Rouse Co., the real estate developer that transformed America's suburban landscape by creating the indoor shopping mall and self-contained communities far from city centers, agreed yesterday to sell itself to a Chicago-based mall owner for $7.2 billion in cash.
The deal, with General Growth Properties Inc., marks the end of a company that turned a vast swath of farms and woodlands in Howard County into the consummate suburban city, Columbia, where Rouse is headquartered to this day. Its sale will thus strip Columbia of one of its major employers and most active philanthropists, and a company whose own history was deeply intertwined with that of the town itself.
The deal also is the end for a company that, under the leadership of its late founder, James W. Rouse, invented or popularized some of the most widespread forms of real estate development of the 20th century, premised on the idea that as the nation's population moved outside of cities, they still needed a community gathering place akin to a village square. The mall food court and urban commercial centers like Baltimore's Inner Harbor owe much of their inspiration to Rouse. Rouse also was one of the first for-profit developers to advocate setting aside a portion of new housing for low-income families, something he did in Columbia.
Rouse Co.'s stock soared 32 percent after the announcement. Anthony W. Deering, the chairman and chief executive of Rouse, said the sale was a good deal for shareholders but also acknowledged the void it will leave in the local community. "Rouse Co. as a unique, local organization will cease to exist, and that's a sad thing," said Deering, who has spent his entire career at Rouse.
In Columbia, local officials were stunned by the news, even as they acknowledged that rumors of Rouse's possible sale have been spread for years. Rouse's involvement in Columbia has gradually diminished from the early years, but its presence is still huge, local officials say. General Growth said it can't yet say how many of the 200 regional Rouse employees will lose their jobs, but two outside analysts predicted that a majority of those working at corporate headquarters will likely be ousted as General Growth seeks cost savings. "Most of the key functions, like leasing, property management and executive functions will transfer to Chicago," said David M. Fick, an analyst at Legg Mason Walker Wood.
Following the acquisition, General Growth, the nation's second-largest mall owner, would own 215 regional shopping malls all over the country, second only to Simon Property Group. Its assets would include local properties Tysons Galleria in McLean and Landmark Mall in Alexandria, both of which it currently owns, and the Mall in Columbia, now owned by Rouse. It will also own land in Columbia earmarked to be sold for further residential development and similar suburban communities outside Las Vegas and Houston.
Some analysts believe that General Growth will ultimately sell off a portfolio of office buildings that Rouse owns in the Baltimore-Washington corridor and Las Vegas. Some also think General Growth will sell or spin off Rouse's business developing suburban communities such as Columbia. General Growth executives said in a conference call that they have little experience developing suburban communities and may seek to sell "non-core" assets.
The transaction came about, said analysts and Rouse executives, because of a sort of paradox. The company has had strong financial results with consumer spending growing, driving up mall rents, and the housing market soaring, pushing up demand for residential lots. For both reasons, Rouse's 2003 earnings were 53 percent higher than in 2000. Its stock price tripled in that time.
Yet Rouse executives saw few strategies that would create the same sort of growth in the years ahead. Its executives saw little demand for more high-end malls. And it seemed unlikely the housing market could improve more than it has in the past few years, and it could very easily get worse, said Deering.
"Residential real estate could be peaking, consumer debt is at a high level, and retail has been strong for the last two years and may or may not stay strong in the future," Deering said, explaining why this is the right time to sell.
When the company hired a new chief financial officer with a background in deal-making last year, many investors thought it was the first step to a sale. In a March 2003 interview, when Rouse stock was trading for $33 a share, Deering said "Every public company in America is theoretically for sale every day. If someone lobs in a $60 a share offer, the board is going to take a real hard look at that."
Since June, Rouse and General Growth have been in detailed talks about a sale, according to a General Growth executive. Under the terms announced yesterday, General Growth will pay $67.50 per share for Rouse stock. Rouse shares soared to $66.65 a share yesterday after closing Thursday at $50.61.
The company will also assume $5.4 billion of Rouse debt, giving the deal a total value of $12.6 billion, the most ever paid for a real estate investment trust. General Growth intends to finance the acquisition by selling $500 million worth of new stock to its existing shareholders, including top executives, and borrowing $7 billion more.
The Rouse board met at its law firm's offices in New York on Thursday, and signed the deal at 3:30 a.m. yesterday. Executives then drove back to Columbia, arriving just as General Growth announced the deal at 7 a.m.
The transaction is scheduled to be completed near the end of the year, subject to the approval of Rouse shareholders and regulators. Analysts said the deal appears highly likely to be completed, noting that no retail real estate transactions in memory have been scuttled by antitrust issues.
Analysts and investors worry that General Growth may be paying too much for Rouse; General Growth's stock fell $1.54 to close at $30 a share yesterday.
"It is a very, very expensive transaction," said Ian Weissman, a senior analyst at UBS Securities LLC, particularly given that the properties are already mostly leased at high rents. "You wonder what the upside is when they spend this much on the portfolio. That said, they're one of the best management teams out there, and if anyone can derive value, it's going to be them."
While analysts called the deal a boon for Rouse shareholders, it also means the end of an icon in the real estate industry.
From the mid-1950s until the mid-1980s, Rouse Co. was on the leading edge of the most transformative residential and retail development movements in the United States, helping house boom babies and give their parents places to shop. No other single developer played such a central role in both the explosive suburban growth and the challenge of urban renewal in postwar America.
James Rouse hung out his first shingle as a mortgage banker in 1939 in Baltimore, a city whose civic life he would be closely involved in until his death in 1996. Rouse began building shopping centers in the early 1950s.
In 1956, Rouse opened Mondawmin Mall in west Baltimore. It was the first retail center to have the term "mall" and had an enormous influence on suburban retail development for decades. Rouse was the first to conceive of a retail development not as a shop.
Five years later, Rouse formed a joint venture with Connecticut Life Insurance Co. to begin planning and buying land for what would become Columbia. By that time, Reston was already in the works, so the idea of a planned community around a central "town center" wasn't entirely new. John Hall, a former principal in the Columbia planning and design firm LDR International, said Rouse was shrewd in how it bought land in eastern Howard County: cheap and in secret. "They selected the property well and bought it at a good price," Hall said.
Columbia became the much-copied New Town: hyper-planned residential enclaves built around retail, cultural and recreational centers. The "town center" was the Mall in Columbia, just as it is today. For James Rouse, Columbia embodied his progressive vision of an American community, a place where people of all colors, incomes and religions would find a home.
"Our cities grow by sheer chance, by accident, by the whim of the private developer and public agencies," Rouse wrote when Columbia was unveiled in 1964. "By this irrational process, non-communities are born, formless places without order, beauty, or reason, with no visible respect for either people or the land." Columbia was Rouse's answer to that criticism.
Jay Brodie, a friend of James Rouse and currently director of the Baltimore Development Corp., said Rouse overcame "doubts about its finances, doubts about its social goals, doubts about whether anyone would want to live there. What happened was it became one of the great successes in America."
The company ceded control of Columbia years ago, but the land it bought in the 1960s continues to generate cash for Rouse in the form of lot sales. The majority of Rouse's more than 3,169 employees now work outside the region.
Rouse's "festival marketplace" developments rivaled Columbia in its influence on real estate development. Its development of Faneuil Hall Marketplace in 1976, a retail and restaurant complex, transformed a dilapidated part of Boston and electrified the urban renewal movement. Four years later, Rouse opened Harborplace and an adjoining office and retail complex on Baltimore's Inner Harbor, making the cover of Time magazine. Festival marketplaces would become the linchpin of numerous downtown renewal efforts for 20 years.
"What Rouse did in the Inner Harbor became the model around the world," said Connie Lieder, a former Maryland secretary of state planning and past president of the American Institute of Planners. "In those days, there were a lot of people who were really anti-urban renewal. Rouse turned that around. He added a really positive focus for urban renewal."
Harborplace, while it gained international attention and invaluable public relations for Rouse, didn't make much money. By the late 1980s, the company began turning away from such costly, risky projects and concentrating on high-end shopping malls. By the time Rouse died, the company that bore his name was large and respected but was known more for steady dividends to shareholders than groundbreaking, innovative vision.
Because of that shift, said Sam Rose, who began his career working for Rouse and now is a partner in developer Greenebaum & Rose, "now you're talking about one big vanilla company merging with another big vanilla company."