Water Tower Place, which has 100 spaces for stores and restaurants, is one of seven Illinois malls operated by Chicago-based General Growth Properties. It has a higher occupancy rate than the national average of mall operators.
Chicago mall operator staves off bankruptcy month to month
Share prices for General Growth Properties hit a record low 35 cents on Nov. 12 and 13, following the company's announcement that it may file for bankruptcy to refinance its debt.
Walking through downtown Chicago’s Water Tower Place, there’s no evidence of financial trouble—the storefronts are filled, shoppers crowd the escalators and American Girl dolls smile in colorful window displays.
But several blocks away, at the corporate headquarters of General Growth Properties Inc.—which operates the shiny seven-story shopping center as well as more than 200 others across the country—the situation is not so cheery.
On Tuesday, the Chicago-based company announced in an 8-K filing with the Securities and Exchange Commission that its lenders, which include Deutsche Bank AG and Bank of America Corp., agreed on Friday to extend a $900 million loan from Feb. 12 to March 15.
The loan, which is secured by mortgages on two Las Vegas properties, was originally due on Nov. 28. However, on Nov. 30 General Growth secured an interim two-week extension.
The company announced Dec. 17 that the lenders agreed to delay the maturity date of the Las Vegas loan to Feb. 12, and another debt, a credit agreement from 2006, to Jan. 30. Both have now been moved back to March 15.
“The passage of time can be a good thing or a bad thing. It’s hard to read into it,” said Tim Goebel, director of investor relations for General Growth. “I was pleased to be able to put out a release that said we have extended it.”
These payments won't come easy for General Growth, which was looking at more than $27.3 billion in debt as of Sept. 30. It posted a loss in the third quarter 2008 of $15.4 million, or 6 cents per diluted share, widening the $9.4 million loss, or 4 cents per diluted share, in the year-earlier period by 64 percent.
The company's revenues were $814.7 million in the third quarter 2008, up 5.7 percent from $864.3 million in the year-earlier period.
General Growth isn’t the only real estate investment trust struggling. An index of 23 REIT stocks compiled by the National Association of REITs fell by 48 percent in 2008. So far this year, the index is down 19 percent. The only real estate sector performing worse than retail is industrial and office buildings.
A tough holiday shopping season and tightened spending are in part to blame for the downturn in retail real estate.
“REITs have underperformed the broader market primarily due to liquidity concerns, but we think the retail subsector has underperformed more due to consumer spending concerns" as well as store closings and bankruptcies, said Ross Smotrich, an analyst with Barclays Capital in New York, in a note to investors.
Mall vacancies rose to 7.7 percent in December, the most since New York researcher Reis Inc. began tracking the figure a decade ago. Struggling retailers are expected to continue to push the vacancy rate higher in 2009.
“As we speak, retailers are still announcing store closings. Even healthy retailers are announcing store closings,” said Mez Birdie, a member of a retail sector advisory group at the Chicago-based Institute of Real Estate Management.
As of Sept. 30, General Growth’s vacancy rate, for spaces subject to leases of more than a year, was 7.3 percent, down half a percentage point from the third quarter of 2007.
“Obviously we're looking to work with all of our tenants to see everybody through this challenging time, but it's a negotiation in each instance. We're going to try to run our properties as effectively as we can,” said Goebel.
Still, Water Tower Place, which Goebel calls a “trophy asset,” has an above-average occupancy rate.
“As big as General Growth is, and as many properties as it has, it’s not like all its properties are distressed,” said Birdie, who serves as the director of retail and investment services for NAI Realvest in Maitland, Fla.
David Keating, a spokesman for General Growth, agreed that some individual properties don’t reflect corporate woes.
“There’s been no impact at Water Tower Place, regardless of what’s going on with our corporation,” Keating said.
The company, in the midst of its delayed debt deadlines, has seen its stock decline dramatically—down about 97 percent in 2008—while its biggest competitor remains financially strong. Shares of Simon Property Group Inc., the only U.S. mall REIT bigger than General Growth, declined about 32 percent last year.
Indianapolis-based Simon posted a 6.5 percent increase in its fourth quarter funds from operations on Friday and has gained the favor of analysts like Barclays’ Smotrich.
“Simon Properties remains our top pick in the space due to its high quality portfolio of mall assets and premium outlet centers. We think SPG will outperform its peers due to its high asset quality, moderate leverage and healthy access to capital,” Smotrich said in a report on REITs released Thursday.
General Growth is scheduled to report its fourth-quarter earnings after market close on Monday. Smoltrich, who rates the stock “overweight,” estimates fourth-quarter FFO of 81 cents, down 12 percent from 92 cents in the year-earlier quarter. He estimates a full-year FFO of $2.93 cents, down just 1.3 percent from $2.97 in 2007.