Fiduciary Neglect in Boardroom of Bankrupt General Growth Properties

Ending months of speculation, General Growth Properties, the second-largest U.S. mall owner behind Simon Property Group, declared bankruptcy last Thursday in the biggest real estate failure in U.S. history. Prompting the filing was the realization by management that the company had virtually no hope of refinancing either its past-due debts or its upcoming maturities in the current credit markets. Even more discomforting, a review of past proxy filings shows that the current chief executive, Adam Metz, failed to exercise prudent judgment in his role as Lead Director in the past three years as the company amassed piles of debt during its ill-fated acquisition and building binge.

Bernard Freibaum, chief financial officer from 1993 until October 2008, was the genius who came up with the financial strategy of piling up mounds of short-term mortgages to fuel GGP’s appetite of growth through acquisitions. The denouement leading up to Freibaum’s ouster last October had to be the $14.2 billion purchase of high-end mall owner Rouse Company in 2004. Financed entirely with debt, this acquisition proved to be the albatross around his and the company’s necks as retail tenants walked away from leases last year, mired in their own credit problems.

Where does Metz fit in of this common real-estate story of boom-to-bust? Metz showed up on the scene as a director on the board in November 2005, due to his prior real estate holdings/financial interest in The Rouse Company. If Metz had any reservations about Freibaum’s growth strategy, he certainly never voiced any concerns. In fact, as a member of the Compensation Committee Metz signed off on the payment of cash/stock compensation totaling some $3.4 million, $4.7 million, and 6.2 million in 2005, 2006, and 2007 to Freibaum.

Further proof of incest in the boardroom is found in Metz’s October 2008 employment agreement, which pays him an annual salary of $1.5 million and — irrespective of whether or not he can successfully steward GGP out of bankruptcy — a guaranteed reward of a $2 million bonus, payable in quarterly installments. Metz could receive up to $1 million in performance bonuses, too, at the sole discretion of the Board.

“From January 1, 2009, through the date of the Chapter 11 filing, $1.1 billion of additional debt has matured which the company is unable to refinance,” Metz said in a sworn statement included as part of the filing. Further, GGP’s inability to refinance debt as it matured triggered acceleration of $4.1 billion in debt that otherwise was not currently due. In total, as of the Chapter 11 filing, GGP had approximately $2.0 billion of past-due indebtedness and an additional $5.9 billion that has been or is subject to acceleration, according to Metz. Another $1.3 billion will mature by its own terms later in 2009.

As of the date of the filing, total assets of $29.56 billion exceeded total debts of $27.29 billion. The company, which owns and manages such valuable properties as South Street Seaport in New York, Water Tower Place in Chicago, Fashion Show in Las Vegas, and Faneuil Hall Marketplace in Boston, will likely need to sell off some of its crown jewels. However, prospective buyers for certain properties [to date] have found it difficult to arrange sources of financing in the current environment, according to Metz.

Although common stockholders will likely be wiped out in a debt restructuring (as creditors swap old debt for new debt with longer maturities and/or equity options), Metz opined the company will survive, noting that GGP shopping centers are located in vibrant, retail markets. In addition, GGP has a well-diversified tenant base (no renter makes up more than three-percent of revenues). Metz also pointed out that competition from new shopping malls will likely be limited in the future because there is no financing available for new developments. Unfortunately, GGP stakeholders learned a costly lesson associated with restrictive credit conditions, too.