GGP Update 2

Hi I've just been going through the GGP bankruptcy docs. I think there are some important points that it makes. It's incredible that GGP is in bankruptcy. Basically, the whole CMBS market froze up and the company was unable to re-finance its debt as it came due. It is still able to pay its interest obligations. In fact, as a show of good faith it has decide to continue paying its interest expense at contractually agreed rates. This shows confidence in the strength of cash flow from shopping centers and other ops. Considering that they are in bankruptcy, it's quite unprecedented that they are paying interest at all. So it wasn't that the company's previous management was incompetent. It's more a question of unprecedented closure of a multi-billion market that they counted on for re-financing.

To answer previous queries about a possible fire sale of all the properties. Apparently, GGP's CEO doesn't think it likely 'coz the potential buyers are going to have problems getting financing. In my opinion, this is true to a certain extent. It might be true now. But as the credit markets start to unfreeze, this will start to change. In fact, I read today in the Journal that Apollo Management and Angelo Gordon might be venturing into REITs. So while the possibility of a fire sale is low right now, it cannot be ruled out in the future. However, the flip side is also true. If others can raise financing, GGP might be able to raise debt to refinance its current obligations.

My final point is that while the current management has cut GGP's capex to $224M from $1.5B for 2009 and from $1.3B to $108M in 2010. Unlike Pershing Sq, I don't believe that this is sustainable for any period of time more than past 2010. The malls need regular face lifts, upgrades and extensive re-investment to keep the public continually coming back to them. If these things are neglected for too long, I do believe this will start to destroy the value of the business. So GGP needs to get itself out of bankruptcy as soon as possible, lest it destroy the value of its assets through neglect.

Here's a summary of GGP's CEO Adam Metz's and restructuring firm, Alix Partner's James Mesterharm's declaration.


"1. GGP’s 2008 company-wide net operating income (NOI), was $2.59 billion, an increase of 4.5 percent over 2007 despite the challenges of the economy.

2. This increase is because the shopping center business is very different from the retail business. GGP’s business is far less cyclical than that of the retail industry because our revenues are insulated by long-term leases, tenant diversity, and the geographic and demographic diversity of our properties.

3. GGP continues to have occupancy rates above 90% - among the highest in the industry – and even now GGP is regularly are entering into new leases with existing and new tenants. As of Dec 31, 2008, GGP Group had 92.5% of its mall and freestanding space leased, and its average lease term was greater than nine years.

4. GGP's resilience to the economic downturn is due to several factors.
- GGP’s shopping centers are well-located and often the leading properties in their respective markets.

- GGP's tenant base is high caliber and well diversified, with no tenant making up more than three percent of our revenues.

- Competition from new shopping malls is likely to be limited in the future because there is no financing available for new developments, and it is extraordinarily difficult to obtain approvals to build competing properties even when financing is available.

- Finally, GGP also has valuable development rights associated with many of its properties, assets which do not generate cash today but in the future have the potential to create enormous value.

5. GGP has sought bankruptcy court assistance to restructure its finances and de-leverage its balance sheet because the collapse of the credit markets has made it impossible for the company to refinance its maturing debt outside of chapter 11.

- the commercial real estate finance markets have ceased to function and effectively are closed, even for loans on quality properties generating stable income. The reasons for this are unrelated to the performance of the shopping center industry generally.

6. GGP has approximately $18.4 billion in outstanding debt obligations that have matured or will mature between now and the end of 2012, including past due maturities of $2.0 billion, $1.3 billion more coming due in the remainder of 2009, and $6.4 billion in 2010.

As of December 31, 2008, the GGP Group as a whole reported approximately $29.6 billion in total assets and approximately $27.3 billion in total liabilities (including the GGP Group’s proportionate share of joint venture indebtedness). Of the $27.3 billion in total liabilities, $24.85 billion represents the aggregate consolidated outstanding indebtedness of consolidated entities, which includes $6.58 billion in unsecured, recourse indebtedness and $18.27 billion in debt secured by properties. For 2008, the GGP Group reported consolidated revenue of approximately $3.4 billion.

7. GGP borrow mortgage loans with low amortizing three to seven year terms, improve the NOI for the property through the company’s operational and management expertise, and refinance those loans at maturity, a model used successfully in the commercial real industry for decades.

8. Default occurred cause on Jan 1, 2009 to the date of the chapter 11 filing, $1.1 billion of additional debt has matured which the company is unable to refinance. GGP’s inability to refinance debt as it matured triggered acceleration of $4.1 billion in debt that otherwise was not currently due.

9. In total, as of the chapter 11 filing GGP had approximately $2.0 billion of past-due indebtedness and an additional $5.9 billion that has been or is subject to acceleration. Another $1.3 billion will mature by its own terms later in 2009. Another $1.3 billion will mature by its own terms later in 2009. GGP has virtually no hope of refinancing either its past-due debts or its upcoming maturities in the current credit markets.

10. GGP tried to re-negotiate the maturing CMBS loans but were unable to because of the constraints on the master servicers and special servicers ability to re-negotiate loans.

11. GGP undertakes many measures to increase short-term liquidity.
- GGP suspends its dividends
- GGP reduced their planned spending for development and redevelopment of properties from $1.5B to $224M for 2009, and from $1.3B to $108 million for 2010. These are capex relating to expansion and redev of shopping malls.

12. GGP ability to divest assets is severely limited because prospective buyers also have limited or no ability to finance acquisitions. GGP was only able to sell one parcel of land, two office parks, and three office buildings in 2008. All but one of these sales closed prior to the 4th quarter of 2008.

13. Pershing Square Capital is the agent of GGP’s DIP financing. PS Green Holdings and PS Green Inc as initial lenders of the DIP facility. DIP facility’s interest rate is at LIBOR plus 12%.

14. GGP has proposed to pay its mortgage lenders amounts equal to contract-rate interest payments during the chapter 11 cases."