General Growth Properties, Inc. GGP, one of the largest regional mall operators in the United States, is one bankruptcy that could result in big upside for shareholders. The company’s bankruptcy is the result of an unprecedented disruption in the credit markets combined with large near-term debt maturities; however, the company’s largest shareholder believes that the company’s assets outstrip its liabilities and equity value could remain intact.

Bill Ackman’s Pershing Square, which owns approximately 7.5% of the common stock, believes that there is a great opportunity for a fair and equitable restructuring of the company that preserves value for all constituents, including unsecured lenders and equity holders. In fact, the hedge fund argues that shares could be worth between $9.11 and $21.50 per share, depending on the cap rate, which it estimates at between 7.5% and 8.5% based on comparables.

A Brief Overview

General Growth Properties has over 24,000 tenants occupying over 200 regional malls, 30 shopping centers, and numerous office properties. The company also owns some 18,000 saleable acres of land that it develops for residential and commercial usage. Finally, the company provides management, leasing and marketing services for all of its properties. Combined, these businesses produce a diversified revenue stream and geographical presence.

The company’s properties also represent some of the best in the market, with 50 of their most productive centers generating average sales per square foot of approximately $648. Meanwhile, the company’s 90.9% occupancy rate, 1.4% year-on-year cash-on-cash net operating income growth, and long-term lease based revenue model offers embedded growth in good times and limited revenue declines in bad times – a very stable investment.

The Big Problem

The big concern with General Growth Properties, and the reason for the bankruptcy, is its large debt load. Unfortunately, the company was a significant holder of commercial mortgage backed securities (CMBS), which accounted for approximately $15 billion of its debt. The market for this CMBS debt has virtually disappeared amid the economic turmoil, and as a result, it is impossible to refinance the debt in today’s environment.

Pershing Square argues that General Growth Properties’ liabilities are actually one of its most valuable assets. A high percentage of the company’s capital structure is based on non-recourse debt, which gives the company a virtual put option at the mortgage amount on properties worth substantially less than their associated mortgage. Meanwhile, approximately 82% of the company’s debt is fixed rate with 75% of the debt not due until 2012.

Bankruptcy Law Sides with Shareholders

Bankruptcy law in the United States calls for creditors to receive a “fair and equitable” plan of reorganization. However, this plan only entitles them to recover 100% of the amount of their claims. And when a debtor’s asset value is exceeds its liabilities, then equity holders are entitled to the residual value. Pershing Square argues that the residual value in General Growth Properties will not only exist, but amount to a substantial price per share.

So, what is a good solution to the problem in bankruptcy court? Well, Pershing Square is calling for a seven-year extension of the General Growth Properties’ secured and unsecured loans at their existing interest rates, giving the company sufficient time to use cash flow from operations to de-lever its balance sheet. With this extension, the activist hedge fund believes that the company would be able to repay its existing creditors in full.

If lenders do not agree to this plan, the bankruptcy code also offers the ability for debtors to “cram down” creditors so long as each class of creditor receives the present value of their claims. So, if a creditor isn’t paid in cash or property when it emerges, it must receive future payments where the present value equals the bankruptcy claim. The interest rate on these payments may be between 1% and 3% when efficient markets are not in place, as in the company’s case.


General Growth Properties has high quality assets, a diversified geographical footprint, inflation-protected cash flows, a diverse tenant mix, and embedded growth opportunity, which could help it emerge from bankruptcy with its equity in tact if Pershing Square gets their way. Until then, investors can purchase a virtual call option on the hedge fund and company’s ability to effect this plan going forward…