The Rise of the REITs
In early February, David Simon, the CEO of Simon Property Group, the largest owner of shopping malls in the United States, sent a letter to Adam Metz, the CEO of Simon Property’s biggest competitor, General Growth Properties (GGP). The letter proposed that Simon Property takeover GGP for $10 billion. ... The deal, if consummated would add 200 shopping malls to its portfolio of more than 300, substantially growing its already dominating market share. Simon’s offer includes $7 billion in cash or stock for 100 percent cash recovery of par value plus accrued interest and dividends to all of GGP’s unsecured creditors, the holders of its trust preferred securities, the lenders under its credit facility, the holders of its exchangeable senior notes and the holders of bonds issued when GGP acquired mall owner Rouse in 2004. But in the week after Simon’s initial overture, GGP leadership didn’t jump at the offer. Unsatisfied with GGP’s muted response to its unsolicited bid, Simon Property made its intentions public, setting off a firestorm in the press. In a public letter to the GGP board of directors, Simon criticized GGP’s response to the offer: “We have not received a substantive response to this offer from GGP or its advisors, nor any indication that you are prepared to enter into serious discussions so as to make our offer available to your shareholders and creditors.” According to a statement Simon Property released to the press, the committee representing GGP’s creditors supported the offer and encouraged GGP to enter into negotiations with Simon Property. “Full cash payment to all unsecured creditors and the substantial recovery for equity holders that Simon has proposed would be a great result. We fully support and encourage prompt engagement by the company with Simon,” Michael Stamer, counsel for the Official Committee of General Growth’s Unsecured Creditors, said in the statement. The next day, GGP and Metz publicly responded to the Simon proposal. “We and our board of directors have given considerable thought to your indication of interest and have concluded based on discussions with other interested parties that it is not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the Company’s stakeholders.” Undeterred, Simon responded to the rejection with another publicly released letter. “[O]ur offer would remove the serious downside risks associated with a recapitalization, the value of which would be inherently uncertain and subject to future market conditions, even if a recapitalization could be secured,” Simon wrote. “Given the clear risks of pursuing an alternative plan, the current state of the retail industry and your company’s past history of risky financial choices, your lack of urgency should deeply concern creditors and shareholders.” “While you pay lip service to time being of the essence, the ‘process’ outlined in your letter will take many months before a transaction could be agreed and made available to stakeholders,” he added. It would seem unthinkable that a company like GGP, in the throes of bankruptcy, would reject an offer such as Simon’s. But GGP can play hard to get, as it has another suitor in Canadian real estate firm Brookfield Asset Management. ... GGP’s bankruptcy is a microcosm of the overall decline in the REIT sector. The global recession was a stress test for REITs, analysts at Ernst & Young recently wrote. The sector reeled from a combination of debt exposure, an illiquid asset base in a falling market and an increasing cost of funding, analysts Robert Lehman and Howard Roth wrote, adding that REITs’ substantial debt maturities in an illiquid market was a wholesale global issue. But just as REITs led the market into the downturn, global REITs are leading the way out. TO READ THE FULL STORY, SUBSCRIBE NOW.