General Growth Properties, one of the largest mall operators in the nation, filed for bankruptcy early Thursday morning in one of the biggest commercial real estate collapses in United States history. Despite bargaining for months with its creditors, General Growth faced increasing pressure to handle its more than $25 billion in debt, largely in the form of short-term mortgages that will come due by next year. The company has been severely wounded by the recession, which has wreaked havoc upon the retailers who inhabit its more than 200 malls in 44 states. Many stores have shuttered, depriving mall operators like General Growth of revenue.
The filing by the Chicago-based company, made in federal bankruptcy court in Manhattan, included most of the company’s malls, which will continue to operate. General Growth’s reorganization efforts will likely focus on selling off properties. It has already suspended its stock dividend, cut its workforce by 20 percent and stopped virtually all new development.
“Our operational model is sound,” Thomas H. Nolan Jr., the company’s president and chief operating officer, said on a conference call early Thursday morning, citing “the unprecedented disruption in the real estate financing markets and the need to extend maturing debt” as the reason the company filed.
“We made extensive efforts to modify existing maturing debt outstide of bankruptcy,” he added.
What began as a crisis in residential real estate has since seeped into the commercial real estate market, as landlords of retail and office space face rising numbers of vacancies. Analysts expect many of these companies to struggle as the recession forces steep cuts in consumer spending and employment rolls.
As the second-biggest operator of malls in the nation, behind only the Simon Property Group, General Growth’s troubles have been closely watched by the real estate and retail industry for months. Founded in 1954 and grown through a series of acquisitions — topped by a $12.6 billion deal for the Rouse Company in 2004 — the company’s huge retail presence has served as a barometer for the ails bedeviling the American retail market.
As more stores have closed, mall vacancies are at their highest point in almost a decade, according to Reis, a research company, which said the vacancy rate at the end of 2008 was 7.1 percent, compared with 5.8 percent at the end of 2007.
That has left many of the roughly 1,500 malls in the United States groping for a solution — any solution — to their woes. Some have converted retail space into office space. Still others have drastically lowered rents for prized tenants, willing to cut deals to simply keep earning revenue. Some have simply gone dark.
Shares in General Growth, which closed on Wednesday at $1.05, have fallen 97 percent over the past 12 months.
General Growth’s filing also marks a humbling of the Bucksbaum family, which grew the company from a family grocery business in Marshalltown, Iowa into a powerhouse of retail shopping in the Midwest. It still holds about a 25 percent stake in the company, and John Bucksbaum, an avid cyclist, remains its chairman after having served as its chief executive.
Few analysts dispute the quality of General Growth’s malls, which include the Ala Moana Center in Honolulu, Water Tower Place in Chicago and the Grand Canal Shoppes at the Venetian in Las Vegas. But its undoing was the mounting pile of short-term mortgages the operator used to expand. That financing strategy was devised by its longtime chief financial officer, Bernard Freibaum, who was dismissed last October.
Since then, the mall owner has pleaded with holders of $2.25 billion in bonds to hold off on demanding payment as it sought to reorganize its debt outside of a bankruptcy filing. But bondholders grew increasingly impatient as bond maturities continued to mount and denied General Growth an abstention from payments for the rest of the year.
The company said in its statement that it has secured a commitment for $375 million in bankruptcy financing from Pershing Square Capital Management, the hedge fund that owns more than 25 percent of the company through its holdings of shares and swap contracts. That financing must be approved by a bankruptcy court judge.
William A. Ackman, the head of Pershing Square, told Bloomberg Television last month that he foresaw an “imminent” bankruptcy filing by the company.
Among the companies listed as General Growth’s 100 largest unsecured creditors are Eurohypo, a unit of Germany’s Commerzbank that holds $2.6 billion worth of loans; Wilmington Trust and the Bank of New York Mellon representing several classes of bonds; casinos including Mandalay Bay and the Venetian; and an assortment of retailers like Sephora, Guess?, Borders and Macys.
In its bankruptcy filing, General Growth said that it sought permission to retain a bevy of advisers, including the investment bank Miller Buckfire, the turnaround consulting firm AlixPartners and the law firms Weil, Gotshal & Manges and Kirkland & Ellis. The document was signed by Marcia L. Goldstein, the chair of Weil’s well-known bankruptcy practice.
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