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Inland American Flirts With Acquiring Cedar

A slowing economy, declining property values and frozen credit markets were supposed to mean that this would be a year of one-off deals. But there could be at least one REIT merger in the works. Late last week, Inland American Real Estate Trust said it was considering buying Cedar Shopping Centers, a Port Washington, N.Y.-based shopping center operator with an 11.4-million-square-foot portfolio and a market capitalization of $449 million.

Analysts think this would be a smart strategy for both Inland and Cedar Shopping Centers. In their view, Cedar Shopping Centers remains fundamentally sound, with core occupancy of 93 percent and a projected same-store NOI growth of 1.5 percent.

Cedar operates grocery- and drugstore-anchored shopping centers--a sector that is necessity-based and should see minimal impact from the consumer slowdown. However, its top five tenants account for 32 percent of its total rental income, according to Morningstar analyst Akash Dave, leaving it exposed if one or more of those tenants does run into trouble. Cedar's largest anchor tenants include Giant, Farm Fresh and Discount Drug.

As a result of those concerns, in addition to the overall market anxiety in the wake of the unraveling of Australian listed property trust Centro Properties Group, the company has seen its market value dwindle in concert with the rest of the retail REIT sector. On January 22, Cedar's stock hit a new 52-week low of $9.42 per share--more than 40 percent off its 52-week high. (It has rebounded some since, closing on January 29 at $10.69 per share--a 13.5 percent gain in the past seven days.)

On January 24, one of its principal shareholders, Newport Beach, Calif.-based private investment vehicle ROCA Real Estate Securities Fund L.P., in conjunction with ROCA Advisors, L.P. and ROCA Advisors--GP, LLC, sent Cedar's president and CEO Leo S. Ullman a letter requesting a review of strategic alternatives. ROCA owns 1,102,098 shares, of 2.5 percent, of Cedar's outstanding stock.

That's when Oakbrook, Ill.-based Inland American stepped into the picture. In addition to revealing that it has already purchased 9.8 percent of Cedar's stock, the firm said it was considering gaining control of the whole company, through either a merger, an acquisition or, alternatively, through seeking to get directors appointed to Cedar's board. In fact, Inland already wants to ask Cedar to waive a rule that prohibits any one entity from owning more than 9.8 percent of its stock. Both Inland and Cedar declined to comment on the situation.

"The REITs have been hammered by the stock market recently, so what better way to acquire assets than buying the whole company?" says Joseph C. French, national director of the retail practice with brokerage firm Sperry Van Ness. "Not only did Cedar's price crash, it's now down substantially enough for its properties to be viewed as under-valued."

If Inland decides to go ahead with the deal, it can be expected to offer approximately $13 per share for the REIT, according to BMO Capital Markets analyst Paul E. Adornato--a "win-win situation," he wrote in a note last Wednesday.

Meanwhile, Inland American boasts two distinct advantages compared to other REITs in the current acquisitions environment, says Rich Moore, an analyst with RBC Capital Markets. Inland American is a publicly registered non-listed REIT sponsored by Inland Real Estate Investment Corporation. That gives it unrestricted access to vast reserves of cash. Analysts estimate that in the past year, it has raised more than $3.9 billion, all of it earmarked for acquisitions.

In addition, since Inland American was formed just three years ago, in October 2004, it has not yet amassed a portfolio large enough to deter it from seeking new acquisitions, French notes. As of September 30, 2007, Inland American’s consolidated portfolio included 399 properties, encompassing 31.5 million square feet of leasable space. And Cedar Shopping Centers, with its portfolio located primarily in the Northeast, one of the strongest retail markets, happens to be an ideal target. Cedar's three largest markets include Pennsylvania (with 55 percent of its GLA), Massachusetts (with 10 percent) and New Jersey (with 8 percent).

"There is still a shortage of good grocery-anchored shopping centers out there, so the type of product they have in their inventory is very desirable and Inland could sell it very easily," says French. "For Inland, that's the REIT that makes the most sense."

The question is whether Cedar is ready for a buyout. In August 2005, the firm received an offer from Equity One, Inc., for $17 per share or $379 million, a 14 percent premium on its trading price at the time. However, when Ullman said that he could not meet the Jacksonville, Fla.-based REIT 's deadline (which gave his board less than a week to make a decision), the offer was taken off the table. "I don't know if he's going to be amenable to an acquisition now," says Moore.

Ullman, who is 67 years old, four years older than most of his peers on Cedar's board of directors, might be thinking of retirement and a sale would allow him to secure the company's future, says Adornato. But French, who has worked with Ullman, says a retirement doesn't seem likely. "He may be 67, but he has more energy than some 40-year-olds. I'd be surprised if he wants to retire."

--Elaine Misonzhnik

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