It is time for another update on General Growth.  What a great day / week GGP has had in the stock market.  Today, GGP (GGWPQ.PK on OTC) was as high as $3.35 and closed at $3.12.  The reason for the run is the accumulating market knowledge that:

(A) the bankruptcy court (Gropper) is going to allow time and market forces to work out the debt refinancing issues of GGP;

(B) the marketplace for Commercial Real Estate (CRE) continues to improve as does the lending industry to the CRE .  Further, it appears TALF funds will be available to resolve troublesome CMBS securitized loans in particular, if needed;

(c) the financial performance of GGP as reported to the SEC on August 4, was very positive for the current market, which many in the press and blogosphere continue to (incorrectly) say is experiencing a consumer boycott.  Not according to the financials of GGP;

I will take each subject in order with supporting data and reports.  From the Chicago Tribune, today, Wednesday, August 12:

CHICAGO (AP) — Shopping mall operator General Growth Properties Inc. said Tuesday night that a bankruptcy judge has denied a motion by a group of lenders to keep a handful of its subsidiaries out of bankruptcy.

The lenders, led by ING Clarion Capital Loan Services, had argued that some of the company’s shopping centers, including the Tucson Mall in Arizona and the Stonestown Mall in San Francisco, were financially stable and did not need to seek Chapter 11 protection.

The creditors claimed General Growth had “swept” the properties into bankruptcy to benefit from their slightly better financial condition.

“We are pleased with the court’s decision and we look forward to moving ahead with the restructuring of the company,” said Adam Metz, CEO of General Growth Properties, in a statement….

…General Growth owns and manages more than 200 U.S. malls, including Glendale Galleria in Southern California and the South Street Seaport in Manhattan. The company included about 166 properties in the bankruptcy filing.

Another ruling by Judge Gropper in July was even more persuasive in that he declared he postponed any rulings until at least April 2010, to buy time and force the lenders to negotiate.  It worked.  A few days later, GGP was able to renegotiate its leases on excellent terms.

NEW YORK, Aug 3 (Reuters) – General Growth Properties last week, possibly in a shrewd negotiating tactic, said it may yet pursue a controversial strategy in its bankruptcy that could upset the legal basis for thousands of asset securitizations.

The second-largest U.S. shopping mall owner at a hearing said it was considering ways to treat some of its subsidiaries as a single debtor and override their status as separate companies, according to a transcript of the hearing.

Potential for such a move is raising concern among investors because borrowing against commercial real estate and other assets is tied to the notion that borrowers are isolated from external events at a parent or other units. It is enough to sound alarms over the credibility of billions of dollars in bond agreements, even though a “substantive consolidation” is tough to achieve, analysts said.

“This was a surprising development that was probably saber-rattling on General Growth’s part,” said Daniel Rubock, a senior vice president at Moody’s, who attended the hearing……

…Consolidating the special-purpose entities (SPEs) would hit at the heart of asset securitizations, which helped fund more than $600 billion for office buildings, apartments and shopping malls in 2005 and 2006. The threat comes as Federal Reserve and Treasury officials have focused on restarting lending to commercial properties in a bid to reduce the sector’s drag on the U.S. economy.

Addressing concerns at a hearing last week, General Growth attorney Marcia Goldstein affirmed the judge’s understanding that consolidation was not in court papers but noted the company needs to assess “inter-relationships” of the debtors.

“And one of the things we’re looking at is whether there are some subgroups that should be appropriately substantively consolidated,” Goldstein said at the hearing, and confirmed to Reuters on Monday. “We have not reached any conclusions on that at this point.”

General Growth may be looking to negotiate a “global settlement” that rewrites all loans to easier terms with its creditors, said Richard Jones, co-chair of Dechert LLP’s finance and real estate group.

More good news:  In late July, Prudential Insurance filed with the court indicating it will agree to extend financing to GGP on the properties it has liened.  This should be the first of many agreements due to the court’s obvious direction to encourage the parties to work out their differences:

“Prudential reaffirms that it is ready and willing to take concrete steps to reach understandings with Harbor Place, 1160/1180, and Rivertown Crossing with respect to plan treatment and reiterates that the primary issues to be resolved – extension of maturities and establishment of new market interest rates”

http://www.scribd.com/doc/17596889/Prudential-GGP

Karl Denninger, another regular contributor on SeekingAlpha.com, also made a post today regarding how the concept of SPE (Special Purpose Entities) which the lenders are trying to use against GGP to break it into pieces by mortgage package, is also being challenged by Judge Gropper through his rulings in the GGP case:

The judge in General Growth Properties Inc.’s bankruptcy case rejected creditors’ motions to dismiss several properties from the case, clearing the way for the mall owner to begin talks with its lenders about long-term debt extensions that would eventually allow it to exit bankruptcy court.

In a decision Tuesday, Judge Allan Gropper of the U.S. Bankruptcy Court in Manhattan ruled against the arguments of loan servicers ING Capital Loan Services LLC and Helios AMC LLC and lender Metropolitan Life Insurance Co. The three had separately argued that the General Growth malls they financed with mortgages are structured as individual “special purpose entities” that shouldn’t be included in a broad corporate bankruptcy filing.

Although General Growth reported last week that its revenue and profits were down, still very notably, there were profits.  Not many bankrupt companies are profitable three months into their bankruptcy.   Given the very tough consumer retail climate, this news is very encouraging.   To provide the highlights:

NEW YORK (Reuters) – General Growth Properties Inc (Other OTC:GGWPQ.PK – News), the large U.S. mall operator that filed for bankruptcy in April, on Tuesday (August 4)  reported a 2.1 percent decline in quarterly net operating income from its retail properties, citing weakness in the economy and falling occupancy rates.

Second-quarter net operating income in the “retail and other” segment, measuring cash flow that properties generate, declined to $615.8 million from $629.1 million a year earlier. (but note: still quite positive)  The Chicago-based real estate investment trust said a sale of three office buildings in 2008 contributed to the decline.

Overall, quarterly funds from operations (FFO) fell 74 percent from a year earlier to $58.2 million, or 18 cents per share. Core FFO, excluding net operating income from the master planned communities segment and a provision for income taxes, fell 44 percent to $124.6 million, or 39 cents per share.

And finally, to culminate our update, here is the most recent 10Q filing from GGP to the SEC on Monday,  August 10:

http://biz.yahoo.com/e/090810/ggwpq.pk10-q.html

It has been a few weeks since the last post on the story of General Growth Companies and Pershing Square’s Bill Ackman. By all accounts, everything is going as originally speculated.

After a brief run to $3 per share, the stock has pulled back down to $1.65. This is not due to any fundamental change, but just the fact the buzz wore off the stock, temporarily. If anything, the recent court rulings and general improvement in the economy and banking sector bode well for General Growth. The objective of Pershing Square and most likely the bankruptcy court, is to buy enough time for the credit markets to thaw sufficiently that financing can be extended for the properties in question.

This is the conclusion of the attached presentation. The judge appears to be leaning towards a series of “cram downs” whereby the court will force the lenders to each property to extend terms of the mortgages and loans in such a way that both the lender and the borrower are made whole. This would be the ideal situation for General Growth and its shareholders as there might not be any dilution at all under this circumstance and no property liquidation.

I purchased more shares last week and will continue to add periodically as the story plays out and the prospects become clearer.

Here is a lengthy presentation on the status of GGP (now GGWPQ.PK as it trades OTC as a pink sheet) from Pershing Square in late May. Special attention should be paid to the financial models in the middle of the presentation. Ackman is using these same arguments in bankruptcy court in his role as largest individual shareholder and board director:

GGP Presentation 5.27.2009

We continue to monitor the events around General Growth Properties’ bankruptcy filing. It is one of the more fascinating corporate bankruptcies in many years.  The last we checked up on GGP in early May, Bill Ackman’s Pershing Square LLP with its 25% stake in GGP, had petitioned the court to be named to provide Debtor in Possession financing for the bankruptcy period.  This would have given Pershing Square the inside track on all the negotiations for the resolution of GGP’s bankruptcy.  Bill Ackman was on CNBC on Monday, May 11, discussing his stake and his interest in being DIP financier.  But Farallon was also interested and had made a better offer (lower interest rates / better terms) and eventually won that competition.

GGP subsequently was successful in bringing over 160 of its malls under the bankruptcy umbrella which gives equity owners a much better negotiating position as compared to the creditors / debt holders that are secured by that same property as Special Purpose Entities or SPEs. 

Here is the latest (last week) on General Growth Properties’ legal maneuverings:

CMBS Market OK with General Growth Rulings, so Far

By Al Yoon

NEW YORK, May 14 (Reuters) – Commercial mortgage bondholders took some comfort after a judge overseeing General Growth Properties’ bankruptcy stopped short of a move that they say would have undermined the structures of their securities.

The inclusion of more than 160 subsidiaries in the No. 2 U.S. mall-owner’s bankruptcy filing in April set off alarms in the commercial mortgage-backed securities market as investors feared a judge would consolidate the units. A consolidation would set a negative precedent in the market, where investors provide money with knowledge the assets are protected from events like bankruptcy at the parent or other units.

Judge Allan Gropper on Wednesday avoided taking steps toward a “substantive consolidation,” even as he allowed the company to garner cash flow from its disparate properties.

“We dodged this bullet, and I think everyone is breathing a sigh of relief,” said Richard Jones, co-head of Dechert LLP’s real estate group. “But this game is not over yet.”

A consolidation of assets under special-purpose entities (SPEs) could still occur as the company looks for leverage to fix the root cause of its bankruptcy: the inability to refinance debt, Jones warned.

Chicago-based General Growth GGWPQ.PK filed for bankruptcy after the credit crunch choked off financing for commercial property mortgages, challenging the company as it confronted maturities on billions of dollars in loans. Some three-quarters of its shopping malls joined in the filing, sparking industry concern.

CMBS provided more than $600 billion in financing for commercial real estate lending from 2005-2006, and the thawing of the market is seen as key for preventing a downward spiral of delinquencies and foreclosures.

“In general, (the judge) respected the SPEs,” said Christopher Hoeffel, president of the Commercial Mortgage Securities Association.

While inclusion of SPEs in bankruptcy is not ideal, the CMSA considered it a victory that Gropper maintained the isolation of the property assets, and put no additional liens on CMBS collateral, Hoeffel said.

Bondholders will continue to get principal and interest under the bankruptcy.

Many of the malls in the filing are top-quality, and their inclusion in the bankruptcy puzzled analysts. General Growth could be angling to use the threat of consolidation as leverage to get lenders and servicers to agree to restructure long term debt, Dechert’s Jones said.

A substantive motion can be made at any time during the bankruptcy case, he said.

Next up will be a May 27 hearing during which loan servicer ING Clarion Capital Loan Services LLC will argue that the eight malls it represents should be excluded from the bankruptcy. ING says that not only is each mall owned separately, but that all of them are current on their mortgages, with some having an ample cushion to pay. (Additional reporting by Ilaina Jonas; Editing by Leslie Adler)

Those of  you readers who, like me, have taken a position in General Growth Properties (GGP) at the time of its bankruptcy filing, will be very interested to watch CNBC’s Squawkbox on Monday morning, May 11.  Bill Ackman of Pershing Square, is appearing as a guest host on the morning show and will discuss his investments in Target (TGT) and also GGP.  I don’t know the exact time he will discuss GGP, but I will be DVDing the entire show (which runs from 6am to 9am EDT) so I don’t miss a thing.

So far, so good with the bankruptcy process.  The market for financing commercial real estate is slowly improving, as shown by the high yield debt interest rates continuing to decline (and bond values continuing to appreciate).  The major casino stocks (LVS, WYNN, MGM) are also improving in price after being near the brink of bankruptcy themselves.  Because there was so much casino construction activity in Las Vegas and elsewhere in the past five years, all done with loads of debt, the casino stocks are a good proxy for GGP’s prospects.

GGP stock has actually improved in price since its bankruptcy filing, moving from around $0.60 per share to the current $0.90 per share.  It is impossible right now to know how much that stock will be worth in two months or two years, but antecdotally, the stock price increase is a positive.  The common stock will certainly undergo significant dilution coming out of bankruptcy.  It is typical for debt to be converted to common to alleviate excess debt and improve the balance sheet and reduce interest payments.  But only time will tell how much dilution is experienced.  I am hoping for 3:1 dilution.  Under this scenario, when the economy returns to full strength, it may be possible for GGP to get to $15 per share.  The actual result may be better or worse.

I have emailed CNBC just now to ask the Squawk staff to query Bill Ackman on the reason he is being replaced as the Debtor in Possession financier on the bankruptcy of GGP.  It is unclear the actual reason. 

It made very good sense for common shareholders to have Ackman aligned with our interests as the DIP financier.  This debtholder status offers the highest priority in claims against assets.  The reason for the change may have been a conflict between GGP upper management and Ackman (he is seeking at least one board seat and probably wants to sell off the GGP assets as that is his M.o.) or, the current debtors may have asked the court to appoint a different DIP financier as they saw Ackman’s position as a conflict of interest (which is why I liked it!).  Hopefully, we can find out the answer Monday morning.

Here is the report from the Bloomberg on the change of financing partners:  

“General Growth Properties replaces lender”

Bloomberg News

May 7, 2009

Chicago-based General Growth Properties Inc., which filed the biggest real-estate bankruptcy in U.S. history, asked a judge to approve an increased $400 million loan from new lenders to continue operations while under court protection.

In court documents filed Wednesday in U.S. Bankruptcy Court in New York, General Growth said it replaced its earlier lender, William Ackman’s Pershing Square Capital Management LP, with new investors. It didn’t give a reason for replacing Pershing, which had agreed to provide a $375 million bankruptcy loan.

The new proposed loan includes a commitment of as much as $210 million from San Francisco-based private-equity firm Farallon Capital Management LLC and as much as $110 million from New York-based Luxor Capital Group, according to the filing.