By  on April 16, 2009

The Chapter 11 filing of General Growth Properties Inc. early Thursday is the biggest bankruptcy of the year — as well as the largest in the history of U.S. real estate.

The nation’s second largest mall owner and 158 of its regional shopping centers filed for bankruptcy court protection in Manhattan.

The Chicago-based real estate investment trust said it has a $375 million commitment for a debtor-in-possession financing facility from Pershing Square Capital Management, the hedge fund run by activist investor Bill Ackman. The DIP facility is subject to bankruptcy court approval. Ackman, who controls 7.8 percent of Target Corp.’s stock and has pushed the retailer, so far without success, to spin off its stores into a real estate investment trust, has been buying shares of General Growth as it’s battled bankruptcy in recent months.

In its filing, General Growth, which operates more than 200 malls totaling more than 200 million square feet, listed assets of $29.6 million and liabilities of $27.3 million. The list of top trade creditors included tenants which are some of the biggest names in fashion retailing, including Sephora, San Francisco, $1.5 million; Lerner New York Inc., now part of New York & Company Inc., New York; $999,816; Guess Inc., Los Angeles, $581,460; Macy’s Inc., Cincinnati, $491,871, and Veneta Bottega Inc., New York, $294,400. Often, landlords reimburse tenants for outlays for new stores or renovations on existing units.

Certain subsidiaries, including those that are parties to joint ventures, have not filed for bankruptcy court protection.

While consumers might not care if retailers or mall operators are in bankruptcy, General Growth sought to reassure its retail tenants that nothing has changed for its day-to-day operations. “Our shopping centers and other properties will continue to offer the same great visitor experience for which our company is so well known,” said Adam Metz, chief executive officer of the REIT.

He said the company’s core business “remains sound and is performing well with stable cash flows. We believe that Chapter 11 is the best process for restructuring maturing mortgage loans, reducing the company’s corporate debt, and establishing a sustainable, long-term capital structure for the company.”

In an affidavit filed with the bankruptcy court, Metz said General Growth has “$18.4 billion in outstanding debt obligations that have matured or will mature between now and the end of 2012, including past due maturities of $2 billion, $1.3 billion more coming due in the remainder of 2009 and $6.4 billion in 2010.” He added that despite attempts to refinance, “virtually every source of commercial real estate financing has dried up, leaving a vastly inadequate supply of credit to meet the demand created by current and upcoming maturities.”

Much of the pressure on General Growth was a result of its 2004 acquisition of Rouse Co. for more than $12 billion. Concern over General Growth’s ability to refinance maturing mortgages had been escalating since last fall. With credit tight and prospective buyers few, the developer had been unable to sell its three Las Vegas properties — the Fashion Show mall, The Grand Canal Shoppes at The Venetian and The Shoppes at The Palazzo — to help pay down its debt. General Growth had asked holders of more than $2.2 billion in unsecured notes issued by Rouse to wait for payment until at least next year.

On a conference call, Thomas Nolan, president and chief operating officer, said the net operating income of the company’s portfolio was “higher in 2008 than it was in 2007. So fundamentally, the business remains profitable and remains strong.” He stressed the REIT is able to pay ongoing interest payments, just not the debt maturities when they come due.

Nolan said General Growth is still signing tenants to leases at its 200 properties. The occupancy rate at the end of 2008 was 92.5 percent, said Nolan, who added the percentage is one of the highest levels in the firm’s history as a public company since 1993.

Nolan also acknowledged that as the firm was attempting to negotiate forbearances with lenders to obtain some breathing room, it had contemplated selling a few properties. However, the same capital crisis that prevented General Growth from refinancing its loans also kept potential buyers from putting together offers having “meaningful capital structures.”

While the firm is obligated to assess potential offers for any asset now that it is under bankruptcy court oversight, “I don’t think it’s our ambition to be smaller,” he said.

The REIT is not planning any large-scale changes in head count, although Nolan did say that once DIP financing is approved by the bankruptcy court, “Bill [Ackman] will look at his role ongoing with the company.” Nolan described Ackman as one who has been a “very vocal proponent” of General Growth, and said “I think he has expressed an interest at some point in joining the board.”

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