TEXT-S&P: General Growth Properties outlook revised to stable from positive

Tue Dec 18, 2012 10:44am EST

Overview
     -- General Growth Properties Inc.'s (GGP) coverage and
debt-leverage measures remain relatively weak, owing to the company's aggressive
financial leverage, notwithstanding the company's improved operating performance
and progress in refinancing property-level debt.
     -- We are revising the outlook to stable from positive and affirming the 
unsolicited 'BB' corporate credit rating.
     -- We are also affirming the unsolicited 'BB+' issue-level rating and '2' 
recovery rating on the senior unsecured notes (commonly referred to as the 
Rouse notes) of GGP's subsidiary, The Rouse Co. L.P.

Rating Action
On Dec. 18, 2012, Standard & Poor's Ratings Services affirmed its unsolicited 
'BB' corporate credit rating on Chicago-based General Growth Properties Inc. 
and revised the outlook to stable from positive.  We also affirmed our 
unsolicited 'BB+' issue-level rating and '2' recovery rating on the senior 
unsecured notes (commonly referred to as the Rouse notes) of GGP's subsidiary, 
The Rouse Co. L.P.

Rationale
Our unsolicited ratings on General Growth Properties Inc. (GGP) reflect the 
company's "satisfactory" business risk position as a major U.S.-based mall 
owner, its fair management and governance profile, and what we view as its 
"aggressive" financial risk profile. With its portfolio of 129 U.S. regional 
malls, GGP is the second-largest mall owner/operator in the U.S. after Simon 
Property Group Inc. Its properties are diversified geographically within the 
U.S., being located in 41 states. In addition, GGP has a 46% equity interest 
in a well-performing Brazilian mall operator, Aliansce Shopping Centers S.A., 
which owns 16 mall properties. GGP has a diverse tenant base, with no 
retailer/tenant accounting for more than 3.0% of rents. Its leases are 
predominantly long term in tenor, and its lease maturity schedule is 
well-staggered.  

GGP emerged from Chapter 11 bankruptcy protection on Nov. 9, 2010, after 
completing one and a half years of restructuring. During and after its 
bankruptcy reorganization, GGP extensively restructured its property portfolio 
by divesting nonmall properties and underperforming malls through asset sales, 
spinoffs, and transfers of properties to lenders. Along these lines, in 
January 2012, it spun off through a special dividend to GGP shareholders its 
ownership interest in Rouse Properties Inc. (RPI), a newly formed entity to 
which it had transferred 30 "class B" malls. (Note: RPI is not the same entity 
as The Rouse Co. L.P., a GGP subsidiary which issued the $690 million 
{currently outstanding} of rated senior unsecured notes.) We expect the 
company to sell its relatively small amount of remaining nonmall properties 
within the next one to two years.

Over the past three years, GGP has benefited from a combination of a cyclical 
recovery in the retail sector and management initiatives to optimize the 
company's continuing operations. Thus, excluding RPI, tenant sales (at mall 
stores with less than 10,000 square feet) have increased over the past three 
years, reaching $541 per sq. ft. in the third quarter of 2012 on a 
trailing-12-month basis, up 8.2% versus the year-earlier period and surpassing 
the 2007 peak level. GGP's leased rate has improved: this stood at 95.5% at 
Sept. 30, 2012 (excluding anchor stores), up from 94.2% one year earlier. GGP 
has also seen improvement in its lease spreads, as recently negotiated leases 
provide significant increases in rents compared with expiring leases: for 
leases commencing in 2012, initial gross rental rates on a suite-to-suite 
basis are 10.4% higher than rental rates for expiring leases. Nonanchor tenant 
occupancy costs were a low 13.0% of tenant revenues in the third quarter, 
which bodes well for further rent increases on GGP's new and renewal leases.

However, by some measures, GGP's operating performance continues to lag that 
of better-positioned peers. Thus, while in bankruptcy, GGP put significant 
reliance on so-called "specialty leases," which are typically short term and 
provide for rent at heavily discounted rates. GGP has had some success in 
reducing specialty leases, but these still accounted for a high 5.8% of gross 
lease area (at 100%) as of Sept. 30, 2012. Also, improvement in same-property 
net operating income (NOI) at U.S. malls was up a relatively modest 3.1% in 
the third quarter of 2012 (3.9% in the first nine months of 2012) compared 
with the year-earlier period.  

As part of its strategy to further improve operating performance, GGP is 
pursuing various development/redevelopment projects related to its existing 
properties. In 2012, GGP began executing a redevelopment plan, initiating 
investments comprising a $1.6 billion development project pipeline. The 
company has indicated that it expects development-related capital expenditures 
to total about $400 million in full-year 2012 and $350 million in 2013. These 
expenditures are heavily concentrated at the company's best-positioned malls, 
with Ala Moana Center in Hawaii alone accounting for $543 million of the 
total. As part of its development program,  earlier this year GGP acquired 11 
Sears locations for $270 million, which it anticipates will ultimately add 
more than 300,000 sq. ft. of new in-line gross leasable area. In addition, GGP 
has opened various new "big box" stores. We believe such 
development/redevelopment efforts will boost returns in coming years. As a 
means of facilitating growth, management has also stated that GGP is exploring 
various joint-venture opportunities. Acquisition activity has been muted since 
GGP's emergence from bankruptcy, but could accelerate, we believe.

GGP's lease portfolio affords significant cash flow stability. Yet, the 
company's coverage metrics are relatively weak, reflecting GGP's heavy debt 
burden. While GGP has taken actions over the past two years to refinance its 
property-level secured debt to extend maturities and lock in low interest 
rates, the extent of deleveraging has been limited. GGP allocated $1.1 billion 
of debt to RPI in conjunction with the spin-off, but the spin-off constituted 
a net distribution to shareholders valued at $427 million. During 2011, GGP 
completed share repurchases totaling $554 million. For our analytical 
purposes, we focus on financial information that accounts for GGP's pro rata 
share of joint ventures (JVs) and excludes RPI. On this basis, 
debt-to-debt-plus-equity is currently a high 70% (based on book value), even 
with the substantial write-up of assets that occurred when the company emerged 
from bankruptcy. Based on our expectation that adjusted funds from operations 
(FFO) will be about $950 million to $1.0 billion in full-year 2012, we 
anticipate that FFO-to-total-debt will be about 5%, debt-to-EBITDA will be 
approximately 9.3x, debt-fixed-charge-coverage will be 1.5x, and total 
coverage will be 1.2x-all levels that we view as only fair relative to the 
current rating. Given ongoing improvements in permanent occupancy and rent 
rates on new/renewal leases, coupled with tight control of costs, we 
anticipate that these measures will strengthen somewhat during 2013-2014, 
barring actions that result in increases to total debt. 

Aggressive financial leverage could ultimately constrain GGP's ability to 
capitalize on growth opportunities and expose the company to refinancing risk. 
Moreover, several private equity firms, through their investment funds, were 
instrumental in providing capital that facilitated GGP's bankruptcy 
reorganization. Brookfield Asset Management Inc.(Brookfield), Pershing Square 
Capital Management(Pershing Square), and Blackstone Real Estate Partners VI 
L.P. continue to hold an ownership interest of more than 50%. In August 2012, 
Pershing Square (which controls an ownership stake of about 10.2% on a 
fully-diluted basis) issued a statement regarding their desire for a sale or 
breakup of GGP that outlined discussions Pershing Square had undertaken. 
Ultimately, Brookfield (42% owner) and GGP's board rejected Pershing Square's 
efforts. We continue to monitor potential developments that could affect GGP's 
ownership structure.

Liquidity
We view GGP's liquidity as adequate. We expect GGP to generate $950 
million-$1.0 billion of funds from operations in full-year 2012 and $1.0 
billion to $1.1 billion per year in 2013 and 2014. GGP had consolidated 
unrestricted cash and cash equivalents of $638 million as of Sept. 30, 2012. 
GGP also had full borrowing availability under its $1.0 billion credit 
facility, currently set to mature in 2016. Financial covenants under the 
facility afford GGP significant downside leeway.

As of Sept. 30, 2012, there were no debt maturities (including JVs on a 
proportionate basis) in the fourth quarter of 2012, apart from $64 million of 
required debt amortization payments. There were a material $1.4 billion of 
maturities and amortization payments due in 2013 and $1.9 billion in 2014; 
however, subsequent to Sept. 30, 2012, GGP redeemed $600 million of Rouse 
notes that were set to mature in 2013 and refinanced $455 million of 
property-level debt maturing 2013-2014. We expect GGP to refinance maturing 
nonrecourse property-level debt. GGP has continued to demonstrate good access 
to the mortgage market. Thus, during 2011-2012 (through November 2012), GGP 
refinanced a total of $12.1 billion of debt ($10.2 billion at share), lowering 
the related average interest rate to 4.51% from 5.49%, increasing average 
maturity to 9.6 years from 2.5 years, and generating approx. $2.0 billion of 
net proceeds.  In the process, GGP also eliminated $2.4 billion of recourse to 
the parent company.

We believe that GGP may need to tap its nonoperating sources of liquidity in 
2013-2014, given our expectation that FFO could be exceed by capital 
expenditures (including investment related to largely discretionary 
redevelopment projects) and the common dividend (which consumes just over $400 
million per year at the recent dividend payout rate).

The company's ability to prepay $5.5 billion of property level debt at par 
enhances the companies funding flexibility. On the other hand, GGP's remaining 
noncore/nonmall assets currently account for only about 2% of total NOI. We 
believe the sale of these assets would not generate substantial proceeds for 
the company. Also, virtually all of GGP's operating assets are encumbered 
under borrowing agreements.

Recovery analysis
We maintain a 'BB+' issue rating on the approximately $690 million (currently 
outstanding) senior unsecured notes (commonly referred to as the Rouse notes) 
issued by GGP's subsidiary, The Rouse Co. LLC. With the recent redemption of 
$600 million of the notes, the company reduced the amount outstanding to 
approximately $700 million.  This rating is one notch above the corporate 
rating on GGP, reflecting a '2' recovery rating, which indicates our 
expectation of a (70%-90%) recovery in the event of a default. For more 
information, please see our recovery report published on Aug. 15, 2012.

Outlook
Our outlook on GGP is now stable. GGP has made significant progress in 
improving its operating performance and refinancing its property-level secured 
debt to extend maturities and lock in low interest rates. However, coverage 
and debt-leverage measures remain relatively weak, reflecting GGP's high 
degree of financial leverage, which is consistent with management's aggressive 
financial policies, in our view. We currently see little likelihood of an 
upgrade within the one-year time frame addressed by our outlook. On the other 
hand, we could lower the rating if, contrary to our current expectations, 
financial leverage were to increase materially -- with debt-to-EBITDA in 
excess of 10X -- as a result of an acceleration of growth initiatives or 
actions to directly reward shareholders.

Temporary telephone contact numbers: Scott Sprinzen (917-579-7904); George 
Skoufis (201-470-2589).

Related Criteria And Research
     -- Methodology: Management And Governance Credit Factors For Corporate 
Entities And Insurers, Nov. 13, 2012
     -- Industry Report Card: Strong Capital Access And Gradually Improving 
Fundamentals Continue To Support North American REITs, Oct. 19, 2012
     -- North American REITs And Real Estate Operating Companies, Strongest To 
Weakest , Oct. 10, 2012
     -- Criteria/Corporates/Industrials: Key Credit Factors: Global Criteria 
For Rating Real Estate Companies, June 21, 2011.
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' 
Speculative Grade Debt, Aug. 10, 2009

Ratings List
Ratings Affirmed; Outlook Action
                                        To                 From
General Growth Properties, Inc.  (Unsolicited Ratings)
The Rouse Company L.P. (Unsolicited Ratings)
 Corporate credit rating                BB/Stable/--       BB/Positive/--

Ratings Affirmed

The Rouse Company L.P. (Unsolicited Ratings)
 Senior unsecured                       BB+                
  Recovery rating                       2

This unsolicited rating(s) was initiated by Standard & Poor's. It may be based 
solely on publicly available information and may or may not involve the 
participation of the issuer. Standard & Poor's has used information from 
sources believed to be reliable based on standards established in our Credit 
Ratings Information and Data Policy but does not guarantee the accuracy, 
adequacy, or completeness of any information used.

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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