End in Sight for General Growth Bankruptcy

The end is in sight, as a plan is in place for General Growth Properties (GGP) to emerge from bankruptcy as early as this summer. The judge overseeing the case approved bidding procedures and the issuance of warrants to a group of investors led by Brookfield Asset Management (BAM). The move signaled an end to a bidding war for the real estate investment trust (REIT) that is the country’s second largest owner of shopping malls, with the Brookfield-led group coming out on top of a contest that began in mid-February. The latest news also puts an end to a highly publicized feud between GGP and its chief rival in the mall REIT space, Simon Property Group (SPG). Brookfield, along with Pershing Square Capital Management and Fairholme Funds will provide a $6.55bn equity investment and a $2bn capital backstop to be raised at closing, including $1.5bn of debt and a $500m equity rights offering. GGP will emerge from bankruptcy as two companies, the “new” GGP, maintaining its role as an owner of traditional shopping malls and a second entity, General Growth Opportunities, which will own a more diverse portfolio, including master plan suburban communities and GGP’s “landmark” developments, notably the South Street Seaport in Manhattan, among others. The investor group will receive GGP common stock at $10 per share and GGO stock at $5 per share. In addition, GGP will grant warrants to the three investors. The warrants will vest over time, 40% upon bankruptcy court approval, 20% on July 12 and the remainder will vest pro rata through the expiration of the commitment. The permanent warrants will include 120m seven-year warrants for reorganized GGP stock at a strike price of $10.50 and 80m seven-year warrants for GGO at a strike price of $5. Its the latest incarnation of a proposal that emerged after Simon’s initial overtures. “We are pleased to reach this agreement with Brookfield, Pershing Square and Fairholme and view this as a critical step to create long-term value for the Company and its stockholders,” said GGP president and chief operating officer Thomas Nolan, Jr. “We are well on our way to emerging from bankruptcy by the fall and beginning the next successful chapter for GGP and GGO.” In commentary released this week, Fitch Ratings said the announced plan will not impact Brookfield’s “stable outlook” rating with the agency. Fitch said it expects Brookfield to syndicate a significant portion of its $2.625bn commitment to other investors and added that Brookfield has adequate liquidity to fund its portion of the transaction. “Longer term, a successful closing of the proposed transaction would add a high quality portfolio of retail, office, and land development assets to Brookfield’s assets under management and would further increase the volume and diversity of Brookfield’s cash flow from investments,” Fitch said. The judge’s decision to allow the warrant issuance puts an end to Simon’s quest to takeover its biggest rival. After proposing its “best and final” offer that amounted to $20 per share for GGP and GGO, a deal that did not include future stock purchase warrants. It was the latest in a string of revised offers between Simon and GGP. When it announced its final offer, Simon said it would end its bid for GGP if the Brookfield warrants were issued. “We are disappointed that the GGP board hastily decided in less than 24 hours to accept substantially less value, rather than take more time to fully assess the benefits of SPG’s offer and enter into negotiations to make this value available to GGP shareholders,” Simon CEO David Simon said. “GGP’s decision to proceed with a transaction that transfers hundreds of millions of dollars in value to the Brookfield consortium has caused us to conclude that we cannot reach a mutually beneficial transaction with GGP.” Simon argued its offer was superior to the Brookfield-led initiative not only in its dollar value, but also because of the company’s experience operating as a mall REIT. In testimony to the bankruptcy court, Nolan said the Brookfield deal is superior for a litany of reasons, including “the intangible differences between potential sponsors, including market perception of the investor, likely impact on post-emergence trading, impact on personnel, and ability to source attractive acquisition.” “After evaluating these factors, it was the board’s business judgment that the risks and uncertainties associated with the Simon proposal and the potential long-term shareholder value of the latest [Brookfield] proposal outweigh the potential dilutive effects of the Warrants,” Nolan’s prepared testimony said. In the current edition of HousingWire magazine, the future of the REIT sector is explored. The global recession was a stress test for REITs, as the sector reeled from a combination of debt exposure, an illiquid asset base in a falling market and an increasing cost of funding. The REIT sector’s substantial debt maturities in an illiquid market was a wholesale global issue. But just as REITs led the market into the downturn, global REITs are leading the way out. Write to Austin Kilgore. The author held no relevant investments.

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