Call it the summer of spending

When General Growth Properties announced last month that it would acquire the venerable Rouse Co. in a deal worth $12.6 billion, it was the latest in a series of big-money plays that saw Simon buy Chelsea Property Group for $3.5 billion and Mills Corp. buy a $1.3 billion stake in nine malls owned by GM's pension plan. Subsequent to the General Growth/Rouse merger, five public REITs will now control 75 percent of the top U.S. malls, according to Friedman Billings Ramsey research.

But even in a season of big deals, General Growth's acquisition of Rouse stands out. One clear reason is price. General Growth agreed to pay $67.50 a share for the Columbia, Md.-based Rouse, a 33 percent premium over the REIT's previous close, and also agreed to assume $5.4 billion in Rouse debt. General Growth will pay $500 million in closing costs. The deal represents a first-year unlevered cap rate between 5 percent and 5.25 percent. Given the quality of Rouse's portfolio and the synergies that the combined companies will enjoy, “We strongly believe that it is a fair price,” CFO Bernie Freibaum told analysts shortly after the deal was announced.

To Barry Vinocur, the editor and publisher of Realty Stock Review, REIT Wrap and REIT Newshound, the deal seems likely “to rekindle the smoldering debate” over whether REITs' NAVs are too low — a debate he says could “have very real implications for investors.”

The acquisition, which is expected to close in the fourth quarter, goes a long way toward bolstering General Growth's already strong portfolio. Rouse either owns or holds stakes in 37 malls and other retail properties totaling 40 million square feet, among them some of the best-known retail sites in the country, including Chicago's Water Tower Place, Boston's Fanueil Hall Marketplace and Manhattan's South Street Seaport (shown on opposite page). Rouse's retail space generates sales of $439 per square foot and has an occupancy rate of 92 percent.

Benefits of the deal

“We are in place to make the equivalent of five years worth of acquisitions in one fell swoop,” CEO John Bucksbaum told analysts. “The Rouse portfolio has always been considered among the most highly productive and well-positioned collection of properties in our business.” The deal will bring General Growth's portfolio closer in size to that of Simon Property Group. According to Retail Traffic's 2004 ranking of top retail space owners, approximately 30 million square feet will differentiate No.1 Simon and No.2 General Growth.

It also gives General Growth a new business component in the form of land development. Rouse is considered the father of planned communities, having built the town of Columbia, Md., and the Las Vegas suburb of Summerlin.

“Geographically, the two companies could not fit any better,” Bucksbaum said, ticking off the areas in which he sees combined strength: Las Vegas, Denver, Salt Lake City, Chicago and all of Texas among them. It also gives General Growth entrée into two entirely new areas: New Jersey and New York.

Is bigger necessarily better? General Growth believes it is. Faced with fewer new areas in which to expand, Rouse will provide General Growth with a roster of properties ready for redevelopment and improve its ability to offer “one-stop shopping” to retailers looking for new space, including Europeans clamoring for an American presence.

General Growth's president and COO, Bob Michaels, said Rouse's centers can be improved through the addition of streetscape retail, more specialty leasing, additional restaurants and in some cases theaters. “There remains substantial upside in this portfolio,” he said.

But nothing on such a large scale comes without a price. General Growth will be carrying debt of $23 billion, or 71 percent of its total capitalization. It vows to begin immediately to work that down.

With stratospheric valuations becoming commonplace, is it possible General Growth paid too much? “It's too soon to know,” says Vinocur. But he quickly adds that the Chicago company's management “is among the best of the best. They've made a lot of money for a lot of people.”