Retail REITS May Fare
Better Than in 1991 Recession
PHILADELPHIA -- Malls and shopping centers should fare better in the current economic downturn than in the recession of 1990-1991, executives of several retail real estate investment trusts said Thursday.
"Our sector is in much better shape than it was in 1990," Mark Pasquerilla, chairman, president and chief executive of Crown American Realty Trust, said during a conference call sponsored by the National Association of Real Estate Investment Trusts.
Retailer consolidation has left a stronger tenant base, according to Pasquerilla, whose Johnstown, Pa., company operates dominant malls in small Mid-Atlantic cities. In addition, he told Dow Jones Newswires later, there has been very little development of new malls in the past few years, making for a better balance between supply and demand.
Crown American in particular is "well-prepared for a more unfriendly environment," Pasquerilla said, explaining that the company has cut $5 million, or 25%, from its overhead in the past five years.
Gary Ralston, president of Commercial Net Lease Realty Inc., of Orlando, Fla., said during the call that the market had fewer vacancies before the current downturn, putting the sector in a better position.
Dan Hurwitz, executive vice president for leasing and development with Developers Diversified Realty Corp., said most discount retailers, which form a key portion of his company's portfolio, are able to maintain low costs. Because retailers saw slowing trends before the Sept. 11 terrorist attacks, he said, "I think people were well prepared for any aftershocks of Sept. 11."
Arlene Isaacs-Lowe, senior credit officer at Moody's Investors Service, agreed that fundamentals in the sector generally are better than in the early 1990s, but still sees challenges ahead for retail REITs. She noted that mall-store sales were down 1.5% during the Thanksgiving weekend from last year, which also saw a weak start to the holiday shopping season.
"We believe 2002 will prove to be a challenging year for maintaining occupancy and increased rent growth," Isaacs-Lowe said on the call.
Moody's is paying close attention to REITs with a lot of leases up for renewal or the need to sign leases for new centers. With some retailers closing stores, REITs may have a difficult time finding replacement tenants, she said.
Grocery, Drugstore Centers Considered Resilient
Some types of retail REITs are better positioned than others to weather the downturn, Isaacs-Lowe said. Shopping centers anchored by drug and grocery stores should be the most resilient because they sell merchandise that people need, she said. The expansion by Wal-Mart Stores Inc., however, poses a challenge to some centers, she added.
Community shopping centers are next on the resilience list, because they sometimes house drugstore and grocery stores, as well as "value-oriented" discount retailer anchors such as TJX Companies' T.J. Maxx and Marshalls, she said. Those anchor retailers, however, don't necessarily drive the bottom line or increase traffic to the rest of the centers, she said.
The fundamentals are less compelling for power centers, the shopping centers anchored by "big box" stores, according to Isaacs-Lowe, who cited potential problems replacing discount-store tenants, among other issues.
One bright spot in that area, however, is that home furnishings and home entertainment products showed robust growth over Thanksgiving weekend. If that reflects a "sustainable nesting phenomenon," said Isaacs-Lowe, power centers "could sustain better than anticipated."
Sales are holding up at outlet centers but ownership is fragmented, and consolidation and acquisition opportunities could place stress on some balance sheets, the Moody's officer said.
She considers regional malls the riskiest in the downturn, since specialty and department stores already faced difficult apparel sales trends that have worsened as the economy declined.
Problems at clothing retailer Gap Inc., which posted a loss in the third quarter and has been criticized for its merchandise selection, don't have the mall REIT executives worried about potential vacancies should the chain decide to close some stores.
Gap "cannibalized" Manhattan and other urban areas by putting stores "one on top of each other," but that's not an issue for mall companies such as Crown American, CEO Pasquerilla said.
The Gap store in a Crown American mall in West Virginia is the only one in a 40-mile radius, and therefore has "meaning," he said. "How much meaning do you think the 50th Gap store in Manhattan has or the 12th or 15th Old Navy store in Manhattan has?" he asked.
Gap has retooling work to do, but remains the most productive mall specialty retailer, Pasquerilla said. "I believe that Gap is going to turn things around, and if their merchandising gets right, real estate may not be the problem," he said.
Among other observations made on the call, Commercial Net Lease Realty's Ralston said he's seeing strong sales rent from the drugstore sector, a major concentration in the company's portfolio. Many chains are generating "remarkable numbers," he said.
Developers Diversified Realty's Hurwitz said his company's market-dominant discounter tenants, or category killers, expect a modest sales increase of 2% to 4% during the holiday season, and that so far, sales appear to be in line with those goals.
Developers Diversified should be able to maintain occupancy in its current 95% range, Hurwitz said.
At Crown American, Pasquerilla noted, third-quarter same-store sales for specialty store tenants were up 0.7%, compared with a 1.1% decline at mall REITs in general. "I think our malls have exhibited great strength over the past two years," he said. The specialty store tenants should see flat to slightly improved same-store sales for the year, Pasquerilla added.
While bankrupt tenants should continue to close stores in the first half of next year, "we think, probably, the worst has been behind us," Pasquerilla said.
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