Strolling the Agora: The Fine Points Of Finance That Are Driving This Industry

Strolling the Agora column for August 24th, 2009 issue of SHOPPING CENTER DIGEST
In broad strokes, I can understand only some of the financial workings that have been driving this industry for so long – certainly not the fine points–and I'm somewhat comfortable with that. Though there are times I wish I had the expertise and understanding of Milt Cooper, who led Kimco and the landlords of this industry into the REIT market in '91, rescuing it from the lack of funding that was crippling development and growth.
There's no doubt that we may be heading into a similar situation dealing with money now –though slightly different. According to First American CoreLogic, “almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall… “
Also, according to the index developed by MIT's Institute of Technology Center for Real Estate, there has been an increase in commercial sales, but also a record drop of 22% on the price sold by institutional investors.
We've been writing for months now about the larger landlords reducing their debt and positioning themselves to acquire new properties and mortgages from strapped owners forced to sell or liquidate their holdings. So far, few “large” acquisitions have been made. There have been numerous new companies or divisions formed by savvy investors and private equity companies to acquire distressed properties, but with few actual large deals being made, and there are many confusing signposts out there.
Extend Rather Than Sell
One financial maven said “we're seeing lenders generally extending their loans when possible to avoid having to sell properties at current low prices and into a market where potential buyers are having difficulty arranging new financing.”
Sure, it was just announced that Cadillac Fairview Corp (owned by Ontario Teachers' Pension Plan, is paying Macerich Co $150 million for 49% of its very successful Queens Center, and its $342 million mortgage; this is the first of three joint ventures by Macerich to cut its $7.9 billion debt by $1 or $2 billion within two or three years. And earlier this year Simon Property Group sold $1.7 billion in stock, and numerous others–Forest City, CBL, Kimco, etc., etc. – have put themselves into a more comfortable financial position by reducing their debt. Thus far, General Growth Properties is the only major developer that was forced into bankruptcy when it couldn't re-finance and control its debt.
It's interesting how GGP's troubles have impacted on statistics for our industry. Delinquency rates for securitized mortgages on shopping malls fell in July to 4% from 5.9% a month earlier. Mainly, according to debt-rating firm Realpoint LLC, because the landlord resumed paying interest on several of its delinquent mortgages after filing for bankruptcy in April. In June, GGP accounted for 43% of delinquent mortgages in retail; in July, that shrank to 18%.
Not Looking To Wall Street
Now, if you listen to the pronouncements, some shopping center developers won't be looking any longer to Wall Street for funding, at least for the time being. Kimco, said CFO Michael Pappagallo, will not “look to the equity market to bail us out. I don't think our investors are going to keep buying into massively dilutive equity issuances solely to pay down debt.”
He continued: “Down the road, there will be circumstances where value-creating shopping center opportunities will be available. Issuing equity at that point would make sense if our price and” returns supported such a transaction.
Then there's Equity One, stating that there weren't too many bargain real estate deals out there, saying it's shifting its focus from property purchases to manage existing properties and paying down debt. And Regency Centers also says it will avoid debt and will be cautious on acquisitions.
Financial advisor Ernst & Young released a recent survey finding that though 53% of its respondents had acquired non-performing properties or loans in the last 18 months, 45% of those who have not believe it's too early to even attempt to purchase distressed properties or loans.
So, essentially, large acquisitions and mergers may not be happening for a while, at least regarding shopping centers and real estate. As for residential, PennyMac Mortgage Investment Trust – founded by former execs at infamous Countrywide Financial Corp – was able to raise only $335 million from the hoped-for $700 million IPO it announced in May.
Then, The Tenants
But then, on the other side of the negotiating table, are the tenants.
Among its annual list of Hot 100 Retailers, said STORES magazine, 7 of the top 10 earned that position through acquisition, rather than growing “organically” through opening new stores; to be eligible, the chains had to have at least $300 million in annual sales.
Those that had impressive boosts through opening stores and increasing its revenue from its units were American Apparel, ranked No. 2, with a sales jump of 57.6% through organic growth; Apple Stores, ranked No. 5, increased its sales by 46%; and the third retailer was jeweler Finlay Enterprises, No. 8 (Bailey Banks & Biddle, Carlyle, and Congress jewelry stores). [Interesting commentary on this last: Finley has just filed for Chapter 11 and plans an auction to sell its business and assets].
Leading this Hot list is DineEquity, formed by the merger of Applebee's and IHOP. And the supermarket mergers, Susser Holdings (Town & Country and Village Market) No. 3, A&P (acquisition of Pathmark) No. 4; Wendy's/Arby's (No. 6).
Granted, there have been many instances over the last year of household names disappearing from the list of tenants in our shopping centers. Some of these brands may live again as internet retailers, or as a division of another mainstream retailer: Goody's and Sharper Image, for example. 
And then, there may be more acquisitions and mergers and investors on the horizon for successful retailers. Several financial mavens have said that Kohlberg Kravis Roberts, a leading private equity company, is considering an IPO to take Dollar General public. Also, Irving Place Capital Management, parent of, Vitamin Shoppe said it plans to raise $143.8 million from an IPO to double the number of its stores, now at 425.
And jvs are still being considered by owners of malls and other shopping centers. Macerich, for example, expects to announce one or two more agreements with institutional investors within a month or two, and says it will receive more than $500 million from investors for the year.
So even if many dealmakers say there's isn't that much leasing and developing taking place, never let it be said that there isn't any activity going on in this industry.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF Major Malls, may be obtained from our website, www.shoppingcenters.com.


Strolling the Agora was a twice-monthly column discussing trends, issues of importance, and commentary on the leasing/development aspects of the shopping center/retail chain industry in the US and Canada. Called Strolling the Agora, it was a part of Shopping Center Digest, a newsletter founded in 1973 published until September 2010. The column provided expert insight into various retail focused topics. It was primarily authored by Murray Shor, Editor & Publisher as well as industry and veteran retail experts.  A smattering of archived columns are presented here for your reading “pleasure”. It's an interesting “look back” at what were current hot topics at the time with regard to shopping center/retail industry focus, development and leasing expansions and processes, retail mix, opinions and more.
About Murray Shor:
Reporting and writing on the shopping center/retail industry since the late ’60s. Began as editor at Chain Store Age, founded Shopping Center World (now Retail Traffic), Shopping Center Digest “The Locations Newsletter” in 1973, and the Directory of Major Malls in 1979. Each issue of Shopping Center Digest contained a column called Strolling the Agora which provides commentary on trends, activity, issues of concern to development and leasing in the shopping center/retail industry.
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