General Growth to raise capital, shares sink

By Ilaina Jonas

NEW YORK (Reuters) - General Growth Properties Inc, the second-largest U.S. mall owner, said on Monday it would review strategic alternatives, including the sale of properties, to raise capital to meet its looming debt obligations, and its shares lost a quarter of their value.

The real estate investment trust said its previously announced planned refinancing of long-term, fixed-rate mortgages on portfolios of properties would likely occur in mid to late November.

In the meantime, it said it would develop a strategic plan to raise capital. Options include selling assets and stakes in joint ventures, issuing preferred equity in specific pools of its properties, raising capital at the corporate level and exploring business combinations.

Chicago-based General Growth last week agreed to raise the repayment guarantee under its $1.75 billion secured portfolio facility to one-half the outstanding facility -- $755 million of the $1.51 billion outstanding, or $875 million if fully drawn. That is double its previous agreement of 25 percent or $437.5 million.

"It appears at this point as if all options are up for discussion," Bank of America analyst Christy McElroy and Samit Parikh wrote in a research note. "In our view, more drastic steps to raise equity and reduce debt levels are necessary to shore up confidence in the stock price."

General Growth shares closed down $5.34 at $16.08 and were among the top percentage losers on the New York Stock Exchange.

The credit crisis has shut down many sources of debt financing, which is crucial for commercial real estate acquisitions and refinancing. Investors have been particularly nervous about General Growth, which used short-term debt to finance much of its $7.2 billion acquisition of upscale mall owner Rouse in 2004.

Compounding the problem, U.S. consumers have been pulling back from spending. Several retailers have filed for bankruptcy protection and have the option to break their leases.

On Monday, credit rating agency Fitch said delinquencies of mortgages supporting U.S. commercial mortgage-backed securities (CMBS) in August rose 0.01 percentage point to 0.44 percent, led by retail real estate, specifically strip malls and older shopping centers anchored by big-box stores.

"While delinquent retail loans represent only 0.26 percent of all loans within the sector, retail delinquencies increased 29 percent over July's total," Susan Merrick, Fitch managing director and U.S. CMBS group head, wrote in a note.

Most of the delinquent retail loans were on properties located in Indiana, Michigan and Texas. But Fitch expects smaller, less competitive regional malls to face additional store closures and declining sales.

General Growth was facing $2.42 billion in refinancing for 2008 at the end of the second quarter, although it has since repaid at least $391 million. It faces $3.33 billion of debt maturing in 2009.

Investors are bracing for even more share weakness and volatility. In the options market, 5,500 put options have traded, compared with just 620 calls, a ratio of almost 9 to 1, according to option analytics firm Trade Alert.

The April $15 puts, giving investors the right to sell General Growth shares at $15 apiece, are the most active. That indicates some investors are bracing for further declines in the share price, said Frederic Ruffy, options strategist at website WhatsTrading.com.

Implied volatility in General Growth options had soared more than 50 percent to 159 percent on Monday, compared with 61 percent in late August. The spike in implied volatility, a key driver of an options price, is another sign investors are concerned about the outlook for General Growth shares going forward, Ruffy said.