simon property group simon property group debartolo

8/14/2019 Simon Property Group Simon Property Group Debartolo

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88 May05 RETAILTRAFFIC

GeneralGrowth

Properties

GeneralGrowth

Properties

HomartDevelopment

Co.

TheRouse

Co.

TheRouse

Co.

TrizecHahn(Mall Portfolio)

? GeneralGrowth

Properties

SimonProperty

Group

DebartoloRealty

Corp

SimonProperty

Group

ChelseaProperty

Group

ChelseaGroup

GinsburgCraig

Associates

Simon

PropertyGroup


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By Jennifer Popovec

RETAILTRAFFIC May05 89

General Growth and Simon Property are now two nearly-equal giants.

How they play their hands will shape the retail real estate industry.

After decades of consolidation, it has come to this:

The mall industry is dominated by two gigantic com-

panies, Simon Property Group and General Growth

Properties. Indianapolis-based Simon, which controls

203 million square feet of retail space in 175 malls, 67

community centers and four mixed-use projects, has

long been the No. 1 mall REIT. But with its $12.6

billion acquisition of The Rouse Co., Chicago-based

General Growth is suddenly a very close second

operating 209 malls totaling 180 million square feet.

The next biggest U.S. retail REIT, Developers

Diversified Realty, is about half the size.

Theres more than bragging rightsor the family

honor of two dynastic corporationsat stake as these

mega-REITs face off. Increasingly, it will be these two

companies that shape the retail real estate industry.

Where they build, what they buy and which tenants

they choose to deal with will determine what lesser

developers can doand, perhaps, which national

retailers will thrive. They will have the power to make

or break retailers and, in many places, determine where

new development occurs and where it does not.

Its brutal, says Mark Lichtman, one of the found-

ers of the Bos Group, which has run up against General

Growth as a competitor for retailers in Rogers, Ark.,

near Wal-Marts headquarters in Bentonville. He has


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already signed up many tenants, however, and

expects to be David to General Growths

Goliath.

General Growth acknowledges that its

new heft gives it greater leverage with retail-ers. CEO John Bucksbaum says that the

company now expects to get at least 50 per-

cent of any national retailers store expansion

program. We dont control 50 percent of the

space, he concedes, but he believes that the

REIT is in the position to demand a dispro-

portionate share of new leases. A primary

reason for building the national platform

from which we operate is that were in a

national business, says Bucksbaum. Were

dealing with national retailers.

Not all developers are afraid of the duo inthe mall business. I dont think that the

General Growth/Rouse deal will dramati-

cally change the landscape, says Stephen

Lebovitz president of Chattanooga, Tenn.-

based CBL Properties Inc, which ranked

sixth on Retail Traffics list of retail real estate

owners. Lebovitz, whose company owns 70

primarily middle-market malls mostly in the

Southeast and Midwest, views the Rouse

acquisition as just one more in the string of

acquisitions that will occur as the maturing

mall industry rationalizes and consolidates. I

do think, however, that for General Growth

its a watershed transaction and takes them to

a new level. (See how smaller REITs feel

about the challenge, starting on page 104.)

Fomenting DissentEven before it swallowed the 37-center

Rouse portfolio, General Growth was accused

of using strong-arm tactics, including intimi-

dating retailers who were considering open-

ing shops in competing centers. Last year, Los

Angeles-based developer Rick Caruso of

Caruso Affiliated, sued General Growth after,

he says, the giant REIT helped create the

community opposition to his attempt to

build a $264.2 million lifestyle center across

from General Growths Glendale Galleria.

While that suit is still in the courts, Caruso

spent millions of dollars fighting the devel-

oper who tried to stop the project, ultimate-

ly forcing the city to hold a special election

to decide its fate. Caruso won by a narrow

margin and his Glendale project, Americana

at Brand, is under construction.

We strongly believe they are violating

anti-trust laws, and I think we have a good

suit, says Caruso. We have strong evidence

of them calling retailers and telling them if

they went into our center, they wouldnt be

allowed to go into other General Growth

properties where they wanted to be. This is

bad for the industry, and bad for business.

Bucksbaum, interviewed before Caruso,

wasnt available to comment on these claims

at press time. In the past, the company has

had no comment.

In a similar situation, Taubman Centers

accuses Simon of derailing its plans to add a

new upscale center in New Yorks Long

Island, one of the most affluent areas in the

nation. Simon owns four malls on Long

90May05 RETAILTRAFFIC

General Growthnow expects to getat least 50 percentof any nationalretailers storeexpansion program.

DevelopersDiversifiedRealty Corp.

Credentials: Developers Diversifieds portfolio contains 107

million square feet of space, ranking it as the third-largest

owner of retail property in the country. Through a series of

joint ventures with Macquarie Bank, Kuwait Finance House,

Coventry Real Estate Fund and Prudential Real Estate

Investors, it has enormous access to capital. It has used

these relationships adeptly to build its portfolio from 35.7

million square feet at the end of 1999 to its current level.

Drawbacks: It is the dominant force in community centers

and has done some mixed use, but it doesnt own regional

malls, so is it really in the same league as Simon and

General Growth? It doesnt target the same tenants. So

even if the firm grows to the same size as the two giants, it

would likely be on a different playing field.

Who Will

Be No.3?


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Island including the sprawling Roosevelt

Field project. Taubmans project is stalled as it

continues to fight litigation from community

dissenters, who it alleges were incited and

supported by Simon.It remains to be seen exactly how the two

giants will behave differently, but it is clear

that they have dealt themselves what poker

players call a nut handan unbeatable

combination of assets, resources and relation-

ships. Together, they dominate other public

and private retail owners and developers. In

addition to their sheer sizethey control 20

percent of all the malls in the nationthey

have the highest concentration of Class A

fortress malls, well-established regional cen-

ters like The Galleria in Houston. As thename implies, such properties have virtually

unassailable positions in their markets.

Going From B to A

This is not the kind of turf that General

Growth has always held. General Growth for

a long time had mostly a class B portfolio, says

REIT analyst Lou Taylor of Deutsche Bank.

With the acquisition of Rouse and some

other assets theyve brought that into a more

even mix of As, Bs and some Cs, he says.

Officially, the arrival of General Growth

in Simons class is no big deal, say Simon

executives.

Being big is important today, but wheth-

er youre first versus second is irrelevant, says

Michael McCarty, president of Simons com-

munity center division.

Still, no No. 2 has ever come this close.

No one ever thought they would see the

day when there are two owners that own

more than 200 malls each, says Greg Maloney,

CEO of Jones Lang LaSalle Retail.

In many respects, the companies are simi-

lar. Both were family run businesses that

became REITs in the 1990s. Both are headed

by scions of the founding entrepreneurs

(John Bucksbaum is the son of Matthew

Bucksbaum and Simon Properties CEO

David Simon is the son of Melvin Simon).

Both families still hold major chunks of their

companies.

Culturally, however, the companies

couldnt be less alike. Simon is known for

being more introverted, while General

The Bucksbaum brothersMartin and Matthewexpand their family

grocery operation by building Town and Country Center in CedarRapids, Iowa, one of the first Midwest shopping centers.

The Bucksbaums, now owners of five properties, become majoritystockholders in General Management Corp. They exchange the stock

for shares in a REIT called General Growth Properties. They formGeneral Growth Cos. to plan, develop and manage the REITs assets.

GGP is listed on the New York Stock Exchange.

General Growth sells 19 malls with 8 million square feet of space toEquitable for $800 millionat the time, the largest single real estate

transaction in U.S. history. The REIT is liquidated, but General GrowthManagement Inc., the management arm of General Growth Cos.

continues as a third-party management business.

General Growth buys The Center Cos., making it the fourth largestowner of malls. However, it ranks as the second-largest manager of

mall properties.

General Growth goes public for the second time. It raises about $220million through its IPO. At the time, its ownership portfolio had dwin-

dled to 21 malls, but it manages 75 centers.

With Westfield Holdings, General Growth Properties acquiresCenterMark Properties in a $1 billion deal. General Growth puts up

$200 million for a 40 percent ownership stake.

General Growth sells its interests in the Centermark portfolio toWestfield in two transactions. In turn, it goes on with four investment

partners to buy Homart Development Co. from Sears, Roebuck and

Co. in a $1.85 billion deal, setting a new record. It sells off 12 millionsquare feet of community centers in a $500 million deal with

Developers Diversified Corp. General Growth moves its corporateheadquarters from Des Moines to Chicago.

General Growth acquires General Growth Management Inc., integrat-ing its ownership and management arms into a single entity. It also

continues acquiring malls, mostly in one-off deals.

General Growth goes on a buying spree. In a few months it acquiresthe U.S.-assets of MEPC, a U.K.-based firm for $871 million. It alsobuys a portfolio from Prime Property Inc. in a $625 million deal. In

September, the acquisition of four malls in Louisiana and Florida pushits owned portfolio to more than 100 million square feet.

John Bucksbuam becomes the companys CEO, succeeding his father,

Matthew Bucksbaum.

General Growth comes close to acquiring Netherlands-basedRodamco North America, before a consortium of Westfield Holdings,

Simon Property Group and The Rouse Co. sweep in with a $5.3 billionbid. Later in the year General Growth acquires JP Realty. It also buys

Hawaii-based Victoria Ward Limited for $250 million.

General Growth buys The Grand Canal Shoppes at the Venetian casinoin Las Vegas for $766 million. It once again sets a record for the larg-est real estate acquisition, this time with the $12.6 billion purchase of

The Rouse Co. At the end of the year, General Growths owns morethan 200 regional malls with a combined 180 million square feet of

space. Its managed portfolio stands at 200 million square feet.

Source: General Growth Properties Inc.

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How They Got Here:

General Growth Properties Inc.


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Growth is more extroverted. Industry players

joke about the idiosyncrasies of both Simon

and General Growth, which reflect the per-

sonalities of David Simon and John

Bucksbaum. David Simon rarely gives inter-

views, leaving executives like McCarty to

represent the company in public. Even Wall

Street analysts say they have trouble getting

anything from the tight-lipped leader.

Bucksbaum, on the other hand, is generally

available and even chatty.

Although both companies downplay their

rivalry, industry watchers say there is no love

lost between the clans. Everybody knows

that they dont like one another, notes one

industry player who didnt want to be identi-

fied. But I dont think either one goes out of

the way to antagonize the other.

That may be harder to do in the future. In

the past they could keep away from each

other, but now they are of such a size that

they are competing in the same markets

more and more.

In Las Vegas, for example, the companies

have dueling properties on the Las Vegas

strip. General Growth acquired the Grand

Canal Shoppes at the Venetian last year. Its

$900-plus in sales per square foot figures are

second only to the $1,400 that Simon is

pulling down a few doors away at the Forum

Shops at Caesars Palace. Both properties

have an abundance of luxury retailers and

target the same high-end shopper.

In Austin, Texas, General Growth has

started to encroach on Simons turf, thanks to

the Rouse deal. Rouse owned HighlandMall, one of the oldest malls in the city.

Simon has been the undisputed leader in the

capitol region, owning two of the three

regional malls: Barton Creek Square and

Lakeline Mall. And it operates the only life-

style centers in the city: Arboretum at Great

Hills and Gateway Shopping Centers.

When rumors began circulating that

General Growth planned to expands its pres-

ence in Austin by developing a project on the

West Side of town, Simon made moves to

strengthen its grip. In addition to developingWolf Ranch, a 750,000-square-foot open-air

center in Georgetown, a suburb of Austin, it

also has announced that it will participate in

the development of The Domain, a

750,000-square-foot open-air center set on

50 acres formerly occupied by IBM Corp.

Moreover, in a southern suburb, Buda, Simon

is in predevelopment for Buda Town Center,

another lifestyle center. And Simons outlet

arm, Chelsea, is developing Round Rock

Premium Outlets, a 430,000-square-foot

outlet center in the northern suburb of

Round Rock where Dell Inc. is based.

Rodamco Battle

The highest-profile run-in between General

Growth and Simon began in late 2001 when

General Growth came close to nailing a deal

to acquire Netherlands-based Rodamco

North America N.V. The deal was so close,

in fact, that General Growth refinanced its

main line of credit and sold 9.2 million

shares of company stock to Lehman Brothers

Inc. to raise $344.5 million in cash. But

Simon came in at the last minute, along with

Westfield America Trust and The Rouse Co.,

and trumped General Growths bid. After a

legal battle in Dutch courts, the joint ven-

ture divided up Rodamcos assets in a $5.3

billion buyout.

General Growth emerged from the fight

with a bruised reputation (several analysts

criticized company management for misplay-

ing its hand). But its second-place finish in

the Rodamco race sent it on a vigorous buy-


WestfieldGroupCredentials: Westfield is the fifth-largest owner of regional

malls with a portfolio of 63 million square feet of U.S.

assets. It is part of a global operation worth $32 billion with

108 million square feet of properties. As an Australia-based

firm, it has benefited from the decline of the U.S. dollar and

has a cheap cost of capital.

Drawbacks: Since the end of 1998, Westfields U.S. portfolio

has barely moved up going from 60.8 million square feet to63 million square feet. In the same time, Simon has grown

its portfolio by about 67 million square feet while General

Growth has added almost 109 million square feet.

Who Will

Be No.

3?


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155,000-square-foot, two-level Dillards. The

project is expected to open in Spring 2006.

Smaller developers and owners need the

relationships that guys like a Jones Lang or an

Urban provide, says one industry leader.Mostly though, they just need someone

who can stand up to the big guys.

On the other hand, even as many industry

players attest to having seen signs of Simon

and General Growth throwing their weight

around, there are questions about how effec-

tive they have been. They try to leverage

their size in a lot of different areas, but how

successful they are is a question, says

Maloney.

A retail broker, who asks not to be identi-

fied, says that Bucksbaums claim that he hasthe muscle to demand half of all new leases is

wishful thinking. Thats ridiculous, he says.

Which retailers is he talking about? And

how can [General Growth] make that hap-

pen when some retailers dont want to be in

malls, period?

Indeed, says Richard Moore, real estate

analyst for KeyBanc Capital Markets, Im

not sure that Simon and General Growth

being as big as they are really matters to the

other guys.

The folks who are in a position to tell

the retailersare mum on the subject, for

obvious reasons. Retailers contacted by Retail

Traffic for this story, declined to comment.

When you ask retailers about it, most of

them laugh it off, but there is an element oftruth about the so-called packaging of deals,

says an industry expert who specializes in

retail tenant representation. Its widely

known that Simon and General Growth, and

every mall owner for that matter, has some

bad assets in their portfolio. So they dangle

the carrot of being in a great mall like Ala

Moana Center or The Forum Shops and tell

them they can have the space they want as

long as they take the space in the turd buck-

ets too.

In fact, the two mall giants have reached

a position of maximum power when

their bread-and-butter propertiesregional

mallsare facing maximum challenges. The

department stores that anchor these centers

are under siege and continue to consolidate.

The retailers are feeling a bit squeezed. They

cant afford to be leveraged anymore,

Maloney asserts. To cut their costs, they and

other retailers have made the decision to go

off-mall, muting the power of the mall land-

lords to dictate terms.

The list of mall defectors includes Sears,

which helped develop dozens of malls, but

whose new management is betting heavily

on a new off-mall format to take on the

discounters. Meanwhile JCPenney, in

announcing its strategic plan for 2005, told

investors that it will grow the chain without

dependence on new mall development. It

expects to have 22 off-mall stores by the end

of this year and says that there is potential for

up to 200.

As both companies add to their portfolios,


The strength ofthe family-runbusiness remainsin place today ...youre not goingto see the missionstatement splat-tered across thefront door.

MacerichCo.

Credentials: The Santa Monica, Calif. firm commands a

portfolio of 65.3 million. Last year it emerged as the sur-

prise winner in the sweepstakes for Wilmorite Properties

$2.3 billion portfolio. The deal came at a time when Macerich

was being mentioned as a potential acquisition target.

Instead, it has emerged as an acquirer. It also won big in

2002 when it bought Westcor Realty LP for $1.5 billion.

Drawbacks: Unlike most of the other candidates for no. 3,

Macerich has yet to explore overseas opportunities. The

Wilmorite deal also came with an expiration date. The firm

has the option to purchase back five of the malls at a later

Who Will

Be No.3?


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the way they do business must change, espe-

cially internally, Maloney says. Trying to

manage that many malls and trying to do it

the same way that its always been done is

going to strain any company, he asserts.

Competing Cultures

Nonetheless, McCarty says that Simon main-

tains its entrepreneurial nature, where indi-

viduals are given opportunities to take risks

and are rewarded for their successes while

being held accountable for their failures.

The strength of the family-run business

remains in place today, he says, but notes that

youre not going to see the mission state-

ment splattered across the front door.

In contrast, General Growth widely shares

its vision, People Creating Special Places &

Experiences and mission statement, both

internally and externally. Bucksbaum says

that customer satisfaction, individual devel-

opment and corporate integrity are top pri-

orities. We hope [our vision and mission

statements] give a clear indication of the kind

of people that we are and the type of com-

pany that we operate here, he says.

Currently, Bucksbaum is focused on get-

ting his arms around the Rouse assets, as well

as paying down and restructuring the bur-

densome debt taken on to make the acquisi-

tion. According to Moore, the debt burden is

the biggest challenge confronting the REIT.

General Growth has really stuck its neck out

with this Rouse acquisition, he says.

Theyre terrific properties, but its danger-

ous, and they havent taken the necessarysteps to correct that.

General Growth has, however, made sig-

nificant progress in its plan to reduce its

floating-rate loans, including setting up $2

billion of fixed-rate replacements last

year. And many analysts feel the company

will achieve its goal of restructuring its bal-

ance sheet in the next couple of years.

Still, its a good thing Bucksbaum says

another big acquisition isnt in the cards. He

contends that redeveloping the Rouse prop-

erties will keep him busy. That will receivetremendous emphasis, he says. Most of

these properties have not received much

redevelopment, so theres a tremendous

amount of that.

Moreover, Rouses acquisition also brought

General Growth into the community devel-

opment business. Thats a fascinating and

very profitable business that few companies

in the U.S. do well, Taylor says. Now,

General Growth owns several master-

planned communities including: The

Woodlands and Bridgelands outside of

Houston; Summerlin, in suburban Las Vegas;

and Columbia, Md.

General Growth has taken steps to make

sure that it benefits from the community

development business. The REIT recently

hired Thomas J. DAlesandro IV to oversee

its master-planned community development

portfolio. Specifically, he focuses on evaluat-

ing redevelopment potential when there is

an opportunity to transform a General

Growth retail center into a mixed-use

property. DAlesandro joined General

Growth from The Woodlands, a 27,000-acre

master-planned community, where he spent

two years as CEO of The Woodlands

Development Co.

In addition to redevelopment and com-

munity development, General Growths

recent expansion has allowed it to more

effectively sell access to its common areas to

national brands. Bucksbaum reports that the

REIT has tapped the growing business,

cementing deals with American Express,


CBL &

AssociatesPropertiesCredentials: CBL has elevated itself from being a regional

player with B properties in secondary markets to being one

of the big boys. It first entered the top 10 on the Retail

Traffic ownership list in 2000. Since then it has more than

doubled its portfolio from 34.9 million square feet to 71.4

million square feet.

Drawbacks: Its portfolio is dominated by second-tier malls

and second-tier markets. It has carved a successful nichespecializing in those assets. But as a result, it doesnt have

the same high profile as the other REITs its size. It also has

not made any move to go international.

Who Will

Be No.

3?


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Pepsi, Fox Movie Studios and others. Size

has contributed to giving us those opportu-

nities, he says.

Bucksbaum also acknowledges the impor-

tance of international growth. Youre seeingmore globalization with foreign retailers

entering the U.S. and U.S. retailers going

abroad, he says. For the same reason our

platform is beneficial here in the U.S, for

domestic retailers, our belief is that we can

provide similar opportunities to international

retailers and, going forward, to establishopportunities abroad.

Simon is growing outside of the United

States, largely due to its 2004 acquisition of

Chelsea Property Holding Inc. for $3.6 bil-

lion. When they bought Chelsea, they

bought not only a company with outstanding

earnings growth, they also bought an inter-

national presence, Moore says. And inter-

national is going to be important. Chelsea

has projects in Japan, Mexico, and as a result

of a joint venture in April, in South Korea.

Chelseas management, which stayed onthrough the acquisition, will also beef up

Simons team, Moore notes. You put the

two together and you have great properties,

including some international, great manage-

ment and a conservative balance sheet com-

pared to General Growth, he says.

On the homefront, Simon wants to bring a

mixed-use element to its existing properties

and new developments. The REIT rolled out a

strategy that is a critical component of its asset

intensification program. Dubbed Version 5.0, it

focuses on adding hotel, office and other uses

to Simons retail properties, McCarty says.

The REITs new St. Johns Town Center

in Jacksonville, Fla., is a Version 5.0 prototype.

If you look at the five or six properties we

have under construction right now, every

one of them has one if not two other real

estate uses being combined with retail,

McCarty points out.

Both Simon and General Growth have

been up front about their overall growth

objectives. But, there are doubts in the indus-

try about their future expansion. We all

wonder how much bigger they can get

before they take their eye off the ball,

Maloney says. Its a huge challenge to man-

age that size of a group effectively.

In the meantime, the pot keeps getting

richer, and in the high stakes game of mall

ownership, neither Simon nor General

Growth is bluffing, and its unlikely that

either will fold.

With reporting by Patricia Kirk

and Mark Henricks.


TaubmanCenters

Credentials: Taubmans portfolio is one of the most highly-

regarded in the business and is loaded with grade A proper-

ties. It boasts the highest sales-per-square-foot marks of

any REIT making it an annual cash cow.

Drawbacks: Taubman is much smaller than the other con-

tenders with a portfolio containing just 23.6 million square

feet. It is mentioned more often as an acquisition target

than an acquirer, though its successful defeat of Simons

hostile bid has quelled some of that talk. It also took a hit

last year when General Motors Pension Trust sold nine malls

Taubman had developed and still managed to Mills Corp.

MillsCorp.

Credentials: Mills entered the top 10 of Retail Traffics Top

75 Owners list for the first time this year. It now has a port-folio of 47 million square feet. Mills has successfully diversi-

fied from its entertainment megamall focus to become an

owner of regional malls. It also has been a pioneer interna-

tionally and has invested in Spain, Italy and Scotland. It is

not afraid of doing new things, as evidenced by the 5-mil-

lion-square-foot Xanadu Meadowlands project now under

construction.

Drawbacks: Mills is still a relative newcomer to owning

regional malls and they make up only a percentage of its

overall portfolio. With a lot of money tied up in development,

Mills may not be as aggressive an acquirer in coming years.

Who Will

Be No.3?

Who Will

Be No.3?

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