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The Return of Rouse

Just short of seven years after the Rouse Co. was absorbed by General Growth Properties in a landmark $12.6 billion deal, the venerable Rouse name is returning to the retail real estate world.

On Monday, Chicago-based General Growth announced a plan that had been rumored for several months in which it will spin a portfolio of 30 malls containing 21.07 million square feet into a new entity called Rouse Properties Inc. Rouse will also assume $1.1 billion in debt.

The spin-off will be to holders of GGP common stock in the form of a taxable special dividend. The dividend is expected to be comprised of common stock in the new Rouse Properties Inc. This distribution is expected to be made on a pro rata basis to holders of GGP common stock as of the dividend record date. Rouse Properties will be listed on the New York stock exchange as a REIT.

But the new Rouse Properties will bear little resemblance to the firm General Growth acquired in 2004. Of the 30 properties in Rouse Properties’ portfolio just two (Collin Creek in Plano, Texas and Southland Center in Taylor, Mich.) were part of the former Rouse Co. The assets that General Growth acquired in 2004 included a mix of shopping centers, community centers, mixed-use projects, master-planned communities and developable land.

The assets for the new firm, in contrast, consist entirely of class-B malls, many of which are in secondary or tertiary locations. The new Rouse properties account for about 7 percent of General Growth’s net operating income. The assets are currently 87.7 percent leased and have tenant sales that average $279 per square foot. (In contrast, the Rouse Co. portfolio in 2004 boasted an occupancy rate of 92 percent and sales that averaged $439 per square foot.)

In essence, the new firm will be comparable to CBL & Associates Properties, PREIT and Glimcher Realty Trust as a regional mall REIT focusing on secondary markets. However, the portfolios owned by those firms have higher occupancy and sales-per-square-foot figures.

The assets being spun-off do not fit into General Growth’s core portfolio. In its Dec. 2010 Prospectus, the firm categorized its portfolio into 47 Tier I Malls, 57 Tier II Malls, 68 Other Malls and 13 Special Consideration Properties. Specifically, the firm categorized “Other Malls” as those that have sales between $200 per square foot and $300 per square foot; properties that were in areas disproportionately impacted by mortgage defaults, the recession and high unemployment rates; and malls that are underperforming and need to be repositioned. In addition, the Special Consideration properties were ones that the firm planned to give back to lenders or to work with lenders to market the assets. Overall, 29 of the 30 malls in the Rouse Properties portfolio came from General Growth’s Other Malls or Special Consideration pools. The other asset in the portfolio, Sikes Senter, was classified as a Tier II property.

Still, the strategy raises some questions.

“Why do this as opposed to sell the assets?” asked Rich Moore, a REIT analyst with RBC Capital Markets. “And why go through the trouble of spinning and not spin the rest? … There’s a question as to whether you recognize as much value as you can for shareholders by doing it this way.”

During a Tuesday call with analysts, General Growth CEO Sandeep Mathrani stressed that the firm was not simply dumping its worst assets and that the Rouse portfolio could experience real growth. (This is one reason why the firm didn’t put more of its Other Malls or Special Consideration properties into the mix.)

“Ultimately we believe it will be more valuable as a standalone entity, where incremental growth will actually move the needle,” Mathrani said. “The intent here is to create a company that has growth potential. … The assets that were selected require a business plan and human capital … [but it can] have a growth plan that is meaningful.”

Indeed, many of the assets have no competition within hundreds of miles, he said.

There has not yet been a CEO or CFO identified for the new company, but Mathrani said that Michael McNaughton, General Growth’s executive vice president of asset management, will join the new company as COO.

McNaughton joined GGP in 2001. Prior to his current post, he served as senior vice president with oversight of department stores, big box retailing, land, hotel and restaurant functions. Prior to that, he was senior vice president of asset management with responsibility for 17 properties totaling 20 million square feet. Before joining GGP, McNaughton was a founding partner and senior vice president of CORO Realty Advisors, an Atlanta-based investment advisory brokerage and redevelopment firm.

According to an Information Packet the firm posted to its site, Rouse is “comprised of malls that generally have a different operation, capital and geographic focus than GGP’s core mall portfolio. … Rouse’s business plan requires specialized asset management approaches that are expected to benefit from a dedicated management team focused exclusively on executing strategies to maximize value.”

What’s left

For General Growth, the removal of some of its weaker assets leaves it with a stronger overall portfolio. Its average sales per square foot will rise to close to $500 per square foot. It also reduces its debt load as the company continues to repair its balance sheet.

“What they’re doing is not a bad move,” Moore says. “General Growth—like what other REITs are doing—is getting rid of the stuff that doesn’t fit in its portfolio. High-profile portfolios are the ones that investors want to see these guys own.”

The move likely means that General Growth will not be shopping a portfolio of its assets, which was another option it was considering as a way of culling some class-B malls from its portfolio.

It also could be an indication that there is not much appetite for mall portfolios. Westfield has been marketing a portfolio of malls for months and indicated in June that it was satisfied with how the bidding was playing out. At the time, General Growth admitted it was watching the Westfield portfolio to determine what it would do with its non-core assets.

“It’s a nice thought to put a bunch of malls out,” Moore says. “But no buyers are stepping forward. … Westfield has had some interest, but so far, nothing has happened. And that is the best portfolio out there.”

Repairing the balance sheet

For General Growth, the spin-off is latest in a series of moves to repair its balance sheet since it emerged from bankruptcy last November.

Other moves include a property swap completed with Macerich in June, a $1.7 billion financing in April, a $1.7 billion sale of shares from Fairholme Fund to Brookfield Asset Management in January and a 135 million share offering last November.

Rouse Properties will be the second spin-off of General Growth. It also created the Howard Hughes Corp. as part of its restructuring. Howard Hughes that controls 34 assets including master planned communities, operating properties, development opportunities and other assets spanning 18 states. Among that portfolio are South Street Seaport in New York City, various properties in Columbia Town Center, Columbia, Md., Landmark Mall, Alexandria, Va., Riverwalk Marketplace, New Orleans, La., Rio West Mall, Gallup, N.M., Cottonwood Square, Holladay, Utah, Park West, Peoria Ariz. and Ward Centers, Honolulu, Hi.

In addition to the Rouse announcement, General Growth also reported its second quarter results. It reported core FFO of $199.6 million, or $0.20 per diluted share, compared to $206.1 million, or $0.63 per diluted share, for the same period a year ago.

Net loss attributable to common stockholders for the second quarter of 2011 was $203.0 million, or $0.22 per diluted share, compared to a net loss of $117.5 million, or $0.37 per diluted share, for the second quarter of 2010. Contributing to this change was a $58.9 million charge recorded in the second quarter of 2011 related to the finalization of default interest on certain restructured loans.

In terms of operations, General Growth reported that comparable tenant sales increased 8.4 percent during the second quarter, to $465 per square foot, on a trailing 12-month basis. The regional mall occupancy rate rose 90 basis points to 92.5 percent compared to a year ago. And the average rental rate on leases signed during the six months ended June 30, 2011 was 9.1 percent higher than rents expiring during the same period. The average rental rate on leases commencing during the six months ended June 30, 2011 was 2.0 percent higher than rents expiring during the same period.

Core NOI for the six months ended June 30, 2011, excluding lease termination income, increased 0.8 percent compared to the same period last year. Core NOI excluding lease termination income and Rouse increased 1.3 percent for the same period.

During the second quarter, General Growth also completed the refinancing of 11 malls representing $2.2 billion of new fixed-rate mortgages at a weighted average interest rate of 5.31 percent and an average term of ten years. The new loans generated proceeds in excess of in-place financing of approximately $579 million, extended the term to maturity by 6 years and lowered the average interest rate by 55 basis points.

In addition, the firm repaid $245 million of corporate debt in advance of its contractual maturity, which had an interest rate of 5.95 percent. It also repaid nine property level mortgages totaling $255 million with a weighted average interest rate of 6.52 percent. And General Growth bought back $487.9 million of the firm’s common stock at an average purchase price of $15.95 per share.

Rouse Properties Assets

  • Animas Valley Mall, Farming, N.M. – 463,168 sq. ft.
  • Bayshore Mall, Eureka, Calif. – 612,991 sq. ft.
  • Birchwood Mall, Port Huron, Mich. – 725,093 sq. ft.
  • Cache Valley Mall, Logan, Utah. – 497,535 sq. ft.
  • Chula Vista Center, Chula Vista, Calif. – 874,241 sq. ft.
  • Collin Creek, Plano, Texas – 1,020,138 sq. ft.
  • Colony Square Mall, Zanesville, Ohio – 492,025 sq. ft.
  • Gateway Mall, Springfield, Ore. – 817,624 sq. ft.
  • Knollwood Mall, St. Louis Park, Minn. – 464,619 sq. ft.
  • Lakeland Mall, Lakeland, Fla. – 884,075 sq. ft.
  • Lansing Mall, Lansing, Mich. – 834,812 sq. ft.
  • Mall St. Vincent, Shreveport, La. – 532,814 sq. ft.
  • Newpark Mall, Newark, Calif. –1,114,332 sq. ft.
  • North Plains Mall, Clovis, N.M. – 303,188 sq. ft.
  • Pierre Bossier Mall, Bossier City, La. – 611,879 sq. ft.
  • Sikes Senter, Wichita Falls, Texas – 667,506 sq. ft.
  • Silver Lake Mall, Coeur D’Alene, Idaho – 325,046 sq. ft.
  • Southland Center, Taylor, Mich. – 903,991 sq. ft.
  • Southland Mall, Hayward, Calif. – 1,264,993 sq. ft.
  • Spring Hall Mall, West Dundee, Ill. – 1,167,540 sq. ft.
  • Steeplegate Mall, Concord, N.H. – 479,110 sq. ft.
  • The Boulevard Mall, Las Vegas – 1,176,872 sq. ft.
  • The Mall at Sierra Vista, Sierra Vista, Ariz. – 365,853 sq. ft.
  • Three Rivers Mall, Kelso, Wash. – 419,477 sq. ft.
  • Valley Hills Mall, Hickory, N.C. – 933,668 sq. ft.
  • Vista Ridge, Lewisville, Texas – 1,062,721 sq. ft.
  • Washington Park Mall, Bartlesville, Okla. – 356,691 sq. ft.
  • West Valley, Tracy, Calif. – 884,673 sq. ft.
  • Westwood Mall, Jackson, Mich. – 507,859 sq. ft.
  • White Mountain Mall, Rock Springs, Wyo. – 303,619 sq. ft.
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