Analysis: General Growth step-sister may be a beauty, someday

NEW YORK (Reuters) - General Growth Properties GGP.N plans to split in two when it exits bankruptcy, but only one of the new companies will house its coveted malls. The other could best be described as the ugly step-sister.

Shareholders of the mall owner are poised to get stakes in both companies, though they could be forgiven if they see little value right now in the spinoff. The new entity does not even have a name yet -- and has been dubbed “Spinco” after General Growth decided not to put its name on it.

Some analysts and investors have referred to it as “HopeCo,” “PoopCo” and worse. But it could be a handsome long-term payoff for investors who have the stomach to hold on until individual markets rebound.

The spinoff consists of an eclectic collection of 31 non-income producing assets including the well-known South Street Seaport in Manhattan and 7,000 acres in the master-planned community of Summerlin, Nevada. Others, such as land in Volo, Illinois or a strip center in Pocatello, Idaho need more explanation and a map.

They all need big investments and are unlikely to make money for years. Yet, over the long run, investors could hit pay dirt.

“By and large, those are assets that may have a lot more value in the distant future,” said Cedrik Lachance, managing director of independent research firm Green Street Advisors. “What you’re buying at this point is the hope that this materializes over time.”

Chicago-based General Growth, liberal with using borrowed money when credit was free-flowing, filed for bankruptcy protection in April 2009 after it was unable to refinance its mortgages and other debt amid the credit crunch.

When it emerges from bankruptcy around the end of October, the namesake retail real estate company will have 183 profit-generating malls.


Investors like owning malls. They face little competition from new entrants in prime locations because of local approval processes. They also generate steady income because of their tenants’ long leases.

Under its proposed reorganization, investors led by Brookfield Asset Management BAMa.TO and including hedge funds Pershing Square Capital and Fairholme Capital Management, will fund up to $8.55 billion in capital for both companies.

Depending if they exercise their warrants, the investor group will own between 6 percent to 22.4 percent of Spinco, with former General Growth stockholders owning the rest.

The new mall company will be one of the largest U.S. real estate investment trusts. It will be added to most real estate indexes, making it a “must-own” stock, according to a Pershing Square presentation.

Spinco won’t get the same kind of reception when it debuts. It will not be a REIT and, like a start-up company, it is unlikely to turn a profit for years.

Even General Growth’s president says that the spinoff has an image problem.

“It got defined by a lot of other people,” President Thomas Nolan said last month. “We didn’t do a good a job of defining it.”

General Growth is valuing Spinco at $5 per share, but the stock could sink initially as General Growth shareholders dump their Spinco shares.

“The public market historically has not ascribed a high value to non-income assets,” said Green Street’s Lachance. “There’s a fair argument that these assets in general will probably fit better in a privately held portfolio.”

In addition, valuing a company with no income expected for years and no detailed plans is at best a guess, Lachance said.


Spinco will be a publicly traded opportunity fund, in which the property is redeveloped or constructed and then sold for a maximum profit.

“This is an opportunity fund that’s going to be a publicly traded one, at least initially,” Nolan said. “We’ll have to see what that the board ultimately decides what to do with it.”

The spinoff is a hodgepodge of residential and retail projects that either were halted or never got off the ground because of the housing bust. Some of these have the necessary permitting to proceed, which adds considerably to their value.

Assets include Elk Grove Promenade, an 80 percent completed mall near Sacramento, and Victoria Ward, a 60-acre oceanfront shopping district, which General Growth had planned to transform into homes, a shopping and entertainment center offices and parks. Also tossed in is an apartment tower at Ala Moana in Hawaii, a medical center in Summerlin, condominiums near Boston, and land in Miami, New Jersey, Illinois and Maui.

General Growth said it would likely outsource most of the property management, design and construction responsibilities, while contributing the land, and its expertise in development planning, financial sourcing and partnership creation.

The diversity of the assets, both geographically and by type, makes it more likely the properties will be sold individually, said Josh Podell, president and chief executive of Podell Real Estate Advisors, which finds locations for retailers.

That could mean a nice long-term payoff for investors who can wait for the properties to end up in the right hands.

“A lot of these can be very strong properties with the right buyer, Podell said.

Reporting by Ilaina Jonas; Editing by Tim Dobbyn