The word “bankruptcy” is anathema to most investors. Holding shares of a company in this position means investors are likely to be wiped out. Sometimes, however, a bankruptcy can be exactly the right thing for both the company and investors, if handled properly.

If the company has enough assets, and creditors can be swayed to lower their interest rate or make a swap for equity, then the company might survive. And if the reason for bankruptcy is just a temporary slowdown in revenue due to overall the economy, then the company may even prosper.

General Growth Properties (NYSE: GGP) is exactly in this position. The company is a real estate investment trust (REIT) that invests, owns, develops and manages shopping malls, shopping centers, residential communities and office and commercial space. The company has been in business since 1954.

Like most other companies involved in real estate, General Growth found itself in a bad position as a result of the economic crisis. General Growth voluntarily entered bankruptcy, however. The company wasn’t forced by a creditor foreclosing and demanding repayment. During the bankruptcy process, General Growth managed to pull all the debtors together and extend $15 billion of debt coming due so that the weighted average duration of debt repayment is now in 6.5 years. In addition, the weighted average interest rate dropped down to 5.07% from 7.7%. In the process, General Growth avoided the death knell of other companies in this position — a fire sale of assets.

Why did the debtors agree to all this? For starters, mall traffic has been improving. Tenant bankruptcies are decreasing because, if mall traffic improves, then the retailers make more money, and that means rents can be paid in full, enhancing General Growth’s equity value. The mall REIT sector itself is also improving as a whole, driving up real estate prices and further enhancing equity value.

These factors play into some secular trends that are extremely favorable to General Growth, and the creditors obviously saw merit in that. Retail construction is at a 20-year low. This is not unexpected. Who wants to be building retail stores and malls when the economic outlook is still uncertain? With construction grinding to a near-halt, that means there will be less competition to General Growth’s malls. This enhances the company’s already prescient strategy of placing half of their 200 malls into markets with no competition, creating a regional monopoly. If people in those areas want to shop, they’ll be shopping with General Growth.

All of these factors create yet another advantageous situation for General Growth — more access to capital. As the company’s financials improve, capital will be more easily accessible, allowing them to grow.#-ad_banner-# All of these reasons are why hedge fund manager Bill Ackman, who runs Pershing Square Capital, invested heavily in General Growth. He now owns almost 15% of the company. Everyone called him crazy when he made the investment at about $1 a share, but he’s laughing last — the stock now goes for $14. In a recent investment presentation, he noted the company will emerge from bankruptcy as two entities: General Growth Properties, which will hold income-producing properties, and General Growth Opportunities, which will hold real estate development assets.

Ackman put the icing on the cake for investors by reminding us that General Growth was removed from the REIT indices because of the bankruptcy. But it will be added back after the company emerges, generating natural buyers required to purchase index holdings (such as mutual funds). 

Action to take –> Buy General Growth. The stock trades at $14 per share, and Ackman values the two new entities at $20, believing they could double during the next few years.  Ackman rarely makes a mistake buying distressed assets, and having already made 14 times his investment on this stock, I think it’s wise to follow his lead.