Simon Property Group has shifted its expansion strategy into the premium factory outlet segment with its recent $4.8 billion acquisition of the 16.6 million-square-foot portfolio of Chelsea Property Group.

Chelsea, the biggest U.S. public outlet mall operator, owns 36 properties stateside and in Japan and has more than $200 million invested in 1.5 million square feet of space under development through 2005. Chelsea also has interests in one Mexican property and seven in Europe.

The transaction gives Simon a second development arm to complement its focus on lifestyle and town centers, and also offers further development inroads in Europe and Asia. With Chelsea's foothold in the Asian outlet business, Simon has the opportunity to build its full-price business there, says Bear Stearns analyst Ross Smotrich. Expect the combined company to sustain an active construction pipeline of over $500 million, says Friedman Billings Ramsey analyst Paul Morgan.

Simon will also gain a closer relationship with its tenants, many of which operate in both full-price and discount-fashion outlets. The retail tenant base in Chelsea properties is almost precisely the same at Simon-owned malls. “The merger makes the company a truly dominant force in the fashion segment of retail real estate,” Morgan says. He adds that opportunities also exist to boost rents at Chelsea properties, where occupancy costs are 8 percent, compared with 13 percent for Simon properties.

Chelsea's International Holdings
Name Location GLA (sq. ft.)
Gotemba Premium Outlets Gotemba, Japan 390,000
Rinku Premium Outlets Rinku, Japan 321,000
Sano Premium Outlets Sano, Tochigi Prefecture, Japan 229,000
Tosu Premium Outlets Tosu, Saga Prefecture, Japan 187000
Total 1,127,000

The deal represents an initial cap rate of 7.2 percent. Simon plans to operate Chelsea as a stand-alone subsidiary based in New Jersey and keep its staff intact.