By Robbie Whelan
Sunny skies and hula dancers aren't the only things attracting
foreigners to Hawaii. Add this to the list: one of the most
valuable shopping centers in the country.
Mall giant General Growth Properties Inc. last week announced it
had sold a 25% stake in Honolulu's Ala Moana Center, the world's
largest open-air mall, for $1.37 billion.
The deal is notable for two reasons: its sky-high price and
General Growth's partner, AustralianSuper, an $84 billion
retirement fund making its first major foray into U.S. property
investment.
Commercial real estate typically is valued based on its
capitalization rate, or the annual net income produced by a
property divided by the purchase price. Like bond yields, falling
cap rates indicate rising values, and vice versa.
Last year, Ala Moana, a 2.2 million square-foot shopping center
with 290 shops and 80 restaurants, produced $145 million in net
operating income, according to Steve Sakwa, an analyst with
Evercore ISI. Based on that, the mall traded at a cap rate of 2.9%,
one of the lowest at which a mall has ever sold.
In comparison, the average mall cap rate in March stood at 5.2%,
according to Green Street Advisors, a Newport Beach, Calif.,
property-research firm.
By the end of 2016, after a scheduled expansion is expected to
add another 660,000 square feet of space, General Growth expects
the mall to be producing about $215 million in net operating
income. That would push the cap rate to roughly 3.9%, still
extraordinarily low for the mall industry but perhaps not such a
red flag.
"If it's not the best mall asset in the country, it is
definitely one of the top five," Mr. Sakwa said of Ala Moana. "I'm
not sure there's any other mall in the country that does over $200
million in net operating income a year."
General Growth, the country's second-largest mall owner by
market value, has been pruning its portfolio since emerging from
Chapter 11 bankruptcy nearly five years ago. In 2010, the company
owned all or part of 169 malls. Today it has 121.
The real-estate investment trust also has started snapping up
pricey urban retail properties, including properties on Fifth
Avenue in Manhattan and on Michigan Avenue in Chicago, at
top-dollar prices.
"We've really been going through a major portfolio
transformation," said Kevin Berry, General Growth's spokesman.
General Growth said it plans to use the proceeds from the sale
of Ala Moana to pay down about $700 million in debt. Ala Moana also
produces more than 10% of General Growth's annual net operating
income, the company said, and selling a stake in it allows the
company to reduce some of the risk associated with having such high
exposure to one asset.
The buyer of the stake in the Hawaiian mall, AustralianSuper, is
one of the largest Australian superannuation funds, which manage
large pools of tax-advantaged retirement savings contributed by
Australian workers and their employers. The funds are typically
invested in a portfolio of equities, fixed-income securities and
real assets. Ala Moana is AustralianSuper's first large American
property investment.
Foreign buyers often find it easier to buy property assets in
one-off deals from private sellers because it is easier to reach a
deal quietly, with less competition than there is for REIT assets,
said James Fetgatter, chief executive of the Association of Foreign
Investors in Real Estate, a trade group.
"A lot of the newer foreigners that have entered the market
recently are playing it safe," Mr. Fetgatter said. "They're buying
core, stable, trophy assets with lower yields."
In recent years, as commercial property prices have risen, the
market has seen several high-profile partnerships between foreign
institutional investors and REITs. In November, for example, office
landlord Boston Properties Inc. sold a 45% stake in three towers in
New York and Boston to Norway's sovereign-wealth fund for $1.5
billion. General Growth has roughly 30 joint ventures with foreign
institutional investors, though not all of them as large as the Ala
Moana deal.
For the Australian fund, the Ala Moana represents a blue-chip
real-estate investment, despite its high price tag and a recent
decline in the value of the Australian dollar relative to U.S.
currency.
"The yields on U.S. property are better than fixed income and
safer than equities," said Mark Delaney, AustralianSuper's deputy
chief executive and chief investment officer. AustralianSuper is
looking to increase its property allocation from about 8.3% to
about 10% over the next three to four years, the fund said.
"The REITs are by and large the main holder of high-quality
assets, which are the type of assets we're targeting in the US,"
Mr. Delaney said. "If you want to get high-quality assets, you have
to deal with their owners."
Write to Robbie Whelan at robbie.whelan@wsj.com