General Growth Properties, the second-largest owner of shopping malls in the United States, has filed for Chapter 11 bankruptcy protection, after lengthy efforts to renegotiate its $27 billion debt load collapsed.
The company, which owns New York's South Street Seaport, Boston's Faneuil Hall, the Glendale Galleria in California and Fashion Show in Las Vegas, said its properties will continue to operate as normal while it attempts to restructure its loans.
"Our core business remains sound and is performing well, with stable cash flows. We believe that Chapter 11 is the best process for restructuring maturing mortgage loans, reducing the company's corporate debt and establishing a sustainable, long-term capital structure for the company," said Chief Executive Officer Adam Metz.
Like many commercial real estate companies, General Growth has found it nearly impossible to refinance the enormous amount of short-term debt it took on during the credit boom.
The company has worked "tirelessly" to address its debt load, but "the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11," Metz said.
Much of the debt was acquired by mortgaging the company's existing malls and was used to purchase more properties, said Peter Slatin, editorial director and associate publisher of Real Capital Analytics, a research firm whose clients include many institutional investors.
For instance, the company spent more than $11 billion in 2004 to buy the Rouse Co., the innovative commercial developer that built the planned community of Columbia, Md., among others.
"They basically never recovered. It was a big swallow, and they never quite digested it," Slatin says.
Slatin says the company pursued a bigger-is-better strategy, buying one mall after another, without any clear strategy.
"What they really did was go on a buying binge almost as soon as they went public in the early '90s," Slatin says. "They got bigger and bigger, but I never felt there was a management philosophy that said, 'This is the type of property we want to own; this is the type we don't want to own.' "
General Growth was founded in 1954 by brothers Matthew and Martin Bucksbaum, whose family owned a grocery business. They built the Town and Country Center in Cedar Rapids, Iowa, one of the Midwest's first regional shopping malls. The company went on to become one of the largest mall operators in the United States, before going public in 1993.
Last year, the company replaced its CEO, John Bucksbaum, with Metz, the first time that a non-family member had been named to lead General Growth.
Now that the company is in bankruptcy, it will probably be forced to sell some of its properties, Slatin said. If it puts too many malls on the market at one time, the already-anemic market for retail real estate could weaken further, and that prospect sent shares of other real estate investment trusts down Thursday.