Robust offers for two prominent commercial real estate companies demonstrate that demand by large investors for prime office and retail properties has yet to peak, industry observers said Wednesday.
Canadian investment firm Brookfield Asset Management Inc. agreed Wednesday to pay $1.35 billion for Mills Corp., the troubled owner of 38 shopping centers, including two of Southern California's largest malls. The price is considered top dollar by mall industry experts.
Shares of Mills rose above Brookfield's $21-a-share cash bid after Tel Aviv-based Gazit-Globe Ltd., Mills' second-biggest shareholder, said in a regulatory filing that it had made an offer of $22 a share. Mills shares closed up $4.69, at $22.46. Brookfield shares climbed 50 cents to $48.50.
Meanwhile, Vornado Realty Trust, Starwood Capital Group and Walton Street Capital on Wednesday offered about $21.6 billion for Equity Office Properties Trust, the biggest U.S. office landlord, with several prominent Southland holdings. That topped a previous $20-billion bid from Blackstone Group that was already a record for a leveraged buyout.
Higher offers may come forth for both Equity Office and Mills, analysts said, as private equity investors look for the stability and predictable returns of top commercial properties.
The Vornado group, which bid $52 a share for Equity Office Properties, and Blackstone are vying to gain control of a real estate investment trust that owns or has a stake in 543 buildings from New York to Los Angeles, including Two California Plaza in downtown Los Angeles and AIG Sun America Center in Century City.
Vornado said it planned to keep about half of Equity Office's assets -- those located in markets on the East and West coasts -- while Starwood and Walton divided the remaining properties.
Equity Office shares rose $1.09 to $50.94. Shares of Vornado slid $3.38 to $122.55. Vornado's two partners in the offer are privately held.
New takeover proposals are emerging for Equity Office amid a deadline today for the company's bondholders to receive a consent payment as part of the Blackstone offer. Blackstone also has the right to best any rival bid.
Office properties have become desirable as vacancy rates have dropped over the last few years and rents have climbed to record levels in many markets, including parts of Southern California.
Although it owns some of the nation's highest-grossing malls, including Ontario Mills and Del Amo Fashion Center in Torrance, Mills has been on the ropes financially. It warned last week that it faced bankruptcy if it couldn't find a buyer or refinance the $1 billion remaining on a loan it got last spring from Goldman Sachs Mortgage Co. to stay afloat.
Mills, a real estate investment trust based in Chevy Chase, Md., also revealed that numerous accounting errors would force it to restate its earnings as far back as 2001, while facing a Securities and Exchange Commission investigation.
Mills also owns the Block at Orange in the city of Orange, as well as three malls in the Bay Area and one each in Nevada and Arizona.
Mills is best known for its massive factory outlet and entertainment complexes such as Ontario Mills, which are tourist magnets strong enough to rival theme parks and draw shoppers from many miles away.
In addition to movie theaters, Mills' shopping centers have offered such indoor attractions as a skiing hill and a skateboard park.
"It worked very well for a while, but there are only so many places you can build those," said George Whalin, president of Retail Management Consultants in San Marcos. "You have to have a pretty big population" nearby.
To keep growing, Mills began in the late 1990s acquiring traditional malls such as Del Amo Fashion Center. That was about the time that many conventional indoor malls began to suffer in competition with so-called lifestyle centers such as the Grove in Los Angeles and Victoria Gardens in Rancho Cucamonga that mimic the sensibility of a small-town Main Street, only with better stores.
"There was also a revolving door of senior executives at that company" that added to its problems, Whalin said.
Brookfield, which is better known as an office owner of such properties as Bank of America Plaza and Figueroa at Wilshire in downtown Los Angeles, wants Mills in part to diversify its holdings, which it lists at $50 billion under management.
"Retail malls represent an asset class that is very attractive to institutional investors, so this acquisition will help us further our asset management strategy," spokeswoman Katherine Vyse said.
Brookfield would invest in improvements to the malls, she said, and draw on its experience in leasing and financing to stabilize Mills as a subsidiary.
Mills' directors voted for the sale, but stockholders still must approve it. A final decision could take more than six months.
Times wire services were used in compiling this report.
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At a glance
Headquarters: Chevy Chase, Md.
Chief executive: Mark S. Ordan
Properties: Thirty-eight shopping centers including Ontario Mills, Del Amo Fashion Center (Torrance) and the Block at Orange
Financials: The company hasn't filed official statements since the third quarter of 2005.
Source: Times research
Los Angeles Times