Friday, May 8, 2009

Is General Growth Properties in Denial?

The CEO of one of their largest competitors thinks so. From an April 27, 2009 Bloomberg story:

Simon Property Group Inc., the largest U.S. shopping-mall owner by stock-market value, tried to buy real estate from rival General Growth Properties Inc. before it filed for bankruptcy, Chief Executive David E. Simon said.

“They didn’t realize they were a distressed seller,” Simon said in a panel discussion at the Milken Institute Global Conference today in Beverly Hills, California. Few commercial real estate sales are being completed because sellers aren’t willing to take losses on their investments, Simon said.

With due respect to Mr. Simon, I don’t think that’s the real issue; the real issue is GGP doesn’t want to give up properties at fire sale prices when they can still service their debt. General Growth Properties report on first quarter results says their net operating income on consolidated properties was $509,085,000 while their interest expense was $328,489,000. That’s a 1.55 debt service coverage, which is generally regarded as a conservative ratio. Loopnet provides an example of an individual GGP property:

…the roll of loans added to special servicing in April only includes one substantial General Growth loan, a $165 million mortgage on the 939,085-square-foot Jordan Creek mall in West Des Moines, Iowa. The loan, securitized through JPMorgan Chase Commercial Mortgage Trust, 2005-LDP5, matured in March. According to servicer data compiled by Realpoint, the property generated $19.6 million of net cash flow last year. That's 1.8 times the cash flow needed to fully service its amortizing debt.

GGPs immediate problem is not the inability to pay debt service; it’s loan maturities. From their quarterly report:

The Company intends to pursue a plan of reorganization that extends mortgage maturities and reduces its corporate debt and overall leverage. We intend to work with our various lenders and other constituencies to emerge from bankruptcy as quickly as possible while executing on a plan of reorganization that preserves GGP's integrated, national business operations.

There’s no reason at this point to expect GGP can’t successfully reorganize in such a manner, because income at their properties is actually holding up fairly well (more on that at this Traffic Court post).

I’ve previously posted on the maturity issue and worked through the numbers in some examples here.