One thing that this doesn't mention is that GGP has assets that outweigh their debts (30 B vs. 27 B) Also, those assets are priced at historical prices. What this means is that on they have not appreciated their assets on their balance sheet since they bought these malls (some many years ago), so many of them may be valued substantially higher. Their core business is producing quite well (considering) and their malls are operating at somewhere between 93 and 97% capacity. Really the problem boils down to they have some money past due to mortgage banks and bond holders (about 1.2 B), and are unable to refi their mortgages due to problems in the credit market, or sell bonds (basically to refi their bonds) due to the fact that most of the money being invested in bonds is going to Treasuries instead of corporate bonds. I have read a few of the analysts who think that this will be a BK just like UHaul's (they had 1.04 B in assets and 889 M in liabilities, and had the same situation trying to refi their existing debt even though their business was good). In this situation, they went through BK to refi debt, and even their common shareholders (those that usually get completely wiped out), didn't lose their ownership of the company. Then UHaul went on with business.
I am looking into this pretty closely because I am hoping that the stock just tanks due to the word BK so that I can buy some (low cost, high risk), but unfortunately the stock opened HIGHER today after the BK announcement.
Edit: I forgot to add that one of its lenders, Citigroup, is its second largest shareholder, so it would make sense that they would fight to keep the stockholders equity in the company intact.
As long as these guys are filing Chap 11 instead of Chap 7, it's OK. Chap 11 means the creditors have to work with them to get the money owed them, Chap 7 means 'screw you creditors, try and get your money now.'
Freakin' banks have hundreds of billions of gov't money and the bas s refuse to lend it. No wonder they're all suddenly reporting better-than-expected results.
sucks
Retail space in general has been very overbuilt, IMO.
Expect to see losses on commercial property further wear down balance sheets of banks.
The problem is that once the banks take ownership of all of these assets, they are responsible for things like taxes, maintenance, etc. as they are the new owners.
For this reason, many banks are hesitant to "pull the trigger" on some of the properties where the loan is failing, because not only do they have to take the loss on the loan, they assume some rolling expenses.
This will take a while to wind down for this reason, current profitability of some larger banks notwithstanding.
retail is slightly overbuilt, but the big problem is commercial construction loans.
The loans usually used to build retail/commercial centers are 10 year loans with a giant balloon payment at the end. The normal practice is to refinance the loan after 10 years to eliminate the massive balloon payment. Unfortunately with credit markets tied up hardly any refinancing is going on at all. The developer usually has no way to cover the massive balloon payment, and defaults on the loan.
Come down to San Antonio and check out the 1604/281 North area and I'll bet you change your mind.
overbuilt, or not overbuilt - that's not the primary cause. The main reason for the commercial bankrupcies is that NOBODY - not even leased, revenue generating properties - can refinance their balloon payments right now.
Bull .
If US consumer spending moderates, who will occupy all those fancy retail stores?
Amount of retail square footage per American has quadrupled in the last 20 years or so.
If consumers consume less, there WILL be less demand for retail space to sell to consumers.
If you build retail space in strip malls or malls to lease and that comes online in the middle of a retail contraction, you won't lease them. It doesn't matter what your balloon payments are 5 years down the road, or even 5 months down the road, because you can't make even the normalized payments.
If you currently own a retail property, like a mall, and one of your tenants goes under, you will have to work REALLY hard to replace that tenant. Either you will go without the rent, or have to bring down your rent to get it leased.
Either way it hits your cashflow.
To be certain, refinancing troubles work into it, but that is not the only cause of the coming commercial defaults.
Drive south on I-35 from Austin to SA.
Count the number of "for lease" signs in the new stripmalls on what used to be the Meadows.
Keep counting until you get to San Antonio.
I commute to both cities, and you would be surprise at the number you will reach.
Don't take my word for it, do it yourself.
In a normal downturn, (re)financing is still available. What is going to make this commercial downturn seem like a giant storm is the fact that aside from the normal bankrupcies that occur in marginal markets / higher risk areas, this time even solidly performing centers are going to be denied the credit needed to survive unless the markets shake loose.
Not trying to minimize the number of bankrupcies or other very legit factors, but if the question is about what is going to make THIS downturn especially bad, the answer currently is no commercial credit.
Also, there's a difference between "moderates" and "falls off a cliff". Consumer spending may never rise to the unsustainable highs it once had, but it's not going to stay where it is, either.
I understand what you are saying, but in this instance, it is not the case. Their business is still running well, their lenders have waited, and not pushed bankruptcy for 8 months because they see that GGP is not distressed. They just can't refi their loans as per their normal business model. As I said before their occupancy percentage is mid to high 90s.
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