Deal proves buyer's mall-sized appetite

Sale Of The Rouse Co.

August 21, 2004|By Paul Adams | Paul Adams,SUN STAFF

In the mall-eat-mall world of retailing, General Growth Properties has been a shark, gobbling up $13.2 billion worth of assets and climbing into the No. 2 spot among shopping center owners since going public for the second time in 1993.

The Chicago-based real estate investment trust's purchase of Columbia-based Rouse Co. for $7.2 billion in cash and the assumption of $5.4 billion in debt is the biggest in the firm's history, putting investors on notice that the company plans to be among the last ones standing in the fierce competition for national dominance.

But the company with the big Wall Street reputation is known just as much for the folksy family members who have run it since its modest beginnings in 1954 as a grocery chain turned small-town shopping center developer in Cedar Rapids, Iowa. Chairman Matthew Bucksbaum and his son, John Bucksbaum, have run a conservative shop, never over-promising on earnings results, contributing generously to philanthropic causes and maintaining a down-to-earth, open-door policy with employees.

If Rouse is Nordstrom, Neiman-Marcus and Saks Fifth Avenue, General Growth leans toward Target, J.C. Penney and Sears. Its holdings tend to be so-called "B-class" properties in middle-America towns stretching from Omaha, Neb., to Eau Claire, Wis.

"Even though they're a big Wall Street company, their roots are very Main Street, and the management is very hands-on still," said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers, an industry trade group that the Bucksbaum family has advised.

The company owns about 170 regional shopping malls in 41 states and is among the best-performing players in the business despite amassing a pile of debt. In 2003, its funds from operations, a common measure of REIT performance, climbed almost 23 percent on a per-share basis. Even before yesterday's announcement, the company had been aggressively acquiring malls nationwide, though the size and price of the Rouse deal surprised many.

"They've made no bones about it that they will continue to make acquisitions," said Claus Hirsch, an analyst with Corinthian Partners in New York. "I was a little bit surprised at the size of it and the fact that they're paying such a huge premium."

Growth starts in Iowa

The deal is a thousand miles and a few billion dollars from 1954, when brothers Martin and Matthew Bucksbaum sold their five grocery stores in the Marshalltown, Iowa, area and took a chance on developing the Town and Country Center in Cedar Rapids.

The gamble nearly cost them their savings. But it put the small Iowa town in the history books as one of the first in the Midwest to witness the mallification of America and the resulting retail shift from downtowns to the suburbs. The project was a financial disaster initially, and the brothers admitted in interviews over the years that they made a bunch of classic mistakes as they struggled to build an empire. "They were pioneers," Kavanagh said. "They learned basically by trial and error."

With their portfolio of centers growing, the brothers formed a REIT and took it public in 1972, a move that funded acquisitions and development through the '70s. But REITs were an exotic investment in those days, and the company's shares languished. The brothers decided to liquidate 19 properties and take the company private again.

As REITs gained acceptance in the 1990s, the family took a second shot at being a public company with an initial public offering in 1993 that netted $22 a share for 19 million shares. The family continues to retain a controlling stake.

Martin Bucksbaum died in 1995, the year the company engineered the $1.85 billion acquisition of Homart Development Co., considered the largest real estate transaction in U.S. history at that time. That was also the year the company moved its headquarters to Chicago.

In 1999, Matthew Bucksbaum, 77, turned the company over to his son, John, but he remains as chairman. Under the younger Bucksbaum's leadership, the company has continued to make big acquisitions, spending $2.85 billion on 30 properties during the economic doldrums of 2002.

"They've been an aggressive bidder, and there have been a lot of malls available for sale in the last 18 months because sellers are getting top dollar," said Richard Latella, senior managing partner at real estate services provider Cushman & Wakefield.

General Growth hasn't been shy about paying top dollar, causing some investors to take pause.

"General Growth gets criticized a lot for paying very substantial prices on some of their large acquisitions, and their stock has been hit," said Ralph Block, chief executive of Essential REIT Publishing Co., which provides consulting and publications for REIT investors. "But they have demonstrated that they've been able to improve the productivity of the properties they've acquired, and they do a very good job of boosting rents."

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