Rouse faces $1.45 billion crunch time

Task is deciding how it will pay for 8 spiffy malls

Balancing act in works

Experts say the mix of debt and equity must be just right

January 15, 2002|By Meredith Cohn | Meredith Cohn,SUN STAFF

The day after the Rouse Co. announced that it would spend $1.45 billion for eight high-end shopping malls, analysts said yesterday that the company's big task is deciding how to pay for the acquisition without scaring off investors or hurting its balance sheet.

The eight-mall acquisition is part of a $5.3 billion deal that Columbia-based Rouse is entering into with two other firms to buy a total of 35 malls and other assets from the Dutch company Rodamco North American NV. Rouse did not say how it will fund its portion of the deal, but it indicated that it will likely sell stock and find corporate lenders.

Analysts generally support the acquisition, saying so many high-end malls rarely come up for sale and Rouse should buy what it prudently can. They say the company can find an appropriate mix of debt and stock, provided the economy does not get much worse and Rouse's stock price holds.

"This transaction could significantly stress the balance sheet," David Fick, a real estate expert who is a managing director at Legg Mason Wood Walker Inc., said yesterday. "Rouse is going to have to do some sort of equity offering to keep the balance sheet in line and the ratings agencies at bay. But that's not a bad thing."

Fick estimated that Rouse will need to sell $400 million worth of stock later this year, and one of its partners, Simon Property Group Inc. of Indianapolis, will need to sell $200 million or more.

The third partner in the deal Sydney, Australia-based Westfield America Trust, says it has raised nearly $700 million to help pay its $2.3 billionportion of the purchase price by selling new shares.

Fick called the financing mix a balancing act. If Rouse sells too much stock, investors will fear that their shares will be diluted. But if not enough shares are sold, the company will have to carry too much debt, which could mean a spiral that would leave Rouse with increasing borrowing costs, shrinking earnings and a sinking share price.

If the stock can stay in the vicinity of $30 a share, Fick said, then the company ought to be able to raise enough money to keep debt at a comfortable level and not overly dilute current holdings.

Rouse shares closed yesterday at $28.65, down 8 cents.

The risk is greater for Rouse, with about $5 billion in assets, than for Simon, the largest U.S. mall company with $19 billion in assets. The Rodamco deal represents about 8 percent of Simon's assets vs. about 25 percent of Rouse's. Rouse has had a good year, with total returns in 2001 beating those of REITs in general, but not other mall REITS. Fick believes that Rouse shares trade at a discount to the company's value, and investors may want to buy the stock going into the next year, especially since earnings should begin to climb as the new malls are folded into the mix by 2003.

When Rouse bought seven malls from TrizecHahn Corp. in 1998, it planned to issue $2 billion in new stock to help pay for them.

Other REITs were already selling millions in new securities to finance acquisitions to build their own portfolios. Rouse investors did not like the news. They feared that the stock they held would be diluted by the sale of so many more shares.

The stock slid. REIT stocks, in general, also got pummeled on Wall Street. Rouse turned to an $800 million financing plan, instead, and said it would sell some stock in the future if needed.

For the latest acquisition, Rouse has said it has secured an 18-month loan from an affiliate of Banc of America Securities for $870 million. It hasn't said specifically what it will do after that.

Rouse Chairman and Chief Executive Officer Anthony W. Deering said Sunday that the company was mindful of taking on too much debt. Moody's Investors Service put Simon under review yesterday for a possible downgrade of its debt ratings. Moody's has announced no action on Rouse, which has a higher ratio of debt, but analysts say it also likely to face review from ratings agencies.

A downgrade could make the financing much more expensive for the companies.

Arlene Isascs-Lowe, a senior vice president at Moody's responsible for the Simon review, said she would review whether the companies find the right funding balance.

"They have any number of constituents," she said. "And what's the balance to keep everyone happy?"

Bloomberg News contributed to this article.

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