General Growth Finds Itself Up the Proverbial (Jordan) Creek

General Growth Stock Price PlummetsGeneral Growth Stock Price PlummetsReal estate investment giant General Growth stock plummeted to around $0.35 per share this morning on news that the company may declare bankruptcy. General Growth developed and owns the Jordan Creek Town Center "retail resort" in West Des Moines.

Over the next few years, almost $4 billion in debt from recent property acquisition comes due, but current income from their real estate holdings doesn't cover the payments. General Growth acquired Rouse Company in 2004 for $7.2 billion, mostly financed through short-term debt instruments. Defaulting on one debt would likely cause other creditors to call their loans due, precipitating a catastrophic avalanche of defaults.

General Growth officials blame the "credit crunch" for the company's current financial woes. That is, they cannot find people to loan them money to cover their existing loans. Now that there is blood in the water, it becomes even more unlikely that anyone will loan them money - a self-fulfilling prophesy.

In real terms this is like transferring debt between credit cards with low teaser rates. As long as you can afford the minimum payments, it's a great idea to transfer your balances to new cards with low introductory rates. But what happens when the credit card companies stop sending you the great deals? It doesn't take long for the debt to explode, especially when you keep buying on credit!

Don't Bet On Malls

As a long-term investment, suburban enclosed malls and big box stores surrounded by a sea of parking are not a good bet. When the Big Guys fall, they take down everyone near them. For example, when Circuit City filed for bankruptcy protection, shares of Developers Diversified Realty Corp (DDR), fell almost 25 percent. DDR has Circuit City stores in 50 of its over 700 shopping centers.

In the long term, suburban malls and big box retailers are probably not a sustainable form of development. Look for increased investment by large retailers in urban stores and "neighborhood markets" with good connection to mass transit, located in dense areas.

Unfortunately, this holiday recession season will probably see a lot of businesses fail, from local shops to giant retailers like Circuit City. If the "credit crunch" continues, you'll be able to pick up some big box real estate for cheap!


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