As Economic Woes Continue, RE Firms Taking Hits

The instability of the capital markets is proving to be a considerable hindrance to the commercial real estate market, forcing several major players to conjure ways to alleviate bottom-line woes.

By: Coreen Bailor, Research Editor

The instability of the capital markets is proving to be a considerable hindrance to the commercial real estate market, forcing several major players to conjure ways to alleviate bottom-line woes. 

The latest evidence of companies that have run into financial trouble surfaced just a few days ago, when retail REIT General Growth Properties Inc. reportedly confirmed that it has retained law firm Sidley Austin L.L.P. as bankruptcy counsel, amid a time when the company is struggling to restructure about $27 billion in debt. The hire does not indicate that a Chapter 11 filing is looming, however, since financially distressed firms frequently bring bankruptcy advisers on board but do not actually file. 

Nonetheless, General Growth has $900 million of mortgages due this week on two of its Las Vegas properties, according to a report in the Wall Street Journal, but has requested an extension. 

The ailing mall giant, which has lost 99 percent of its share value this year, has had a particularly rough go of it as of late. In October, the company announced that it was suspending common stock dividends. That same month, it tapped Edmund Hoyt, most recently the firm’s senior vice president & chief accounting officer, as CFO on an interim basis, replacing Bernard Freibaum. 

Other executive shakeups that month included Polaris Capital L.L.C. founding partner Adam Metz as interim CEO, replacing John Bucksbaum, who retained his role as chairman, and Thomas Nolan Jr. as interim president. Nolan took the reins from Robert Michaels, who, although remaining as COO, vacated his board seat. 

An affiliate of a Bucksbaum family trust advanced unsecured loans to Michaels and Freibaum to repay personal margin debt relating to company stock. The loan to Michaels, which totaled $10 million, has been repaid in full. The loan to Freibaum, who according to General Growth was let go prior to the board’s knowledge about the loan, totals $90 million and had $80 million outstanding as of late October. 

Another REIT, industrial real estate behemoth Prologis, saw Jeffrey Schwartz resign as its chairman & CEO, a post Schwartz–CPN’s 2008 Executive of the Year–held four almost four years. Former president & COO Walter Rakowich has been named CEO, while Stephen Feinberg, lead trustee of the company’s board, will take over the role of chairman. Prologis also announced that it would cut dividends, hold new development starts and lower general and administrative expenditures by 20 to 25 percent. 

General Growth and Prologis were among the largest equity REITs at the end of the second quarter, but now neither is among the top 15. 

Meanwhile, last week investment firm California Capital L.P. nabbed 4,650,000 shares of Maguire Properties Inc.’s common stock, representing a 9.7 percent stake. Maguire, the largest owner and operator of Class A office properties in the Los Angeles CBD district, ran into fiscal troubles following its $3 billion pickup of an 8.1 million-square-foot former Equity Office Properties portfolio of office and development sites from Blackstone Real Estate Advisors in April 2007, as reported by CPN. Yet another REIT, Maguire, which reported a funds-from-operations third-quarter loss of $20.2 million, or 42 cents per share, announced earlier this month that it extended the maturity of mortgage loans at Brea Campus in Orange County and at City Parkway in Central Orange County. 

Also this month, California Public Employees’ Retirement System, the nation’s largest public pension fund, announced that it saw the value of its portfolio plummet 35 percent from its original cost of $9.3 billion to $6.1 billion as of June. 

And other types of market players have also run into hard times as well. Tenant-in-common and 1031 exchanges specialist DBSI Inc. filed for bankruptcy just two weeks ago. And in September, Allied Capital portfolio company Ciena Capital L.L.C. voluntarily filed for bankruptcy protection. 

International players are also reeling from the global fiscal turmoil. For starters, Germany-headquartered Hypo Real Estate, which notched a $63 billion bailout from the German government in October, lost a staggering $4 billion in the third quarter. And as consumers continue to hold on tighter to their wallets, several retailers have been forced out of business or to shed some square footage. Circuit City Stores Inc., Mervyns and Steve & Barry’s, Linens ‘n Things and Boscov’s Department Store L.L.C., among others, have filed for bankruptcy; Gap Inc.’s intend to trim its 40-million-square portfolio by 10 to 15 percent over the next three to five years; Walgreens intends to cut back its expansion initiatives; Starbucks plans to close the doors of 600 stateside locations; and Lifetime Brands Inc., a kitchenware, tabletop and home decor products company, closed all of its stores and its York, Pa., distribution center.