After a flurry of M&A activity during the past four years, acquiring properties is almost second nature to Stuart Tanz, president and CEO of Pan Pacific Retail Properties, a real estate investment trust (REIT) based in Vista, Calif. More than a year ago, Tanz became interested in the opportunity to acquire another REIT, Emeryville, Calif.-based Western Properties Trust.

Up until that time, Pan Pacific had acquired only individual pieces of property, so acquiring a company involved more of a challenge. Tanz and the Pan Pacific management team combed over Western Properties' real estate offerings and found they reached the same markets, offered the same type of real estate (neighborhood shopping centers) and provided a great balance sheet.

“Western Properties was a perfect fit for Pan Pacific,” Tanz said. In November 2000, Pan Pacific finalized its deal to acquire Western Properties Trust in a stock-for-stock transaction valued at $440 million, including $200 million in debt. The acquisition made Pan Pacific the largest neighborhood shopping center REIT on the West Coast with coverage in California, Washington, Oregon and Nevada.

Western Properties Trust added 50 shopping centers to Pan Pacific's portfolio, bringing its roster to a total of 110 shopping centers with more than 15 million sq. ft. of space and an approximate market value of $1.4 billion. “Occupancy within the Western portfolio is approximately 93%, and its largest tenant, Raley's Supermarket, averages sales north of $500 per sq. ft.,” said Jeff Olson, co-head of real estate research at New York-based UBS Warburg, an investment banking firm.

The combined occupancy rate is now around 96% to 97%, according to Tanz. The company's goal is to increase the level to the three-year average of 97% to 98% established before the acquisition.

Making the right moves

“Certainly with the acquisition, in one move we achieved five strategic objectives,” Tanz said. He explained that this deal expanded the company's market presence on the West Coast, strengthened public equity float (increased the company size by 55%), strengthened the balance sheet, enhanced tenant synergies, and added properties in West Coast cities where operations and leasing offices already existed.

Acquiring Western Properties also put Pan Pacific squarely in the development arena. The company is now involved in two development projects in Walnut Creek, Calif.: Olympic Place, a $35 million theater/retail development; and Plaza Escuela, a $42 million, 156,000 sq. ft. development featuring Andronico's Market and The Container Store. A third project, On Broadway, is a $36 million urban/retail entertainment center in Redwood City, Calif.

UBS Warburg's Olson was cautious about the deal at first, but he has since become more positive about the transaction. “The leasing is going better, and they're going to increase occupancy,” he said. “Also, as far as the three development deals, it looks like those are going to come through. We were more wary about the theaters (included in two of the development deals), but the returns are higher than expected.

“Pan Pacific's earning estimate per share is at a high valuation of 8.3, and it can afford to increase its (number of) properties,” Olson said. “The higher the valuation number the more the shareholders believe in your story.”

When evaluating REITs, shareholders follow three factors, including cash flow, properties owned and management, Olson explained.

Pan perspectives

Pan Pacific grew from its initial holdings of 22 shopping centers at its IPO in September 1997, to its current portfolio of 110 centers by acquiring properties that fit the company's mission, according to Tanz. “I will always go out and look for opportunities that offer growth and value for shareholders,” he said.

When considering acquisitions, the management team focuses on shopping center properties that match Pan Pacific's lineup, such as regional malls containing grocery stores and drug stores. According to Tanz, Pan Pacific focuses on these types of stores because of their inherent stability. The company's other advantage during an economic downturn, Tanz said, is a diversified property lineup.

Tanz said Pan Pacific is always in the market for new properties that offer its shareholders value. Tanz envisions the combined entity accelerating the internal growth and making Pan Pacific a stronger player in the REIT sector.

Pan Pacific at a glance

  • Pan Pacific Retail Properties is a neighborhood shopping center REIT based in Vista, Calif., with 110 West Coast properties.

  • NYSE symbol: PNP

  • Price as of 2/15/01: $22.18

  • 52-Week High: $23.50

  • 52-Week Low: $17.50