The Wall Street Journal-20080119-The Buzz -- MarketWatch Weekend Investor- General Growth-s Indebtedness Raises Fears Among REIT Investors
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The Buzz -- MarketWatch Weekend Investor: General Growth's Indebtedness Raises Fears Among REIT Investors
'Our substantial indebtedness could adversely affect our financial health and operating flexibility." Such boilerplate "risk factor" disclosures, such as that one from recent annual reports of Chicago- based mall developer General Growth Properties, are usually overlooked by investors as standard warnings for anything and everything that could go wrong.
But after default worries in recent weeks nearly wiped out the stock price of Centro Properties Group, an Australian shopping-center operator with large holdings in the U.S., investors in General Growth Properties started taking notice.
For good reason: Among large, actively traded real-estate investment trusts, General Growth's debt relative to assets and capitalization is higher than most. And most of its debt, which at last count topped $25 billion, isn't just any debt. Unlike most of its peers, such as Simon Property Group, which rely on the public debt markets and run more conservative balance sheets, most of General Growth's debt is in the form of good old-fashioned mortgages and construction loans that are secured against specific malls. In those recent freewheeling days of easy money, General Growth would from time to time dip into the once- thriving mortgage-backed-securities market.
The company's approach to financing made General Growth, which has more than 200 properties in 45 states, "more risky than its peers," says Steven Marks, managing director of the REIT group at Fitch Ratings, which rates the company's debt as "junk." While Fitch hasn't made any changes to General Growth's "stable" outlook, and doesn't believe that the REIT is another Centro in the making, Mr. Marks acknowledges that General Growth is "next on the list" after Centro, with $6 billion of debt that needs to be refinanced over the next two years.
General Growth didn't respond to calls for comment.
While Mr. Marks says that risks of a bankruptcy filing are low, he also says that companies such as Centro "and potentially General Growth get into trouble when they face lots of maturities over a short period of time in a weak market."
Nobody really cared about any of this, of course, as long as the credit markets remained open and friendly -- and as long as General Growth's stock, one of the best performers of all REITs over the past five years, continued to dazzle. And dazzle it did until peaking at about $67 last March, a near-quadrupling over the previous five years.
Its shares have since fallen by half, harder than many other REITs, closing Friday at $32.86, as investors grow increasingly concerned that everything that worked in General Growth's favor, including the use of secured financing, may now work against it.
In better times, with access to cheap money, including mortgage- backed securities, General Growth continued to build and acquire new projects. Its growth culminated in 2004 with the $14 billion acquisition of Rouse Co.
Along with Rouse's malls came a residential-development business in Maryland, Texas and Nevada, which may have looked genius at the time but has since "become increasingly lumpy and prone to impairment charges," according to a recent report by UBS analyst Michael Dimler.
At the same time, retail sales and property values are falling just as the company looks to refinance.
The company isn't without fans. Just this past week, Merrill Lynch analyst Steve Sakwa upgraded the stock to a "buy," saying the stock's decline "exaggerates the concerns about its ability to refinance its debt."
Maybe not for 2008, but "the picture for '09 is a bit fuzzier," says Ben Yang, an analyst with Green Street Advisors, which specializes in REITs. He adds that "a REIT's balance sheet should never impact its capacity to operate its core business" but that General Growth "appears to be near that point."
General Growth has issued several statements in recent weeks trying to allay concerns, including one Thursday that announced that it has agreed to sell two office buildings and has lined up two small refinancings.
The company also says it is negotiating with "numerous lenders" on as many as a dozen new loans. "Although it is not possible to accurately predict the availability of commercial mortgage financings in the future," one news release said, "the company believes that the supply of financing will increase later in the year."
That may be, but if there is one thing we have learned in this mortgage mess, it is that company crystal balls have been useless.
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Herb Greenberg, MarketWatch senior columnist, doesn't own stocks except his employer's -- nor sell individual stocks short or invest in hedge funds. MarketWatch is a unit of Wall Street Journal publisher Dow Jones. Email [email protected]
