Chicago Illinois Real Estate Blog

Shares of General Growth Properties Inc. fell as much as 15% Thursday morning, after the mall owner released a disappointing second-quarter earnings report and three brokerages cut their ratings on the company.

The Chicago-based real estate investment trust (REIT) on Wednesday lowered its profit forecast for the rest of the year and said it would defer about $500 million of spending on new developments over the next 18 months. The reduced earnings outlook surprised some analysts, who noted that other mall REITs, including chief rival Simon Property Group Inc., have not lowered their profit projections.

Analysts also remain concerned about General Growth’s high debt load and looming loan maturities, a major issue considering how hard it has become to refinance properties in the current credit squeeze.

“Fundamentals are deteriorating and continued refinancing risk is exacerbated by higher leverage and capital constraints,” Citigroup Global Markets Inc. analysts write in a report.

General Growth’s debt-to-assets ratio is 61%, vs. an average of 47% for the mall REIT sector, according to Citigroup, which lowered its rating on the REIT’s shares to “sell” from “hold.” Wachovia Securities and FBR Capital Markets also cut their ratings on the company.

General Growth shares fell as much as $4.37, or 15%, to $25.72, a 52-week low, in early trading Thursday. The shares rebounded slightly by late morning, to $27.04. The stock has fallen 43.5% over the past year, vs. a 16.7% drop for the Bloomberg REIT Regional Mall Index.

General Growth manages a portfolio of 200 shopping malls in 44 states, including Water Tower Place in downtown Chicago, Northbrook Court in Northbrook and Oakbrook Center in Oak Brook.

The company reported funds from operations, or FFO, of $228 million, or 71 cents per share, in the second quarter, compared with $210.3 million, or 71 cents, in the year-ago period. FFO removes the profit-reducing effect that depreciation — a non-cash accounting item — has on earnings.

The results trailed the average analyst forecast of 74 cents per share, according to Reuters Estimates.

“There is no question the world we operate in has changed dramatically from last year,” Chairman and CEO John Bucksbaum told analysts in a Thursday-morning conference call, according to a transcript. “The credit markets we have known are either not available or have changed considerably. The strong employment environment we have enjoyed during the last three years is weakening.”

General Growth also lowered its 2008 forecast for core FFO to $3.42 per share from a range of $3.52 to $3.58, citing a continuation of current weak economic conditions.

“General Growth continues to face significant balance sheet challenges, but mall demand headwinds are increasing faster than we expected,” Stifel Nicolaus & Co. analysts write in a report.

Though General Growth has been able to refinance a big chunk of its debt coming due this year, the company is not out of the woods yet, with another $3.3 billion in debt maturing next year. The company also is trying to raise cash by selling equity stakes in parts of its portfolio to joint venture partners.

“Investors should be aware that GGP could be forced to issue significant dilutive equity over the next year if planned JV sales are not successful,” the Stifel Nicolaus analysts write.
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