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Shopping Center Spin-Offs Driven by 'Pure-Play' REIT Craze

Retail REITs Launch Separate Shopping Center REITs in Bid to Attract Investor Interest, Deleverage Balance Sheets
March 26, 2014
After bulking up through acquisitions and new development, major REITs have been practically tripping over themselves to get small through a recent spate of spin offs.

Recent examples include Simon Property Group's plans to set up a separate REIT for its strip center and smaller enclosed malls business, and American Realty Capital Properties' plans to split its retail portfolio in two, keeping its single-tenant retail business while breaking out its multitenant shopping centers into a separate publicly traded entity valued at more than $2.2 billion.

Most recently, The Wall Street Journal reported that Vornado Realty Trust is considering a spinoff of its suburban shopping center portfolio in order to focus on its office holdings and high-end retail centers in Manhattan and Washington, D.C.

According to the REITs and analysts, the spin-off strategy achieves two main goals for REITs. It offers a clean, pure-play investment story to Wall Street, which hopefully attracts more investment, and it can also reduce leverage for the parent company, the spin-off, or both.

The recent spinoff-to-simplify-structure trend isn't restricted to retail REITs. In November 2013, Ashford Hospitality Trust Inc. completed a spinoff of Ashford Hospitality Prime Inc., comprised of eight high-performing hotel properties, hoping that the new REIT would be able to offer lower leverage and a higher-quality pure-play portfolio than the legacy company.

Simon (NYSE: SPG) on Monday announced progress towards the spinoff of Washington Prime Group, filling four senior management positions and four independent director slots on the board. Simon named Mark Ordan CEO of the proposed company in February.

Simon Property's strategy with the spinoff is expected to occur in the second quarter and have an enterprise value of about $6 billion. In doing so, Simon said it hopes to create value by focusing on operational efficiency within a smaller group of assets. Washington Prime Group expected to own or have an interest in 54 strip centers and 44 malls in 23 states.

The creatively restructured concept is simply based on the theory that two parts are worth more than the whole. The spinoff will occur sometime in the second quarter with a value of the new entity of around $6 billion.

Analysts said the most recent retail spinoff of American Realty Capital Centers by ARCP will strengthen the company's balance sheet by reducing leverage, eliminating shopping centers financed with mortgages and extracting $400 million of equity from the shopping center portfolio, requiring management to issue fewer shares to fund its planned capital deployment of $2 billion to $3 billion of investments planned.

Yet the spinoff strategy does simplify its structure, giving investors an option to invest in a pure play triple-net REIT in ARCP, or a shopping center REIT, the moves are not without a downside, in the view of analysts. ARCenters will be managed externally by ARCP Advisors, a team of leasing, accounting and investment professionals within ARCP, which will earn a fee equal to 50 basis points on the initial $3.5 billion of gross assets.

"We believe this externally advised structure somewhat offsets some of the goodwill recently created with investors after internalizing the management of ARCP," said Mitch Germain and Peter Lunenburg of JMP Securities in a research note.

The new REIT is expected to start life with a higher debt ratio compared with its peers, which will require ARCM to invest more equity into deals in order to re-align leverage, JMP said.

Vornado's strip-mall business includes more than 100 properties and 15 million square feet mostly in the Northeast U.S.

Alexander Goldfarb, analyst with Sandler O'Neill, said his firm has advocated Vornado splitting off it's suburban business since April 2012.

"This is consistent with management's action plan of simplification," Goldfarb said in a note earlier this month. "Whether this merger happens or VNO spins off its strip center portfolio as an independent REIT, we continue to believe there is untapped potential in these assets given the age/location in infill New Jersey/metro N.Y. markets."

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