Las Vegas Sun

October 20, 2019

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Analysts skeptical of plan to buy Rouse Co.

Analysts are not thrilled about General Growth Properties' plan to buy the Rouse Co., developer of Summerlin and the Fashion Show mall, and they said the $12.6 billion in cash and debt acquisition is too much for the company to take on.

Some analysts have downgraded General Growth, a large owner of shopping malls in Las Vegas and nationwide, and Moody's Investors Service placed both companies on review for downgrade.

Since last week's announcements and rating downgrades from analysts, General Growth stock has continued to fall. In early trading this morning, General Growth stock fell 1.38 percent to $28.55. Before the announcement it closed Thursday at $31.54.

Rouse stock has continued to inch up since the buyout announcement, and in early trading this morning, it was up .15 percent to $66.58. Before Friday's acquisition announcement, it closed Thursday at $50.94.

Rich Moore, an analyst with KeyBanc Capital Markets, said the deal is "very, very expensive" and that General Growth hasn't said why the acquisition makes sense.

"It is all being done with variable-rate debt, and there's always the threat interest rates could go up," Moore said. "I feel like they don't have anything quantified as to why it makes sense to make this acquisition at this price."

Moore downgraded General Growth from an aggressive buy to a hold after last week's announcement.

When the purchase is finalized -- expected by the end of this year, pending shareholder approval -- General Growth will have control and ownership of four malls in the Las Vegas Valley, including the Fashion Show, Boulevard, Meadows and Grand Canal Shoppes at The Venetian for a total of more than 4.5 million square feet of local mall retail space.

It also will own the successful 22,500-acre Summerlin community in the western Las Vegas Valley and the Howard Hughes Corp., a division of Rouse.

Matthew Ostrower, an analyst at Morgan Stanley, wrote in a research note that because of current market prices for high-quality regional malls, it does not necessarily represent an attractive use of capital for mall Real Estate Investment Trusts (REITs) and their shareholders.

"This deal has, in our opinion, quite negative implications for GGP (General Growth Properties)," Ostrower wrote. "The first implication is of course the deployment of very large amounts of capital at what we would describe as generally unattractive un-leveraged rates of return."

On Monday, Morgan Stanley cut both Rouse and General Growth to "equal weight" from "over weight."

Moody's reported that the positive aspects of the deal, including economies of scale, a more diverse portfolio, and increased market share, are mitigated by the amount of debt General Growth will have to take on, including variable-rate debt.

Prudential Equity Group also downgraded General Growth, from an overweight rating to a neutral rating.

Because General Growth is a developer and owner of shopping malls, some have speculated that it would spin off some of Rouse's assets, mainly the community development and commercial property holdings.

Moore said General Growth in the past entered the regional community center market -- at the time assets outside its core of regional mall holdings -- through acquisitions, and so it is not a far stretch to think the company is growing into office and community development through acquisition.

"They've kind of alluded that they would sell off properties very quickly, but they also pointed out there is some synergy," Moore said. "It's possible they think they can do this, but I think the office and industrial holdings they would sell."

John Ritter, chief executive of Focus Property Group, developer of communities Mountain's Edge and Providence (formerly Cliff's Edge) in Las Vegas, said Summerlin is a great asset.

"If they want to sell it, I'd love to buy it. I'll have to give them a call," Ritter said. "It's an appreciating asset and to a certain extent it's on cruise control."

Ritter said it depends what General Growth's goals and objectives are as to whether Summerlin, or certain aspects of it, would be sold.

Jim Widner, KB Home Nevada division president, said if General Growth did sell off Summerlin land, the national home builder would be interested.

"If their core business is shopping centers and not the development of raw land, there's the possibility they'd sell off the non-core assets of the business in order to finance the purchase," he said. "If they do that we'd certainly be interested in talking to them."

But the purchase of Rouse may be giving General Growth an opportunity to get into a new aspect of the development business, without starting from scratch.

Nationwide, Rouse has ownership interests in 37 regional malls, four community centers and six mixed-use projects totaling about 40 million square feet. Rouse also is the developer of planned communities Summerlin, the Bridgelands and The Woodlands in Houston and a community in Columbia, Md., where Rouse is based.

Despite numerous sell-offs over the years of its Las Vegas office and industrial properties, Rouse retains control of 18 office buildings, totaling about 1.2 million square feet of space.

Randy Broadhead, senior vice president in CB Richard Ellis, Las Vegas, office division, said he has been told it's going to be "business as usual." CB Richard Ellis has the listings for Rouse's Summerlin office properties.

"They want to be in the land business in Las Vegas. The only question now is, will development pick up or stay the same?" he said.

Broadhead said one of the reasons General Growth was interested in Rouse was because of the Fashion Show mall on the Strip and the potential for future development in Las Vegas and Summerlin.

Rouse has announced plans for a large regional mall at Sahara Avenue and the Las Vegas Beltway in Summerlin, to open in 2006 or 2007. General Growth Properties has said it will open an extension to the Grand Canal Shoppes at The Venetian.

During last week's conference call, John Bucksbaum, chief executive of General Growth, said while the company doesn't have experience in planned community or office and industrial development, he wants to "build on the success" of Rouse.

Anthony Deering, Rouse chairman and chief executive, said General Growth is very enthusiastic about the Summerlin Town Centre project, which includes the planned mall, the now under construction Station casino, and a "village" of office and residential products.

Deering said Rouse decided to sell because real estate prices continued to escalate and that the company was having a hard time buying property. After looking at the different options, the company pursued a buyout, Deering said.

Deering has commented during past conference calls that the company was interested in a joint venture at its Fashion Show mall.

Rouse acquired the Howard Hughes Corp. in 1996 and has sold off many of its Las Vegas office and warehouse assets in recent years while aggressively developing Summerlin and Fashion Show.

Most recently, Rouse sold the Hughes Center office park, a 1.1 million-square-foot high-end office complex just east of the Las Vegas Strip, for $233 million including $137.5 million of debt to Houston-based Crescent Real Estate Equities. Rouse, in turn, purchased Crescent's 52.5 percent interest in The Woodlands, a planned community just north of Houston.