There’s one thing clear about the recent deal that saw The Shops at Mission Viejo get a new ownership structure and a sizable new mortgage: Orange County’s retail market has the attention of America’s largest public pension fund.
Drawing a bead on the true value of the largest enclosed mall in South Orange County is much tougher to figure.
Indianapolis-based Simon Property Group Inc., the largest owner and operator of malls in the U.S., recently inked a deal to transfer nearly half of its ownership in The Shops to Skokie, Ill.-based Institutional Mall Investors LLC, which is backed by the $240 billion California Public Employees’ Retirement System.
IMI got a 49% stake in The Shops, a 1.2 million-square-foot center that’s anchored by Nordstrom and Macy’s just off the San Diego (I-5) Freeway.
Simon retains 51% of the ownership in the center—which it had previously owned outright—and it will continue to manage the property.
CalPERS made the deal because “they did want (an) increase to their California exposure,” Simon Properties Chief Executive David Simon told analysts last week.
The mall, built in 1979, is Orange County’s seventh-largest shopping center by sales, and the county’s largest center south of Irvine, according to Business Journal records. It counts about 150 stores for an occupancy of nearly 96%, and it saw about $337 million in sales for the 12-month period ending last June.
The Shops was debt-free prior to the deal with IMI, although plans were in place to take a new mortgage on the property. The joint venture eventually took a 10-year, $295 million mortgage with an interest rate of 3.61%, according to Simon executives.
The deal is notable for Orange County and the national retail market at large, said Andrew Johns, a mall analyst for Newport Beach-based Green Street Advisors Inc.
“Regional malls like this don’t come to market very often,” Johns said.
Biggest in Years
The deal appears to be the largest OC retail transaction in years, although there are still questions about the financial terms and the price tag placed on IMI’s 49% stake.
Recent appraisals are said to have assigned a value of a little more than $540 million—or about $468 per square foot—to the entire mall.
Rating agencies that analyzed a commercial mortgage-backed security that counts the mall-secured loan as its underpinning put the property’s value in the $400 million range.
Standard & Poor’s last week said it estimated a “moderately leveraged” loan-to-value ratio of 74% in its analysis of the CMBS.
The low end of the valuation range by ratings agencies would hew to the $400 million range and put IMI’s stake at about $200 million.
That dwarfs other recent area shopping center sales, most of which have involved much-smaller properties.
The largest retail sale in OC of late was 2011’s sale of Shops at Rossmoor in Seal Beach, which changed hands for a reported $125.9 million.
The true market value of The Shops at Mission Viejo could be closer to the $540 million appraised value of the property, if not higher, based on the typical capitalization rates seen in other high-end retail sales across the country of late, according to Green Street’s Johns.
Another sizable IMI-Simon transaction taking place in the suburbs of Chicago adds even more complexity to the Mission Viejo end of the deal.
Simon got a 50% stake in Woodfield Mall in Schaumburg, Ill., in return for the 49% stake in The Shops at Mission Viejo that IMI received. Woodfield Mall covers 2.2 million square feet, and its the country’s ninth-largest shopping center in terms of size.
IMI-backer CalPERS had a 50% stake in Woodfield until late last year, when it bought out the remaining ownership portion of the center from another pension fund. That deal valued the entire mall at a little more than $1 billion, a figure that appears to greatly exceed the best-case valuation of the Mission Viejo mall.
Offset
It’s believed that the difference in valuations was offset with a fee paid by Simon Properties to the IMI venture, although no specific details of that transaction have been disclosed by any of the parties.
“These are two of the 100 best malls in the U.S.,” Simon told analysts last week.
IMI and Simon jointly run three other malls nationally.
The transaction involving The Shops at Mission Viejo made sense for both parties, Johns said.
“From CalPERS’ perspective, it allows them to diversify their asset base, and Simon gets access to a great property (in Woodfield),” Johns said. “It’s a pretty good fit for both parties.”
