Simon’s $3.6B Taubman Buy a Positive Sign for Class A Malls

Beverly Center, Los Angeles. Image courtesy of Taubman Centers Inc.

Simon Property Group Inc.’s pending acquisition of an 80 percent interest in Taubman Centers Inc.’s The Taubman Realty Group LP will give Simon majority ownership of some of the highest quality malls in the U.S. And the $3.6 billion price tag on the 25 million-square-foot portfolio serves as a vote of confidence in the future of premier malls amid a challenging climate for lesser quality shopping destinations.

Of the 24 super-regional shopping centers involved in the transaction, 21 are located in the U.S. and three can be found in Asia. The portfolio includes such notable properties as the nearly 900,000-square-foot Beverly Center in Los Angeles, which emerged from a half-billion-dollar makeover in late 2018; the 1.3 million-square-foot Country Club Plaza in Kansas City, Mo.; and the Mall at University Town Center in Sarasota, Fla., featuring 880,000 square feet. Assets in Asia include Starfield Hanam, a 1.7 million-square-foot center in Hanam, Gyeonggi, South Korea.

“Admittedly, Taubman is a much smaller mall REIT than Simon, but it’s a company that has well above-average sales productivity in their centers—the Mall at Short Hills [in Short Hills, N.J.], Cherry Creek [in Denver], Waterside Shops in Naples,” James Sullivan, managing director & REIT analyst with BTIG, told Commercial Property Executive. “So, they’re really focused in very strong local residential markets in the U.S. that have very high sales numbers and rich revenue.”

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The Taubman portfolio was 94 percent leased in the fourth quarter of 2019 and recorded U.S. comparable sales totaling an average of $972 per square foot. The deal marks an upgrade for Simon, as while Taubman’s portfolio is comparatively small, its average quality is higher than the average quality of Simon’s holdings.

LONG LIVE THE (CLASS A) MALL

Simon’s cash acquisition of all Taubman common stock amounts to $52.50 per share, marking a 51 percent premium to Taubman Centers’ closing price just days ago on February 7. “While they’re paying a 51 percent premium to the closing price, these stocks have sold off 60 percent over the past 15 months so it’s at a discount to where it was trading back in 2018 and it’s at a discount to where just about everybody on the street pegs where the actual underlying value of the real estate should trade,” Kevin Brown, equity analyst with Morningstar, told CPE.

Country Club Plaza, Kansas City, Mo. Image courtesy of Taubman Centers Inc.

Simon plans to rely on existing liquidity to fund the multi-billion-dollar Taubman purchase. Both Sullivan and Brown agree that while this is a big-ticket deal, Simon—graced with size and an investment-grade balance sheet—will likely be able to take out long-term debt and equity to pay down their credit facility as pricing on debt and equity moves to a better position over the next couple of years.

“[The Taubman acquisition] shows that Simon is in this for the long term and they are some of the smartest people in the space out there, and it gives everybody confidence that at least with the Class A malls, there is a long-term viability and potential there,” Brown noted. “If Simon says it’s too good to pass up, it sends a signal that Class A malls are undervalued.” High-end mall REIT Macerich saw its stock go up 11 percent on news of the Simon-Taubman agreement, but the reaction has been different for Class B and Class C mall owners. PREIT stock was up just 3 percent, and CBL Properties’ stock went on the downswing. “This gives credence to the he story I’ve been telling investors over the last year; we’re looking at a bifurcation of retail where the top 100 malls are going to continue to see very strong, solid growth but the headlines are going to be dominated by stories of store closures and dying malls that are all going to happen in the Class B and C category,” he added.

LONG TIME COMING

Simon has been pursuing major acquisitions for a few years now.

In 2015, Simon made a failed unsolicited bid for Macerich, ultimately proposing to buy the mall REIT’s outstanding shares for $23.2 billion, including the assumption of debt, before rescinding the offer.

More recently, news emerged last week that Simon had joined Brookfield and Authentic Brands Group on the proposed acquisition of most of fashion retailer Forever 21’s business in a stalking-horse bid of $81 million. The Taubman deal, however, is a gamechanger. “This is a really good move for Simon. There are only a select number of Class A malls in the U.S. and those malls just don’t become available every day,” Brown said. The transaction is on schedule to close in mid-2020.