A Mall Mammoth With Little Room To Grow?

Perhaps in Chechnya you might find a worse travesty of majority rule. But I'd say it's a toss-up next to what just went down in Bloomfield Hills, Mich., U.S.A., home to Taubman Centers, the leading owner of upscale shopping centers. To elude takeover by rival Simon Property Group, Taubman got Michigan on Oct. 7 to enact a measure letting Taubman insiders thwart a majority of investors who had accepted Simon's merger offer.

Frustrating as that must be to Taubman's public shareholders, Simon Property Group may have it worse. It spent $10 million on a yearlong quest for Taubman, but the wasted money and time is not the problem. It's having now to find other avenues of growth. With some 238 properties, SPG already is far and away the top U.S. retail lessor. In nearly 10 years as a public company, SPG quintupled revenues, to $2.3 billion, while total return has far outstripped that of the Standard & Poor's 500-stock index. Its stock is up 39% this year alone. Maintaining such a pace has to be daunting, yet with the stock near its all-time high of $45.90, investors may not appreciate how growth has slowed.

SPG IS GOING AHEAD with plans to build five or six new shopping centers in the U.S., with a $400 million to $500 million annual development budget set for the next three to five years, all funded internally, its CFO, Stephen Sterrett, told me. SPG also expects to buy a few other malls as they become available and to expand more abroad, notably via a French joint venture that already gives it part of nine properties. All told, SPG sees revenue growth of 8% to 10% a year. "We're the Steady Eddie," Sterrett said.

Nothing wrong with that. But Simon's history is marked by faster growth, driven by deals. In 1996, Simon merged with DeBartolo Realty. Revenue in 1997 leaped 41%. Then, with a string of deals over the next three years, SPG raced ahead. In the 1990s, gross leasable space ran to 185 million square feet from 69 million. SPG since has added some other malls, such as the upscale Stanford Shopping Center in Palo Alto, Calif., bought in August. But it sold some locations, too. Its portfolio of retail spaces now is about as big as three years ago.

Rising rents have fed growth, too, but in SPG's regional malls they gained a middling 7% a year on average since 1996. SPG also has boosted occupancy to nearly 92%, from under 85% in 1996. Impressive, yet such a high current rate leaves less headroom. Sterrett thinks occupancy theoretically might go up to 95%. Finally, to supplement leasing revenues, SPG has sold business services to tenants and put the Simon brand on gift cards and such. These initiatives are growing nicely, but brought in just $40 million in 2003's first half.

Given all this, it's no wonder Simon fought hard for Taubman's nearly $400 million in revenue. Centers such as The Mall at Short Hills. N.J., command much higher base rents, currently an average of more than $42 per square foot, vs. about $31.50 at SPG's malls. Finding another source of such concentrated earning power by acquisition is unlikely: SPG's main public-company rivals see average rents of $30 to $31 per square foot. Even without Taubman, SPG is the industry's dominant force. Trouble is, majorities don't always win.

By Robert Barker

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