General Growth Properties, owner of premier malls such as Tysons Galleria in McLean, filed the largest real estate bankruptcy in U.S. history Thursday, but analysts say the move is not a sign of retail Armageddon.
General Growth, like many homeowners, paid top dollar in a rush to buy properties earlier in the decade and now finds itself awash in debt with its asset values shrinking.
The company built up $27 billion in debt during its spending spree - which included the acquisition of Columbia, Md.-based Rouse Co. five years ago for $11.3 billion - and became the second-largest mall operator in the nation.
“This is a crisis of capital,” said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers. “And the inability to refinance debt really doesn’t have anything to do with the slowdown in sales.”
The move will not affect shoppers or residents of planned communities such as Columbia, which the company manages. The Columbia property is not included in the bankruptcy filing, the company said.
“Our shopping centers and other properties will continue to offer the same great visitor experience for which our company is so well known,” Adam Metz, General Growth’s chief executive officer, said in a statement Thursday.
The company owns more than 200 malls, including locally the Shops at Georgetown Park and Harborplace & the Gallery in Baltimore. Other properties include Faneuil Hall in Boston and South Street Seaport in New York.
Shop owners in Tysons Galleria said they remain upbeat and credited General Growth for its management of the upscale mall.
“What they did at this mall was practically a 100 percent face-lift,” said Aram Itani, owner of exclusive women’s apparel store Aram Boutique.
“The ideas they implemented, the type of accounts they brought in, it just became such a beautiful center. It’s unfortunate the economy is under such stress,” said Mrs. Itani of Potomac.
She was an original tenant in the mall who left and returned last summer because of General Growth’s management, she said.
Yendi Jackson, owner of 7 For All Mankind, which sells denim and sportswear, said, “They came over today and gave us a letter and said that nothing is in jeopardy, the mall is open for business as usual.
“As far as I’m concerned, I’m satisfied. Everybody’s filing for bankruptcy right now. The economy is going to switch, and our business is fine,” said Ms. Jackson of Herndon.
Weakness in retail spending is causing store owners to press for lower rents and pushing up commercial loan delinquencies, but that is not the main issue for the struggling mall giant, Mr. Kavanagh said.
“General Growth has a strong portfolio. Sales per square foot are up with the industry leaders, occupancy levels are over 90 percent, and their funds from operations have been good.
“It’s simply that they took on a lot of debt. They bought Rouse and basically bought it by borrowing money and mortgaging their existing properties. Now, because of the credit crisis, they are unable to refinance debt,” Mr. Kavanagh said.
Funds from operations are used as a proxy for earnings among real estate investment trusts such as General Growth.
The company warned in November that it might seek bankruptcy protection if it couldn’t reach a deal with its creditors.
“While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11,” Mr. Metz said in the statement.
The company’s shares, which traded as high as $67 two years ago, plunged 15 percent to 89 cents in pre-market action Thursday on the New York Stock Exchange before trading was halted. Common stockholders generally get wiped out in bankruptcy.
Simon Property Group, the nation’s largest mall owner, said General Growth’s troubles will not affect it.
Simon owns the Arundel Mills Mall in Hanover, Md., and Potomac Mills Mall in Woodbridge, Va., having purchased distressed mall pioneer Mills Corp., of Chevy Chase, in 2007 with other investors.
“The filing of bankruptcy from General Growth has absolutely no impact on the Simon shopping centers,” said Steve Sterrett, chief financial officer of Simon.
“The filing had nothing to do with the operating performance of their shopping centers; it had everything to do with their debt,” he said. “Everything is tougher these days in this economic environment, but [Simon’s] centers are performing very well.”
The Washington-area economy is doing better than many others because of the prevalence of government jobs, Mr. Kavanagh said.
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