Rouse issues stock in deal for 8 malls

Shares would raise $397.3 million to aid planned acquisition

Analysts raise concerns

Firm's share of cost $1.45 billion

other financing undecided

January 18, 2002|By Meredith Cohn | Meredith Cohn,SUN STAFF

The Rouse Co. announced yesterday that it issued 14.5 million shares of common stock to raise $397.3 million for its planned acquisition of eight malls.

The malls are Columbia-based Rouse's share of a $5.3 billion deal announced Sunday among three companies to buy the assets of Rodamco North America NV. Rouse's bill for its malls and other assets amounts to about $1.45 billion, including $675 million of Rodamco's debt.

The deal requires the companies to pay cash, and analysts had predicted that Rouse would sell some shares to cover the cost. The other partners in the deal are Indianapolis-based Simon Property Group Inc. and Westfield America Trust, of Sydney, Australia.

Rouse had already secured an 18-month loan for $870 million from an affiliate of Banc of America Securities, but needed a more permanent financing mechanism.

Deutsche Banc Alex. Brown underwrote the stock. A decision on other financing methods has not been made, said David L. Tripp, a Rouse vice president and director of investor relations. He said Rouse might sell its shares in noncore assets acquired from Rodamco, including a New York office building.

Analysts, who largely favor the deal for upscale malls not often for sale, said a concern was Rouse's debt, which was already higher than comparable real estate investment trusts, or REITs. They expected Rouse to raise cash quickly to avoid a negative reaction from debt-rating agencies. That would make borrowing more expensive.

Immediately after the deal was announced, analysts at Legg Mason Wood Walker Inc. said Rouse would likely need to sell $400 million worth of stock some time this year. They did not expect Rouse to sell stock to cover the entire tab because that could upset shareholders by diluting their shares.

David Fick, a managing director at Legg Mason and a real estate analyst, said shareholders will still take a hit.

He said Rouse should have waited until its stock price was higher to sell common shares or raised the equity by issuing preferred shares, which pay bigger dividends but do not dilute earnings. Or, he said, the company could have taken on a joint venture partner for a cash infusion.

"We assumed the management would be prudent about when to raise equity and not issue shares at this price," he said.

"They have said they believe the stock is worth $36 a share; we feel it's more like $32. Now they're selling at below $28 a share, and that tells the market what they think they're worth.

"You should not sell equity below what you think it's worth. If you do, you're not exercising prudent corporate governance."

Legg Mason has lowered its per-share earnings estimate for Rouse by 8 cents this year. The consensus analysts' estimate for Rouse's shares in 2002 is $3.88.

Rouse shares fell 19 cents yesterday to close at $27.52.

Louis Taylor, an analyst for Deutsche Banc, said he believes that earnings will not be diluted with the offering because Rouse is adding assets at the same time.

Analysts have said the new malls should translate into additional earnings of 5 cents to 10 cents a share in 2003, once the properties are integrated into the Rouse mix.

Taylor said REITs are popular with investors because, by law, they pay 90 percent of their taxable income each year to shareholders as dividends. Even retail REITS are popular despite slumping sales at the malls, he said. Those malls are paying their rent.

"For retail REITs, that's the main concern," Taylor said. "In an environment where return in the overall market is flat to negative, you have REITs with a 5-10 percent dividend yield and still some earnings growth. People are realizing that REITs are one of the best alternatives."

Rouse's Tripp said company officials thought the stock sale was a good idea to raise money quickly. He said companies selling stock always wish the prices could be higher. "Credit agencies had put us on a negative watch," he said. "Simon, too. And this is something for lenders to potentially be concerned about.

"Our reading was that we had no choice but to raise equity. To let it go on a long time - we didn't think it would be conducive to raising our share price. And we raised the money we were looking for. So, from our perspective, we're very happy with the outcome."

In a related move, Rouse has entered into a currency hedge, which limits what the company would have to pay if the value of the euro changes.

The Rodamco deal was done in euros, and Rouse would have been liable for the difference if the U.S. dollar weakened against the euro.

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