The Mills Saga Continues – Is This The Perfect Solution?

Implications: The combination of an institutional investor already at major risk in a transaction plus a professional developer/manager with a great industry record has the best opportunity for success in this turnaround.  I remember also that Simon in the past had a major investment in Mills which it withdrew.  That memory tells me there was a disagreement over the future plans for Mills by the previous management.  I have a feeling that Gazit, the major Israeli investor with a big stake in Mills, might also be comfortable with Simon.  This feels warmer to me than the Brookfield solution of a month ago which lacked shopping center development and management expertise, a hand-in-hand feel for Farallon and Gazit and any background in the properties.

Analysis:

Simon and Farallon are paying more for the company than Brookfield agreed to.  The big reason I think these properties are worth more to Simon is that Simon has relationships with upper-end retailers that will carry the day.  Many of these properties are “A” locations with “C” results currently.  Simon has been successful in pushing their portfolio volumes to $ 475 per sq. ft. annually.  Mills is averaging about $ 375 per sq. ft. from the unconsolidated properties which comprise 35 of the 38 centers.  I think the way to do this is to raise the quality/price points of the tenancy.  I’ll give Simon the discretionary call here as some investments should be made with more reliance on the operator than the property and I think Simon is this caliber of organization.  Nevertheless, major properties such as these in major metro areas are supply constrained and the properties warrant this quality of developer/manager in my opinion.

I’m optimistic that these properties will stabilize at higher numbers under this expertise and financial strength.  The process won’t be done overnight, but progress should be steady and sure.