If General Growth Properties Inc., the Chicago-based retail giant that owns Providence Place, files for bankruptcy, it’s unlikely to lead to a significant disruption or closure of the mall, which has a well-diversified set of stores and is in a prominent retail market, according to two real estate analysts.
Since its 1999 opening, the 1.3 million-square-foot mall has been a centerpiece for retail in Providence and the state, also helping spur hotel development and annually bringing millions of shoppers to the city. But GGP – one of the largest real estate investment trusts (REITs) in the United States – said last month that it may seek bankruptcy protection.
Providence’s Alan Doyle, principal with the real estate finance firm Larew, Doyle & Associates, recently told Providence Business News that a GGP bankruptcy would be the result of the company overextending itself. It has “an excessive debt burden in a presently unforgiving and overly restrictive capital market,” he said.
That it can’t handle its debt is in part due to the economy, but it’s also the result of the company overbuying, he said.
“It’s no secret that [CEO] John Bucksbaum, the hard-charging son of the co-founder of General Growth Properties, picked a poor time to go on a highly leveraged shopping spree,” Doyle said, “acquiring the residential community and retail giant The Rouse Company for $14 billion in a highly leveraged transaction in 2004.”
Two years earlier, Maryland-based Rouse had bought Providence Place in a $522 million deal with developers The Providence Place Group. When GGP took control of Providence Place – along with 36 other malls – it increased its portfolio to about 200 regional malls in 44 states. GGP reported taking out an $8 billion four-year acquisition loan to finance the deal.
The company grew, posting a 2007 profit of $287.95 million, almost five times the $59.27 million profit it posted for 2006.
But in October of this year, GGP announced that CEO John Bucksbaum and President Robert A. Michaels had resigned. A week later, the company’s third-quarter report was released, showing steep losses in the three-month period ending Sept. 30. The $15.41 million in losses amounted to a 64.71-percent increase from the $9.36 million in losses in the same 2007 quarter. Total revenue last quarter fell 5.73 percent to $814.7 million, GGP announced.
Then, last month, in a regulatory filing with the U.S. Securities and Exchange Commission (SEC), the company stated that it might be forced to seek bankruptcy protection, citing “substantial doubts as to our ability to continue as a growing concern.”
A few days later, on Nov. 12, Standard & Poor’s 500 Index dropped the company, citing its drastic decline in share value. That day, GGP shares closed at 35 cents, down more than 99 percent from their March 2007 value of $65.57 per share.
A number of firms are in similar situations, said Ray Cirz, CEO of national real estate consulting firm Integra Realty Resources Inc., which has a Providence office. “Right now, if you have a significant amount of leverage on your portfolio, it’s a concern,” he said, “because of all the issues that are being brought up with the credit crisis.”
In response to an interview request with Timothy Goebal, director of investment relations for GGP, Director of Public Affairs Nicole C. O’Connor e-mailed a statement to PBN. She said GGP is now “working with our advisers to develop a comprehensive, strategic plan to generate capital from a variety of sources including, but not limited to, core and non-core asset sales, joint venture interests, a corporate-level capital infusion and/or strategic business combinations.”
Cirz said the troubled credit markets will make it difficult to buy, sell or finance those properties.
Doyle added that if GGP decides to sell, it would have to do so at a steep discount. He said that the company may not “have time” to sell properties and avoid bankruptcy. “The company’s $27 billion in long-term debt is just too unwieldy in the present credit environment,” he said.
A better option might be a stock-by-stock sale to another REIT, Doyle added. Two potential buyers might be Sydney, Australia-based Westfield Group and Indianapolis-based Simon Property Group Inc. Each has enough available credit to buy the company, he said, adding that such a buyer would be “in the best position of quickly stabilizing the company’s assets.”
On Nov. 25, an SEC filing by Pershing Square International Ltd showed that William A. Ackman, managing member of the hedge fund, had bought 20.08 million shares of GGP. That’s a 7.5-percent ownership stake. [And Pershing Square has an interest in another 33.4 million General Growth shares, or 12.4 percent, via total-return swaps it acquired Nov. 20 to 24, the filing revealed. (READ MORE)]
Doyle said it’s unclear whether that purchase will enable GGP to avoid bankruptcy, although it might be a boost to investor confidence. “They’ve got so much debt – that’s the problem,” he said, “it’s not the value of the stock.”
He added, “Ackman’s play may really be: ‘I’ll own a piece of the company, prop it up, so that when General Growth sells I get a good price.’”
Cirz said Providence Place is one of the more “desirable malls” in the Northeast and, regardless of who owns it, the mall is still an economic engine in Providence.
At The Providence Foundation, Executive Director Daniel Baudouin said the mall’s impact is easily visible in the city’s retail scene, but has also been extended to tourism and hospitality.
“If you put a circumference around the mall, since it came in, heading in all directions, you have growth and development,” he said. “I think that was one of the original intents of the development.”
He pointed to the development at The Westin Providence, Marriott’s Courtyard Providence, GTECH Corp.’s downtown building and the Renaissance Providence Hotel as having been influenced by the mall in some way. He added that he expected that influence to continue.
“It brings in [about] 12 million people a year” to shop in the city’s downtown, he said. “They come into our downtown and they weren’t coming before, so it’s very important.”
Citing vacancy numbers from Retail Traffic Magazine, Doyle said national mall vacancies are now about 7 percent. GGP reported that the vacancy at its properties rose last quarter from the same three-month period last year. It reported that vacancies hit 7.3 percent last quarter, when a year before it was at 6.8 percent.
But Cirz and Doyle both said a possible GGP bankruptcy wouldn’t affect the mall’s overall performance.
“Shoppers wouldn’t see any significant difference at Providence Place,” Cirz said. “GGP’s tenants are obligated to continue paying rent and there are leases in place. And they don’t have some of the problem tenants out there – like Circuit City or Linens N Things – that have declared bankruptcy.”
Providence Place Senior General Manager Craig Gorris said earlier this month that the vacancy rate is about 5 percent at the mall, but that all of those vacancies were filled with temporary tenants.
Gorris added that the mall is largely “insulated” from market forces because it has entertainment, dining and retail components: “Retail is very cyclical, and I think because of our diversity, we’re somewhat more immune.” •
