Retail Traffic

Winds of Fortune Lift CBL to Lofty Retail Heights

In the 1950s, a Chattanooga, Tenn., firm founded by Moses Lebovitz was developing drive-ins and movie theaters in and around the city. But in a story worthy of the silver screen, fate was about to intervene and change the company, Independent Enterprises.

Fate, in this case, came in the guise of a severe storm. In 1960, high winds blew down one of the company's drive-in theater screens. Rather than rebuild, Lebovitz decided to act on another idea he had been considering: building a shopping center on the site. This decision introduced Lebovitz to retail development and readjusted the course of the businessman's future.

Opened in 1961, the new shopping center was the first in a long line of projects for the company that would eventually become one of the most successful retail developers in the country, CBL & Associates Inc. At the end of 1998, the company portfolio contained 131 retail properties totaling 34 million sq. ft. located across the eastern United States. CBL is now headed by Moses Lebovitz's son Charles, who serves as chairman of the board; and John Foy who is the director, vice chairman and CFO.

The Lebovitz family's rise to retail prominence took time, and its course wasn't necessarily direct, as a series of business moves put a few unanticipated curves in the family's path. But Moses (who died in 1991), Charles and Stephen Lebovitz, the founder's grandson and current company president, kept their philosophy intact and have continued to move forward.

"The company's strategy was to build shopping centers in smaller markets across the Southeast," says Stephen Lebovitz. "We wanted to own the dominant center in these markets - and that is what we did."

Eager for growth By 1970, Independent Enterprises was eager to expand, so the firm merged with Arlen Realty, a New York firm with a large portfolio of retail centers in the Northeast and Midwest.

The merger worked well for a while, but by the mid '70s the firm began to have problems with some of the retail chains in its portfolio. The problems made Charles Lebovitz long for the ability to chart his own course, as his father had done two decades before. So, in 1978, Charles Lebovitz and four partners spun off CBL & Associates Inc., keeping its base in Chattanooga.

The new company had a $500,000 capitalization and no properties, but it maintained the strategy of developing the dominant centers in middle markets. "The idea was that we would have less competition in these markets and be able to create a more dominant franchise for our centers," explains Stephen Lebovitz.

From its inception, CBL & Associates was developing both regional malls and community centers, but the sheer size of the malls made them the dominate property type in the portfolio. By 1993, 70% of the company's revenues were generated from regional malls.

But management had no intention of moving away from the community center business. In fact, it looked for ways to augment it.

CBL's management saw the advantages of diversifying not only by property type but also by geographic region. The result was the opening of CBL's Boston office in 1988. The catalyst for the move was the expansion plans of two of CBL's largest retail tenants, Wal-Mart and Home Depot. Both chains were aggressively targeting the New England market for new store locations.

In addition to a strong tenant base to work with, CBL had expanded into completely new territory, which provided new opportunities in development and leasing. "Suddenly we had more to offer expanding retailers," says Eric Snyder, CBL's senior vice president and director of leasing. Now, CBL could help national chains roll out their stores all along the East Coast.

The Boston office, which oversees the Northeast down to Virginia, concentrated on power and community center projects, a reflection of its initial close ties with big-box players. Indeed, Wal-Mart and Home Depot were just beginning to move into New England, and CBL had already developed a good working relationship with the chains, having assisted them with their expansion throughout the Southeast.

To date, CBL's Boston office has developed 2.6 million sq. ft. and currently has another 600,000 sq. ft. under construction. Its focus is still power and community centers. Although CBL has yet to make a major move into another region of the country, it is taking a few small steps into other areas by way of acquisitions. Recently, the company added to its portfolio single malls in Pennsylvania, Michigan, Wisconsin and Minnesota. The Midwest could be the next move for CBL, although Snyder says no definite plans have been confirmed.

Surviving the storm While the move into New England provided CBL with opportunities for growth, the economy was beginning to be a more critical factor. In the late '80s and early '90s, the real estate depression began taking its toll on the industry . Lack of capital was making growth difficult..

In response, CBL & Associates became a REIT in October 1993. "We had recognized the changes that were coming in the capital markets, and the move allowed us to continue to grow," says Stephen Lebovitz.

Up until its initial public offering, CBL's entire portfolio comprised centers the company had developed. "But we have gotten much more involved with the acquisition business," he says.

Last year alone, the company purchased eight malls and three community centers at a cost of $570 million. Although the company looks for properties with upside potential that can be realized through redevelopment, management's original strategy of owning the dominant shopping center in a market often makes Class A properties the focus of CBL's acquisition efforts.

"Some of our acquisitions have been malls that were already producing high sales figures," says Snyder. "Obtaining these properties had the effect of suddenly changing our standing with retailers by allowing us to immediately offer them strong locations within particular markets."

Snyder, a member of CBL's acquisition committee, emphasizes that leasing data is key to developing a good acquisition strategy. Potential retenanting is one of the most important issues in deriving the worth of a property. "We look at the length of the existing leases, and if we can turn over a space and fill it with a stronger retailer, then the deal improves immeasurably in our eyes," he explains.

In general, CBL has a 10-year cycle for redeveloping its center.

Success story CBL's strategies have proven successful, especially last year when the real estate business, and REITs in particular, hit a wall. In fact, CBL performed much better than most of its peers. The company produced 17.5% growth in FFO (funds from operations) and achieved an overall return of 12.5% for its investors. Lebovitz credits this performance to the company's decisiveness last year.

"All of our acquisitions were completed by August," he says. "So most of our business was concluded by the time the capital market tightened up. But when it did, we became more cautious."

Even Wall Street smiled on CBL as the company's stock rose 5%, while REIT stocks in general plummeted. Lebovitz says the fact that the company was coming off a record year for development in 1997 added to its good fortune by assuring good growth numbers that obviously influenced investors. In 1999, Lebovitz and company have another 2 million sq. ft. under construction, including a new 1 million sq. ft. mall, Arbor Place, going up in a western suburb of Atlanta. The project is scheduled for completion this fall.

In a business based on relationships, CBL knows its business. "We like to stay involved with these retailers even if we don't have a deal in the works," says Snyder, who adds that it is this constant communication on both sides that cements a developer-retailer relationship. "We are trying to earn their trust, and retailers know who has offered them productive deals in the past."

Although regional malls have been a big part of the company's development history, the future may depend more on the company's community center business. However, CBL's management expects to continue work on both property types.

"Consolidation of the department stores, the challenges of getting development approvals, and meeting environmental regulations are all problems that slow down the mall business," says Lebovitz. "And there is no question that there is a limited number of new mall sites."

Thus, community centers will remain a major part of the company's portfolio. However, Lebovitz stresses that mall development will always be important at CBL.

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