Posted on 04/17/2009 7:53:44 AM PDT by SeekAndFind
I am at a loss to write about now since all news is good news. I am sure I can find a way to twist the 2nd largest mall REIT going bankrupt into a "positive" for the rest of the sector. My working thesis is this bankruptcy will put pressure on the Federal Reserve to make an even larger commitment to bail out all the other REITs. Yep, that works. It will also allow the banks to offload more of their commercial property loans onto the Federal Reserve balance sheet, since it's now a clearly a threat to them making billions.
I am not sure how we can say that REITs are "too big too fail" but we will find a way - the lobbyists have been working very very hard [Dec 22, 2008: Wall Street Journal - Property Developers Ask for Government Bailouts] [Jan 13, 2009: Bailout Nation Continues in Commercial Real Estate Land - "Lemme In on that Money"] and now we are hearing rumblings that the Federal Reserve which is supposed to only have short term loans (months long!) on their balance sheet but are making an exception with TALF loans (up to 3 years) now are succumbing to pressure by financiers in commercial real estate to support their loans for at least 5 years [Feb 23, 2009: Fed May Need to Recast TALF on Commercial Real Estate]
So again, this is not bad news - it is good news. Because it will bring government even deeper into the "free markets". Therefore please take as much risk as possible in the future as whatever the mess, the government will fix it. My brain has incorrectly been working in a capitalist mind frame; it's taking me a while to switch over to central command economy.
The story with General Growth Properties (GGP) was no surprise [Nov 11, 2008: General Growth Properties Looks to Join Its Tenants] and now we will see if Bill Ackman's bet works out. [Jan 13: Logic Behind Bill Ackman's Purchase of General Growth Properties]
Via Bloomberg
* General Growth Properties Inc. filed the biggest real estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree that turned it into the second-largest shopping mall owner.
* The company listed $29.5 billion in assets and debts of about $27.3 billion in the Chapter 11 filing. General Growth will continue operating its more than 200 properties.
* “We intend to emerge as a leaner company,” General Growth President Thomas Nolan said in an interview today. “We want to come out as a less leveraged company. Our business model remains strong.”
* General Growth collapsed after spending $11.3 billion to buy commercial-property developer Rouse Co. in 2004 only to get caught in the credit crunch and a U.S. recession that has cut spending and property values. Banks have reduced lending amid mortgage-related writedowns. Commercial real estate prices in the U.S. dropped 15 percent last year, according to Moody’s Investors Service.
* Hedge fund manager William Ackman’s Pershing Square Pershing Square Capital Management LP will provide General Growth with $375 million in financing to help run the company during the Chapter 11 process, today’s statement said. Ackman is likely to play a key role in the reorganization since Pershing is the third-largest shareholder, according to Bloomberg data.
* Much of the company’s debt can be traced to its purchase of Rouse Co. in 2004, which owned malls including South Street Seaport. As Chicago-based General Growth struggled to meet debt deadlines, it lost 81 percent of its market value in the last six months after saying repeatedly it may have to file for bankruptcy.
* Nolan said General Growth, the largest mall owner after Simon Property Group Inc., was a victim of “a broken capital market.” No one could have predicted the severity of e “the credit markets shutting down,” he said.
* “It was a disaster waiting to happen,” said Patrick Sumner, head of real estate securities at Henderson Global Investors in London. “They didn’t realize the market was going to get like this and that they were going to be in the front line when the guns went off.”
Via WSJ
* The long-anticipated Chapter 11 filing might wipe out what remains of the Chicago company's stock, but it won't result in mall closures. Many analysts suspect General Growth will survive a lengthy bankruptcy intact, but perhaps smaller after selling properties, without resorting to liquidation.
* The bankruptcy will have far-reaching implications for the mall industry, including putting pressure on already declining property values of U.S. malls, and subsequently mall mortgages, if General Growth dumps property to pay creditors. (not a problem, the Federal Reserve will take care of it)
* The collapse points to an underlying concern for the commercial real estate industry, too. Developers and property owners that loaded up on debt during the past real-estate boom now face mountains of that debt coming due. But some of those borrowers, like General Growth, lack the cash or the borrowing capacity to refinance or pay those debts. Many lenders are granting cash-strapped borrowers extensions of their payment deadlines, but that only postpones rather than resolves the issue. This year alone, an estimated $248 billion of commercial mortgages will come due. Meanwhile, commercial-property values have sunk, hampering the ability of owners to refinance or sell their properties. Real estate research company Green Street Advisors predicts a 40% overall decline in U.S. commercial property values in this recession.
* Some say that, even if General Growth's equity value slightly exceeds its debt, that surplus will be gobbled up by the many fees and costs of the bankruptcy process. Others are betting that shareholders will salvage something if creditors are willing to forego a fire sale and allow a lengthy and orderly process to restructure General Growth's debt.
* Many analysts suspect that, rather than liquidating, General Growth will restructure in bankruptcy court and emerge as a smaller company after shedding several malls to satisfy creditors. If not, a fire-sale liquidation of General Growth's malls would flood the already weak market for mall sales and hammer the value of those and other malls. "If even 10% of those 200 [General Growth] malls are sold, it will represent a deluge of regional malls on the market," says Victor Calanog, Reis' director of research. "Any increase in supply without a pickup in demand will depress prices."
More analysis here :
Does General Growth’s Bankruptcy Signal the Beginning of the End for Other Companies?
By Don Miller
After months of speculation, General Growth Properties Inc. (GGP) filed the biggest real estate bankruptcy in U.S. history, ending a futile seven-month effort to refinance its debt.
General Growth filed for Chapter 11, seeking protection from creditors after it amassed $27 billion in debt accumulating over 200 shopping mall properties. The filing covers 158 of its U.S. malls, but excludes its joint-venture properties and third-party management business.
The Chicago-based company – the country’s second largest shopping mall owner – owns such valuable properties as Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston. It listed total assets of $29.56 billion and total debt of $27.29 billion.
“We intend to emerge as a leaner company,” General Growth President Thomas Nolan told Bloomberg News in an interview. “We want to come out as a less leveraged company. Our business model remains strong.”
In the eyes of many observers, the filing brings the U.S. real estate collapse full circle as commercial properties values are now plummeting in concert with the ailing residential housing market. Commercial real estate prices in the U.S. dropped 15% last year, according to Moody’s Investors Service.
Many commercial real estate companies have been squeezed out by the credit crunch as banks continue to curb lending.
Nolan said General Growth was a victim of “a broken capital market.” No one could have predicted the severity of “the credit markets shutting down,” he said.
Last November, General Growth warned it might have to seek protection from its creditors because it was unable to refinance maturing debt obligations. The company was trying to restructure bonds it floated to finance a $14.3 billion all-stock deal for Rouse Co., a high-end mall dealer it bought in 2004.
“It just tells you that this debt can’t get redone, especially for big properties,” RBC Capital analyst Rich Moore told Reuters.
“General Group has long been the poster child of too much debt,” said Moore.”General Growth has malls, and malls are some of the biggest assets out there.”
Analysts said the bankruptcy might allow competitors to cherry-pick some of General Growth’s more desirable properties, giving Simon Property Group Inc. (SPG) the opportunity to bolster its position as the No. 1 mall operator.
“I think Simon’s going to be able to pick up some of these assets on the cheap,” Dan Fasulo, managing director at real estate research firm Real Capital Analytics, told Bloomberg.
However, Fasulo also called General Growth’s filing “the beginning of the end,” which could lead other companies to fail. “This bankruptcy will drive down the values of mall assets in the United States. It’s going to put, I believe, more supply on the market than can be absorbed by investors,” he said.
About $814 billion of commercial mortgage debt is expected to mature over the next two years, which will only serve to put more pressure on the market, according to real estate research firm Foresight Analysis.
Meanwhile, the residential market chimed in with its own bad news. On the same day General Growth filed, the U.S. Department of Commerce said builders broke ground on 10.8% fewer homes in March and new permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures.
“Buyers seem to be more interested in picking up bargain- basement prices in the existing-home market than in the new-home market,” Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, told Bloomberg News.
Notice this week in the markets the divergence of the insurance stocks from other financial stocks in pricing. Until this week they feel and rose on par. The big insurance companies have a much higher percentage stake in the commercial real estate market than do major banks . This will be the second shoe to drop. Lot’sa hurt for Prudential, Hartford, Met Life and the like.
Meanwhile as the 2nd largest U.S. mall operator filed BK yesterday, SRS, the bearish Commercial Real Estate ETF fell 15%.
As if that isn’t puzzling enough, the largest U.S. mall operator, Simon Property Group, rose 12% on the day.
Coming to a mall near you - U.S. Gov’t owned.
* Much of the company’s debt can be traced to its purchase of Rouse Co. in 2004, which owned malls including South Street Seaport. As Chicago-based General Growth struggled to meet debt deadlines, it lost 81 percent of its market value in the last six months after saying repeatedly it may have to file for bankruptcy. Hummm Chicago humm there’s that word again...
I do some commercial real estate. We have been hammered hard. I’ve even tried to sell some GGP properties, mostly to Chinese investors. Fortunately I have been able to fall back on my good looks and work as a gigolo for the over 90 jet-set, or I’d be in big trouble! (actually, I fibbed a little, we are doing some small deals, but I don’t think everyone realizes how much more still will collapse).
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