General Growth Properties today announced a $1.1 billion deal to acquire JP Realty Inc. of Salt Lake City. The acquisition will add 18 malls and 26 community centers to the Chicago-based REIT’s portfolio.
General Growth says the deal, which is expected to close sometime in the second quarter, should generate an unleveraged return of about 10% on cost in a year.
The acquired portfolio includes 18 regional malls with about 10.3 million sq. ft. of GLA, 26 community centers with about 3.4 million sq. ft. of GLA, and an additional 1.3 million sq. ft. of industrial properties. The malls are 83% leased and posted average sales in 2001 of about $260 per sq. ft.
"The transaction looks like a new positive for General Growth," said Ross Nussbaum, retail REIT analyst with Salomon Smith Barney. "It’s accretive to Funds From Operation starting day one, and although it’s a little bit of a departure from the company’s core strategy, it’s a good fit because these are market-dominant assets."
The market also appeared to like the deal. Immediately after an acquisition announcement, the share price of the company doing the acquiring usually dips. But in trading on The New York Stock Exchange today, General Growth’s share price rose steadily and finally closed at $43.22, up $1.02 from the previous close.
The deal marks General Growth’s fifth acquisition since it became a public REIT in April 1993. After the transaction closes, General Growth will have ownership interests in 120 regional malls with an aggregate value of about $10 billion.
In a statement, General Growth CEO John Bucksbaum described JP Realty as the "dominant" mid-market retail property management and development company in the inter-mountain states region.
JP Realty focuses on the states of Utah, Idaho, Arizona, Nevada, Washington, California, Wyoming, New Mexico, Colorado and Oregon.
Financed by Rodamco bid
General Growth has been sitting on a $350 million cash pile as a result of its failed bid late in 2001 to acquire the portfolio of Rodamco North America. "General Growth has clearly been in the marketplace looking for a home for that money and JP Realty is obviously a good place to put it," Nussbaum said. "We understand they are also looking at a couple of other transactions, and this move does not preclude them from doing something else later in the year."
The total acquisition price of $1.1 billion includes about $440 million in cash, assumption of about $460 million of existing debt, and $116 million of existing preferred operating units.
The deal follows General Growth’s recent strong earnings report, in which the REIT posted a 12.2% increase in FFO for 2001. Other mall REITs have published similarly strong numbers. As a result, the rapidly consolidating mall industry is feeling pretty confident.
General Growth is "clearly very bullish on the fundamentals in the sector," Nussbaum said. "They feel it’s appropriate to be buying assets at this time, especially with interest rates so low. It’s very easy for General Growth to acquire a mall at an 8-and-a-half or 9-and-a-half percent cap rate and still make it attractive to their investors, because of where the mortgage rates are today."
-- Joel Groover