On Monday, February 10th, Simon Property Group (SPG) announced their forthcoming acquisition of competitor Taubman Centers (TCO). The long-awaited mega mall merger between David Simon and Robert “Bobby” Taubman follows a rebuffed takeover from Simon in 2003. TCO owns the highest-quality finite collection of U.S. shopping and dining destinations, including The Mall at Short Hills, Dolphin Mall in Miami, and Cherry Creek in Denver. Despite today’s challenged retail environment, TCO’s portfolio boasted industry-leading sales, relatively strong occupancy, and growing rents. Even so, Simon negotiated an attractive capitalization rate of 6.2%. The $3.6 billion transaction is structured as a partnership between SPG and TCO. Taubman will continue leading the existing TCO platform, although it is technically a privatization with executives realizing their exit payments.
While some may perceive this deal as signaling positive change among general sector headwinds, it is anomalous, given the lack of top-quality assets that change hands. Globally, listed retail real estate has been underperforming drastically in recent years. Drivers include retailer bankruptcies, oversupply in retail space, a lack of innovation, and a shift in consumer preferences to online shopping experiences. Retail landlords are facing pressure from their tenants, trying to cut costs by restructuring rents and lowering occupancy costs.
In today’s retail landlord environment, only those with premier locations and assets, scale, and healthy balance sheets can survive. SPG does seem to possess these attributes, while TCO lacked the latter two. Presently, the SPG/TCO merger makes sense from our perspective. SPG will benefit strategically and financially, as they will gain negotiating leverage against retailers by controlling a larger pool of premium assets. Additionally, SPG will have further optionality in their established Asian development platform, offering more locations and bolstering them as a global player. The deal is immediately accretive to SPG’s earnings, with more upside coming from future general & administrative synergies, operating efficiency improvements, and interest expense savings.
For TCO, this merger provides a perfect exit and solves some key issues that have been negatively weighing on shares. It will satisfy demands from activist investors, against whom TCO has been paying hefty ongoing legal fees in recent years. TCO will also benefit from SPG’s larger leasing platform, allowing them to recover negotiating leverage due to its smaller scale. Finally, it prevents TCO from facing too many potential liquidity needs at once, particularly as it relates to redeveloping vacating department stores.
A strategic merger of this sort is in line with an M&A trend we have observed in other global real estate sectors— larger REITs with good balance sheets taking over smaller underperforming players, e.g. Prologis vs. Liberty in the industrial sector. However, despite the strategic merits of this deal, the ongoing retail real estate industry challenges will remain, though we may see a smaller number of bankruptcies and store closings this year. To stay relevant and competitive, retail landlords must focus on redeveloping and improving their assets to offer the ideal shopper experience. Retail tenants now have an even bigger reason to consider premium players and locations.
Opinions represented are subject to change and should not be considered investment advice. Forward-looking statements are necessarily speculative in nature. It can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes.