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Shopping malls brace for wave of consolidation

October 1, 2014

The next wave of U.S. mergers might be coming to a shopping mall near you.

Washington Prime Group Inc., a Bethesda, Maryland-based owner of strip shopping centers and regional malls, agreed last month to buy rival Glimcher Realty Trust in a $4.3 billion deal. Washington Prime is a spinoff of Indianapolis-based Simon Property Group Inc., and its operations headquarters is in the city as well.

The transaction may spark further consolidation among owners of “B” malls, those that aren’t generally in the top tier of a major metropolitan area or are the main complexes in smaller cities, said DJ Busch, an analyst at Green Street Advisors Inc.

Getting bigger in the mall business allows property owners to increase efficiency and gain leverage in leasing negotiations with tenants. And lower-tier malls offer a better bargain than higher-priced luxury properties, said Jerry Bruni, money manager and founder of J.V. Bruni & Co.

Pennsylvania Real Estate Investment Trust and CBL & Associates Properties Inc., which trade below the value of their underlying assets, could be the next targets, according to Green Street’s Busch.

With B-mall operators trading at discounts, “something is going to break loose one way or another, and we saw that with the Glimcher transaction,” Jonathan Litt, founder and chief executive officer of investment firm Land & Buildings, said in a phone interview. “Assuming others are looking to consolidate as it appears they are, I wouldn’t be surprised to see some of these other companies to be under pressure and evaluate a transaction.”

Land & Buildings, based in Greenwich, Connecticut, owns shares in Penn REIT.

Consolidation may be the next step in a process that started with large real estate investment trusts jettisoning their less productive properties. Washington Prime was spun off this year, following the spinoff in 2012 of Rouse Properties Inc. by Chicago-based General Growth Properties Inc.

By now combining efforts, these lower-tier stand-alones can lower costs, improve performance and expand their geographic reach.

“There are a lot of benefits to scale,” Green Street’s Busch said in a phone interview.

Washington Prime will gain 23 properties with its purchase of Columbus, Ohio-based Glimcher. The $2.7 billion REIT also expects to lower general and administrative and operating expenses, while boosting funds from operations—a gauge of a REIT’s ability to generate cash.

The deal “calls a little bit more attention to this sector of the mall market,” Bruni of Colorado Springs, Colorado-based J.V. Bruni, which has $570 million under management and owns shares of Rouse, said in a telephone interview. By owning the dominant mall in a smaller area, where there’s nothing like your property for miles, you’re insulated from competition, Bruni said.

Even Before the Washington Prime deal, Barry Sternlicht’s closely held Starwood Capital Group had been buying up lower-tier mall properties sold off by big real estate owners, including its agreement in June to buy seven malls from Taubman Centers Inc.

Penn REIT, the $1.4 billion property owner, and Chattanooga, Tennessee-based CBL, with a market value of $3 billion, are two of the cheapest mall operators.

Both property owners have an estimated net asset value of $25 a share, according to a Sept. 3 report from Stifel Nicolaus & Co. Penn REIT, with properties in a dozen states, closed at a 20 percent discount to that level yesterday. CBL—which owns, holds interests in or manages more than 150 properties—traded at an even larger 28-percent discount to its underlying value.

Penn REIT and CBL trade at about 10 and 8 times estimated 2015 funds from operations, respectively, according to data compiled by Bloomberg. Luxury mall owner Taubman has a multiple of almost 20.

High-end malls “are kind of pricey right now,” Bruni said. “It appears to be a better bargain in some of these smaller malls.”

Penn REIT may be a more willing seller than CBL, because CBL has been a family business for some time, Green Street’s Busch said. CBL’s chairman is Charles Lebovitz, a longtime real estate developer who was chief executive officer from the company’s initial public offering in 1993 until 2010 when his son Stephen took over as CEO.

“They don’t have the same legacy issues as CBL,” Busch said of Penn REIT.

Rouse, with a market value of $934 million, “is in a unique position to further consolidate the ‘B’ mall space,” Busch wrote in a Sept. 16 report. “In addition, following the Glimcher transaction, Washington Prime doesn’t appear to be in a position to compete if Rouse were to make an offer for one of its lower-productivity brethren, particularly Penn REIT.”

New York-based Rouse trades at less of a discount to its assets than Penn REIT or CBL, based on Stifel’s $20-a-share valuation for the property owner. Rouse shares closed yesterday at $16.17.

A representative for Rouse declined to comment, while representatives for CBL and Penn REIT didn’t return phone messages asking for comment.

Some analysts see a limit to how much further consolidation can go. None of the large mall operators are going to buy operators with lower-quality properties and B-mall REIT share prices are low and they don’t have the currency to make deals for each other, said Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio.

The Washington Prime deal with Glimcher was unique because Washington Prime needed a management team, which it gained with the acquisition, Moore said.

“I don’t think it’s a trend,” Moore said in a phone interview.

Even so, there may be benefits to combining.

“In scale, you can have a successful business with these types of assets,” Green Street’s Busch said.
 

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