By Esther Fung and Micah Maidenberg
Simon Property Group Inc. is buying rival mall owner Taubman Centers Inc., a $3.6 billion transaction that demonstrates how the largest U.S. mall owner is pushing ahead with expansion despite headwinds in the industry.
The Taubman deal comes a week after Simon Property said it plans with two partners to buy out of bankruptcy struggling retailer Forever 21 Inc. for $81 million.
The recent activity shows Simon Property's willingness to use its financial resources to build out its portfolio, or to rescue a crucial tenant. That behavior stands in contrast to many other mall landlords, which have been more focused on shedding weaker locations and cutting costs to lower their debt.
Some analysts said they aren't surprised that Simon is going on offense when most peers are getting defensive. With strong cash flow and a robust balance sheet, the real-estate investment trust is a natural acquirer of smaller mall REITs. Their share prices were hit hard in recent years amid an uptick in store closures, retailer bankruptcies and the explosion of online shopping.
"We believe in our industry. We believe in the business," Chief Executive David Simon said in a call with analysts. "I don't think folks ever appreciated our balance sheet. This gives you a sense of our ability to do it."
Some investors said they were privately speculating whether Simon's new deal signals that it believes that the plummeting share prices of mall owners may be nearing a bottom. The last time Simon made a public attempt to purchase a rival U.S. mall owner was in 2015 when it offered to purchase Macerich Co. Simon was rebuffed then.
Taubman is a better fit for Simon Property because it has a smaller but stronger portfolio of luxury malls that will draw more affluent shoppers to Simon's other ventures such as advertising. Macerich has a bigger and more complicated portfolio of shopping centers, analysts said.
Simon said it would pay $52.50 a share in cash for Taubman's shares, giving it control over the Taubman subsidiary that owns all of that company's interest in retail properties, the companies said Monday.
The Taubman family will sell Simon about one-third of its ownership interest in Taubman and remain 20% owner in the operating subsidiary of its namesake real-estate firm. Simon will own 80% of the Taubman operating entity when the transaction is completed. Taubman said its management will remain active in running its portfolio of 26 malls alongside Simon.
Taubman shares gained 53% to $53.12 on Monday, while Simon's added 1.5% to $143.06.
The deal values Taubman's portfolio at a capitalization rate of around 6.2%. Capitalization rate is used by real-estate investors to measure the annual return of income-producing properties and to compare potential returns of different assets. Cap rates rise when values fall and vice versa.
Simon raised $3.5 billion in senior notes in September at rates between 2% and 3.25%. Analysts say the company has better access to capital than any of its peers. The firm also has a record of boosting its revenue after past acquisitions, including outlet owner Chelsea Property Group and DeBartolo Realty Corp.
"They have mastered the technique using the size they have, putting to bear their operating strengths to these transactions," said Jim Sullivan, an analyst at BTIG Research.
The popularity of e-commerce is increasing pressure on mall landlords as retailers and department stores shrink their bricks-and-mortar footprint. Redeveloping malls or adding a hotel or residences requires huge capital investments, stretching many landlords' budgets.
Santa Monica, Calif.-based Macerich, for instance, said that it has turned its focus on selling its noncore assets this year, after seeing soft demand when marketing stakes in its top tier mall assets last year. Macerich added that it is currently in the process of selling two retail properties.
"I'm sure this is no surprise to you, but today, retail real estate, particularly mall real estate, is out of favor with institutional investors," said Thomas O'Hern, chief executive officer of Macerich, in its earnings call last week.
Simon Property, which currently owns 233 properties world-wide, made an unsuccessful attempt to purchase Taubman in 2002 at $18 per share.
This time, the added financial heft of Simon has made a deal more attractive.
"We believe we will accomplish more given the expertise and best practices of our two companies as well as the added financial strength that Simon represents," said Robert S. Taubman, chairman, president and chief executive of Taubman Centers in the same call.
Write to Esther Fung at email@example.com and Micah Maidenberg at firstname.lastname@example.org