Rouse eyes Hughes properties Company negotiating to acquire portfolio of late billionaire

'A pretty good fit'

Deal, possibly worth $600 million, could be done by end of year

Commercial real estate

January 10, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

The Rouse Co., largely hampered in previous efforts to bolster its $4.7 billion commercial real estate holdings through acquisitions, is negotiating to purchase the sizable property portfolio owned by the heirs of billionaire Howard R. Hughes Jr.

The Howard Hughes Corp. portfolio -- encompassing 3.6 million square feet of office and industrial buildings, shopping malls and thousands of acres of undeveloped land in California and Nevada -- would mark Rouse's first major success in a three-year program aimed at augmenting its assets.

"We're in the final negotiations of a recapitalization effort begun last May," said Mark E. Brown, a Hughes vice president. Both he and Rouse executives declined further comment.

If the transaction is completed, it would represent the largest single event involving the Columbia-based real estate concern since 1988, when the company completed a $550 million deal to acquire McCormick & Co. Inc.'s real estate arm in conjunction with Teachers Insurance & Annuity Association.

Rouse hopes to complete the Hughes purchase, valued at between $500 and $600 million, by the end of 1996. Rouse would finance the Hughes transaction through a combination of stock and cash, and assume about $300 million worth of Hughes' debt obligations. Rouse has roughly $100 million in cash, according to company data.

Rouse has retained Alex. Brown & Sons Inc. for advice and to structure a transaction, an investment banking source familiar with the negotiations said.

The deal would also signal a tremendous diversification for Rouse, which previously had planned to grow by buying or developing regional malls such as The Mall in Columbia. The bulk of the Hughes portfolio consists of office buildings and raw land.

Last May, for instance, during its annual shareholders meeting, Rouse announced plans to invest $300 million to refurbish and expand 13 of its malls and develop two others. In all, Rouse controls 75 retail projects totaling 47 million square feet of space.

"We all know retail sales and projects have been less than stellar in the past year," said John A. Somers, a Teachers Insurance senior vice president. "This could represent a major diversification effort, which would be very positive. I think retail 11 has and always will be there for them, but in slow times, you have to find another way to fill the tank."

With Hughes, Rouse's future development work would mirror its past. In the wake of the success of the 15,000-acre planned community of Columbia in the early 1960s, the company created a community development division and attempted to replicate Columbia on Maryland's Eastern Shore and in other locales nationwide. Those plans ended and the division dismantled, though, with the economic recession of the early 1970s that nearly crippled the company.

Hughes' holdings include the 22,500-acre planned community of Summerlin near Las Vegas, and a 1,100-acre project known as Playa Vista in Los Angeles.

Additionally, Hughes is developing a 115-acre business park, a 120-acre office complex and a 390-acre industrial park in Las Vegas, and a 70-acre, upscale office complex in Los Angeles.

In all, the Las Vegas-based Hughes' land holdings have a potential for 14.2 million square feet -- roughly equivalent to all the office space in downtown Baltimore.

"Hughes doesn't do anything half-baked," said Dennis Cornelison, a vice president of Pinnacle Realty Management, a Las Vegas-based brokerage and consulting firm. "They have A-plus projects."

The Hughes deal would also include a controlling stake in Fashion Show Mall, a 840,000-square-foot mall on Los Angeles' Sunset Strip.

Since Rouse decided to increase holdings in an effort to take advantage of the real estate industry's collapse six years ago, it has met with mixed success, analysts say. Although Rouse has managed to consolidate ownership in several retail projects by buying out partners, the company has failed to complete an acquisition of any stature.

In 1994, Rouse bid for the retail and office holdings of Cadillac Fairview Inc., a giant Toronto-based development firm hammered by falling property values and excessive debt. The effort was unsuccessful, however, and the company is in the midst of a complicated restructuring in Canadian bankruptcy court.

Rouse also made a stab at buying Homart Development Co., the retail development arm of Chicago department store Sears, Roebuck & Co., which had $2.2 billion in assets. But that attempt fell flat when Sears accepted a $1.8 billion bid for Homart from a real estate investment trust. The price included the assumption of significant debt.

"Potentially, Hughes is a pretty good fit and it would give Rouse exposure to new, dynamic markets," said Fred Carr, a principal of the Penobscot Group Inc., a Boston-based real estate valuation firm. "But it would definitely impact the company and change the character of its growth prospects."

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