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Simon Property Group Inc. (NYSE: SPG) defied prevailing commercial real estate trends yesterday (Tuesday) by agreeing to acquire Prime Outlets Acquisition LLC, an operator of 22 outlet centers around the nation, for $2.33 billion including debt.
Prime Outlets operates factory outlet centers in major U.S. metropolitan markets including Washington D.C., Baltimore, San Antonio and Orlando. The centers were 92% occupied as of June 30 and generated sales of about $370 a square foot, Simon Property said.
Simon will pay Prime Outlets' owners $700 million, 80% in cash and 20% in common operating partnership units, plus $1.63 billion in debt, Indianapolis-based Simon Property said.
The acquisition marks another expansion of Simon Property's interests in the retail outlet business. The real estate giant acquired Chelsea Property Group Inc. in 2004 for $3.5 billion in cash and stock. As of Sept. 30, Simon Property owned 325 properties in the U.S., including 41 outlet centers.
"It's a good deal," Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP, who has a "buy" rating on Simon Property shares told Bloomberg News. "Simon's done a good job with Chelsea, and this makes sense. It just fits well within the outlet portfolio."
Outlet centers sell designer merchandise from such retail giants as The GAP Inc. (NYSE: GPS) and Tommy Hilfinger Corp., at discount prices. Most of Prime Outlets is owned by The Lightstone Group LLC, a closely held real estate investor founded by David Lichtenstein, and Lightstone Value Plus Real Estate Investment Trust, Bloomberg reported.
"Prime Outlets is an excellent opportunity for Simon as it represents a strong strategic fit for our existing premium outlet portfolio and enhances our leadership position in the outlet business," Simon Property Chief Executive Officer David Simon said. "Following the completion of this transaction our outlet portfolio will have 63 centers comprising approximately 25 million square feet."
The deal comes as other shopping mall and commercial real estate operators are suffering through a spate of pricing pressures and bankruptcies.
In April, General Growth Properties Inc. (OTC: GGWPQ), an operator of 92 U.S. shopping malls, filed for Chapter 11 bankruptcy protection and recently petitioned the court to restructure $9.7 billion in debt.
But Brookfield Asset Management Inc. (NYSE: BAM), a global property investor, revealed Monday it is a "meaningful creditor" in GGP and has held talks to assist it in its reorganization, Reuters reported. The announcement came after reports surfaced it had purchased close to $1 billion of General Growth's unsecured debt in recent months.
Newspaper reports last week said Simon had quietly acquired General Growth bank debt and bonds to position itself to take a run at the company.
The recent merger activity in the retail sector stands in contrast to the freefall in the overall commercial real estate market.
Regional and community banks are reeling from an aggressive push into commercial real-estate lending during the bubble. About $770 billion of the $1.4 trillion commercial mortgages that will mature in the next five years are currently underwater, according to a report by Foresight Analytics LLC, obtained by The Wall Street Journal. As of Dec. 7, 129 banks have failed this year, the most since 1992-the peak of the savings-and-loan crisis.
News & Related Story Links:
- Bloomberg News:
Simon Property to Buy Prime Outlets for $2.33 Billion
Brookfield says meaningful creditor in GGP
- The Wall Street Journal:
Banks Get New Rules on Property