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As Mall REITs Recover, are they Overvalued?

In the depths of recession, after big-name retailers flipped off their lights for good, lenders everywhere warned landlords of the penalties for violating loan covenants. Marshall Loeb, president of mall owner Glimcher Realty Trust, remembers all too well when drowning retailers threatened to pull his company under.

As Glimcher lost rental income, the Columbus, Ohio-based real estate investment trust (REIT) drifted closer to the financial danger zone. The company risked losing its financing, and incurring punitive legal actions by the lender and tax consequences. But it navigated the dangers. “Most of those retailers we lost were struggling in a good economy,” says Loeb. “When things went bad — euthanasia is probably too strong a word.”

Like so many mall owners, Glimcher was highly leveraged and its debt acted as an albatross. But over the past 12 months, the REIT has made wrenching decisions to improve its balance sheet. The toughest was committing to sell a majority stake in two of its choicest properties, the 1.5 million sq. ft. Lloyd Center in Portland, Ore., anchored by Nordstrom and Macy’s, and the 1.1 million sq. ft. WestShore Plaza in Tampa, Fla., with its Main Street design, Saks Fifth Avenue, Ann Taylor and Maggiano’s Little Italy restaurant.

Glimcher made a deal with The Blackstone Group, the New York-based private equity goliath. Blackstone snapped up a 60 percent interest in each of the centers, a combined transaction valued at $320 million that closed in March. Glimcher continues to manage the two assets.

A year earlier when it needed capital, Glimcher had sold six lower-quality malls, but by early 2010 there was no market for underperforming properties. “We made sacrifices for the good of the company,” explains Loeb. Today, the retail REIT is still standing, as are others whose executives made sacrifices for the good of their companies.

Hard decisions

REITs have had little choice in making tough calls. “There were lots of companies on the ropes last year,” says Keven Lindemann, director of real estate at research firm SNL Financial, based in Charlottesville, Va.
The harrowing financial crisis that has bled nonfarm payrolls by approximately 8.2 million since December 2007 profoundly damaged consumer spending. Thousands of store closures compelled landlords to grant concessions to keep struggling mall tenants. That left owners with dangerously high levels of debt.

REITs had a dire need for capital to pay down their debt at a time when lenders balked at refinancing. And they needed cash to cover expenses. Options were few. Some REITs sold properties or sent them back to the lenders. Others raised millions of dollars of equity, which diluted the value of shareholders’ stock. They paid dividends in shares to conserve cash.

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