The chief operating officer of General Growth Properties has been hit with a massive margin call. The call was not answered, instead shares were sold. Please consider General Growth Official Sells Shares.

A steep decline in the stock price of General Growth Properties Inc. (GGP) prompted a top executive of the company to sell half of his common shares this week to cover a margin call.

Bob Michaels, General Growth’s president and chief operating officer, sold 700,000 shares Tuesday at an average price of $27.13, according to a filing with the Securities and Exchange Commission.

The sale left Mr. Michaels with 690,507 common shares in General Growth, which develops and owns shopping malls. Mr. Michaels, who joined the Chicago-based company in 1972, serves on the board in addition to his executive post. General Growth owns more than 200 U.S. malls.

“We assume he had modest leverage when the stock was [above] $60, but at the current pricing we believe Mr. Michaels was basically forced to sell,” UBS AG analyst Jeffrey Spector wrote in a note to his company’s clients Friday.

General Growth’s stock has fallen nearly 50% from its year-ago level primarily because of investors’ concerns about the weakening U.S. retail environment and General Growth’s $18.4 billion in debt coming due in the next 3½ years.

Flashback 2002 Worldcom

In 2002 Bernie Ebbers turned $1 billion in Worldcom stock into bankruptcy via margin, greed, and fraud. Santa Clara University in Silicon Valley has a great recap of Ethics at Worldcom that inquiring minds will want to read.

It was the massive margin call at General Growth Properties that triggered a memory of Worldcom. I am not suggesting fraud at GGP.

GGP Weekly Chart

click on chart for sharper image

How can someone in the business fail to see what is happening to lease rates, vacancies, and cost of credit? With that in mind, Let’s take a closer look at the cost of credit and when it is due.

General Growth has $18.4 billion in debt coming due in the next 3½ years according to the WSJ. It is also sporting a very hefty PE of 74.67. Cash on hand is $87 million.

From the latest GGP 10-Q Quarterly Report

The weighted-average effective annual interest rate (which includes both the effects of swaps and deferred finance costs) on our mortgages, notes and loans payable was 5.33% at June 30, 2008 and 5.55% at December 31, 2007.

The weighted-average remaining term of our mortgages, notes and loans payable was 4.07 years as of June 30, 2008.

Interest expense for 3 months ending June 30, 2008 was $312,943,000.
Net Income for 3 months ending June 30, 2008 was $34,082,000
Earnings per share from continuing operations was $.01
Earnings per share from discontinued operations was $.12
If the cost to refinance $18 billion were to rise to 8.0%, interest expense would rise by 50% to a whopping $469,414,000 per quarter. Even 7% would be a killer based on the numbers presented above.

Given that the Shopping Center Economic Model Is History and credit is tightening everywhere, General Growth Properties is going to be in deep trouble if credit conditions remain as they are, or even if they improve slightly. I expect credit conditions to worsen.

Mike “Mish” Shedlock
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