Simon Property Group (SPG -0.88%) has $6 billion burning a hole in its pocket and it's starting to go on a spending spree.
After helping to buy fast-fashion retailer Forever 21 out of bankruptcy for $81 million, the shopping mall operator has now acquired an 80% interest in industry peer Taubman Centers (TCO), which operates regional and super-regional malls, for $52.50 per share cash, or $3.6 billion.
Although we're in the midst of what's still being described as a retail apocalypse, one that could last for another two years, Simon Property Group obviously doesn't agree this is end times for shopping malls and still sees opportunistic deals that can be made.
A matter of self-preservation
The acquisition of Forever 21, which was done in partnership with fellow mall operator Brookfield Properties Partners (BPY) and brand management firm Authentic Brands Group, and its solo purchase of Taubman Centers are two different kinds of deals.
Forever 21 was acquired to prevent its malls from being degraded. Because the fashion retailer has a presence in about 100 Simon malls, representing about 1.4% of its total base rents (and it accounted for about 2% of Brookfield's base rents), allowing it to be liquidated would mean many store vacancies.
That sort of blight has a contagious effect. Consumers see empty stores and visit the mall less often, leading to declining sales at other stores and creating financial difficulties. Other retailers might end up closing down storefronts too.
Propping up retailers with a cash infusion can forestall that from happening, and with the right target, can result in a healthy company once again. The trio of buyers did just that when they acquired Aeropostale in a similar deal a few years ago.
Time to go on the offensive
Taubman Centers is different. Although the shopping mall is not the robust retail experience it once was, that's not a blanket statement across the industry. Class A shopping malls, the top tier centers, are actually doing quite well. The industry may be over-stored, so we will see more closures and maybe even failures of mall operators, but the class A malls aren't as likely to be a part of it.
Simon Property Group operates those top-tier shopping centers, and Taubman Centers super-regional malls, such as the Beverly Center in Los Angeles and The Mall at Short Hills in New Jersey, along with several it runs in Asia, are also upscale venues.
For a mall-focused real estate investment trust like Simon looking for an opportunity to expand when others, such as rival Macerich (MAC -1.85%) has said it wants to focus on selling off non-core assets, acquiring a smaller peer is an easy way to do so -- and it's worth the 51% premium it is paying for Taubman.
Even though both mall operators have fared better than most of their peers during the retail apocalypse, prior to the deal's announcement, shares of the two REITs had been hammered over the past year.
Not coincidentally, Taubman Centers also had a large exposure to Forever 21, with 17 locations in its 26 malls, making the fast-fashion icon its No. 1 tenant.
Not a high price to pay
Simon Property Group expects the Taubman acquisition to be at least 3% immediately accretive to its funds from operations per share on an annualized basis as soon as the deal is done. That helps assuage any fears investors may have had it was overpaying for the REIT.
The deal also represents a capitalization rate of approximately 6.2%, a measure that can be used to show how profitable a newly acquired property is.
With the acquisition expected to close by the middle of the year, Simon Property Group has plenty of time to find more deals over which it can shower that stockpile of cash it has laying around.