Pyramid Stirs Up the Question:
What Is a Mall Really Worth?

Ever since closely held Pyramid Cos. said it was exploring the sale of its shopping malls, investors have been eagerly awaiting the announcement of a deal in order to help answer a nagging question: What's a mall portfolio worth these days?

The sector's only major transaction in the past few years was Simon Property Group Inc.'s $1.64 billion purchase of Mills Corp., which closed a few weeks ago. But that transaction may not be a reliable benchmark for what malls are worth because Mills was forced to sell out after a series of management blunders.

For retail real estate "it is difficult to peg what mall values and mall cap rates are at this point because of the dearth of transactions," says Jim Sullivan, an analyst with Green Street Advisors, a Newport Beach, Calif., real-estate research firm.

Now that Pyramid is considering putting 16 of its 17 shopping malls on the block, investors and mall owners hope to get a better idea of current valuations and how mall capitalization rates -- the return on investment in the first year of ownership -- compare with those in other sectors of commercial real estate, where cap rates have fallen to record lows. Cap rates for commercial real estate overall have fallen to 6.5%, compared with about 9.3% six years ago, according to Real Capital Analytics.

Rich Moore, an analyst with RBC Capital Markets, estimates that Pyramid's portfolio could bring between $4.7 billion and $6.3 billion including debt. If the malls sell at the high end of that range or above, it would be one of the biggest mall transactions ever and the largest since General Growth Properties Inc.'s $7.22 billion acquisition of Rouse Co. in 2004.

The mall industry, unlike the rest of the commercial real-estate business, is extremely consolidated, with only seven major mall real-estate investment trusts. Between them, the REITs own nearly 90% of the top 400 malls in the country.

That has left the industry on the sidelines for the wave of mergers and buyouts that has rippled through other sectors, most notably offices. Analysts see public mall companies as less likely than their counterparts in other sectors to be targets of private equity, since the conventional wisdom is that malls don't fit the leverage buyout model.

"The mall business really benefits from size," Mr. Sullivan says. "Private equity's strategy has been to buy a whole portfolio and split it into pieces." But in the mall business, he says, size, critical mass and tenant relationships are ingredients of success.

So why sell Pyramid now? The Congel family, which controls the company, doesn't want to miss out on the continuing real-estate feeding frenzy as it did in 1998 when it put the company on the market only to yank it back after it learned how far malls had fallen out of favor amid the rise of online retailers and forecasts of the "death of the mall."

"It's an opportunity given what's happening with real estate in general," says Tim Ahern, a trustee of the Congel Family Trust, which is overseeing the strategic-alternatives process. "It would be nice to take advantage of that. I think in 1998 the timing didn't work in the company's favor. We would prefer not to miss the timing."

Founded by Robert J. Congel in the 1970s, the Syracuse, N.Y., company built shopping malls in upstate New York and Massachusetts at a torrid pace in the late 1970s and 1980s, assembling a portfolio of malls that typically face little competition from other malls in their markets. Pyramid has faced controversy -- last fall it settled a Racketeer Influenced and Corrupt Organizations Act lawsuit with several partners for an undisclosed amount. The partners had alleged the company siphoned money from their projects and put it into others.

What remains to be seen is how big demand is for "Class B" malls -- especially among companies like Simon Property Group and General Growth Properties, companies that can afford to buy Pyramid but usually prefer "Class A" malls, which tend to have above-average sales per square foot and above-average growth prospects.

Pyramid, by contrast, has "a steady portfolio of decent assets in places that don't face a lot of competition," Mr. Sullivan says. "But they're in markets that don't have the population growth that translates into sales growth." Pyramid has malls in Albany, N.Y., Buffalo, N.Y., and Kingston, Mass., among other markets.

Analysts, including Mr. Sullivan, say CBL & Associates Properties Inc. would be the most natural fit for Pyramid's properties, which mesh well with CBL's strategy. The company declined to say whether it is interested in Pyramid.

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