In the 10 years since General Growth Properties went public it has executed a consistent game plan: gain market share through acquisitions, and redevelop under-performing properties.

During that stretch, the portfolio of the Chicago-based real estate investment trust (REIT) has swelled from 21 malls comprising 13 million sq. ft. in 15 states to 160 malls, owned or managed, in 39 states for a combined total of 141 million sq. ft.

In 2002 alone, the giant mall REIT added 21.1 million sq. ft. to its portfolio, raising the total gross leasable area (GLA) owned to 109.6 million sq. ft., an increase of 24% over the previous year. General Growth is second only to Simon Property Group with 183.3 million sq. ft. of GLA owned in this year's Top Shopping Center Owners Survey.

The acquisitions were fueled by low interest rates and expanded use of joint ventures. General Growth partnered on $276 million in joint-venture purchases with Illinois' Teachers Retirement System and New York State Common Retirement Fund. “For a decade, it's all been about opportunity and the properties where we can create additional value,” says General Growth CEO John Bucksbaum.

Target: Redevelopment

Key to the company's expansion strategy has been targeted redevelopment initiatives. In 2001 and 2002, it spent more than $567 million on property improvements. Although redevelopment slowed in the first part of 2003, the company has $1 billion in redevelopment either under way or planned, Bucksbaum says.

Having pulled through the sluggish economy better than many sectors of real estate, retail stocks have become a safe haven for investors. And General Growth is among the favorites. Buyers have taken note of the company's growing portfolio, and skyrocketing funds from operations (FFO) have driven up its stock price. In June the company's stock reached a 52-week high of $60.75, up from a July 2002 low of $41.35.

General Growth's strategy has paid off. Since it went public in 1993, the company has seen average annual growth in funds from operations (FFO) of 15% per share. Revenues for the first three months of 2003 were $273.9 million, or $70.8 million higher for the same period in 2002 — a 35% increase.

Credit Suisse First Boston has raised its estimates on GGP's FFO from $5.58 per share in 2002 to $6.25 for 2003 based on the company's recent acquisition of the St. Louis Galleria, Coronado Center in Albuquerque and of the purchase of Ivanhoe's shares in seven regional malls the companies held together.

The boost came from $2.9 billion in 28 regional malls, a stake in two regional malls and other properties.

General Growth is not slowing down. Near the end of the second quarter, the company was busy closing an $869 million deal to buy out Ivanhoe Cambridge's stake in seven malls the two companies hold jointly. The investment makes General Growth the owner of the 430,000 sq. ft. St. Louis Galleria and the 400,000 sq. ft. Coronado Center. The deal was expected to close in June.

Retail Sticker Shock

The company's retail rental rates increased between 1% and 3.25% in 2002, resulting in higher pricetags for mall properties. Real Capital Analytics reported that the average price of mall retail properties jumped 4% in 2002.

The rising value of retail properties is a Catch-22. REITs don't want to pay too much for a property, but they don't want to miss an opportunity to buy a property that will perform well long-term. Low interest rates coupled with sellers' eagerness to sell at a time when they can still get a premium for their properties could create more acquisition opportunities for General Growth in the foreseeable future.

Morgan Stanley REIT analyst Matthew Ostrower says that GGP's $869 million deal to buy the St. Louis Galleria, the Coronado and Ivanhoe's stake in properties the company's held jointly was 10% higher than he expected. However, he adds that low debt costs associated with the deal will provide an increase to General Growth's FFO.

“I would like to think that we are always picky, but as the returns go down, I think, yes, you have to be even more selective,” Bucksbaum says. “We will continue to look for properties that have been under managed, under leased” and located in regions that show promising demand for residential growth and demand for retail in the long term.