INDIANAPOLIS - Simon DeBartolo Group Inc., the largest publicly traded real estate investment trust, bid $19.37 a share last week for the Retail Property Trust, a private REIT owned largely by pension funds.
The bid was the highest of eight submitted by other public REITs and investor groups for the $1.1 billion RPT.
It also exceeds - for now - a proposal by New York-based O'Connor Group, the manager of the RPT, to merge RPT's regional malls with those from two developers and roll them up into a $4 billion to $5 billion public REIT.
The initial public offering proposal, called Grand Slam, involved the merger of regional malls from The Richard E. Jacobs Group Inc., Westlake, Ohio, and New England Development, Newton, Mass. The company would own 52 malls and would property manage another 33.
"The board believes that this is a superior proposal to Grand Slam," said RPT president Bruce Macleod. "There is a period now for Grand Slam to consider what it wants to do.
Grand Slam has "the ability to match the offer," said Mr. Macleod. "That is under consideration now."
Mr. Macleod acknowledged the Simon offer is a "strong proposal." It gives the shareholders cash and no IPO risk, said Mr. Macleod.
O'Connor still gets paid
As part of an agreement between RPT trustees and O'Connor, a $19 million break-up fee would be paid to O'Connor and the Grand Slam group, if another option is pursued.
O'Connor was able to extract the concession because its management contract states it would be the only manager of the RPT assets, sources said.
Grand Slam was proceeding smoothly this summer until Simon DeBartolo tossed the equivalent of a knuckle ball, buying shares from some pension funds at below net asset value and amassing a total of 2.3 million shares.
Sources said Simon DeBartolo initially was advised by Liquidity Financial Advisors, Emeryville, Calif., which specializes in secondary market purchases of commingled funds.
Merrill Lynch & Co. then was brought in to advise on the tender offer.
The negotiated secondary market purchases that gave Simon a stake in RPT were followed by a $17.50 tender offer two weeks ago. The offer was about $1 above June 30 net asset value of $16.44.
Simon's initial pitch forced the eight unaffiliated trustees of the RPT board to hire Lazard Freres & Co. L.L.C. to evaluate alternatives. Mr. Macleod, O'Connor Chairman Jeremiah O'Connor and Steve Karp, president of New England Development, are affiliated trustees.
Lazard Freres opined that Grand Slam was the best choice to maximize shareholder value, subject to an evaluation of other offers.
Some sold too early
Some pension funds, however, didn't get maximum value for their shares.
According to several sources, the Board of Pensions of the Presbyterian Church, Philadelphia, and the pension fund for New York-based RJR Nabisco Inc. sold their shares to Simon at below net asset value.
Several calls to the Presbyterian Church pension fund were not returned. Ed Robertiello, director-pension and benefit investments with RJR Nabisco, declined to comment.
The Los Angeles City Employees' Retirement System also sold its shares before last week's offer, and a source familiar with the transaction said that Goldman, Sachs & Co., working with NED and Jacobs Group, was the buyer.
Goldman Sachs is Grand Slam's investment banker and would have taken the company public, said Mr. Macleod.
Oscar Peters, general manager for the Los Angeles city fund, said his fund sold early because Simon's $17.50 tender offer was contingent upon it receiving a majority interest. Mr. Peters said he didn't know the specifics of the $19.38 offer, but if it's the same as the initial offer, there is risk if Simon didn't get 51%.
He declined to identify the buyer or the sales price, saying it was confidential.
The two largest investors in the RPT are California State Teachers' Retirement System, Sacramento, and the New York Common Retirement Fund, Albany.
The $90 million New York fund has not sold its $65 million investment in RPT. "We are awaiting the opinion and recommendation of the RPT board members," said Jeffrey Gordon, a spokesman.
Representatives for California Teachers were unavailable.
The public retirement systems for Kansas and Idaho also are RPT investors and are taking the offer under consideration, said representatives of both funds.
Lazard Freres will host an investor meeting in New York on Sept. 16, and shareholders are scheduled to vote on the proposal Sept. 30.
RPT's performance ho-hum
Until Simon's latest offer, the performance of RPT has been anything but a bases-clearing home run. It has been more like a sacrifice bunt, its mediocre performance advancing the runner one base at a time.
According to Pensions & Investments Performance Evaluation Report, RPT returned an annualized 4.3% for the 10 years ended June 30. The Retail Sub-Index, compiled by the National Council of Real Estate Investment Fiduciaries returned 5.8% annualized for the same period.
For five years, RPT posted a 2.7% annualized return and the index, 4.1%; for three years, RPT returned 4.8% and the index, 5.1%.
RPT's fortunes apparently began to turn around in last year's second half. The REIT posted one-year returns of 10.5% vs. 4.9% for the index.
"RPT has trailed because the portfolio was assembled from 1987 to 1990 and prices dropped," said Mr. Macleod. "Everything bought then went down dramatically.
"The tide was going out, which was to everyone's detriment."
But RPT has performed well when measured by other criteria like sales per square foot, which will result in a rise in rents and an improvement in performance, said Mr. Macleod.
David Simon, chairman of Simon DeBartolo, said he genuinely wants to own the RPT assets, and is not trying to break up a potential competitor.
"It (our offer) may not allow RPT to go into the merger, but that is not what we are in this for," he said. "We have been interested for quite some time."
The company that would have resulted from Grand Slam would become the second largest public REIT.
Grand Slam isn't the first attempt to take RPT public. Investors scuttled a plan a few years ago when Goldman Sachs concluded RPT would have traded below the net asset value at which the properties were appraised, Mr. Macleod confirmed.
"Four years ago, we recommended to the shareholders that they think about going public," said Mr. Macleod. "The timing and the multiples (being paid for public REITs) were good.
"For a series of different reasons, it didn't get enough support to take it forward," said Mr. Macleod. "In hindsight, it would have given RPT access to capital and potential to grow."
The O'Connor Group is one of several pension fund real estate money managers attempting to aggregate and roll up disparate investment entities into one property company and sell itself to the public, which is paying a premium for property.
But investor reaction to the proposals has been mixed.
Last month, investors with AMB Institutional Realty Advisors Inc. approved a roll up by that company (Pensions & Investments, Aug. 18), the first by a traditional real estate money manager.
In the past, however, investors have twice rebuked Heitman Capital Management's effort to roll up its numerous partnerships into three companies.