Which Regional Mall REITs Might Be the Next Takeover Targets?

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Which Regional Mall REITs Might Be the Next Takeover Targets?

The primary suspects may not be who you think.

John Egan | Feb 20, 2020

In the wake of Simon Property Group Inc.’s pending $3.6 billion purchase of an 80 percent stake in Taubman Centers Inc.’s operating subsidiary, all eyes are on Macerich Co. as the next potential takeover target among retail REITs.

Santa Monica, Calif.-based Macerich is “next in line” to be acquired, says Alex Pettee, president and director of research and ETFs at Rowayton, Conn.-based investment adviser Hoya Capital Real Estate LLC, thanks to its high-quality portfolio of retail properties. The Macerich portfolio encompasses 51 million sq. ft., primarily made up of 47 regional malls along the West Coast, and in the New York City-Washington, D.C. corridor, Arizona market and Chicago market.

The tenants at Macerich malls generated annual sales of $801 per sq. ft. in 2019, up about 10 percent on a year-over-year basis, according to Callum Turcan, associate investment analyst at Woodstock, Ill.-based investment research firm Valuentum Securities Inc. By comparison, tenants at Simon’s malls and premium outlets reported annual sales of $693 per sq. ft., up about 5 percent year-over-year and tenants of Brookfield Property Partners LP’s core retail properties saw annual sales per sq. ft. grow by 5.9 percent year-over-year to $798.

Macerich’s geographical footprint, desirable properties and “meaningful” rent increases would make the REIT an attractive takeover target for Indianapolis-based Simon or Bermuda-based Brookfield, notes Turcan. Pettee expects Simon to hold off on further M&As—including a possible purchase of Macerich—until it has fully absorbed Taubman.

In 2015, Macerich rejected an unsolicited $22.4 billion buyout offer from Simon that included assumption of $6.4 billion worth of Macerich debt. That’s the last time Simon made a run at one of its competitors. The Simon-Taubman combination makes sense, given both REITs’ reputations as class-A operators, according to Pettee. Until now, Bloomfield Hills, Mich.-based Taubman had been hesitant to sell.

“Losing 50 percent to 70 percent of one’s market value over a three-year period—as Taubman and most other mall REITs have—seems to have humbled executives across the mall REIT space,” Pettee says.

The Taubman deal would put control of nearly 203 million sq. ft. of U.S. retail properties in the hands of Simon, according to S&P Global Market Intelligence.

On the whole, Scott Crowe, chief investment strategist at Plymouth Meeting, Pa.-based CenterSquare Investment Management LLC, embraces the financial merits of the Simon-Taubman deal. But he argues that Simon “appears to have paid a steep price by levering up their balance sheet at a time when redevelopment capital has become very precious.”

Still, the Simon-Taubman combination demonstrates there’s continued interest in U.S. retail properties, says Chris Needham, principal of East Greenwich, R.I.-based development and consulting firm Gaspee Real Estate Partners LLC.

“With cap rates continuing to stay low, we’re seeing value-add opportunities being snatched up quickly. Tenant interest is as strong as ever, with investors seeing the ability to reposition vacancies and add value,” Needham says. “I see that pattern continuing as long as interest rates stay low.”

Amid that environment, which retail REITs could be ripe for M&A, other than Taubman and Macerich?

Pettee believes lower-rung retail REITs like Chattanooga, Tenn.-based CBL & Associates Properties Inc., Philadelphia-based Pennsylvania Real Estate Trust and Columbus, Ohio-based Washington Prime Group Inc. probably won’t be acquisition targets but, rather, might be headed for consolidation. Why? For one reason, the market caps for all three REITs sit well below $1 billion, Pettee notes.

“Lack of scale has quickly become an issue for these smaller, lower-productivity mall REITs, and I think investors would look favorably on a combination of two or three of these players,” he says.

Crowe, along with Patrick Wilson, CenterSquare’s portfolio manager for real estate securities, add New York City-based Urban Edge Properties and Rockville, Md.-based Federal Realty Trust to the mix of prospective M&A candidates.

Urban Edge’s gross leasable area per capita is particularly attractive in the midst of a growing move toward mixed-use formats, notes Wilson. Urban Edge owns 79 retail properties totaling 15.2 million sq. ft. of GLA.

“We firmly believe in the mixed-use playbook when it is executed on a piece of land with the necessary population density to create enough foot traffic that the retail and non-retail components can truly draft off each other in order to create a vibrant atmosphere,” Crowe says.

An acquisition of Urban Edge Properties by Federal Realty Trust would boost the latter’s earnings in the short term and would create a long-term pipeline for high-density redevelopment projects, according to Wilson. Federal Realty owns more than 100 properties comprising 24 million sq. ft. of space.

Throughout the retail REIT sector, M&A chatter has intensified recently, according to Pettee.

“Specific to mall REITs, desperate times call for desperate measures, and I think anything and everything is potentially on the table for these struggling REITs, which have underperformed the broader REIT average for four straight years,” he says.