Shopping Centers and Simon Property Group and Real Estate & Retail

Flush with cash, developer Simon revives hunt for acquisitions

September 12, 2009

Simon Property Group Inc. has managed to grow revenue tenfold since going public 16 years ago. Not bad given that the malls are a slow-growth industry.

The key has been well-timed acquisitions. When the price is right, the company drops billions to scoop up competitors.

This looks like one of those times. Simon this year conserved cash by paying most of its dividend in stock. At the same time, it’s used its clout to launch a capital-raising spree, rolling out stock and debt offerings at a time many real estate companies are begging for money.

The result: Simon now has $6 billion in “dry powder” it can use for acquisitions, according to a report by J.P. Morgan.

“We believe the opportunity remains large,” added Deutsche Bank, noting that the company plans to add to its “war chest” by paying most of its dividend in stock through the rest of the year.

“We believe Simon is aggressively pursuing multiple acquisitions,” Raymond James said in a report.

Simon, already the nation’s largest mall company, isn’t commenting on specific acquisition plans. However, in a conference call last month, CEO David Simon did nothing to quell the speculation. The company had been hoarding cash to get through the downturn, but he said he now feels “better about deploying capital opportunistically.”

The company hasn’t been shy about pulling the trigger on megadeals in the past. In 1996, it bought DeBartolo Realty Corp. for $1.5 billion. That was followed by the acquisition of Retail Property Trust for $700 million in 1997 and Corporate Property Investors for $5.8 billion in 1998. This decade, it snapped up Chelsea Property Group for $3.5 billion and teamed with a financial partner to buy Mills Corp. for $1.6 billion.

The most alluring target these days may be the properties owned by Chicago-based General Growth Properties Inc., the No. 2 mall operator, which slid into bankruptcy in April. Its holdings include prized properties like Water Tower Place in Chicago and Fashion Show in Chicago.

Simon favors high-end malls. But analysts say it also might find opportunity buying distressed properties owned by firms unable to make their debt payments. On the conference call, Simon repeatedly expressed interest in acquisitions but offered few specifics.

On a similar call early last year, before the worst of the financial crisis set in, Simon was less cagey.

“When times are challenging is when we’ve done some good work,” he said. “That’s where you can make some hay, and that’s where great wealth has been created in our industry—either through development or buying at the right price. And you tend to be able to buy at the right price when few can buy.”

Now, with signs proliferating that the recession is ebbing, Simon is poised to return to that playbook.

KeyBank expanding

Forget all that talk about bank branches becoming dinosaurs in the Internet age. KeyBank officials still see branches as a key part of their growth strategy, even as customers do more transactions online.

The Cleveland-based banking company has opened two branches this year, bringing its roster of central Indiana branches to 36. It plans to add two more—one in Beech Grove and another in Zionsville—by the end of 2009, before adding another seven in 2010.

Additional branches are on the drawing board for 2011, said Gary Hentschel, president of Key’s central Indiana district.

He said most of the customers banking online still walk into branches for some services.

“Clients, like everyone else, want choices,” Hentschel said.

Retail stocks surge

Retail spending remains anemic, but that hasn’t stopped investors from fawning over Indiana-based chains.

Shares of HHGregg Inc. have quadrupled since November, and shares of the Steak n Shake Co. have tripled in that span. Even the relative laggards, Finish Line Inc. and Shoe Carnival Inc., have more than doubled.

Investors are betting the economic recovery ushers in stronger sales, and opens the way for expansion. But so far that’s a leap of faith. The Commerce Department reported that U.S. retail sales in July declined 0.1 percent, despite the boost that the Cash for Clunkers program gave the ailing auto industry. Excluding autos, retail sales fell 0.6 percent.

HHGregg and Steak n Shake shares are up 90 percent for the year, while Finish Line and Shoe Carnival are up 55 percent. All have drastically outperformed the overall market, as measured by the S&P 500. That index is up 14 percent in 2009.•

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