Retail REITs Say ICSC Was Strong, Leasing Getting Tougher, Distressed Opportunities Arising
Last week, all the major Retail REITs made presentations and participated in question-and-answer sessions at the National Association of Real Estate Investment Trusts (NAREIT) annual investor forum, REIT Week, held at the Waldorf Astoria in New York City. Executives at REIT Week provided investors with a number of take-aways from the conference. (Editor's note: Read more CoStar Advisor coverage of the conference.)
To start, each company was asked their perceptions regarding the attendance, deal volume and trends at ICSC's RECon, which was held May 18-21 in Las Vegas.
"ICSC was better than our expectations and the retailers that were there were there to do business. Our leasing people felt encouraged with the results they were able to achieve at the convention," said David Simon, Simon Property Group's CEO. He added that as Simon is the largest retail landlord, the convention is not instrumental in its business.
Michael Glimcher, chairman and CEO of Glimcher said a "slowdown" wasn't apparent at ICSC, "other than the fact that there were fewer bankers and lenders." He estimates attendance was down about 10% over last year, but said; "we had a couple hundred retailers come through our booth."
John Foy, CBL's vice chairman and CFO said, "ICSC attendance was consistent with past years. The conference was very productive for our company and I think everyone was pleasantly surprised at the mood and the tone of the conference." Charles Lebovitz, CBL's chairman and CEO, said, "As much as we tried to boost morale of our leasing staff in advance of Vegas, the headlines are the headlines. So I think our leasing staff expected a difficult reception there. They came back with a far more encouraged outlook than when they went."
Marshall Loeb, Glimcher's president and CEO, said the company took care to really coach its leasing agents this year, as "many of them have not been through a down environment." He added, "Each of our leasing agents work with our general managers to focus on leasing strategy, to figure out 'Who are our next level of tenants?"
Loeb said that Glimcher has seen a few lease deals fall through towards the end of the leasing process and expects this trend to continue, so the company is focused on getting deals done quickly. It formed a "75-day" group to push leases through to execution. "We're trying to get out and on the road in front of retailers to do deals as rapidly as they can. Speed is of the essence," said Loeb.
Foy said retailers were interested in leasing at ICSC, but on "quality expansion" only. Lebovitz gave a particular example involving luxury handbag retailer, Coach. "Earlier this year we completed a deal with Coach to locate in six of our projects. At ICSC, we met with the head of real estate for Coach and they informed us that they had conducted their own survey concluding that there are seven more of our malls where they could have Coach stores, based on sales of their products in department stores in those malls. So that may represent the thinking of retailers today. They're conducting their own independent market analysis, looking at both major and middle markets. What they're really trying to accomplish is good occupancy cost in locations where they can be in the main retail destination in any given market."
At ICSC, CBL hosted a dinner with 15 major restaurateurs represented. "They definitely are experiencing significant slowdowns in their business and are accordingly slowing down their growth program. We're seeing that there's definitely a slowdown in commitments from that type of restaurant [full service casual dining] -- we're not sure how long it will continue, but its something we're having to deal with," said Lebovitz speaking on the restaurant sector in particular.
Steve Sterritt, Simon's CFO commented on the change in the industry atmosphere and situation compared to last year's ICSC conference, "There is going to be some stress in the marketplace. The music stopped so fast. Last year at ICSC, Money was everywhere -- anyone who had a shovel and an architect called him or herself a developer and was trying to do a deal. By Labor Day the world was ending."
"One of the trends we saw at the ICSC show is that everything [new projects] is being pushed to 2010. The fact that we're delivering space this year is a positive because there's not a lot of product being delivered right now," said Glimcher in explaining that although retailers are "certainly doing fewer stores than in years prior," they still need space.
Ken Bernstein, CEO of Acadia said his perception of ICSC was mixed, "ICSC is always fascinating. There are a lot of guys you run into that say things are great. At night at a cocktail party they'll tell you they have 10 developments going, but then in the morning they say they need $20 million tomorrow because they're about to be foreclosed on all of them."
Bernstein said Acadia executives spent most of their time at ICSC with retailer CEOs. "They're seeing very mixed results. There's no consensus on how the recession is playing out. Some of them are able to pass through the cost increases or any of the issues to their vendors, and some are not. Some are enjoying the food inflation; some are not. There wasn't a clear consensus that this is the worst recession we've seen in 20 years, but we're starting to hear some retailers say that. What we are hearing is across the board is that they're being much more cautious in secondary and tertiary locations. The third interesting piece was the recognition that they're sitting on a lot of real estate still and the thought that they could monetize the underlying inherent real estate value in-house, the 'anyone can be a re developer' concept, is shifting a little. It wouldn't surprise me to see if retailers recognize that their use is not 'best and highest' and that there could be some kind of evolution and redevelopment of their real estate," said Bernstein.
Analysts asked executives to comment on the retail environment regarding layoffs and store closings. Simon said, "Bankruptcies are up slightly from last year, and last year was abnormally low. There are a few we continue to be concerned about, but generally the bigger retailers are so much better positioned financially than they were. There will always be marginal retailers that come and go, but we don't see the economy driving the retailers into chapter 11. Look at Linens 'N Things, which was really buyout-oriented, as opposed to performance-oriented; the deal just had too much debt on it. Our vast majority of retailers are well positioned, regardless of low comp sales." Sterritt added, "Last time we saw a large amount of bankruptcies was in the mid '90s. Today, the balance sheets, capitalization and management teams of our bigger retailers are much stronger than they were back then."
Glimcher said he's only seen a "handful" of bankruptcies that have affected the company this year. He echoed Simon's comments regarding the improved strength of retailer's balance sheets. When asked if retailers that are opening stores have more leverage in this environment, Glimcher said, "No. We still expect releasing spreads of 10% to 13%, which is a product of our assets, not retailers negotiating harder. Retailers are certainly doing fewer stores than in year’s prior. The relationship is really with the quality of the asset and how much the retailer wants to be there. If a market's bad or conditions are bad, there's still always bright spots and retailers are making 7-10 year decisions on these stores."
Lebovitz said, "There are going to be store closings and bankruptcies - it’s the nature of the business ad this isn't the first time. It's not all bad because you always want to introduce fresh new concepts into your projects and that's when you're given the opportunity to do, as the ones who are not performing go out of business. We experienced it in the past, will in the future and are today."
"it is very encouraging when you look at companies that were in bankruptcy 3-4 years ago, such as KB Toys and Wilson Leather; today they are back in the business of opening stores and going forward with some interesting programs. I thought it was very important to see Toys 'R Us' new announcement of combo stores with Babies 'R Us, occupying 60,000 to 75,000 square feet, especially considering headlines reading that the toy industry was suffering. Specialty retailers have the means to reformat their operations," added Lebovitz.
Simon was asked how it deals with store closings, in particular big boxes. After saying he expects the trend of department stores closing to continue over the next 3-5 years, Simon said, "The alternative uses go from Target to Kohl's to J.C. Penney's, and then tearing it down and rebuilding it with bookstores, theatres and other tenants as an outdoor lifestyle center." With the caveat that getting the real estate back from department store retailers who own their spaces can be hard, Simon added, "The mall is very enclosed and doesn't create an appearance to the outside. As we reclaim some department store space, we're going to open it up and invite you in."
When asked to suggest retailers or categories that continue to do well and are in expansion mode, executives consistently mentioned names in the teen category including Hollister, Aerie, Buckle, Gilly Hicks, Forever 21, Vans, Aeropostale and Abercrombie. H&M and J. Crew were other favorites named.
Nearly all the retail REITs said that as long-standing institutional entities that have been through down times before, they are all poised to take advantage of opportunities that come their way, whether it be joint venturing on distressed assets, making strategic acquisitions, or simply providing financial relief to developers in need.
Bernstein said, "There's still a lot more issues within the financial institutions that needs to be reconciled on the commercial real estate side. I thought we would see a lot more trading this year, but so far, we're seeing enough opportunities for a small company of our size, but no where near the wholesale opportunities. The distress will come further up the food chain at the developer and owner level realizing they own 100% of the downside. There are recapitalization issues that have to play out there over the next year or so."
Acadia added the parameters it sees as sensible in reviewing pro formas of properties it would consider investing in, "Don't assume construction costs are coming down; Rents - unless it is a must-have location, the tenants are going to have a stronger seat at the negotiation table, so don't assume rental growth is going to match CPI." He talked a little about cap rates saying the spread between Class A and secondary/tertiary assets will continue to widen; where before the difference was usually only 50 to 100 basis points.
Bernstein still sees retail acquisition and/or redevelopment opportunities for Acadia in the New York City metro area. "We have 10 developments and 2.5 million square feet of retail and mixed-use here in NYC. We think from a retail perspective, NYC has certain attributes that are unique -- the single most important fact is that the U.S. has roughly 22 square feet of retail per person; in NYC, the number is six square feet per person - with that fact, tenants are recognizing that [like Target, Best Buy] and they seize the opportunity when it presents itself, because they may not have that chance later on."
Simon's Sterritt said although its early, Simon expects opportunities to increasingly come its way, with developers who "got caught" looking to Simon to help them complete their development through supplemental financing, or unload their developments. "We're always looking. What's exciting about this market, which is counterintuitive, is we can be terrifically opportunistic, so we're really thinking about what we're going to do next. One will be capital oriented -- people wanting to unload paper or needing capital. Second, for a lot of people, it gets very difficult to run a company when things are grinding away. I say bring it on. I think some are wearing down and I am gearing up and that's opportunity for us," said David Simon.
CBL gave a specific example of a recent opportunistic move, "In February, in a market near Biloxi, MS called D'Iberville; we are in the process of starting construction on a 700,000-square-foot power center anchored by Kohl's, Target, Dicks and Best Buy. Forum Development proposed this project and they got caught in economy and didn't have the financial wherewithal to take project ahead. Target was very much committed to the location, so they contacted us and asked if we could involve ourselves to see if we could make that project happen so they could open their store in the fall 2009. So after a very extensive eight-week due diligence and renegotiation of over 60 individual owners of parcels and the ability to finalize financing through the state, we were able to step in and restructure. Now Forum development is a 15% minority owner. That is a good example of being opportunistic, but also being selective. I have no question there will be many other opportunities; many projects are having to be abandoned or delayed because of abilities to secure financing as well as challenges in the leasing environment," said Lebovitz.
(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 spardy@CoStar.com Also, click hereto subscribe to CoStar's dedicated Retail RSS Feed.