Real Value In a Mall Sale Is in the Property

By Jerry Knight
Washington Post
September 6, 2004

The sale of Rouse Co. of Columbia for $12.6 billion has made investors realize that a major regional shopping mall is a lot like a piece of land -- valuable because they aren’t making any more of it.

Since the sale of Rouse to General Growth Properties Inc. of Chicago was announced Aug. 20, the stocks of every major real estate investment trust (REIT) that owns big regional malls have gone up -- except General Growth, which some analysts suspect may have paid too much for Rouse.

Even General Growth shares have held their own -- an indication that investors aren’t skeptical enough of the Rouse takeover to bail out of the stock the way they so often do when Wall Street believes a bad bargain has been struck.

Shares of the other REITs that specialize in major regional malls are up by 4 percent to 14 percent, with Mills Corp. of Arlington leading the pack. Mills made its own mega-deal just three days before the sale of Rouse was announced, agreeing to pay $1 billion for a 50 percent stake in nine regional malls owned by General Motors.

The two transactions support the theory that the value of major malls will keep going up because it’s difficult to build more. Even if developers can find a rare desirable location where there isn’t already a mall, the hurdles of getting such a project through the planning process remain very high.

So the existing mega-malls are increasingly being linked into mega-mall chains. When General Growth takes over Rouse, the majority of the nation’s big enclosed malls will be controlled by seven big REITs -- eight if you throw in Westfield Group, the Australian company that owns the “Shoppingtowns” that used to be called Montgomery Mall and Wheaton Plaza and many others around the United States. (Smaller malls, outlet center, strip shopping centers and “Big Box” centers are a different business, though they may be owned by regional mall companies.)

As the mall giants buy more giant malls -- and each other -- their property values are going up.

“The Rouse transaction showed the market what the underlying value was in the real estate and it was higher” than previously recognized, said David Fick, the REIT analyst and mall expert at Legg Mason in Baltimore. Legg Mason is very active in investment banking for the REIT industry and has extensive ties to Mills and Rouse.

Fick said malls that dominate their markets “are fortress assets and those assets are virtually irreplaceable.” Old, smaller, out-of-date malls keep getting torn down, but only three new enclosed regional malls are opening in the whole country this year, he said.
“No one can ever build a mall in the greater Baltimore-Washington area in my lifetime,” Fick said. “None are planned or proposed.”

If the supply is fixed -- or nearly so -- and demand remains strong, then the value of mall real estate will keep going up, argued Fick. New stores going into mall locations this year have been paying rents 20 percent higher than the previous tenants, he said.

There are suburbanologists and students of shopping who argue with Fick’s thesis. Big box centers and “anti-malls” like Bethesda Row are taking business away from regional malls, they point out; so is Internet shopping.

Other arguments: Department stores, which regional malls depend on, may be dinosaurs. The bigger malls get, the less convenient it becomes to shop there. Malls will have to find some other attractions to attract the necessary throngs of shoppers, which is why there is a roller coaster inside the Mall of America outside Minneapolis, the biggest U.S. mall.

Mills has been a pioneer in the “shopping as experience” retail business ever since it built Potomac Mills in Prince William County, proclaiming that it was not a shopping mall, but a tourist attraction.

That history helps explain the General Motors deal. Mills Corp. has long acknowledged that troubled malls need to be reinvented to bring back shoppers.

Mills is becoming a partner with GM in nine properties. GM’s original plan was to unload three underperforming properties and to find a partner to buy half interests in five other malls and run them. After hearing what Mills proposed doing with the properties, GM decided to keep a half-interest in all eight and to add another mall to the batch, said company spokesman David Douglass.

“GM recognizes our record in doing exactly what we proposed to do with the properties, which would significantly boost their value,” Douglass said.

While known as a developer of huge properties like Arundel Mills, Potomac Mills and a dozen like them, Mills Corp. two weeks ago unveiled its first effort at reinventing a conventional mall. It took a rundown regional mall in Ohio, gutted everything but the department stores, rebuilt it and proclaimed it Cincinnati Mills. There were only 50 stores in the mall when Mills Corp. took over; it reopened with 190 and only 5 percent of the stores vacant.

In Anne Arundel County, not far from Arundel Mills, is one of the nine properties Mills will share with GM: Marley Station, a conventional enclosed mall. Douglass said Mills will not turn Marley Station into a “mills” type property -- not with Arundel Mills nearby. “There are significant differences in the way they are tenanted and in how we’ll redo Marley Station,” he said, declining to provide details.

Nor will Mills say what it plans to do with Lakeforest Mall in upper Montgomery County, another of the properties included in the GM transaction. That deal is scheduled to close in mid-October. Mills will take over management from Taubman Centers Inc. by the end of the year.

Anchored by Sears, Roebuck; J.C. Penney; Hecht’s and Lord & Taylor (the last two are sister chains owned by May Department Stores of St. Louis) Lakeforest probably is not ripe for the “mills” treatment with factory stores and promotional retailers.

But it could be given the same kind of treatment planned for Westfield Shoppingtown Montgomery, which is scheduled to get a multi-screen movie complex, a batch of upscale restaurants and some new retail stores with entrances on the outside of the mall.

Even with its ambitious expansion plans, Mills could be one of the companies that is acquired as the mega-mall consolidation continues, Legg Mason’s Fick said.

He considers MaceRich Co. of California and Taubman of Michigan as the most likely to be bought. Taubman fought off a hostile takeover bid by Simon Property Group of Ohio last year and says it is not for sale, as does MaceRich. Mills Corp. declined to comment on whether it might be an acquisition target.

Fick points out that the Rouse transaction provides a rough guide to the gap in how Wall Street and the mall industry value the major mall REITs. Rouse is being sold for $67.50 a share, 33 percent more than the $50.61 a share that Rouse stock was selling for before the General Growth bid. Even with the recent increases in their stock prices, other mall REITs are bargains based on what General Growth is paying for Rouse.