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Growing Debt A Problem For General Growth Properties
General Growth Properties, Inc. (NYSE:GGP) has seen its share price fall precipitously the past year as worried investors have dumped the stock due to a highly leveraged balance sheet and possible future equity dilution.
General Growth Properties is a real estate investment trust (REIT) that specializes in retail properties. The company owns or has management responsibility for over 200 properties, and is diversified by store category and geography. It also has a Master Planned Communities segment that develops property for residential and commercial use. (Interested in learning about real estate investment trusts? Check out What Are REITs?)
Too Much Debt At Wrong Time
General Growth Properties has total portfolio debt at June 30, 2008 of $27.4 billion. On July 11, 2008, the company borrowed $875 million under a new secured mortgage loan facility and paid down all of its third quarter maturing debt, except for a small issue with a prepayment penalty. The maximum balance permitted under this facility is $1.75 billion. The company since has accessed this facility at least two more times, bringing the total owed to $1.51 billion as of September 17, 2008. The company no doubt will update the investment community about its rollover schedule at the next earnings release, but the general worry about this leverage has hurt the stock. As of noon on Wednesday October 22, 2008, the stock was down almost 30%, trading at $3.40.
Another issue gnawing at investors is an obligation that General Growth Properties inherited when it merged with the Rouse Company. In 1996, the Rouse Company purchased the remnants of the empire of Howard Hughes, which at the time included tens of thousands of acres of land in Nevada and Los Angeles. As part of this deal, Rouse signed a contingent stock agreement (CSA) that obligated them to pay out stock twice yearly to the Hughes descendants, and to make one final payment in 2010 based on a final valuation in 2009. General Growth Properties assumed the obligations under this CSA after the merger with Rouse, and the company expects the payout to be "significant". Although the payout will be in stock, and not cash, it has raised fears of dilution amongst existing investors.
Dividend Cut
The company recently suspended its dividend despite management insistence at the last conference call that it didn't need to. President and COO Robert A. Michaels said, "there is no need to consider reducing our dividend. We've outlined so many different places that we can get cash; there are so many things we would do before we cut our dividend...I can't imagine any scenario where we would need to cut our dividend."
Perhaps the situation at General Growth Properties will ignite more debate over funds from operations (FFO), a commonly used metric in the REIT industry to measure performance. The company reported core FFO of $872 million in 2006 and $881 million in 2007, something that investors might see as an indication of financial strength. The company defines this core FFO as funds from operations, excluding the real estate property net operating income from the Master Planned Communities segment and the provision for income taxes. The company considers it the best measure of its performance.
Other REITs have been sold off due to general concerns about real estate and leverage concerns. Developers Diversified Realty Corp. (NYSE:DDR) is down significantly after the company revealed that it had $1.7 billion in debt due over the next two years, and that it had 38 locations in its portfolio leased to Mervyn's, a regional department store that announced it was closing all of its locations after the holiday season.
Several exchange-traded funds (ETFs) that track the REIT industry overall are down year-to-date, providing an opportunity for investors if they feel the sector has bottomed. The Vanguard REIT Index (NYSE:VNQ) is trading around $40, down from its all-time high of nearly $80 in February 2007. The Dow Jones Wilshire REIT SPDR (AMEX:RWR) is trading at $44, down from its all-time high around $90 in February 2007. (Thinking about building an ETF portfolio? Read 3 Steps to a Profitable ETF Portfolio.)
General Growth Properties has experienced a large sell-off due to investor concerns about its ability to rollover its huge debt load as well as worries over possible future dilution.
General Growth Properties is a real estate investment trust (REIT) that specializes in retail properties. The company owns or has management responsibility for over 200 properties, and is diversified by store category and geography. It also has a Master Planned Communities segment that develops property for residential and commercial use. (Interested in learning about real estate investment trusts? Check out What Are REITs?)
Too Much Debt At Wrong Time
General Growth Properties has total portfolio debt at June 30, 2008 of $27.4 billion. On July 11, 2008, the company borrowed $875 million under a new secured mortgage loan facility and paid down all of its third quarter maturing debt, except for a small issue with a prepayment penalty. The maximum balance permitted under this facility is $1.75 billion. The company since has accessed this facility at least two more times, bringing the total owed to $1.51 billion as of September 17, 2008. The company no doubt will update the investment community about its rollover schedule at the next earnings release, but the general worry about this leverage has hurt the stock. As of noon on Wednesday October 22, 2008, the stock was down almost 30%, trading at $3.40.
Another issue gnawing at investors is an obligation that General Growth Properties inherited when it merged with the Rouse Company. In 1996, the Rouse Company purchased the remnants of the empire of Howard Hughes, which at the time included tens of thousands of acres of land in Nevada and Los Angeles. As part of this deal, Rouse signed a contingent stock agreement (CSA) that obligated them to pay out stock twice yearly to the Hughes descendants, and to make one final payment in 2010 based on a final valuation in 2009. General Growth Properties assumed the obligations under this CSA after the merger with Rouse, and the company expects the payout to be "significant". Although the payout will be in stock, and not cash, it has raised fears of dilution amongst existing investors.
Dividend Cut
The company recently suspended its dividend despite management insistence at the last conference call that it didn't need to. President and COO Robert A. Michaels said, "there is no need to consider reducing our dividend. We've outlined so many different places that we can get cash; there are so many things we would do before we cut our dividend...I can't imagine any scenario where we would need to cut our dividend."
Other REITs have been sold off due to general concerns about real estate and leverage concerns. Developers Diversified Realty Corp. (NYSE:DDR) is down significantly after the company revealed that it had $1.7 billion in debt due over the next two years, and that it had 38 locations in its portfolio leased to Mervyn's, a regional department store that announced it was closing all of its locations after the holiday season.
Several exchange-traded funds (ETFs) that track the REIT industry overall are down year-to-date, providing an opportunity for investors if they feel the sector has bottomed. The Vanguard REIT Index (NYSE:VNQ) is trading around $40, down from its all-time high of nearly $80 in February 2007. The Dow Jones Wilshire REIT SPDR (AMEX:RWR) is trading at $44, down from its all-time high around $90 in February 2007. (Thinking about building an ETF portfolio? Read 3 Steps to a Profitable ETF Portfolio.)
General Growth Properties has experienced a large sell-off due to investor concerns about its ability to rollover its huge debt load as well as worries over possible future dilution.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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