Pershing Square betting on General Growth bankruptcy
Tue Dec 30, 2008 4:05pm EST
By Dan Wilchins and Ilaina Jonas
NEW YORK (Reuters) - Hedge fund Pershing Square Capital Management, one of General Growth Properties Inc's GGP.N biggest shareholders, is betting the No. 2 U.S. mall owner will file for bankruptcy -- and equity investors will end up big winners, a person familiar with the firm's thinking said.
Pershing Square declined to comment. General Growth, whose top properties include Fashion Show in Las Vegas and Faneuil Hall in Boston, declined to comment.
Bankruptcy usually leaves stock investors with plenty of nothing, but General Growth is an unusual case. It has almost $30 billion of assets on its books, and just about $27 billion of debt.
But most of the company's real estate assets are recorded on its books at their historical value, and many were bought years ago, meaning their value now is likely substantially higher. The company's problems are not with its assets, but with refinancing maturing debt in frozen markets.
Historically, companies whose assets are worth much more than their liabilities have gone through bankruptcy in a way that leaves shareholders intact, which is what Pershing Square is banking on, the person familiar with the firm's thinking said.
It's not the first time Pershing Square, led by activist investor William Ackman, has made a big bet on real estate linked to retail. He recently made headlines with a so-far unrealized plan to boost discount retailer Target Corp's (TGT.N) stock price by forming a trust that owns the land under its stores and then spinning off part of the trust in a stock offering.
General Growth's shares were down 4 cents, or 3.3 percent, at $1.17 in afternoon trading on Tuesday, down 98 percent from their peak in March 2007.
Pershing Square owns or has exposure to more than a quarter of General Growth's shares.
MANAGEMENT TALENT
Elsewhere, the high-profile Ackman has reaped big returns on short positions in bond insurers. But he has also made some missteps, including investing in insurer American International Group Inc (AIG.N).
General Growth's book value, or accounting value, was about $1.8 billion as of the end of September. But the company's market value before Lehman Brothers Holdings Inc (LEHMQ.PK) filed for bankruptcy in September was about four times that. That reflects the fact that its more than 200 malls, many which are high-end, have appreciated in value.
More than a month before Pershing announced it was buying General Growth shares, a report by Green Street Advisors said that the value of the company's assets was high enough to leave shareholders with something after bankruptcy.
In real estate circles, Chicago-based General Growth is admired for its ability to manage its properties well, boosting their value in the process.
But the credit crisis has hit the company hard, sending its stock price down more than 97 percent, and leading to the firing of its chief financial officer. The company is trying to raise cash by selling off some malls but has yet to do so.
In Pershing Square's estimation, General Growth's real problem is its maturing debt, in particular two loans totaling $900 million. Those loans were set to mature at the beginning of December. Lenders extended that deadline to February, adding to the $2.49 billion of other debt due next year.
THE EXAMPLE OF AMERCO
General Growth is not the first company to find itself in this bind. Amerco Inc (UHAL.O), parent of moving truck rental company U-Haul International Inc, filed for bankruptcy in 2003 after a dispute with its former auditor and multiple accounting restatements left it unable to refinance debt.
The company listed $1.04 billion of assets and $884 million of liabilities in its bankruptcy filing, and had considerably more assets off its balance sheet as well. Its shares tripled during bankruptcy, and rose more than fourfold after it emerged from bankruptcy in 2004.
Pershing Square sees parallels between Amerco and General Growth. The founding families of both companies own substantial blocks of stock, giving them a real incentive to refrain from diluting shareholders' stakes during bankruptcy.
And General Growth is still generating more than enough cash flow to service its debt and meet other day-to-day obligations, just as Amerco was. Pershing Square views General Growth as having trouble refinancing its debt due to broader difficulties in the commercial mortgage market in the weeks after Lehman's Chapter 11 filing.
In other words, General Growth has problems with liquidity rather than solvency, the person added.
Pershing Square directly owned about 7.5 percent of General Growth's shares as of December 8 and had exposure through derivatives to another 18.1 percent of the company's shares.
Pershing either bought or gained exposure to the shares at prices ranging from 35 cents to $1.58 per share, according to a filing with the Securities and Exchange Commission. In March 2007, General Growth's stock traded at more than $67 per share.
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