Jason Stipp: I'm Jason Stipp with Morningstar. Real estate news topped the headlines this week, with Simon Property Group making an offer for General Growth Properties, which is a firm in bankruptcy, for about $10 billion, or $9 per share. Here with me to dig into the deal is Morningstar's Jeremy Glaser. He's a market's editor and also a former real estate analyst here at Morningstar.
Thanks for joining me, Jeremy.
Jeremy Glaser: You're welcome, Jason.
Stipp: First question for you, Simon Growth runs malls, General Growth also runs malls. What does this combination mean, and most importantly for Simon shareholders, what did they see as the opportunity here?
Glaser: Simon's been raising a lot of money for a while now, re-capitalizing their balance sheet, which has always been pretty strong, looking for opportunities, looking for distressed malls. And I think they've probably been stalking General Growth for a while now.
Even before the firm entered bankruptcy, there was talk of Simon being a potential suitor, being a white knight and coming into those properties. So I think that they finally decided that they could get a good price, to come in and get some pretty good assets to add to their already sizeable position as the largest mall owner in the United States.
Our REIT analyst pegs it around a 7% cap rate, which means your return on your first year is about 7%, which is pretty good in this space, especially given those malls that at the peak were trading at 3%, 4%, 5% cap rates. Which obviously now those valuations look a little bit crazy.
So I think they saw that they could get a really good price on some good assets, and they could leverage their strong balance sheet to take care of the financing problems that got General Growth into trouble in the first place.Read Full Transcript
Stipp: Even though it could be a cheap price, it also seems like malls haven't been really doing all that well. So is this sort of a risky bet, to actually go out and grow in an environment where maybe malls are a little bit murky in the future?
Glaser: Malls certainly are struggling right now. There's no question that retailers aren't expanding in the way that they were before. Occupancy rates are starting to creep up, and you certainly have issues with lease rates not being quite as high and you can 't get quite the numbers that you used to get before.
But long-term, regional malls still look like a pretty good bet in terms of real estate. There aren't a lot of new regional malls being built anywhere in the United States. If you think about your local giant mall that has some of higher-end retailers, these are the properties that Simon and General Growth both own, you don't see a lot of competition there.
So there's been a ton of build-out in retail, especially in strip centers and in kind of the super-centers. You think about the Wal-Marts and Targets of the world. There hasn't been a lot of new construction on your regular inline mall stores. Those are the ones that could be incredibly profitable, and I think are going to continue to be a part of American shopping culture and something that people are going to do for a while.
So I wouldn't be too concerned about the end of the mall, or malls never coming back. I think the real key is price. If Simon was buying this at the top of the market, I think you should have reason to be concerned. But I think because they're paying a pretty reasonable or fair price for these assets, they could probably even go a little bit higher and still get a pretty good deal on it. It makes sense for them in the long term.
Stipp: Maybe even see a nice lift if the economy does turn around and consumer spending picks up, they've gotten these assets on the cheap.
Stipp: What's next, then? General growth was trading above the share price offer, so does that mean potentially people are expecting higher bids to come in? What are the next steps here?
Glaser: I think people are expecting there to be higher bids. I'm not sure if any will materialize. But there definitely seems to be a sense that Simon is getting a pretty good deal here at $9 a share, and that they might be forced to up that offer to get everyone on board to make this happen.
But I think Simon has a lot of things going for it than I think a lot of other potential suitors. And no one has emerged yet. I mean, it's only been a few hours, but no one has emerged yet to that. I think Simon has the capital and the expertise to do this.
In 2007, they bought Mills Corp, which was another troubled real estate company. It didn't quite get into bankruptcy yet, but they kind of swooped in right before it made it. So they have experience in taking over these somewhat troubled companies before. They have the access to the unsecured credit market, so they've shown they can go out there they can raise money, they can raise capital. And they have, obviously, their own balance sheet already.
If I'm a creditor and I'm waiting to get paid back through bankruptcy court, Simon looks like a pretty good, solid option. You know you're going to get your money. You don't have to worry about this complicated bankruptcy process getting even more complicated.
That being said, could other people emerge? Absolutely. Could Simon be forced to raise their offer? Yes. We just hope that they don't raise it to the point where they don't get the value from this deal. Because, as I said before, if they pay too much for these malls, any potential benefit just goes right out the window.
Stipp: Thanks, Jeremy, for your insights and for joining us today.
Glaser: You're very welcome.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.