General Growth Properties Inc., 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.
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.
