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The Honolulu Advertiser
Posted on: Sunday, April 14, 2002

Big players reshaping Hawai'i's retail market

General Growth Properties purchased Ala Moana Center in 1998. Four years later, it acquired the mall's nearest rival, Victoria Ward, above. The deal is expected to close July 31.

Cory Lum • The Honolulu Advertiser

By Andrew Gomes
Advertiser Staff Writer

Mitch D'Olier is convincing.

General Growth Properties purchased Ala Moana Center in 1998. Four years later, it acquired the mall's nearest rival, Victoria Ward, above. The deal is expected to close July 31.

Cory Lum • The Honolulu Advertiser

As president and chief executive of Victoria Ward Ltd., he has been able to sell investors, developers and public officials on the ambitious transformation of a hodgepodge of 25-plus-year-old commercial buildings in Kaka'ako into a vibrant retail and entertainment complex.

Now, in the middle of this renewal, D'Olier must convince company shareholders to approve an agreement he and Victoria Ward directors made last week to sell the business to a Chicago company for $250 million after nearly agreeing to sell it to longtime kama'aina firm Alexander & Baldwin Inc.

D'Olier, a self-described optimist, says that even he initially was skeptical about Ala Moana parent General Growth Properties Inc.'s bid to acquire Victoria Ward.

General Growth, however, proved to be convincing, too.

The details of how General Growth won over the leader of one of Hawai'i's largest landowners and its directors at the last moment may never be known. The company declines to comment, and A&B has declined to elaborate on what it calls "last-minute events that led to the (General Growth) decision."

D'Olier also says he cannot get into specifics, but notes that getting the deal done was difficult. "The process was really hard," he says. "We had to worry about shareholders and employees, the future of the company and the future of Hawai'i."

Now, only time will tell how General Growth treats Victoria Ward's ambitious redevelopment plans and how General Growth's ownership of the two dominant shopping complexes on O'ahu will reshape the retail market.

The decision by roughly 35 Victoria Ward shareholders to explore selling a company that has been in the Victoria Robinson and Curtis Ward family for more than 130 years arose about two years ago.

D'Olier says it started when serious, well-capitalized buyers approached Victoria Ward about acquiring the company. He referred the unsolicited interest to shareholders, who instructed him to pursue a possible sale.

A&B, according to more than one person with direct knowledge, discussed buying Victoria Ward at the time, but Victoria Ward, after progressive talks, early last year opted to hire New York investment banking firm Credit Suisse First Boston to solicit additional interest.

Credit Suisse sent a prospectus to select potential buyers, including General Growth, around the middle of last year, then narrowed the field to three: General Growth, A&B and Honolulu-based real estate investment firm The Shidler Group.

After a delay caused by the Sept. 11 attacks, the sale process advanced during the first few months of this year. Then a few "best and final" offers were revised higher.

For most of the first week in April, A&B was certain it was going to sign a deal to buy Victoria Ward, as boards of both companies were meeting to approve the purchase agreement.

But in the wee hours of April 4, General Growth submitted a last-minute offer, outbidding A&B.

According to one person close to A&B, who asked not to be named because of the sensitivity of the deal, A&B's bid was $10 million to $15 million short of General Growth's last offer.

After months of negotiating and spending $100,000 in trying to buy the estate, the out-bidding hit A&B hard. It was even harder to take given that General Growth and A&B had competed to buy Ala Moana, and that General Growth had won that deal, too, with its $810 million bid.

In Victoria Ward's case, D'Olier says he and the board had a fiduciary duty to attract the highest and best offer and ultimately accept General Growth's bid.

"At the end of the day, that's our job," he says.

Still, D'Olier says he felt uncertain about selling to General Growth until he met John Bucksbaum, the company's chief executive officer.

As part of the last-minute bid on April 4, Bucksbaum hopped on a plane from Chicago to join a financial team here and help close the deal in person.

"I didn't have a sense of who he was or what they were about," D'Olier recalls. "John made me feel better about this thing.

"John walked into this room and looked (Victoria Ward board member and major shareholder) Frank Hustace in the eye, and said, 'I understand what a family business is like; I am involved in one too.' "

Getting to know one another

General Growth doesn't exactly resemble the traditional family business. Formed in 1954 by brothers Martin and Matthew Bucksbaum, the company was first listed on the New York Stock exchange in 1972 and has grown to become a $2.9 billion company mostly owned by institutional shareholders.

Still, Matthew Bucksbaum, 76, is board chairman, and his son John, 45, is chief executive. Through a trust, the Bucksbaums own about 23 percent of the company.

John Bucksbaum has been with General Growth for 21 years, rising to become executive vice president in 1992, then chief executive in 1999.

On a recent two-day Hawai'i trip, Bucksbaum read the book "Victoria Ward and Her Family: Memories of Old Plantation", and quietly walked the 65-acre Ward estate to understand it better.

Meanwhile, "his finance guys and I were yelling at each other trying to figure out whether we could get a deal done or not," D'Olier recalls.

Bucksbaum, other than cordially introducing himself to Victoria Ward officials and expressing enthusiasm for what they had created, did not negotiate final points of the sale agreement on that trip.

Instead, he observed what was going on outside. "I know the property from the past, but I never looked at it from the perspective that we could be the potential owner of it," he said last week.

"I watched what people were doing ... how they would utilize the Starbucks stores," he recalls. "What the tables out front meant — was it just a place to sit down and drink coffee, or were there people who were sitting down and really socializing? Were they local shoppers, or were they tourists, or were they combinations of both?"

Back in Victoria Ward's conference room, attorneys and investment specialists agreed on a price of $250 million. Required signatures were gathered over the weekend, and the sale agreement was executed Monday.

The deal still needs shareholder approval and is anticipated to close by July 31.

A complicated deal

Douglas Pothul, a senior vice president at local commercial real estate firm Colliers Monroe Friedlander, says that in his experience working with A&B on other acquisitions, the company has been very aggressive valuing deals.

But because the Ward estate is a complicated asset with ground leases and space leases with retail, office and industrial tenants as well as redevelopment potential, this asset was extremely difficult to value.

"It doesn't get more complicated than this," he says.

Greg Andrews, an analyst with Green Street Advisors, a real estate investment trust research firm in California, says REITs such as General Growth have become more aggressive with purchases in the last three to six months.

That's because their stock has been trading at a premium to the value of their real estate assets. "That does make them very competitive," he says.

As a REIT with major tax benefits for reinvesting in property, General Growth has been aggressive on acquisitions. Earlier this year, the company agreed to buy JP Realty Inc., owner of 18 malls, for $1.1 billion, after losing out on buying mall owner Rodamco North America NV to a $5.3 billion competing bid.

In buying Victoria Ward, General Growth may have had other advantages as well, according to Andrews, who says other prospective buyers could have valued Victoria Ward in ways that generated a smaller return despite a purchase price lower than General Growth's.

For example, the near-term return would have been lower if a buyer had assumed Victoria Ward's plan to tear down Ward Warehouse, eliminating a lot of tenant income, and spending about $200 million redeveloping the center before realizing higher income.

General Growth says it expects to earn an 8.5 percent return on its purchase of the property as is. And though its purchase price is based on Victoria Ward's existing net operating income — not redevelopment — several retail analysts believe General Growth is better equipped than anyone to improve the property.

With nearly 50 years of experience as a developer and mall owner, General Growth has powerful relationships with retailers that would allow the company to more easily fill up 400,000 square feet of new retail space under Victoria Ward's plan.

For example, Saks, Target, Nordstrom, Dillard's and May Department Stores together operate 144 stores at General Growth malls.

Other analysts believe General Growth will try again to locate Nordstrom at Ala Moana by convincing Macy's it would be better to have the competing department store at the same mall rather than two blocks away. (Macy's and its predecessor in Hawai'i, Liberty House, have used a lease provision to block Nordstrom from opening a store at Ala Moana.)

Additional potential benefits of General Growth owning Victoria Ward include combining marketing and leasing operations, and giving tenants more location options.

A purchase also gives General Growth the added benefit of controlling development plans that would have made Victoria Ward more of a competitor with Ala Moana, General Growth's single-largest asset.

For all these reasons, General Growth could afford to pay more, analysts say.

Possibilities moving ahead

Bucksbaum says the company agreed to buy Victoria Ward, despite being unlike any of the other 142 malls General Growth owns or manages, for both its existing business and redevelopment potential.

He says it wasn't a maneuver to protect Ala Moana from an increasingly formidable competitor, although many retail analysts believe defensive strategy was part of General Growth's motivation.

According to Victoria Ward, the company projects $34.1 million in revenue and $25.6 million in net operating income this year — roughly one-third the estimated net operating income of Ala Moana.

Redevelopment plans include replacing Ward Warehouse with a 500,000-square-foot center anchored by a Nordstrom department store, closing Auahi Street, adding a supermarket and developing six residential high-rises.

Bucksbaum says he quickly formed his own ideas as to what the property could and should be, but he's not committing to his or Victoria Ward's vision until General Growth can study the ideas more closely.

Bucksbaum says he likes the concept of residential high-rises, or perhaps rental or multi\family apartments. He notes that General Growth actually did some residential and hotel development in the 1970s and 1980s. The company also owns about 2 million square feet of office space, including two buildings at Ala Moana.

It's difficult to directly compare what plans the company might have for the Victoria Ward property with what it does at its other properties around the country, since most of the company's retail properties are traditional enclosed malls.

Still, some of those have been redeveloped by General Growth to display a certain flair. For instance, in Texas the company is planning to develop a 1.6 million-square-foot mall bisected by an open-air village and ice rink. And in Los Angeles, the company is redeveloping a 788,000-square-foot indoor mall into a 1.1-million-square-foot big-box-anchored power center.

D'Olier is realistic about whether General Growth will follow through on the vision he has spent the last 8 1/2 years creating and gradually implementing, saying that what General Growth does depends on the economy, capital costs and "opportunities present in the future."

Still, he says he's confident that whatever General Growth comes up with will be right for the property and Hawai'i.

"I have a lot of respect," he says, "for the ingenuity of General Growth."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.