowing costs and the suspension of their common stock dividend have raised liquidity concerns in the equity markets such that their stock price as of December 31, 2008 has declined by almost 97% since December 31, 2007.


On April 16, 2009, General Growth Properties, Inc., filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. General Growth will continue to manage their properties and operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. [6] Currently, General Growth Properties trades in the OTC with the ticker symbol: GGWPQ.

DIP Credit Agreement

On April 15, 2009, General Growth obtained a commitment letter from Williams Ackman's Pershing Square Capital Management, L.P., as agent, to provide GGP with bankruptcy financing, referred to as a DIP Credit Agreement. In connection with the Commitment Letter, the Company paid Pershing a fee of $15 million.[7]

The DIP Credit Agreement provides for a term loan in the aggregate amount of $375 million, which will be used to refinance certain pre-petition secured indebtedness and will be available to fund GGP's working capital requirements. The DIP Credit Agreement provides that principal outstanding on the DIP Term Loan will bear interest at an annual rate equal to LIBOR plus 12%. This is subject to a minimum LIBOR floor of 3%.[8]

The DIP Credit Agreement further provides that upon the effective date of a plan of reorganization for GGP, the company will issue warrants to Pershing and its designees to acquire for a nominal exercise price:

  1. With respect to the Company, 4.9%, on a fully-diluted basis, of each class or series of equity securities of the company
  2. With respect to certain subsidiaries, 4.9%, on a fully-diluted basis, of any class of equity securities of such subsidiary issued in respect of certain claims in connection with the Chapter 11 cases.

In connection with a plan of reorganization, if GGP offers to sell any newly issued equity securities, they will be obligated to offer to sell to Pershing and its designees up to an aggregate of 4.9% of such equity securities (on a fully-diluted basis) on the same terms. [9]

Business Financials

GGP's primary source of revenue is the 200 malls that the company owns and manages.[10] GGP's operating structure has been to purchase under-performing mall assets, financing the acquisitions with floating rate debt.[11] GGP purchases an under-performing property using primarily floating rate debt. It then renovates the property, and then refinances, paying off the floating rate debt with less volatile fixed rate debt. This strategy, while lucrative, has led GGP to accumulate a large debt balance and now it is attempting to shift its focus away from acquisitions and to development.

The company's Master Planned Community Segment is involved in residential real estate, and has developed communities in three states, including Summerlin in Nevada, The Woodlands and Bridgeland in Texas, and Columbia in Maryland. The company builds residential developments, then sells the land to developers for residential and commercial uses. As of December 31st 2007 it had held approximately 18,000 acres available for sale in 5 residential communities in Maryland, Nevada and Texas.[12]

In July of 2007 GGP acquired the remaining ownership stake in 23 properties co-owned by GGP and the New York State Retirement Fund.[13] Prior to this transaction GGP had owned a 50% stake in these properties, with the NYSRF an institutional partner. The transaction left GGP with 100% ownership in 20 of the 23 regional malls in the portfolio, and was completed at a cost of $2.24B ($1.2B in cash and $1.04B in the assumption of debt).[14] This acquisition is one of the primary reasons revenues increased in 2007.

From 2006 to 2007 revenues and income changed primarily due to:

  1. An increase of 10% or $280M of base rental income.[15] This was a result of expanding the retail portfolio to 62.8M square feet from 61.9M square feet, and increasing the entire portfolio's occupancy from 96.6% to 96.8%.[16]
  2. Land sales in the master planned community segment declined $278M or 66%[17] due to decreased demand.[18]

Though revenues have been steadily increasing, operating income as a percentage of revenues has been falling. This suggests that as the company grows it is not realizing economies of scale and is actually suffering from higher incremental costs.

Error creating thumbnail

The graph of Net Income on FFO is also telling. Funds From Operations (FFO) is a measure commonly used in the real estate industry, and it is a company's net income, excluding any gain on real estate sold during the period and excluding any depreciation/amortization. It measures a company’s funds produced that are available for reinvestment or distribution to shareholders. FFO continued to rise as the company expanded, but until 2007 the company's net income continued to fall due to greater depreciation costs from that expansion. This increase in depreciation caused net income as a percentage of FFO to fall below 5% in 2006. Though net income shot up in 2007 this was the result of a one time tax benefit due to internal restructuring, not any change in the fundamental operating characteristics of the company.[21]

Error creating thumbnail

Trends and Forces

Interest Rate Fluctuations Could Decrease Cash Flow And Leave GGP Unable to Meet Its Debt Obligations

  • As mentioned above, GGP's strategy over the past few years was to purchase under-performing assets using cheap floating rate debt, then to refinance at lower rates when the asset stabilized.[24] Through this strategy GGP accumulated a large debt balance, with $3.25B in floating rate debt.[25] Due to its large debt balance, management at GGP believes interest rates are the most important external factor affecting the company's cash flow.[26]
  • GGP's $24.3B total debt as of the first quarter 2008 is primarily long-term fixed and variable rate debt.[27] Its debt/equity ratio is 16.67, while the retail REIT industry average is a mere 2.77.[28] GGP's debt is over 71% of its total enterprise value (value of all common equity plus market value of debt and preferred equity).[29] Because GGP is so highly levered, a small increase in interest rates, particularly the LIBOR average that most of GGP's variable rate debt is tied to, could cause large increases in the rates GGP has to pay.
  • GGP estimates a mere 25 Basis point (bps) movement in the interest rate on its $3.25B of variable rate debt would result in an approximately $8.1M annual change in operating income and cash flow.[30] This is particularly disconcerting when GGP's interest coverage ratio (Earnings Before Interest and Taxes Divided By Interest Payments) is a low 0.92, compared with an industry average of 2.11.[31]

The Credit Crunch Is Making it Difficult for GGP to Finance Its Acquisitions, and Refinance its Existing Debt

  • GGP has $2.63B in debt maturing in 2008 and $3.21B maturing in 2009.[32] It has not, as of its 2007 annual report, reached any agreements to refinance that debt.[33]
  • The company has insufficient current assets on its 2007 balance sheet to cover debt obligations, with just $99.5M in cash and $388M in receivables.[34] The company's ratio of assets (assets convertible to cash within one year) to liabilities (liabilities which must be satisfied with cash within one year) was a low 0.3 in 2007. This makes it unlikely the company will be able to satisfy these debt obligations without borrowing.
  • The company's high debt balance and the credit crunch in the markets casts doubt on whether the company will be able to refinance its maturing debt obligations with more debt. The company has been approaching pension funds and life insurance firms about possible joint venture opportunities to pay off the almost $19B in debt the company has due in the next 4 years.[35]
  • If the company is unable to find debt financing, it will be forced to issue equity or enter joint ventures at unfavorable terms, diluting current stockholders interest in the company. This would harm shareholders by requiring all future cash flows to be payed out among a larger pool of investors. Alternatively the company it will be forced to sell assets at unfavorable terms. This would lose value for investors, as GGP will fail to realize the full economic potential of these assets. If the company is unable to issue more equity, and is unable to sell properties due to the Credit Crunch it will find itself insolvent as it will be unable to meet debt obligations.

GGP Is Exposed To The Turbulent U.S. Housing Market

  • There has been turmoil in the residential housing market due to the fallout from the subprime lending crisis, and housing values are falling while the number of new homes sold has been declining.
  • GGP has a portfolio of over 18,000 acres for sale in residential communities the company has developed. They are for sale primarily as finished residential lots.[36]
  • During 2007 GGP recognized a $127.6M impairment charge related to the land it held for sale,[37] and its land sales fell from approximately $509M to $231M.[38] It recognized the write down to to its expectation that it would be able to sell the land for less than previously thought. The write down and slower land sales had the effect of lower net income for GGP in 2007.
  • If GGP is forced to make any other write downs on its land values, net income will decline. Similarly, if GGP's lots continue to sell poorly cash flow and revenues will be lower.

Shifting US Economic Conditions Could Decrease GGP's Revenues

  • GGP's properties consist primarily of retail space, making the company especially vulnerable in a general economic downturn. If consumer spending levels decline, demand for GGP's properties will decrease as retail businesses will contract rather than expand. Slow demand lowers the rents that tenants are willing to pay for GGP's properties.
  • GGP's two largest anchor tenants (Tenants which occupy a large portion of space in properties and draw foot traffic) were Macy's and Sears.[39] These two companies accounted for about 43% of total anchor space at GGP's properties. Though anchors typically account for a smaller portion of total rent, because they either own their property or sign leases for reduced rent, they benefit all tenants in a center by increasing foot traffic.
  • During an economic downturn, premium retailers such as Macy's and Sears will see hard times as consumers switch to cheaper discount retailers like Wal-Mart . Many of these retailers have already gone under in a wave of bankruptcies.[40] If GGP's anchors were to cancel their leases, not only would the company lose out on the rental revenues from those properties, but smaller tenants might cancel their leases as their contracts include a right to cancel the agreement if a property is without an anchor tenant. Thus, if one of GGP's anchors were to leave the property due to poor performance of insolvency, and GGP was unable to find another anchor tenant, it would impact revenues on the shopping center involved.

Consumers Are Increasingly Switching To Lifestyle and Community Centers for Retail Shopping

  • Many property owners are finding it necessary to switch from the Mall concept to "Lifestyle Centers". These centers focus on dining options, rather than anchor department stores, and include areas to work or relax, even attempting to recreate a city park or the urban street.[41] These centers feature entertainment options, retail stores, condominium and apartment units, and office space all in the same development. They are an attempt to recreate the "Town Center" concept, a place where people can live, work, shop and dine. These centers are intended to entice consumers away from cheaper big box and discount stores, faster drive up centers and online shopping.[42]
  • GGP is expanding its focus to include lifestyle centers and mixed use retail centers.[43] GGP currently owns such lifestyle centers as the Shops at La Cantera, an award winning lifestyle center in San Antonio Texas, Pinnacle Hill Promenade in Rogers, Arkansas and The Shops at Fallen Timbers in Toledo, Ohio. Under development are projects such as the Summerlin Center in Las Vegas, Nevada and Cottonwood in Salt Lake City, Utah, examples of GGP's new focus on lifestyle centers. GGP believes several factors will enhance consumer demand for lifestyle centers. These include:
    • Shifting demographics, away from suburban families to older Americans who want the convenience of living and working in a lifestyle center.[44] These older Americans who no longer need large living spaces to house their families are attracted by the dining and retail convenience lifestyle centers provide.
    • By 2020, three out of four households will not contain children.[45] As the number of households with children fall, the demand for large housing spaces also falls. Urban apartments and condominium units become more attractive options for many households. This is helping to fuel a "Back to the City" movement increasing the desire to live in these lfiesty centers, which often fucntion as a city center, and decreasing the demand for suburban housing.
    • Increased demand for convenience, in both office and residential environments. Lifestyle Centers, which place apartment and condominium housing next to office development and retail stores, satisfy this demand for close, convenient shopping.


GGP competes with numerous other firms to both acquire properties and lease tenants. Competing REITs include:

  • Simon Property Group (SPG) Simon property group owns 320 income producing properties in 41 states and Puerto Rico. It operates 184 regional malls, as well as outlet centers, community lifestyle centers and other shopping centers. It properties contain approximately 242M square feet of gross leasable area.[46]
  • Macerich Company (MAC) focuses on shopping centers particularly in Arizona, California, the New York City metropolitan area, and suburban Washington, D.C. Its holdings include 74 regional shopping centers and 20 community shopping centers with over 80 million square feet of space.[47]
  • Taubman Centers (TCO) has a portfolio of 23 properties mostly consisting of super-regional malls with more than 800,000 square feet. Taubman also has a division in Asia, where it develops malls with local partners.[48]
  • CBL & Associates Properties (CBL) is an active developer of new regional malls, open-air centers, lifestyle and community centers that owns, holds interests in, or manages 159 properties including 86 enclosed malls and open-air centers. Their strategy focuses on acquisition of regional malls.[49]

The table below provides competitive data comparing GGP with some of its close competitors.

Company Revenues (12/31/2007, Millions) Market Cap(Billions, 04/17/08) Operating Properties Number of States With Operating Properties
General Growth Properties (GGP) 3261.80 [50] 9.92 [51] 200 [52] 45 [53]
Simon Property Group (SPG) 3650.80 [54] 22.75 [55] 320 [56] 41 [57]
Macerich Company (MAC) 896.37 [58] 5.35 [59] 94 [60] 19 [61]
Taubman Centers (TCO) 626.82 [62] 2.96 [63] 23 [64] 10 [65]
CBL & Associates Properties (CBL) 1040.63 [66] 1.62 [67] 159 [68] 27 [69]

Retail Competition

The nature of competition varies from property to property in each segment. The principal factors that retailers consider in making their leasing decision include:

  1. Consumer demographics
  2. Quality, design and location of properties
  3. Total number and geographic distribution of properties
  4. Diversity of retailers and anchor tenants at shopping center locations
  5. Management and operational expertise
  6. Rental rates [70]

Market Share

Market share is listed by FFO. Globally there were 38 REITs focusing on retail properties.[71] Most of those were small companies, only 9 Retail REITs are listed in the Russell 1000. Among all retail REITs GGP's market share is about 11%.

Error creating thumbnail
2007 Data[72]
  • General Growth Properties (GGP) has ownership interests in and/or management responsibility across regional shopping malls totaling over 200 million square feet of retail space with 24,000 retail stores and anchor department stores, as well as theaters, sit-down restaurants, ice skating rinks, and other forms of family entertainment.[73]
  • Westfield Group, traded on the Australian Stock Exchange, is the largest retail property group is the world with a portfolio of 119 shopping centers across Australia, the U.S., New Zealand, and the United Kingdom. The Westfield Group's properties are valued at $53.2 billion.[74]
  • Kimco Realty (KIM) is largest publicly traded owner and operator of neighborhood and community shopping centers in the U.S., with more than 1,519 properties comprising 180 million square feet of leasable space across 45 states, Puerto Rico, Canada, Mexico and Chile.[75]

Pershing Square Capital Management LP

According the SEC Filing, hedge fund manager William Ackman's Pershing Square Capital Management LP disclosed that it owns a 7.5% stake or 20,080,690 common shares in General Growth Properties. Pershing Square also has an additional economic exposure to approximately 48,500,000 common shares under certain cash-settled total return swaps ("swaps"), bringing their total aggregate economic exposure to 68,580,690 common shares, which amounts to approximately 25.6% of the outstanding shares.


  1. 2007 Form 10K page 2
  2. 2007 Form 10K Page 2
  3. 2007 Annual Report, Letter to Shareholders
  4. [https://research.scottrade.com/research/stocks/secfilings/drawFiling.asp?docKey=136-000095015209001871-414CQPFVJQ98B3R3T3R20KCK30&docFormat=HTM&formType=10-K 10-K 2008
  5. 2007 Form 10K page 2
  6. 8-K 2009
  7. 8-K 2009
  8. 8-K 2009
  9. 8-K 2009
  10. 2007 Form 10K Page 1
  11. Akash, Dave; Morningstar Analyst Note, February 5th, 2007
  12. 2007 Form 10K Page 4
  13. Reuters news service
  14. 2007 Form 10K Note 3 Page F-19
  15. 2007 Form 10K Page 40
  16. 2007 Form 10K Page 37
  17. 2007 Form 10K Page 40
  18. 2007 Form 10K Page 33
  19. 2007 10K Page 29
  20. Google Finance
  21. 2007 Form 10K Page 41
  22. 2007 10K Page 29
  23. 2007 Annual Report "Company Profile"
  24. Akash, Dave; Morningstar Analyst Note, February 5th, 2007
  25. 2007 Form 10K Page 52
  26. 2007 Form 10K Page 48
  27. Yahoo Finance
  28. Reuters
  29. Yahoo Finance April 17th, 2007
  30. 2007 Form 10K Page 52
  31. reuters
  32. 2007 Form 10K Page 49
  33. 2007 Form 10K Page 48
  34. Reuters
  35. Wall Street Journal, April 15th 2007
  36. 2007 Form 10K Page 4
  37. 2007 Form 10K Page 34
  38. 2007 Form 10K Page 34
  39. 2007 Form 10K Page 27
  40. Barbaro, Michael "Retailing Chains Caught in a Wave of Bankruptcies" The New York Times, April 15th 2008
  41. Postrel, Virginia, The Los Angeles Times, December 10, 2006
  42. Postrel, Virginia, The Los Angeles Times, December 10, 2006
  43. 2007 Annual Report, Letter to Shareholders
  44. 2007 Annual Report, Letter to Shareholders
  45. 2007 Annual Report, Letter to Shareholders
  46. Reuters
  47. Reuters
  48. Hoovers: Taubman Centers company overview
  49. CBL Properties company website - About Us
  50. Google Finance
  51. Google Finance
  52. [1]
  53. [2]
  54. Google Finance
  55. Google Finance
  56. Reuters
  57. Reuters
  58. Google Finance
  59. Google Finance
  60. Reuters
  61. 2007 10K Page 22-26
  62. Google Finance
  63. Google Finance
  64. Reuters
  65. Reuters
  66. Google Finance
  67. Google Finance
  68. CBL Properties company website - About Us
  69. CBL Properties company website - About Us
  70. [https://research.scottrade.com/research/stocks/secfilings/drawFiling.asp?docKey=136-000095015209001871-414CQPFVJQ98B3R3T3R20KCK30&docFormat=HTM&formType=10-K 10-K 2008
  71. U.S. Global REITs
  72. Datamonitor Industry Market Research: Global - Retail REIT's
  73. VNO Company Site - About Us
  74. Westfield Group company website - Company Profile
  75. Kimco Company Website - About Kimco
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki