Mall REITs soared in 2012 by ditching struggling centers

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Mall owners, including Simon Property Group Inc. and General Growth Properties Inc., have been moving on from struggling retail centers as the economic rebound drives them to focus on the best-performing markets.

A $94 million loan on a South Dakota mall owned by Indianapolis-based Simon, the largest U.S. real estate investment trust, was transferred last month to a special servicer, which negotiates with landlords on behalf of bondholders. General Growth had three malls with loan-workout firms in the third quarter, and Glimcher Realty Trust Realty Trust handed over a loan on a mall in its hometown of Columbus, Ohio, to a special servicer in October.

Mall landlords were the second-best-performing U.S. REIT group last year, gaining 26 percent, even as the delinquency rate for retail properties remains close to the April 2011 peak, according to data compiled by Bloomberg. The operators are focusing on the most lucrative markets, while turning to special servicers or even giving properties back to lenders in a sign that some shopping centers may never fully recover from the real estate crash.

“There are some tired malls out there that shouldn’t exist and won’t exist in a few years,” said Ryan Severino, a senior economist at Reis Inc., a New York-based real estate data company. “It’s very difficult to bounce back. Very difficult.”

Troubled properties—which are often older and in less-populated areas—are being left out of a rebound spurred by improved store performance. Retail sales climbed 5.2 percent last year, the Commerce Department reported on Jan. 15.

Mall companies were the best-performing REIT industry group in 2012 after industrial and warehouse owners, whose shares gained 27 percent.

General Growth gained 36 percent in 2012, making it the second-best performer in the nine-member index. The company’s funds from operations rose 8.8 percent in the third quarter from a year earlier, to $231 million. The measure is a gauge of cash flow used by REITs.

The Chicago-based company is focusing on properties that generate the highest sales per square foot for tenants and deciding whether to sell lower-quality centers, CEO Sandeep Mathrani said on a Nov. 1 conference call with analysts.

“We want to own and operate high-quality regional malls in the best markets,” he said. “We’ve been very focused on identifying opportunities to acquire assets that fit within this strategy, and also to identify and ultimately dispose of those assets we consider non-core that do not fit our long-term plans.”

General Growth had three malls in special servicing in the third quarter: West Oaks in Ocoee, Fla., Regency Square Mall in Jacksonville, Fla., and Southlake Mall in suburban Atlanta, according to a supplemental filing on the company’s website.

Simon reported that funds from operations jumped 19 percent in the third quarter from a year earlier, to $720 million. The company, which owned or had stakes in 329 properties as of Jan. 11, had a 23-percent stock gain in 2012.

The loan on Simon’s Rushmore Mall in Rapid City, S.D., was packaged into a bond and sold as a commercial-mortgage-backed security. It was transferred to a special servicer Dec. 11, according to Fitch Ratings. The 830,000- square-foot center was built in 1978 and renovated in 1993, data compiled by Bloomberg show. Simon acquired full ownership after a multiple-property swap with its partner on the mall, Macerich Co., Simon said in February.

The mall had an appraised value of $117.5 million in 2006 as the commercial-property market peaked, and was appraised at $45 million in September 2011, less than half the amount owed on it, the data show. The occupancy rate for the mall was about 87 percent in the third quarter, down from 96 percent at the end of 2011, according to a regulatory filing. CWCapital Asset Management is the special servicer for the debt.

Michael Goodwin, a spokesman for CWCapital, declined to comment on its mall loans in special servicing. Les Morris, a Simon spokesman, also declined to comment.

“There are still malls that are underwater,” Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio, said, referring to properties worth less than what’s owed on them. “Just because the economy is better doesn’t change that.”

The rate of U.S. retail properties with debt payments 60 days or more late was 6.56 percent last month, little changed from a year earlier and close to the 6.91 percent rate in April 2011, the highest in Bloomberg CMBS data going back more than five years.

The biggest reason properties go into special servicing is because the value of the property is lower than the amount of the loan, said Cedrik Lachance, an analyst with Green Street Advisors Inc. in Newport Beach, Calif. When that happens, the landlord doesn’t have as much incentive to put money into the real estate and is likely to hand it over to the lender. More often than not, the property is put up for sale after going into special servicing, he said.

West Oaks was sold for $15.9 million to West Oaks Mall FL LLC, which has a Las Vegas address, on Nov. 21, according to a quit-claim deed filed in Orange County, Fla. The buyers won the property in an auction conducted by CWCapital, which agreed to forgive the debt owed by General Growth in exchange for proceeds from the sale, said Steven Maksin, a principal of the group that bought the property.

“It’s going to take some time to turn the mall around,” said Maksin, CEO of Moonbeam Capital Investments LLC. “It’s a great asset, well located.”

Investors in the bonds backed by the West Oaks loan lost $50 million with the sale, according to a Dec. 26 report by Standard & Poor’s.

David Keating, a spokesman for General Growth, said in an e-mail that the company no longer owns West Oaks, and declined to comment on Southlake and Regency Square.

Other mall REITs are looking to sell their lower-quality malls to improve the quality of their portfolios, Nathan Isbee, an analyst with Stifel Nicolaus & Co. in Baltimore, wrote in a Jan. 7 note. Macerich, for example, has started marketing 17 lower-quality malls in secondary markets, he said. Thomas O’Hern, chief financial officer at Santa Monica, Calif.-based Macerich, didn’t return telephone calls seeking comment on possible sales.

Malls that are No. 2 or 3 in their markets and haven’t been renovated recently aren’t performing as well as those with upscale stores or dining and entertainment attractions, Craig Guttenplan, a REIT analyst at CreditSights Inc. in London, said. When the economy was stronger, retail spending was high enough to support more malls, Guttenplan said.

“Lower-quality malls are going to languish until consumer spending ramps up across the board,” he said.

Glimcher had the loan on its 1 million-square-foot Eastland Mall in Columbus transferred to special servicer LNR Partners so it could work out a restructuring of the debt, according to data compiled by Bloomberg. The loan balance is about $41 million.

Glimcher is in talks with LNR and exploring its options, Karen Bailey, a Glimcher spokeswoman, said in an e-mail.

The mall, with tenants including J.C. Penney Co., was 74-percent occupied at the end of October, Bloomberg data show. The property is located near other malls and has vacancies in its anchor space, according to Lachance.

“It doesn’t have the greatest of competitive positions,” Lachance said in a telephone interview. “It’s a mall that’s reasonably productive at this point, but its competitive position is eroding.”

Malls can go from being valuable to being worth next to nothing if occupancies decline with the loss of retailers that help draw customers, Lachance said.

“As vacancies start to mount, the problems really multiply themselves,” he said. “It might be a benefit for the company to send the keys back rather than help the mall over time.”


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