The Westfield Group has formed a $4.8 billion joint venture on 12 regional shopping malls in the United States with the Canada Pension Plan Investment Board (CPPIB.) The deal is the largest real estate investment made by the institutional investor, and a big bet on the future health of U.S. shopping malls. The investment gives CPPIB ownership interests in 26 malls in major U.S. markets. It has also invested in malls in the U.K., Australia, Brazil and Germany.
CPPIB will become a 45% joint venture partner in a portfolio of 10 regional malls and two redevelopment sites. The portfolio contains 13.53 million square feet of gross leasable area and includes one mall each in Maryland (Annapolis) and Washington (Tukwila). All of the other malls are in California.
Westfield stands to net $1.85 billion in cash from the deal after CPPIB assumes property-related debt.
The rich valuation seemingly ups the price tag for all U.S. mall REITs. Ki Bin Kim, head of U.S. Equity Research - REITs for Macquarie Capital (USA) Inc., said that based on this transaction, he thinks U.S. mall REITs "appear very attractively priced."
Kim values the CPPIB deal at a 5.8% net operating income cap (although Westfield management is quoting a 5.6% cap) for a portfolio generating sales of $456/square foot.
"The 5.6% [cap rate] is based on actual, in-place rents today," Kim said. "The 5.8%, we calculated is based, on appraised cap rates, which includes vacancy value pickup and repricing of near term lease rolls."
"Also, Westfield charges a 5% management fee, while most other property managers would charge only 2.5% fee off of gross rents," Kim added. "So a potential buyer, could theoretically pay relatively more [for the portfolio], with the plan of bringing in a newer, cheaper manager."
"While we aren't 100% sure whether it was at a 5.8% or 5.6% cap rate, we do need to take into account a minority discount," Kim said. Westfield "is selling only a 45% interest, while maintaining control. The historical minority discount for operating companies (not real estate) has typically been in the 30% range. Real estate shouldn't have the same minority discount, but 5% seems reasonable, which would bring the cap rate down another ~30bps, further widening public vs. private pricing."
The deal pricing makes other U.S. mall REITs look attractive, Kim said.
"We think GRT [Glimcher Realty Trust] is worth about $12.50 share on NAV [net asset value] alone," Kim said. "GRT's portfolio generates sales close to about $400/square foot, just 13% less productive than the Westfield-sold asset pool, yet the stock trades at a 7.74% implied cap rate, or 33% cheaper than the recent comp of 5.8%. Pricing and quality aren't linear equations, but this is a very wide pricing discrepancy."
"GRT is the cheapest, but SPG [Simon Property Group] and GGP [General Growth Properties] all appear undervalued," Kim added. "For example, SPG has a portfolio with sales of $536/square foot (17.5% better than Westfield's asset pool), but trades only 8.5% more expensive than the cap rate of 5.8%."
The Westfield joint venture represents CPPIB's largest real estate investment globally to date.
Westfield will act as the managing general partner for the joint venture and will be responsible for property management, leasing and development. The transaction will increase the number of joint ventured centers in the U.S. to 19, representing 50%, by value, of the Westfield's U.S. portfolio.
With the completion of this transaction, CPPIB will become one of the largest institutional owners of regional shopping centers in the U.S. with interests in a total of 26 malls in major urban markets. As at Dec. 31, 2011, CPPIB's real estate investments totaled $14.4 billion representing 9.5% of the CPP Fund.
Separately, Westfield also sold its interest in three non-core shopping centers in the United Kingdom to Hermes Real Estate, one of the UK's largest property fund managers.
The two deals combined provide Westfield Group with $9 billion of capital for redeployment into "higher return opportunities." The opportunities include the Westfield's share of the $11 billion development pipeline, recent expansion into Brazil, as well as the investment in major iconic projects at Milan (Italy) and the World Trade Center in New York.
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