Taubman Deal Is Good News for Buyers
When one of the country’s biggest real estate magnates decides to offer the public a piece of his empire, you wonder: Why now?
For the past two to three years, real estate values have been falling in many parts of the country. A lot of people, homeowners in particular, want to believe the worst is over.
But if that were really the case, why would Michigan multimillionaire Alfred Taubman choose to sell the public a 32.5% stake in his 19 shopping malls--premier properties that include the glitzy Beverly Center in Los Angeles?
If you believe in “buy low, sell high,” you have to figure the 67-year-old Taubman is trying to do the latter. If he thought real estate prices could only go up from here, the public certainly wouldn’t be invited to the party.
That’s an over-simplified explanation for the Taubman stock offering, announced earlier this week. But the deal points up a basic fact of life in the real estate market today: After the unprecedented property boom of the 1980s, there still are countless real estate owners who want or need to convert their investments into hard cash.
For potential buyers--and perhaps especially for home buyers in Southern California--the biggest risk these days is in moving too fast for fear of missing a bargain. The pros know better; the tide has turned, and better prices are coming.
Scott Offen, an analyst who tracks the national real estate scene for mutual fund giant Fidelity Investments in Boston, says there’s no question that property values are rebounding in some areas. Apartments in Texas are booming, he says, and shopping centers throughout the Southwest are hot.
But beyond those pockets, Offen sees a market still heavily burdened by supply. What’s more, there’s nothing to suggest that the bulk of the potential sellers have been washed out of the market over the past few years, he says.
“The leveraged owners of real estate have to continue to sell,” Offen says. “We’re going to see many, many more of these deals.”
Taubman is a case in point: The $360 million he hopes to get in the stock offering wouldn’t go into his pocket. Instead, it would pay off a big chunk of a $600-million loan he owes the AT&T; and General Motors pension plans, which invested with him in the mid-1980s.
Though rumors have it that Taubman is being squeezed by the real estate crunch, his officials deny that there’s any pressing need to pay off debt. Instead, Taubman spokesman Chris Tennyson says the decision to go public is “strategic” in that it would give Taubman greater flexibility with his real estate empire.
It’s easy to see why GM and AT&T; would sanction the stock offering. They get at least a partial payoff on their investment. Plus, the rest of their loan is converted to shares--which they’ll be able to unload on the market later, if they choose.
Indeed, major institutions’ desire to cut back their exposure to real estate is a big reason why property values in many parts of the country have nowhere to go but down, some experts say.
“There are a lot of real estate loans coming due over the next year or so, and I think we’re going to see more and more demand by the lenders for some pay-down of those loans,” says Arthur Von Thaden, chief executive of BRE Properties, a real estate investment trust in San Francisco.
For the indebted property owners, a cash-call by lenders almost inevitably translates into a need to dump property. That’s because few other lenders are willing to step up and lend new money, Von Thaden notes.
So who’s ready to buy the real estate that distressed owners must sell? BRE Properties might --but not until Von Thaden is sure he’s getting the best price possible. And so far, he says, “There’s still a wide gap between what the seller thinks a property is worth, and what the buyer thinks it’s worth.”
Von Thaden’s REIT owns 32 properties, mostly in California and mostly apartment buildings. Like other REITs, BRE basically collects rent on its properties and passes it through to shareholders. The stock, listed on the New York Stock Exchange, now trades at $30.875 a share and pays an annual dividend of $2.40 a share. So at the current price, shareholders earn a 7.8% yield--a substantial return these days.
But to preserve that return, Von Thaden has to be sure that his properties stay well-occupied, and that anything new he buys isn’t a vacant building waiting to happen. After all, if rents drop, shareholders’ dividends will drop too. That’s why Von Thaden and other REIT managers have to be extraordinarily picky about buying into the real estate morass.
There, too, is the warning for investors who might want to buy into the Taubman deal, which also would be a REIT: At a proposed offering price of $13.50 a share, the proposed 88-cents-a-share annual dividend would mean a yield of about 6.5%.
Potential shareholders have to decide if that’s enough of a return to offset the risks that retail rents might slump badly over the next few years, if consumer spending stays weak and mall landlords like Taubman are forced to make life easier for their tenants. If a sustained retail slump lies ahead, Taubman’s shareholders will certainly feel it.
Indeed, the REIT field has been littered with disasters in recent years. The latest casualty is Rockefeller Center Properties in New York City, owner of the famed retail and office complex of the same name. The stock has plunged from $17.50 earlier in the year to $11 now as the REIT’s managers have wrestled with high debt and declining rents. Some analysts believe Rockefeller’s dividend might drop as much as 50%, from $1.92 a share now.
Is there a message in all this for homeowners? You bet. In California, residential real estate prices have come down in the recession, but home prices overall haven’t crashed. But as with the commercial market, demand versus supply is way out of whack. There are too many sellers, and that suggests that home prices have further to fall.
John Karevoll, whose Dataquick Information Systems in La Jolla records virtually every home sold in Los Angeles County, says the median home price peaked at $203,000 in 1989. Since then, it has hovered slightly below that, at $200,000. His numbers differ from the official National Assn. of Realtors figures because he charts every sale, while the Realtors merely estimate from surveys.
Many homeowners would like to believe that $200,000 will be the bottom. But look at the backdrop: As the Southland economy worsens, vast numbers of new homes are going up for sale. Yet buyers aren’t rushing in.
In the San Fernando Valley, the local realtor board counted 14,954 single-family homes and condos for sale at the end of June. That was up 27% from 11,732 at year-end.
In Central and West L.A., the number of homes for sale was 18,332 in June, up from 17,041 a year earlier. Yet the number of closed sales in June totaled 635, down from 919 a year earlier.
With nothing on the horizon to suggest a turnaround in the L.A. economy anytime soon, home buyers here--like commercial property buyers in most of the country--ought to realize they’re completely in control of the market. Nobody has to overpay for real estate today--not the investors who may buy from Al Taubman, and not you.
End of an Era?
The price of the typical home in L.A. County rocketed from $80,000 in 1978 to a peak of $203,000 in 1989. But since then, the median home price has actually slipped to $200,000. People who bought homes in the late-1980s as an investment have lost money--something many figured couldn’t happen. Median single-family home price, L.A. County 1992 year to date: $200,000 Data compiled from all recorded home sales each year. Source: Dataquick Information Systems
Taubman’s Rents: A Mixed Picture
While retail tenants in Alfred Taubman’s 19 shopping malls are paying more rent overall than a few years ago, the average base rent paid by new stores that opened in 1991 fell sharply from 1990 levels--a sign of economic hard times.
Existing leases, New stores, avg. base rent avg. base rent Year (per square foot) (per square foot) 1987 $20.85 $31.85 1988 22.84 34.80 1989 24.98 35.62 1990 27.13 38.60 1991 29.54 35.00
Source: Taubman prospectus
