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MEPC Faces New Horizon

With parent MEPC Plc. shopping its U.S. holdings to the highest bidder, MEPC American Properties Inc. tries to keep the real estate fires burning.

The officers and employees at Dallas-based MEPC American Properties Inc. are likely starting the new year with a bittersweet view of the real estate business.

During the last five years, the shopping mall investor has flourished -- tripling the size of its holdings, completing renovations at several of its properties and even restarting its dormant office and industrial development business. In fact, MEPC American has done so well, that its British owners -- London-based MEPC Plc. -- have decided to put the company up for sale.

"It was something that we certainly didn't anticipate would happen," says MEPC American president David Gruber, of the late-September decision to put the U.S. subsidiary on the block. "The decision was based in part on how good the U.S. markets were performing. If ever there was a time to sell, now is the time."

With real estate investment trusts and pension fund investors scrambling to acquire assets, MEPC American has an attractive portfolio that is likely to woo potential buyers. The company has seven regional shopping centers and approximately 4 million sq. ft. of first-class office and industrial space.

"We've had a million inquiries," says Gruber, who has headed the 23-year-old U.S. investment company since 1983. "We hope to sell the company as a single unit, or break it into two: one retail and one office component. The last thing we will do is sell the assets off, because we think there is a lot of value built up in the company."

Branched out from its roots Founded after World War II, MEPC Plc. already was a major, publicly held residential and commercial developer when it began growing internationally. The British real estate company set up subsidiaries in Canada, Australia, the United States and Europe. Building U.S. assets, however, is what MEPC American's parent had in mind in the mid-1970s, when it first started acquiring industrial buildings in the Midwest. Later, MEPC expanded into retail and office projects in Minnesota, Colorado and Texas.

In 1981, when MEPC American branched out into the Sun Belt, the company relocated its headquarters from Minneapolis to Dallas. And after investing primarily in office and industrial buildings during the 1980s, MEPC American refocused its operations on regional shopping malls.

"We were developing and buying office buildings in Dallas, Houston, Denver and Minneapolis, and we did very little with our retail holdings," recalls Gruber. "It wasn't until the late 1980s that we made the move to divest some of our office holdings and make more of a commitment to retail. As it turned out, it was great having regional malls in a time when people were writing off between 50 and 70 percent of their net worth in office properties."

During the early to mid-1990s, MEPC American increased its mall portfolio from two original properties -- 760,000 sq. ft. Apache Mall in Rochester, Minn., and 1.2 million sq. ft. Boulevard Mall in Las Vegas -- with a series of acquisitions. Today, the company's retail properties account for more than 70 percent of its U.S. assets.

"From 1993 to 1997, we had a 37 percent annual growth in operating income from buying regional centers," Gruber says. "We went from a $300 million company to a $1 billion-plus company over a five-year period."

Gruber says MEPC American's retail investment strategy has proved successful by acquiring the right properties at the right time. "When we started buying in the early 1990s, it was before the REITs were established and there really weren't many buyers," he notes. "That enabled us to acquire properties for very good prices."

In 1993, MEPC American made its first major purchase, acquiring 1.2 million sq. ft. Cumberland Mall in Atlanta and 1.5 million sq. ft. Northridge Fashion Center in Los Angeles for approximately $300 million. Between 1995 and 1996, the company spent approximately $350 million on three more centers: 1.1 million sq. ft. Valley Plaza in Bakersfield, Calif.; 1.4 million sq. ft. Regency Square in Jacksonville, Fla.; and 478,200 sq. ft. McCreless Mall in San Antonio.

Not without speed bumps MEPC American's rapid expansion into retail didn't come without a few hitches. Several of the properties had to be remodeled and faced retenanting because of the loss of anchor department stores. And in 1993, just after acquiring Northridge Fashion Center, a devastating earthquake nearly decimated the 16-year-old, two-level mall, causing $100 million in damage.

"The [center's purchase] closing and the Northridge earthquake were almost simultaneous," Gruber said. "The morning of the quake, the center's general manager called me and told me that two parking garages had fallen down and a department store had collapsed. We ended up being closed for a year and a half to rebuild."

While Gruber admits that the center has been slow to achieve pre-quake sales, he notes that "in the last 12 months, it's been doing very well, with sales of more than $300 per sq. ft."

Indeed, sales at all of MEPC American's centers average more than $300 per sq. ft. "Several are in the $370 per sq. ft. range," Gruber says, adding that the company's retail properties overall are more than 92 percent occupied. "In each of our centers, the occupancy has increased in the last 12 months."

"Right now, we have about a $175 million development program in place in Dallas, Minneapolis, Jacksonville, Fla., and Los Angeles," says Gruber. The biggest chunk of that program is MEPC American's expansion of its flagship Colonnade office complex in North Dallas, to which MEPC will add a 16-story, 370,000 sq. ft. office tower.

MEPC American is working on other office and industrial projects in the Dallas area and in Minneapolis. These new deals, however, have taken a backseat to MEPC Plc.'s decision to put the U.S. operations up for sale.

Pressure to backtrack? While many American companies are trying to go global, Gruber says MEPC Plc. is retreating to its homeland in order to pay its shareholders a large, one-time dividend and to focus on gaining value from its U.K. holdings. "The company's share price was not keeping up with other British property companies," he says. "And there was a lot of pressure on the company to do something substantial to change its fortunes."

While MEPC Plc. sold its European holdings in 1996 for about $500 million, the $6 billion British company's remaining overseas subsidiaries now account for about 30 percent of its assets and 50 percent of its total income.

MEPC American has hired Goldman Sachs & Co. to solicit offers for the firm; Gruber says he expects a sale to take place sometime this spring. According to Tom Lardner, chief executive of Dallas-based L&B Group (another institutional investor), finding a buyer should not be difficult.

"There will be a lot of bidders," he says. "What makes MEPC American valuable and attractive is the combination of its assets and the quality of the company operations."

Certainly, MEPC American's management is hoping the potential buyer will value what the company has accomplished in the last five years. "Maybe I'm naive, but I have a sense that something positive will evolve out of all this," he says. "I don't plan on retiring. I still have a lot of ambition and enthusiasm for this company and the business."

Steve Brown is a Dallas-based freelance writer specializing in commercial real estate.

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