06/02/2010

Walton Street to Sell Mall Stake to Partners

Simon Property and a Calpers partnership will take full ownership of the Houston Galleria by acquiring Walton Street Capital's 37.5% stake in a deal that values the trophy mall at roughly $1.65 billion.

Simon and the Calpers partnership will get an initial annual return of about 5.9% on the purchase, according to people familiar with the transaction. That indicates that Walton Street's interest was valued at about $619 million, based on the mall's projected net operating income of $98 million. Eastdil Secured is brokering the deal.

The stake in the 2.3 million-square-foot Houston Galleria, one of the nation's premier malls, drew bids from foreign investors and large pension funds. But in the end, Walton Street's partners opted to exercise a right of first refusal.

It's unclear how the two remaining partners plan to divide the Chicago fund operator's 37.5% stake. Simon, an Indianapolis REIT, currently holds a 31.5% interest and manages the property. Institutional Mall Investors, an entity controlled by Calpers and Miller Capital Advisory of Skokie, Ill., holds the remaining 31% stake.

The mall has an $821 million mortgage, most of which was securitized, that matures in 2015. The property was appraised at $1.2 billion in November 2005, according to a servicer report.

Houston Galleria was built in 1970 as part of the massive mixed-use Galleria complex, which includes 1.2 million sf of office space and two Westin hotels, which are separately owned. The upscale mall has undergone four expansions and renovations, the latest just a few years ago. The occupancy rate was 91% as of September, down just slightly from 93% the year before. Top-flight malls like Houston Galleria haven't been hit as hard as other properties by the recession because retailers are reluctant to give up their prime locations.

The mall has more than 375 stores and restaurants and an ice skating rink. It is anchored by Macy's (233,000 sf), Nordstrom (216,000 sf), Neiman Marcus (200,000 sf) and Saks Fifth Avenue (186,000 sf). There is some 1.2 million sf of in-line space whose tenants include such high-end retailers as Gucci, Cartier and Tiffany & Co.

A Walton Street fund acquired a 33% stake in the mall in 1999 from the property's developer, Hines of Houston. As part of the transaction, Walton Street also bought other portions of the Galleria complex. The fund increased its interest in the mall two years later when Simon and the Calpers partnership entered the ownership group.

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