This article first appeared in the St. Louis Beacon, Dec. 15, 2008 - Mall owners are getting nervous as the domino effect of a recession works its way through the retail sector.
The formula for anxiety is based on years of aggressive expansion and the inhaling of debt to finance growth. Now, the bills are coming due when consumer confidence is low, unemployment is rising and retailers are struggling.
Consumers are less willing to spend in the way that they have propelled the economy in recent years. The makers of retail goods -- from shoes to electronics to furniture -- are cutting back because of a projected lower demand amidst a string of well-publicized retail setbacks.
"Retail is a heartbreak," says Jim Fisher, associate professor of marketing at Saint Louis University's John Cook School of Business. In addition to a feeble economy and constantly changing retail concepts and fashions, "malls are not quite the magnets that they once were."
As a result, the stocks of many publicly traded real-estate investment trusts, which own or manage malls and shopping centers, are getting hammered.
"How can anyone like stocks with consumer exposure going into a consumer-led recession that we think could be deep and long?" asks a recent research report by Stifel, Nicolaus that analyzes real estate investment trusts, best known by the acronym REIT.
Stifel isn't ready to administer last rites for REITs. In fact, it just raised its rating to "buy" on 13 REITs, including several specializing in malls and shopping centers. Stifel analysts believe the financial foundations of these REITs are more solid than those of their peers; and their stock prices have reached bargain levels.
Still, the retail REIT retreat includes many companies with properties in the St. Louis area, Metro East and outstate Missouri. Some of these firms' shares are off by more than 80 percent in the last 12 months.
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CHAIN REACTION
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Publicly traded REITs face two major problems. One occurs at the corporate level because REITs are constantly refinancing debt to meet dividend payout standards required by the Internal Revenue Service. A so-called equity REIT must pay 90 percent of its taxable income to shareholders every year. It must generate at least 75 percent of gross income from investments in, or mortgages on, real estate.
"When credit is scarce, refinancing becomes difficult, and in some cases, impossible," says Todd Lukasik, who tracks retail REITs for the financial research firm Morningstar.
The second problem comes when consumers cut their spending, and retailers -- the mall tenants -- suffer. "In such an environment, tenants may pursue better lease terms, scale back expansion plans, close existing stores or even file for bankruptcy," says Lukasik.
Eventually, retailers' woes become mall owners' headaches "in the form of lower occupancy rates, lower lease rates and greater tenant concessions," he adds.
A troubled REIT doesn't necessarily mean that an individual mall or shopping center is imperiled. Large REITs can shrug off problems at a few sites because they can own hundreds of properties in this country and abroad.
Likewise, a parent's financial distress doesn't automatically mean that a healthy mall will be hurt. At the least, a healthy property could be sold to help the parent pay off its debts in a bankruptcy reorganization. Just hope that the new mall owner is in better shape than the current owner.
The eroding economy creates a scary prospect for investors who flock to REITs for their high dividend yields. Stifel says 25 REITs, covering retail and other areas such as offices and industrial buildings, have reduced or suspended dividends this year. Stifel expects more dividend cuts.
Meanwhile, mall owners are watching the retailers, who are watching the returns from the holiday shopping season -- the most important indicator of a retailer's health and future. "It's a battle between consumer pessimism and the marketing prowess of retailers," says Fisher of Saint Louis University.
At the moment, pessimists are prevailing. On Friday, the Commerce Department said retail sales for November were 1.8 percent below sales in October, the fifth consecutive monthly decline. The November figure was 7.4 percent below the November 2007 result. However, sales at department stores rose a surprising 2 percent.
Last week, the research firm ShopperTrak said foot traffic at shopping outlets fell 16.7 percent in November versus the same period last year. There was a 12.4 percent drop in October versus the year-ago period and a 9.3 percent decline in September. The consumer is "uncertain" and the retail marketplace is "volatile," ShopperTrak said.
The International Council of Shopping Centers recently said chain-store sales fell a record 2.7 percent in November versus November 2007 on a same-store basis.
The trade group has cut its November-December holiday sales forecast to flat or down 1 percent compared to the same period a year ago. That's the second downgrade since October, when the council predicted a 1.7 percent sales growth for November-December.
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SLUMPING STOCKS
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For St. Louis consumers, REITs aren't exactly household names because the largest publicly traded ones aren't based here. Perhaps the best known, thanks to unwelcome headlines, is General Growth Properties. The Chicago-based firm owns or manages more than 200 malls and shopping centers in 44 states, including the Saint Louis Galleria.
For the 12 months ended Dec. 12, its stock has fallen 96 percent, and it is walking a tightrope of bankruptcy. The company recently got a last-minute extension from certain lenders, but many analysts believe the next step is a Chapter 11 reorganization.
The debt burden has "reached the point where even strong malls in Missouri or other markets probably won't allow it to avoid bankruptcy," says Morningstar's Lukasik.
In early December, a General Growth spokesman told the St. Louis Beacon that the Galleria won't be affected by its parent's problems. In November, a spokesman was quoted in the Columbia Tribune as offering the same assurances for Columbia Mall, in Columbia, and the Capital Mall, in Jefferson City.
General Growth also manages Branson Landing, in Branson, and the struggling Northwest Plaza, in St. Ann, which is being restructured and renamed Lindbergh Town Center. The mall is owned by a pair of private California companies involved in real-estate investment and development. They say the renovation should be completed next year.
Analysts say General Growth has been hurt by its debt-filled acquisition of the Rouse Co., a Maryland-based developer, in 2004 and aggressive expansion. "Punch-drunk on easy credit" is how a recent Morningstar report described it.
General Growth recently announced a refinancing of some debt; and it is seeking extensions on other debt obligations. Morningstar says the company is deferring development projects, "including improvements that it has historically offered customers." That could put its malls at a competitive disadvantage, "and it may lose business."
MORE MARKET MALAISE
General Growth is one of several retail REITs with a strong Missouri connection whose stocks trail the Standard & Poor's 500-stock index. For the 12 months ended Dec. 12, the index was down 41 percent.
The stock of CBL & Associates Properties, was off 78 percent. CBL has five Missouri properties: the Chesterfield Mall; West County Center in Des Peres; South County Center; and Mid-Rivers Mall in St. Peters.
Kimco Realty, which focuses on shopping centers, has seen its stock fall 59 percent. Kimco has 23 Missouri properties, most of which are in the St. Louis area. The largest local property is Kirkwood Crossing with just over 249,000 square feet.
Another large REIT is Developers Diversified Realty, which owns and operates shopping centers smaller than 100,000 square feet and what it calls regional power centers -- larger units such as the 342,000-square-foot the Plaza at Sunset Hills. It has 11 Missouri properties, most of which are in the St. Louis metro area, and more than 660 properties, primarily in the U.S.
The company's website lists 50 shopping centers up for sale, although none is in Missouri. It is selling assets to deal with "large debt maturities at the most inopportune time," says a recent Morningstar report. "Asset sales are proving very difficult in the current environment." The stock is down 86 percent over the last 12 months.
The stock of Regency Centers, which has 23 Missouri properties, is down 44 percent. Most of Regency's Missouri properties are shopping centers with less than 100,000 square feet and most are in the St. Louis metro area. The largest is Kirkwood Commons at just under 210,000 square feet.
Some analysts, such as Stifel's David Fick, like Regency's strategy of anchoring most of its properties -- about 80 percent -- with grocery stores. This provides a steadier flow of business during an economic slump, and that's one reason he raised his rating to a buy last month. "Regency has less exposure to discretionary spending-focused tenants," he says in a recent report.
The drawback to Regency, warns a recent Morningstar report, is that it has many projects in progress. Nearly three-fifths of its business is in three states: California, Florida and Texas, all of which have been hit hard by the housing crisis.
Most Wall Street analysts remain on the fence about Regency; the number of "hold" ratings is twice the number of "buy" ratings, according to data compiled by Thomson Reuters. "Hold" and "sell" recommendations significantly outpace "buy" ratings for General Growth and for CBL. "Holds" and "sells" slightly outnumber buys for Developers Diversified and for Kimco.
The one exception among REITs analyzed by the St. Louis Beacon is Simon Property Group. Sixteen analysts have "buy" ratings; one is neutral. Simon can "weather the storm better than all of its peers," says Fick, in a recent report, as he raised his rating to "buy." "Simon is in a better position to re-lease store closures than any of its peers.
The analysts' faith remains even though Simon's stock has skidded by 46 percent in 12 months. Simon owns or manages eight Missouri properties, ranging from an 86,000-square foot factory outlet in Lebanon to the 1.2 million-square foot St. Louis Mills. Simon is the largest American retail REIT based on revenue and market capitalization
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PREDICTING THE REIT STUFF
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When Morningstar evaluates a REIT's danger signs, it looks at high leverage, high debt maturities and a large list of new projects.
"With debt maturities comes refinancing risk and the possibility of financial distress if refinancing is unavailable," Lukasik explains. "One can never be certain of the eventual consumer demand for new retail properties, so they are inherently risky."
Although Morningstar also looks at sales per square foot, population density and average income in the area surrounding a mall, Robert Lewis examines many local factors.
Location, transportation access, population trends, demographic trends, income trends and competition are part of the complex mosaic determining a mall's future, says Lewis, president and principal of Development Strategies, a St. Louis firm that provides economic research, consulting and appraisal services.
Using all or some of these criteria, Lewis says struggling malls include Northwest Plaza, Jamestown Mall, Crestwood Court and Alton Square Mall.
The St. Louis retail scene is "overbuilt," he says. That means there are too many with "empty space or low occupancy rates in places that are no longer on the beaten track."
However, St. Louis is not unique. "Nationwide, we have twice as much retail space as we need," he says.
Builders keep building because people keep moving, putting pressure on the owners of existing malls and shopping centers. "Retail can fail even with good demographics if there's poor location or poor access," Lewis says.
Lewis says mall owners get worried once a property's vacancy rate enters the 12-15 percent range. "It's hard to renegotiate leases and find high-grade tenants," he says.
So, imagine the distress among mall managers who must cope with the recent bankruptcies of Circuit City, KB Toys and Linens 'n Things, among others.
And if the mall loses an anchor tenant, such as a giant department store, it will be weakened if it can't find a replacement. "An anchor won't leave if the mall is sustainable," he says.
Although Lewis expects the weak economy to cause a shakeout at local malls and shopping centers, the St. Louis area won't be as hard hit as other parts of the country. "We didn't grow as grotesquely," he says, "so we won't crash as grotesquely."
Robert W. Steyer is a freelance business journalist living in New York.