Retail Traffic

Shuffling the Deck

Call it the "Westfield Two-Step."

In deals worth a combined $1.43 billion, Australian mall giant Westfield Group reached agreements with regional mall REITs CBL & Associates Properties Inc. and Simon Property Group Inc. that increases its footprint in Florida and lowers its exposure in St. Louis.

Analysts lauded the deal from all sides. For Westfield, the deal fits in with its "clustering" strategy by bulking up its presence in Florida where it already owns five other properties. Meanwhile, for Chattanooga-based CBL, shoring up its presence in St. Louis fits into its strategy of building a portfolio dominated by strong centers in secondary markets. It now becomes the biggest regional mall owner in St. Louis. Lastly, for Simon, the Florida properties came with its acquisition of Mills Corp. and selling them culls its portfolio of assets that don't fit.

The CBL/Westfield deal--worth an estimated $1.03 billion in all--is a complicated transaction involving two parts. The two sides have formed a vehicle called CW Joint Venture LLC. Westfield will contribute three of its four St. Louis centers to the joint venture while CBL will add six malls--including its only St. Louis property--and three associated smaller centers. In a separate deal, Westfield will sell its fourth St. Louis center to CBL outright.

"The St. Louis market is a very stable and steady market," says a spokesperson for CBL. "We garner economies of scale by maximizing our portfolio. ... We strongly feel these malls complement our portfolio of dominant shopping centers."

As part of the deals, CBL will assume a $140 million loan on the property it is acquiring outright, Chesterfield Mall. The joint venture, meanwhile, will assume $320 million of debt on Westfield's three other St. Louis properties.

While it is a joint venture, CBL will be the dominant partner. It will assume management and leasing of the properties and retain 100 percent of the property cash flow after payout of joint venture units and debt service costs. Westfield will retain a financial stake through $420 million of perpetual preferred joint venture units. Westfield will be entitled to a 5.0 percent annual preferred distribution on these units. (CBL, meanwhile, will have the right to purchase these units following the fifth anniversary of the deal's closing.) This structure is advantageous since it avoids tax payments that would be associated with an outright sale, according to Yaacov Gross, corporate partner with Morrison & Foerster LLP, a law firm that advised CBL on the deal.

Although CBL and Westfield have not teamed up on prior deals, Gross says the fact that management at both firms have a close relationship was integral in getting the joint venture done.

"There's a close relationship between the Lebovitz family and Lowy family," Gross says. "I think they know each other on a personal basis. That's probably the background to how they came together on the specific arrangement. And I can tell you that the relationship was important because it's a complicated transaction."

CBL and Westfield estimate the valuation of the four St. Louis Westfield malls at $1.03 billion. That value is based on a capped 6.2 percent weighted average cap rate calculated based on NOI after management fees and a structural reserve. CBL is also projecting a five-year increase of 20-30 basis points on the initial yield of the investment.

Bear Stearns & Co. REIT analyst Ross Smotrich characterized the deal as a "nice upgrade" for CBL in a research report. Meanwhile, UBS REIT analyst Jeffrey Spector wrote that the deals enable CBL "to dominate the St. Louis market, which may not fit well with [Westfield's] U.S. strategy, but is a good fit with CBL's dominant middle market strategy."

One concern raised by Citigroup REIT analyst Jonathan Litt is that the deal leaves CBL leveraged up to 51 percent--a high level given the suddenly shaky credit environment.

"Given the uncertainty of the future of cap rates, CBL's operational challenges and growing development pipeline we would have preferred to see CBL maintain dry powder," Litt wrote.

In Westfield's other deal, it is acquiring the Westland and Broward malls for $400 million from Simon Property Group. Friedman Billings Ramsey Group REIT analyst Paul Morgan estimates the cap rate on that deal is a low 5.5 percent. A price that is "likely reflecting the upside redevelopment potential and attractive South Florida location of the two centers," Morgan wrote in a research note. For Simon, though, the deal lowers its market concentration in Florida--where it has 45 properties. That might be a good thing since it won't leave the company as exposed to hurricane and tourism risks.

-- David Bodamer
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