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TrizecHahn deal to fuel dynamo in West

In separate interviews prior to ICSC's Spring Convention, SCT editor Debra Hazel spoke with Westfield America Co-Presidents Peter Lowy and Richard Green about their reasons for the purchase and their future plans. The conversation with Mr. Lowy appears here while Mr. Green's comments appear in Green: TrizecHahn buy calls for patience.

SCT: This is your first major purchase of a block of centers since CenterMark Properties. Why is this the right time to do this, and will there be more growth by acquisition?

Mr. Lowy: The joint venture with CenterMark with General Growth and Goldman Sachs was in 1994. Then in 1996, we bought them out and raised capital in Australia publicly. In May 1997, we went public in the United States to grow the company and buy portfolios. A year ago, you could see where the consolidation was coming from. We didn't think it would be this quick. But you need the access to the capital markets to be able to make these large portfolio deals. We have access to the U.S. capital market, the Australian capital markets and the European markets.

We can do it now because of our structure, and because the assets are available. You can't buy the centers if they're not for sale. Acquisitions depend on three things for us: first, price; secondly, the redevelopment potential of the actual centers themselves; and thirdly, the strategic fit to our portfolio. Hahn met every one of those criteria.

If it will be a spate of acquisitions is difficult to say. Prior to '94, people built malls from the ground up, or they redeveloped them. You got better yields doing that than buying someone else's mall, depending on its redevelopment. Since 1994 onwards, you get as good a return, if not a little better than you're getting from redeveloping and from building from the ground up. Depending on where prices go, it hinges on whether the industry will shift back to the redevelopment phase or the expansion phase.

Depending on what else comes up, where and when, we're still a buyer.

Had you worked with Rouse before? How did this partnership come together in order to bid on this portfolio?

Interestingly enough, we actually owned a mall with Rouse in a joint venture in 1980, Connecticut Post Mall [in Milford, Conn.] The two of us [looked] at it and [were] able to split it up along strategic lines. ... Rouse took everything in Las Vegas and [the] East, and we took everything on the West Coast.

Is this a lot of debt to carry? This is a 50% equity/50% debt deal for both of your companies.

Yes. The company plans over the next 18 months or so to bring its debt levels back down to around 50% or a little bit lower. That means that we need to raise some form of equity over that period. ... We could bring in an institutional partner to enter into that portfolio or any other part of our portfolio. ... We have a financing plan over the next 18 months that should bring the company back down to around the 50% debt level [from] around 65%.

What plans do you have for the new centers in your portfolio?

We have between $400 million and $500 million in redevelopment in this portfolioover the next five or six years, or maybe a bit longer than that. Combine that with our current portfolio, we probably have about $1 billion in expansion and renovation work over the next seven or eight years.

I've heard the cap rate on this deal was 6.5%.

There is always a buyer's cap rate and a seller's cap rate. Sellers tend to take the trailing 12 months' income, and the buyers take the forward 12 months' income. The settlement of these deals will happen between August and December, so the first full year of operation will be 1999. On 1999's earnings, on the seller's budgets, it's a 7.4% cap rate, which is 13.5 times earnings. That's from their numbers.

We did the due diligence from the ground up. From our numbers, it's an 8.1% cap rate, for 12.3 times earnings. That's what I told the analysts. The 6.5, 6.6 rate comes from Hahn, what they said Hahn's 1998 estimates were.

What do you think this means for the industry, going beyond this purchase?

The consolidation has happened a lot quicker than anybody thought. The Simon company is responsible for a lot of it. Pyramid is up for sale, and there are rumors that everyone is up for sale. I've heard that Urban [Shopping Centers, Chicago] is up for sale, Taubman [Centers, Bloomfield Hills, Mich.] is for sale.

... The consolidation will keep happening because it is the most efficient way for institutional investors to own real estate and/or regional malls, securitized real estate. ... Are we getting to the end? We're probably getting close, unless you start having consolidation between the public companies.

All of the major players say they're getting into it for operating efficiencies. That's true to an extent. But we manage portfolios because they're undermanaged and/or underdeveloped. Operating efficiencies are a one-time hit when you buy something, and they get you so far. ... We buy portfolios because we can get long-term growth out of them and we can get a better return on the asset than the previous owner.

... When you have assets that we own in the markets that we are in, you don't need many more assets for the major players to deal with you. If you own Horton [Plaza, San Diego], University Towne Centre [LaJolla, Calif.], Topanga [Plaza, Canoga Park, Calif.], Valley Fair, Garden State, Montgomery [Mall, Bethesda, Md.], we're Nordstrom's largest landlord. Do you need 200 centers? No. Do the retailers need to deal with us? Yes.

You don't need more consolidation to have more clout.

Peter Lowy, left, and Richard Green, Westfield America's co-presidents, say the timing is right for their acquisition of much of TrizecHahn's portfolio.