Sandeep Mathrani, chief executive officer of General Growth Properties, offers an unvarnished view of America’s retail landscape.
“Thirty percent of all retail should go away in the U.S. I am talking about 30 percent of strip shopping centers, 30 percent of power centers, 30 percent of outlet centers, 30 percent of lifestyle centers and 30 percent of malls,” Mathrani plainly stated. “Obsolescence and competition from other bricks-and-mortar is the cause of the demise.
“America is over-retailed. America has 24 square feet per person,” he added. “Canada has 15. Australia has 10. The U.K. has five.”
The economy isn’t helping the situation. “It’s OK, not great, growing at 2 percent” and possibly headed for a “mild recession in late 2017 or 2018,” Mathrani predicted.
“I actually believe that the emerging-market nations’ debt and forfeits within emerging-market debt will have an overhang, because it’s all dollar-dominated debt. Eventually that global slowdown will have an impact on us. You can’t deny a Chinese slowdown, a European slowdown. We can’t be an island to ourselves. This will have an impact. Our savior will be consumers. They have increased their savings rate, and hopefully they will unleash their wallets.”
At the New York office of the Chicago-based GGP, Mathrani made his case for why, in a tough business climate, the nation’s second-largest mall operator can “organically” grow 4 to 5 percent over the next two years. In a rare interview — he says he’s been “under the radar” — Mathrani cited the company’s “streamlined” portfolio focused on class A properties; refuted prevailing perceptions that mall traffic is dying; cited a consumer “flight” to better malls as weaker ones close, and outlined opportunities to renovate and remerchandise GGP shopping centers.
The Bombay, India, native said at the age of 16, he immigrated to the U.S. against his father’s will and developed a passion for real estate and dealmaking initially by selling an apartment at a $20,000 profit about a year after buying it.
“Our strategy is very simple: to be the owner of best-in-class retail assets in America,” Mathrani said. “That means A malls, and urban retail assets,” including a few Fifth Avenue buildings. “Over the last five years, we have sold over 60 malls. Today, we own 128 retail properties, and we own 100 of the top 400 malls in this country. We want to be purely retail-focused.”
Among GGP’s flagship properties is the 2.2 million-square-foot Ala Moana mall in Honolulu, the world’s largest open-air center, which was just overhauled to the tune of $700 million. There’s also Tysons Galleria in McLean, Va.; Glendale Galleria in Los Angeles; Fashion Show in Las Vegas, and Chicago’s Water Tower Place.
The real estate investment trust has a market capitalization of $25.5 billion and 125 million square feet of retail space generating $584 a foot. Last year, the firm increased same-store net operating income by 4.8 percent, while earnings before interest, taxes, depreciation and amortization grew 5.4 percent. Funds from operations, or FFO, per diluted share grew 8.7 percent from the year-ago period to $1.38 billion. The stock is hovering around $28, close to its 52-week high of $30.30.
“In our portfolio, 94 percent of our net operating income comes from very high-quality assets,” Mathrani said.
As overexpanded retailers and weak malls shut down, “There is a flight to quality where the top 500 malls would actually be the beneficiaries,” Mathrani said. “We are going to be the beneficiary of the demise of surplus real estate.
“We believe we can grow organically our EBITDA 4 or 5 percent over the next two years so we don’t have to go out and acquire assets,” he continued. “At this moment in time, we are not in the acquisition business. It is very hard to buy A malls. Very few come up for sale. When they do, we are definitely a player.
“But we elected to grow externally by owning street retail.”
That part of the portfolio includes the Crown Building on 57th Street and Fifth Avenue in Manhattan housing Bulgari, Piaget and Mikimoto; the retail portion of 530 Fifth Avenue between 44th and 45th Streets, which houses Desigual and Fossil; 830 North Michigan Avenue in Chicago, which houses Uniqlo, H&M and Topshop, and One Stockton Street in San Francisco, which has an Apple store.
As for that “mild recession” for late 2017 or early 2018, Mathrani said, “We want to be positioned to be opportunistic if one does occur. It means you complete your development deals that have exposure. It means you make sure you only start projects that are 100 percent leased. It means you make sure your balance sheet is in the healthiest position it can be, and that you have sufficient cash to take advantage of [acquisition] opportunities that could arise. Our opportunities are either malls or street retail.”
For the 53-year-old Mathrani, his ceo role is that of “an operator” intent on connecting with the GGP people on the ground. “It’s about providing leadership, providing strategy, providing resources. I talk to my people all the time. I love it.”
He said he’s on the road two days a week, visiting malls — and not just GGP’s. Recently, he visited GGP’s Oakbrook Center and then stopped by Woodfield Mall, which is owned by the Simon Property Group, the nation’s largest mall operator. Both malls are in the Chicago suburbs.
“I walk through and see what the traffic is like, what the shopper demographic profile is, to see the stores themselves and the new stores as they open. [Oakbrook is] an A-plus mall that continues to capture market share. The curation has been dramatic. We put in what I like to call the ‘new generation’ of retailers — the Teslas, the Microsofts, the Apples. We are working on a name e-commerce retailer that is opening brick-and-mortar stores.”
It’s believed to be Warby Parker.
GGP can capture additional space at Oakbrook as a 50-50 partner in the Sears store, as part of the Seritage real estate investment trust, controlled by Edward Lampert, chairman and ceo of Sears Holdings. GGP can re-tenant half the existing Sears space. “This is a mall that continues to evolve,” Mathrani noted. “We spent extensive capital over the last two years to renovate the mall.”
After the walk-through, he said, “I spend a lot of time meeting with the property managers and the asset management team on the ground. I do that for multiple reasons. One is because they are the heart and soul of the company. They make these malls, which are really small companies, work. It is important for them to connect with upper management. It’s important for me to connect. You learn about their wins and their losses,” like a strong opening, or a robbery. “When I meet our people on the ground, we talk about those. We talk about how corporate can enable them to be better operators. Our job as leaders is to provide the appropriate resources for the individuals to win and to provide strategic guidance. There’s a subjective side and an objective side to running a company. The objective side is pretty easy: earnings per share, FFO growth, EBITDA. They’re numbers. People get them. From 2012 to 2016, the numbers have been pretty spectacular — peer leading. What people don’t really talk about is the subjective side — our core values and our culture. It’s really the DNA of our family, the thread that keeps all of us together. Our core values are humility, attitude and to do the right thing. Be together.”
GGP’s largest redevelopment project is the 1.3 million-square-foot Staten Island Mall, with a 160,000-square-foot addition planned for fall 2017. According to Mathrani, the space is essentially pre-leased to retailers including Zara and Dave & Buster’s.
In Norwalk, Conn., GGP is building a 700,000-square-foot mall called the SoNo Collection, where Bloomingdale’s and Nordstrom will be anchors. It’s expected to open in fall 2018.
And with Seritage, GGP is a partner in 12 Sears sites where it can remake 50 percent of the square footage at each location. “All of them will get redeveloped,” Mathrani said. “We will start a handful this year. Basically, half of it will get leased to other retailers, whether they be sporting goods, entertainment, restaurants, or in-line tenants. Each one is different.”
Over the last five years, GGP’s $2.3 billion capital program has touched more than 90 assets and redeveloped 80 department stores. There’s still $800 million to $1 billion of redevelopment in the pipeline for the next three or four years.
Mathrani came to the U.S. as a Rotary Club exchange student, attending Phoenixville Area High School outside Philadelphia. After high school, he got a scholarship to Stevens Institute of Technology in Hoboken, N.J., where he studied to be a civil engineer.
When Mathrani was in his early 20s, he sold his Nissan Sentra to help pay for an apartment. “It was a seminal moment in my life to buy an apartment, but I think the real seminal moment was when I learned that you could sell the apartment at a healthy profit, which sort of led me to say I want to be in real estate,” instead of engineering.
“I remember it like yesterday. It was a two-bedroom apartment at 4600 Duke Street in Alexandria, Va.,” where he worked as an engineer at a construction management company. He bought it for $55,000 and about a year later sold it for $75,000.
He started his career designing shopping centers in 1989 for a former real estate firm, Sanford Nalitt, which owned strip centers in Staten Island, New Jersey and Pennsylvania. He later joined Forest City Ratner, working for Bruce Ratner, who became a mentor, and launched Ratner’s New York retail practice. “I learned how to be humble, how to navigate process, and never give up. Never give up,” Mathrani said.
Then he became an executive vice president of Vornado, and president of the retail group. Mathrani re-tenanted more than 70 strip shopping centers and spun off the retail entity into Urban Edge.
In 2010, Mathrani — whom sources describe as a whiz with numbers, an extraordinary deal-maker, decisive and aggressive but in a nice way, and opinionated but not too hard-ball — joined GGP a year after it went bankrupt with $27 billion in debt. It was the largest bankruptcy by a mall operator. Mathrani became part of the team orchestrating the restructuring, which involved a new deal with banks, a capital infusion from Blackstone, Brookfield, Fair Home, Texas Teachers and Pershing Square in exchange for equity, and two big spinoffs, of the Howard Hughes Corp., and the Rouse Properties. It was there Mathrani solidified a reputation of a great “curator,” of the real estate portfolio and of the tenant mix at individual malls.
“Effectively the strategy was developed by this management to own best-in-class properties only in America. We sold our B malls and everything not mall-related, restructured over $19 billion in debt over the last five years, and got into owning some urban retail.
“We obviously made our company a lot more streamlined.”