The economy is slowly recovering, but many department store chains continue to struggle. Against that backdrop, shopping center owners are pruning weak assets from their portfolios, a strategy The Rouse Co. (NYSE: RSE) has pursued for a decade. During that stretch, the Columbia, Md.-based development and management firm has sold its interests in 40 aging centers.
It has also been a selective buyer. Since 1993, Rouse has acquired 16 high-performing properties in select markets with strong demographics. Rouse's latest move came this spring when the company sold six properties in the Philadelphia area to Pennsylvania Real Estate Investment Trust for $548 million. Rouse simultaneously purchased a 50% interest in the 1 million sq. ft., 97% occupied Christiana Mall in Newark, Del., which sold for $200 million. Thomas DeRosa, vice chairman and CFO, talked with NREI about Rouse's disposition program and the company's strategy.
NREI: What's at the heart of your disposition strategy?
DeRosa: In an environment where sales are declining and retailers are struggling, what worries a mall operator is retailers vacating space, and the inability to collect the target rents. We believe that we are better positioned than most companies in the industry because we have sold off that lower-productivity space. If you're a national retailer, when you look to rationalize your business you're going to be closing stores in less productive locations. We feel that we are less vulnerable than we were in 1993 to store closures.
NREI: What's the state of your portfolio today?
DeRosa: We score malls on an A, B, C basis, with A malls generating more than $400 per sq. ft. and above. Back in 1993, about 65% of our mall portfolio would have fallen into the “C” category. Today, based on what we've done to the portfolio in terms of acquisitions and dispositions, it's flip-flopped. Now only 10% of our assets fall into the C category, and 90% are A's and B's.
NREI: In the competitive shopping center space, how does Rouse stand out?
DeRosa: We're a community development company, not a pure-play mall company. Although the biggest component of revenue for Rouse comes from retail, we look for our malls to be the town center, the place that people congregate. Take Staten Island Mall, for instance. Staten Island is a borough of Manhattan with a population of 550,000. To drive off and back onto the island you have to pay $7 in tolls. So, where do people shop? They shop at Staten Island mall. It's the only show in town, and that's our property.
NREI: Why do we see so few U.S.-based shopping center owners doing business overseas?
DeRosa: It's clearly a higher risk to go outside the U.S. In the United Kingdom the lease structure is much different than the leasing structure in the U.S. It's typical to have 30-year leases in London; in the U.S. we deal with 10-year leases. The basic legal structure of many [European] countries gives certain rights to the lessee, which can make it hard on the lessor. You have to decide as a public company if you are willing to take that risk and can get a superior return for your shareholders.