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GGP ROUSE

Deal good for General Growth, Bucksbaum tells Wall St. critics

BY BRANNON BOSWELL AND DONNA MITCHELL

Last month General Growth Properties outmaneuvered two rivals to land The Rouse Co.’s peach of a portfolio. And though Wall Street critics are suggesting that General Growth is paying caviar prices for its peach, CEO John L. Bucksbaum, SCSM, says the $12.6 billion price tag is well worth it.

The deal is critical to the continuing growth and prosperity of this firm, Bucksbaum insists. “From a long-term perspective, this is the most exciting and the greatest thing that General Growth has been involved in,” he said.

Analysts are concerned about the deal’s low cap rate. According to Morgan Stanley estimates, the deal puts a 5.4 percent cap rate on the Rouse portfolio, based on General Growth’s plan to pay $7.2 billion in cash and assume $5.4 billion in Rouse debt. By comparison, Simon Property Group’s $4.8 billion purchase of the 16.6 million-square-foot Chelsea Property Group portfolio bears a cap rate of 7.2 percent. On average, quality malls are trading in the 6.5 percent range these days, according to market sources.

But cap-rate assumptions on property portfolios are fleeting, says Bucksbaum, adding that analysts must take a longer view of General Growth as a company. The firm continues to top mall REITs by several measures.

“Our performance has substantiated the decisions that we have made,” he said. Since the company’s IPO in 1993, General Growth’s annual dividend has grown at an average annual compound rate of 8.4 percent, and its total returns have beaten the Morgan Stanley REIT index.

Even analysts admit that cap-rate assumptions are very subjective and might therefore not be the best way to assess a deal in foresight. When The Macerich Co. bought Westcor in July 2002, for instance, the market estimated that the deal bore a roughly 7 percent cap rate, recalls Barry Vinocur, editor of Realty Stock Review, a newsletter for stocks linked to real estate. But now the consensus among market observers is that the deal was great for Macerich.

Referring to General Growth, Vinocur said, “When you’ve got somebody who is really good at what they do, we tend to give them the benefit of the doubt.”

Analysts say they are also concerned about the increased exposure to variable-rate debt that the deal will bring to General Growth. The firm will be carrying about $23 billion in debt after the deal closes, roughly $9 billion of which will be variable-rate debt. General Growth’s overall debt will represent 71 percent of its total capitalization, according to Merrill Lynch analyst Steve Sakwa.

But General Growth has always paid down its debt in a timely manner, and Wall Street’s concern about a high acquisition price is nothing new, asserts Bucksbaum. Since General Growth’s entry into property buying and corporate mergers, Wall Street analysts have questioned the prices and financing methods of almost all its acquisitions, he says. The company’s prior portfolio acquisitions include Centermark, Homart and JP Realty.

Anatomy of a deal
The Rouse deal represents a marked departure from General Growth’s past portfolio transactions, Sakwa wrote in a recent report. Deals such as the JP Realty transaction included undermanaged assets with unrealized potential. Now General Growth is taking on a portfolio filled with trophy assets and assuming control of dominant malls in many of the largest U.S. metro markets.

Rouse owns 40 million square feet of retail space, 9 million square feet of office, industrial and other kinds of commercial space, and several large community developments. The retail portfolio includes some of the industry’s most highly regarded centers, including Faneuil Hall Marketplace, Boston; Fashion Show, Las Vegas; Park Meadows, Denver; New York City’s South Street Seaport; and Water Tower Place and Oakbrook (Ill.) Center, both in the Chicago area. Sales in these retail properties average $439 per square foot, and occupancy is approximately 92 percent.

In all, acquiring Rouse would lift General Growth’s portfolio to about 220 shopping centers, totaling some 200 million square feet of retail space. The additional properties make General Growth closer in size to Simon, the biggest U.S. retail real estate landlord. Simon itself is said to have been one of the contenders for Rouse.

Most of the facts concerning the auction process that resulted in General Growth’s win are confidential, but a recent proxy statement Rouse filed with the SEC reveals a few interesting details. For example, Rouse executives approached General Growth and another leading mall company to solicit bids only after the CEO of a third company (“Company A” in the proxy statement) suggested a merger to Rouse CEO Anthony W. Deering over dinner in early June. According to the proxy statement, Deering rejected the offer because he felt the offered price was insufficient. But the conversation prompted Deering and Rouse CFO Tom DeRosa to enlist Deutsche Bank and Goldman Sachs to advise the company on a possible sale.

In July Rouse contacted General Growth and another company (“Company B”) to solicit bids in the $70-to-$75-per-share range. By August 18 Company B withdrew from the auction, citing an unfamiliarity with the nonretail side of Rouse’s business and a reluctance to rush the arrangement of financing. On August 19 Company A re-entered the discussion, requesting that Rouse delay the sale process so it could make an intervening bid in the $65-to-$70-per-share range. But General Growth put forth its formal offer of $67.50 per share that same day, and Rouse’s board voted to approve it rather than extend the bidding process. “Although each of Company A and Company B had requested additional time to evaluate Rouse and to present its best proposal, our board considered that there were significant risks in extending the sale process,” the proxy statement reads. Those risks included the possibility that General Growth might withdraw or reduce its proposal or that the bidders might seek to bid jointly.

Because of the limited number of REITs with the balance-sheet capability to consider the deal, industry insiders say Simon was Company A and Westfield Group was Company B, though neither firm would comment for this story. The boards of General Growth and Rouse have agreed to the deal; at press time it was awaiting the approval of Rouse shareholders.

One thing is clear: The deal is a watershed event in the REIT sector because of its size and because it is a cash transaction. If anyone had suggested 10 years ago that one REIT would buy another for $12.6 billion, they certainly would have drawn strange looks, says Vinocur.

Further, the deal emphasizes that the mall business is increasingly becoming global, especially as more and more retailers from overseas try to enter the U.S. market.

“These are major macro forces that are coming into place,” said Vinocur. “This is a big step up. This allows General Growth to acquire one of the best mall portfolios in the country.”

Moving forward
General Growth has ambitious plans for Rouse. For one, General Growth will drop the Rouse name when the deal closes sometime in the fourth quarter. But the Chicago REIT has not decided whether it will keep Rouse’s Columbia, Md., headquarters, or what titles and roles it has in mind for the senior management, Bucksbaum says.

Merrill Lynch’s Sakwa suggests that General Growth is likely to keep some of Rouse’s key land-development experts, particularly DeRosa and executive vice president and director of development Al Scavo. General Growth also has to determine what it will do with Rouse’s nonretail assets, particularly the land it holds for such community projects as Summerlin in Nevada, outside Las Vegas.

“That’s an interesting business; it’s one that we haven’t been in,” Bucksbaum said, adding that the company will examine the matter closely before deciding whether to continue to develop the land or sell it.

The company will also study Rouse’s office and industrial properties. “Those would be the more likely of the noncore kind of assets that we might be interested in looking to sell, but, again, we don’t know a lot about them at this particular time,” he said. “We’ll get to know them better, and then we’ll make those determinations.”

In addition, the firm expects to take over the management of any Rouse malls held by joint venture partnerships, Bucksbaum says, which in Rouse’s case are mainly institutional investors.

Also General Growth will be able to take advantage of a growing ancillary business in the mall sector: advertising. Its expanded shopping center base will serve as an advertising medium for brands and companies looking to broadcast their messages to the public, Bucksbaum says.

“Companies such as ours can offer a very broad range of coverage,” he said, noting that the mall portfolio will hit a broad range of demographics and geographical markets for advertisers.

And perhaps most important of all, the acquisition will provide General Growth’s current and prospective tenants, including newcomers from Europe, with a lot more markets to choose from, Bucksbaum says.

For these and other reasons, he argues, it’s a good deal.