Turnpike Deal Gets Bumpy

Abertis-Citi Encounter High Costs and Potholes for Infrastructure Investors

America is definitely becoming a mecca for deal-hungry infrastructure funds. Whether investors in this burgeoning asset class making the pilgrimage to these shores will find redemption, however, is far from certain.

A consortium led by Spanish transportation and highway operator Abertis has offered $12.8 billion to operate the Pennsylvania Turnpike for 75 years, edging out local heavyweight Goldman Sachs Group in the process. Moreover, the final price was 20% more than Abertis, along with a Citigroup fund and a minor Spanish partner, had offered in the first round of bidding. From the looks of it, Abertis and Citi have stretched themselves to the limit.

The total size of the deal, which includes a cushion for working capital, will be $14.5 billion, of which about 60% will be funded with debt. In less shell-shocked markets, a toll road might support as much as 80% debt. But with the credit crunch, Abertis and Citi may need to tap several segments of the markets for the $8.5 billion they need.

The high price and modest leverage make the expected return on the partners' $6 billion of equity look unexciting. Abertis expects a low double-digit annual return. Some people who have analyzed the deal think returns could come in under 10%. Either way, most infrastructure investors look for 12% to 15% -- much less than, say, private-equity funds, but enough to compensate for operating risks, a long time horizon, and constraints on prices -- in this case, toll increases will be capped at the higher of inflation and 2.5%.

Abertis wanted a foothold in the U.S., where plenty of investors are eyeing infrastructure assets. If the deal is approved by Pennsylvania's legislature, the turnpike will bring the Spanish group another strategic benefit as well, extending the average life of its portfolio of toll-road concessions from 18 to 28 years. Citi's fund managers, meanwhile, get to put a big chunk of money to work and stake their claim to future deals. Goldman's bid fell about 5% short. Being trumped at the finish might seem unlucky. But with Abertis and Citi now set for rather meager returns, the investment bank may yet wind up a lucky loser.

By: Fiona Maharg-Bravo & Una Galani
Wall Street Journal; May 21, 2008

Brakes Put On for New Malls

Retailers' Demand for Space Wanes as the Credit Crisis Reins in Consumer Spending


Retail construction, which surged in recent years amid easy financing and robust consumer spending, has lost momentum as retailers curtail growth plans and lenders remain stingy.

Many of the largest U.S. developers of malls and shopping centers have reacted to retailers' waning demand for space by postponing by a year or more some of their projects. Other venues will be built piecemeal as leasing progress allows. Still others have been canceled before the start of construction.

The slowdown comes as consumers rattled by the credit crisis rein in spending, causing retailers to rethink their previously aggressive expansion plans. Among the national chains that recently pared their growth plans are J.C. Penney Co., Chico's FAS Inc., Starbucks Corp. and Home Depot Inc. At least partly because of the spending lull, nearly 6,500 U.S. stores are expected to close this year, the highest tally since 2001, according to the International Council of Shopping Centers.

Standing in the way of a recovery are deep-seated problems such as depleted home equity and high personal-debt levels. "We believe it is going to be harder for consumer confidence to come back quickly until some of these issues are resolved," J.C. Penney's chairman and chief executive officer, Myron Ullman, said Monday at the shopping-center council's annual trade show here.

The mood at the five-day conference, which attracted nearly 50,000 attendees and is slated to conclude Wednesday, is cautious. "I'm not afraid for '08 [results]," said Michael Glimcher, chairman and CEO of Glimcher Realty Trust, which owns 23 malls. "Where you get nervous is thinking about '09. Retailers are clearly opening fewer stores, and they're being more aggressive" in negotiations with landlords.

Developers, in turn, are hitting the brakes. This year, they are expected to complete retail projects totaling 136.4 million square feet in the top 54 U.S. markets, says market researcher Property & Portfolio Research Inc. But, next year, newly completed projects will amount to only 70.9 million square feet, reflecting the construction slowdown initiated in recent months. In comparison, the average annual production from 1998 to 2007 was 122.7 million square feet.

Pennsylvania Real Estate Investment Trust, or PREIT, which owns 55 malls and shopping centers, has altered plans more than once because of waning demand from tenants. The developer had lined up Target Corp. and Home Depot to anchor its $73 million Monroe Marketplace shopping center to be built in Selinsgrove, Pa. But Home Depot, which hadn't signed a lease, recently backed out, so PREIT is building only half of the project, with the rest put on hold. Similarly, PREIT recently canceled plans for a shopping center in suburban Chicago.

Massive projects backed by big-name developers are no exception. Real-estate tycoon Stephen M. Ross's Related Cos. recently postponed portions of two enormous mixed-use projects in Los Angeles and Phoenix. Dallas billionaire Thomas Hicks opted this month to redraft plans for his 1.3 million-square-foot, $500 million Glorypark mixed-use development in Arlington, Texas, after a partner's efforts to land department store Dillard's Inc. for the project failed and financial backers balked. Mr. Hicks now sees Glorypark spanning a more modest 400,000 to 500,000 square feet, perhaps hosting more entertainment-focused tenants than retailers. He still plans for the first phase to open by 2011. "It's going to happen," Mr. Hicks said. "But I can't control the capital markets."

A growing list of national retail developers has pared construction plans. Developers Diversified Realty Corp., which owns 740 retail properties and has $650 million of projects in development, has cut this year's development spending by 20%. General Growth Properties Inc., which owns more than 200 regional shopping malls, has cut $600 million from its four-year development budget, now $1.5 billion.

Others, such as shopping-center developers Regency Centers Corp. and Weingarten Realty Investors, plan to do more "phasing" by building projects in segments as new tenants warrant it. Macerich Co., which owns 72 malls, will phase the construction of two shopping centers near the Phoenix site targeted as the eventual home of its Prasada mall. "It's testimony to the fact that we're not going to build something until it's ready to be built" as dictated by market demand, said Macerich CEO Art Coppola.

Some retail developers point to benefits amid the economic slowdown. The lack of financing means fewer new projects are surfacing to compete for land and tenants. Additionally, as economic conditions have damped construction prospects, many of the largest retail landlords are seeking to buy cash-strapped development projects unable to land financing. "We see this as a huge opportunity, but we think the deal terms that are available are only going to get better," said David Oakes, chief investment officer at Developers Diversified.

By: Kris Hudson
Wall Street Journal; May 21, 2008

Comcast's Surprise

Philadelphians have been giving good reviews to the numerous architectural flourishes in the city's first new skyscraper in 15 years, the headquarters of cable giant Comcast Corp.

The lobby features a 120-foot-tall winter garden and artwork titled "Humanity in Motion" by Jonathan Borofsky. Atop steel poles that crisscross the lobby are fiberglass-and-Kevlar figures of people frozen in mid-stride.

Meanwhile, there's a three-flight glass stairway connecting the executive floors and a 400-seat employee cafeteria overlooking the city skyline. It's named Ralph's Cafe, after Ralph Roberts, who founded the company in 1963.

But there's one more design surprise being saved for the building's official opening in a few weeks: The entire back of the lobby will be a huge video wall, a company spokeswoman says. It will feature special artistic programming rather than be tuned to any of Comcast's channels. The wall is a "fun gift to Philadelphia," the spokeswoman says.

Wall Street Journal; April 30, 2008