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Area Mall Owner's Crisis Signals Wave of Distress
Tysons Galleria Operator Files for Chapter 11

By David S. Hilzenrath
Washington Post Staff Writer
Friday, April 17, 2009

General Growth Properties, the giant shopping mall company whose holdings stretch from Tysons Corner to the planned community of Columbia and Baltimore's Inner Harbor, yesterday sought protection in bankruptcy court, citing debts of more than $27 billion.

The bankruptcy heralds a wave of trouble in commercial real estate that threatens to put another damper on the economy, industry analysts said. By the end of 2011, $1.2 trillion of commercial real estate debt will come due, and like General Growth, many of the borrowers will be unable to refinance or repay their loans, said Gregory H. Leisch, chief executive of Delta Associates, which tracks the industry.

That would spell more losses for banks and institutional investors such as life insurance companies that are already coping with the meltdown in residential real estate.

The bankruptcy adds a new element of uncertainty to the future development of Columbia, where General Growth has been working on a long-term plan that county officials have been counting on to revitalize the downtown. The economic crisis already assured a delay for the first major effort to remake the 1960-era planned community in decades.

But for people visiting General Growth's malls, the Chapter 11 reorganization could be imperceptible.

"We're convinced that we're going to make this bankruptcy filing invisible to the shoppers in our malls," company president Thomas J. Nolan Jr. told reporters. "We're open for business today, and we're going to be open for business tomorrow."

General Growth, the nation's second-largest shopping mall owner, had struggled for months to win reprieves on billions of dollars of debt, much of which was past due. The company tried to sell some properties to raise money, but the same lack of credit that prevented it from replacing its loans kept prospective buyers from raising money.

"What it tells you is that if they don't get the financial system restarted, then every real estate company is going to go bankrupt," said William Ackman, principal of the hedge fund Pershing Square Capital Management, which holds a major stake in General Growth.

Other observers said General Growth left itself exceptionally vulnerable to the recession and credit crunch because it had mortgaged itself so heavily.

"They're the poster child for too much debt, and they have been for five years," said analyst Richard Moore of RBC Capital Markets.

The company, based in Chicago, owns or manages more than 200 malls in 44 states. Its interests include Harborplace and the Gallery in Baltimore, Boston's Faneuil Hall Marketplace, New York's South Street Seaport, the Fashion Show Mall in Las Vegas, Alexandria's Landmark Mall as well as Laurel Commons and Tysons Galleria.

General Growth's problems can be traced partly to its debt-financed purchase in 2004 of Rouse, the pioneering developer of Columbia and of festival markets such as Harborplace.

Asked what the bankruptcy means for Columbia, the company's president said the time table for further development there is uncertain, but he said that was mainly a reflection of broader financial conditions.

"The reality is that there is not much capital available today for new development," Nolan said.

In October, General Growth unveiled its long-anticipated plan for transforming downtown Columbia. The ambitious blueprint, three years in the making and now under review by the county's planning board, called for the construction of 5,500 new housing units and 640 hotel rooms along with retail and office space. Howard County officials hoped it would generate needed revenue and pump life into the community, home to 40 percent of the county's residents.

County Executive Ken Ulman (D) said a General Growth official called him early yesterday morning to discuss the filing and told him the company would continue to pursue the zoning changes.

The recession has taken a toll on retailers, and vacancy rates have climbed sharply at strip shopping centers across the country. General Growth's malls show signs of that weakening. For example, sales per square foot in the company's malls were declining at an annual rate of 4.2 percent late last year, and the occupancy rate fell to 92.5 percent on Dec. 31 from 93.8 percent a year earlier, the company reported.

Still, "virtually none of its problems are tied to the overall retail environment," said Steven Marks, who analyzes real estate investment trusts for Fitch Ratings. One of the last straws for the company came days ago when a group of bondholders called for legal action to enforce payment of the bonds.

General Growth said it has lined up $375 million to fund its operations while in bankruptcy. The financing is from Ackman's Pershing Square, which has amassed a 25 percent stake in the company over past months, betting that the company was worth more than its depressed share price suggested.

General Growth shares closed at $1.05 yesterday, far below its 52-week high of $44.23.

The company's bankruptcy filing listed assets of $29.6 billion and debts of $27.3 billion. During the bankruptcy, the company plans to pay interest on its mortgages but not on its bonds, Nolan said. That translates into continued pain for unsecured creditors.

Major investors, directly or indirectly, include Fidelity's FMR and fund manager Vanguard Group, according to the bankruptcy filing.

The big losers in the company's decline include its founding Bucksbaum family. As of March 23, chairman John Bucksbaum and other family interests held more than 2.6 million shares, according to a regulatory filing.

Bucksbaum was replaced as chief executive in October. The company also replaced chief financial officer Bernard Freibaum, who had been struggling with debts of his own. Freibaum sold almost 3 million shares in October to repay margin calls -- demands for repayment of borrowing -- and he was left with $3.4 million of margin debt, the company reported in October.

When Adam Metz, who had been the company's lead director, was named interim chief executive last fall at a salary of $1.5 million, the company promised him a "fixed bonus" of $2 million and the potential to earn an additional bonus of $1 million based on performance.

"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," Metz said in a news release.

Separately, one of the nation's top bankers yesterday predicted that the banking system will experience mounting losses from commercial real estate.

"You're going to see rapidly rising charge-offs," J.P. Morgan Chase chief executive Jamie Dimon told analysts.

Staff writer Lori Aratani contributed to this report.

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