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Retail REITs Feeling Impact of Financial Market Turmoil

"The Market has Clearly Indicated that Liquidity is More Valuable Today than Maintaining a High Dividend:" John Foy, CBL & Associates Properties
November 19, 2008
In the midst of addressing the most difficult financial environment in decades and ongoing retailer casualties and pullbacks, retail REITs reported difficulty with loans and refinancing, limited success in asset sales, and a pullback in new development. In this issue of CoStar Advisor, we summarize the significant trends and opinions shared by retail REIT executives in the recent round of third quarter conference calls on the important challenges they face, including: financial markets and debt issues; asset sales and joint ventures; development trends; acquisitions; and distressed opportunities.

REITs referred to in this story include Simon Property Group (NYSE:SPG), General Growth Properties (NYSE: GGP), Macerich (NYSE:MAC), Pennsylvania Real Estate Investment Trust ("PREIT", NYSE:PEI), Tanger Factory Outlet Centers (NYSE:SKT), CBL & Associates Properties (NYSE:CBL), Glimcher Realty Trust (NYSE:GRT), Developers Diversified Realty (NYSE: DDR), Ramco-Gershenson Properties Trust (NYSE:RPT), Kimco Realty Corporation (NYSE:KIM), Cedar Shopping Centers (NYSE:CDR), Weingarten Realty Investors (NYSE:WRI), Regency Centers (NYSE: REG), Equity One (NYSE:EQY), and Inland Real Estate Corporation (NYSE:IRC).


This is "an environment that combines an unprecedented crisis in the capital markets [with] a recession. I have been taken aback by how severely and rapidly the financial markets have frozen," said Martin E. Stein, Jr., Regency's chairman and CEO.

Dave Henry, vice chairman and CIO at Kimco, said, "The real estate markets continue to change dramatically. Mortgage financing, acquisition and disposition activity and development projects have all been curtailed to an unprecedented degree."

"We’re experiencing an unprecedented time as it relates to the global debt and equity markets, record levels of volatility and significant downward pressure on equity share prices,” not congruent with the asset value of REIT’s underlying real estate," said Michael Glimcher, chairman and CEO.

Adam Metz, Interim CEO at debt-strapped GGP said, "We realize that we need to generate billions of dollars to de-leverage the company. We have a significant amount of debt maturities ahead of us, a challenging capital market, and a rapidly deteriorating retail climate. These are the worst credit markets most of us have experienced in our careers. We are currently in a world where even performing assets with strong sponsorship and low loan to values have difficulty refinancing upon loan maturity. Debt capital is an extraordinarily scarce resource today.”

Because of "the reality of the refinancing market," GGP is "attempting" to "negotiate loan extensions where possible," said Metz, declining to provide any details on its progress in extending or restructuring the $900 million in debt coming due Nov. 28, 2008 on two Las Vegas malls it recently put up for sale.

"The market has clearly indicated that liquidity is more valuable today than maintaining a high dividend," said John Foy, vice chairman and CFO of CBL.

Simon said that despite the capital markets being "shut down," the company doesn't anticipate any concern about refinancing its debt coming due next year.

Chairman and CEO Scot Wolstein said DDR will use "any and all necessary financial measures" to reduce its leverage. CFO Bill Shafer added that DDR continues to "pursue opportunities with the largest US banks, select life insurance companies, certain local banks and some international lenders," but said that, across the board, the "approval process has slowed while pricing and loan to value ratios remain dependent upon the specific deal terms, but in general spreads are higher and loan to values are lower."

Richard Smith, CFO at Ramco, said loan officers are indicating credit market stabilization, “but I’m not sure they are stabilizing where we want them to be. I think people expect the markets to change. It may not be until next year. Some brokers are starting to see light at the end of the tunnel." Smith added that a big issue is not that lenders don’t have the money, but that they don’t know how to price the loans.

Regency said that some mortgage lenders "seem keenly interested in making loans to select borrowers especially in modest loan amounts on quality shopping centers." Specifically, life companies are still expressing a "high level of interest" for low leverage grocery-anchored center loans, said Regency.

On the cap rates it is currently seeing on refinance or new finance deals on its grocery-anchored centers, Leo Ullman, chairman, CEO and president of Cedar, said "we expect 8% when we refinance."

CBL's Foy said that lenders are focused on the size of a loan, "the number of institutions that can go over $100 million is much more limited," he said.

When asked if there has been any "thawing" or "optimism" in conversations with loan officers, Mark Yale, Glimcher's CFO said, "I think there is some more optimism in that they finally understand their financing structure and what their ultimate cost of capital is going to be. At least now they are not focusing on survival…they are confident they are going to be there. "

"Until there is a mechanism like CMBS in place, whether it is that, or something that is reinvented (certainly it is going to have much lower leverage levels), things are pretty backed up," added Glimcher.


"Nobody wants to catch a falling knife. As long as cap rates keep rising, there is a great deal of nervousness. Nobody can pick a bottom and they'd rather invest on the way up than invest on the way down. There is a huge degree of caution from pension funds, insurance companies and others about investing today in a substantial way," said Kimco's Henry.

"We're seeing some all-cash buyers, private REITs, wealthy individuals, 1031 buyers, and small developers with strong bank relationships. A year ago, a big portfolio was all the rage and now smaller is better. It has slowed down a lot, but not quite ground to a halt." said Weingarten president and CEO, Drew Alexander.

At CBL, Foy said a lack of transactions in the marketplace translates into little to no clarity on where cap rates are.

DDR appears to be meeting buyers' pricing expectations, as the REIT said it expects to generate more than $200 million in individual or small portfolio asset sales this year. On sales closed during third quarter, David Oakes, EVP of finance said DDR the average cap rate was below 6%. On smaller assets with non-core locations that were fully leased, cap rates were in the 7% range, he added. On asset sales currently under contract, cap rates are around 8%, said Oakes.

"Perspective buyers range from local individuals to larger more regional private investors to large REITs. We continue to receive bids on assets we have," said Oakes.

Metz said GGP continues, "to explore some entry-level equity infusion alternatives. We're looking at these asset sale deals and the corporate level deals to deleverage the company and generate cash that will allow us to pay our debts as they come due. I don't think we're going to have one monster transaction that's going to solve all the company's leverage issues.”

Interim president Tom Nolan said GGP is actively marketing "primarily non-strategic and non-mall (master planned community and land divisions) assets." Metz explained that its decision on which assets to sell is largely driven by when loans are coming due and its percent ownership.” In listing the Las Vegas assets, the REIT expected to generate interest from a broader buyer pool.

Simon said that while "a lot of life insurance companies are on hold for the rest of this year, they are anxious to replenish their investment next year."

Glimcher said it is interested in opportunities to joint venture or sell a portion of its trade area dominant portfolio, "however, with the uncertainty created by the current capital markets, it is difficult to forecast the timing, specific pricing, and size of such an opportunity or whether these types of opportunities may be realized in the near term," said Glimcher.

At Weingarten, CFO Steve Richter said he doesn't expect to see many deals get done over the next few months, "We think it will take a while for the difficult projects to cycle through and land owners to adjust their expectations."

Dennis Gershenson, chairman and CEO, said Ramco is finding the market for asset sales "very slow", and as a result, it has turned to contributing stabilized properties to new joint ventures. "The biggest problem with asset sales is that the people with money who are potential buyers feel the sale price should be a lot lower than the seller does," said Gershenson.

Equity One is looking to bring on institutional capital partners and said it is actively seeking opportunities from sellers on "attractive assets, corporate transactions, and real estate debt." The company currently has two existing joint venture partners -- one focused on core-plus and the other on opportunistic deals. President Tom Caputo expects that "within six months to a year, after the markets return to some sense of normalcy," Equity One will have secured three to four more joint venture partners.

On how open Regency is to providing seller financing, Bruce Johnson said, "We look at who we are dealing with, the type of property we're selling and the likelihood for repayment. Our general rule is 35% equity -- we wouldn’t do more than 65%. You wouldn’t get any money if you didn’t [do] the seller financing; so we’re going to generate 35% of the proceeds."

Weingarten's Alexander said the company would provide seller financing, "in the right circumstance with a good down payment," to get merchant build deals done.

On its Inland Real Estate Exchange subsidiary, Zalatoris said, "The 1031 investors are reliant upon financing being available for their buyers so there has been a slowdown experienced. They’re also experiencing an unusual phenomenon in that they’re getting all-cash buyers coming in to put their cash into hard real estate assets, than into equity markets."

"In the last week or so, we’ve seen rates come down substantially and some financing transactions are getting done. Given the new Administration, there’s a greater likelihood of increased capital gains taxes, which should spur some more sales activity," added Zalatoris.

(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to be added to the distribution list by contacting senior editor, Sasha Pardy at Also, click here to subscribe to CoStar's dedicated Retail RSS Feed.


"We haven’t initiated any new development projects at this time [and have] an eye to holding development costs to a minimum," said Inland's Zalatoris. "The lease-up period is lengthy in certain developments due to the economic slowdown," he added.

"New development is being slowed and will be halted if necessary to make sure that we have more than adequate capital to meet our funding obligations and maintain dry powder," said Regency's Martin Stein.

Regency's change in return requirements (from 8% before to 10% now) on new developments is a fundamental that limits the developments Regency elects to move forward on. "We are not being bashful to renegotiate with landowners to increase returns to an acceptable level and we will not proceed even if the consequences involve walking away from pre-closing costs and expensing development G&A," warned Martin Stein.

"The projects we do pursue [in 2009] will be those that retailers want, that consumers want and that our co-investment partners ultimately want to own. In short, projects are being evaluated based on the ability to quickly and profitably recycle capital," said Martin Stein. "We will not be pursuing mix use projects nor will we buy land to hold except for extraordinary opportunities. We’ll be doing a higher percentage of grocery-anchored centers catering to nondiscretionary shopping [and] will further reduce the amount of [small] shop space we build." he added.

Weingarten said its yield expectations and underwriting standards have increased, limiting new development projects.

Cedar is still developing new properties, but won't start construction without a signed lease from a supermarket anchor, accounting for 50% or more of the leasable area.

On the new development front, Simon continues to be motivated on its Chelsea Outlet model in the near-term, as returns on that product "continue to be in the 12% to 14% range," said Simon.

Stephen Tanger, president and COO of Tanger Outlets said the company has a modest goal of delivering at least one new center per year for the next three to five years. "Our long standing policy of only buying property and starting construction when at least 50% of the first phase is leased and when we have all non-appealable permits remains in place -- we will not and never have, built on speculation." The company recently terminated purchase options on two development sites in Florida and Arizona.

Ramco-Gershenson said that it is eliminating or postponing capital expenditures on the four projects it has in development, until it secures a "critical mass" of tenant commitments. In addition, Ramco has redesigned the projects so that construction can be completed in phases, to hedge against building out "significant un-leased space" and has even reduced retail square footage at one project to accommodate a higher level of interest in office space.

Ramco has had more luck with 12 redevelopment/expansion projects it has on the table; with lease commitments for new anchor tenants substantially secured at these centers, Ramco expects to open all of them in 2009. Across the board, retail REIT executives reiterated more success and less risk with redevelopment and expansion projects.

"We are drastically reducing our development spending, and have either canceled or postponed projects. Most of our development spending in the fourth quarter is already committed. The real impact of our reduction will be felt in 2009. We have also been in an ongoing dialogue with our key department stores and tenants, and they are very supportive of this change," said GGP's Metz.

At CBL, president Stephen Lebovitz acknowledged a "difficult leasing environment" at the four new developments the REIT has under construction; so while it will maintain a pipeline of new opportunities, the company has decided to hold its major new projects and pre-development activity until it sees "a more favorable environment," he said.

CBL has "taken measures to limit exposure [on existing developments] by phasing the small shop portion or converting a portion of the smaller shops to anchor space," said Lebovitz. Most other REITs echoed this remedy.

Cedar has seen some benefit from a limited new development market, said Ullman, "We’ve been able to achieve substantial savings on construction costs for site work, which often represents 20% to 25% of the total cost of a center."

Regency's Brian Smith said, "Today land prices are down, construction costs are soft, and with a complete lack of competition, we are pretty much able to negotiate whatever terms we need. For the first time in about 15 years we can negotiate to tie-up properties for as long as necessary and put off closing until we have all entitlements and significant leasing in place."

"This is in marked contrast to market peaks where developers had virtually no negotiating power with landowners and were forced into taking increased amounts of risk. Today cities are willing to work closely with us on reasonable terms and retailers are bringing exclusive opportunities. We’re entering the sweet spot of development that comes around very rarely and in those periods developers can create extraordinary value," added Smith.

At GGP, Interim CFO Ed Hoyt pointed out that cutting back on new development has a dramatic impact on reducing spending on tenant improvement allowances.


"The acquisitions market for institutional quality properties continues to be extremely difficult primarily due to the credit markets, which are virtually shut down. Spreads for fixed rate loans from life companies spiked in the last 45 days from a range of 225 -250 basis points over comparable treasuries to 350 - 400 basis points over," said Caputo.

"Two years ago, no one was interested in acquiring properties with existing financing. Today, desirable properties with attractive in-place debt are in high demand," said Caputo.

Ullman said Cedar has "ramped down its acquisitions enormously" this year. Going forward, it expects to only acquire, with joint venture partners, "high quality supermarket anchored properties in the Northeast" where it would expect to assume "existing attractive debt with substantial remaining term and a leveraged return of at least 10%."

Cedar said it is open to entering into "joint ventures with smaller developers who may be challenged by current credit constraints, permitting an investment return of 9.25% of 9.5% on our invested funds coupled with a 60% or greater backend ownership interest."

"There’s starting to be a little more at least anecdotal evidence of opportunities coming out which means there are sellers in distress or have debt maturities and can’t get replacement financing that are now bringing properties to market. I think that’s going to accelerate to a much greater degree in 2009 and we’d certainly like to take a look at all those opportunities and have capital available for that," said Inland's Zalatoris.

Regency said it intends to use some of its "dry powder" to take advantage of future opportunities "which are already becoming more attractive," according to Martin Stein. "The current turmoil in the capital markets will cause a significant number of distressed, compelling acquisition opportunities. We will seek opportunities that generate returns in excess of Regency’s cost of capital after incorporating the impacts from the downturn and are being bought at cap rates above the long-term average for the property." He said the company would likely pursue these opportunities with joint venture partners.

"Our institutional partners have been ready to join us for the last six months, but opportunities…in the marketplace have been almost nonexistent," said Equity One's Caputo. “It might be distressed properties or those forced to sell because their debt is maturing. For the first time in 15 months, we're starting to see opportunities that sound realistic, that we think we might be able to execute on, and if we can, we’ll be there with joint venture partners."

Andrews added, "The bigger side of distress today is really coming from developers that were in it for the short-term that maybe have completed their projects or come close to completing their projects, but haven’t put the permanent financing in place and never had an intent to own the projects long term -- we’re seeing that all over the country."

DDR is moving forward on the formation of an institutional joint venture to invest in distressed development projects; it expects to report a first closing before year-end. "We see a significant number of projects with some level of distress, and increasingly, projects offer considerably below an investor's cost basis in an effort to avoid personal bankruptcy." He added that DDR is using very conservative assumptions in underwriting selected "compelling opportunities that are becoming available at highly favorable terms and pricing."

"In retailer services, our business is focused on working directly with retailers on sale lease backs, bankruptcy financing, property dispositions and other opportunities. We think the current economic environment will provide selective opportunities to make profitable investments. We have longstanding relationships with many retailers which may lead the opportunities to help them dispose of excess real estate and recycle capital back into their core retailing business," said Kimco's Henry.

When asked if the company would look at acquisitions of individual assets, David Simon, CEO of Simon said the REIT might participate in a "number of unique opportunities.”

But he dismissed reports that identified his firm as one of the only companies with the resources capable of acquiring GGP. Citing the size and risk involved in such a combination as his prime concerns, Simon stated, "In the current environment I cannot envision a set of circumstances that would result in such a transaction."

Quotes for this story were pulled from conference call transcripts provided by Seeking Alpha.

(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to be added to the distribution list by contacting senior editor, Sasha Pardy at Also, click here to subscribe to CoStar's dedicated Retail RSS Feed.

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