Canadian Industrial Real Estate Blog

This blog is dedicated to industrial real estate but from time-to-time, one must pay attention to large industry deals that occur, regardless of discipline. The Globe & Mail newspaper reported today that Brookfield Asset Management Inc. has agreed to buy troubled U.S. shopping mall owner Mills Corp. for $1.35-billion (U.S.) in cash. Brookfield will pay $21 a share for Mills, which owns 38 U.S. shopping malls. The Canadian company will also pick up Mills' debt and preferred stock, raising the total value of the deal to about $7.5-billion, the companies said. Mills, which put itself up for sale last year, said in a recent regulatory filing that it was considering seeking bankruptcy protection after accounting errors and executive misconduct resulted in the restatement of four years of financial results. Mills will be merged into a newly-formed subsidiary of Brookfield. Brookfield said it will provide debt financing for Mills until the merger is completed, likely in the second half of 2007.

Mills chief executive officer Mark Ordan said in a statement that the deal was done after “a very competitive process” where the company's board considered a number of alternatives. Brookfield chief executive Bruce Flatt said “we are pleased to be able to work with The Mills Corp. to move beyond the recent issues it has encountered.” He said he looks forward to working with Mills management in “getting back to business and focusing on service excellence to attract premium tenants to this high quality retail portfolio.” Michael Goldberg, an analyst with Desjardins Securities, said at first blush the deal makes sense for Brookfield because the company has “a lot of expertise in the real estate area, they have a lot of expertise with troubled companies, [and] they're very well connected financially.”

Pearson International Airport wants to lease prime land to developers to reduce landing fees, which are among the highest in the world. The Greater Toronto Airports Authority, operator of Pearson, is expected to announce today that a 6-hectare site across from Terminal 3 on the east side of Airport Rd. is available for an estimated $300 million development. The site, now a parking lot, could hold a 400-room hotel, conference centre, retail shops and two office buildings. Check out a full article about this recently written in the Globe & Mail newspaper by clicking here.

The sale leaseback is a method being employed by more and more companies as an effective means of freeing capital tied up in corporate non-core assets such as real estate. Often capital allocated to non-core competency line items is in ineffective use of vital capital and hinders the ability to invest in those competencies that are core to the business and its survival/prosperity.

Sale leasebacks are an opportunity to address these concerns and enhance the balance sheet by raising cash without the costly time-consuming process of a new debt issue, and without restrictive covenants or other major managerial encumbrances.

Primary capital reasons to consider a sale leaseback include:

1. 100% fair market value versus 60%-80% with conventional debt sources
2. Improve earnings - recognizing the appreciated value of your real estate
3. Expand locations - increasing market share without depleting corporate capital
4. Special investment opportunities - provide funds for other business initiatives, mergers, acquisitions, etc
5. Off-balance sheet - favourable accounting treatment
6. Operational flexibility - maintaining flexibility for future real estate requirements