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Will REIT deals alter landscape?

By Dave Bodamer

A week of mergers and acquisitions in late September that will go down as one of the wildest in industry history proved that retail REITs are undervalued by investors, according to Wall Street analysts and REIT owners.

The transactions could also mark the beginning of the long-talked-about consolidation within the retail REIT industry that observers say will change the regional mall landscape in the United States. Furthermore, the deals showed that net asset values (NAV) that analysts use when grading REITs have merit, despite many REITs’ dislike of the tool.

“The announced deals ... vindicate the integrity of our NAV estimates,” Merrill Lynch analyst Eric Hemel wrote in a report that week. “It appears that the values shareholders have received in public-to-public merger and acquisition transactions we’ve tracked over the past few years have been at least equal to our assessment of the intrinsic values of the companies being bought out.”

In nearly simultaneous announcements, Dutch real estate group Rodamco North America (RNA) — just 14 months after its formation by Rodamco’s split into four groups — greatly elevated its place in the regional mall sector by agreeing to buy Chicago-based Urban Shopping Centers for $3.4 billion. And CBL & Associates made official what had been rumored for months by announcing it would buy 21 Richard E. Jacobs Group regional malls for $1.2 billion.

Those transactions, along with two other large deals concerning strip center REITs, had analysts cautiously projecting that the retail REIT landscape could change, with current conditions favoring further consolidation.

“We see a couple of giant companies emerging in the next five or 10 years,” said Salomon Smith Barney analyst Jonathan Litt at the National Association of Real Estate Investment Trust annual meeting in Washington last month. “The industry will move toward certain companies taking on more scale and enjoying the benefits of that scale.”

Other analysts echoed that sentiment.

“If I were a REIT CEO, the question I’d ask myself every day is where can I raise capital? ... There are a million arguments on why [consolidation] should happen,” said Mike Kirby, a principal at the research firm Green Street Advisors, Newport Beach, Calif. “Acquired companies are generally underperforming in the stock market.” Those transactions create shareholder value and create companies poised to move ahead in the industry, Kirby said.

By adding Urban’s 24 malls to the 12 centers it operates in joint partnerships with firms like The Rouse Co. and Taubman Centers, RNA will have a portfolio with a gross leasable area (GLA) exceeding 40 million square feet, with average sales per square foot of $445 on a pro-forma basis for 2000. Moreover, the assets, which will include such high-profile centers as Water Tower Place in Chicago, the Houston Galleria and the Garden State Plaza in New Jersey, would have a $7 billion market value, ranking RNA behind only Simon Property Group and General Growth Properties.

“The mall sector, we believe, is in a consolidating phase, where only the largest, most dominant owners will prosper and perhaps even survive,” Rodamco CEO Gerald Egan said on a conference call with investors and analysts. “In this sector, size is power.”

The deal also gives Rodamco control of Urban’s property management arm. Rodamco has been outsourcing management functions to RREEF, a U.S. firm it acquired in 1998, and to third parties.

The transaction valued Urban at $48 a share, a 39% premium over the closing price of $34.44 of the day before the deal was announced.

“This acquisition will transform [Rodamco] into a fully integrated, self-managed company,” Egan said in a statement. “Urban’s strengths in property management and leasing will enable [Rodamco] to replace functions that we previously outsourced to third-party companies.”

Egan will be the CEO of the merged entity and Urban’s chief executive, while Urban CEO Matthew Dominski “will be an integral part of our management team,” Egan said, without elaborating. The original founders of Urban, which in the aggregate currently own a 35% interest in Urban on a fully diluted basis, will retain a minority interest in the Urban portfolio.

“The deal solidifies our long-held belief that the mall REITs are undervalued and trade at a significant discount,” Salomon Smith Barney analyst Jonathan Litt said in an e-mail bulletin to clients.

Like Rodamco, CBL & Associates moves up a notch among regional mall owners as a result of its deal. Its portfolio will have a GLA of 55 million square feet, making CBL one of the top five regional operators in the country. The deal also effectively begins the dismantling of what was the largest private shopping center owner in the United States and makes CBL one of the largest mall REITs.

When the acquisition is concluded, CBL’s portfolio will total 161 properties, including 51 enclosed malls in 26 states. The purchase price includes $106 million in cash, assumption of $733.8 million in fixed-rate nonrecourse debt at an average interest rate of 8.25% and the issuance of nearly 12 million special common units of CBL’s operating partnership valued at $385 million. Following the transaction, the Jacobs family will own about 20% of CBL and will occupy two seats on its board of directors. The cash portion of the purchase price will be funded through a $212 million unsecured loan from Wells Fargo Bank.

The agreement has been approved by CBL’s board of directors and is subject to CBL shareholder approval as well as certain consents from Jacobs’ lenders and partners.

Jacobs announced its intention to dissolve its 45 million-square-foot portfolio last August as an estate-planning move for Jacobs. Other transactions are expected.

“The most compelling reason for adding these centers to our portfolio is not size but rather the tremendous opportunities to apply the proven redevelopment, management and leasing expertise of our experienced team to maximize the internal growth from these properties,” CBL Chairman and CEO Charles B. Lebovitz said in a statement. “We are committed to continuing to add value for the benefit of our shareholders.”

John N. Foy, CBL’s vice chairman and CFO, added, “We have stated for some time that we would only acquire a large portfolio of shopping centers if the economics and structure of the deal provided long-term growth potential greater than we could achieve through individual acquisitions. We believe this transaction meets our stringent criteria and, more importantly, creates value for our shareholders with properties that will be accretive to FFO from day one. We expect this transaction will accelerate our FFO and dividend growth over the next several years.”

Stephen Lebovitz further noted, “This transaction clearly defines CBL as the leading mall owner in the Southeast and accelerates our previous expansion into the Midwest. With our knowledge of these markets and our dominant position in the Southeast region, we believe this transaction will add significant value to our company.”

Consolidation

“The mall sector, we believe, is in a consolidating phase, where only the largest, most dominant owners will prosper and perhaps even survive,” RNA CEO Gerald Egan said during a conference call with investors and analysts. “In this sector, size is power.”

The deal also gives Rodamco control of Urban’s property management arm. Rodamco has been outsourcing management functions to RREEF, a U.S. firm it acquired in 1998, and to third parties.

The transaction valued Urban at $48 a share, a 39% premium over the closing price of $34.44 on the day before the deal was announced.

“This acquisition will transform [Rodamco] into a fully integrated, self-managed company,” Egan said in a statement. “Urban’s strengths in property management and leasing will enable [Rodamco] to replace functions that we previously outsourced to third-party companies.”

Egan will be the CEO of the merged entity and Urban’s chief executive, while Urban CEO Matthew Dominski “will be an integral part of our management team,” Egan said, without elaborating. The original founders of Urban, which in the aggregate currently own a 35% interest in Urban on a fully diluted basis, will retain a minority interest in the Urban portfolio.

“The deal solidifies our long-held belief that the mall REITs are undervalued and trade at a significant discount,” Litt said in an e-mail bulletin to clients.

Like Rodamco, CBL & Associates moves up a notch among regional mall owners as a result of its deal. Its portfolio will have a GLA of 55 million square feet, making CBL one of the top five regional operators in the country. The deal also effectively begins the dismantling of what was the largest private shopping center owner in the United States.

When the acquisition is concluded, CBL’s portfolio will total 161 properties, including 51 enclosed malls in 26 states. The purchase price includes $106 million in cash, assumption of $733.8 million in fixed-rate nonrecourse debt at an average interest rate of 8.25% and the issuance of nearly 12 million special common units of CBL’s operating partnership valued at $385 million. Following the transaction, the Jacobs family will own about 20% of CBL and will occupy two seats on its board of directors. The cash portion of the purchase price will be funded through a $212 million unsecured loan from Wells Fargo Bank.

The agreement has been approved by CBL’s board of directors and is subject to CBL shareholder approval as well as certain consents from Jacobs’ lenders and partners.

Jacobs announced its intention to dissolve its 45 million-square-foot portfolio last August as an estate-planning move for Jacobs, who also sold the Cleveland Indians baseball team. Other transactions are expected.

“The most compelling reason for adding these centers to our portfolio is not size but rather the tremendous opportunities to apply the proven redevelopment, management and leasing expertise of our experienced team to maximize the internal growth from these properties,” CBL Chairman and CEO Charles B. Lebovitz said in a statement. “We are committed to continuing to add value for the benefit of our shareholders.”