Mergers & Acquisitions and Eli Lilly and Co. and Shopping Centers and Retail Development and Deals and Health Care Businesses and Glendale Mall and Retail and Health Care & Life Sciences and Health Care & Insurance and Real Estate & Retail

Despite sour economy, retail developers press on

December 1, 2008
Retail developers always have been an audacious breed. They spend millions to build shopping centers, confident that tenants will flock to fill the slots they didn't prelease.

To charge ahead these days takes more than the usual dose of intestinal fortitude. Everyone is nervous — from shoppers to lenders to retailers, many of which have put the brakes on new locations.

And for those developers that are publicly traded — such as locally based Kite Realty Group Trust — there's the unnerving experience of seeing investors sell off their shares in a near panic.

Kite shares have tumbled 79 percent this year, to $3.20 — a depth that would have seemed unimaginable a few months ago. The plunge has pushed the annual dividend yield to 25 percent.

Kite executives in a November conference call acknowledged conditions are tough, but didn't sound like captains of a sinking ship.

"We are still making very, very good progress on the leasing front, but we are being extremely cautious in terms of when we deploy our capital," CEO John Kite said on the call.

Indeed, Kite, which operates in nine states, enjoyed some successes in the third quarter. For one, it completed the $28 million transformation of Glendale from an enclosed mall into an open-air center anchored by a new Target.

On the conference call, Kite Chief Operating Officer Tom McGowan called the redevelopment "very successful." He noted that occupancy of Glendale has reached 92 percent.

In better times, that occupancy rate would be a little on the lackluster side. For-lease signs remain posted in a number of prominent spaces along the northern side of the shopping center.

But these aren't normal times. Simon Property Group Inc., co-developer of the $126 million Hamilton Town Center in Noblesville, found itself opening that property in May at just 79-percent occupancy.

Retailer anxiety has peaked in the past two months, as deepening economic woes combined with the stock market meltdown to sap consumer confidence.

"The climate of the entire economy has put a cloud over any new development, regardless of where it is," said Eric Hillenbrand, a senior leasing associate with Sitehawk Retail Real Estate.

You don't have to tell that to Bridget Farren, a former Duke Realty Corp. vice president who two years ago launched Farren Retail Group, a brokerage and development firm.

Farren is in various stages of negotiations with four tenants for her first development, The Shoppes at Buck Creek, a two-phase, $4 million shopping center near the intersection of Bluff and Southport roads. She's teaming on the project with another local developer, PK Partners.

In heady times, it would be a slamdunk site. It's across the street from a bustling Kroger that recently was renovated. And the area is densely populated, with average household incomes within a two-mile radius topping $80,000.

Yet nothing is a sure thing in this environment. Farren said all retailers and restaurants are being more cautious, and many have put new sites on hold.

But not all of them. Farren is keeping her chin up. She knows she's good at what she does, and says she's fortunate to have had "a solid 18 months of success under my belt before this wave of caution hit.

"I enjoy hard work," she added. "It is a very different time. Anybody would be kidding if they say it is not. But if you understand your product, and you understand your clients, it can work out fine."

Lilly on hot seat

Now that Eli Lilly and Co. has completed its $6.3 billion purchase of ImClone Systems Inc., a New York-based developer of cancer drugs, the real work begins.

Lilly has a lot to prove on two fronts — that it didn't overleverage itself with the all-cash purchase, and that it didn't overpay in its zeal to find replacements for a bevy of its own drugs that soon will go off patent.

Lilly shares have tumbled since the deal was announced Oct. 6, in part because the overall market slid into free fall. But analysts say the hefty purchase price limits the potential upside for Lilly.

The company's stock is trading for around $32, down from $41 before the deal was announced.

On Nov. 24, Fitch Ratings downgraded Lilly's debt, saying the acquisition isn't enough to mitigate concerns about the "drug patent cliff" the company will confront starting in late 2010.

Gift cards a gamble?

Gift card sales are expected to be robust again this holiday season, potentially reaching $40 billion, according to Purdue University retail professor Richard Feinberg.

But this year, more than ever before, there's a risk to giving the cards that many people fail to consider. FTI Consulting of West Palm Beach, Fla., notes that retailers that go bankrupt aren't required to honor their cards, though they sometimes receive court approval to do so.

With many retailers on financially shaky footing, FTI advises against buying cards recipients might not use for weeks or months. Instead, it recommends cards for practical purchases, such as gasoline or fast food.

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