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Mills Wins GM Portfolio on Merit, not Money

Last month, Mills Corp. beat out a long list of bidders for the General Motors Pension Trust portfolio of malls. But the Arlington, Va.-based REIT's victory is based more on what the company is than what it offered to pay for the properties, says David Fick, an analyst with Legg Mason. The final deal has Mills paying $1.3 billion for 50 percent interest in nine malls, representing a cap rate of 6.4 percent. Financing will include assuming $170 million of property debt, $377 million of new mortgages and proceeds from a $275 million convertible preffered offer. The $200 million balance will come from Mills' credit facility or proceeds of pending asset or joint-venture sales. Mills will take over management duties on the properties from Taubman Centers.

Observers had been speculating for months that the malls would be sold outright to one REIT as a package. That's not how the transaction played out. ”This portfolio, while fully valued, did not go to the high bidders,” Fick says. “GM instead sold it to a preferred partner.” GM originally requested that bidders propose pricing for 50 percent of five malls and buy four of the lower-performing assets outright, he adds. But Mills put forth specific plans to boost productivity at each of the malls, including increasing occupancy levels and beefing up specialty leasing programs. These suggestions convinced GM to retain 50 percent interest in all nine centers.

The deal puts Mills one step closer toward establishing itself as a major player in the conventional regional mall business, rather than as a mere development machine cranking out the trademark mega outlet malls it originated. Plans are under way to bring in new anchors, as well as entertainment and restaurant features to the malls. Also, the GM portfolio currently has about 15 kiosks per mall, and Mills expects to bring that number up to at least 20. Mills also plans to use its influence with retailers to draw in more tenants at the malls, raising occupancy levels from their current average of 81 percent. Fick predicts Mills will be able to raise the GM portfolio's average occupancy to at least 90 percent within 18 months. Two of the proprties involved, Columbus City Center in Ohio and Marley Station near Baltimore, will require more TLC than others since they are especially troubled.

General Motors Pension Trust Portflio
Mall Location GLA Sales Per
Sq. Ft.
Occupancy Year
Briarwood Mall Ann Arbor, MI 983,000 $390 97% 1973
The Falls Miami, FL 817,000 $433 91% 1980
Meadowood Mall Reno, NV 889,000 $434 92% 1979
Stoneridge Mall Pleasanton, CA 1.3 million $473 96% 1980
Tuttle Crossing Columbus, OH 1.1 million $384 89% 1997
Columbus City Center Columbus, OH 1.2 million N/A N/A 1989
Hilltop Mall Richmond, CA 368,000 $247 89% 1976
Lakeforest Mall Gaithersburg, MD 413,000 $340 82% 1978
Marley Station Glen Burnie, MD 363,000 $352 81% 1987
Total/Weighted Average 8.4 million $381 89%
Source: Company reports and Smith Barney estimates
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