Simon to Buy Outlet Landlord

With $700 Million Deal, Mall Owner Raises Bet on a Resilient Retailing Format By KRIS HUDSON Mall owner Simon Property Group Inc. said it will buy Prime Outlets for $700 million, in a deal that highlights the relative health of outlet centers in a mostly bleak environment for retailers. The deal, the year's biggest in the U.S. commercial real-estate industry, also marks the first time Simon has tapped a $4 billion war chest it has raised this year to take advantage of the property sector's spreading distress. Unlike private real-estate owners, big public companies like Simon have been able to borrow money and sell equity. Many of these companies are expected to use their resources to snap up properties weaker landlords are forced to put up for sale. Simon already is the country's largest owner of retail properties by number, with 323 malls and other shopping centers. Adding Prime's 22 centers would cement Simon's dominance of the resilient outlet-center market, giving it a total of 63 outlet properties. That's twice as many as No. 2 outlet-center operator Tanger Factory Outlet Centers Inc. Controlling so many properties promises to give Simon an enormous advantage when negotiating leases with retailers. The company would have the clout to do multiple deals, potentially insisting that retailers take space in poorly performing locations as a condition of getting prime real estate in the most popular centers. "Simon has the heft to be an active participant in consolidating the mall and outlet sector industries, which are two businesses where bigger is better," said Jim Sullivan, an analyst at Green Street Advisors Inc. Like most owners of outlet centers, Prime Outlets has been weathering the storm better than other owners of retail properties, as shoppers have favored the centers' brand-name merchandise offered at discount prices. Prime Outlets' occupancy stands at 92% and its sales per square foot at $370. But Prime's parent, David Lichtenstein's Lightstone Group LLC, has been struggling on a number of fronts. Its biggest problem has been the 660-hotel Extended Stay Hotels chain, which closely held Lightstone bought for $8 billion in 2007 and saddled with nearly that much in debt. Mr. Lichtenstein contributed roughly $200 million in equity in that deal, much of which he borrowed. Extended Stay sought bankruptcy protection in June. Prime Outlets is Lightstone's largest and strongest asset, and its sale will give the company cash to address Extended Stay's capital needs and possibly make new investments. But selling it now means that Lightstone is getting less for the centers than what they were worth at the peak of the market. David Simon, chief executive of Simon and the son of late founder Mel Simon, has made it clear in recent months that he thinks the downturn will provide rare opportunities to buy valuable assets cheaply. The company also is trying to position itself to take over General Growth Properties Inc., which owns 200 U.S. malls and is attempting to exit Chapter 11 bankruptcy protection next year. Simon's deal for Prime Outlets isn't putting much of a drain on Simon's war chest. Simon is paying $700 million in cash and stock and assuming $1.2 billion of securitized mortgages and $400 million of other debt. None of the mortgages are delinquent, according to a person familiar with the matter. The deal is expected to close in the first quarter of 2010. Lightstone began speaking to Simon and others about selling Prime Outlets two months ago, according to people familiar with the talks. Tanger also bid on the properties before Simon prevailed, these people said. A Lightstone representative declined to comment. A Tanger representative didn't return calls seeking comment. Lightstone forfeited four malls separate from Prime Outlets to its lenders this year. The company still has several office buildings, strip centers, industrial buildings and 20,000 apartment units. Lightstone bought Prime Outlets in 2003 for $625 million. Green Street puts the number of outlet centers in the U.S. at roughly 300, meaning Simon will control 30% of the market once it completes its deal for Prime Outlets. Simon's Chelsea Outlets division, which Simon bought in 2004, posted occupancy rates of 95.6% and sales per square foot of $492 in this year's third quarter. In comparison, Simon's regular malls had occupancy rates of 91.4% and sales of $438 per square foot. What's more, the 4.5% decline in sales per square foot at the Chelsea outlets was less severe than the 11.1% decline at Simon's regular malls. Simon was advised in the deal by J.P. Morgan Chase & Co. and UBS AG. Lightstone was advised by Citigroup Inc. Write to Kris Hudson at kris.hudson@wsj.com