General Growth Properties - Death Spiral

Chicago-based General Growth Properties suspended its dividend and announced that its CFO, Bernard Freibaum, would be leaving the company (WSJ1, WSJ2). Freibaum joined the company in 1993. He was a key player in the company's acquisition strategy that saddled the firm with $27 bln of debt. GGP's largest acquisition was the purchase of REIT Rouse in 2004 for $12 bln. The purchase was financed almost entirely with debt. GGP owns 200 US malls. The company was founded in 1954 by Matthew and Martin Bucksbaum. The company went public in 1993 and accelerated its growth under John Bucksbaum who took over from his father in 1999.

Executives acquired shares, often on margin. Roughly 60% of the 17.5 mln shares owned by executives were purchased on margin. Most shares were acquired through exercising options and borrowing to pay for the shares and taxes. Shares hit a record of $67 per share in March of 2007.

Freibaum and other executivs have been dumping shares in recent weeks. The company was added to the short-selling ban, but executives have been allowed to continue selling shares to meet margin calls (and it sounds like there have been a lot of margin calls). Feigenbaum sold shares on Thursday to meet a margin call, after GGP was in a blackout period prior to its quarterly earnings announcement. This typically requires an SEC exemption - it is not clear whether Feigenbaum has such an exemption. Freibaum has sold more than 6.4 mln of his 7.6 mln shares since Sept 18.

Suspending the dividend will save an estimated $600 mln over the next year. This is about how much GGP has maturing in unsecured bonds coming due in March and April. GGP has $1 bln of mortgages tied to its Fashion Show Mall and Shoppes at the Palazzo properties that come due in November. The company has $19 bln of debt due by year end 2011. Given the state of the real estate market, it is unclear whether GGP will be able to refinance these obligations. On Friday, S&P lowered its rating on $5.9 bln of bonds one notch to Baa3, three notches below investment grade.