Q&A with CEO Terry Brown of Edens & Avant: ‘We’re Playing Offense and Defense’

Q&A with CEO Terry Brown of Edens & Avant: ‘We’re Playing Offense and Defense’

For shopping center owner and developer Edens & Avant, 2010 truly marks a new beginning. During the holidays, the Columbia, S.C.-based company moved its headquarters to a new 18-story office tower at the corner of Main and Gervais streets in the heart of downtown. The high-rise is located directly across the street from the South Carolina State House.

Terry Brown, CEO of Edens & Avant, recently told The State, the local newspaper in Columbia, that the glass-covered building developed by Atlanta-based Holder Properties is both “an extraordinary location and an extraordinary building.” Edens & Avant is not only an occupant, but also part owner of the $60 million tower.

Being involved in such an ambitious project is just par for the course for Edens & Avant, which owns more than 140 shopping centers in 14 states throughout much of the East Coast. The company’s portfolio consists of lifestyle, neighborhood and power centers as well as mixed-use developments largely in upscale areas. Major grocers are the predominant anchors.

NREI recently spoke with Brown about the lingering effects of the recession that began in December 2007, as well as the near-term goals for the company. What follows is an edited transcript from that interview.

NREI: In this soft economy, to what extent are retailers in your shopping centers seeking rent relief?

Brown: Generally speaking, about 10% of our retailers have requested rent relief. About 2% of our retailers have been granted rent relief since late 2007 and early 2008. The keynote speaker at the National Retail Federation convention in January 2009 told retailers that if you are not asking for rent relief, you are not doing your job.

There was a surge of rent relief requests from January through April 2009. That trended way down over the course of the summer months. Let’s assume that we’ve had 260 rent relief requests. The rent relief requests have dropped from about 20 a month to about two or three a month.

More than half of the retailers who request rent relief never even submit the information we request to evaluate the situation.

NREI: Why the hesitation on the part of retailers?

Brown: If they don’t submit that information, it’s because they don’t need rent relief. You may get a rent relief request from a retailer that’s doing [a very healthy] $400 to $500 in sales per square foot, or a retailer that has a 2% to 3% rent-to-sales ratio. The retailers submit the request because they think it’s trendy, that it’s something they should do.

NREI: Some shopping center owners say that while they may not be able to grant rent relief, they can help the retailers market their stores so that it’s a win-win for landlord and tenant. Is there some merit to that idea?

Brown: Listen, the requests for rent relief are not really a bad thing. We need to work with our retailers. We need to partner with our retailers. When we get a rent relief request, we take it seriously. We visit the store and we evaluate what’s going on in the store. We require that some of the rent relief go into marketing and advertising.

We try to be fair with the retailers. To the extent that we want them in our center, it’s not in our best interest to have that space be vacant. So we try to be flexible. Now is the time to work with retailers that we want to keep.

NREI: Is Edens & Avant taking any other specific steps to help the retailers?

Brown: We’re setting up Facebook sites for every one of our shopping centers. We are providing Facebook training and Twitter training to retailers who are interested. We are connecting our Facebook site for the shopping center to the retailer’s site.

(Facebook is a social networking website, and Twitter is an instance messaging system that enables users to send text messages through their cell phones.)

NREI: Is there a pattern as to which retailers are seeking rent relief?

Brown: It’s typically anything related to home building. It could be a home furnishings store or a mortgage broker office. Anything home related generally has suffered. Casual dining also is a big area of retail casualties. One of the big line items for grocers is prepared foods, and it’s one of the reasons casual dining has suffered.

NREI: Speaking of grocers, how have they performed during the sharp economic downturn and slow recovery?

Brown: 2008 was a banner year for grocers. If you go back to 1996 to 2000, everyone was going to have their groceries delivered to their house through Peapod and Web Van (online grocers, the latter of which went bankrupt in 2001). Then all of a sudden the concern was that Wal-Mart was going to outsell every grocer in America through the Super Wal-Mart, and that concern kind of faded away.

The grocers between 2000 and 2007 went through a rationalization of their businesses. They exited markets where they couldn’t be the No. 1, 2 or 3 player in the market, so they focused on market share.

Instead of developing new grocery stores in suburban areas, most of the grocers tended to reinvest in their stores. They tended to remodel their stores and protect market share. They tended to invest in margin and everyday low pricing and offer a value proposition to customers.

Whether it’s Kroger, Publix or Stop & Shop — the primary grocers in our centers — those companies are doing very well.

NREI: Can you give us a sense of how the Edens & Avant portfolio of shopping centers is performing overall relative to occupancy?

Brown: We started observing a decrease in occupancy in the first quarter of 2008. We had a decrease of about 250 basis points between the first quarter of 2008 and the end of the first quarter of 2009.

But since the end of the first quarter of 2009, our occupancy is up about 90 basis points. The average occupancy in our portfolio was 92% at the end of September 2009. A year earlier, the average occupancy rate portfolio-wide was 93.8%.

NREI: What do you account for the relatively benign hit you’ve taken on the occupancy front?

Brown: First of all, 90% of our properties are grocery-anchored, and so we didn’t have a lot of loss in big-box tenants. We had very few big-box issues with Circuit City and Linens ’n Things and Home Expo.

Florida is our biggest issue with exposure to vacancy, and we started to see that trend in rising vacancy after the holidays in 2007. Occupancy in our Florida portfolio has been stable since the end of the first quarter of 2009. (Brown estimates that Edens & Avant owns 25 to 30 shopping centers in Florida.)

NREI: What’s the short-term outlook for occupancy across the portfolio?

Brown: We think it’s going to be a slow recovery. I don’t think that we would forecast picking up 100 basis points in occupancy over the next 12 months. We are projecting a relatively flat period.

NREI: So much of commercial real estate’s fortunes are tied to job growth, and right now the economy is still shedding jobs, albeit at a slower pace than in early 2009. What does the U.S. need to do to stimulate job growth?

Brown: I am a big believer in worker retraining. There also is going to have to be tax policy that drives business investment, which accounts for about 12% to 14% of GDP. That tax policy could include investment tax credits or accelerated depreciation.

NREI: Edens & Avant is undertaking more renovation and repositioning of shopping centers today than new development. What are the driving factors?

Brown: There aren’t the retail anchors to do new ground-up development in areas in which we’d like to do it. You’ve got to remember that most of the ground-up development that occurred over the last five to seven years was in greenfield areas in suburban counties — areas where people were counting on new rooftops, and population growth. But in many instances that just didn’t play out.

To the extent that we’ve had issues with either rents or occupancy, those issues have tended to be concentrated in suburban areas and newer developed properties.

What has held up very well are properties that are 10 to 30 years old, properties in areas with strong demographics in terms of household income and population density. These are centers with stable shopping patterns. These are places where you can still get strong returns on your capital. You can raise the profile of the center and connect better with the neighborhoods.

You have an opportunity to establish those locations as dominant centers. They are centers that might have been at risk, if there were a lot of new lifestyle development nearby, but there’s not a lot of new development. We’re taking advantage of the marketplace. We’re playing both offense and defense.

NREI: If the economy were not so soft, would you still be undertaking so much redevelopment?

Brown: We have definitely increased the velocity of the redevelopment activity in our portfolio, but I don’t think that’s spurred by the economic conditions. We’re fortunate because we’ve been able to keep our development and construction teams in place by shifting a lot of our activity from ground-up development to redevelopment.

If you think about it, the redevelopments are smaller in scale and scope, so you can probably do two or three redevelopments instead of one big new ground-up development. Some of that has been a shift of resources and focus here at the company.

The old days of buying a neighborhood shopping center, putting long-term debt on it, and clipping a coupon bond for 20 years are gone. Now you are largely changing the merchandising mix of a neighborhood shopping center every five to seven years. Consumers’ shopping patterns change.

NREI: What’s the outlook for new ground-up development for the next six to 12 months?

Brown: We’re continuing to work the deals that we have in the pipeline. We will break ground in February on our big project at Mosaic in Fairfax County in northern Washington, D.C. right at the beltway. (The Mosaic District is a 1.9 million sq. ft. mixed-used project.)

We expect to break ground in the first or second quarter of 2010 on Albemarle Place in Charlottesville, Va. (Albemarle Place is a 2 million sq. ft. mixed-use development.) We also have a number of Publix-anchored shopping centers in the Southeast that are either under construction or will be under construction in early 2010. One is in metro Savannah, Ga., one in Bluffton, S.C., and one here in Columbia, S.C.

NREI: As an executive of a leading shopping center firm, what’s your biggest challenge?

Brown: I think capital is always an issue today, not so much because we’re in an at-risk position. I’m referring to capital to exploit new opportunities, and that is a challenge.

Another challenge is identifying a strategic direction for our company that’s going to allow us to take advantage of the people that work here.

We don’t have motivational or morale issues, or things like that. We have a bunch of aggressive young people who are looking for opportunities, and they want to grow.

Sorting out how to maximize the use of the people that we have here and their capabilities is probably the single biggest challenge.

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