Rouse ready to pay $4 billion for REIT New York-based CPI owns malls, offices, 50-story GM Building

January 16, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

In what would be one of the largest commercial real estate deals ever, Rouse Co. is negotiating to acquire a New York mall and office building owner for roughly $4 billion.

If the Columbia-based real estate concern's efforts to acquire Corporate Property Investors Inc. succeeds, it would also represent the biggest event in Rouse's nearly six decades in business, dwarfing the $520 million it spent to buy the Howard Hughes Corp. in June 1996.

Rouse's deal to acquire CPI could be completed as early as next month, according to industry analysts and sources familiar with the discussions.

"It would be a real huge coup for Rouse," said Robert A. Frank, director of research at Legg Mason Wood Walker Inc.

"It would be a terrific platform for the company. Corporate Property Investors has some of the best properties around."

Among the 27 properties the privately held CPI controls are the 50-story General Motors Building in New York; Nanuet Mall in Nanuet, N.Y.; and Roosevelt Field Mall in Garden City, N.Y.; as well as retail projects in Boca Raton, Fla., and Atlanta.

In all, CPI's portfolio is valued at $1.7 billion and totals nearly 30 million square feet. Its malls are considered among the top in the nation, generating sales per square foot of about $400, more than $100 per square foot above the industry average.

"They own high-quality properties, and they're a well-managed company," said John Kriz, a managing director of Moody's Investors Service Inc. "Over the long term, they have a strong track record. It's a high-class operation, and our rating on them is the highest we have for a U.S. REIT."

By comparison, Rouse controls more than 250 office, retail, RTC industrial and planned communities valued in excess of $6 billion, and its portfolio totals more than 70 million square feet in 26 states and Canada.

CPI would mark the first significant transaction for Rouse since it converted to a REIT on Jan. 1, a move that the company indicated would allow it to pursue mergers and acquisitions aggressively.

Rouse declined yesterday to discuss a potential purchase, while CPI officials could not be reached.

"The company has no comment at this time," said David L. Tripp, a Rouse vice president and its director of investor relations.

The decision to sell CPI, which was created in the early 1970s as a real estate investment vehicle to generate stable returns for institutional investors, reportedly came at the behest of an AT&T Corp. pension fund, one of CPI's major shareholders.

Buying CPI would also allow Rouse to benefit from a corporate structure known as a "paired-share" real estate investment trust, a form that allows CPI to own both property and operating companies while retaining its tax-exempt status, Frank added.

"It would give them enormous potential, one of the few companies in the country with the flexibility that a paired-share REIT enjoys, and it would make them more competitive," Frank said. "The question is, would they go into operating businesses like hotels or health care companies to maximize the advantage?" By comparison, traditional REITs -- such as Rouse -- were prohibited by Congress in 1984 from controlling non-real estate businesses, although a few companies, including CPI, were "grandfathered" and retained the status.

The structure gained attention last year, when Starwood Lodging Trust used its "paired-share" status to outbid Hilton Hotels Corp. in a $13.7 billion bidding war for ITT Corp.

In other words, with CPI, Rouse could not only own and operate malls such as White Marsh Mall and the Gallery at Harborplace, it could own and operate the stores within.

Rouse's talks to buy CPI also underscore the tremendous consolidation experienced within the real estate industry in the past three years, driven largely by a Wall Street judgment that only those REITs able to grow ever larger will be able to maximize operating efficiencies.

To date, the largest real estate transaction in history occurred last month, when Equity Office Properties Trust, a Chicago REIT, paid $3.8 billion for Beacon Properties Corp., a Boston-based REIT.

"Clearly the market has rewarded high-growth companies, so there is considerable pressure to grow in a smart manner," Frank said.

Pub Date: 1/16/98

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