At a time when consolidation is rocking the hotel, apartment and office sectors, there have been few major mergers in retail. The retail REIT market is cluttered with about 60 different companies, many with a market cap at less than $100 million. As a comparison, the number of hotel REITs total less than 20.

And, new retail REITs are still arriving. In March, Morgan Keegan & Co. in Memphis took public United Investors Realty Trust, a Houston-based company that owns 16 centers. The initial public offering was valued at $76 million.

Intransigence runs deep in the sector, and many of the bigger companies still eschew mergers. The mind set of the retail sector is best summed up by Morgan Keegan's Andrew Shipman, a senior equity analyst, "There are still opportunities for [retail] REITs to grow without looking to consolidate."

The lack of mergers in retail stems largely from the mentality of the management, which is neither willing to sell nor willing to make a hostile offer, says Larry Raiman, analyst with Donaldson, Lufkin & Jenrette, New York.

Wall Street predicts consolidation will come to the sector, says James Steuterman, executive vice president of New Plan Realty Trust, New York.

"I'm just not convinced it will be in the same meaningful way as office or hotels," he says. "The retail shopping center environment is highly fractured and built upon the talents of individuals who formed companies, took risk and built big portfolios. These personalities are very much involved in the businesses today."

Change of attitude While mergers between retail REITs are still rare, early 1998 has been marked by a number of large portfolio sales, which have the same effect as mergers: narrowing ownership in the hands of fewer companies.

A number of substantive deals rocked the staid world of shopping center REITs in the first quarter of the year. Simon DeBartolo Group, the largest shopping center REIT, agreed to buy privately held Corporate Property Investors for $4.8 billion in cash and stocks. Including the assumption of $980 million in debt, the transaction was valued at $5.78 billion.

The high price was due to the hotly contested run at CPI, as The Rouse Co., General Growth Properties Inc. and Vornado Realty Trust were also interested in the company. Rouse got a second chance at a big portfolio when it teamed with Westfield America Inc. to acquire for $2.55 billion a portfolio of shopping centers from TrizecHahn Corp.

There is substantial room for consolidation in retail - outside the mall sector in particular, says Mark Berry, a vice president with New York-based Duff & Phelps Credit Rating Co.

"The ownership is highly fragmented among regional players," he says. "There are very few national players that own freestanding buildings and community centers. We see a lot of consolidation opportunity, but there is only so many attractive portfolios out there."

Joint ventures Simon DeBartolo, a company with a big appetite for acquisitions, in early March completed a joint acquisition of an ERE Yarmouth-managed portfolio of 12 regional malls. The Macerich Co. joined Simon DeBartolo in the $974.5 million portfolio, with each partner coming in on a 50-50 basis.

Before this deal, Macerich basically held to a one-off acquisition pace for the past year. Was the joint venture a change in strategy? Not necessarily, says Edward Coppola, executive vice president of Macerich.

"We view this as Macerich being nimble, creative and flexible in maximizing value for its shareholders," he says. "We feel it is a portfolio that we can make a lot of money on together."

Macerich acquired three malls in 1997 for $300 million, and not counting the joint venture, Coppola says, its volume should be about the same in 1998. And maybe there is another big portfolio deal in the future. "We see opportunity for assets currently in institutional hands, and in individual or private hands that will end up in public hands," Coppola says.

The Simon DeBartolo-Macerich partnership is a slight change from the joint venture that Developers Diversified Realty Corp. formed with Prudential Real Estate Investors at the end of 1997. Those two firms will form a separate entity to invest in retail properties in need of substantial re-tenanting or market positioning. DDR contributed $70 million to the capitalization of the new company, DDR Management LLC, and PREI added $210 million.

Scott Wolstein, DDR chairman and chief executive officer, explains the advantages of the arrangement. "This gives us the opportunity to pursue transactions that wouldn't necessarily be long-term holds," he says. "We can get in, do some work and get back out. It also gives us an opportunity to leverage off Prudential's capital, and it creates income for DDR."

This does not mean DDR will avoid traditional investments. Last year, the company did about $300 million in acquisitions and development. This year, says Wolstein, "We already have $400 million in the hopper, and there are several more deals coming."

In a union of another ilk, Colony Capital Inc., a Los Angeles-based opportunity fund, will make a $100 million investment in Franchise Finance Corporation of America, a freestanding store REIT. In February, Colony announced it will make its equity investment in newly issued shares of FFCA stock representing about 8 percent of the company. Colony also will get warrants to purchase an additional 3 percent of the company.

"We wanted to broaden our horizons, and we needed a strategic partner," says Morton Fleischer, chairman and chief executive of FFCA. "Colony's investment experience and financial sophistication will be invaluable as our company grows. With this important investment, we have added to our financial flexibility and capabilities."

To buy or not to buy General Growth Properties has bid on nearly all the major portfolios that have come on the market, only to see Simon DeBartolo walk away with most of them. "They have been aggressive on these acquisitions," says John Bucksbaum, executive vice president. "We made a conscious choice to withdraw from the bidding process when we didn't feel the price made economic sense."

But General Growth has been aggressive elsewhere. In 1997, the company sated its acquisitive desires with a number of one-off transactions totaling $520 million. This year, it pulled off a coup when it nabbed eight shopping center properties from United Kingdom-based MEPC for $871 million. "We are not just growing to get bigger, but to make General Growth better and more profitable in the long term," Bucksbaum says.

Big portfolio deals must be accompanied by wisdom, says Adam Metz, director of acquisitions for Urban Shopping Centers Inc., Chicago. The company has not made any major portfolio transactions in over a year, although it did acquire $750 million worth of properties over a 15-month period of time.

"We are interested in portfolios, but you have to figure out what makes sense from a financial point of view," Metz says.

First Washington Realty Trust Inc., which concentrates on anchored shopping centers, has not made a large portfolio buy, either. Since 1994, when it went public, the Bethesda, Md.-based REIT has tripled its capitalization to $600 million and its portfolio has grown from 20 to 50 centers. Last year, it bought nine centers for just over $100 million. Through the first quarter of 1998, it has announced acquisitions of approximately $50 million.

"We are seeing private to public mergers and acquisitions, but not public to public," says Stuart Halpert, chairman of First Washington. "The reason for that is the economy has been strong, business has been good and interest rates stayed down. You will see more consolidation when one or more of those factors retreat."

There is much for sale on the private side of the business, Metz adds, which also explains the lack of consolidation among the shopping center REITs themselves.

That, too, is beginning to change.

REIT-to-REIT deal In January, Kimco Realty Corp., a New Hyde Park, N.Y.-based strip center REIT announced it would acquire The Price REIT of Los Angeles in an $835 million transaction. This was Kimco's first acquisition of another company.

"If there is opportunity in acquisitions, we will pursue it," says Milton Cooper, Kimco chairman and chief operating officer. "The strategic combination of Kimco Realty and Price REIT will create a company with the skills and resources to pursue a wide variety of growth opportunities by expanding our presence in key markets nationally, diversifying our tenant base and giving us greater management depth."

Kimco was already the nation's largest publicly traded owner and operator of neighborhood and community shopping centers with real estate valued at $1.4 billion. The Price transaction will add a number of larger power centers to the mix.

Kimco also announced plans to spin off a new REIT that will be 75 percent leveraged. The move was made so Kimco could get more leverage on its balance sheet, according to Raiman of Donaldson, Lufkin & Jenrette.

"The current REIT has an investment grade rating that comes with low leverage requirements," he says. "Kimco wants to lever off certain types of retail real estate, such as those that carry high credit leases. The leveraged REIT will give them that opportunity."

Bigger is better Currently, there are more than 40 real estate companies, both REITs and C Corps., with a $1 billion market cap. There were none five years ago. "The efficiencies of the larger companies are apparent on both the cost-savings side and the revenue-generating side," says Lee Schalop, equity research analyst at J.P. Morgan Securities Inc., New York. "As a general rule, bigger is better, but as long as you are over some type of threshold, you will attract interest."

General Growth's John Bucksbaum agrees. "As malls are consolidated into fewer hands, this is going to create greater opportunities to strengthen these properties," he says. "We can do a lot of innovative things within the malls by having a larger portfolio. With larger portfolios you can work with retailers, offering them what would be one-stop shopping."

With acquisition also comes a new pool of talent, including alignments with experienced executives. In the spring, FAC Realty Trust entered into agreements to buy community centers from two private firms: Konover South and Rodwell/Kane.

At the conclusion of the Konover South transaction (11 centers, $100 million), Simon Konover will become chairman of the company that will be renamed Konover Property Trust. And with the Rodwell/Kane transaction (seven centers/$47.5 million), FAC Realty created an alliance with developer Roy Rodwell. C. Cammack Morton, president and chief executive officer of the Cary, N.C.-based strip center REIT, indicated that his company would be working with Rodwell on future projects.

Another REIT picking up portfolios and partners is San Diego-based Burnham Pacific. Last year, the company acquired $525 million of new shopping centers.

Among its major plays was an agreement to buy 10 shopping centers from Powell Development Co., the first five of which were bought for $23.3 million.

Burnham Pacific continues to be active. "1998 has been a good year so far," says Jim Gaube, chief investment officer at Burnham Pacific. "And we have several deals in the works."

In January, the company closed its $302.4 million acquisition of a 2.6 million sq. ft. portfolio of retail from Golden State Properties. Simultaneous to the closing of the acquisition, affiliates of Blackacre Capital Group LP (the previous majority owner of the Golden State Properties Portfolio) and Westbrook Partners LLC invested $120 million in newly issued convertible preferred securities of Burnham Pacific.

The key to survival for shopping center REITs are the consolidation opportunities, Schalop advises. "Owners can slash costs dramatically and in many cases raise rents because they have more leverage. If you are a single mall owner or you are Simon DeBartolo and you have to negotiate a lease with a national client, you have very different leverage."

The trend line for 1998 appears to be running along the same pattern of previous years. Except for the few companies like FAC Realty Trust, strip and community shopping center REITs will continue to grow by one-off deals.

As First Washington's Halpert explains, "Companies have not been compelled to merge so as to generate shareholder value. When the economic climate is such that you can regularly deliver substantial returns to shareholders, there is really no reason to look to an M&A to create shareholder value."

Apparently, mall REITs operate within a different set of parameters. Consolidation, even if it is not happening among the REITs themselves, is rapidly moving forward as large, privately held portfolios are being gobbled up by public companies.