Anatomy of a Mall Empire

Talk about maturity mismatch, buried inside the Journal’s story about the fall of the Bucksbaum mall empire, General Growth, are details of the company’s finances–and the finances of the executives–that reads like a textbook on assuming outsized risk. Bruce Freibaum was the company’s finance chief replacing the legendary founder who was a penny-pinching obsessive:

Mr. Freibaum, now 56, became the company’s finance architect. His tenure coincided with a broader shift in the way some real-estate companies were financing their operations. Rather than apply for bank loans, General Growth began taking out short-term mortgages on its malls. As the mortgages came due, the company would replace them with even larger mortgages to provide cash for additional acquisitions.

The strategy picked up steam with the emergence of new debt-trading markets. In the mid-1990s, lenders started slicing up commercial mortgages and selling them to multiple investors as bonds. The boom in trading made mortgage-backed debt much cheaper and more plentiful — as long as investors were willing to buy.

General Growth was soon at the forefront of this market. And because the company was borrowing mostly against its individual properties, lenders didn’t place restrictions on its overall debt load, allowing it to accumulate more and more debt.

General Growth’s ratio of its debt as a percentage of its asset value has soared to 83%, compared to 63% for mall owner Macerich Co., 54% for Simon Property and 48% for Taubman Centers, according to Green Street Advisors. [ . . . ]

That didn’t appear to be a problem until August 2007, when the credit markets froze on concerns about subprime mortgages. The commercial-mortgage market that General Growth relied on essentially vanished. Unable to refinance mortgages, Mr. Freibaum spoke publicly about selling stakes in several malls, but he didn’t strike a deal. By September 2008, the stock was down 60% from its 2007 high of $67 a share.

The stock plunge set off a second crisis: Top executives had to dump millions of their General Growth shares to cover margin calls. Many executives had borrowed heavily to buy General Growth stock. Mr. Freibaum bought 7.6 million shares — more than 3% of General Growth’s total — mostly on margin.

The Bucksbaum family’s trust loaned Mr. Freibaum $90 million and President and Chief Operating Officer Bob Michaels $10 million to meet the margin requirements without dumping stock. Any executive sale of stocks would have had to be publicly disclosed, which could have spooked investors and led to more selloffs. The board said it had no knowledge of the loans.

Yet by August and September, the stock had fallen so far that General Growth executives couldn’t avoid selling roughly 8.5 million shares to cover margin calls. By early October, the board’s patience with Mr. Freibaum had run out, and it voted to dismiss him.

It wasn’t until later that month that the board heard rumors about the Bucksbaum trust’s loans and confronted John Bucksbaum, who acknowledged the loans, according to people familiar with the matter. While not illegal, the loans violated company policy, since they could pose a conflict of interest. Mr. Bucksbaum, for instance, might be less likely to discipline or fire Mr. Freibaum or Mr. Michaels because of their financial ties.


Dark Days for Mall Empire
WSJ, December 9, 2008

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