In the latest consolidation of the outlet retail business, Horizon Outlet Centers Inc., Muskegon, Mich., and McArthur/Glen Realty Corp., McLean, Va., have agreed to merge and create what is considered the largest outlet center developer/manager in the country. Tbe, a tax-free exchange valued at more than $300 million, was announced in March and is expected to close in the third quarter.
The new firm, which will be called HGI Realty Inc. and based in Muskegon, will own 32 centers totaling 6.4 million sq. ft. of GLA in 19 states. Horizon owns 14 centers in eight (mostly Midwestern) states. McArthur/Glen owns 19 centers in 16 states. Combined, the two firms have about 2 million sq. ft. scheduled for delivery this year.
The merger is considered a good marriage of portfolios and management. Horizon is the marketshare leader in the Midwest and McArthur/Glen is strong in the West and Southeast. Additionally, both firms are "location" developers of quality properties.
"The combined portfolio is a strong mix of middle-to-upper quality centers," says Jim Sullivan, a senior REIT analyst with New York-based Prudential Securities. "McArthur/Glen has a broader selection of higher price-point tenants. One question is whether the strong relationships with higher-end tenants, particularly apparel and footwear manufacturers, can be used to the benefit of Horizon's centers."
The combined portfolio contains about 370 tenants, one-third of which have leases with both firms.
"Their philosophies are similar," adds Michael Coster, director of real estate at Bank of Boston, which is a major agent or lead bank in arranging lines of credit to outlet REITs. "I have a lot of respect for Horizon's people and McArthur/glen has some nice assets. It makes a good company even better.
"It's also good for the industry because it takes one player that was going to deliver 1 million sq. ft. a year off the market," he adds, addressing what he calls an overstated fear of saturation.
Perry Grueber, Horizon's director of research and investor relations, says almost all of McArthur/Glen's centers are expandable -- an important factor as all developers aim to create larger destinations to increase market share. Horizon, which is known to take larger sites than most other outlet developers to add compatible real estate uses like restaurants and hotels, will look to use this strategy in McArthur/Glen's projects.
Despite the leading positions both firms hold in the outletbusiness, there's only one market -- Birch Run, Mich., near Detroit -- where there is competitive overlap. With its large portfolio, HGI Realty will be able to offer many site locations to tenants, particularly those that want to roll out new stores across the country. HGI will own between 15% and 20% of the industry's space by year-end. "Tenants will be happy with the efficiency of dealing with one owner, but they may also be concerned that a developer of this size might result in a less competitive situation," Sullivan adds.
The merger combines the best and worst performers of the outlet REIT field. McArthur/Glen's stock never recovered from a mid-1994 drop, which hurt its ability to secure credit lines for expansion. Bumping against its debt limit, the firm increased the upper range of its debt limits from 50% to 60% last year. Its payout to projected cashflow is estimated at a high 85%. Meanwhile, vacancies in its 3.2 million sq. ft. portfolio were reportedly higher than the industry average. In effect, it had few options.
HGI Realty Inc. will be led by the following executives: McArthur/Glen chairman Alan Glen will become chairman, and Horizon's chairman, CEO and president Jeffrey A. Keff will become co-chairman, CEO and president. In addition, Horizon chief financial officer George Haworth will hold the same title in the new company, and McArthur/Glen COO James Harris will become senior vice president. Cheryl McArthur, co-founder, president and CEO of McArthur/Glen Realty, will retain an interest in the new company and stay on as a consultant.