Mall REIT Mergers Could Grow Hostile, Expert Warns

Could the proposed $12.6 billion purchase of The Rouse Co. by General Growth Properties mark the end of the line for cooperative consolidation in the regional mall industry? At least one expert thinks so. “We'll see another round of consolidation,” predicts Fred Witt, national director of real estate tax services for Deloitte Consulting, “but I expect them to be more aggressive, hostile takeovers.”

The failed attempt by Simon Property Group and Westfield America to purchase Taubman Centers Inc. in 2003 may foreshadow what's to come. “There's no doubt in my mind that Taubman will ultimately get sold,” says Arthur Milston, managing director of Granite Partners LLC, a real estate investment banking firm. “At some point, the [competitive mall companies] are going to look very attractive.”

There are currently seven REITs in the regional mall industry — CBL & Associates Inc., Pennsylvania Real Estate Investment Trust, The Mills Corp., The Westfield Group, General Growth, Simon and Taubman.

“In my opinion, we could end up with three to five major REITs in the next few years,” says Greg Maloney, president & CEO of the retail group of Jones Lang LaSalle Inc.

But the pressure to consolidate may actually wane over the next 12 to 18 months before accelerating. “None of them are under financial duress, and if they're going to sell, it's going to be at a very rich price,” says Lou Taylor, an equity REIT analyst with Deutsche Bank Securities Inc. “After a certain size there's no reason to focus on increasing the asset base. Shareholders are looking for earnings growth.”

REITs also are concentrating on assimilating the portfolios they've acquired into their corporate structure, Witt notes. For example, he expects that General Growth will be less concerned about acquisitions in the near-term and more focused on absorbing the Rouse assets into its portfolio.

The deal between General Growth and Rouse — expected to close in the fourth quarter once Rouse shareholders have approved the transaction — will add 150 properties in 22 states to General Growth's existing mall portfolio of 178 owned and managed centers.

General Growth is focusing intently on operations. “It's one of those deals where 1+1 equals 3,” says John Bucksbaum, CEO of Chicago-based General Growth. “We will be able to build upon the Rouse properties, and our existing portfolio is going to benefit as well.”

In particular, General Growth stands to gain from Rouse's community development business. Rouse is the developer of master-planned communities in Columbia, Md.; Summerlin, along the western edge of Las Vegas; and Bridgelands, a project on the western side of Houston. The company also owns an interest in The Woodlands, a master-planned community near Houston.

Although analysts expect General Growth to divest the community development business, Bucksbaum says that the REIT has no plans to sell it. “It's an interesting business that we're going to pursue for the foreseeable future,” Bucksbaum says. “We haven't been in that business, but we're comfortable with it.”

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