General Growth Properties: To The Brink and Back
General Growth Properties: To The Brink and Back
Students:
Yu (Cherry) Chen, Kevin Connolly, Bill Davis,
Stephen Duncan, James Faello, Michael Hazinski, Noah Johnson
Faculty Supervisor:
Joseph L. Pagliari, Jr.
Copyright 2011 The Real Estate Group at The University of Chicago Booth School of Business
All Rights Reserved
This case study has been prepared solely for academic purposes. It should not be construed as a judgment
about or an endorsement of any particular business matter. Moreover, the information contained herein
has been obtained from sources we believe to be reliable; however, we make no representation or warranty
as to its accuracy.
TABLE OF CONTENTS
EXECUTIVE SUMMARY ...................................................................................................... - 1 GENERAL GROWTH BACKGROUND ............................................................................ - 7 2004: A Historic Year for General Growth........................................................................ - 9 2005-2006: Secured Mortgages and Increasing Debt ..................................................... - 16 Simon vs. GGP - Capital Markets Strategy ..................................................................... - 24 IMPACT OF THE CREDIT CRISIS .................................................................................. - 31 GGP Faces Liquidity Challenge ....................................................................................... - 37 Management Changes ....................................................................................................... - 41 Last Steps before Bankruptcy ........................................................................................... - 47 THE BANKRUPTCY FILING ............................................................................................. - 50 The Chapter 11 Process...................................................................................................... - 51 Key Rulings ......................................................................................................................... - 52 Financial Outcome for Various Classes of Claims ........................................................ - 62 DEPARTING BANKRUPTCY............................................................................................ - 64 Rationales for Simon versus BFP ..................................................................................... - 79 New GGP and Howard Hughes Corporation (HHC) .................................................. - 86 New GGP Board of Directors and Management Team ................................................ - 89 Comparison with Simon ................................................................................................... - 95 SUBSEQUENT EVENT...................................................................................................... - 100 CASE QUESTIONS ............................................................................................................ - 102 ACKNOWLEDGEMENTS ................................................................................................ - 105 APPENDICES ...................................................................................................................... - 107 -
EXECUTIVE SUMMARY
In April 2009, General Growth Properties (GGP) filed for Chapter 11 bankruptcy
protection, the largest real estate bankruptcy ever at that time. One of the biggest real
estate companies in the world, GGP had been felled by a combination of collapsing
credit markets, high overall leverage, and inflexible credit structures. Despite this
seemingly epic collapse, GGP was able to successfully reorganize and maintain
substantial value for its common stockholders. The events leading up to and during the
bankruptcy would have long-standing effects on the company, including a complete
overhaul of top management and the division of the companys assets into two separate
companies. This paper seeks to explore these topics in depth and provide a thorough
analysis of the circumstances that forced the company to seek bankruptcy protection,
the management of the bankruptcy process, and the companys performance since reemerging as a publicly traded company.
Focus on Growth
One of the most important characteristics at GGP was its emphasis on consistently
growing the company. This took a number of different forms: growing net operating
income (NOI) at existing locations, expanding through de novo developments,
acquiring existing operations and maximizing the use of leverage.
This corporate philosophy had been true since the companys IPO in 1993, but many
people consider the $12.7 billion acquisition of the Rouse Company in 2004 as an
inflection point. The company had to outbid several key rivals to complete the
purchase, paying a premium to do so. As would ultimately prove imprudent, GGP
provided only $500 million in equity to fund the acquisition, less than 4% of the total
deal price.
GGP had almost doubled in size overnight, and issued de minimis equity to do so. The
companys leverage ratio spiked from 54% to 71%. This would have been acceptable on
a short-term basis, as GGP had sufficient cash flow to cover debt service and the
flexibility to de-lever over time, returning to a capital structure more in-line with its
peers. However, to do so would have meant slowing down the growth engine. The
companys thirst for growth and leverage was satiated by the lending communitys
loose underwriting standards prevalent in the mid-2000s. Ultimately precarious levels
of leverage are what placed the company at the mercy of the credit markets in 2008.
-1-
-2-
was the son of one of the companys founders and his family owned over 20% of the
company.
Current board members Adam Metz and Tom Nolan took over as the companys new
executive leadership. Very quickly after taking over, Metz and Nolan began
positioning the company to file for Chapter 11 bankruptcy protection.
Value in Bankruptcy
Despite all the problems the company had run into over the past year, GGPs operations
were fundamentally strong. It had excellent cash flow, many trophy properties, and
its total asset value exceeded its total liabilities. The company was solvent; it just had a
severe liquidity problem.
One of the first outsiders to recognize and act on that fact was the hedge fund Pershing
Square, which made significant bets on both GGP stock and unsecured debt at the
height of the companys uncertainty in November 2008. By January 2009, still three
months before bankruptcy, Pershing Square had amassed control of 24% of the
companys stock through direct purchases and derivative contracts.
Despite great concern among many market participants, Pershing Square was confident
that GGP would be able to realize significant equity value through a restructuring in
Chapter 11 bankruptcy. In publicly available letters, Pershing Squares CEO, Bill
Ackman, referenced similar bankruptcy cases (the Till and Johns Manville cases) in
which the filing company had successfully retained equity value by exiting bankruptcy
with positive net asset value. Pershing Squares support for the companys common
shareholders was a key factor in their attempt to retain some piece of the new GGP.
Bankruptcy-Remote Entities Challenged
When GGP filed for bankruptcy protection on April 9, 2009, it filed on behalf of the
parent company and 388 subsidiaries. These single-purpose entities (SPEs) were the
actual owners of the companys real estate, and were the mortgagors with GGPs
lenders. Almost immediately after GGP filed, five of the companys creditors sued to
have the bankruptcy disqualified, believing that they had provisions in their loan
agreements which effectively prevented GGP from filing Chapter 11.
These bankruptcy remote covenants had been designed to isolate the companys
individual assets from each other and, in theory, protect the lender from having their
interests consolidated with other creditors. In particular, lenders on high-quality
properties desperately wanted to avoid being consolidated, as that would in effect force
-3-
-4-
Property Group, GGPs largest competitor, made an offer to buy the entire company at
$9 per share ($6 in cash and $3 in a new spin-off company).
An alternative plan emerged shortly thereafter when a consortium of investors led by
Brookfield Asset Management proposed an alternative recapitalization plan. Under this
plan, GGP would remain an independent company valued at $15 per share ($10 cash
and $5 worth of stock from the same spin-off company as the Simon plan).
After multiple rounds of proposals, with each side upping its offer, GGP selected the
Brookfield-led recapitalization plan in May 2010. This plan had the benefit of speed
and certainty, as any deal with Simon would likely require anti-trust approval by the
US federal government. While Simon ultimately offered a higher total price, the board
believed that the timing and lack of obstacles to closing were more important.
Performance
Throughout this entire process, GGP made some moves that were questionable and
some that were visionary. The challenge of this case is to fairly judge GGP on its
process, and on its results; to try and determine, with the benefit of hindsight, which
actions were flawed a priori and which were intelligent risks that backfired as part of a
market-wide collapse?
-5-
GGP first went public in 1972, and the companys board of directors included fellow
Midwesterner Warren Buffett. After ten years as a public company, the Bucksbaums
were reportedly frustrated with the public markets valuation of their company.
According to REIT historian Ralph Block: No one paid any attention to REITsThe
Bucksbaums got tired of the fact that the market wasnt valuing their company the way
it should be valued. 3
1
2
-7-
In 1984, the company sold its 19 shopping centers for $800 million to Equitable Real
Estate Investment Management. George Puskar, CEO of Equitable Real Estate,
commented: [The Bucksbaums] always had a vision of what was going on in the
financial community. They were one of the first companies to go from public to private
when the circumstances dictated it. And they knew when the market cycle shifted, and
they went public again.4
Influences that Lead to the 1990s
Malls IPO wave
- The 1993 Federal Revenue
Reconciliation
Act,
which
amended the Five or Fewer rule
and made REIT investments more
accessible
to
institutional
investors.
- An innovative tax sheltering
structure originated in the 1992
Taubman Centers REIT IPO. The
UPREIT structure permitted
real estate owners to access the
public markets without realizing
taxable gains on the assets they
contributed to the REIT.
- ]The collapse of the Savings and
Loan industry (a major real estate
capital provider in the 1980s),
which created severe limitations
on the availability of real estate
financing.
- The mall industrys lifecycle,
which
evolved
from
an
expansionary phase into a
consolidation phase. With the
majority of retail tenants having
national platforms, consolidation
of mall ownership was a logical
step for the industrys evolution
because economies of scale
advantages could be achieved.
4
5
6
-8-
chased scale advantages. Two significant players emerged: Simon Property Group
(SPG) and GGP.
Exhibit #1
GGP
SPG
Macerichb
a
b
Malls
21
57
-
1993
Enterprise Valuea
$1,055
2,294
-
Malls
135
175
55
2003
Enterprise Valuea
$13,511
20,043
6,318
Enterprise Value as defined by GA A P ; pro -rata share o f JV debt is excluded. Sho wn in millio ns.
M acerich co mpleted an initial public o ffering 1994 with 15 M alls.
60
50
40
30
20
10
0
Purchase Price
Malls Purchased
General Growth Properties, December 31, 2004 Quarterly Supplemental Financial Information
Report.
-9-
Occupancy
Sales PSF
GGP
90.7%
$351
Rouse
92.2%
$426
Premium
1.7%
21.4%
- 10 -
Combined Company
Exhibit #4
GGP
Rouse
Combined Company
Master Planned Communities in Columbia, MD;
Summerlin, NV; Houston, TX
- 11 -
Exhibit #5
Harborplace: Baltimore, MD
- 12 -
9
10
11
Transcript of conference call discussing the acquisition of The Rouse Company, 2004.
Brannon Boswell and Donna Mitchell, Good Deal for General Growth, Bucksbaum tells Wall
Street Critics, Shopping Center Today, October 2004.
Christopher Hitzel, General Growth to Buy Rouse in $12.6B Deal, CoStar, August 20, 2004.
- 13 -
Price
Drawn
Proceeds
15,900
$32.23
$512,600
$512,600
Libor Spread
Maturity
238,006
2,040,100
1,145,000
1,145,000
2.00%
11/12/2005
250,000
500,000
2.25%
11/12/2007
3,650,000
3,650,000
2.25%
11/12/2007
Four-Ye ar Te rm Loan B
2,000,000
2,000,000
2.50%
11/12/2008
$9,835,706
$7,807,600
2.28%
Total Sources
Uses
Assumed
Equity Purchase
Share s
Price
Cash
103,718
$65.21
$6,762,962
$6,762,962
103,718
$2.29
238,006
238,006
103,718
$0.29
30,203
30,203
Total
$67.79
4,636,072
849,791
Liabilities
4,636,072
849,791
1,651,600
1,651,600
687,800
687,800
Me rge r Costs:
Othe r Costs
65,135
65,135
275,000
275,000
125,000
Total Uses
$9,835,706
30,203
Assume d Rouse De bt
4,636,072
849,791
Othe r Costs
65,135
275,000
Warrants Offering
$512,600
125,000
Transaction Price
$12,744,163
$15,321,569
$6,762,962
125,000
$5,485,863
$12,744,163
% of Equity in Transaction
4.02%
The e xis ting c re dit fa c ilitie s o f the R o us e C o m pa ny a nd Ge ne ra l Gro wth we re re tire d in c o nne c tio n with the tra ns a c tio n.
The diffe re nc e be twe e n the $ 15.3B in To ta l Us e s a nd the $ 12.7B in the Tra ns a c tio n P ric e re la te s to the re tire d R o us e C o m pa ny / GGP C re dit Line s a nd the R o us e C o m pa ny e xtra o rdina ry divide nd pa id to
s ha re ho lde rs prio r to c lo s ing.
- 14 -
With just $512.6 million in equity contributed, the acquisition was funded almost
exclusively with debt and raised the combined companys pro-forma leverage from 54%
to over 71%.
Exhibit #7
Exhibit #4
Land
General Growth
The Rouse
Pro-Forma
Pro-Forma
Properties
Company
Adjustments
Consolidated
$1,488,769
$648,655
$502,071
$2,639,495
Building
9,529,278
5,433,127
4,086,972
19,049,377
-1,257,898
-1,076,387
1,076,387
-1,257,898
237,832
224,732
$9,997,981
$5,230,127
$5,665,430
$20,893,538
$755,816
$587,763
$541,784
$1,885,363
455,494
601,037
1,056,531
Development in Progress
Net Property and Equipment
462,564
8,241
8,241
Cash
15,265
36,220
51,485
150,074
67,147
217,221
Other Assets
229,065
584,566
41,814
855,445
Total Assets
$11,148,201
$6,969,558
$6,850,065
$24,967,824
$8,171,891
$4,564,916
$6,934,726
$19,671,533
485,608
814,745
1,005,236
2,305,589
Total Liabilities
$8,657,499
$5,379,661
$7,939,962
$21,977,122
Preferred Units
$403,506
Common Units
407,566
S tockholder's Equity
$403,506
-21,880
385,686
1,679,630
1,589,897
-1,068,017
2,201,510
$11,148,201
$6,969,558
$6,850,065
$24,967,824
$512,600
$8,618,291
$8,105,691
403,506
403,506
10,027,430
5,404,906
6,934,726
22,367,062
$18,536,627
$5,404,906
$7,447,326
$31,388,859
54.1%
71.3%
* GAAP a c c o unting princ ipa ls inc lude the pro -ra ta s ha re o f unc o ns o lida rte d jo int ve nture de bt a s a n o ffs e t in the ne t a s s e t a c c o unt o f Inve s te s m e nt in Unc o ns o lida te d Affilia te s .
- 15 -
GGPs CFO assured investors that the companys balance sheet had the capacity to
operate at this leverage level and that the company would de-lever in the coming years
through a combination of four options:
1)
2)
3)
4)
12
72%
51%
56%
The portfolio was named after the cross streets of the original Sears Tower in Chicago: Homan
and Arthington.
- 16 -
Exhibit #9
GGP Outstanding Debt (billions)
$29
28
27
26
25
24
23
22
21
$20
As early as the first quarter of 2005, Freibaum informed investors that the company was
not focused on reducing the companys debt and acknowledged the burden of a heavy
development pipeline:
At this point we have so much development, redevelopment activity, which is so profitable, we're
actually not generating any excess cash flow to reduce the debt level. As we said when we decided
to buy Rouse the most effective way for us to de-lever is not to pay down the nominal amount
of the debt but to keep increasing the NOI so that the nominal debt, even if it stays the same,
becomes more conservative on a relative loan to value basis we may not dramatically decrease
the nominal debt level, [but] we're very confident that the relative debt to the value of the
portfolio as the income goes up will drop.14
13
14
- 17 -
15%
14%
13%
12%
11%
10%
9%
General Growth did increase the Retail and Other NOI segment15 on a trailing twelve8%
month basis 16 from the fourth quarter of 2005 (the first full year of combined
GGP/Rouse operations) to the fourth quarter of 2008 by 21%. However, that gain was
offset by the corresponding 21% increase in debt
($4 billion) over that same period.
Q4 2004 - Q3 2005 m e a s ure m e nts a re e s tim a te d a t 9%; Ac tua l TTM De bt Yie lds fo r this
pe rio d a re s ke we d be c a us e o f the R o us e Ac q.
Exhibit #10
Exhibit #11
GGP Retail and Other Segment Debt Yield (TTM NOI/Total Debt)
16%
16%
15%
14%
13%
12%
11%
10%
9%
8%
15%
14%
13%
12%
11%
10%
9%
8%
Q4 2004 - Q3 2005 m e a s ure m e nts a re e s tim a te d a t 9%; Ac tua l TTM De bt Yie lds fo r this
pe rio d a re s ke we d be c a us e o f the R o us e Ac q.
Q4 2004 - Q3 2005 m e a s ure m e nts a re e s tim a te d a t 14.2%. Ac tua l TTM De bt Yie lds fo r
this pe rio d a re s ke we d be c a us e o f S P G's Ac q in Oc to be r o f 2004 o f C he ls e a P ro pe rty
Gro up fo r $ 5.2B .
A commonly used ratio in real estate finance to analyze leverage is the debt yield which
16%
is calculated as NOI / debt.17 General Growths debt yield ratio improved by nearly 50
15%
bps, but the fact remained that the peak 9.5% debt yield ratio at the end of 2006 (post14%
13%
Rouse acquisition) was materially less than the company had pre-Rouse18 and also less
12%
than Simons (General Growths best comparable) debt yield ratio from 2003-2008. The
11%
company was generating NOI growth, but leverage was not materially decreasing.
10%
9%
8%
Q4 200415- Q3 2005 m e a s ure m e nts a re e s tim a te d a t 14.2%. Ac tua l TTM De bt Yie lds fo r
this pe rio d a re s ke we d be c a us e o f S P G's Ac q in Oc to be r o f 2004 o f C he ls e a P ro pe rty
Gro up fo r $ 5.2B .
16
17
18
As reported on the May 5, 2005 conference call, following the Rouse Acquisition, GGP reported
net operating income for the master planned community (MPC) business separately from the
mall and office business lines. GAAP accounting allocates a higher costs basis to master planned
communities than would have been attributable to these assets under Rouses ownership, making
the net operating income less relevant as a benchmark for cash flow and value.
Any mall cash-flow metric should be analyzed on a trailing twelve-month basis to offset
quarterly inconsistency created by seasonality.
The illustrated debt yield calculation does not incorporate: third-party management revenue,
corporate expenses, or any value to the MPC segment which had an appraised value greater than
$3 billion.
The sudden decline and subsequent recovery in 2007 relates to $1.05 billion of assumed debt from
an acquisition early the third quarter of 2007: the trailing twelve-month NOI in the numerator
does not reflect the acquisition until the second quarter of 2008.
- 18 -
19
General Growth Properties, Third Quarter Earnings Conference Call, November 1, 2005.
- 19 -
In the same quarter as the announcement of the Rouse acquisition, GGP had a
development pipeline that included 5 new mall developments with extensive lifestyle
components and 13 redevelopment projects featuring lifestyle additions to malls. One
year later, Chief Operating Office Bob Michaels referred to the companys development
pipeline as the busiest it has been since we became a public company in 1993.
According to General Growths quarterly supplemental filings, the development budget
increased precipitously in 2005.
Exhibit #12
Development Pipeline Budget (billions)
$2.5
2.0
1.5
1.0
Rouse
Acq.
0.5
$0.0
By focusing its energies on its significant development pipeline, the company was
turning the page on acquisitions and looking internally for growth. As Bucksbaum said
in 2007,
Our redevelopments, new developments, alternative income sources, and other internally generated
growth prospects remain healthy and strong. Coming off an era of growth by acquisition, we are now
in a period of organic growth.20
20
General Growth Properties, First Quarter Earnings Conference Call, May 1, 2007.
- 20 -
when you're borrowing at 5.8%. So, at least in terms of the present and the foreseeable future, for
that reason, I would expect less acquisitions.21
Unfortunately for the company, some of these development projects produced returns
well below underwritten projections and resulted in material losses. As the economy
began to affect the viability of development projects, the company began to take
significant impairment charges on select projects: $116.6 million in 2008 and $1.2 billion
in 2009.22 Examples of impaired developments include:
The Shops at Summerlin Centre 1.5 million square foot regional mall
development in the companys MPC of Summerlin, Nevada near Las Vegas. The
project was halted in 2009 and the company recognized an impairment charge of
$176.1 million.
B.
On July 9, 2007, General Growth acquired the remaining 50% interest in the
GGP/Homart I portfolio. The portfolio was comprised of twenty-two malls and was
owned by a joint venture of GGP and the New York State Common Retirement Fund
(NYSCRF). The joint venture agreement contained a conversion exchange right for
any of the co-investors to exchange the value of their ownership interests, as defined by
a valuation formula, for shares of GGP common stock or an equivalent cash sum, at
GGPs election. NYSCRF exercised this option and GGP elected to buy its partner out
with cash.
21
22
23
General Growth Properties, Fourth Quarter Earnings Conference Call, February 22, 2006.
General Growth Properties, December 31, 2008 and December 31, 2009 Form 10-Ks.
Megan McKee, 55 condos at Natick mall sold at auction, Boston Globe, October 5, 2009.
- 21 -
Just three months prior to the purchase, GGPs stock traded for an all-time high of $67
per share, but by July of 2007 the price had trended down to the low $50s. GGP
management believed this decline contradicted the companys financial results and
position.
Bucksbaum commented:
The bad news is that our stock declined by almost 18% during the quarter and was down an
additional 9% for the month of July. Something is wrong. We have strong earnings, good
operating metrics, and an exciting future full of new developments, redevelopments, international
activity, and urban opportunities. Albeit, we need a strong
consumer to continue spending, but whenever there has been
GGP/Homart
24
a bet against the consumer, it has generally been wrong.
24
25
General Growth Properties, First Quarter Earnings Conference Call, August 1, 2007.
General Growth Properties, December 31, 2007 Form 10-K.
- 22 -
26
27
General Growth Properties, First Quarter Earnings Conference Call, August 1, 2007.
John Bucksbaum, interview by authors, Chicago, IL, October 28, 2011.
- 23 -
Exhibit #13
Exhibit #14
Exhibit #15
Mall Sales PSF
Mall Occupancy
95%
$550
94%
$500
93%
92%
$450
91%
90%
$400
89%
$350
88%
$300
GGP
SPG
GGP
28
Green Street Advisors, Mall REITs 2005 Annual, April 12, 2005.
- 24 -
SPG
After the Rouse acquisition was completed, GGP and Simon each had a portfolio with
comparable metrics and a comparable share of the aggregate A & B malls in the United
States. Both companies had additional non-regional mall assets that created
differentiation, but their core business and the lion share of their assets were regional
malls. The truly differentiating characteristic for these companies was their sources of
capital.
Large regional mall owners have traditionally had three categories of financing
available to them:
- 25 -
50%
40%
30%
20%
10%
0%
1/1/2003
1/1/2004
1/1/2005
1/1/2006
GGP
SPG
- 26 -
1/1/2007
1/1/2008
Exhibit #17
Exhibit #18
Leverage (Debt as a % of Total Market Capitalization)
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
90%
80%
70%
60%
50%
40%
30%
GGP
GGP
SPG
SPG
GGPs preference for secured mortgages was a strategic decision. Freibaum explained:
We financed the company with what will give us the lowest cost of debt. It's not that we like
secured debt, over unsecured debt. It's that secured debt is substantially cheaper, as long as you
don't go above the tranches that are priced very tightly by the market today. So we get the
cheapest possible debt we can in the form of secured debt.
In fact, from 2003-2008, GGP appeared to have a significant debt cost advantage. From
the first quarter of 2003 through third quarter of 2004, Simon was paying a significant
premium to General Growth. GGPs leverage spiked to 70% by the end of 2004 with the
highly levered Rouse transaction, but remarkably, the weighted average interest rate of
GGPs loan portfolio remained below Simons loan portfolio.
GGP took advantage of the strong appetite secured debt that was prevalent in the
markets throughout the early and mid-2000s. During this time, a CMBS loan on a
quality regional mall asset was likely to have been priced significantly inside of an
unsecured bond transaction of similar size. This discrepancy may have resulted from a
few reasons: 29
29
- 27 -
isingle asset)
kd (single asset)
- 28 -
kd (portfolio)
rf
Leverage Ratio
GGP
SPG
- 29 -
Just like variable-rate debt, financing assets with shorter maturity terms can generate a
lower cost of capital as the borrower accepts the risk of rising interest rates in the near
term.
Exhibit #20
G e n e ra l G ro wt h P ro p e rt ie s A n n u a l D e b t M a t u rit ie s a s a % o f T o t a l D e b t 2 0 0 3 - 2 0 0 8
G e n e ra l G ro wt h P ro p e rt ie s A n n u a l D e b t M a t u rit ie s a s a % o f T o t a l D e b t 2 0 0 3 - 2 0 0 8
Thereafter
Thereafter
9
9
7
7
5
5
3
3
1
1
0.0%
5.0% 10.0%
0.0%
5.0% 10.0%
GGP 2008 Maturity
GGP 2008 Maturity
GGP 2005 Maturity
GGP 2005 Maturity
Exhibit #21
S im o n P ro p e rt y G ro u p A n n u a l D e b t M a t u rit ie s a s a % o f T o t a l D e b t 2 0 0 3 - 2 0 0 8
S im o n P ro p e rt y G ro u p A n n u a l D e b t M a t u rit ie s a s a % o f T o t a l D e b t 2 0 0 3 - 2 0 0 8
Thereafter
Thereafter
10
109
98
87
76
65
54
43
32
21
1
0.0%
5.0%
10.0%
15.0%
20.0%
0.0%
5.0%
10.0%
15.0%
20.0%
SPG 2008 Maturity SPG 2007 Maturity SPG 2006 Maturity
SPG 2008 Maturity SPG 2007 Maturity SPG 2006 Maturity
SPG 2005 Maturity SPG 2004 Maturity SPG 2003 Maturity
SPG 2005 Maturity SPG 2004 Maturity SPG 2003 Maturity
- 30 -
25.0%
25.0%
Housing Decline
With the acquisition of Rouse, GGP had acquired multiple MPCs that contained
residential assets, including land for future development. By retaining these assets, the
company exposed itself to losses associated with the housing industry. The value of the
housing development business was estimated to be $3.9 billion in 2005. In 2008, Green
Street would estimate the value of the community to be roughly $2.3 billion.
The
Case-Schiller
Index
shows the decrease in
housing prices began in the
summer of 2006. A key asset
in GGPs MPC portfolio was
the Summerlin development,
located in the western
suburb of Las Vegas, NV.
During the housing market
crash,
the
Las
Vegas
metropolitan
area
was
devastated.
GGPs share
price mirrored the decline in
housing prices with a slight
delay.
Exhibit #21
In addition to being affected by the direct decline in home values, the opacity of GGPs
housing exposure added both complexity and risks, creating a major deterrent for both
potential REIT investors and creditors during this period. While the MPC business only
represented 10% of GGP, investors concerned about housing fled GGP
disproportionately.
- 31 -
Although Las Vegas was a microcosm of the difficulties within the housing industry,
home values had declined on a national basis as well. The collapse in the entire housing
market also would reflect upon GGP as evidenced by the chart below that outlines the
Case-Schiller indices for the hard-hit, so-called sand markets: Phoenix, Los Angeles,
Las Vegas, and Miami as well as Case-Schillers Composite Index for the twenty largest
markets.
Exhibit #22
Index Metric
$300.00
250
$250.00
200
$200.00
Phoenix
Los Angeles
$150.00
150
Top 20 Markets
Las Vegas
Miami
$100.00
100
$50.00
50
0
Jan-00
$0.00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
- 32 -
Jan-08
Jan-09
Jan-10
Jan-11
During the second half of 2007, CMBS originations dropped off significantly, an
indication of declining issuance. The boom and bust of the market was substantial: the
CMBS market had grown from $8 billion of issuance in the first quarter of 2000 to $73
billion in the second quarter of 2007 and crashed to $6 billion of issuance in the through
the first three quarters of 2008.
- 33 -
In early November 2007, Freibaum maintained his optimism about the CMBS market.
At some point in the first half of 2008 we will see an improvement in the historical
CMBS market and much more competitive spreads.30 He pointed to the small amount
of delinquencies within commercial mortgage backed securities, stating, [theyre]
infinitesimal. Theyre so tiny. Theyre not even a basis point.31
Exhibit #24
Jan-06
Jan-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
AAA 10Yr
65
83
71
80
83
87
104
132
118
115
168
160
Junior AAA
68
90
78
90
97
99
120
164
168
153
244
257
AA
72
98
85
100
109
109
133
203
205
193
289
323
81
109
93
112
128
129
160
254
266
257
404
446
BBB
124
172
123
202
237
217
289
420
434
442
734
773
"BBB" Corporate
112
127
126
125
126
129
134
148
157
155
168
193
REITSa
98
113
95
99
97
97
108
160
191
174
209
228
CMBS Tranche:
On December 17, 2007, Bloomberg reported that Centro Properties Group, which
owned 700 U.S retail centers, would suspend its dividend because there were no
traditional sources of funding. The CMBS AAA spread in December 2007 rose to 127
30
31
General Growth Properties, Third Quarter Earnings Conference Call, November 1, 2007
General Growth Properties, Fourth Quarter Earnings Conference Call, February 17, 2008.
- 34 -
basis points over swaps and 195 basis points over Treasuries;32 this was the highest level
AAA CMBS spreads had reached since the 1998 Russian Ruble Crisis.
Along with contagion from other structured finance vehicles, such as RMBS and CDOs,
the CMBS industry had fundamental problems with its 2005-2007-vintage underwriting
practices. The use of interest-only payment structures, low debt service coverage ratios
and high loan-to-value advance rates during the peak years of CMBS origination (20052007) would make it difficult to refinance many of these vintage loans as their terms
expired in a difficult financial climate.
Exhibit #26
Interest Only Loans in CMBS
Exhibit #27a
Exhibit #27b
69%
70%
69%
68%
68%
67%
67%
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
1.50
1.48
1.46
1.44
1.42
1.40
1.38
1.36
1.34
4Q2007
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
4Q2007
Securitization Year
32
Securitization Year
CMBS is typically priced over swaps, but the table uses Treasuries in order to ensure
comparability to BBB-rated corporate and REIT bond spreads.
- 35 -
As shown in the exhibit below, the decline in commercial real estate value was not a
one-time occurrence. Historically, commercial real estate has repeatedly illustrated
boom and bust cycles. However, the 2007/2008 downturn was much more severe than
past declines, due largely in part to the extreme dislocation of capitalization rates.
Exhibit #28
The structural nature of CMBS combined with the cyclicality of the commercial real
estate cycle would become a problem for GGP as it needed to extend or renegotiate
loans. Because the CMBS market had not experienced a complete market collapse, the
process involved to navigate a workout in a down market had not been entirely
established.
Furthermore, the agency risk associated with different stakeholders within the CMBS
structure complicated the workout process. A specific problem that occurred with largeloan CMBS was the placement of single loan into multiple CMBS issues. This would
mean that, for GGP to negotiate an extension, multiple servicers would have to agree to
the terms. Below is a chart that demonstrates the complex distribution of a single GGP
property loan into multiple CMBS issues.
- 36 -
Exhibit #29
- 37 -
For as long as the supply of traditional CMBS funding remains constrained, we can and
will obtain new mortgage loans from so-called balance sheet or portfolio lenders.33
MetLife, a typical balance sheet lender, provided approximately $700 million in loans to
GGP over 2007 and early 2008. However, beginning in early 2008 this source of capital
reportedly dried up as well, with MetLife looking to limit their exposure to GGP. This
presumably occurred because of the life insurers ability to be selective among deals. A
deteriorating retail climate combined with the sponsor risk of a highly levered GGP
reduced the attractiveness of GGPs malls for loans.
Bridge Financing
One of the first tests of GGPs ability to navigate these headwinds was the expiring
cross-collateralized loans for two Las Vegas malls: The Fashion Show and The Shoppes
at the Palazzo. Fashion Show was a top-performing mall; therefore GGP had the
opportunity to put in place a long-term loan34, despite the difficulties in the financing
markets. Palazzo, while able to receive long-term financing, was in lease-up and
therefore not able to get the same attractive terms.
Exhibit #30
33
34
35
Average Maturity
7
6
5
4
3
2
1
GGP
SPG
General Growth Properties, Fourth Quarter Earnings Conference Call, February 12, 2008.
Bernie Freibaum on the General Growth Properties, Second Quarter Earnings Conference Call,
July 31, 2008: As I mentioned earlier, we had offers from a group of life insurance companies to
a put a new loan on Fashion Show of the same amount that we chose to borrow from banks, $650
million.
Specifically, the syndicate provided a $650 million loan short-term loan in January 2008 to
refinance the $351 million Fashion Show loan due to mature on 1/28/08. The syndicated $650
Fashion Show loan had seven consecutive one-month extensions with a final maturity date of
November 2008. During 2008, GGP acquired the Palazzo under a prior agreement. In addition to
the loan that refinanced Fashion Show, the five banks supplied an additional $250 million in
- 38 -
Issuer
( in m illio n s )
Coupon
Term
Moodys
S&P
$1,100
7.13%
10
A2
A-
4/29/2008 AMB
$325
6.30%
Baa1
BBB
BBB+
5/1/2008 ProLogis
$600
6.63%
10
Baa1
BBB+
BBB+
$325
6.25%
Baa1
BBB+
$800
6.13%
10
A3
A-
$700
5.30%
A3
A-
$750
8.63%
Baa2
BBB
BBB
$80
11.50%
$4,680
6.8%
7.7
n/a
n/a
n/a
Total/Avgerage
Fitch
On March 24, 2008, GGP issued 22.8 million shares of common stock at $36 per share
(the stock was currently trading at $38.16), including 2.4 million shares to the
Bucksbaum family trust. The $822 million in proceeds went to pay down the companys
revolving credit facility and other company-level debt. While the market responded
36
37
short-term secured debt. The loans were cross-defaulted and set to mature together, in
November of 2008.
General Growth Properties, Fourth Quarter Earnings Conference Call, February 12, 2008.
Commercial Mortgage Alert, May 5, 2008.
- 39 -
positively to this offering (the stock price rose to over $40 the following week), many
analysts viewed this as a highly dilutive equity issuance. Green Street estimated that
the sale of common stock represented a staggering 45% discount to our NAV estimate.
38
We surmise that the timing of the equity issuance was related to the near-term maturity
(July 6, 2008) of the one-year $750-million bank loan originated to buy-out GGPs joint
venture partner of the Homart I portfolio in 2007. An additional $147 million was
repaid in the second quarter of 2008 concurrent with a $452.6 million draw on the
revolving credit facility. The balance of the loan would be refinanced with $875 million
in proceeds from additional financing activity in July. The companys July press release
noted that the new secured mortgage facility repaid all loans with maturities in the
third quarter of 2008.
This move solved one of GGPs immediate problems, but the relatively small size of the
equity issuance did not fundamentally change the companys liquidity position. The
company would not issue any additional equity before filing for bankruptcy, despite
the fact that the stock price was still over $30 per share as late as July 30, 2008.
One of the factors that may have underpinned the decision not to sell more common
stock was that GGPs management team believed that the credit freeze would be a
temporary phenomenon. In the third quarter of 2007 earnings call, Freibaum had
responded to an analyst question that, Although it doesnt sound like a long time,
eight months based on what has happened in the last two months, I think I can say is
close to an eternity. We believe GGPs management team was operating under the
assumption that by the time additional liabilities came due in the fourth quarter of 2008
they would once again be able to access the credit markets.
Recourse Loans
In July, 2008, GGP received a $1.45 billion secured credit facility from a syndicate of
banks.
Morgan Stanley, Goldman Sachs and Deutsche Bank each provided $410
million portions each, while five other banks split the final $225 million. The interestonly loan had a three-year term and was secured by 24 cross-collateralized retail centers.
GGP proved that there was still some liquidity within the market, but it came at a hefty
price; the loan was approximately 50% recourse to GGP. The loan encompassed some
of the lower quality malls that GGP had struggled to finance up to that point. Of the 24
38
Green Street Advisors, General Growth Properties, Inc. (GGP) A Case Study in Balance Sheet
Distress, March 28, 2008.
- 40 -
Management Changes
On September 15, 2008 Lehman Brothers filed for bankruptcy and the credit markets
were overtaken with panic. CMBS spreads over Treasuries increased to staggering
levels reflecting the fear in the market.39
Exhibit #32
10-Year Spreads over Treasuries
Holliday Fenoglio Fowler, L.P. Capital Markets Overview ULI 2009 Presentation
The collapse of Lehman (and continued worsening of the economy) boded ill for GGP.
Rich Moore, an analyst with RBC Capital Markets, said, In this environment, no one
39
Holliday Fenoglio Fowler, Capital Markets Overview, Presentation at the ULI Conference, San
Francisco, CA, November 2009.
- 41 -
can get a loan. When youre a company like GGP thats desperately in need of capital,
theres a real threat that you can go insolvent despite your good assets. . . . banks wont
lend to each other, much less a real estate firm. 40
Exhibit #33
Consumer Confidence: 2007-2009
The equity market reacted to the Lehman Brothers
filing with broad losses on the day of the
announcement; the S&P 500 saw the worst decline in
the index since the first day of trading after the
September 11th attacks in 2001. GGP outpaced the
indexs decline of 4.7%, falling 13.8% on September
15th and another 47.7% over the next week.
Exhibit #34
GGP & S&P 500 Index in the Week After the Lehman Bankruptcy
110%
100%
90%
80%
70%
60%
50%
By the end of September 2008, GGPs situation had become more desperate. The
proposed financing avenues laid out in its Capital Road Map were unlikely to
materialize and the companys $900 million in short-term financing on the Fashion
Show and the Palazzo was maturing in less than two months.
40
Amended Class Action Complaint: Sharankishor Desai v. John Bucksbaum, Bernard Freibuam, et al.
- 42 -
Bernie Freibaum
Before he joined GGP in 1993, Freibaum
accumulated 20 years of experience in the real
estate
industry
that
included
key
management
positions
as
General
Counsel/CFO at Stein & Company and
SVP/Finance at American Invesco Corp.
Freibaum holds both a CPA and a juris
doctorate. He is known for a strong financial
acumen and an attention to detail. The
market perceived him as a highly influential
decision-maker for the company and as the
architect of GGPs balance sheet.
As of August 2008, Freibaum owned nearly 7.6 This perception provided accolades in good
million shares over 3% of GGPs total shares times; he was awarded Best CFO in the
public REIT sector for three consecutive years
outstanding. This stake was amassed through by Institutional Investor magazine (in a
compensation awards, cash purchases and survey of investment analysts and
borrowing (through the use of a margin account). A institutional investors from 2004-2006). This
perception was quickly reversed, as he was
significantly leveraged equity position in a company attributed a disproportionate share of the
can be problematic for an influential executive at a blame for the companys misfortunes in 2008.
company facing significant declines in share price.
Margin-induced insider sales can create disastrous signaling effects to the market and
the effect of short-term share-price movements on an executives personal finances may
color the decision-making process for that individual.
Freibaum GGP Stock Trading Activity
Exhibit #35
Implied Value
Date
Shares
P rice
Transaction
Type
Shares Owned
of Holdings
8/8/2008
1,400
$26.50
($37,100)
Purchase
7,546,956
$ 199,994,334
9/18/2008
(44,200)
13.70
605,540
S ale
7,502,756
102,787,757
9/18/2008
(200,200)
16.89
3,381,458
S ale
7,302,556
123,343,092
9/18/2008
(114,500)
18.55
2,124,193
S ale
7,188,056
133,352,096
9/19/2008
(85,300)
19.10
1,629,230
S ale
7,102,756
135,662,640
9/19/2008
(66,500)
20.62
1,371,203
S ale
7,036,256
145,084,784
9/19/2008
(187,400)
21.52
4,032,848
S ale
6,848,856
147,387,381
9/19/2008
(801,900)
22.43
17,984,452
S ale
6,046,956
135,616,896
9/23/2008
(1,247,500)
17.25
21,519,250
S ale
4,799,456
82,790,136
9/23/2008
(2,500)
17.86
44,645
S ale
4,796,956
85,664,040
9/25/2008
(431,455)
15.71
6,780,143
S ale
4,365,501
68,602,102
10/2/2008
(1,304,167)
7.42
9,676,919
S ale
3,061,334
22,715,098
10/2/2008
(1,391,976)
8.93
12,430,346
S ale
1,669,358
14,907,367
10/2/2008
(253,857)
9.21
2,338,023
S ale
1,415,501
13,036,764
10/2/2008 1
(3,926)
0.00
S ale
1,411,575
13,000,606
10/3/2008
(44,800)
9.80
439,242
S ale
1,366,775
13,400,545
10/3/2008
(215,229)
10.93
2,352,130
S ale
1,151,546
10/3/2008
(64,971)
$11.78
765,599
S ale
1,086,575
- 43 -
12,584,670
$
12,803,874
From September 18th through October 3rd 2008, he sold more than six million shares,
over 80% of his holdings and more than 2% of the companys outstanding shares at the
time.41
The boards decision to fire Freibaum may have also been influenced by a perceived
principal/agent conflict created by Freibaums leveraged equity holdings. In the
press release announcing his termination, the company specifically noted that all
continuing executive officers of the Company have informed the Company that they
have repaid in full all previously existing margin loans and thus there will be no further
sales of Company Stock by those executives to satisfy margin calls.42
Another potential rationale, as described by a
Wachovia analyst report, was that, regime
change is often necessary to re-establish
credibility in the capital markets in advance of a
capital infusion.
Mr. Freibaum, architect of
GGPs balance sheet, has shouldered the blame
for GGPs dire straits and underperformance.43
Finally, the board may have simply hoped that a
new CFO would be better able to negotiate
extensions or other relief measures from the
companys lenders. Freibaum was a famously
tenacious negotiator, and there was a sense in the
market that few financing sources were interested
in doing him favors. We are skeptical that
Freibaums aggressive approach to negotiations
was a factor in the companys downfall, but it
nonetheless may have played a role in his exit.
Almost immediately after his termination, word spread that Freibaum and the Chief
Operating Officer and President, Bob Michaels, had been loaned $100 million by the
Bucksbaum family. We believe these loans were extended over the summer to provide
liquidity for margin calls as the stock price declined, to prevent distressed sales.
41
42
43
Class Action Complaint: Sharankishor Desai v. John Bucksbaum, Bernard Freibaum, et al.
Amended Class Action Complaint: Sharankishor Desai v. Bucksbaum, Bernard Freibaum, et al.
Ibid.
- 44 -
However, facing additional distress brought on by the failure of Lehman Brothers, these
loans were likely insufficient to cover the trading losses of both executives - triggering
the massive insider sales in late September and early October.
Exhibit #36
Lehman
Bankruptcy
GGP Issues
Equity
CFO
Terminated
The loans were not a violation of the SECs Sarbanes-Oxley rules because they were
provided by the family trust as opposed to the company. 44 However, the loans
apparently violated an internal policy that Bucksbaum is reported to have personally
drafted. In addition to the negative press regarding the loans, the stock fell below $2.17
on October 24th; the continued deterioration of the companys share price may have
provided another catalyst for change. That day, two members of General Growths
Board of Directors asked CEO John Bucksbaum to resign. Bob Michaels would also be
asked to resign his role as President. Michaels would remain with the company
through bankruptcy and retain his title of Chief Operating Officer, reportedly to avoid
violating change in control provisions in the companys debt covenants and maintain
continuity.
44
Michael J. Sandretto, Cases in Financial Reporting. Florence, KY: Cengage Learning, 2012.
- 45 -
45
46
New Management
Adam Metz earned relevant experience
in the regional mall business when he
served as the President and CFO of
Urban Shopping Centers, a publicly
traded REIT that owned 25 malls and
managed 60 others. The company was
sold to Rodamco North America in 2000
for $3.4 billion.
Coincidentally,
Rodamcos assets would be acquired by
The Rouse Company, Simon and
Westfield in 2002 and General Growth
would end up owning some of the
original Urban Shopping Centers, like
Water Tower Place in Chicago.
Thomas Nolan had a twenty-year career
at AEW, a multi-billion dollar real estate
management firm. He was a principal of
the firm and oversaw AEWs private
equity division. He also served as CFO of
the Loreto Bay Company which
developed MPCs.
Robert Frank and Kris Hudson, Dark Days for Mall Dynasty, Wall Street Journal, December 9,
2008.
David Phillips, Fiduciary Neglect in Boardroom of Bankrupt General Growth Properties, CBS
MoneyWatch, April 20, 2009.
- 46 -
- 47 -
47
According to industry insiders an agreement with the syndicate was verbally reached. However,
Citigroup pulled out of the syndicate at the last minute, reportedly in an attempt to extract
payment or concessions in relation to a Citigroup loan on Oakwood Mall, a different GGP
property secured outside of the bank syndicate.
- 48 -
Exhibit #37
- 49 -
Chapter 11
Chapter 11 bankruptcy is a form of bankruptcy
reorganization available to corporations and
partnerships. (For more information on Chapter 7
and 11 bankruptcies, see Appendix C.) Chapter 11
is the common choice of companies struggling
with untenable debt loads, as it allows a company
to maintain control of the day-to-day business
operations (albeit under the supervision of the
Court, which has the right to approve any
significant business decisions) and attempt to
restructure its debt. Chapter 11 provides the most
flexibility of all the bankruptcy chapters (see
below regarding plan approval and classes of
claims) but is generally the most costly and timeconsuming.
- 50 -
- 51 -
Key Rulings
Debtor-in-Possession (DIP) Financing
On April 16, 2009, GGP and its affiliated property-level entities filed a motion seeking,
among other things, approval of DIP financing. As initially proposed by GGP, the DIP
financing would have been secured by second liens on each of the shopping centers
owned by the scores of property-level entities, and a first lien on the centralized cash
management account (company cash flow). GGP further proposed that the propertylevel entities guarantee the DIP financing and secure those guarantees with liens on
substantially all their assets, subject only to existing liens.
- 52 -
Additionally, the GGP proposal included an affiliate DIP loan concept,49 through which
intercompany loans would be made by property-level entities and, in return, each of the
property-level entities making an intercompany loan would be given an administrative
claim in the bankruptcy case of the entity receiving the cash. The GGP proposal,
including continuing its cash management system, would effectively turn the propertylevel entities into DIP lenders to GGP secured by administrative bankruptcy claims.
Various creditors subsequently filed objections to the DIP motion.
The initial prospective DIP facility was to be arranged by Pershing Square. Prior to the
hearing on the DIP financing, alternative bidders for the DIP loan emerged, allowing
GGP to create an auction among the various prospective lenders. The secured creditors
of the SPE Property Owners were afforded an opportunity to weigh in on the process
and establish a more favorable collateral position
Farallon Capital Management
than the one initially proposed.
Farallon Capital Management is a
hedge fund headquartered in San
Francisco. Founded in 1986, Farallon
made
headlines
by
reportedly
becoming the largest hedge fund in the
world in 2006. Farallon helped Simon
acquire The Mills Corporation in 2007.
49
50
Case and White, Client Alert: Chapter 11 Ruling Calls into Question Basic Tenets of
Securitization Structures, May 2009.
Ibid.
- 53 -
Common Stock). Any repayment through the issuance of New GGP Common Stock
was limited to be lesser of (i) 8.0% of the total amount of New GGP Common Stock
distributed on a fully diluted basis, or (ii) 9.9% of New GGP Common Stock actually
distributed.
The collateral properties for the DIP loan were the retail assets that at the time served as
collateral for an approximately $210-million loan from Goldman Sachs. The Goldman
loan reportedly included a discounted payoff mechanism if the loan was discharged
prior to June 1, 2009.51 The $400 million in DIP financing retired the Goldman Sachs
loan.
The approved DIP plan also provided the DIP lenders with a lien on the centralized
cash management account, provided that such lien is junior to the lien of the secured
creditors to the SPE Property Owners.
On July 8, 2010, GGP filed a motion seeking approval for new DIP financing, to be
provided by Barclays plc. The replacement DIP loan contained substantially the same
terms as the initial facility but carried a much more attractive interest rate of 5.5%
(fixed). The replacement DIP loan paid off the original DIP facility and also had a
maturity date of the earlier of May 16, 2011 or the date of bankruptcy emergence.
While the replacement DIP loan was initially funded by Barclays, the interests under
the replacement DIP loan documents were assigned to Brookfield Retail Holdings
shortly after closing.
In fact, the DIP loan documents explicitly stated the payments under the DIP loan were
intended to fund Brookfields investment in GGP. 52 In addition, subject to certain
conditions, GGP would have the right to elect to repay all or a portion of the
outstanding amount of the DIP loan at maturity by issuing common stock of the
company to the lender.
The aggregate limits on the stock that could be issued to repay the DIP facility were
identical to the initial DIP facility, on both a fully diluted and actual basis.
51
52
- 54 -
- 55 -
To this point, it was commonly accepted in the institutional lender community that
these provisions were designed to make the borrowing entity bankruptcy-remote (i.e.
insulate the lender from having its project-level entity included in a bankruptcy filing
by the parent entity).
On May 4, 2009, five motions to dismiss the bankruptcy case were filed, three by
MetLife (as a conventional mortgage holder of approximately $568 million) and one
each by ING Clarion and Helios (as special servicer of various CMBS trusts that
contained mortgages of approximately $1.265 billion). MetLife, ING Clarion, and
Helios are referred to collectively as the movants in this section.
The movants motions sought to dismiss the bankruptcy filing of the project-level
entities that served as borrowing entities under its mortgages. The movants based their
filings on a bad faith standard. Specifically:
The case was filed prematurely in that, at the time of filing, there was no
immediate threat to the financial wherewithal of the property-level
borrowing entities on the movants loans.
There was no chance of reorganization since there was no possibility of the
confirmation of a plan over the objection of the lenders.
MetLife argued that the borrowing entities under the MetLife loans have
no other creditors, that it holds the only impaired claim, and that the
debtor will never be able to satisfy the condition of the Bankruptcy Code
that the plan be accepted by one class of impaired creditors.53
The property-level entities failed to negotiate with the lenders prior to filing.
The property-level entities replaced their independent directors prior to the
bankruptcy filings.
The movants further argued that the single-purpose nature of a property-level obligor
requires that each debtors financial condition be analyzed solely on its own merits,
53
General Growth Properties, Inc., et al., Debtors, Memorandum of Opinion, Allan L. Gropper, August
11, 2009.
- 56 -
without consideration for the parent entity, since these entities were technically solvent,
they should not be included in GGPs corporate bankruptcy filing.
In arguing this motion, the role and duties of the independent director (also referred
to as independent manager) were also debated in court. Traditionally, independent
directors have had vaguely defined roles. The operating agreements of the propertylevel special-purpose entities simply state that the independent directors were expected
to act in a way that considers only the interests of the Company (SPE), including its
respective creditors, in acting or otherwise voting and that, performing their duties,
any independent manager shall have a fiduciary duty . . . similar to that of a director of
a business corporation. 54
Indeed, Judge Gropper himself stated that, outside of the vague obligation to act in a
fiduciary capacity, the evidence presented to the court does not explain exactly what
the independent managers were supposed to do.55 The testimony of one lender made
it clear that it believed the sole purpose of the independent director was to prevent a
bankruptcy filing.
On August 11, 2009, Judge Gropper dismissed the movants motion and allowed the
solvent SPE subsidiaries of GGP to maintain their bankruptcy cases. In dismissing the
movants motion, the judge decided that no requirement existed that an entity be in
financial distress before it could file a bankruptcy motion, no plan must be made
available to a creditor for review prior to filing, and no requirement exists that a debtor
must make an effort to negotiate with a creditor prior to filing. This last ruling is not a
particularly surprising one, as the judge cited GGPs well-documented futility in
attempting to negotiate with its various CMBS servicers prior to filing.
The judge also concluded that, despite ruling against the movants, the entity-related
lender protections contained in the loan documents are still in place, including the
prevention of consolidation of the project-level entities into other entities.
Wrote Judge Gropper,
These Motions are diversion from the parties real task, which is to get each of the Subject Debtors
out of bankruptcy as soon as possible. . . It is time that negotiations commence in earnest.56
54
55
56
General Growth Properties, Inc., et al., Debtors, Memorandum of Opinion, Allan L. Gropper, August
11, 2009.
Ibid.
Ibid.
- 57 -
With that ruling in place, debt restructuring negotiations came to the forefront of the
bankruptcy proceedings.
Debt Restructuring
The uniqueness of this bankruptcy case manifested itself in many ways during the debt
restructuring negotiations, including:
The fact that GGP was a cash flow-positive and had remaining equity value on its
balance sheet (i.e., its assets exceeded its liabilities as of the filing date).
The labor- and scale-intensive business of operating large retail centers gave GGP a
comparative advantage in its lender negotiations. We surmise that lenders were
surely aware that the value of a GGP mall was significantly greater while under the
control and operation of GGP as compared to if the mall were to be taken back by
the lender.
The continued upheaval in the capital markets also most likely allowed GGP to
negotiate a more favorable position. We further surmise that most of the lenders
involved in the GGP proceedings were working through other credit-related issues
in their portfolios, albeit most likely nowhere near the scale and visibility of the GGP
case.
- 58 -
loans by property typeregional malls, strip centers, and office propertiesand further
grouped the loans based on the following characteristics57:
debt yield,
sales per square foot,
occupancy,
projected NOI, and
demographic information:
o population density, and
o local household income.
Analyzing the characteristics of each loan covered produced two groups of loans -Group A (essentially, higher-quality collateral) and Group B (essentially, lower-quality
collateral).
Once the methodology was developed, the debtors
drafted a term sheet that was distributed to the
lending entity on each of GGPs 108 secured loans.
The term sheet, distributed on November 18, 2009,
described the proposed terms to be used to
restructure the outstanding property-secured debt.
57
58
Interviews with individuals close to the negotiations surrounding the secured debt restructuring,
Chicago, IL, October 2011.
Ibid.
- 59 -
The biggest negotiating point that lenders argued was the quality of the collateral
underlying its loan the lender would want its collateral to receive a higher quality
ranking (i.e., lenders on Group B loans wanted their collateral to be included in Group
A) so that its loan would fall into a shorter extension proposal on the methodology
matrix.60
Initially, lenders on 87 of the 108 project-level loans (totaling approximately $10.2
billion) approved the restructuring terms. Shortly after the results of the initial
59
60
- 60 -
Certain loans (13 in total) with total secured debt of $730.6 million were unable to be
restructured. On these Special Consideration Properties, the settlements reached
with the lenders allowed the borrowing entities and the applicable secured lender to
negotiate a fundamental restructuring of the loan obligations. These settlements also
offered, absent a mutually satisfactory restructuring, a right of either party to call for the
property to be deeded to the lender in satisfaction of the loan obligations. As of the
third quarter of 2011, seven of the properties had been deeded back to the lender, two
had been taken back by GGP via a discounted pay-off, and three had been sold, and one
remained on GGPs balance sheet. For a complete list of the Special Consideration
Properties, see Appendix D.
- 61 -
Entitled to
Vote *
Recovery
Unimpaired
No
100%
Unimpaired
No
100%
N/A
Unimpaired
No
100%
N/A
Unimpaired
No
100%
N/A
Unimpaired
No
100%
N/A
Unimpaired
No
100%
N/A
Unimpaired
No
100%
4.1
Unimpaired
No
100%
4.2
Unimpaired
No
100%
4.3
Unimpaired
No
100%
4.4
Unimpaired
No
100%
4.5
Unimpaired
No
100%
4.6
Unimpaired
No
100%
4.7
Unimpaired
No
100%
4.8
Unimpaired
No
100%
4.9
Unimpaired
No
100%
4.1
Unimpaired
No
100%
4.11
TRUPS Claims
Unimpaired
No
100%
4.12
Unimpaired
No
100%
4.13
Unimpaired
No
100%
Unimpaired
No
100%
4.15
Unimpaired
No
100%
4.16
Impaired
No**
100%
4.17
Impaired
Yes
100%
4.18
Intercompany Obligations
Unimpaired
No
100%
4.19
Unimpaired
No
100%
4.2
Unimpaired
No
100%
4.21
Unimpaired
No
100%
4.22
Unimpaired
No
100%
4.23
Undetermined
Yes
Class
N/A
N/A
4.14
* Any classes that are unimpaired are "Deemed to Accept" and are unable to vote on the
acceptance of the Plan
** Deemed to accept under acceptance of the terms of the Subsidiary Plans.
- 62 -
- 63 -
DEPARTING BANKRUPTCY
Competing Offers for GGP
In the 18 months it took GGP to emerge from Chapter 11, the saga surrounding the
control of GGPs assets would take many twists and turns. Simon Property Group
(Simon) started a 3-month bidding war outlined in the exhibits below in February
2010 against a team of investors led by Brookfield Asset Management.
Despites Simons overtures, GGP ultimately entered into an agreement with Brookfield,
Fairholme Capital and Pershing Square Capital Management, to recapitalize the
company and exit bankruptcy. This bidding war is described in detail in the following
sections.
- 64 -
Brookfield joined
by equity
commitments
from Fairholme
and Pershing
Square to form
BFP proposal
Simon joined
additional new
capital partners
and revises its 2nd
offer; adds capital
backstop
February 8, 2010
March 8, 2010
Brookfield initial
bid valued at
$15.00 per share
February 24, 2010
Simon matches
BFP terms valued
at $15.00 per
share
April 14th, 2010
Bankruptcy court
approves the BFP
plan and awards
stalking horse
status. Simon
withdraws offer.
* BPF represents Brookfield Asset Management, Pershing Square Capital Management and Fairholme Capital.
GGP emerges
from bankruptcy
November 8, 2010
Competing Offers
Exhibit #40
Illustrative Bid Summary
(Billions)
$34
33
32
31
30
29
28
Additional Equity Raise at $10.00
Per Share of MallCo
27
26
25
24
Unsecured Debt to be Raised
Secured Debt
Secured Debt
Secured Debt
Secured Debt
Secured Debt
Secured Debt
SPG Bid II
February 8, 2010
March 8, 2010
May 3, 2010
May 6, 2010
23
22
61
62
63
64
In April 2007, GGPLP sold $1.55 billion aggregate principal amount of 3.98% Exchangeable
Senior Notes, which were exchangeable for GGP common stock or a combination of cash and
common stock.
Simon Property Group Press Release, February 16, 2010.
Green Street Advisor, Simon Lights the General Growth Take-Over Olympic Torch, but General
Growth Turns Down the Gas a Notch, Feb. 16th, 2010.
In a February 16, 2010 letter from Adam Metz to Simon Property Group, Metz described Simons
initial offer an indication of interest.
- 67 -
history of risky financial choices, your lack of urgency should deeply concern creditors and
shareholders.
Predictability of
Operating Retail
Transitional
Near-Term
Near-Term
Company
Assets
Assets
to Value
Cash Flows
Capital Needs
New GGP
175
High
High
Medium
GGO
21
Low
Low
High
Under the Brookfield plan, GGPs unsecured creditors would be paid in full the debts
face value plus accrued interest as would the secured creditors. Specifically,
Brookfield would invest $2.5 billion in cash in GGP in exchange for GGP common stock,
thereby providing sufficient liquidity to fund GGP's bankruptcy emergence needs.
Under the terms of the plan, Brookfield would invest $2.5 billion at $10.00 per share for
new GGP common stock and up to $125 million at $5.00 per share for GGO common
stock. In return, Brookfield would also be granted seven-year warrants to purchase 60
million shares of existing GGP common stock at $15.00 per share. The warrants were
intended to provide compensation to Brookfield for its financial commitment and serve
as a sizeable breakup fee in the event a higher offer would be subsequently accepted. 65
GGP reacted to Brookfields offer positively. Metz said: 66
This proposed plan offers significant value for all of our stakeholders. It is designed to allow GGP
to deliver a minimum of $15 per share in value to our existing common shareholders, while
providing our unsecured creditors with par plus accrued interest.
65
66
Brookfield will not receive any other consideration or bid protection, including any break-up fee,
expense reimbursement, commitment fee, underwriting discount or any other fees.
General Growth Properties Press Release, February 24th, 2010.
- 68 -
The Brookfield-sponsored recapitalization coupled with the more than $13 billion of
restructured debt, our compelling scale as the second-largest regional mall owner, our fortress
assets and a business plan that focuses on further deleveraging the balance sheet and building
liquidity provides a strong financial foundation for the future.
In a press release issued that same day, David Simon responded to Brookfields bid:67
General Growths proposed recapitalization (via Brookfield bid) amounts to a risky equity play on
the backs of unsecured creditors. While continuing to block the immediate and certain 100% cash
recovery provided by Simons offer, General Growth has preempted its own self-proclaimed
process in favor of a highly speculative and risky plan to attempt to raise $5.8 billion of new
capital in todays uncertain markets on top of the approximately $28 billion it already owes.
Simon is providing $10 billion of real value - $3 billion to shareholders as well as $7 billion to
creditors as compared to a complex piece of financial engineering that is so highly conditional as
to be illusory.
67
68
- 69 -
Below is a summary of the two most critical deal points of the Fairholme/Pershing
Square investment:
1) $3.8 billion Equity Commitment: The equity commitment from
Fairholme/Pershing Square answered the biggest question surrounding the
Brookfield proposal of how GGP could raise $5.8 billion in new equity capital in
the current markets. Before the Fairholme/Pershing Square proposal, there was
significant doubt that GGP would be able to raise equity from new investors and
69
70
Fairholme and Pershing Square Term Sheet to General Growth Properties, March 8, 2010.
Ibid.
- 70 -
speculation that GGP would need to sell key assets in order to accomplish this
goal. These were chief concerns not only in the marketplace, but also a lynchpin
to Simons argument that its $9.00 per share offer was superior to the Brookfield
proposal at $15.00 per share.
2) Unsecured Lenders to be Repaid at Par Plus Interest in Cash: Another key
element of the Fairholme/Pershing Square proposal was that it allowed for full
repayment in cash of roughly $7 billion in unsecured debt at par plus accrued
interest vs. a combination of cash and stock. This cash repayment of the
unsecured lenders matched the repayment terms of the Simon proposal that had
been previously approved by the unsecured creditors committee.
Specifically, the terms of the Fairholme/Pershing Square offer were as follows71:
71
$3.8 billion of Common Stock of GGP: Each investor would commit to purchase
their pro rata share of $3.8 billion of common stock of the reorganized company
(New GGP) at $10.00 per share. Fairholmes pro rata share was 71.4% or $2.7
billion and Pershing Squares pro rata share was 28.6% or $1.1 billion. GGP
would have the ability to claw back 50% of these shares at the $10.00 per share at
any time prior to the 30th day prior to issuance in the event the company is able to
raise equity at a lower cost of capital (subject to a $1.9 million minimum
investment by Fairholme/Pershing Square).
Warrants: Fairholme and Pershing Square would receive warrants on a pro rata
basis to purchase a total of 60 million shares of existing GGP common stock at an
exercise price of $10.00 per share with a seven-year term. The pro rata split
amounts to 42.5 million warrants for Fairholme and 17.1 million warrants for
Fairholme and Pershing Square Term Sheet to General Growth Properties, March 8, 2010.
- 71 -
Pershing Square. The investors would also each receive 20 million warrants of
GGO shares at an exercise price of $5.00 per share with a seven-year term.
Board Seats: The investors would be allowed to appoint one member of a ninemember board of directors to the new GGP company and two members of a
nine-member board of GGO.
When taken together with the $2.5 billion Brookfield proposal, the total commitment
from BFP totaled $6.3 billion. In addition, GGP planned to raise $1.5 billion of
unsecured indebtedness, bringing the total to $7.8 billion; these cash proceeds were to
be used to pay off unsecured lenders with approximately $800 million remaining to
fund working capital needs:
Exhibit #42
$2.7 Billion
Fairholme
$2.5 Billion
Brookfield
$1.5 Billion
Unsecured Debt (Term Loan)
$1.1 Billion
Pershing Square
$7.8 Billion Total
S ource: The Reorganization of General Growth Properties , GGP company presentation dated July 2010.
- 72 -
- 73 -
Exhibit #44
2,307,330
7.75%
29,772,000
654,396
404,041
1,056,555
31,886,992
(24,456,017)
(120,756)
(86,077)
(866,400)
(38,289)
(1,122,888)
(450,000)
(27,140,427)
4,746,565
313,831
15.12
Note that the NAV analysis above could be considered a floor valuation for GGP for
two reasons:
- 74 -
6.50%
$33.37
6.75%
$29.18
7.00%
$25.29
7.25%
$21.67
7.50%
$18.29
7.75%
$15.12
8.00%
$12.16
8.25%
$9.38
8.50%
$6.75
Green Street Advisors estimated GGPs NAV to be between $11.00 - $15.00 per share
between February and March of 2010.
Simply put, Fairholme/Pershing Square believed that GGP had a liquidity problem, not
a solvency problem, and that there was significant equity value in the company.
In addition, Fairholme/Pershing Square believed that the bankruptcy process
represented an opportunity to improve the current overall capital structure by
negotiating favorable repayment terms with secured mortgage holders. Pershing
Square in particular believed this to be the case based on its analysis of the precedent set
in Till v. SCS Credit Corp in 2004 (Till Case). In the Till Case, the U.S. Supreme Court
established a precedent to adjust interest rates (for secured and unsecured debt) in the
bankruptcy context.
Pershing Square believed that, similar to the economic environment in the Till Case,
there was not currently an efficient market to reset GGPs interest rates. In such an
environment, the court in the Till Case used a formula approach whereby interest rates
- 75 -
were set (essentially a cramdown) at prime plus a risk premium of between 1.0 - 3.0%.
This was the methodology that Pershing Square suggested be used for GGP72.
Simons Second Bid An Improved Offer to Match the BFP Bid
April 14, 2010: Simon announced that it would offer to acquire 250 million shares of
common stock in GGP for $10.00 per share, or $2.5 billion in the aggregate, matching
the BFP offer.73 Simon also agreed to backstop the GGO rights offering as contemplated
in the Brookfield-sponsored recapitalization, and would otherwise enter into
agreements on the same basis as Brookfield with respect to the recapitalization of GGP
and the spin-off of GGO. Simon stated in the bid that it would not receive any warrants
or similar fees with respect to its commitment to invest in GGP and that it would
seriously consider adding co-investment partners. It also stated that there would be no
financing contingency to Simon's obligations to close the transaction and the terms of
Simon's offer would be substantially identical to the BFP offer.74
Additional Improvement to Second Bid
April 21, 2010: Simon announced that it had
received $1.1 billion in capital commitments from
ING Clarion Real Estate Securities, Oak Hill
Advisors, RREEF and Taconic Capital Advisors to
support its recapitalization of GGP. 75 These
commitments, in addition to the previously
announced $2.5 billion proposed investment by
Simon and a $1 billion co-investment commitment
by the hedge fund firm Paulson & Co., brought
Simon's proposal to the same level as the
Brookfield-sponsored offer but without the equity
72
73
74
75
Pershing Square Capital Management, The Bucks Rebound Begins Here, Presentation, May 27,
2009.
Amended and Restated Cornerstone Investment Agreement, effective as of March 31, 2010,
between REP Investments LLC (as predecessor to Brookfield Retail Holdings LLC), an affiliate of
Brookfield Asset Management Inc. and Old GGP (previously filed as Exhibit 10.1 to New GGP's
Current Report on Form 8-K dated November 9, 2010 which was filed with the SEC on
November 12, 2010).
Simon Property Group Press Release, April 14, 2010.
Simon Property Group Press Release, April 21, 2010
- 76 -
76
77
78
- 77 -
The interim warrants to be issued to the investment parties as part of the transaction
vested over time (rather than immediately) as follows:
o 40% upon Bankruptcy Court approval,
o 20% on July 12th, (the day GGP was expected to file the Plan and Disclosure
Statement with the bankruptcy court), and
o remainder would continue to vest pro rata through expiration of commitment;
The permanent warrants included 120 million 7-year warrants for reorganized GGP
stock at a strike price of $10.75 (for Brookfield) and $10.50 (for Pershing Square and
Fairholme) and 80 million 7-year warrants for GGO at a strike price of $5.00; and
Brookfield agreed to enter into a strategic relationship agreement to use GGP as its
primary platform for any regional mall opportunities in North America.
- 78 -
Blackstone Group
Blackstone Group, the worlds biggest
private equity firm, has been a world
leader in private equity real estate
investment with $25 billion on capital
invested in real estate worldwide and
$11 billion in available capital for
future real esatet investments.
Blackstone had been seeking mall
investments, said Cedrik Lachance,
senior analyst with Green Street
Advisors.
The company bought
stakes in two retail centers in 2009 as
port of a joint venture with Glimcher
Realty Trust.
been in preliminary talks with Blackstone about making a potential joint bid for GGP.
Finally, on May 6th, Blackstone joined the Simon bid officially, committing more than $1
billion to support the takeover bid.
Simon also came up with a plan to address anti-trust issues raised by the potential
merger, by divesting certain assets from the combined portfolio. However, Simon stated
that it would not participate in the bidding process if GGP issued warrants associated
with the Brookfield-sponsored recapitalization.79
According to Pershing Square, Simons recapitalization offer no longer included any of
the original investors: Paulson & Co, ING Clarion, Taconic, Oak Hill and RREEF (but all
joined the takeover plan). Furthermore, according to Pershing Square, the offer only
provided $2.5 billion of equity and no longer backstopped the rest of the required
capital or debt required. 80 Given that Simons recapitalization plan would be subject to
a serious anti-trust investigation, the lack of capital commitment took this offer out of
contention as a viable alternative in Pershing Squares estimation.
Bidding Is Completed | GGP Must Decide
At this point, GGP had two offers on the table:
- Simons takeover / acquisition offer, and
- BFPs recapitalization offer.
We will analyze the above two offers in detail in the following paragraphs from both
the perspective of the bidders and of GGP.
79
80
- 79 -
525 malls with a total of 450 million square feet of retail space if its offer was accepted.81
In addition, Simon would be able to acquire some of the highly sought after trophy
malls in GGPs portfolio. Such concentration may have resulted in a near-monopoly
position for Simon in U.S. regional malls.
Brookfield had long coveted retail properties in the U.S. In early 2007, the company
tried to buy the Mills Corp., a shopping mall operator struggling with accounting issues
and troubled developments. Brookfield thought it had a deal, but Simon trumped it by
offering a 20% premium and won the bid.
Roughly a year later, when GGP started struggling,
Brookfield approached it with an offer to inject
capital and help with restructuring. 82 Brookfield
sent 150-person due-diligence team to examine its
properties and meet management, but any deal at
that time fizzled before GGP filed bankruptcy. In
October 2009, sensing another opportunity,
Brookfield bought roughly $1 billion of General
Growths unsecured debt at a deep discount, giving
it a voice among General Growths creditors.
Brookfield does not have a North American retail property splatform and, given its scale, GGP
would therefore represent the natural platform for opportunities
in the retail sector available
t
in our broader global organization.
o
n
Both Fairholme and Pershing Square were bullish on eregional malls and their stable
cash flows. In addition, both investors believed that GGP was a best-in-class operator
G
with a top-quality mall portfolio and a valuable ownership/management
platform.
r
o
81
82
83
- 80 -
2. Financial Reasons
Simon - Synergies
Significant economies of scale exist in the mall business bigger is better is believed
to be true when a nationwide platform offers higher operation efficiency. Most believe
that SPG would be able to capitalize on added leverage in lease negotiations and
reduced expenses if the company were to acquire GGPs portfolio. Any loss that Simon
might incur as a result of its GGP investment would likely be offset by the competitive
benefits that would naturally occur in Simons primary business.
Exhibit #46
An Estimate of the Synergetic Value of SPG/GGP Merger
Synergies
Comments
$71*
G & A Savings
$160*
Total
$231
company fe e s, e tc.*
Me dian of SPGs implie d cap rate : 6.7%
as of March 2010.
Synergy Value
$3,448
$11
[231/.067=3,447.76]
[3,447.76/313,831 outstanding
share s=10.99]
* Green Street Advisor estimation as of March 19 th, 2010 Higher REIT Prices = Higher Value for GGP, by Cedrik
Lachance, Jim Sullivan and Andrew Johns
BFP - Warrants
If the BFP bid was accepted, the GGP Board would have agreed to grant 7-year
warrants in both New GGP and GGO to the sponsors. Until the company
emerged from bankruptcy, the warrants effectively served as a break-up fee
against a topping bid. Post-emergence, the warrants provide a purchase option
vis-a-vis the two companies. Therefore, to GGP, the warrants serve to dilute
- 81 -
future upside in asset value increases. If the warrants were exercised, equity
capital being provided to the company would be at a price likely to be below
NAV.
Given the seven-year term of the warrants, this deal point also provided
significant upside for BFP in the event of price appreciation via NOI growth,
merger, etc.
84
85
- 82 -
SPG is a chief competitor and benefits from GGP's failure. This alone is sufficient reason for the
Board to decide in its business judgment not to put the company in a position where the only sponsor
of its exit from bankruptcy is its chief competitor.
2. Financial/Economic Reasons
Exhibit #47
Offer-Terms Comparison: SPG vs. BPF
New GGP
SPG
$5 cash
+ $10 SPG Stock
HHC
Total
Other Adjustments
$5
$20
$5
$15
$10
Simons offer clearly provided higher value to GGPs equity holders, although the
presence of a 67% stock component to its offer did add a degree of uncertainty.
However, the stock component included in the Simon bid did offer GGP shareholders a
chance to participate in SGPs potential upside.
From the perspective of GGPs creditors, however, BFPs offer was clearly superior.
They were to be paid the same amount under either plan, but with BFP they would
receive cash sooner and with a higher degree of certainty. Since their cooperation with
any plan was key to GGPs successful emergence from bankruptcy, their role in this
process cannot be overlooked.
3. Legal Reasons (Anti-Trust Concerns)
The GGP/SPG combination would place roughly 50% of the 300 A quality malls in the
U.S. under the management of one company. While the properties would account for
only a fraction of the retail real estate in the U.S., they would represent a significant
portion of the rents paid by large retailers that use malls as a main distribution channel.
This potential monopolistic concentration resulting from a SPG/GGP merger would
likely, have raised concerns at the Federal Trade Commission (FTC).
86
Letter from Pershing Square Capital Management to General Growth Properties Board of
Directors, May 7, 2010.
- 83 -
At the time of the SPG offer for GGP, the FTC was reviewing the proposed $2.3 billion
merger between Prime Outlets and SPG due to concerns that SPG would control too
many outlet malls. The Prime/SPG deal was announced in December 2009, but took
nine months to close in part due to FTC involvement. As part of the final settlement
with the FTC, SPG was required to modify leases or divest property out of concern for
monopolistic competition in three of the markets where the 22 Prime centers are located.
Said Brian Weinberger, antitrust lawyer at Buchalter Nemer, 87
There is a strong likelihood that this proposed merger will get a good look from regulators. Any
time you have the largest and second largest companies combining, you are going to have antitrust issues. Fears are that the potential of the combined entity to control rents and because so
many of the "B" & "C" level malls will be closing, the owners of the "A" malls will have more
and more of a monopoly position because the tenants will no longer have alternative locations to
if the rents get too high.
Simon insisted that a Simon/General Growth combination would have few, if any,
antitrust issues because malls compete with many other retail venues, including big-box
stores (like Wal-Mart), department stores, and online stores. Simon also argued that the
varying classes of malls present in the portfolio would negate any anti-trust issue, as
these malls cater to different classes of retailers. Additionally, a Simon representative
argued that a combined Simon/GGP could not arbitrarily raise rents, because rents are
determined by the quality of the real estate, not who owns it.88 Although no specific
retailer publically opposed the merger, it was speculated that retailers feared that
exposing their names would result in retaliation by Simon.
Simon proposed to sell up to 10 malls to address the potential anti-trust concerns, while
Simon confirmed that it would not part with General Growth's higher-quality malls
(defined roughly as malls with sales of more than $450 per square foot). One possible
solution would have been for Simon to divest properties in cities where the two
companies have overlapping concentrations.
If everything else was equal, GGPs board, as well as the bankruptcy judge, might have
leaned toward accepting the BFP deal to avoid the significant uncertainty that could be
87
88
Michael Corkery, Anti-Trust Issues Could Cloud Simons General Growth Bid, Wall Street
Journal, February 16, 2010.
Todd Sullivan, US Retailers Concerned Over Possible GGP/SPG Combination, Todd Sullivans
Value Plays (blog), www.valueplays.net, March 6, 2010, accessed October 2011.
- 84 -
associated with an FTC review. In this regard, officials with the National Retail
Federation, the largest trade association for U.S. retailers, indicated that large members
complained to FTC that the deal would give Simon so much market clout that it could
dictate higher rents and sway store openings and closings. 89
4. Bankruptcy Context
Since both plans offered similar reductions in GGPs corporate debt and overall
leverage, evaluating the timing and certainty of each
A Tax Rationale
bid was an extremely critical element in GGPs
As part of the exit from bankruptcy,
decision. Any delay or uncertainty in the bidders GGP stepped up the tax basis of the
plan presented a serious risk to the companys assets on its balance sheet. This move
future as a stand-alone operation. The potential increased the size of depreciation
antitrust issues were a major concern, as they could expenses for future years and reduced
the tax liability from the future sale of
delay the transaction for months. If they were any assets.
ultimately required to reformulate a reorganization
plan, the extra cost could run as high as an While a step-up in basis is normally
associated with a significant taxable
additional $250 to $300 million. 90 Moreover, the gain, GGP was able to avoid this by
capital commitments of Pershing Square and applying its Net Operating Losses
Fairholme in conjunction with Brookfields (NOLs) from the previous years. GGP
was likely motivated to use the NOLs
investment provided a higher degree of certainty in in this transaction, because the
closing the transaction.
Brookfield-led recapitalization would
have
triggered
change-in-control
provisions that limited their future
usefulness.
89
90
91
Todd Sullivan, US Retailers Concerned Over Possible GGP/SPG Combination, Todd Sullivans
Value Plays (blog), www.valueplays.net, March 6, 2010, accessed October 2011.
The additional cost consisted mostly of advisory fees.
Fairholme and Pershing Square Term Sheet to General Growth Properties, March 8, 2010.
- 85 -
No Cash Fees: The Fairholme/Pershing Square deal did not require any fees
other than reimbursement for out-of-pocket expenses and the seven-year
warrants to Fairholme at a roughly $15.00 ($10.75+$5.00 or $10.50+$5.00) strike
price.
market driven,
debt overhang,
clientele effect,
ease of execution,
focused operational strategy,
key-employee Retention, and
- 86 -
tax efficiencies.
Market Driven
The equity market tends to reward pure-play companies with more favorable multiples
than those with diversified holdings. The transitional assets that would be held by
HHC are typically not fully valued in the marketplace because investors principally
value REITs based on current cash flow. The HHC
HHC
assets only generate a fraction of present NOI, with
an uncertain contribution to future NOI and value HHC is a publicly traded real estate
growth. Thus, the investor profile for HHC is in operating company (or REOC) created
to specialize in the development of master
stark contrast to the equity holders in New GGP planned communities, the redevelopment
that desire transparent value, stable earnings and or repositioning of operating real estate
assets, and other strategic real estate
consistent growth. The characteristics of HHC are opportunities in the form of entitled and
unentitled land and other development
perhaps most relative to homebuilder stocks.
rights.
Debt Overhang 92
Debt overhang is when an organization has existing debt so great that it cannot easily
borrow more money, even when that new borrowing is actually a sound investment (i.e.,
has a positive net present value). Debt overhang became more common during the
recent financial crisis, and GGP was no exception. For example, several of GGPs A
malls failed to have their loan extended or refinanced due to debt overhang in late 2008.
Clientele Effect
The clientele effect assumes that different investors are attracted to different investment
profiles of companies, and that when a company's investment profile changes, investors
will adjust their stock holdings accordingly. As a result of this adjustment, the stock
price will move. In the case of GGP, the mall operating business and MPC
development business attract different investor types. Prior to splitting the two
businesses, investors that prefer pure-play companies may have avoided investing in
GGP. After splitting into two separate businesses, there may be more investors
investing in new GGP and HHC in aggregate.
92
The term debt overhang refers to an organizations inability to issue equity due to the book
value of its debt exceeding the fair market value of the total enterprise. For example, please see:
Richard Brealey and Stewart Myers, Corporate Finance: Capital Investment & Valuation,
McGraw-Hill/Irvin, 2010.
- 87 -
Ease of Execution
Similar to a classic good bank/bad bank structure that was used by financial
institutions to separate performing and non-performing assets, GGPs core and noncore businesses were to be segregated in the hopes that offering more finely defined
risk/return strategies would improve each businesss ability to attract future capital.
Since the market has long preferred GGPs separate reporting for its malls and
MPC/land development segments, splitting GGP into two companies became apparent.
Focused Operational Strategy
Many assets in HHCs portfolio have unique, complex and management-intensive
attributes due to their exit strategy, lease-up (or sale) progress, entitlement stage and
end-user. Therefore, these assets require a very different skill set and much more
human capital per asset than a traditional mall business. This strategy clearly benefits
both New GGP and HHC as each company can attract and retain key executives that
are best suited to maximize shareholder value for each portfolio.
Key-Employee Retention
With two separate companies, GGP was thought to be in a better position to retain key
employees because the financial performance (including stock prices) of the different
business models would be more closely aligned with managements objectives.
Tax Efficiencies
New GGP would continue to own and operate most of the retail centers and divest noncore assets. Its business plan also contemplated the transfer of certain non-performing
retail assets to applicable lenders in satisfaction of secured mortgage debt. New GGP
would principally be a real estate operator (and, occasionally, developer) of performing
regional malls with, at December 31, 2010, an ownership interest in 180 regional
shopping malls (including "Special Consideration Properties") in 43 states as well as
ownership interests in other rental properties. New GGP would be organized as a REIT
for future tax years.93
93
- 88 -
HHC is a publicly traded real estate operating company (or REOC) created to
specialize in the development of MPCs, the redevelopment or repositioning of
operating real estate assets, and other strategic real estate opportunities in the form of
entitled and unentitled land and other development rights. HHC was not structured as
a REIT, but instead as a REOC offering HHC the flexibility to maximize the value of
its real estate portfolio.
Below is a diagram/list of the assets that were retained by HHC: 94
Exhibit #48
94
HHC by segments: Master Planned Communities includes the development and sale of land, in
large-scale, long-term community development projects in and around Las Vegas, Nevada;
Houston, Texas and Columbia, Maryland. This segment also includes certain office properties
and other ownership interests owned by The Woodlands Partnerships as such assets are
managed jointly with The Woodlands Master Planned Community. Operating Assets includes
commercial, mixed use and retail properties currently generating revenues, many of which we
believe there is an opportunity to redevelop or reposition the asset to increase operating
performance. Strategic Developments includes all properties held for development and
redevelopment, including the current rental property operations (primarily retail and other
interests in real estate at such locations) as well as our one residential condominium project
located in Natick (Boston), Massachusetts. Howard Hughes Corporation, Form 10-Q August
2011.
- 89 -
New GGP filed an S-11 on July 15, 2010 indicating their issuance of new common stock
as the parent company to old GGP. In the disclosure, GGP indicated that Brookfields
three board selections would be current Brookfield executives Ric Clark, Bruce Flatt and
Cyrus Madon. Adam Metz and Tom Nolan would remain on the board at this time and
the remaining four positions remained open. The Board would not become official until
the company exited bankruptcy.
On July 22, 2010, New GGP appointed Steven J. Douglas as Executive Vice President
and Chief Financial Officer. Steven Douglas was previously at Brookfield Property
Corporation for over 16 years, most recently serving as President. Mr. Douglas
succeeded Ed Hoyt who had been GGPs interim Chief Financial Officer since 2008.
On September 7, 2010, New GGP announced an executive transition plan for both
Adam Metz and Tom Nolan. Metz and Nolan would remain in their positions as CEO
and COO, through the remainder of the year until the company completed its
emergence from bankruptcy. This announcement served as one of the final chapters of
the nineteen-month process in which Metz and Nolan are credited with the largest real
estate bankruptcy restructuring in history.
Adam Metz commented in the press release issued by GGP that day:95
We (Tom and I) are pleased to help position the company for the next chapter in its growth story
and ensure a smooth transition for employees, shareholders and tenants while the Board of
Directs selects a permanent management team.
Below is a summary of the compensation to Metz and Nolan during the duration of
their employment as Chief Executive Officer and President and Chief Operating Officer,
respectively:
Exhibit #49
95
- 90 -
Thomas H. Nolan
President and Chief Operating
Officer
2010
2009
2008
Total
2010
2009
2008
Total
Company Stock
KEIP Payments
Incentives
[1]
CVA Payments
Salary
Bonus
1,459,615 $
1,557,692
230,769
3,248,076 $
- $
3,114,130
3,114,130 $
1,972,500 $
2,001,870
3,974,370 $
44,317,390 $
44,317,390 $
1,941,288 $
1,941,288 $
[2]
3,584,997 $
43,622
213,147
3,841,766 $
Other [3]
53,275,790
4,715,444
2,445,786
60,437,020
Total [4]
1,216,346 $
1,298,077
2,514,423 $
- $
2,491,302
2,491,302 $
1,578,000 $
1,578,000 $
32,771,727 $
32,771,727 $
1,556,923 $
1,556,923 $
2,871,188 $
113,080
2,984,268 $
39,994,184
3,902,459
43,896,643
Upon bankruptcy emergence, Metz and Nolan would earn $44.3 million and $32.7
million respectively under GGPs Key Employee Incentive Plan (KEIP). The KEIP
payout formula was allocated with 40% of the incentive based on the debt recovery
amount and 60% on the market recovery value of the equity as of 90 days after
emergence. The KEIP plan was approved by GGPs Board in July 2009 and by the
Bankruptcy Court in October 2009 based on the full support and recommendation of
the official unsecured creditors committee, the official equity committee and the United
States Trustee96.
The following month, on October 5, 2010, New GGP announced its nine-member Board
of Directors. All Directors would be subject to annual re-election whereas Old GGP
directors previously served staggered, three-year terms.
1) Ric Clark, Chairman Chief Executive of Brookfield Properties
2) Mary Lou Fiala Former President and COO of Regency Centers
3) Bruce Flatt Senior Managing Parter and Chief Executive of Brookfield Asset
Management
4) John Haley Current GGP board member
5) Cyrus Madon Senior Managing Partner of Brookfield Asset Management
6) Adam Metz
7) David Neithercut President and Chief Executive of Equity Residential
96
- 91 -
97
98
99
100
- 92 -
101
102
- 93 -
split the company into two separate and independent publicly traded
corporations.
103
- 94 -
Source: Bloomberg
104
- 95 -
Exhibit #51
Source: Bloomberg
The charts above show that despite a strong initial surge, GGP has overall trailed Simon
since emerging from bankruptcy protection. While it is impossible to say exactly how a
potential merger would have played out, the numbers provide an interesting potential
counter-point to the story in 2010.
- 96 -
In $000s
$4,000,000
$3,500,000
$3,000,000
$2,500,000
1/2/2009:
Conversion of OP
units to common
stock
$2,000,000
$1,500,000
$1,000,000
$500,000
$-
- 97 -
Below is a theoretical
Exhibit #53
1/1/2009
6/1/2008
11/1/2007
4/1/2007
9/1/2006
2/1/2006
7/1/2005
12/1/2004
5/1/2004
10/1/2003
3/1/2003
8/1/2002
1/1/2002
6/1/2001
4/1/2000
9/1/1999
2/1/1999
7/1/1998
12/1/1997
5/1/1997
10/1/1996
3/1/1996
8/1/1995
1/1/1995
4/1/1993
11/1/1993
6/1/1994
11/1/2000
In $000s
$2,500,000
$2,250,000
$2,000,000
$1,750,000
$1,500,000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$-
Assumptions:
[a] Annual taxable net income (including depreciation) is equal to annual distributions.
[b] The 21 malls were originally contributed to GGP by the Bucksbaums in 1993 for $1.2 billion, with a cash gain of
approximately $350 million and a deferred taxable gain of $600 million.
- 98 -
Exhibit #54
Comparison of Final BAM & SPG Offers at Present Day (as of 6/30/2011):
Final BAM Offer at $15.00 Per Share Total Consideration
New GGP Value
SpinCo / HHC Shares
$
$
As of 5/3/2010 [1]
10.00
5.00
As of 6/30/2011
0.09834
65.04
$
$
15.00 $
$
6.40
16.69
23.09
8.09
53.91%
$
$
$
10.00
5.00
5.00
0.11670
116.23
- 99 -
As of 6/30/2011
0.11670
85.68
$
$
$
20.00 $
$
13.56
5.00
6.40
24.96
4.96
24.81%
SUBSEQUENT EVENT
On December 12, 2011, subsequent to the conclusion of our case study, the General
Growth Properties board of directors approved a spin-off of its subsidiary Rouse
Properties, Inc. (Rouse). GGP stockholders of record as of December 30, 2011 will
receive approximately 0.0375 shares in the spun-off company. Rouse will be a separate
company seeded with 30 GGP malls:
The Rouse name for this company is ironic: only Collin Creek and Southland Center are
legacy Rouse malls acquired in the 2004 purchase and the new Rouse portfolio is
comprised of lower quality assets. The portfolio was 88% occupied and tenants
generated $279 average annual sales per square foot as of June 30, 2011 while the
residual GGP portfolio will be 94% occupied with average annual sales per square foot
of $494.105
In his first analyst conference call as CEO, Sandeep Mathrani stated his belief that
quality is better than quantity and an intention to focus the company on high quality
retail.106 He cited the fact that 87% of the companys core NOI came from 125 of 169
malls in the portfolio and targeted a long-term goal of paring the portfolio down to 150
assets. The Rouse spin-off achieves that goal in a single transaction.
105
106
Kris Hudson: General Growth Starts Year With a Gamble, The Wall Street Journal, 1/4/2012
General Growth Properties, Fourth Quarter Earnings Conference Call, March 1, 2011
- 100 -
- 101 -
CASE QUESTIONS
1) Was it already too late for GGP in January 2008?
2) Was Pershing Square taking a prudent risk or did they get lucky?
3) Was it market irrationality that produced GGPs apparently cheaper debt or was
it justified?
4) Given the information below, comment on whether GGP should have been
concerned about its funding concentration?
GGP Large Loan CMBS Due 2009
Year
CMBS
Total
% CMBS
2009
$1,512
$1,295
$2,807
54%
2010
$4,175
$382
$4,557
92%
2011
$5,459
$128
$5,587
98%
2012
$1,509
$947
$2,456
61%
2013
$1,314
$1,678
$2,992
44%
Total
$13,969
$4,430
$18,399
* Debtors Memorandum of Law in Opposition to the Motions of Ing Clarion Capital Loan Services
LLC and Wells Fargo Bank, N.A. as Trustee, ET, to Dismiss, the Cases of Certain Debtors and
Debtors in Possesision.
At the time, GGP filed bankruptcy; ten property-secured loans were in default. Of those, seven were
CMBS loans. The other loans in default were Fashion Show, Palazzo and Prince Kuhio.110 In other words,
of the 10 defaulted secured loans, seven were securitized and two were short-term loans originated with
the intention of being securitized. In an analysis by Banc of America Securities, GGP had approximately
$14.8 billion in CMBS loans at the time of bankruptcy.111 In addition to the total securitized debt, GGPs
securitized maturing debt in 2009 through 2011 is significantly larger than its non-CMBS debt.
GGP had indicated in 2004 that they were the largest CMBS user in the world. 112 This had adverse
repercussions during the financial crisis, as GPP represented a large percentage of CMBS maturities
within the total CMBS market. JPMorgan, in late 2008, analyzed the amount of large securitized loans
due in 2009 by borrower. GGP represented almost 30% of the large-loan secured market coming due.
110
111
112
- 102 -
5) In the aftermath of the GGP bankruptcy, comment on what you think has been
the consequences for secured lenders? See information below on reasons why
secured lending can be priced below REIT bond prices.
CMBS loans are priced based mainly on the quality and cash flow of the underlying collateral versus the
underlying corporate credit profile of the sponsor and, as a result, larger institutional-quality assets such
as Class A malls receive high visibility and full credit financing (i.e., the full strength of the real estate,
financial, and credit aspects of an asset are considered) under a secured debt structure.
Conversely, unsecured bonds are priced based on the corporate credit strength of the issuer relative to the
unsecured bond marketplace, which contains issuers of every type of industry. As a result, the quality of
the underlying assets that a company like Simon owns may not get the full attention of the marketplace.
Bond traders are reviewing credit ratings and balance sheet fundamentals and rarely get down to
property- and asset-level granularity during due diligence.
6) What are the pros and cons of secured and unsecured debt for REITs?
7) See the analysis below of two REITs; one that is unlevered and one that is
levered at 65%:
Unlevered
Levered
REIT
REIT
Cap Rate
Annual Growth
Cost of Debt
7.0%
1.0%
5.0%
7.0%
1.0%
5.0%
$10.00
$10.00
Leverage
0.0%
65.0%
Current FFO/Share
Forward 12 Month
FFO/Share
Growth %
$0.70
$1.07
$0.80
14.3%
$1.36
26.7%
12.0x
$9.60
12.0x
$16.29
NAV/Share
FFO Multiple
Share Price
- 103 -
Per this analysis, the levered REIT should trade at a share price of $16.29 vs. the
unlevered REIT share price of $9.60. What, if any, Miller and Modigliani (M&M)
principles are violated in this analysis?
8) Why would the board reject the SPG offer and accept the Brookfield
conglomerate offer?
9) In a normal circumstance, what are some pros and cons of both secured and
unsecured debt from a borrowers perspective?
10) What are some pros and cons of both secured and unsecured debt from a
lenders perspective?
11) In this case, the judge restructured the debt associated with this deal. Is it
possible to mitigate the risk of a cram-down or loss risk?
12) Describe the risk that GGP took by including its SPE borrowers in its bankruptcy
filing and why it had to take this risk.
13) What were the movants motivations for filing the Motion to Dismiss on May 4,
2009?
14) What would have happened had Judge Gropper allowed the May 4, 2009
Motion to Dismiss to stand?
15) What additional protections would you imagine lenders might attempt to
negotiate in future loan documents?
16) What are the possible and reasonable decisions GGP could have made during
2007 to 2010? Among all, which one(s) you think would most benefit a) GGP
equity holders, b) debt holders, and c) management team, and why?
17) Assess the decisions that GGP had made during 2004 to 2010. How would you
improve or challenge them if you were on the board?
18) What do you think caused GGPs down fall?
19) From the GGP shareholders perspective, did GGP make the right decision to go
with the BPF bid?
- 104 -
20) Besides spinning off HHC, would you suggest GGP divest or acquire any other
assets post bankruptcy? What kind or which assets? What is the rational driving
your recommendation?
21) General Growths 12/31/2008 10-K reflected:
$29.6 billion Total Assets
$27.3 billion Total Liabilities
$ 2.3 billion Stock Holders Equity & OP Units113
General Growths 12/31/2008 Supplemental 8-K listed the market value of GGP
common stock and OP Units as $412.2 million. Why would there be a
discrepancy between the market value of equity and the book value of equity of
over 5x?
22) What are the implied cap rates for General Growth and Simon Properties Group
as of 12/31/2008 and 12/31/2007? For this exercise make the following
simplifying assumptions:
Assume that the book value of debt including the pro-rata share of
unconsolidated joint venture debt is a fair representation of total debt.
Include the pro-rata share of unconsolidated joint venture net operating
income in your calculation to match the total debt input.
For General Growth, adjust total market capitalization for the book value
of the master planned community assets and utilize reported Real Estate
Net Operating Income excluding master planned community NOI.
What can we conclude from these calculations? [Hint: GGP and SPGs 8-K
Supplemental filings will be very useful sources for this exercise.]
23) What are the advantages of a Real Estate Investment Trust? What are the
requirements to maintain this designation? Finally, what is the Five or Fewer
Rule and why was the amendment of this rule a catalyst for the REIT IPO wave
in the early 1990s?
ACKNOWLEDGEMENTS
113
Note The GGP 12/31/2008 Balance Sheet includes $2.5 million in consolidated minority joint ventures
included in Minority Interest is $508.8 million. This amount is ignored as immaterial for this analysis.
- 105 -
- 106 -
APPENDICES
Appendix A
Estimation of Warrants Value based on Black-Scholes Option Pricing Model
As we have highlighted in the report, the value of the warrants GGP would grant BPF
(provided the BPF being approved by the Bankruptcy Court) has been an important
factor when evaluating the offers from Simon and BPF. Using the parameters laid out
in the bankruptcy documents, we estimate the warrants value by applying the BlackScholes Option Pricing Model.
Model Inputs:
S = Underlying Security Price
k = Exercise Price
= Volatility
r = Risk free rate
T-t = Time to Maturity
C = Call option value per underlying share
Z = number of shares underlying warrants
Black-Scholes Formula
The value of a call option for a non-dividend paying underlying stock in terms of the
BlackScholes parameters is:
C ( S t , t ) S t N (d 1 ) k exp( r (T t )) N (d 2 )
where
2
S
Ln t r
(T t )
2
k
d1
T t
d 2 d1 T t
and N(.) is the cumulative standard normal distribution function
Total Warrants Value = C*Z
We used the terms between GGP and BFP (as stated below) and additional assumptions
based on market data as the model inputs to calculate the call option value presented by
the warrants.
- 107 -
Warrants Terms
Post-Emergence Warrant Terms & Valuation
New GGP Warrants
Brookfield
Fairholme
Pershing Square
Total
Stock with an initial exercise price Stock with an initial exercise price Stock with an initial exercise price
of $10.75 per share
# of Shares
60,000,000
42,587,143
17,142,857
119,730,000
50.11%
35.57%
14.32%
100%
Strike Price
$10.75
$10.50
$10.50
$2.79
$2.90
$2.90
$167,363,811
$123,331,665
$49,645,432
# of Shares
40,000,000
20,000,000
20,000,000
80,000,000
50.00%
25.00%
25.00%
100%
$5.00
$5.00
$5.00
%
Strike Price
Warrant Value per Share
Total Estimated Value (b)
$340,340,908
$1.95
$1.95
$1.95
$78,065,227
$39,032,613
$39,032,613
$156,130,454
Total Value
$496,471,362
(a )
(b)
Key Assumptions:
For the underlying security prices for New GGP and HHC, we used $10 per share and
$5 per share, respectively, per the BPF bid. The terms state that the warrants life time is
7 years, with 6.5 years left upon issuance. And accordingly, we used an interpolated
estimate of the yield to maturity on the seven-year U.S. Treasury bond as of May 6th,
2010 for risk-free interest rate. Dividends were, for simplicity, assumed to be $0 per
share for both New GGP and HHC shares. The volatilities of New GGP as estimated by
an Independent Financial Expert engaged to make the calculation for GGP was 20%,
and that of HHC was 30%. 114
HHC Shares
114
10.00
20%
5.00
- 108 -
30%
Sensitivity Analyses:
Illustration of the Senstivity of the Estimated Warrants Valuation
$1,250
$1,050
$850
$650
Estimated Warrants Valuation ~ $496 million
Assuming GGP s = 20% and HHC s = 30%
$450
$250
75%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
Using the volatility suggested by the Independent Financial Expert, we estimate that the
warrants worth of approximately $500 million. However, given the difficulty of
estimating the volatility of the overall market and the particular uncertainty of the two
new companies, the value of the warrants could range from $450 million to $1,000
million based on various underlying stock price and volatility assumptions. The above
chart illustrates the sensitivity of the warrants value to changes of the volatility and
underlying share price assumption.
Warrants Value Estimate (New GGP + HHC)
140%
21.00
$ 19.50
75%
976.07
$ 828.90
80%
984.99
85%
994.69
90%
Percentage of 95%
100%
16.50
$ 15.00
$ 686.52
$ 550.74
$ 423.92
$ 839.27
$ 698.37
$ 563.97
$ 438.22
$ 850.29
$ 710.72
$ 577.52
$ 452.66
$ 1,005.07
$ 861.89
$ 723.50
$ 591.33
$ 467.19
$ 1,016.05
$ 873.98
$ 736.64
$ 605.36
$ 481.81
Estimated
100% $ 1,027.57
$ 886.50
$ 750.09
$ 619.56
$ 496.47
Volatility
105% $ 1,039.57
$ 899.40
$ 763.79
$ 633.90
$ 511.17
110% $ 1,051.97
$ 912.60
$ 777.70
$ 648.35
$ 525.88
115% $ 1,064.74
$ 926.09
$ 791.79
$ 662.88
$ 540.59
120% $ 1,077.83
$ 939.80
$ 806.03
$ 677.47
$ 555.29
125% $ 1,091.19
$ 953.71
$ 820.38
$ 692.10
$ 569.97
- 109 -
18.00
- 110 -
Appendix B
Background on the US Bankruptcy Code
The Bankruptcy Code was written to afford protection to every variety of debtor.
Corporations, partnerships, and individuals can all seek protection under the Code.
Certain chapters of the Code apply to all bankruptcy cases, while certain others apply
only to specific types of bankruptcies and entities. The most commonly used
bankruptcy chapters are 7 and 11, both of which will be explored below.
A bankruptcy case begins when a petition is filed with the clerk of the Bankruptcy
Court. The petition states the debtor qualifies for relief under the Code. A debtor can
file its own petition and commence a voluntary case, while certain sections of the Code
allow unsecured creditors (in certain specific cases and provided they meet a minimum
dollar amount) to file an involuntary petition under Chapter 7 and 11 and put a debtor
into bankruptcy (provided the debtors objections are overruled).
Filing a voluntary petition has several immediate effects. The filing itself constitutes an
order of relief that stays the majority of proceedings against the debtor, known as the
Automatic Stay. As defined by the US Code,
The automatic stay is one of the fundamental debtor protections provided by the
bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping
all collection efforts, all harassment, and all foreclosure actions. It permits the
debtor to attempt a repayment or reorganization plan, or simply to be relieved of
the financial pressures that drove him into bankruptcy115.
Additionally, the assets and liabilities of the debtor are transferred into a bankruptcy
estate. The creation of the estate changes the debtor into a debtor-in-possession (DIP)
that acts as a trustee over the assets of the estate.
Chapter 11 provides certain benefits to the distressed firm. While in Chapter 11, the
debtor does not have to pay or accrue interest on its unsecured debt (in keeping with
the relief afforded under the Automatic Stay). Chapter 11 also allows the firm to reject
unfavorable lease contracts and to borrow new money on favorable terms under what is
known as DIP financing. These terms grant the DIP lender super priority over the
115
U.S. Congress. Senate. Judiciary Committee, Notes of Committee on the Judiciary, Senate Report No.
95-989.
- 111 -
existing lenders. Finally, a reorganization plan in Chapter 11 can be passed with the
approval of fewer creditors than a restructuring plan negotiated out of court, as out-ofcourt restructurings usually require creditors unanimous support.
Chapter 7
A Chapter 7 bankruptcy is a liquidation carried out under the guidance of the
bankruptcy system. The debtor can convert a Chapter 7 case to a Chapter 11 at any
time. Additionally, the Court may elect to convert a Chapter 7 case to a Chapter 11 after
request by an interested party; however, the most common conversion is,
unsurprisingly, a Chapter 11 case to a Chapter 7 case. In this instance, the bankruptcy
court may decide that the best financial outcome for the stakeholders is for the company
to liquidate all assets and pay creditors from the proceeds.
Impairment and the Voting Process
Only classes of claims that are impaired are allowed to vote on the acceptance of a
plan. According to the Bankruptcy Code, 116
. . a class of claims or interests is impaired under a plan unless, with
respect to each claim or interest of such class, the plan
(1) Leaves unaltered the legal, equitable, and contractual rights to which
such claim or interest entitles the holder of such claim or interest; or
(2) Notwithstanding any contractual provision or applicable law that
entitles the holder of such claim or interest to demand or receive
accelerated payment of such claim or interest after the occurrence of a
default
(A) cures any such default that occurred before or after the
commencement of the case under this title,
(B) reinstates the maturity of such claim or interest as such
maturity existed before such default;
(C) compensates the holder of such claim or interest for any
damages incurred as a result of any reasonable reliance by such
holder on such contractual provision or such applicable law; and
(D) does not otherwise alter the legal, equitable, or contractual
rights to which such claim or interest entitles the holder of such
claim or interest.
116
- 112 -
117
Proskauer Rose LLP, Real Estate Bankruptcy Cramdowns: Fact or Fiction?, Client Alert, March
2009.
- 113 -
Appendix C
Bankruptcy Committee Members
The GGP Creditors Committee, appointed April 24, 2009118:
Eurohypo AG, New York Branch;
The Bank of New York Mellon Trust Co.;
American High-Income Trust;
Wilmington Trust;
Taberna Capital Management, LLC;
Macys Inc.;
Millard Mall Services, Inc.;
Luxor Capital Group, LP;
M & T Bank;
HSBC Trust Company
The GGP Equity Committee, appointed September 8, 2009119:
Marshall Flapan, as Trustee;
Warren & Penny Weiner, as Tenants by the Entirety;
Stanley B. Seidler Trust;
William J. Goldsborough;
Platt W. Davis, III;
General Trust Company, as Trustee;
Louis A. Bucksbaum.
118
119
In re General Growth Properties, Inc. et al, as Debtors, Disclosure Statement for Plan Debtors Joint
Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, filed July 13, 2010.
Ibid.
- 114 -
Appendix D
Special Consideration Properties, status as of 9/30/2011
Property
Northgate Mall
Piedmont Mall
Chico Mall
Country Hills Plaza
Chapel Hills Mall
Mall St. Vincent
Southland Center
Bay City Mall
Lakeview Square
Moreno Valley Mall
Eagle Ridge Mall
Oviedo Marketplace
Grand Traverse Mall
Description
Sold
Transferred to lender
Sold
Transferred to lender
Sold
Discounted pay-off
Discounted pay off
Transferred to lender
Transferred to lender
Transferred to lender
Transferred to lender
Transferred to lender
Date
September 2011
September 2011
July 2011
July 2011
June 2011
April 2011
April 2011
February 2011
February 2011
February 2011
November 2010
November 2010
Debt
$43,950
$33,918
$55,063
$1,324
$112,217
$49,000
$105,390
$23,341
$40,512
$85,623
$46,726
$50,813
$82,759
$647,877
- 115 -
Appendix E
Growth in Asset Values
General Growth Public Market Assets & Total Book Liabilities: 1998-2011
$50,000
Rouse Acquistion:
11/12/2004
GGP Bankruptcy:
4/16/2009
$45,000
$40,000
$35,000
EQUITY
$30,000
$25,000
DEBT
$20,000
$15,000
$10,000
$5,000
Lehman Bankruptcy:
9/15/2008
$0
GGP Liabilities
GGP Equity
- 116 -
GGP
Recapitalization:
11/10/2010
Appendix F
General Growth Institutional Ownership
GGP is one of the largest companies in the REIT universe. Over the decade of the 2000s,
the company was a primary holding of many institutional investors. Additionally, GGP
was added to the S&P 500 index on June 25, 2007 and subsequently de-listed on
November 14, 2008.
September 30, 2002 Institutional Ownership
5.5%
5.0%
4.8%
16.7%
4.1%
3.8%
6.1%
10.2%
Wellington Management
Co. LLP
6.0%
4.3%
3.7%
60.0%
50.0%
Other Institutional
Investors
6.2%
17.4%
Non-Institutional Investors
5.2%
3.8%
4.8%
7.5%
4.0%
3.7%
BlackRock Fund Advisors
3.8%
2.6%
47.6%
State Street Global Advisors
29.9%
57.8%
Non-Institutional Investors
5.7%
19.7%
Non-Institutional Investors
Non-Institutional Investors
The composition of the companys top institutional holders fluctuated year over year,
but dramatically changed as the stock price plummeted in late 2008 and during the
bankruptcy process. Some institutions may have sold out of their positions strategically
while other may have been restricted from holding equities priced below minimum
dollar per share thresholds or restricted from holding equities of bankrupt companies.
Additionally, some institutions like Pershing Square Capital Management amassed
enormous positions in the company at distressed prices in 2008 and 2009.
- 117 -
$
$
(1)
Unreliable data
for 9/30/09 (2)
17.23 $
23.93 $
35.30 $
47.47 $
52.10 $
67.00 $
57.51 $
16.80
12.07 $
15.37 $
24.05 $
31.59 $
39.94 $
46.50 $
14.21 $
0.33
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2010
155,719,299
168,834,492
169,263,486
192,170,418
196,128,856
202,807,132
244,358,740
167,215,606
187,039,407
214,639,605
217,293,976
239,332,077
239,865,045
245,605,179
269,695,257 318,842,071
83.3%
78.7%
77.9%
80.3%
81.8%
82.6%
90.6%
52.4%
103,488
7,038,171
3,493,332
5,740,740
10,267,065
19,596
9,034,542
6,913,389
7,749,054
2,668,095
5,635,143
369,099
6,529,938
9,403,047
2,168,253
3,884,637
6,138,000
3,013,677
8,152,356
5,389,737
2,043,000
3,050,055
5,666,430
135,975
13,968,657
2,296,389
4,937,853
7,275,312
5,637,990
213,804
6,710,145
12,251,847
3,792,693
5,932,290
9,517,200
2,395,704
6,282,335
9,837,693
5,011,080
41,125
4,601,724
352,223
14,540,936
782,410
11,960,083
8,196,305
3,052,474
160,370
5,249,967
1,197,626
4,532,935
7,675,587
12,079,470
1,056,406
139,120
7,931,600
8,774,739
7,039,322
2,794,825
5,614,144
502,723
14,569,693
24,388,922
8,316,686
2,430,285
506,649
2,080,044
5,458,145
4,863,020
10,363,537
14,368,111
- 118 -
3,665,555
131,359
7,423,705
9,779,251
5,828,924
1,282,257
4,998,499
199,718
6,516,100
15,768,697
30,454,538
3,570,839
5,293,279
432,054
5,113,037
1,813,455
5,730,621
11,923,591
9,461,981
4,018,030
141,804
5,368,575
12,815,671
126,728
482,199
2,791,187
3,342,843
6,060,337
430,928
3,847,526
217,500
15,245,247
5,365,096
5,171,023
214,624
3,783,787
9,400,496
9,435,678
13,919,427
7,251,835
7,779,881
5,305,456
17,793,459
55,091
164,997
3,800,023
6,238,929
1,258,850
36,800
5,755,217
897,928
17,105,377
3,525,512
5,243,581
1,613,001
5,634,352
10,634
7,042,496
12,652,272
16,719,828
16,732,110
3,033,438
7,000,000
12,787,276
8,140,150
606,482
11,810,059
1,214,339
949
5,484,695
15,347,167
2,202
7,119,614
6,561,500
23,953,782
2,239,782
4,445,200
305,203
-
Annual Transaction Activity of GGPs Largest Institutional Holders from 2002 2010:
Annual Change in Holdings of Significant Institutional General Growth Holdings
Added to S&P 500
on 6/25/2007
Removed from
S&P on 11-14-08
Unreliable data
for 9/30/09 (2)
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2010
13,115,193
428,994
22,906,932
3,958,438
6,678,276
41,551,608
(77,143,134)
27,600,198
2,654,371
22,038,101
532,968
5,740,134
24,090,078
49,146,814
2,910,189
1,114,185
1,896,405
2,043,000
(2,690,685)
(4,600,635)
116,379
4,934,115
(4,617,000)
(2,811,201)
4,607,217
2,847
(155,295)
180,207
2,848,800
1,624,440
2,047,653
3,379,200
(617,973)
(1,870,021)
4,447,956
2,968,080
(3,008,930)
(1,064,706)
216,248
572,279
(1,513,979)
7,022,230
920,993
(2,585,516)
(53,434)
(1,460,178)
(11,054,221)
740,242
1,743,297
2,562,270
(1,339,298)
(6,143,215)
7,931,600
(1,062,954)
2,028,242
2,753,700
1,012,420
150,500
28,757
(782,410)
12,428,839
120,381
(622,189)
346,279
(3,169,923)
4,260,519
330,085
2,687,950
2,288,641
- 119 -
2,609,149
(7,761)
(507,895)
1,004,512
(1,210,398)
(1,512,568)
(615,645)
(303,005)
6,516,100
1,199,004
6,065,616
(4,745,847)
2,862,994
(74,595)
3,032,993
(3,644,690)
867,601
1,560,054
(4,906,130)
352,475
10,445
(2,055,130)
3,036,420
126,728
482,199
(3,037,737)
2,060,586
1,061,838
231,210
(6,516,100)
(11,921,171)
217,500
(15,209,291)
1,794,257
(122,256)
(217,430)
(1,329,250)
7,587,041
3,705,057
1,995,836
(2,210,146)
3,761,851
(141,804)
(63,119)
4,977,788
(71,637)
(317,202)
(2,791,187)
457,180
178,592
827,922
36,800
1,907,691
680,428
1,860,130
(1,839,584)
72,558
1,398,377
1,850,565
10,634
(2,358,000)
3,216,594
2,800,401
9,480,275
(7,779,881)
(5,305,456)
(14,760,021)
7,000,000
12,732,185
7,975,153
(3,800,023)
(5,632,447)
10,551,209
1,177,539
(5,755,217)
(897,928)
(17,105,377)
(3,524,563)
5,484,695
(5,243,581)
13,734,166
(5,632,150)
7,108,980
6,561,500
23,953,782
(7,042,496)
(10,412,490)
4,445,200
(16,414,625)
(16,732,110)