Malls' owner plans huge bond sale
By Jonas Bergman
Bloomberg News Service
CHICAGO — General Growth Properties Inc. plans to refinance $2.55 billion of debt, the largest such transaction in the real estate business, to take advantage of low interest rates, boost earnings and gain cash for new investments.
The Chicago-based company, the second-largest shopping mall owner in the United States, will take out an initial three-year mortgage with Lehman Brothers Inc. and Goldman, Sachs & Co. The mortgage will be secured by 28 shopping malls, including Honolulu's Ala Moana, the largest open-air shopping complex in the world, and packaged into bonds and sold to investors.
The bonds may be a tough sale because of the loan's size, concentration of malls and the widening in yield spreads for mortgage securities after Sept. 11 on concern that occupancy rates and rents will fall more than first expected. Since the terrorist attacks, about $4 billion in commercial mortgage bonds have been sold, down from about $8 billion a month in May through August.
"It will be interesting to see whether a deal this large can get done," said John Levy, head of the real estate investment banking firm John B. Levy & Co.
The $300 billion commercial mortgage bond market is a key part of the $1.6 trillion market for real estate loans. Banks depend on selling real estate loans packaged as bonds to raise money for new loans. The bond price helps determine rates charged on mortgages.
General Growth, started by brothers Matthew and the late Martin Bucksbaum in 1954, owns or manages 145 malls in 39 states, with about 126 million square feet of space. Only Indianapolis- based Simon Property Group Inc., which 251 properties and 186 million square feet of space, is bigger in the mall business.
The company's shares are up 1.33 percent this year, making it the worst performing member of the Bloomberg Mall REIT Index, which is up 11 percent. The company's shares have lagged after it said in February that fourth-quarter earnings rose less than analysts expected. And in July, it took a larger-than-expected $65 million charge to end a venture selling Internet services to retailers.
In a bond document, Lehman and Goldman estimate the income from the malls is more than twice the interest payment. The loan represents 63 percent of the malls' value of $4 billion, according to an appraisal by Cushman & Wakefield done before Sept. 11. None of the loans being refinanced come due before next year, and others not before 2009.
"The assets that we are refinancing have improved in cash flow dramatically" since 1999, said Bernard Freibaum, chief financial officer for General Growth.
The final terms of the loan will depend on what investors are willing to pay for the bonds. The loan's average interest rate is expected to float at a rate about 75 basis points over the one-month London interbank offered rate, or Libor, people familiar with the loan said. Libor is at all-time low of 2.34 percent, and is down from about 6.50 percent at the start of the year. A basis point is 0.01 percent.
By refinancing General Growth is "going to get a lower rate and that is going to have a very positive effect on earnings," said Ross Nussbaum, an analyst at Salomon Smith Barney.
If the whole loan is floating rate, Nussbaum estimates that earnings will grow by 5 cents a share, or 3.1 percent, this quarter and 20 cents a share, or 3.7 percent, in 2002. By adding floating rate debt, though, the company takes the chance that interest rates may rise rapidly on any hint of an economic recovery and a pickup in inflation
That would be "a significant risk," said Nussbaum.
General Growth may hedge against a rise in interest rates by swapping floating rate debt for fixed-rate debt in the derivatives market, said Freibaum.
The loan's size, combined with yields below 3 percent and the more than $6 billion in commercial mortgage bonds in the market waiting to be sold, may make the bonds a tough sale regardless of the rates, investors said.
Commercial mortgage bonds are slumping as rents fall and vacancies rise, triggered by the slowing economy and exacerbated by the terrorist attacks. Retail sales, which mall owners use to help set rents, fell 2.4 percent in September, the largest drop in almost 10-years, according to the Commerce Department.
"The fundamental bet in all of this is: Will consumer shopping drop?" said Jim Callahan, head of Pentalpha Group, a Greenwich, Conn.-based real estate advisory and risk management firm. "Going to the mall is a family thing, that's the good part. The bad part is: Will they spend any money?"
