Simon Out of Control

After the Mills and the Prime Outlets acquisitions, Simon Property Group is at it again bidding on the General Growth Portfolio. Simon's reckless spending spree is reminiscent of the bender Federated Department Stores went on after picking up May Department Stores, Marshall Field's and others.

The problem is that Simon, like Federated, will be forced to take on massive amounts of debt through the acquisition...the same debt that is putting General Growth under. In 2004 GGP purchased Rouse for $12 billion - a portfolio with a focus in the Baltimore area...a first year unlevered cap rate of aproximately 5.0%.

The right play here is to forget taking on an entire portfolio which has some real gems and some real duds. What Simon should be doing is making off market bids on General Growth's best assets including Water Tower Place, Oakbrook, White Marsh and the Ala Moana center in Hawaii in the form of cash. Leverage is a REIT's worst nightmare these days...particularly in the next few years.

Simon Bids on General Growth

Simon Property Group Inc., the nation's largest mall operator, offered to buy rival General Growth Properties Inc. for more than $10 billion in a deal that would give shareholders, who are typically left empty-handed in bankruptcy reorganization, $9 a share.

The Indianapolis-based company said it sent an offer letter to General Growth CEO Adam Metz on Feb. 8 and a follow-up letter to the board of directors Tuesday, but has yet to receive a response. About $9 billion of the bid is in cash.The unsolicited bid sets the stage for a takeover battle as Chicago-based General Growth prepares its plan to reorganize the company and raise capital needed to emerge from bankruptcy this year. General Growth filed the biggest real estate bankruptcy reorganization in U.S. history in April after an acquisition spree left the shopping center company saddled with $27 billion in debt.

"We just saw the first move in what will be a very interesting chess match," said Jim Sullivan, managing director of Green Street Advisors, an independent research firm in Newport Beach, Calif., that tracks real estate investment trusts.

Simon's bid comes after overtures from Brookfield Asset Management Inc. In the past year, the Toronto-based real estate firm has bought almost $1 billion in unsecured debt in General Growth, positioning it to have a say in the reorganization's outcome, according to a Wall Street Journal report. Brookfield spokesman Denis Couture declined to comment.

It had been anticipated for months that Simon would make a run at part or all of General Growth, the second-largest mall operator in the U.S.

Combining the two entities would create a national shopping center behemoth with about 600 properties, one that would hold sway over setting retail rents for major chain stores such as Gap and Pottery Barn.

Simon Property's share of the shopping mall arena would almost double, to 17.4 percent from 9.4 percent if its bid to acquire General Growth succeeds, according to IBIS World. Simon also would gain access to a host of high-performing gems, including Ala Moana Center in Honolulu and the Grand Canal Shoppes at The Venetian in Las Vegas, where sales per square foot are estimated to be more than $1,000, more than double that of a healthy mall.

General Growth has interests in more than 200 shopping centers, including Water Tower Place in Chicago, Oakbrook Center in Oak Brook and Northbrook Court in Northbrook.

Among Simon Properties' 382 properties are Chicago Premium Outlets in Aurora and Gurnee Mills in Gurnee.

Hedge-fund investor William Ackman, head of Pershing Square Capital Management LP, said in December that General Growth's shares could be worth $23 to $43 a share, according to Bloomberg News. Pershing Square has a 25 percent economic interest in General Growth, including a 7.5 percent equity stake.

Ackman had lobbied for General Growth to enter Chapter 11 bankruptcy reorganization last year, betting that the equity would survive. He joined General Growth's board last summer.

Under bankruptcy law, stockholders are at the end of the line to get paid. And there is rarely money left over after the higher-ranking banks and bondholders receive their share.

"The reason it is rare is that companies usually don't go into bankruptcy unless they can't pay their creditors," said James Shein, a professor of management and strategy at Northwestern University's Kellogg School of Management.

General Growth found itself in bankruptcy court, in large measure, because billions of dollars of loans were up for renegotiation when the banking crisis was in full swing and liquidity came to a screeching stop, Shein said. Even so, he predicted that given the complicated bankruptcy proceedings, shareholders still could get shortchanged.

Under the terms of Simon's bid, $7 billion of the offer would be used to repay in full all unsecured creditors, along with some bondholders and lenders.

Shareholders, for their part, would receive $6 a share in cash and $3 a share in certain General Growth assets that include undeveloped land earmarked for residential development in Las Vegas. Simon said it is willing to consider offering General Growth shareholders common stock in Simon in lieu of the cash portion.

The official committee of General Growth's unsecured creditors has advised Simon that they support the offer.

"Simon is in the unique position of being able to offer General Growth creditors and shareholders full, fair and immediate value," David Simon, chairman and CEO of Simon Property, said in a press release.

General Growth declined to comment beyond a letter sent to Simon Property on Tuesday, which was made public after the market closed.

The letter said General Growth is considering a sale of the entire company, a stand-alone restructuring with institutional equity capital and other "possible business combinations."