Mills agrees to acquisition deal

Implications: Brookfield has offered $ 156.25 per sq. ft. for the 48 million sq. feet in the remaining 38 shopping centers in the Mills portfolio.  Eighteen percent of the cost in cash will be paid at closing.  I believe that the deal will not return historical costs to the shareholders and reproduction cost is significantly higher.  The largest current shareholders are offering to compete for the acquisition.  They have made the decision to continue to invest.  They propose that this is not a case of throwing good money after bad.

Analysis:

Current management seems to have adopted a releasing program that emphasizes eventual releasing of the properties to full-price, high-end retailers.  The idea is to raise volumes and rents by means of the program without destroying the cost basis of the properties.  The program shoots at Taubman Centers at $ 544 per sq.ft. volumes and $ 42 per sq.ft rents, Simon at $ 475 per sq. ft. and General Growth at $ 450 per sq.ft.  Mills is currently at say $ 375 per sq.ft. which correlates more closely with CBL and its small market portfolio.  Many of Mills sites have “A” characteristics in major markets so the prospects may be possible.  Brookfield thinks so and so do the other two.

Try this calculation, $ 375 volume X 8% factor equals $ 30 per sq. ft. minimum rents at an acquisition price of $ 156.25 per sq. ft. or a gross multiplier of 5.2 X.  Raise the volumes to $ 450 and the rents go to $ 36 by the same process and the value to $ 187 per sq. ft.  That’s over $ 30 per sq. ft. profit or say 100 + % on the equity.  We don’t have the factors of the capital costs required, the time to accomplish the program or the transaction costs for the exit, but we can see that a lot of equity capital might be invested at reasonable returns if this result is obtained.

I look forward to following this case.