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General Growth lives up to its name and then some

If anybody still thinks regional malls are dinosaurs, they should think again.

That's the short and sweet conclusion one walks away with after listening to the story behind General Growth Properties Inc. (GGP).

This Chicago-based real estate investment trust (REIT), along with its investor group, has just swallowed up the huge $1.85 billion acquisition of the Homart Development Co. portfolio of regional shopping malls from Sears, a deal which closed on December 26, 1995. GGP moved quickly to sell off the Homart Community Centers division to Developers Diversified Realty Corp. last November for $405 million, and is close to purchasing the majority employee-owned General Growth Management Co.

So now when you put it all together, GGP owns and/or manages a total of 127 malls and shopping centers across the country, making it a true powerhouse in a powerful retail niche.

Recent retail demographics seem to bear out the health of regional malls. By nearly all estimates, more shoppers during this past holiday season turned to malls and department stores for more of their purchases than in recent years, adding further proof to the notion that malls are still very much alive and kicking.

It's something the Bucksbaum brothers, Martin and Matthew, banked on some 40 years ago when they borrowed $1.2 million to expand the family grocery operation into Town & Country Center in Cedar Rapids, Iowa, making it one of the earliest centers in the Midwest.

As time went on, the Bucksbaums became retail legends of a sort. Unfortunately, Martin passed away last September, and the impact is still being felt at the firm.

"No question he was the visionary," says Robert Michaels, president and COO of GGP. "Martin trained us all very well. His philosophies we certainly grew up with and embrace. The day-to-day business operates pretty much as it has. We cherish that training that we had. It goes back to the way we develop, the way that we manage, our work ethic, our culture. Obviously Matthew Bucksbaum, John's father, was with Martin all of these years and is still very active in the company. So you've really got that continuity going forward."

Today John Bucksbaum is executive vice president and chief administrative officer for GGP, continuing the long line of Bucksbaum involvement in the company.

"Martin showed not to be afraid to follow through on your ideas," says Bucksbaum. "Martin was always thinking a few steps ahead of the others, in a creative way but well thought out. It gets down to the opportunity to follow through on some of your dreams or your desires for where you want to see a company go. You know that you can do it, because we've all seen it done. But it takes a lot of effort to get you there."

General Growth differentiates itself from other regional mall companies in several ways.

"We have a large third-party business in addition to owning and managing our own centers. Organizationally, we're set up as the largest third-party manager for institutions in the country," says Michaels. "In addition to the centers we manage for General Growth Properties, we manage 56 third-party malls for other institutions, and that contains about 45 million sq. ft."

Traditionally, General Growth has taken a hands-on approach to running its centers. "We're very close to our properties. We have for years had our mall managers be very active in the leasing process as opposed to many developers where all of their leasing is done by the national leasing representatives, which tends to give you more of a national tenant flavor in the centers. As you begin to use your local managers, who should know the malls better than anybody, then I think you tend to get more of a local flavor, a more interesting flavor in your malls and we have found that to be true," says Michaels.

GGP's work down at the property level has led to some interesting concepts that have shown dramatic results, including the use of so-called "carts." "We have really worked hard on the specialty leasing, temporary leasing area, and have really turned that into an industry within an industry," says Michaels. "We have shown growth rates that to this day are still running 15% to 20% each year over and above the previous year."

To bottom line it, "We've always known how to make money in this business," says Bucksbaum.

True enough. General Growth first went public in 1970 when the Bucksbaum brothers exchanged their General Management Corp. stock for shares in General Growth Properties, a publicly traded REIT. Then in 1984, General Growth sold 19 malls to Equitable for $800 million, a deal that was considered the largest single real estate transaction in history. General Growth went private in 1985 when private market values increased, but General Growth Management Inc. continued to manage the properties. In 1989, General Growth acquired The Center Companies, making it the second-largest regional shopping center manager.

Then General Growth went public again in 1993 with 55% of the company's holdings (the Bucksbaum brothers retained a 45% stake), raising more than $400 million. In 1994 GGP acquired a 40% interest in CenterMark Properties, which owned and managed 16 regional malls and three power centers. On Dec. 19, 1995, GGP sold 25% of its 40% stake to Westfield Holdings Group for $72.5 million in cash, and if Westfield exercises its option to buy the remaining 15%, GGP could stand to turn a healthy $108 million profit on its initial investment.

With all of that history behind them, and with the Homart deal still looming large, it's no wonder that rumors have been flying for a while now about GGP going private again.

"If it's the right thing to do, then you should probably think about doing it," says Bucksbaum. "We don't think that's the path for us today, but we did it back in 1985. We have done it before, and we're not afraid to do it. Some companies try to outsmart themselves or the market and they've waited too long. When General Growth has decided to do these things they have proceeded."

The next immediate step for GGP is assimilating the Homart acquisition. What does it really mean to General Growth?

"It gives you more exposure to markets which you have not been in," says Michaels. "It enables you to have a portfolio of 100 regional malls now to offer to retailers. That's important. One of our primary strategies dealing with retailers is what we call the ,portfolio review" where we bring the retailer in for a couple of days and go through our entire portfolio. It's really one-stop shopping for the retailer. It really gives you an opportunity to show the retailer across the country what you have."

That exposure translates into financial rewards. "It gives us an opportunity to Increase our earnings," says Bucksbaum. "We see this great potential for enhancing the value of that portfolio."

One of the ways that happens is through greater economies of scale. "If we produce a television commercial that costs say $60,000 to produce, and if 60 out of 100 malls bought into that commercial, it costs them $1,000 apiece versus if you had 10 malls buying into it at $6,000 apiece," says Bucksbaum.

It even comes down to negotiating vendor contracts, since GGP has a reputation for passing any cost savings directly to its retailers. "Consider floor wax. There is 10 million sq. ft. of common area that's getting waxed on a regular basis and it makes a difference when you're buying that stuff. So it helps keep the common area costs down, which is a key item to the retailer," says Bucksbaum.

That attitude has played well on Wall Street, but General Growth has not fully utilized the public markets, many varied sources of capital. To date, GGP did a secondary offering of 4.5 million shares, raising $93 million. It also has used the sale of operating units in its properties as a financing tool, but it has yet to establish any sort of credit line, which is another popular financing tool.

"We haven't used credit lines because we haven't been rated," says Bucksbaum. "Being rated is important to us, but we haven't had the luxury of having a low debt to capitalization ratio that you could go and get rated on. We borrowed money to do CenterMark and we're borrowing money to do Homart."

So that option is still on the table. "It's something we want to do," says Michaels.

In general, Wall Street still brings a relatively new set of eyes to the overall real estate industry and the REIT vehicle. Though REITs have been around for more than 20 years, the IPO flurry in 1994 created a large enough market to gain the Street's attention.

"I think the analysts are starting to understand it more than they have in the past, that real estate is a long-term hold and you probably cannot value real estate on a day-to-day basis as you do with other companies," says Michaels.

"You can analyze it on a daily basis but when Bob makes a Dillards deal for Bowling Green, Ky., and once the Dillards wing is better than what had previously been done, all of that change is slow. The center is going to be strengthened over time but you're not going to see that in next quarter's numbers or the following quarters, numbers," says Bucksbaum.

Still, the constant message being transmitted to the Street is a simple one.

"Martin loved to say, `The more things change, the more they stay the same.' What it means is that we were successful before and we can be successful again by essentially using a lot of the same principles, good solid business principles. And if you stick to what you know you're going to be able to be successful. Of course you have to change in certain areas when you deal with different retailers, but you still recognize you want to give the consumer what they want," says Bucksbaum.

Since the relationship between health in the retail markets and health in shopping center and mall REITs is inevitably intertwined, Street analysts spend much time tracking retail trends. In general, the nation's retailers have had to contend with changing demographics and a whole new era of "entertainment" to keep traditional mall shoppers coming back and to attract a new young segment.

"Really if you look at our business, we're not in the real estate business as much as we're in the retail business, and the consumer votes every day with their pocketbook as to what they want in these centers," says Michaels. "It's our job to stay ahead of that curve and make sure that when the consumer is ready to vote or to spend their money, that we're there with what they want. We're continually rethinking our centers. What does the consumer want, not only today but two or three years from now?"

Is it really "entertainment," which has become a dominant retailing theme, or it is something as yet undiscovered?

"The worst mistake you can make is to have a center that really has no future, and to spend money on it and say, ,We're going to turn this into an entertainment concept., It's not going to work. To me, entertainment means theaters, it means restaurants, it means interactive retail, it means giving the consumer something that's fun again. It means an expanded Disney concept, Warner Brothers, interactive-type movie theaters that are becoming popular with the kids. That's what I see as entertainment," says Michaels.

"We're sensing what they're (consumers) telling us is that they want more entertainment," says Michaels. "That's kind of a buzzword, but the way we define entertainment is the stores themselves. That's the best entertainment you can have. The shopping experience and the interactive entertainment within the retailer themselves. We also think they want more restaurants, larger theaters, easier access in and out, want larger bookstores and larger music stores. That's what we're trying to give them, and to make sure that `one-stop shopping, is what the regional mall is all about."

"All of the centers are evolving and changing, and it's up to the local manager, the leasing people, all working as a team, to try to give that consumer not what they want today necessarily, but what they're sensing they want down the road," says Michaels.

The shopping public will get a chance to see "from the ground up" iterations of that message in four new malls now under construction and slated to officially grand open this year. They are located in Tracy, Calif., Winterhaven and Orlando, Fla., and Waterbury, Conn.

Though retailing has always been more art than exact science, there are a few basic marketing tools that can pin point opportunities. "We do a lot of market research. We do focus groups, we hire consultants to come in and grade us and grade the retailers. We do secret shoppers. You name it and we do it to try to figure out what's right," says Michaels.

If General Growth needs to change any of its centers based on its findings, it has the tools in-house to turn on a dime. And since tenant consolidations are likely to continue, malls may be less affected by movements than power centers.

"The regional mall is the ultimate big box. You can change walls and do any number of things," says Michaels. "Typically you would have two 3,000 sq. ft. book stores in your centers, a B. Dalton and a Waldenbooks. What we're doing is taking one of those out, expanding the other and repositioning it as a 7,000 sq. ft. to 8,000 sq. ft. store. We're adding restaurants, we're taking out a lot of the popular priced ladies ready to wear and adding unisex."

Are all of these changes providing adequate returns?

"We're finding there are good returns. The theaters are the best example. You can build a new theater today and you get good rent," says Michaels.

And he is convinced that has been a key advantage of regional malls, through thick and thin times. "The well-positioned regional mall will always find a way to remake itself and evolve."

Total Portfolio Size:97.7 million sq. ft. Total Sq. Ft. Owned: 38.5 million Total Sq. Ft. Managed:78.5 million Total Number of Malls & Non-enclosed Centers: 127

Source: General Growth Properties Inc.

Goldman Sachs, N.Y.: "This transaction (the recent Homart purchase) not only should be immediately accretive to FFO, it should provide the company with above-average growth over the next several years as it leases vacant space. We anticipate that both new developments and selected asset sales will be an additional engine for growth. Furthermore, Bob Michaels, John Bucksbaum and Bernard Friebaum are aggressively taking charge, as is evidenced through their stated aim of increased disclosure which has been notoriously inadequate and the acceleration of plans to acquire General Growth Management." Wilson Magee, The Penobscot Group, Boston: "Closing the Homart and management company acquisitions and the attendant personnel transition will be an organizational challenge to senior management. We also think that succession is a major issue going forward. With the death of Martin Bucksbaum, the company lost its leader and a savvy financial strategist. The senior management team seems quite capable, but the company will miss Martin Bucksbaum's entrepreneurship and leadership. Exactly who runs the company will be very interesting to watch, but ultimately how effectively it is run will be most significant to investors."

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