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Shuffling The Deck

Call it the “Westfield Two-Step.”

In deals worth a combined $1.43 billion, Australian mall giant Westfield Group reached agreements with regional mall REITs CBL & Associates Properties Inc. and Simon Property Group Inc. that increases its footprint in Florida and lowers its exposure in St. Louis.

Analysts lauded the deal from all sides. For Westfield, the deal fits in with its “clustering” strategy by bulking up its presence in Florida. Meanwhile, for Chattanooga, Tenn.-based CBL, building a portfolio in St. Louis fits into its strategy of accumlating strong centers in secondary markets. It now becomes the biggest regional mall owner in St. Louis. Lastly, for Simon, the Florida properties came with its acquisition of Mills Corp. and selling them culls its portfolio of assets that don't fit.

The CBL/Westfield deal — worth an estimated $1.03 billion in all — is a complicated transaction involving two parts. The two sides have formed a vehicle called CW Joint Venture LLC. Westfield will contribute three of its four St. Louis centers to the joint venture while CBL will add six malls — including its only St. Louis property — and three associated smaller centers. In a separate deal, Westfield will sell its fourth St. Louis center to CBL outright.

“The St. Louis market is a very stable and steady market,” says a spokesperson for CBL. “We garner economies of scale by maximizing our portfolio…. We strongly feel these malls complement our portfolio of dominant shopping centers.”

As part of the deals, CBL will assume a $140 million loan on the property it is acquiring outright, Chesterfield Mall. The joint venture, meanwhile, will assume $320 million of debt on Westfield's three other St. Louis properties.

While it is a joint venture, CBL will be the dominant partner. It will assume management and leasing of the properties and retain 100 percent of the property cash flow after payout of joint venture units and debt service costs. Westfield will retain a financial stake through $420 million of perpetual preferred joint venture units. Westfield will be entitled to a 5.0 percent annual preferred distribution on these units. (CBL, meanwhile, will have the right to purchase these units following the fifth anniversary of the deal's closing.) This structure is advantageous since it avoids tax payments that would be associated with an outright sale, according to Yaacov Gross, corporate partner with Morrison & Foerster LLP, a law firm that advised CBL on the deal.

Although CBL and Westfield have not teamed up on prior deals, Gross says the fact that management at both firms have a close relationship was integral in getting the joint venture done.

“There's a close relationship between the Lebovitz family and Lowy family,” Gross says. “I think they know each other on a personal basis. That's probably the background to how they came together on the specific arrangement. And I can tell you that the relationship was important because it's a complicated transaction.”

The estimated $1.03 billion valuation of the four St. Louis Westfield malls is based on a capped 6.2 percent weighted average cap rate calculated on NOI after management fees and a structural reserve. CBL is also projecting a five-year increase of 20 to 30 basis points on the initial yield of the investment.

One concern raised by Citigroup REIT analyst Jonathan Litt is that the deal leaves CBL leveraged up to 51 percent — a high level given the suddenly shaky credit environment.

In Westfield's other deal, it is acquiring the Westland and Broward malls for $400 million from Simon. Friedman Billings Ramsey Group REIT analyst Paul Morgan estimates the cap rate on that deal is a low 5.5 percent. This is a price that is “likely reflecting the upside redevelopment potential and attractive South Florida location of the two centers,” Morgan wrote in a report. For Simon, the deal lowers its concentration in Florida, where it has 45 properties. That might be a good thing since it gives it less exposure to hurricane and tourism risks.

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