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Shopping Center REIT Execs Push Back Against Negative Fallout from Retailer Bankruptcies

"Reports of the Death of Retail Real Estate have been Greatly Exaggerated," -- Conor Flynn, CEO of Kimco Realty
May 4, 2017
Retail REITs have been hitting back against the onslaught of negative retail headlines and analyst sentiments during the current round of quarterly earnings conference calls, with executives touting robust leasing, strong shopper foot traffic and occupancies, and even rising rental rates.

"Reports of the death of retail real estate have been greatly exaggerated, and Kimco's strong first quarter is living proof," said Conor Flynn, CEO of Kimco Realty (NYSE: KIM). "Our leasing volume has validated the success of our transformation in helping to offset the challenging retail environment the industry is currently experiencing."

Simon Property Group Inc. Chairman and CEO David Simon said the company continues to see strong demand across its portfolio, with occupancy at the firm's mall and premium outlets standing at 95.6% at the end of the first quarter amid solid leasing activity. Simon's mall and outlet center retailers reported sales of $615 per square foot, a 30-basis-point increase to the prior year period, and Simon said the average base minimum rent increased 4.4% from a year ago.

"I just think the (negative) narrative is a way ahead of itself," Simon said. "Traffic is strong, it was up throughout our portfolio where we measure it, but you know at the end of the day, we've all got to have a better experience for the consumer because they're a tough nut to crack. We're frustrated only by the narrative, but not by what's happening in our business."

General Growth Properties (NYSE: GGP) CEO Sandeep Lakhmi Mathrani also refuffed the narrative this week, asserting "a wide discount between public and private markets," with the sum value of GGP's properties far greater than its current stock price and valuation. GGP announced plans this week to explore strategic options, including the potential sale of the company.
  Related News  Mall Owner GGP to Consider Buyout Offers

While apparel sellers and other retailers have clearly underperformed, Simon attributed much of the pain to over-leveraging and "financial maneuvering" by private-equity shareholders.

"We do think private equity has been more of a detriment, and by the way most of these guys are my buddies. But when you lever-up any business, whether it's the mall business or the retail business, and you can't invest in your product, then you've got a problem. We've seen a lot of that."

Simon said he's hopeful that retailers will reinvest in their stores, improve their inventory mix, and provide better service to their customers.

"This is the great narrative that is being absolutely ignored by the national media," he said.

Noting that mall owners are under the same pressure to reinvest, Simon said space give-backs by department stores are a great opportunity for the company to redevelop and re-lease space in its malls. For example, in the King of Prussia Mall, where JCPenney announced the closure of its store, SPG is planning a mixed-use development that won't be apparel oriented.

"We could have saved that deal. We decided absolutely unequivocally not (to)," Simon said.

Acadia Realty Trust CEO Ken Bernstein added that "there has been a flood of news about retailing and retail real estate, and while there is reason for legitimate concern, there is too much over-generalization going on."

Bernstein attributed the current round of retailer downsizings to a combination of factors, including once-strong chains that have lost their edge, others that have over-extended themselves or under-delivered.

Long-term secular shifts as a result of technology, including the continued growth of e-commerce and price transparency, as well as the strong U.S. dollar and deflation in grocery prices are also factors Bernstein cited in a business that has "always been Darwinian and always been cyclical."

"If we as landlords choose our locations wisely and structure our leases thoughtfully, then we should be fairly well insulated from these cyclical shifts," Bernstein said. "The good news is that over time, the pricing subsidies in e-commerce will likely moderate and traditional retailers will have competitive omni-channel capabilities that complement their bricks and mortar locations."

It's highly likely that virtually all successful online retailers today will have a strong brick-and-mortar presence in the future to reduce their cost per acquisition, connect with their customers and strengthen margins, Bernstein added.

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