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Alexander Haagen Properties Looks To Dominate The West

Moving out from its home turf of Southern California, the REIT is looking for acquisition opportunities throughout the western United States.

A strategic alliance (to the tune of $235 million in equity) with Lazard Freres Real Estate Investors has strengthened the resolve of Alexander Haagen Properties to become the best in the West.

"We expect for the next 18 months that $100 million [in acquisitions] will be an uneventful quarter," declares Fred Bruning, senior vice president for leasing and acquisitions for the Manhattan Beach, Calif.-based firm.

"In a five-year window, I see us becoming a several billion dollar company," he continues. "[By then,] we will have emerged as one of the dominant retail REIT players on the West Coast.

Nearly 40 years of expertise The company, which was founded in 1963 by Alexander Haagen Sr., has acquired, developed and redeveloped more than 100 shopping centers and has become a major player in the Southern California retail market. Although its holdings over the years have run the gamut of retail property categories, the company's principal area of expertise involves open-air centers.

"We have survived several major real estate cycles. As opposed to entities that have been in the business for only a few years, we have the depth of knowledge and understanding of the industry many of our competitors don't have. We also have the ability to function in several disciplines, including development, redevelopment, acquisition and management. This makes us a very strong company," he says.

When Alexander Haagen Properties went public December 1993, the company had 38 properties in its portfolio and a value of approximately $640 million. At the time of the agreement with New York-based Lazard Freres in August 1997, the portfolio had increased to 40 with GLA of approximately 8.2 million sq. ft. (about 6.5 million of which was owned by the trust).

The REIT's initial goal, says Bruning, was to build a solid foundation for future growth. The company concentrated on renovating or redeveloping centers that needed it, disposing of assets that did not fit with its overall program and acquiring others that did.

Since going public, Haagen's stock has maintained a yield of about 8.5 percent, placing it securely among the better-performing retail REITs. The industry average is about 7 percent, according to the National Association of Real Estate Investment Trusts.

Lazard Freres agreement The alliance with Lazard Freres Real Estate Investors marks a giant step forward for Haagen. The company should be able to leverage the $235 million investment into more than a billion dollars of acquisitions and development. The investment bank provided an initial sum of $20 million, with the remainder to be added in installments through January 1999.

"The foundation phase is past. From now on, 100 percent of our focus will be on projects that will result in additional value to the shareholders," Bruning says.

By the time the two organizations initiated talks in June, the REIT had a total value of $800 million, with the stock trading at a little under $14 a share. Lazard Freres made its investment through a stock purchase, making an initial payment of approximately $20 million for 1.3 million REIT shares, or about $15.40 a share. The premium, said analysts, reflected the investor's confidence in projected revenue growth. The purchase gave Lazard Freres an initial 18 percent interest in the REIT and made it Haagen's largest single shareholder. When it completes its purchase agreement, Lazard Freres will control 57 percent of the common stock and 38 percent of the company.

When the agreement was announced, Arthur P. Solomon, chairman of Lazard Freres REI described Haagen as "one of the strongest retail operators in California" with "an unmatched understanding" of local property markets. "As a result of our investment," he said, "it will now have the access to capital necessary to grow its core property portfolio in the recovering Western markets."

Company founder and chairman Alexander Haagen Sr. termed the strategic alliance a "watershed moment" in the company's history. He said the association with Lazard Freres gives the REIT a competitive advantage by providing superior strategic advice and efficient access to capital.

In Bruning's opinion, by structuring the investment to give Lazard Freres an ownership stake, the investor has great incentive to enhance the value of its shares through aggressive but prudent growth.

100 centers by 1999 Haagen's 1997 acquisitions have increased the total number of properties in its portfolio to 54. By the time the agreement with Lazard Freres ends in 1999, the total will likely exceed 100 in seven Western states.

To ensure tenancy levels remain strong as the company concentrates on expansion, the REIT struck another strategic alliance through an exclusive agreement with Los Angeles-based CB Commercial Real Estate Group to handle leasing. The company manages all its own properties but does not do third-party management.

While Haagen has been actively scouting for acquisition opportunities, news of the alliance with Lazard Freres has prompted owners to approach the company with properties that have not officially been placed on the market. "They know we have funds and our structure will allow them to defer taxes on the property if they sell to us," Bruning says.

Although the company currently owns two enclosed malls -- Media City Center in Burbank and Baldwin Hills-Crenshaw Plaza in Los Angeles -- the REIT intends to sell them. No specific plans have been made, however. It will also divest itself of the 16 single-tenant properties in its portfolio. "We're not really a triple-net leasing company, and we're not a large enough regional mall developer that we can use the scale of ownership to create additional value," Bruning explains.

Life on the fast track Although the company technically ceased to be a family firm with the transition to a REIT structure, the family remained very much involved. All that changed dramatically the last week of November 1997 when, with little fanfare, Alexander Haagen Sr. resigned as chairman and CEO and his son Alexander Haagen III resigned as vice chairman. Charlotte Haagen, the wife of Haagen Sr., also left. The board of directors agreed to pay the family $2.5 million and, over the next 18 months, buy all family-owned stock at market value or a minimum of $17 per share.

The board named Edward D. Fox, senior partner of Commonwealth Pacific LLC and former president and senior partner of Los Angeles-based Maguire Thomas Partners, interim president and CEO. Arthur Solomon was named as interim chairman of the board.

Because both Haagen and Lazard Freres prefer holding assets long-term, the company's overall strategy is not likely to change. "There's always a time to sell assets, but strategically our aim is to hold them and gain value through operations rather than real estate inflation," Bruning says.

All in all, he avows, the company's future looks very bright.

"We're very excited about the prospect of being on the fast track," he states. "The Lazard Freres relationship will be the catalyst that will propel us to the head of the pack as REITs evolve on the West Coast."

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