Call it the summer of spending. When General Growth Properties announced Aug. 20 that it would acquire the venerable Rouse Co. in a deal worth $12.6 billion, it was the latest in a series of big-money plays that saw Simon buy Chelsea Property Group for $3.5 billion and Mills Corp. buy a $1.3 billion stake in nine malls owned by GM’s pension plan.
But even in a season of big deals, GGP’s acquisition of Rouse stands out. One clear reason is price. GGP agreed to pay $67.50 a share for the Columbia, Md.-based Rouse, a 33% premium over the REIT’s previous close, and also agreed to assume $5.4 billion in Rouse debt. Given the quality of Rouse’s portfolio and the synergies that the combined companies will enjoy, "We strongly believe that it is a fair price," Bernie Freibaum, CFO, told analysts shortly after the deal was announced.
To Barry Vinocur, the editor and publisher of Realty Stock Review, REIT Wrap and REIT Newshound, the deal seems likely "to rekindle the smoldering debate" over whether REITs’ NAVs are too low — a debate he says could "have very real implications for investors."
The acquisition, which is expected to close in the fourth quarter, goes a long way toward bolstering GGP’s already strong portfolio. Rouse either owns or holds stakes in 37 malls and other retail properties totaling 40 million sq. ft., among them some of the best-known retail sites in the country, including Chicago’s Water Tower Place, Boston’s Fanueil Hall Marketplace and Manhattan’s South Street Seaport. Rare is the slacker in its lineup: Rouse’s retail space generates sales of $439 per sq. ft. and has an occupancy rate of 92%.
"We are in place to make the equivalent of five years worth of acquisitions in one fell swoop," CEO John Bucksbaum told the analysts. "The Rouse portfolio has always been considered among the most highly productive and well positioned collection of properties in our business."
It also gives GGP a new business component in the form of land development. Rouse is considered the father of planned communities, having built the town of Columbia, Md., and the Las Vegas suburb of Summerlin.
"Geographically, the two companies could not fit any better," Bucksbaum said, ticking off the areas in which he sees combined strength: Las Vegas, Denver, Salt Lake City, Chicago and all of Texas among them. It also gives GGP entrée into two entirely new areas, New Jersey and New York.
Is bigger necessarily better? In this case, GGP clearly believes it is. Faced with a dearth of new areas in which to expand, Rouse will provide GGP with a roster of properties ready for redevelopment and improve its ability to offer "one-stop shopping" to retailers looking for new space, including Europeans clamoring for an American presence.
GGP’s president and COO, Bob Michaels, said Rouse’s centers can be improved through the addition of streetscape retail, more specialty leasing, additional restaurants and in some cases theaters. "There remains substantial upside in this portfolio," he said.
But nothing on such a large scale comes without a price. When the deal closes, GGP will be carrying debt of $23 billion, or 71% of its total capitalization. It vows to begin immediately to work that down.
With stratospheric valuations becoming commonplace, it is possible GGP paid too much? "It’s too soon to know," said Vinocur. But he quickly added that the Chicago company’s management "is among the best of the best. They’ve made a lot of money for a lot of people."