The GGP Town Center Value Myth

There is a myth being perpetuated by those opposed to General Growth Properties redevelopment plans for Columbia Town Center that ties the county councils approval of the redevelopment legislation to the attempted hostile takeover of the company by rival Simon Property Group. Anti growth activists such as Barbara Russell and Alan Klein have claimed that the approval of the legislation will guarantee windfall profits and consequently made them an attractive takeover target. Nothing could be further from reality.

GGP was attractive to Simon Property Group because of their shopping malls, not their community development operations. More specifically, Simon coveted the malls that GGP acquired when GGP beat out Simon in the bidding for The Rouse Company back in 2004. The Rouse Company portfolio of shopping malls was widely acknowledged in the shopping center industry as one of the best performing retail real estate portfolios in the country. That’s what Simon wanted, not Columbia Town Center.

The malls that Simon wanted produce great cash flow. The only reason that GGP sought protection of the bankruptcy courts was their inability to refinance their debt during a recession. They were the rare case of a company with positive cash flow having to declare bankruptcy.

The community development operations of GGP on the other hand were hit hard by the recession. Undeveloped land doesn’t produce cash, it eats it. True, entitlements such as increased density enhance land value on paper but you can’t eat paper. The true value of those entitlements is only realized after the land has been developed and begins producing revenue. In the interim, this requires an even greater infusion of cash.

This is the very reason that GGP is planning on spinning off the community development business as part of their reorganization plans. The new company will initially have a lower valuation than the mall business because, even with approved development entitlements, future profitability is far from certain. There are many things outside the control of the developer that can trip up a development project like another recession or a sudden jump in interest rates. In short, projects like Columbia Town Center redevelopment actually have an adverse effect on a company that otherwise has a strong revenue stream.