Owner Of Most Baltimore-area Malls, Heavily In Debt, Files For Chapter 11

April 17, 2009|By Andrea K. Walker | Andrea K. Walker,andrea.walker@baltsun.com

General Growth Properties Inc.'s decision to file one of the biggest Chapter 11 bankruptcy cases in U.S. history Thursday resulted from its inability to refinance mounds of debt, taken on during a rapid expansion, when credit markets crumbled.

The nation's second-largest mall owner wasn't helped by a weak economy that crimped consumer spending; a drift by some shoppers away from mall stores to big-box stores, discounters and the Internet; and a consolidation of the department store industry that put some mall anchors out of business.

The Chicago-based company, which is master developer of Columbia and owner of most of the Baltimore area's regional malls, amassed $27 billion in debt by buying malls and shopping centers. Much of that debt came with its acquisition of Columbia's Rouse Co. in 2004.

Many of the company's healthier properties, including Towson Town Center, Mondawmin Mall and most of its holdings in Columbia, were not included in the bankruptcy petition. Harborplace, the Rouse project that was central to redevelopment of Baltimore's Inner Harbor, was included, as were The Gallery downtown, Owings Mills Mall, White Marsh Mall and The Village of Cross Keys

General Growth grew at a time when interest rates were low and banks were readily lending. But real estate loans are only signed for five to 10 years, and many of General Growth's loans expired just as banks stopped lending, retail brokers said.

The weak retail environment made its predicament worse. As people stopped shopping, sales at the retailers that filled its malls began to suffer. Malls often get a percentage of a store's sales as part of the lease. Some retailers shut down, leaving empty spaces in General Growth malls. In the Baltimore area, General Growth was hard hit by the closing of Boscov's department stores at Owings Mills and White Marsh malls.

Even though the company owns some of the premier malls in the country and has a 92.5 percent occupancy rate, it couldn't survive the financial squeeze.

"When they bought the Rouse Co., they borrowed money and in a different era; the terms for borrowing money were different than they are today," said Jerome Trout III, principal with Trout Daniel & Associates, a regional retail brokerage. "When notes come due, the lending institutions will renegotiate those terms. Considering the difficulty in the lending market today, those terms have changed. The terms have gotten more stringent and will require more equity put in."

The company said that the filing, made in U.S. Bankruptcy Court in the Southern District of New York, wouldn't affect business at its more than 200 malls. Chief Operating Officer Thomas Nolan said during a morning conference call that the bankruptcy would be "invisible" to shoppers. Tenants will continue to pay rent and leases.

The company, which employs about 3,500, doesn't expect large-scale job cuts because of the bankruptcy.

The company has spent millions on upgrades at Baltimore-area malls, including adding a luxury wing to Towson Town Center and redeveloping Mondawmin Mall. Owings Mills Mall suffers from high vacancy.

General Growth tried to fend off bankruptcy over the past several weeks by trying to renegotiate debt with its lenders and putting some properties up for sale, including Harborplace and the Village of Cross Keys. But it wasn't able to reach an agreement with lenders. Potential buyers didn't offer enough money or faced the same problems accessing credit as General Growth, Nolan said.

Nolan said the core business is sound and that its $12.6 billion acquisition of Rouse wasn't at the root of its financial crisis.

"Up until the post-Lehman Brothers credit crash, this company has successfully refinanced debts as they came through, including all debts incurred with the Rouse acquisition," Nolan said.

But critics argue that the Rouse acquisition was too big and that General Growth didn't have the cash flow to manage the debt when credit markets got worse.

"The big problem with General Growth was the Rouse debt, where suddenly they became so leveraged, where they were at the mercy of these financial institutions," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail brokerage and investment banking firm based in New York.

The company said yesterday it has received a $375 million commitment from New York-based Pershing Square Capital Management LP for financing to help it operate during the bankruptcy process.

Executives at Simon Property Group, the nation's largest mall owner, said General Growth's problems shouldn't be seen as an indicator of the health of the mall industry.

"It's important for people to understand that it's totally distinct from the business of the mall business," said Stephen Sterrett, Simon Property CFO. "This is all related to their balance sheet and their capital. The fundamentals of the mall business are pretty good."

Sterrett wouldn't say whether Simon is looking to acquire General Growth malls.

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