General Growth Properties, Inc. Business Information, Profile, and History

Company Perspectives:

The corporate mission of General Growth Properties is to create value and profit by acquiring, developing, renovating, and managing regional malls in major and middle markets throughout the United States.

History of General Growth Properties, Inc.

General Growth Properties, Inc. (GGP) is the second largest shopping mall owner/operator in the United States, trailing only Simon Property Group. The Chicago-based real estate investment trust (REIT) is also the largest third-party manager of regional malls. The company has ownership stakes or management responsibility for more than 150 regional shopping malls, located in 41 states. These properties contain approximately 135 million square feet of retail space and house more than 15,000 anchor department stores, specialty retailers, as well as movie theaters, restaurants, ice skating rinks, and other family entertainment facilities. GGP is primarily owned by the founding Bucksbaum family.

Bucksbaum Family Becoming Involved in Shopping Centers in the 1950s

The Bucksbaum family was originally in the grocery business in Cedar Rapids, Iowa. In 1954, brothers Martin, Maurice, and Matthew Bucksbaum were looking for a site to locate a fourth supermarket in a chain founded by their father when they learned of a chance to finance the construction of a shopping center in Cedar Rapids. Rather than continue to be tenants in someone else's building, they borrowed $1.2 million to become landlords. What resulted was one of the first shopping centers in the United States, the Town and Country Shopping Center, which opened in Cedar Rapids in 1956. The Bucksbaums decided that their future lay in the building of strip malls and even before Town and Country opened they had exited the supermarket business. They then built the Wakonda Shopping Center in Des Moines and another shopping strip in Bettendorf, Iowa. According to Matthew Bucksbaum's recollection some 40 years later, "There was some conversation following the completion of the third mall that we'd never have to do anything else." Instead, with Martin Bucksbaum assuming the lead role, they continued to build. By 1964 they owned five properties and formed a management company, General Management Corporation, in which the Bucksbaums were majority stockholders. With the advent of enclosed malls in the 1960s, the Bucksbaums shifted from building strip centers to the new shopping mall format.

In 1970 the Bucksbaums exchanged their interests in General Management Corporation for shares in a REIT they named General Growth Properties (GGP). Another entity, General Growth Companies, was then formed to plan, develop, and manage the REIT's assets. Ultimately, GGP spawned a management company called General Growth Management Inc. to oversee its properties on a third-party basis. The Bucksbaum brothers ran their businesses from offices located in Des Moines. REITs were a relatively new creation, established by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock. They were also subject to regulation by the Securities and Exchange Commission. Unlike companies issuing stock, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year. Because REITs were allowed only to own real estate, third parties, such as General Growth Companies, had to be contracted to manage the properties. Because of a number of factors, REITs at this stage in their history did not gain much favor with the investment community.

GGP's Sale of Its Portfolio in 1984

Starting in 1979 the Bucksbaums began to believe that the market was not fairly recognizing the true value of GGP. When the prices for retail properties improved significantly in the early 1980s they decided to sell GGP's portfolio of 19 shopping centers. In 1984 GGP sold the centers to Equitable Life Assurance Society for $800 million, which at the time was the largest single-asset real estate transaction in history. Although GGP's shareholders, primarily the Bucksbaums, were paid off and the REIT was liquidated, the Bucksbaum family continued to manage most of the properties through General Growth Management. In 1986 Martin and Matthew Bucksbaum formed General Growth Properties, Inc. as a vehicle to purchase and own mall properties. Three years later the company acquired the assets of The Center Companies, a deal that in turn made General Growth Management the second largest manager of regional shopping malls and the leading manager for institutional owners.

Not until the Tax Reform Act of 1986 changed the nature of real estate investment did REITs begin to gain widespread usage. Tax shelter schemes that had drained potential investments were shut down. Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. The act also permitted REITs to provide customary services for properties, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, REITs were still not fully utilized. In the latter half of the 1980s banks, insurance companies, pension funds, and foreign investors (in particular, the Japanese) provided the lion's share of real estate investment funds. That period also witnessed overbuilding, leading to a shakeout in the marketplace. With real estate available at distressed prices in the early 1990s, REITs finally became an attractive mainstream investment option.

In 1993 the Bucksbaums packaged 55 percent of General Growth Partners' assets into a new REIT using the old GGP name in order to take the business public and look for acquisition opportunities--in particular poorly run malls whose management could be improved and facilities updated. The Bucksbaum family retained the remaining 45 percent of the General Growth Partners' holdings. An initial public offering of GGP, which owned 21 malls in 14 states, was then held, in which 19 million shares were sold at $22 per share. GGP's first acquisition came in early 1994 when it paid $182 million for a 40 percent interest in CenterMark Properties from The Prudential Insurance Company of America. CenterMark owned 16 regional malls along with three power centers, 14 freestanding department stores, a 116-unit apartment project, and other real estate assets. A year later GGP sold 25 percent of its stake to Westfield Holdings Group--an Australian mall company that had been its partner on the CenterMark deal--for $72.5 million in cash. In June 1996 GGP sold the balance of its CenterMark interests to Westfield, so that in little more than two years the REIT realized a tidy $143 million financial gain on the deal.

GGP spent much of 1995 working on a massive transaction in conjunction with four investment partners: the $1.85 billion acquisition of Homart Development Co. from Sears, Roebuck and Co., which was unloading noncore assets in order to return its focus to retailing. Of that amount, roughly $800 million was paid in cash and the balance was the assumption of $1 billion in debt. Homart owned 27 regional malls and five strip shopping centers, as well as 17 suburban office buildings. It was in the course of finalizing the deal that Martin Bucksbaum died of a heart attack at the age of 74. His brother Matthew replaced him as GGP's chairman. Following the Homart acquisition, GGP relocated its headquarters from Des Moines to Chicago.

In 1996 GGP acquired General Growth Management, which brought GGP's marketing, leasing, and marketing operations under one roof. While competitors began to buy up mall properties at a furious pace, as a consolidation wave swept the industry, GGP refused to overpay for properties and appeared content to wait for the right opportunity. In 1997 it spent just $350 million to add eight malls, including the Oaks Mall in Florida and Westroads Mall in Nebraska. The REIT's next major acquisition did not come until 1998 when it paid $871 million in cash for eight shopping malls owned by U.S. subsidiaries of MEPC plc, a London-based development company. According to one analyst quoted by the Wall Street Journal, "I'd be hardpressed to say there's any better pricing on this than the other deals." Regardless, GGP picked up some choice properties, including the Boulevard Mall in Las Vegas and the Cumberland Mall in Atlanta. Other transactions soon followed in 1998. GGP paid $625 million, less some $65 million in debt, to acquire U.S. Prime Property, acquiring another six malls. Also in 1998 GGP bought Northbrook Court, a suburban Chicago shopping mall. It was an important deal because it provided a flagship mall for GGP in the city where its headquarters was now located. Other acquisitions in 1998 included the Pierre Bossier Mall and Mall St. Vincent in Louisiana; Spring Hill Mall in Illinois; and Coastland Center and Altamonte Mall in Florida. Moreover, GGP was involved in the development of new malls, despite the perception that the country was overstocked with malls. In July 1998 it opened the Coral Ridge Mall in Coralville, Iowa, some 20 miles from the Bucksbaum's first strip shopping center in Cedar Rapids. Later in 1998 GGP broke ground on a new project, the Stonebriar Mall in Dallas, Texas.

Naming John Bucksbaum CEO in 1999

The year 1999 marked a significant turn in the history of GGP: Matthew Bucksbaum's son, John Bucksbaum, succeeded him as CEO of the company. (The 73-year-old Matthew Bucksbaum did stay on as chairman of the board.) John Bucksbaum was deserving of the promotion and well seasoned after being involved in the business for some 20 years. He started on the development side, after earning an economics degree from the University of Denver, Colorado, and initially worked on projects in Colorado. Following a stint in Puerto Rico he spent ten years as the head of General Growth of California, which he was responsible for creating. As GGP went public in 1993 he relocated to Chicago two years ahead of the rest of the company to help launch the offering.

A change in leadership did not affect GGP's continuing efforts to grow its holdings in 1999. In January of that year it bought The Crossroads Mall in Kalamazoo, Michigan. In May 1999 GGP acquired a prized property, the Ala Moana Center, located in Honolulu, Hawaii, regarded by many as the crown jewel of Pacific Rim retailing. GGP paid $810 million to a Japanese consortium to land the 1.8 million-square-foot complex. Because of a recession in Asia, the $810 million represented a reasonable price for the property, about 12.5 times cash flow as opposed to the 15 to 17 times cash flow that GGP calculated it would have cost to purchase the property three years earlier. Later in 1999 GGP and a partner, Ivanhoe, Inc., teamed up to make a number of investments, including the acquisition of Oak View Mall in Nebraska and Eastridge Mall in California. Also in 1999 GGP acquired Baybrook Mall in Texas.

With the advent of the Internet and the rising popularity of online shopping, GGP and all mall developers and managers faced new challenges as the 20th century came to a close. For decades malls were designed to keep consumers within their confines, hopefully to induce impulse buying. As a result, planned inconvenience became the norm and malls turned into mazes, with plants and other fixtures introduced simply to create twists and turns in the customer's journey to a particular store or venue. Even directories were designed to confuse more than to help, again preventing customers from efficiently navigating through the complex. To combat the trend of shoppers opting to avoid malls in favor of big-box discounters or shopping over the Internet, GGP, after three years of testing, began to design its new malls with similar shops clustered together. In this way, for instance, someone shopping for children's clothing could confine their mall visit to a particular wing. As for the Internet, rather than fight it, GGP actually chose to embrace it. With the help of IBM GGP in 2000 launched MalibuDirect, an Internet-based kiosk system for its malls. Customers would have entry to web sites of participating retailers, although access would be hobbled to prevent users from surfing the entire Web. They would be able to purchase goods online and have them shipped to their homes. Malibu also offered job notices and other services. Not only did GGP receive a percentage of sales, it was now able to gather customer information through registration. In that way, for example, the company would be able to notify customers via email about upcoming sales that would be of interest to them. In addition to launching Malibu, GGP teamed up with Cisco Systems to install a digital broadband cable infrastructure in its malls, which helped retailers to be more productive. Highspeed communications improved credit card verifications and inventory tracking.

Although high-tech innovations were welcome, the main focus of GGP in the new century remained growth through development and especially acquisition, as the mall sector continued to undergo consolidation. The large players were buying up the smaller operators in hopes of gaining leverage when negotiating with department store chains and national specialty retailers. In 2000 GGP opened Stonebriar Centre in Frisco, Texas, a suburb of Dallas. Early in 2001 GGP grew the management side of its business when it won the management, leasing, and marketing contracts for a 14-mall portfolio owned by an institutional investor. Acquisitions in 2001 included Houston's Willowbrook Mall and the Tucson Mall in Tucson, Arizona. In 2002 GGP paid $440 million and assumed $576 million in debt to acquire JP Realty Inc., a REIT with properties in the Intermountain region of the United States. The deal added 18 regional malls, in addition to 26 community centers and 1.3 million square feet of industrial space. Later in 2002 GGP acquired Victoria Ward, Limited, a privately held real estate company, picking up the Ward Centre, Ward Warehouse, and the new Ward Entertainment Center. The move strengthened GGP's position in Hawaii, which was already contributing a significant portion of its revenues. Although GGP was now the second largest mall operator in the United States, it would have to continue to grow to maintain that ranking. Management, in the hands of a second generation of the Bucksbaum family, was likely, however, to remain cautious and only strike deals that made long-term sense.

Principal Subsidiaries: General Growth Finance SPE, Inc.; GGP Limited Partnership.

Principal Competitors: The Rouse Company; Simon Property Group, Inc.; Westfield America Trust.

Chronology

• Key Dates:
• 1956: The Bucksbaum brothers open the first strip mall in Cedar Rapids, Iowa.
• 1964: General Management Corporation is formed.
• 1970: General Growth Properties is formed as a REIT.
• 1984: General Growth sells its holdings to Life Assurance Society for $800 million.
• 1993: The Bucksbaums form a new REIT using the General Growth Properties' name.
• 1995: Martin Bucksbaum dies.
• 1999: John Bucksbaum becomes CEO.