General Growth files for bankruptcy; malls likely stay open

By Steve Green

Published Wednesday, April 15, 2009 | 11:44 p.m.

Updated Thursday, April 16, 2009 | 2:28 p.m.

General Growth Properties Inc. of Chicago, a big player in the Las Vegas real estate and retailing industries, filed for bankruptcy late Wednesday Las Vegas time.

The Wall Street Journal reported the filing may cause shareholders to lose their investments, but likely will not result in closures of the company's shopping centers. In Las Vegas they are the Fashion Show, Grand Canal Shoppes, Shoppes at the Palazzo, Boulevard and Meadows malls. Work on the company's long-planned Summerlin Centre mall has been suspended.

General Growth also owns the Howard Hughes Corp., developer of Summerlin.

The Journal said many analysts suspect that General Growth will restructure in bankruptcy court and emerge as a smaller company after selling several malls to satisfy creditors. Simon Property Group, owner of the Forum Shops at Caesars and two Las Vegas outlet malls, is most often mentioned as a potential buyer in Las Vegas and other cities.

For months General Growth has teetered on the edge of bankruptcy as it struggled under a debt load of $27 billion while the economy moved into recession.

General Growth's board decided to make the filing in U.S. Bankruptcy Court in New York after talks with creditors were not productive, the Journal said. The filing came early Thursday New York time. It ranks among the largest real estate collapses in U.S. history and makes General Growth one of the largest victims yet of the nation's recession.

Earlier Wednesday, debt rating agency Standard & Poors said it had learned that a loan backed by the Grand Canal Shoppes at the Venetian resort on the Las Vegas Strip was transferred to special servicing after General Growth, the mall owner, couldn't come to terms with servicer LNR Partners Inc. on an extension. This means General Growth is in danger of defaulting on the loan.

The balance on the loan, which matures May 1, is $393.7 million, S&P said.

"All day-to-day operations and business of all of the company's shopping centers and other properties will continue as usual,'' General Growth said of the bankruptcy filing.

"Our core business remains sound and is performing well with stable cash flows. We believe that Chapter 11 is the best process for restructuring maturing mortgage loans, reducing the company's corporate debt and establishing a sustainable, long-term capital structure for the company," Chief Executive Officer Adam Metz said in a statement. "While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11."

General Growth, long a respected mall operator, bought the Rouse Co. in 2004 for $11.3 billion, picking up Summerlin developer the Howard Hughes Corp. and the Fashion Show mall in the process. The acquisition saddled General Growth with extra debt and has been cited as a key factor in its financial woes.

Besides its malls, General Growth has a big land-development business with planned communities around the country, including Summerlin. Hughes says Summerlin, with a population of about 100,000, is projected to grow to 200,000 people as development continues on the remaining 7,300 acres in the 22,500-acre community.

General Growth said in its annual report in February that land sales tumbled from $230.66 million in 2007 to $138.7 million in 2008. Including impairment charges, the land sales generated net operating losses of $71.5 million in 2007 and $11.4 million in 2008.

Observers Thursday continued to ask if the Rouse acquisition was a mistake.

General Growth President and Chief Operating Officer Thomas Nolan said in a conference call with reporters that the real problem was the tight credit markets that have prevented the real estate giant from refinancing debt.

"It wasn’t so much the Rouse acquisition as it was that credit markets shut to any refinancing," he said, according to an account of the call on the Retail Traffic magazine Web site.

But retail consultant Kenneth Leonard, a longtime critic of General Growth's decision to keep the Rouse/Howard Hughes land portfolio, continued to question the deal this week.

"Not only did GGP buy the Rouse malls at the peak of the feeding frenzy driven by competition and an excess of cheap money which caused them to substantially overpay for a bunch of 'trophy properties,' but they also significantly overpaid for many thousands of acres of raw land in the most expensive residential community in the state of Nevada,'' he said in a blog this week, referring to Summerlin.

In bankruptcy, he said, "there is simply no way they could recover more than 80 percent to 85 percent of the loan value on their mall properties. The real killer, however, is the likelihood that the Vegas lands will only bring 25 percent of what GGP paid.''

Compounding the issue for General Growth is a little-noticed provision in its deal to buy Rouse requiring it to pay half of the value of its Summerlin holdings to the heirs of Howard Hughes next year, with the price to be based on an appraisal. Even with declining land values, that provision is likely to involve hundreds of millions of dollars that may now be part of the bankruptcy case. General Growth had planned to pay the heirs with stock, But with its stock valuation wiped out by the bankruptcy, it's unclear now how that provision may proceed.

Trading in General Growth stock was suspended Thursday by the New York Stock Exchange because of the bankruptcy. But in premarket trading it fell 43 percent to 60 cents. It closed Wednesday at $1.05, giving the company a market value of about $329 million before the bankruptcy. The stock traded as high as $67 in March 2007.

For 2008, the company reported a loss from continuing operations of $19.7 million vs. a profit in 2007 of $287.9 million. Revenue in 2008 of $3.361 billion was up from $3.261 billion in 2007, but the 2008 results were hurt by $1.296 billion in interest payments.

As the company's finances deteriorated in 2008, it suspended its cash dividend. In the bankruptcy filing, General Growth listed assets of $29.5 billion and debt of $27.3 billion.

Bloomberg News contributed to this report.