The Rebirth Of General Growth Properties

After the Chicago-based company exited bankruptcy in 2010, its shares on Friday hit $18.49, a record high.

General Growth is on the right path to delivering solid shareholder returns, wrote Citigroup (NYSE: C), citing rising retail rents, the company's more effective management and a strengthened property portfolio. At the end of June, the bank upgraded the real estate investment trust (REIT) to Buy from Neutral and raised its target price to $20 from $17 after meeting with management.

General Growth has outperformed its peers on the Dow Jones All REIT Equity Index, composed of 133 REITs. The index rose 4 percent in the second quarter, down from a 9.5 percent rise in the first quarter. But General Growth shares gained nearly 6.5 percent in the second quarter and 13.12 percent during the first quarter.

In May, General Growth reported first-quarter earnings of 22 cents per share, beating a consensus forecast of 21 cents. During the first quarter, its new leases averaged a rent of $62.12 per square foot, up 7.4 percent compared to expiring base rents. Retailers' sales rose 9.6 percent to $525 per square foot for the 12 months ending in March, up 4 percent compared to the prior quarter. General Growth reports second-quarter earnings on Aug. 1.

Bill Ackman's hedge fund Pershing Square Capital Management LP, a major shareholder in General Growth, as well as J.C. Penney Co. (NYSE: JCP) and Burger King (NYSE: BKC), also endorsed the REIT in its June letter to investors. General Growth's 4.1 percent same-store net operating income growth during the first quarter outpaced its annual guidance of 2.8 percent growth. The company's portfolio is stronger following a spin-off of its weaker malls into a new company, Rouse Properties Inc. (NYSE: RSE), at the end of 2011.

As below-market leases that were negotiated in bankruptcy continue to expire and are replaced at significant rent premiums, we expect General Growth's earnings momentum to continue, wrote Pershing Square.

General Growth doesn't have the financial might of rival Simon Property Group (NYSE: SPG), the nation's largest mall owner. But Pershing Square said it remains attractively valued, with a stock trading around a 5.3 percent earnings yield, below Simon, which trades at a 15 percent higher earnings yield.

Along with improvements in the retail sector, General Growth has benefitted from more favorable borrowing terms. Credit has always been vital for the firm's operations -- it declared Chapter 11 bankruptcy after being unable to refinance its debt during the post-Lehman credit freeze, with $29.6 billion in assets and $27.3 billion in debt at the end of 2008. But in the second quarter of 2012, General Growth was able to refinance $3.1 billion in mortgages. It was able to lower the average interest rate of its loans to 4.20 percent from 5.24 percent, generating $329 million in returns.

Alexander Goldfarb, a REIT analyst with Sandler O'Neill + Partners LP, credits the company's new management for the turnaround. In the wake of its bankruptcy, General Growth hired as its CEO Sandeep Mathrani, a retail veteran from Vornado Realty Trust (NYSE:VNO), which controls office and retail properties in New York and Washington, D.C.

In November 2011, General Growth brought in a new CFO, Michael Berman, formerly of resort community REIT Equity LifeStyle Properties Inc. (NYSE: ELS) and Merrill Lynch, now a unit of Bank of America Corp. (NYSE: BAC). He replaced Steve Douglas, who returned to Brookfield Asset Management (NYSE: BAM), a major shareholder of General Growth.

Berman has streamlined the company and called for better reporting across divisions, Goldfarb wrote in May, after meeting with him at the International Council of Shopping Centers's annual meeting. Compared to pre-bankruptcy General Growth, it certainly seems like he has reshaped the culture, wrote Goldfarb in a June research note, but added that fully integrating the firm's various divisions will take time.