General Growth Properties (GGWPQ.PK)

General Growth Properties Inc. (GGWPQ.PK) resides under bankruptcy protection. To grasp its potential, it’s beneficial to look into its history as to how it ended up in its current bankruptcy status. Brothers Martin and Matthew Bucksbaum started with a Marshalltown Iowa family grocery store, and borrowed $1,200,000 in 1954 (when a dollar was worth something) to build a shopping center in Cedar Rapids, Iowa. From that model, the brothers built shopping centers throughout the Midwest, went public in 1993, moved its headquarters from Des Moines to Chicago, and began an acquisition spree of upscale shopping malls, including the purchase of Rouse Co, the owner of 30 malls that included Chicago’s Water Tower Place. In the last decade, the company had grown to become the nation's second-largest shopping mall company, with more than 200 centers, but with those properties the company was saddled with $27 billion of debt. Each property is held in a special purpose subsidiary and is financed in large part by debt financing that is collateralized by a mortgage on the property. Lenders often will take a pool of mortgaged backed loans, bundle them together into commercial mortgage backed securities (CMBS), and sell those securities into the markets.

As credit markets began drying up in 2007 and real estate properties have been losing their value, the company filed for bankruptcy in April 2009 to obtain protection from its creditors. U.S. Department of Treasury rules governing the CMBS market historically have prohibited the restructuring of CMBS loans unless the borrower is in payment default of its loan. So a “performing” loan that has an out-of-date interest rate or repayment schedule could not be modified until the loan would become “nonperforming.” In a first round of relief to the CMBS market, the Treasury has released new tax rules to allow modifications of loans even if the collateral is currently generating cash that meets a loans minimum payment requirements. Details are available in this WSJ article: http://online.wsj.com/article/SB125306317643414339.html

The company lobbied for these new rules and, now that they are implemented, it is in prime position to take advantage of them by restructuring the loans on its many properties. Modifying the CMBS loans will allow the company to take advantage of lower interest rates and to extend the loan maturities over the extended life of the properties. As these changes are negotiated and applied to the portfolio of properties, I expect several positive results: (1) nonperforming loans and loans that are barely performing will become fully performing, thus taking a special purpose subsidiary owning the now-performing property off of creditwatch; (2) with lower rates and extended maturities, less of the properties current cash flow will be needed to service current maturities of long-term debt, thereby freeing up cash to make needed improvements on the properties and to distribute cash to the parent company; (3) the thawing of the old rules will bring the commercial property credit markets to resume lending, which should ease the gridlock over real property transactions currently experienced in almost all major markets; and (4) the culmination, as least from the viewpoint of the company, will be its emergence from bankruptcy protection. Through October 2009, the bankruptcy judge ruling on the parallel bankruptcies of GGWPQ and its many special purpose subsidiaries has consistently rejected various motions and requests put forth by secured creditors who are attempting to unwind the bankruptcies of the subsidiaries.

Now that is quite a bit of work to be tackled before the sun is fully shining on the commercial real estate market again. And it may take several years before all of the effects are realized, but the seeds are there. GGWPQ might not ever reclaim its glory days of trading above $70 per share, but in my opinion, the potential problems, risks of bankruptcy, and assumptions of a full-blown economic downturn all seem to be fully baked into the existing stock price.

My original pitch was shared here: http://caps.fool.com/Pitch/GGWPQ.PK/4263464/on-september-16-2009-at-214-am.aspx Due to limitations on that account the position there was closed out. Now I am substantially repeating the original pitch to keep it up for sharing and discussion.