Mall REITs soared in 2012 by ditching struggling centers

Back to TopCommentsE-mailPrintBookmark and Share

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.”


Post a comment to this story

We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
You are legally responsible for what you post and your anonymity is not guaranteed.
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
thisissue1-092914.jpg 092914

Subscribe to IBJ
  1. Here are a few candidates for this new group, "ripped from the headlines." First up, that bizzaro State Senator Brent Waltz; secondly, the unethical Todd Huston, and his contractual arrangements scheme; Finally, but not least of all, the dishonorable Eric Turner. What sayeth you Greg Zoeller?

  2. Good day. I can't hide this great testimony that take place in my life I will love everyone to know it and be partaker that is why I always place it on answer, I am Mrs,Natalie Cuttaia by name, I live in Texas, United State Of America, I want to thank (Mr.Bruce Brandon) for his kindness upon my family life. I never knew that there is still nice lender like this on internet and earth here. Just some Months Back, I was in search for a loan of $100,000,00 as I was running out of money for feeding and rent. I was scammed $6,800 Dollars and I decided not to involve my self in such business again but a Friend of my introduced me to a loan firm due to my appearance and doings. And I told him that I am not interested of any loan deal anymore but he told me that there is still a nice lender who he will recommend me to, and I made a trial and I am most grateful lucky am I today, I was given a loan amount of $100,000.00usd, by this great Company (Bruce Brandon Loan Company) managed by (Mr.Bruce Brandon) If you are in need of a genuine or legit loan or financial assistance and you can be reliable and trusted of capable of paying back at the due time of the funds I will advice you to, contact him via: ( bruce.brandon071@gmail.com ) And you will be free from scams in the internet. All thanks to Mr.Bruce Brandon You are the one who remove me and my family out of poverty. The reason why i am doing this is that, i promise Mr.Bruce Brandon that if i truly got my loan, i will advertize his company and bring customers to his company. Contact him via ( bruce.brandon071@gmail.com )for the Loan you have been looking for..

  3. Hello, We are firm Organization formed to help people in needs of helps,such as financial help. So if you are going through financial difficulty or you are in any financial mess,and you need funds to start up your own business,or you need loan to settle your debt or pay off your bills,start a nice business, or you are finding it hard to obtain capital loan from local banks,contact us today via email mrsroseberrywilkinsfunds.usa@gmail.com So do not let these opportunity pass you by because Jesus is the same yesterday, today and forever more. Please these is for serious minded and God fearing People. Your Name: Loan Amount: Loan Duration: Valid Cell Phone Number: Thanks for your understanding to your contact as we Await Regards Management Email:mrsroseberrywilkinsfunds.usa@gmail.com

  4. The question is, where could they build a new stadium? It seems in the past year, all the prime spots have been spoken for with potential projects. Maybe in the industrial wasteland area a block past Lucas Oil? I think it needs to be close to the core, if a new stadium is built.

  5. Aldi is generally a great shopping experience. Still, I'm sure YOU wouldn't want to shop there, which I consider a positive.