Rouse Co. executives yesterday announced a definitive agreement to acquire the Howard Hughes Corp. of Las Vegas for $520 million, the Columbia-based real estate concern's largest purchase in nearly a decade and a transaction that will significantly alter the complexion of the company.
At the same time, Rouse reported a third consecutive year of record earnings, generating earnings before noncash charges of million, a 14 percent jump from its 1994 performance.
The immediate effect of the Hughes deal will be to shift Rouse's geographic focus toward Los Angeles and emerging markets such as Las Vegas, where Hughes' land holdings are concentrated.
It also will catapult Rouse into new community development for the first time in nearly 20 years, and elevate office properties to a new importance in its $4.7 billion portfolio.
"This represents more of a geographic shift than a shift in product lines, because they are involved in businesses we're already in," Rouse President and Chief Executive Anthony W. Deering said during a conference call with reporters. "We felt very fortunate to be able to make an offer for an attractive portfolio with great potential."
Rouse will add 59 office buildings totaling 4.34 million square feet to its portfolio, which now consists of 115 office buildings containing 11 million square feet. Hughes also controls 3,090 acres of undeveloped commercial land that has a potential for 15.3 million square feet -- more than all the office space in downtown Baltimore.
The Hughes transaction, scheduled to close in mid-May, also will provide Rouse with opportunities through planned Columbia-like developments such as Summerlin in Las Vegas, which has gross land sales of $100 million annually and is slated to contain as many as 160,000 people, and Playa Vista in Los Angeles, a 974-acre community planned for 13,000 residential units and 6 million square feet of commercial space.
"We view the Hughes transaction as extremely positive for Rouse, because it allows them to leverage the multiple strengths they already have," said an analyst who follows Rouse.
"Rouse is known for its development prowess, and this provides them an opportunity to flex those muscles, while providing for diversification," said the analyst, who requested anonymity.
Rouse will acquire Hughes -- soon to be a separate operating division within Rouse -- by providing shareholders with $50 million in cash and notes, $176 million in company common stock and by assuming $294 million of its debt.
"The Rouse Co. is an industry leader," said John L. Goolsby, Hughes' president and chief executive, in a prepared statement. "It has a long history of improving the quality of life of the communities in which it operates. This is an outstanding transaction not only for our owners, but for our employees and the region as a whole."
Executives of the real estate company that is developing land once belonging to billionaire Howard R. Hughes Jr. first explored merger possibilities with Rouse last June, as part of a push to recapitalize.
As part of the deal, Hughes shareholders will be able to realize returns from future development through participating units that could be worth millions. Summerlin, for instance, is a 22,500-acre tract that won't be completed until roughly 2020.
Mr. Deering said Rouse expects its 1996 earnings before noncash charges to increase between 15 and 20 percent because of the Hughes transaction, a figure that would lift earnings over the $130 million mark -- even if income from its existing portfolio remains static.
That is unlikely, however, based on its 1995 performance.
In the fourth quarter, Rouse's earnings before noncash charges totaled $31.4 million, a 14 percent gain from the comparable period a year ago. Revenues for the quarter were $177.5 million, up slightly from 1994.
Revenues for the full year were flat at $672.8 million.
While the bulk of the Hughes' assets involves land and offices, the deal does add to Rouse's retail holdings the Fashion Show Mall in Las Vegas, an 840,000-square-foot project generating $420 million in annual sales.
Rouse last completed an acquisition of this magnitude in 1988, when it acquired the real estate development arm of McCormick Co. Inc. in a $550 million deal with Teachers Insurance & Annuity Association.
In that transaction, Rouse-Teachers gained 90 buildings totaling 6.1 million square feet and 470 acres of undeveloped property.
Although Rouse officials said they will continue to hunt for attractive investments, as the company has for the past three years, they downplayed the possibility that another major acquisition will occur before 1998.
SG "This will occupy us for a great period of time," Mr. Deering said.