While speculation continues to swirl about the possibility of Simon Property Group going after bankrupt regional mall owner General Growth Properties, the Indianapolis-based REIT quietly worked out a deal to expand its outlet portfolio.

On Tuesday afternoon, while many in the industry were still at ICSC’s New York National Conference and Dealmaking, Simon announced it had reached an agreement to buy Prime Outlets Acquisition Co. and some of its affiliated entities from the Lightstone Group and Lightstone Value Plus REIT Inc. for approximately $2.3 billion. It is the largest deal in the retail real estate industry since 2007, before the credit crisis began.

The purchase price includes $713 million in equity and the assumption of $1.2 billion in non-recourse mortgage debt and the payoff of $405 million of existing construction debt. The $700 million in equity will be 80 percent in cash and 20 percent in Simon common operating partnership units. The debt payoff will be funded using its credit facility and cash.

Earlier in the day, Simon announced that it has entered into a new unsecured corporate credit facility providing an initial revolving borrowing capacity of almost $3.6 billion. The base interest rate on the Company's new facility is LIBOR plus 210 basis points.

The Lakewood, N.J.-based Lighstone Group has been struggling recently because of the cross-collateralized debt on its books.

The Prime Outlets portfolio includes 22 outlet shopping centers totaling 8.2 million square feet. Simon already owns 41 outlet centers in the U.S., which it acquired from Chelsea Property Group in 2004. That portfolio has performed extremely well during this downturn—for the third quarter ended Sept. 30, Simon reported that its outlet center portfolio was 97.5 percent occupied, compared to the 91.4 percent occupancy reported at its regional malls. Sales per square foot have also been stronger at the outlet properties, at $492 vs. $438 for regional malls.

It also controls a portfolio of Mills centers that are not quite traditional outlet properties but include many off-price retailers. Back in the spring of 2007, Simon, along with Farallon Capital Management, acquired the troubled company for approximately $7.9 billion, including assumed debt and preferred stock. At the end of the third quarter, Simon’s portfolio contained 36 former Mills properties, including 16 regional malls, 16 The Mills and four community centers.

Given the strength of outlet centers and Simon’s significant property management expertise, the new acquisition makes great sense, notes Robert McMillan, industry analyst with New York City-based Standard & Poor’s Equity Research Services. As of June, the Prime Outlets portfolio was 92 percent occupied and had sales per square foot averaging $370.

“I think it’s a good move on their part,” says McMillan. “Simon will be able to use its management expertise and its relationship with retailers to both increase sales per square foot and occupancy levels at the assets it’s acquiring.”

Moody’s Investors Service does not expect the deal to affect Simon’s debt ratings (currently at A3 with a stable outlook). Moody’s analysts think the transaction’s structure will not affect Simon's metrics or ratings, but will continue to monitor its capital structure and success at integrating the assets.

Meanwhile, because the size of this acquisition is relatively modest, Simon should have plenty of cash left over if it has its eyes on other assets, according to Rich Moore, analyst with RBC Capital Markets. Prior to today’s announcement, Simon had approximately $7 billion of cash available, plus it has just negotiated a new unsecured corporate credit facility which will provide the firm with a revolving borrowing capacity of $3.565 billion. The facility will mature in March 2013. It has also conducted several public debt offerings this year.

Simon declined to comment on the transaction.

Moore estimates that the Prime Outlets acquisition has been completed at a cap rate of approximately 8 percent, which he views as a very favorable price in today’s market. “I think [this deal] is excellent and they don’t have to rely on anyone else to complete it,” he says.

–Elaine Misonzhnik