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Jacobs malls for sale, but who’s buying?

by Debra Hazel and Jon Springer

It may be the end of the era of the large private mall owners. In late August, The Richard E. Jacobs Group, the largest privately held owner of shopping centers in the United States, announced that it is exploring the sale of its 45 million-square-foot portfolio.

The Cleveland-based developer plans to hold on to three Columbus, Ohio-area malls, including Northland Mall, now in the midst of a contentious battle with the proposed Polaris Fashion Center (SCT, September 1999). But the sale of the remaining 35 centers, attributed officially to the 74-year-old Jacobs’ need for estate planning, raises two questions: Who will acquire the projects; and can any major real estate company operate effectively without access to or support from Wall Street?

The plan, as announced, would be to sell the 35-mall portfolio either as a whole or in part. Jacobs has retained Goldman Sachs, which is brokering the sale of Richard E. Jacobs’ interest in the Cleveland Indians, to handle the centers’ disposition.

“This is a very difficult decision for me, because so many talented people have contributed to the growth and success of this organization,” said Chairman and CEO Richard E. Jacobs, in a statement.

Richard E. Jacobs founded the firm in 1955 with his late brother, David. Included in Jacobs’ retail portfolio are: Cary Towne Center, Raleigh, N.C.; Citadel Mall, Charleston, S.C.; SouthPark Center, Cleveland; Galleria at Erieview, Cleveland; and Eastgate Mall, Cincinnati. Projects under development include: Triangle Towne Center, a 1.1 million-square-foot regional mall to open in Raleigh, N.C., in fall 2001.

The firm also owns six office buildings, two corporate office parks and 19 hotels.

The divestiture should take from six to 12 months, Martin J. Cleary, Jacobs’ president, told Shopping Centers Today. Whether the centers will be sold as a single portfolio or piecemeal remains undecided.

“It is early in the process,” Cleary noted, explaining that the announcement was made in mid-August to eliminate uncertainty for the Jacobs staff. At press time, Goldman was to have produced an analysis of the projects in September.

Some analysts and shopping center executives, noted that Jacobs’ properties have been “unofficially” on the block for some time.

Last year, the firm was to have acquired the highly regarded Retail Property Trust (RPT) portfolio in partnership with New England Development (NED). The two firms would then have merged and gone public. However, Simon Property Group (SPG) outbid the venture and acquired the RPT portfolio, a deal that resulted in Jacobs suing SPG for $200 million. The lawsuit is pending.

Ironically, in August, NED completed the sale of nearly all of its portfolio to SPG. As with the Jacobs plan, NED retains projects under development.

Less successfully, The Pyramid Cos., a privately held developer based in Syracuse, N.Y., announced similar plans to divest its portfolio last year. But no deals resulted.

The sale does not necessarily come at the most propitious time, noted James Sullivan, real estate analyst for Prudential Securities, New York.

“Current mall REITs have quite a bit of debt, and public markets are concerned and wouldn’t be pleased to see it increase,” he said.

Likely acquirers would include the “usual suspects” among mall owners — SPG, General Growth and The Rouse Co., Sullivan said. But Jeff Donahue, executive vice president of Columbia, Md.-based, Rouse, noted that his firm had been selling, rather than buying, projects similar to many in the Jacobs portfolio — regional malls in second- or third-tier markets.

“This is a mixed portfolio where some assets are out of position. This won’t win any beauty contests,” Sullivan said.

However, “there are enough different properties in different locations that a number of people would have interest in buying the project in whole or part,” said Keith Honnold, director of acquisitions for CBL & Associates Properties, Chattanooga, Tenn.

“It’s a good portfolio, and Jacobs is a good operator,” said David Contis, COO of The Macerich Co., Santa Monica, Calif. He did not say whether his firm might have any interest in the properties, however.

Odds are, the acquirer(s) will be public.

“It takes capital to buy, either debt or equity. Public companies have access to Wall Street debt and equity,” Honnold noted.

However, analyst Drew Jones of Morgan Stanley Dean Witter, New York, said that real estate investment trust (REIT) investors are paying particular attention these days to prices paid for malls, noting that previous acquisitions have not provided the near-term gains investors want to see.

“One of the larger REITs could make a run at the properties, but there would be a significant price issue,” Jones said. “Plus, everyone’s stock is cheap and not many REITs currently have the balance sheet to make a cash deal.”

So can private companies survive at all? A few remain, including Buffalo, N.Y.-based Benderson Development, which after the Jacobs sale would be the largest private owner of shopping centers in the United States, followed closely by The Cafaro Co., Youngstown, Ohio.

“The speed of change is much faster than a decade ago; to be successful in the mall business you have to change, and that’s capital-intensive. For someone without access to public capital markets, it’s very tough,” Honnold said.

Not surprisingly, privately held developers disagree, saying the era of the entrepreneur is not over.

“We find that operating in today’s environment requires the same business principles as always. Even though we have remained private and have been for over 55 years, we believe our reputation and conservative approach is respected more by financial institutions,” said Andrew J. Groveman, senior vice president of Memphis, Tenn., based Belz Enterprises, which builds both traditional and off-price centers.

Still, the selling of portfolios will continue, Groveman believes, even as firms like his become more of a rarity.