Chapter 14 – Mergers and Acquisitions

Mergers and Acquisitions can make or break a real estate company. If you acquire bad assets than you run the risk of the previous owners problems becoming yours. Most real estate investors invest in what is called “value-add” properties. These are typically assets that are struggling in some way but the buyer sees how they can improve the property and flip it for a multiple in the future gaining a nice return on their investment. Institutional investors, like Simon Property Group, tend to stay away from these types of investments since they are risky. SPG likes performing assets that have positive cash flow so they can satisfy their investors and pay dividends. That doesn’t mean they don’t buy assets they hope to improve, it just means they stay away from the extremely risky properties.

Simon is a heavy acquisition company. Since 1993 they have completed over $40B in acquisitions according to Market Realist. Below are just a few of these acquisitions to highly.

With over $40B in acquisitions, I believe it’s safe to say that they are an acquisition focused company. Where Simon differentiates itself is the type of acquisitions they do. They focus on strategic markets that fall into demographic categories conducive with what their retail tenant database are looking for. This assures them they can fill the space (or maintain) with retailers or other commercial use tenants. Focusing on these locations has its pitfalls though, such as paying a premium and sometimes at or above market value. Why would a company pay above value for an asset? In real estate that term is simple, Simon most likely sees a great opportunity for improvement in the management with an even greater upside potential if successful. Maybe they have large leases set to expire and Simon has relationships and knows how to get the tenants to renew their leases at or above their current rate. Or maybe Simon has an anchor tenant looking for a spot in a city and they feel they can attract that tenant to this location, which could have monumental affects on the in-line retail space and increase revenue for them.

M&A is a huge part of real estate and Simon has done a great job at being very strategic with what they buy and as a result they have been successful in an industry where others are struggling just to stay afloat.