General Growth to reach end of bankruptcy

By Ilaina Jonas

NEW YORK (BestGrowthStock) – General Growth Properties Inc (GGP.N: ), the No. 2 U.S. mall owner, is slated to clear its final bankruptcy hurdle on Thursday, ending the largest U.S. real estate Chapter 11 filing.

While bankruptcy could soon be behind it, the company has a lot of challenges ahead, as investors and Wall Street will be looking at how it regains credibility as one of the largest U.S. real estate investment trusts (REITs).

When General Growth exits bankruptcy, it will emerge as two companies. Howard Hughes Corp will house its residential real estate as well as the shopping centers under various stages under development and other non-income producing properties.

The main company will be its mall company, which will retain the name General Growth Properties. It will remain a REIT, with about 170 malls, and be among the world’s top six publicly traded mall companies, according to Credit Suisse.

But it will face new hurdles. It plans on raising $2.25 billion selling shares. But many investors want to know who will be in charge of running the company and how they will turn it around.

“They have to get the management structure lined up. for employees and the tenants,” said Michael Torres, chief executive officer of Adelante Capital Management. “I will watch it trade. We’re not in hurry to jump into the situation.”

Operationally, General Growth has improved this year, Green Street Advisors Managing Director Cedrik Lachance said. Its tenant sales, an important measure of the health of its rent-paying tenants, rose 7.8 percent in the second quarter, compared with 5 percent for the sector.

But it still struggles with its yearly comparable net operating earnings, or property level revenue net of property-level expenses. It was down 3.4 percent, compared with negative 0.5 for the sector.

“What’s hurting them is rent, probably,” Lachance said. “What we’re seeing now anyway is the result of leases negotiated last year. Part of that is related to bankruptcy. I think it’s fair to say you’ll see improvement in operating results shortly. That said, you’ll see improvement in operating results in all the operating companies.”

Credit Suisse valued of General Growth shares at about $12.50 each and Hughes shares at $4.00.

Credit Suisse said the mall company’s performance will likely depend upon its new management, and does not recommend selling shares of competitor Simon Property Group Inc (SPG.N: ) to fund buying General Growth shares.

HERE COMES THE JUDGE

Nearly 99 percent of the existing shareholders already have approved the reorganization plan. It just needs Judge Allan Gropper’s approval.

During the confirmation hearing, some advisers and executives are slated to testify that the plan is feasible and complies with the bankruptcy code. The Chicago-based REIT is still wrestling with holders of its 2006 credit facility, but an agreement is not needed for General Growth to exit bankruptcy.

Should all go as expected at the hearing, General Growth would exit bankruptcy around November 8.

That’s a long way from April 16, 2009, when the $28 billion company filed for Chapter 11 bankruptcy protection after the credit crisis left it without sources of new loans to replace its rapidly maturing mortgages and corporate debt.

General Growth shares bottomed at November 12, 2008 at 26 cents per share. They closed at 60 cents a share when it filed for bankruptcy.

The stock on Wednesday was at $17.10, up 4.1 percent.

As part of an incentive agreement to take the company through bankruptcy and increase its value, Chief Executive Adam Metz will receive $37.6 million and President and Chief Operating Officer Thomas Nolan will get $27.8 million.

“I think the management team deserves a lot of kudos, and the lenders for being rational,” said Robert Gadsden, portfolio manager of Alpine Realty Income & Growth Fund, which owns General Growth stock. “There certainly was enough value of the assets, enough cash flow to support a restructured company.”

Among the malls that General Growth owns are some of the most profitable and valuable: Ala Moana Center in Hawaii, Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston.

But if creditors, shareholders and management didn’t get on the same page, the General Growth could have been stripped of its malls and possibly left as a management company.

Investor William Ackman had for months spoke in support of the company and urged it to file for bankruptcy protection. He would later be credited with bringing aboard Fairholme Fund, one of the capital providers for the new company, and earning more than $1 billion on an investment of about $200 million.

Over the past year and a half the company, its investors, creditors and advisers have made it a bankruptcy case that even Judge Gropper called “unique.”

Its creditors had no vote on the plan because they are being repaid in full.

Its lender in debtor-in-possession financing agreed to be repaid in stock or cash. While it was still in bankruptcy, it relisted on the New York Stock Exchange.

It fended off a heated takeover attempt by Simon Property after it attracted about $8 billion in from Brookfield Asset Management (BAMa.TO: ) bondholder Fairholme Capital, and Ackman’s Pershing Square Capital Management LP to finance its emergence as an independent company.

(Reporting by Ilaina Jonas, editing by Gerald E. McCormick)

General Growth to reach end of bankruptcy