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Real Value In a Mall Sale Is in the Property

By Jerry Knight
Monday, September 6, 2004; Page E01

The sale of Rouse Co. of Columbia for $12.6 billion has made investors realize that a major regional shopping mall is a lot like a piece of land -- valuable because they aren't making any more of it.

Since the sale of Rouse to General Growth Properties Inc. of Chicago was announced Aug. 20, the stocks of every major real estate investment trust (REIT) that owns big regional malls have gone up -- except General Growth, which some analysts suspect may have paid too much for Rouse.

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Even General Growth shares have held their own -- an indication that investors aren't skeptical enough of the Rouse takeover to bail out of the stock the way they so often do when Wall Street believes a bad bargain has been struck.

Shares of the other REITs that specialize in major regional malls are up by 4 percent to 14 percent, with Mills Corp. of Arlington leading the pack. Mills made its own mega-deal just three days before the sale of Rouse was announced, agreeing to pay $1 billion for a 50 percent stake in nine regional malls owned by General Motors.

The two transactions support the theory that the value of major malls will keep going up because it's difficult to build more. Even if developers can find a rare desirable location where there isn't already a mall, the hurdles of getting such a project through the planning process remain very high.

So the existing mega-malls are increasingly being linked into mega-mall chains. When General Growth takes over Rouse, the majority of the nation's big enclosed malls will be controlled by seven big REITs -- eight if you throw in Westfield Group, the Australian company that owns the "Shoppingtowns" that used to be called Montgomery Mall and Wheaton Plaza and many others around the United States. (Smaller malls, outlet center, strip shopping centers and "Big Box" centers are a different business, though they may be owned by regional mall companies.)

As the mall giants buy more giant malls -- and each other -- their property values are going up.

"The Rouse transaction showed the market what the underlying value was in the real estate and it was higher" than previously recognized, said David Fick, the REIT analyst and mall expert at Legg Mason in Baltimore. Legg Mason is very active in investment banking for the REIT industry and has extensive ties to Mills and Rouse.

Fick said malls that dominate their markets "are fortress assets and those assets are virtually irreplaceable." Old, smaller, out-of-date malls keep getting torn down, but only three new enclosed regional malls are opening in the whole country this year, he said.

"No one can ever build a mall in the greater Baltimore-Washington area in my lifetime," Fick said. "None are planned or proposed."


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