Malls in grip of merger mania

Consolidation driven by need for revenue, construction costs

February 10, 2002|By Meredith Cohn | Meredith Cohn,SUN STAFF

When three major mall operators recently scooped up 35 of the nation's premier malls owned by Rodamco North America NV, observers said they were not likely to get such an opportunity again soon.

Top-tier malls and portfolios of malls are not often for sale these days because many have already been sold. About 35 percent of the nation's 45,025 retail centers - including 1,182 enclosed malls - are owned by a handful of large companies, including Columbia-based Rouse Co.

Despite heavy debt loads and weak retail sales in general, Rouse, Simon Property Group Inc. and Westfield America Trust jumped at the chance for Rodamco's malls. And, they said, they will look at just about every deal that comes up.

This means that the consolidation that began about 10 years ago will continue, although the dwindling supply of available properties and sellers also means deals will be bigger - entire companies and their portfolios rather than individual malls.

"We've looked at every major transaction," said Anthony W. Deering, Rouse's chairman and chief executive officer. "In our experience, we only see one every couple of years now. And they're big."

Shoppers are not likely to notice many differences when a mall is sold, Deering and others said. But the growth is crucial to the companies.

In the $5.3 billion Rodamco deal, Rouse got eight malls, while Simon got 13 and Westfield, 14. The new malls are expected to increase Rouse's earnings by 5 cents to 10 cents a share in 2003.

"For the consumer, they're not really going to know who owns their mall," said Patrice Selleck, a spokeswoman for the International Council of Shopping Centers, an industry membership and research organization. "From the industry standpoint, increasing portfolios means increasing revenue."

Also driving consolidation is the slowdown in construction of new malls, the result of soaring costs as available land has shrunk. Eleven malls opened last year, while nine are expected this year, Selleck said. Mall officials say a new center costs $175 million to $300 million, making it one of the most costly real estate projects.

Companies have another reason to grow: The bigger a company gets, the less its chances of being swallowed.

Indianapolis-based Simon Property Group already is the nation's largest mall owner and manager with 187 million square feet of space in 252 retail centers.

Rouse, which now acquires only upscale malls that dominate their region, is the nation's third-largest retail company, with about 41.2 million square feet of space in 61 retail centers.

Fewer properties

Sydney, Australia-based Westfield has 37.8 million square feet in 39 retail centers, and ranks fourth.

After the Rodamco deal closes this year, Rouse will rank fourth behind Westfield.

The other large mall companies are Chicago-based General Growth Properties Inc., which ranks second with 125 million square feet of space in 145 centers, and Bloomfield Hills, Mich.-based Taubman Centers Inc., which ranks fifth with 35.2 million square feet of space in 31 centers.

Rouse is one of the few major mall owners that has fewer properties than it did a decade ago - a result of its strategy to focus on high-end malls. It had 80 retail centers in 1991.

"We're a little different in that we haven't been involved in the consolidation to have size alone," Deering said. "We've had a strategy to sell as well as buy. But only the biggest and best survive, so we'll keep buying."

Rouse's share of the Rodamco deal is about $1.45 billion. It sold 14.5 million shares of common stock to raise $397.3 million to help pay for malls and has not said how it will finance the rest.

Deering said the company will have to absorb the debt before making another large purchase. The company will also likely slow the pace of building until the economy improves.

Deering, however, predicts that his company will make another large acquisition in the next five or six years - or whenever an opportunity becomes available. And the company will continue to sell malls that do not fit its upscale strategy.

Analysts say public companies have been buying up malls and other real estate for the past decade from individual owners and, more recently, other companies.

"The larger companies are now buying the smaller companies, and midsized companies are merging," said Louis Taylor, a retail real estate analyst for Deutsche Bank. "They get a better return for shareholders by being part of a larger entity. There are efficiencies of scale."

About 100 public real estate companies generate about $5 billion in cash flow each year, giving them the ability to buy $10 billion in real estate each year, including malls, he said.

There are more than 1,300 companies that own, lease or manage retail centers, according to the International Council of Shopping Centers.

Companies will continue to buy and build whenever possible, Taylor said. The U.S. population grows at about 3 million people a year, and people move, thus "creating opportunity," he said.

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