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Mall REITs Pursue Multiple Strategies in Dealing with Tenant Troubles

They all share a common long-term goal for their businesses, however: a focus on class-A properties as the most efficient way to deliver value to shareholders.

PREIT declared that the old business model of malls relying heavily on apparel and accessories tenants is dead. Simon Property Group continued its expansion overseas. General Growth Properties (GGP) made headlines by discussing “strategic alternatives,” and Macerich refined its portfolio by selling off several assets.

Each mall REIT had a different story to tell investors in the early rounds of recent quarterly earnings reports. They all shared a common long-term goal for their businesses, however: a focus on class-A properties as the most efficient way to deliver value to shareholders. Those priorities shone through during earnings calls.

For PREIT: A new industry model is rising

Investors who continue to envision a regional mall as palatial space overflowing with apparel chains will not see eye to eye with executives at Philadelphia-based PREIT.

“The historical view of [the] mall, one that relies heavily on apparel and accessories, really is dead and a new model is rising,” Joseph F. Coradino, PREIT’s CEO, said during the company’s earnings call on April 1. He added that the company is taking a consumer-driven approach to creating its tenant mix, especially when it comes to replacing vacant department stores. “Today's consumer craves a variety of offerings and is agnostic as to where they shop, they want [it] all and a personalized social experience in one place.”

To that end the company has focused on selling off underperforming assets and bolstering the remaining malls as places where consumers can find as much entertainment as they do outfits.

It replaced the Sears at Capital City Mall in Camp Hill, Pa. with a Dick’s Sporting Goods, and another Sears, at Woodland Mall in Grand Rapids, Mich., was replaced with a Von Maur, a high-service fashion anchor. In a sign of its commitment to include more entertainment tenants in its malls, the company added a LEGOLAND Discovery Center to the Plymouth Meeting Mall in Philadelphia.

The payoff: PREIT’s sales per sq. ft. increased to $465. Leasing spreads for non-anchor space reached 92.1 percent, an increase of 160 basis points over the previous quarter. Same-store net operating income (NOI) was flat, however, due to department store closures and bankruptcies among in-line tenants.

For Simon: Foreign correspondent

In its call on April 27, Simon CEO David Simon highlighted the REIT’s international expansion efforts through its joint venture partnerships. In April Simon opened Siheung Premium Outlets in Seoul, South Korea, with partner Shinsegae Group. Also in April, it opened the Provence Designer Outlet, the first luxury designer outlet in the South of France, along with partner McArthurGlen Designer Outlets.

The company’s NOI for its total portfolio in the first quarter reached 5.6 percent. Retail sales averaged $615 per sq. ft., compared with $613 per sq. ft. during the same period a year ago. Comparable property NOI was up 3.8 percent.

Building on that, executives with Indianapolis-based Simon noted that had the metrics been observed on a NOI-weighted basis, the portfolio’s picture would have been even better. By that measure, the portfolio’s sales per sq. ft. would be $765; the average base minimum rent would be $67.60, compared with $51.87; and leasing spreads would increase to 16.4 percent, compared with 13 percent, they said during the earnings call.

Yet the REIT did sound one cautious note. It reaffirmed its previous guidance that net income for 2017 would be between $6.50 and $6.60 per diluted share, and FFO would fall between $11.45 and $11.55 per diluted share, according to the company’s first-quarter earnings statement.

“There is a range of outcomes that's a little harder to predict,” Simon said. He added that he is hopeful retailers will stay focused on improving their in-store experience for consumers. “I'm hopeful that they're going to reinvest in their stores, improve their inventory mix and service their customer better.”

For GGP: No sacred cows

The ultimate value of a trophy mall property might be discovered through bids from eager investors. In the eyes of GGP CEO Sandeep Mathrani, however, the Chicago-based company’s current market value, $20.46 billion at press time, does not accurately reflect the true value of the properties in its portfolio.

“There is a wide discount between the private and public markets,” Mathrani said during the company’s first quarter earnings call on May 1. “The sum of the parts is far greater than GGP’s current price. We are reviewing all strategic alternatives to bridge the gap.”

Company officials are exploring a range of options. Those alternatives might mean monetizing one of its famed properties and using the proceeds to pay higher dividends or to buy back stock, Mathrani said.

Echoing the view that weighted NOI is the best way for REITs to highlight the quality of properties in a portfolio, Mathrani noted that GGP’s sales per sq. ft. on an NOI-weighted basis would be among the highest in the sector, at $705, for tenants under 10,000 sq. ft.

Floris Van Dijkum, a senior REIT analyst for Boenning & Scattergood, a Conshohocken, Pa.-based asset management firm, noted that GGP’s 45 class-B malls might represent as much as $8 billion if spun off in a sale. Mathrani acknowledged that, and reiterated several times throughout the earnings call that the management team was exploring many options to deliver value to shareholders.

“There is no sacred cow,” he said.

For Macerich: Withstanding setbacks and shedding assets

The Santa Monica-based REIT sold the Northgate Mall in Durham, N.C. and the Cascade Mall in Burlington, Wash., for a total of $170 million recently and used the proceeds primarily to fund a buyback of common stock, according to a statement from the company.

Despite the deals, Macerich posted mixed results for the quarter. The company acknowledged that recent tenant bankruptcies had a negative impact on the company’s results. Net income was $69.2 million, down from $420.9 million. It reported diluted FFO as $133.6 million, down from $141.0 million from the same period a year before.

Despite the setback in Macerich’s portfolio fundamentals, the company was able to snatch an important victory during the quarter. Sales across the portfolio increased to $639 per sq. ft. Trailing 12-month leasing spreads dropped slightly to 17.5 percent from 17.7 percent the previous quarter, the company said in a statement.

As consumers embrace e-commerce more and more, mall anchors and in-line tenants are forced to compete with digital channels. Many of today’s mall REITs are responding by supporting the retailers who have identified what appeals to the consumers who still make trips to malls, or diversifying their means of growth.

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