Retail Traffic

Merger Benefits Companies

For two of the country's most successful and best known real estate companies, the decision to merge operations might have surprised outsiders. Dallas-based Trammell Crow Co. (TCC) and Faison & Associates Inc. of Charlotte, N.C., were both fast-growing, multi-market real estate firms when they decided to team up last summer.

In June, TCC paid $39.1 million to buy 32-year-old Faison's real estate development, management and leasing operations. By joining forces, the two real estate service companies hoped to dramatically expand their operations and become more competitive nationwide.

So far, the game plan is paying off.

"By making the kind of investments we have made in this business and acquiring a brand like Faison, we have attracted a lot of attention," says TCC president George Lippe. "As a result, we see a lot more national clients calling us for business and a lot more top-notch real estate people wanting to join our operation."

Faison president and CEO Philip W. Norwood, who was previously a TCC officer, rejoined the company as a vice chairman. And company founder Henry J. Faison became a director and executive vice president of TCC. Faison is also president of a new shopping mall subsidiary, Trammell Crow Faison Regional Mall Services (TCFRMS).

A step ahead The merger made TCC the country's largest non-REIT operator of retail properties, with close to 60 million sq. ft. of shopping center space. The deal also took the company a long way toward its goal of being a true nationwide retail real estate service company.

"1998 was a year of growth for us as a company where we accomplished a lot of our long-term objectives," says William Rothacker, president of Trammell Crow Retail Services (TCRS). "The addition of Henry Faison and (former Faison partner) Jimmy Culpepper and their team gave a big boost to our credibility in the retail marketplace. It showed retailers all over the country the kind of commitment we were willing to make to this business."

During the past three years, TCC has focused on creating the same kind of multi-level, nationwide service operation in the retail sector that it has long utilized in the office and industrial property markets. With 150 offices in the United States and Canada, TCC manages more than 200 million sq. ft. of real estate in almost 16,000 properties, using existing operations as well as new talent to set up a nationwide retail platform.

The 50-year-old real estate giant has been growing its retail tenant business, representing some of the country's largest merchants including PetsMart, OfficeMax, Blockbuster, Schlotzky's and Pearle Vision.

"By integrating its development, management and leasing operations, TCC's retail division is offering retailers almost every kind of property service, from construction management of new locations to dispositions of surplus stores.

"For the retailer, our goal is to do everything," Rothacker says. "We can find the right location for them. We can build it for them, and we can lease it to them."

And TCC last year set up a National Retail Financial Services division to invest in net-leased, single-tenant retail buildings. "We can buy the assets they own and in effect take them off their balance sheets," he says.

Growth period In 1997, TCC made its first big investment in the shopping center industry with its $28 million purchase of Cleveland-based Doppelt & Co., one of the country's best-known retail tenant rep firms. Last year's Faison purchase more than doubled TCC's retail management portfolio.

"There still aren't that many people - other than the big REITs - involved in the shopping center business in multiple markets," Rothacker says. "It's still basically a local business."

The acquisition of Faison expanded TCC's retail operations into new cities in the East and brought the company into the regional mall business for the first time. "In regional malls, we had a void and needed their general knowledge and development capabilities," Rothacker says. "They had a skill set that added to ours, and it's turned out to be a great marriage."

In the merger, Faison brought a management portfolio of 16 malls and more than 200 strip centers in markets stretching from Washington, D.C., to Georgia. Before the combination, TCC had strong retail operations in the Southwest and Colorado, and in East and West Coast markets such as Seattle, Portland, Boston and Miami.

"We are now looking for new markets to expand our retail development program into," says Culpepper, who is now TCC's president of Eastern Retail Development. "Now that we have this national presence, we can look for opportunities on a nationwide basis."

That's what Faison was after in its merger with TCC. Faison was already the biggest real estate player in the Southeast, doing office, industrial and retail development, management, and leasing. But increasingly its clients wanted to deal with a larger, more geographically diversified firm.

"We really needed to align ourselves with a large, full-service real estate company," Culpepper recalls. "We wanted to join with a company that was culturally compatible with us and valued our main strengths. The idea was to be successful at integrating the people, the geographic locations and best practices of both organizations."

The transition has gone smoothly, Culpepper reports, and at the same time the combined company has continued to bring in new business. TCFRMS in November took over the management of Volusia Mall in Daytona Beach, Fla. The 1.07 million sq. ft. center is anchored by Dillard's, Burdines, Gayfers, JCPenney and Sears and is located near the Daytona International Speedway.

In December, TCC began managing the Honey Creek Mall in Terre Haute, Ind. The 700,000 sq. ft. shopping center is anchored by JCPenney, Sears, L.S. Ayres and Elder-Beerman stores. Both the Florida and Indiana shopping centers were acquired by Faison Enterprises, a real estate investment partnership set up by Henry Faison.

As part of the sale, Faison Enterprises has also funded a $300 million TCC retail development program over the next two years.

"Our forte has been development and redevelopment of shopping centers since the company was founded in 1966," Culpepper says. "TCC's offices can tee up retail development opportunities for us in new and existing markets all over the country. It's a real plus."

In 1998, TCC and Faison combined developed about 3.9 million sq. ft. of new retail projects. "We see increased development activity in 1999," Culpepper says.

A greater reach One new area that TCRS is looking at this year is increased big-city infill and redevelopment. "It's unusual to have a company our size focusing on urban areas around the country," Rothacker says. "But many retailers need to go into major metropolitan areas with a lot of urban locations. It's a completely different animal from finding suburban locations. And a big problem for retailers is that each urban area has its own set of players."

Responding to client needs has driven TCC's recent expansions including the Faison purchase, Rothacker says. "The retailers, who want a competitive advantage over other companies, love the fact that we have further penetration and are a service provider in more markets," he says. "Because of the strength of TCC, we can add ability in any area our clients need."

The Faison merger also was seen as a big plus for institutional and private investors who participate in TCC developments. "Our investor clients love it, because it gives them a source of deal flow," he says. "We can provide development services, and they can co-invest with us."

The Faison acquisition was TCC's fifth and largest real estate service company acquisition since the company went public in 1997. Also last year, TCC paid $32.8 million to purchase Fallon Hines & O'Conner Inc., a Boston real estate brokerage firm. The company has also bought real estate firms in California, Washingtonand Ohio.

"In calendar year 1998 we closed five purchases," Lippe says. "We will be a little more selective this year. A number of real estate companies were on a rapid consolidation pace last year.

"As a group, we are doing some digesting right now," he says. "We have to deliver what we promised with these acquisitions."

Lippe says the Faison and Doppelt purchases are already paying off for TCRS. "When I do the simple math on how much we've invested in our retail services business, it adds up to over $60 million," he says. "Our two fastest growing businesses are now retail services and infrastructure management."

The shopping center industry has noticed TCC's investment, and the company is adding local retail services talent in many markets.

"I underestimated the magnet this would create for people to join us," Lippe says. "We've hired a number of top people already in 10 to 12 markets, and we are in serious discussions with others."

At the same time, TCC is seeing benefits of a stronger retail division in other core businesses.

"As a company, we also have the ability to provide all aspects of real estate to retailers, everything from office space to warehousing to the actual retail sites," Lippe says. "This kind of ability gives us an advantage over our competitors. As a result, we see more of these firms calling us."

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