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Shopping Centers Today -> October 1999
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The Quiet Giant
Rodamco demerger offers a look
By Debra Hazel
Its partners included some of the best-known shopping center owner/operators in the United States - The Rouse Co., The Taubman Co. and Westfield America. Its REIT investments have included still other firms, such as General Growth and CBL & Associates. Worldwide, its retail properties extended around the globe from Paramus, N.J., to Singapore.
But little has been known about the Dutch property investment fund Rodamco until now.
On July 21, the $6 billion firm split into four regional companies (North America, Europe, the United Kingdom and Asia) and went public as Dutch BIs (roughly the equivalent of U.S. REITs). The quiet giant whose structure could only be described as labyrinthine is quiet no more.
The labyrinth is still another matter; untangling the complex relationships of asset management companies under the old Rodamco umbrella may have been one of the goals of the demerger. But that goal may still be a bit off.
"The structure was very complicated to begin with," said Andrew Penny, real estate analyst for the London office of J.P. Morgan Securities, which has published reports on the four newly independent firms: Rodamco North America, Rodamco Continental Europe, Rodamco United Kingdom and Rodamco Asia.
Even some partners of the newly separated Rodamco remain a bit, well, confused about who reports to whom over in Rotterdam.
"I’ve been through it and I can’t pass the quiz," admitted Jeff Donahue, executive vice president and COO for The Rouse Co., Columbia, Md., which partners with Rodamco on five centers, including Perimeter Mall in Atlanta and Willowbrook (N.J.) Mall.
He isn’t alone.
"It is a complicated set of circumstances," said William Taubman, executive vice president of Bloomfield Hills, Mich.-based Taubman Centers, which co-owns two Detroit malls with Rodamco.
But according to Jan A. de Kreij, the former CEO of the original Rodamco, and now an executive at Rodamco Continental Europe, it isn’t all that hard.
"In 1979, Rodamco was founded within the Robeco group of investment funds," de Kreij told Shopping Centers Today in an interview. Robeco is a 50-year-old investment consortium that oversees some 100 different investment funds, and already owned some property. It was felt that there was a demand for property funds, so Robeco formed Rodamco.
Initial investments were in Europe, though the fund’s objective always was to be global, de Kreij continued.
"After the firm was established, we went to the United States." Rodamco entered the market through Hexalon Real Estate, whose assets included New York office buildings and, for a time owned Corporate Property Investors, the New York-based owner of properties such as Roosevelt Field mall in Garden City, N.Y.
Rodamco then recruited Cecil Conlee in the early 1980s as a consultant to provide asset management services for the U.S. portfolio. As it grew, he expanded his organization and in January 1990 formed CGR Advisors with David Goldin (at one time Hexalon’s attorney) and Rodamco as partners. Conlee serves as chairman of the Atlanta-based firm, Goldin as president.
"We basically ran Rodamco North America’s program," Conlee recalled. Conlee also lived in Hong Kong for eight months to help set up Rodamco’s Asia interests.
In 1993, Rodamco created RoProperty Investment Management (RoPro), the source of much of the confusion. A global real estate investment management company, RoPro operates through subsidiary companies, with offices in Rotterdam, London, Glasgow, Paris, Madrid, Chicago, San Francisco, New York, Dallas, Hong Kong and Singapore. The third largest real estate asset management business in the world (after TIAA-CREF and Lend Lease Real Estate Investments), RoPro’s assets under management currently are estimated to be $21.4 billion, according to J.P. Morgan.
Prior to the demerger, Rodamco properties comprised 40% of RoPro’s assets under management. But under the demerger, ownership of RoPro was spun off to the new companies, with RNA taking 22.5%; Rodamco Continental Europe, 35.0%; Rodamco United Kingdom, 35.0%; and Rodamco Asia, 2.5%.
RoPro’s subsidiaries include Argyll Property Asset Managers, a British real estate management company, acquired in 1996; RoPro Netherlands, the investment manager of the real estate assets of the insurance company Interpolis NV; RoProperty Venture Capital Managers, a specialized real estate venture capital business working for both the Rodamco Continental Europe and Rodamco United Kingdom, founded in 1998; and Atlanta-based RREEF, acquired in 1998, which now oversees RoPro’s activities in the United States.
Demerging
But straightening out a corporate structure was not the real reason for the split-up. The vagaries of a global real estate company led to the demerger. The breadth of Rodamco’s investments actually was hurting the portfolio."Over the last 20 years, investors clearly wanted this. They are more sophisticated and thinking more in economic blocks - the U.S., Britain, Europe. But we offered a global fund. That was the deciding factor for me," de Kreij said.
The move also will allow each regional company to focus on what will work best, such as the super-regional mall investments in North America, without worrying about its effect on a global fund.
"It was a difficult project, but I decided it when I took over two years ago. It fits our investors, it fits our capabilities," de Kreij explained. "My role as CEO of Rodamco is to allocate capital. If there were an opportunity to get into a market in the United States, the overall global fund could have become lopsided. [Investments in the United States comprised some 40% of the Rodamco portfolio.] By splitting up, you give each individual fund the opportunity to work on its own.
The split also simplified decision-making for investors, who were unsettled about problems in Asia. Rodamco had entered Asia about five years ago.
"It was a time when people felt Asia was the next booming area, which it was until it stumbled a bit," de Kreij admitted. However, he maintains that the "emotional discount" of Asian stocks far outweighs the reality of the region’s problems.
Even so, "The market was confused, and Rodamco lacked a compelling strategy for new investors," Penney of J.P. Morgan said. "And even though the firm had a smaller exposure to Asia, when the crisis hit, it had a disproportionate effect on prices."
The demerger could not have been done earlier because of Dutch law, which would have imposed severe tax penalties on Rodamco’s shareholders. That law was changed in 1998, and in June Rodamco got the green light to split up the firm.
Changes
Other changes had taken place before the demerger, most notably the switch from CGR to RREEF. But that transition has been smooth, according to Rodamco’s U.S. partners."So far, nothing has changed," Rouse’s Donahue said. The firm co-owns five centers with Rodamco. "When they were looking at structures, they talked about whole investments in fewer centers. But they haven’t talked about buying us out."
The relationship began in the 1970s, when Rouse sold an interest in Franklin Park Mall in Toledo, Ohio, as well as a share in Willowbrook and Perimeter to Rodamco. Rouse remained the manager of the property, while consulting its 50% partner on major decisions.
"Maybe the best way to characterize the relationship is that they are professional folks," Donahue said. "They know what they are doing. For example, at Perimeter Center, we just didn’t have any disagreements at all," and Rodamco agreed, he added.
Rodamco partnered with Taubman Centers on Detroit’s Twelve Oaks.
Taubman echoed the sentiment regarding its two joint ventures, Lakeside Mall and Twelve Oaks, both in suburban Detroit.
"The relationship is the same, the people have changed," said Lisa Payne, Taubman’s CFO.
The future of Rodamco’s private holdings in the United States remains uncertain.
"[Rodamco North America] had direct ownership of 17 shopping centers, then $300 million to $400 million in shares of REITs, including CBL & Associates, General Growth and Rouse, most of those obtained through trades for assets. There is almost $1 billion of private shopping center investments, including a deal with Kravco,” a joint venture announced last year, Conlee said.
However, in order to be more closely compared with major U.S. REITs, such as Simon or General Growth, Rodamco was advised to divest its non-direct shopping center ownership investments, including its shares in other firms. At least one of those companies is not too worried.
"Rodamco is a significant shareholder of Rouse. It wouldn’t be unusual for them to own between 1% and 3% of the company. In a general sense, [the sale plans] are not a concern. More specifically, yes, it’s still a concern, but only if they do something that hurts themselves, like selling in a short period,” Donahue said.
That isn’t going to happen, according to de Kreij. Sales of U.S. shares will be conducted over at least 18 months.
Disposition of the private investments is being handled by CGR, which is no longer owned in any part by Rodamco. CGR has the option of acquiring Rodamco’s private properties, while performing the asset management for them.
"This is really a new business for us in some ways, but not in others," CGR’s Goldin said. "They have financed us for 18 months."
Both Rodamco and Kravco are being quiet about the future of that joint venture, though as Penny observes, "They said they would sell their private ventures, and Kravco is one of them."
At press time, marketing to find a new joint venture partner for Kravco was to begin in the fall.
Rodamco, meanwhile, has its own stock worries, including what de Kreij said he considers a grossly undervalued Rodamco N.A. On Aug. 24, Rodamco North America (RDMA.AS) closed at 35.7 euros per share, well below J.P. Morgan’s July 19 valuation of 51 euros per share. The company, however, placed a value of 57 euros per share prior to the demerger.
"I expected that because of the timing at high summer, and with people on holiday, we would get very little turnover. I expected a bit of switch and low volumes. With RNA, frankly, I’m a bit disappointed. Its price is so far below net asset value, over 40%. It’s a real buy," de Kreij added.
The other stocks are lagging by all indices. On Aug. 24, Rodamco Continental Europe (RDMB.AS) closed at 42.25, vs. J.P. Morgan’s 12-month price target of 46; Rodamco Asia (RDME.AS) closed at 13.15, vs. a J.P. Morgan fair value of 20; and Rodamco U.K. NV closed at 43.55, vs. a J.P. Morgan valuation of 55.
"We’ve told our shareholders it would be best to sit on it, not to switch. We are creating a platform for each company to grow in a better and faster way than we had done before," de Kreij said.
Property-wise, RREEF remains at the helm of the U.S. assets, even as the firm’s U.S. development partners run the properties. Acquisition of super-regional malls is the main goal, and one that appears to be obtainable, at least in terms of financing purchases — Rodamco is underleveraged at 23% compared with most U.S. REITs, which average more in the 55% range, according to the J.P. Morgan report.
“They have a very strong balance sheet in terms of acquisitions. But their partners may not want to sell,” Penny said. Rodamco is targeting a 50% leverage in North America, slightly lower in Europe.
And Europe provides other opportunities, both for acquisitions and new development. Rodamco Continental Europe is the dominant shopping center owner in Spain, and is a substantial owner in France. “Those centers are very protected, and their centers dominate their regions,” Penny said.
The company also has interests in Eastern Europe and Ukraine.
“We can push into pan-European development, which no one else has. We see ourselves as the consolidators in Europe,” de Kreij said. “We are doing what Simon is doing, dominating regions. It’s like a global glue,” he said.
But challenges remain, even beyond stock price.
“The challenge now for the four separate companies is to prove the ability of the management boards. These are all fresh companies, operating as completely independent firms,” Penny said.
If you can tell who’s in charge.
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