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Shopping Centers Today -> December 2007
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DEALS OF THE YEAR
THE PAST 12 MONTHS SAW A FLURRY OF DEALS, BUT NONE COULD COMPARE IN BREADTH OR IMPACT TO THESE THREE TRANSACTIONS
As expected, 2007 was a frenzy of noteworthy merger-and-acquisition activity, punctuated by deals that were as creative, complex and far-reaching as any seen in the past. In fact, this year’s deals were all over the map — and a world map at that.
One deal paired a Chattanooga, Tenn., REIT with a gigantic Aussie competitor in a portfolio reshuffle that saw one party emerge as the dominant retail landlord in St. Louis. Another transaction involved a Cleveland company that absorbed a Chicago concern to create a Southeast “dream portfolio” — but only after having outmaneuvered a highly unconventional bidder. A third deal featured a friendly European union that matched French and Dutch “peer” companies to cap off a long-rumored merger that industry wags dubbed the “deal of the decade. Want to learn more? Read on.
A SOUTHEAST DREAM PORTFOLIO
In the fall of 2006, when Developers Diversified Realty Corp. was eyeing Inland Retail Real Estate Trust as an acquisition target, DDR learned that a surprising competitor was vying to buy the unlisted public subsidiary of the Oak Brook, Ill.-based Inland Real Estate Group of Cos.
That challenger: the Inland Real Estate Group itself. “That was an interesting obstacle, where a related property to the seller was actually a bidder,” said Daniel B. Hurwitz, DDR’s president and COO. “It caused some interesting discussion on what the [acquisition] process would be.”
It turned out to be a moot issue, though. Cleveland-based DDR’s $6.2 billion offer, including the assumption of $2.3 billion in debt, would ultimately prevail. In the end, Inland Retail and its bid manager, Bank of American Securities, “handled the potential conflict with professionalism and integrity,” said Hurwitz. The deal, which would reinforce DDR’s already strong Southeast retail portfolio, went ahead, and DDR found itself the biggest open-air shopping center REIT in the U.S., with 800 shopping centers, totaling 162 million square feet.
But there were additional moving parts to synchronize before DDR could seal the deal. The financing structure called for the creation of a closed-end fund with a yet-unnamed venture partner, which it would identify a few weeks later as the gigantic TIAA-CREF.
The two met to hammer out a deal in which TIAA-CREF would contribute 85 percent of the equity to a $3 billion joint venture. The venture would buy 67 of the Inland-acquired properties, most of them measuring 250,000 square feet or more, and then position DDR as operator and minority owner. “This was a very important transaction for us from a financing perspective, and it advanced a relationship with an incredibly important partner,” Hurwitz said.
Also fueling the acquisition engine was the $1.5 billion DDR Domestic Retail Fund I, created after the transaction’s first-quarter 2007 closing. The commingled fund, fed by a consortium of undisclosed institutional investors, bought 63 primarily grocery-anchored shopping centers consisting mostly of former Inland Retail properties from DDR and its affiliates. As part of that pact, DDR would receive fees for various services involving the properties. “Both the fund and the joint venture were really very significant catalysts to supporting the bid from the beginning,” Hurwitz said.
Inland Retail, formed in 1999 by Inland’s group of companies to buy centers in the rapidly growing Southeast region, had been looking for an exit strategy and conditions were ripe for the sale, said Rich Moore, a Cleveland-based equity analyst at RBC Capital Markets. “[Inland Retail] knew when they got to a certain size, they were eventually going to exit,” Moore said. “And DDR’s philosophy is to take these entities and split them in joint venture institutions.”
In a retail acquisition climate flush with capital but short on available deals, “the timing was right for what they like to do — take a portfolio and divvy it up into institutional pools that are looking for that kind of product,” Moore said. The broadened portfolio also makes DDR centers more attractive to major retailers and enhances operating-expense efficiencies for its centers, Moore says.
Indeed, the Inland Retail subsidiary had been obligated all along to consider a “liquidity event,” such as a public listing, a sale, or a merger, the Inland Group said in a report to investors. On its Web site Inland Retail told employees it was selling because market conditions were favorable and because the board was convinced that a sale was “a more desirable alternative for its stockholders than other strategic alternatives.”
DDR Chairman and CEO Scott A. Wolstein called the deal “a transformative event for our company [in which] we will emerge with a dream portfolio.” Over 70 percent of the 307 properties the Inland centers added to that “dream” slate are located in the growth-oriented states of Florida, Georgia, North Carolina, South Carolina and Virginia. Most of them are relatively new (seven years old, on average) and well leased, with an average occupancy rate of 95 percent. In Florida alone, DDR gained $1.3 billion worth of properties in the deal.
Moreover, a little over a third of Inland Retail’s leased space would be coming up for renewal over the next five years, creating additional upside potential. “We were familiar with the majority of Inland’s retail assets, because they were located in areas where we already had centers,” said Hurwitz. “So it was a little easier to do our due diligence. Certainly, Inland did a great job with these assets, but we felt our platform allowed us to better maximize their value.”
The Inland Retail portfolio included 53 Publix supermarkets, a chain that is “probably the single grocery store everyone speaks of when they speak of stores invulnerable to the Wal-Mart onslaught,” Wolstein told analysts. “If this was a portfolio of Food Lions and Winn-Dixies, we’d feel very differently.”
When the sale closed early this year, DDR had taken on $11.2 billion in acquisitions in under four years, beginning with the March 2003 purchase of Atlanta-based JDN Realty.
Few such landmark acquisition opportunities remain, Hurwitz says. “There certainly are not a lot of deals of this magnitude out there today, unless we see more of the big companies merge. From a historical perspective, this deal was quite large.”
THE SPIRIT OF ST. LOUIS
How does a retail REIT expand its small stake in a key Midwestern market while the shadow of the world’s biggest shopping center landlord looms overhead? In the case of CBL & Associates Properties, the answer is: If you can’t beat ’em, get ’em to the table.
Actually, though, this go-round it was Australia-based property conglomerate Westfield Group that invited CBL to the table. The proposal: to sell the Chattanooga-based REIT four St. Louis-area centers, which would make CBL top mall dog in the area, in exchange for a stake in a nine-mall joint venture and cash on the barrel.
Here’s how the multitiered deal, announced in August, shook out. Westfield offered CBL, which owned just one mall in the St. Louis area — the 1 million-square-foot St. Clair Square shopping center, in Fairview Heights, Ill. — the chance to buy four additional local centers with an aggregate value of $1 billion in two separate transactions. Three of the malls — Mid Rivers Mall, in St. Peters; South County Center, in Mehlville; and West County Center, in Des Peres, each on the Missouri side of the market — would go into a new CBL-operated joint venture, which would include nine CBL properties around the U.S., including the highly successful St. Clair Square.
Westfield would receive a minority interest in the venture, valued at about $420 million, plus cash in a second transaction from CBL’s outright purchase of a fourth area mall owned by Westfield, the 1.3 million-square-foot Chesterfield Mall in Chesterfield, Mo.
“This deal was unique,” said CBL President Stephen D. Lebovitz. “And it was also a little bit unconventional in that it paired up what were essentially two direct competitors. But we had dealt with Westfield as a competitor for a lot of years and knew their senior people on a personal level, which helped get this done.”
Greasing the wheels was Westfield’s purchase of two Florida malls from another rival, Simon Property Group. Westfield would pay about $400 million to Simon for both the Broward Mall, near Fort Lauderdale, and the Westland Mall, just north of Miami International Airport, to replace the Chesterfield Mall in a 1031 exchange. Westfield would have to juggle both deals to qualify for the exchange, under which the replacement purchase is required to close within 180 days from the sale of the original asset, in this case the Chesterfield Mall, to get the capital-gains-tax deferred.
What else motivated Westfield? The company would not comment, but when the St. Louis transaction was announced, Peter Lowy, a Westfield managing director, said the deal complemented ongoing capital-raising activities and would allow the firm to better allocate its management expertise “into our U.S. portfolio and extensive redevelopment pipeline.” The four suburban regional malls would add 4.6 million square feet to CBL’s ledger, with average sales per square foot of $376 and an average occupancy rate of about 86 percent. “It not only gives us a dominant position in St. Louis, it adds strong, high-quality malls to the portfolio,” Lebovitz said. All the centers are situated in submarkets with above-average population, income and trade growth, and they present ample opportunities for value creation, he says. “These are strong assets with a good growth percentage.”
CBL’s newly acquired malls range in age from the 20-year-old Mid Rivers Mall to the 44-year-old South County Center, but all have undergone major renovations. CBL, which will oversee management, leasing and any development for all four, is going forward with plans to further refresh the properties, “which is a positive sign for the market,” said Grubb & Ellis in a report. CBL is also expected to add lifestyle center components similar to improvements it made at St. Clair Square, the report says. Occupancy averages at the four centers are about 4 points below the average market retail occupancy rate of 90 percent, Grubb & Ellis says.
Westfield will get a 5 percent annual distribution on the $420 million in preferred joint venture units it received in the deal. On the fifth anniversary of the venture’s creation, CBL will have the right to buy back those units at liquidation value. In the Chesterfield purchase, CBL assumes a $140 million nonrecourse loan secured by the mall at a fixed rate of 5.74 percent.
Both deals closed in mid-October. CBL now has interests in 132 properties across 27 states, including 80 regional malls and open-air centers. Westfield’s extensive investment portfolio, with stakes in 119 shopping centers in Australia, New Zealand, the U.K. and the U.S., is valued in excess of $50 billion.
The other malls CBL contributed to the Westfield joint venture include:
The 860,000-square-foot Chapel Hill Mall, in Akron, Ohio, which is 89 percent occupied, posts $297 in sales per square foot and boasts JCPenney, Macy’s and Sears as anchors;
The Greenbrier Mall, in Chesapeake, Va., an 890,000-square-foot, two-story mall that is 96 percent occupied, posts $363 in sales per square foot and boasts Dillard’s, JCPenney, Macy’s and Sears as anchors;
The 1 million-square-foot Mall of Acadiana, in Lafayette, La. This one is 98 percent occupied, posts $440 in sales per square foot and boasts Dillard’s, JCPenney, Macy’s and Sears as anchors;
The 547,000-square-foot Park Plaza Mall, in Little Rock, Ark., which is 91 percent occupied, posts $487 in sales per square foot and contains a Dillard’s East and a Dillard’s West.
The 1 million-square-foot Westmoreland Mall, in Greensburg, Pa., with Bon-Ton, JCPenney, Sears, Steve & Barry’s and a 15-screen Carmike cinema as anchors and generates $327 in sales per square foot, with a 98 percent occupancy level.
CONTINENTAL CONVERGENCE
The 2007 merger of the French Unibail Holdings with Dutch property group Rodamco Europe was widely heralded as the “property deal of the decade” in European real estate circles.
Perhaps rightly so. The newly merged company’s market capitalization of roughly $30 billion puts its well ahead of such European property stalwarts as British Land Co. and Land Securities Co. in value, and also vaults it into position as one of the Continent’s largest commercial property firms. A weighty portfolio of 95 shopping centers totaling 47.9 million square feet also makes the merged company, Unibail-Rodamco, among the biggest pan-European owners of retail space.
Unibail-Rodamco now boasts a retail presence in 14 European countries and a portfolio that includes 10 of the top 25 shopping centers on the Continent, by number of annual visits.
Though the union was announced in April and closed in June, it followed a very long courtship. Paris-based Unibail first made a run at Rotterdam-based Rodamco Europe back in 2001, according to Citigroup Global Markets analyst Philippe Le Trung. The press suggested that the pairing had been considered even earlier, as noted in a Fortis Bank report.
What made the merger prospect so compelling to some was the potent joining of Unibail’s development and investment skills to Rodamco’s broad European retail footprint. It was also to be a merger of peers that would make a perfect recipe for long-term value creation in the fast-growing European shopping center industry, according to Le Trung.
Others thought the union might not pan out quite as expected. “In my view, there are no compelling reasons for a merger,” said Henk Brouwer, head of property research at AEK, a Dutch financial and research firm. “Both parties are large and dominant in their markets and could have continued to grow without any merger.”
Brouwer said one challenge was to avoid the impression that one party was acquiring the other. “For this reason the CEO is French and the chairman of the supervisory board is Dutch, and the shares are listed in Paris, but the corporate headquarters will move to Amsterdam,” he said. Moreover, the firms agreed that no country in the joined portfolio would have more than 50 percent of total property holdings. “Currently, investments in France account for over 50 percent of the portfolio, so the new company has to grow outside France, or it will have to sell a part of its French investments.”
Another challenge was to create a truly European company. “The risk is that the French business culture will become dominant,” said Brouwer. Presently, the European business community generally assumes that Unibail acquired Rodamco, he says. “This problem will not disappear within a few years. It will be important to watch the composition of the boards and the country management [strategy] in the near future.”
Neither Unibail CEO Guillaume Poitrinal nor former Unibail CEO Leon Bressler, now a partner at boutique investment bank Perella Weinberg Partners, would comment about the transaction, a deal that had a few analysts worried over its sheer size, says Le Trung.
But in July Poitrinal told a European Public Real Estate Association publication that the merged company “gives you a better access to new and existing retailers, to development and extension opportunities and to additional revenues. [It] allows you to develop advanced marketing skills and innovative ideas that can be deployed on the entire portfolio, resulting in a more attractive retail product.”
Other concerns centered on what Le Trung calls “execution risks.” A highly regarded presence in France, Unibail would in effect be entering 13 additional countries post-acquisition, some of which do not enjoy market positives such as the limited retail supply and tenant transparency found in France. Mitigating that, however, was Rodamco’s established track record in the Netherlands, Sweden and Spain, which would give the merged firm a track record in 90 percent of its portfolio, according to Le Trung.
Recent rent depression on the Dutch retail property scene, coupled with an oversupply of retail space and challenges in monitoring tenant sales performance could hamper the company’s medium-term growth, some industry experts say.
Citigroup says Unibail has the most disciplined approach in the property sector not only in acquisitions, but in property management and the recycling of capital as well. The merged company’s exposure to prime retail properties and its unique development pipeline could still deliver strong earnings per share and dividend growth, even in a declining property market, according to Le Trung.
When the first phase of the deal closed in mid-June, Unibail had 80 percent acceptance of its takeover offer from Rodamco Europe shareholders. To push that up to the 95 percent required to force conversion of the remaining Rodamco Europe shareholders in what is called a squeeze out, Unibail left open the period for converting Rodamco Europe shares until July 10. The play worked. The end tally was 95.7 percent approval.
One of Rodamco Europe’s two main shareholders, Dutch pension fund PGGM, agreed to tender its shares in part because Unibail was able to offer it a tax-favorable security in exchange. Analysts lauded the exchange as an added premium for Rodamco Europe’s main shareholders because it came at no expense to Unibail shareholders, according to Le Trung.
At a Reuters summit in London, Bressler said Unibail-Rodamco “has a huge potential for increasing its operating income” and that he expects the company’s net rental to improve “substantially” over the next five years. Bressler, who spent 14 years at the helm of Unibail and advised the French firm on the merger, said the newly merged firm’s broad footprint, operating expertise and retail specialization make it “a natural vehicle for non-European investors in European real estate. The Unibail-Rodamco portfolio has a 73 percent retail focus.
Though Bressler considered the Unibail-Rodamco deal a positive strategic move, he does not anticipate an ensuing wave of consolidations on the Continent. The European property sector is one “in which concentration is not necessary. In a lot of cases, mergers do not create value.”
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