By and  on November 24, 2008

Real estate investment trusts are being tested as never before.

Although many of the larger regional mall REITs are hanging on in the face of the economic firestorm, executives expressed growing concern amid a resurgence of the credit crisis and sinking consumer confidence and spending.

Fear over the abilities of REITs to refinance their debt has driven their share prices perilously low.

The highest-profile casualty is General Growth Properties, which has an interest in more than 200 malls nationwide and $900 million in mortgage debt maturing on Las Vegas properties this week. At the close of trading on Friday, shares of the Chicago-based firm had fallen from a 52-week-high of $49.79 to just 41 cents as General Growth confirmed reports that it had hired bankruptcy counsel.

“They took on too much debt, and in the end they got hurt for it,” said Richard Moore, an analyst with RBC Capital Markets.

Moore said General Growth has attracted potential buyers for some of the properties it put on the market to raise capital, but the credit freeze is even affecting those deals.

“They have significant interest in those assets,” he added. “But again, the buyers need to secure debt.”

Shopping center operator Developers Diversified Realty has had more success, announcing $270 million in net proceeds from asset sales in late October. But the sell-off hasn’t helped the trust’s stock price, which had declined more than 70 percent in November to $2.75.

Not surprisingly, retail REITs that are free of solvency concerns have fared well with analysts relative to the overall decline in commercial real estate.

“Vornado’s liquidity remains among the best in the REIT group with over $1.5 billion of unrestricted cash and liquid securities on its balance sheet, and its available credit line capacity is about $2.4 billion — well in excess of debt maturities through 2010,” J.P. Morgan Securities analyst Anthony Paolone wrote of Vornado Realty Trust in a Nov. 4 research note.

Mall operator Simon Property Group also won praise for its ability to address its debts. “Simon remains our top pick in the mall sector,” wrote Banc of America Securities analyst Christy McElroy on Nov. 3. “Having addressed ’08 debt maturities, Simon has adequate sources of capital to address $1.9 billion of ’09 maturities.”

There may be no bigger problem than debt.

“Issues around the debt structure are overwhelming,” said Sam Chandan, chief economist at real estate analysis firm Reis Inc. “Embedded in the debt structure is the assumption that occupancy would stay stable and that rents would continue to grow.…In 2006 and early 2007, the market’s expectations were pretty aggressive.”

“We’re expecting retail vacancy rates to go to 10 to 11 percent next year from 7 to 8 percent this year,” said Deutsche Bank analyst Louis Taylor. He added, however, that he didn’t think the current economic conditions would change the REIT model in the long run. Taylor said that REITs had learned from past bankruptcies to diversify their tenant lists.

For the third quarter ended Sept. 30, Simon Property Group, Taubman Centers, CBL & Associates Properties Trust and Glimcher Realty Trust exceeded analyst estimates. Macerich Co., Pennsylvania Real Estate Trust and General Growth Properties missed analysts’ consensus estimates.

Last week, activist investor William Ackman continued his quest to turn the land on which Target Corp. stores sit into the largest REIT in the world. Convincing investors of the plan’s viability could be difficult, given the performance of the industry in a devastating year. As of its Thursday close at 61.06, the FTSE NAREIT All REIT index, compiled by the National Association of Real Estate Investment Trusts, has given up 60.9 percent of its 2007 close of 156.07.

“The biggest drivers in the decline in share prices of REITs is the relatively high levels of leverage in the REIT universe and the fact that there’s a big question as to whether REITs are going to be able to refinance this debt,” Ackman said. “If you were to rank REITs by highest decline in share price over the last two months, all you’d need to do is figure out when their debt comes due. If the debt comes due in a relative short term, the stock prices have been decimated because of fear of their inability to refinance. Even if REITs can refinance, the concern is that new debt is going to be repriced at materially higher rates than current rates.”

Ackman’s proposed Target REIT would be debt free.

The shuttering of retailers such as Steve & Barry’s, Circuit City and Mervyns has contributed to higher vacancy rates and lower or flat rents. And there could be more empty stores, as the survival of several retailers beyond Christmas is uncertain.

Empty space may have been seen as a good opportunity to upgrade with new tenants a year ago, but with few new concepts on the horizon and many chains announcing scaled-back expansion or closures, retailers with the ability to open new stores aren’t lining up at the mall door. Companies launching new units are often asking for cheaper rents and other concessions.

PREIT, which operates properties in 13 states, said the health of the centers varies by geography.

“The whole country is about to go into recession,” said Edward Glickman, president and chief operating officer. The major issue for PREIT is the difficulty in securing mortgage financing. “It impacts development and impacts projects that are in the process of being developed.”

PREIT is working on a redevelopment of the Cherry Hill Mall in Cherry Hill, N.J., where a new Nordstrom is being built. The Voorhees Town Center in Voorhees, N.J., and Gallery Mall in Philadelphia also are getting facelifts.

“We recently completed a power center, Monroe Marketplace, in Sudbury, Pa., and we’re working on another power center,” Glickman said. “In this type of economy, people trade down and look for value. Until the economy brightens, they will hunt for the best product at the cheapest price.”

Sales per square foot for PREIT centers is inconsistent across the portfolio.

“Some properties are up, others are down, and there doesn’t seem to be any rhyme or reason,” Glickman said. “As of September, sales per square foot are off slightly. We all expect Christmas to be difficult. In areas where gas looks like it will break below $2 per gallon, it might be easier. Many retailers are financially stressed. The quality of the Christmas season will be part of their decision-making process [on whether or not to go forward]. They’ll think about staying as long as they can get access to credit.”

Glickman described the credit crisis as “pervasive. Our hope is that the government insists that the banks it is supporting with the [$700 billion] bailout lend that money. We, as an industry,have to demand it. Unfortunately, at the moment, we’re between two administrations and it’s very difficult to get any consensus. It’s unclear as to who’s listening. We hope [President-elect Barack] Obama’s transition team will address this. It’s going to hurt a lot of us until we get back on track.”

The travails of GGP could present opportunities for stronger REITs. “We are an opportunistic company and are always looking for opportunities,” Glickman said. “The dramatic decline of REIT stock prices makes it difficult to make acquisitions. We’re window shopping. Our credit card is full right now.”

Retailers scaling back plans for new stores have made it difficult for Glimcher to implement its strategy, said Marshall A. Loeb, president and chief operating officer.

“We are feeling it first in our stock price and in our debt financing,” he said. “What we’re hearing a little more is that retailers want to be in the mall but are having trouble with their financing. Some things we can overcome. If someone says they don’t like their location in mall, I can work with that, but I can’t solve their financial problems.”

Loeb said that the new supply of stores “has just completely dried up. I can’t imagine that we wouldn’t have a number of retailers filing bankruptcies or closures [after the holidays].”

Glimcher Realty Trust is getting creative with its leasing. If traditional anchors and in-line stores are not expanding, the company will consider nontraditional users. “We would love to have Target as an anchor,” Loeb said. “We’ve looked at movie theaters and we’d look at any number of things. Barnes & Noble is a nice anchor. We just opened an L.A. Fitness Center in one of our malls. With a health club, you have someone visiting your mall several times a week, and on some of those trips, they may eat or shop. We’ve kicked around the idea of grocery stores, which they have in Australia. We’ve talked to Whole Foods and Trader Joe. That would be an interesting way” to fill space.

Although there isn’t a lot of new construction, Glimcher’s pipeline hasn’t completely shut down. The company is developing Scottsdale Quarter in Scottsdale, Ariz., across the street from Kierland Commons. The mixed-use property will have 600,000 square feet of retail space. Williams-Sonoma, West Elm and Hennes & Mauritz are among the chains that have signed leases.

In California, which has been hard hit by home foreclosures, Glimcher’s experience doesn’t exactly match the headlines, Loeb said. “We’re opening a new Forever 21,” he said.

Jersey Gardens, a center that combines factory outlet stores with off-pricers and full-priced retailers, is doing well, benefiting from its proximity to Newark Liberty International Airport and an influx of international consumers. “We’re struggling in malls that were struggling before the downturn,” Loeb said.

Macerich, whose high-end malls include the Shops at the Biltmore Fashion Park in Phoenix and Scottsdale Fashion Square Mall, has been less affected by the retail closures than other centers.

“In the past, we’ve seen more of the big-box retailers restructure,” said Tony Grossi, senior executive vice president and chief operating officer. “The big-box retailer for us is a peripheral part of our business. Steve & Barry’s and Comp USA, these folks for us are peripheral. For many locations, we’ve already found better tenants. The core of our business is still operating well. Occupancy in the last quarter has held up at almost 93 percent. While retailers are dealing with reluctant consumers, they’re resilient, as well.”

Grossi said upscale malls absorb shock better than B malls. “Fundamentally, I don’t think the retail model is broken,” he said. “While this type of economy knows no friends, the top half of our portfolio does sales of $575 per square foot.” Nonetheless, Grossi said, “we’ve got our eye out on the retail industry.”

Macerich fortuitously planned projects in Arizona far enough out — 2010 or 2011 — to see the economic crisis subside before a shovel hits the ground.

“We have projects on the drawing board in North Phoenix, One Scottsdale and Palisene, two of the best pieces of dirt for future consideration,” Grossi said. “We also have a site in West Phoenix, Estrella Falls. We’ll bring those on line as conditions warrant. We’re planning and will introduce the product at a time that’s responsible for the growth of that market.”

The economy has been responsible for the derailment of one Taubman project, Macao Studio City in Macao. “Clearly, financial markets are very difficult,” said Robert Taubman, chairman, president and ceo. “We recently stated that the project is temporarily delayed until the project gets financing.”

The company is moving forward with a project under construction in Salt Lake City and is working on other developments such as University Town Center in Sarasota, Fla.; The Mall at Oyster Bay, in Oyster Bay, N.Y., and developments in Atlanta, Puerto Rico and Songdo, in South Korea.

“We expect that, if the economy continues to deteriorate, there will be opportunities for acquisitions of properties, including some of GGP’s,” Taubman said. “We will look at these individual opportunities to see if they make sense for us.”

Sales per square foot at Taubman malls increased 0.5 percent for the third quarter and 2.3 percent for the nine months ended Sept. 30. “While we are optimistic by nature, given what we are seeing, we expect it to be a challenging holiday,” Taubman said.

Taubman’s comparable occupancy rates also increased in the third quarter. “Through September, our bankruptcy filings were relatively low at 1.5 percent of leases,” he said. “Despite reported weak sales performances, retailer balance sheets are in fairly good shape.” If vacancies are created, Taubman has a list of concepts that have or will debut in malls, including A’gaci, Nike, Adrenalina, Best Buy Mobile, Gilly Hicks, Kira Plastinina and Ralph Lauren Children.

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