Updated, 5 p.m.: Comment from Doug Adams.
NORWALK, Conn. — Mall developer GGP is considering expanding the retail component of The SoNo Collection, GGP CEO Sandeep Mathrani said Monday.
This, as GGP seeks local governmental approvals to reduce the square footage of the project by getting permission to not build the hotel that had been planned.
Mathrani, in a conference call Monday to explain and respond to GGP’s quarterly report, also said that investors are keen on the project and it’s possible that The SoNo Collection might become a joint venture. Also of note, given GGP’s request to amend the definition of Class A anchor, Mathrani mentions that GGP has recently leased mall space to a German grocery store. And Mathrani twice declined to rule out selling GGP, both times using the phrase, “There is no sacred cow.”
A recording of the conference call is available on GGP’s website. The company is “exploring strategic alternatives” given the low stock prices, Mathrani said, characterizing the stock as undervalued, with a “disconnect” between public and private market pricing.
Just over eight minutes into the call, Mathrani states that the company expects to break ground soon in Norwalk.
“Demand from retailers has been very strong, and as a result and in discussion with potential institutional partners, we’re increasing the scale of the project. The leasing activity so far has produced rent numbers consistent with our expectations and demonstrated of a regional shopping center with sales productivity well over $700 per square foot. We are about 50 percent pre-leased.
“Institutional investors cannot get exposure to high-quality regional shopping centers and are eager to invest in a ground-up development. More parties have provided us with a letter of intent.”
About 23 minutes into the call, Mathrani was asked to expand on his comment that the mall may be getting bigger. Mathrani replied:
“Well, you know, we, we’ve chosen to be prudent here. We’ve chosen to seek out institutional investors to come in and be our partner. The institutional investor base is eager to acquire more A centers. There are no A centers in the market for sale. They’ve elected to be part of a ground-up development such as Norwalk. And in discussions with them, because there are so few of these, the question is, should we increase the size of the project from about 200,000 square feet to 300,000 square feet? We’re evaluating that. The leasing activity, as I mentioned, if this project was 300,000 square feet is pre-leased to about 50 percent today. The mix so far has been a combination of entertainment, fitness, restaurants, apparel, electronics, home furnishings. I will actually venture to say, of that 50 percent, a larger percentage has been non-apparel.”
He was asked about the return on investment for The SoNo Collection.
“We’ve said it’s an 8 percent to 10 percent return,” Mathrani replied. “The rents we are getting today would demonstrate that the retailers feel that the sales productivity of the center will be in the high-700s.”
The call’s last question also got a response concerning Norwalk, as, about 50 minutes in, a caller asked about the value of Class A malls given the current market and negative rhetoric.
“When we went out to put the project of Norwalk to find institutional investors, each one of the four institutional investors that presented a proposal to us for Norwalk inquired what’s the asset sales or JV (joint venture) partnership in the built stabilized assets. And they did tell us in discussions how they view the market pricing to be. As a matter of fact, if you speak to most of the institutional investors and ask them which is the best performing asset class within their portfolios, it usually is super regional malls that have produced over the last 20 years the best return. We continue to see that today. If I actually just look at the A’s and the higher-quality A’s, it’s actually as the quality increases, that growth rate goes from 4 to 5, even in this environment.”
Multiple references were made during the call to joint ventures with Seritage Growth Properties.
NancyOnNorwalk made multiple attempts to contact GGP on Tuesday and Wednesday, calling GGP’s Chicago office and sending emails to GGP Senior Vice President of Investor and Public Relations Kevin Berry and GGP Vice President Doug Adams, with no replies.
Although Mathrani said, “The question is, should we increase the size of the project from about 200,000 square feet to 300,000 square feet,” the retail component of The SoNo Collection is 661,552 square feet, according to GGP’s application to change the Land Disposition Agreement (LDA) for the site.
“We are not seeking any increase in the size of the project from what is currently approved by the City of Norwalk,” Adams said in a Thursday email. “Our CEO was referring to just the smaller inline shop space, and was not including the two anchor stores in the calculation.”
He continued, “It is true that the current approvals are larger than what we had originally thought we would build when we started on entitlements in 2014. The CEO was referring to the strong tenant demand that led us to increase the leasable area from that original concept to the currently approved plan that we expect to start this month.”
Asked about the comments made in the conference call, Mayor Harry Rilling in an email said, “I was not privy to the conversation you cited. There has been no increase in size of the proposed SoNo Collection. I feel it is encouraging that others are interested in investing in this project. This is a Class A center, the type that is flourishing.”
He disputed the idea, from NoN, that many people are taken aback by GGP’s request to remove the hotel.
“On the contrary, most people with whom I’ve had discussions, want to see this center built. The development is now moving forward and we expect an October 2019 grand opening,” Rilling said.
NoN asked Michael McGuire of the Austin McGuire Company, a commercial real estate company, about joint venturing. He said:
“I wouldn’t be concerned if they move to a JV format. All good companies (regardless of type) project out risk and reward and look at the various options with every facet of the business – ownership structure being one of them.
“I can’t speak to GGP’s financials but as they project out risk/reward going to a JV format likely provides their shareholders with the some of the best returns while providing the very good risk mitigation. Seems like the Institutional JV’s have a demand for this product, at this point in time, that may be stronger (i.e. requires lower returns) than other funding sources.
“These are smart people undertaking prudent business analysis. The only thing none of us can time is the market.”
On Wednesday, the Real Deal reported that Manthri has made his first move to liquidate an asset, reporting that GGP is looking to sell its half of the New York City retail and office building 685 Fifth Avenue.
Common Council members are on Thursday considering GGP’s request to amend the LDA, in a Planning Committee meeting.
Two weeks ago, some members balked at GGP’s request to change the definition of Class A anchor to “high-end entertainment concepts, high-end fitness centers, high-end or specialty grocers and high-end furniture stores.”
Lidl, a German supermarket operator, is opening soon in the Staten Island Mall, in space formerly occupied by Sears, Mathrani said Monday.
“Lidl operates over 10,000 stores throughout Europe and is bringing their concept to the U.S. beginning with eight states,” Mathrani said. “The expansion and redevelopment of the center is progressing according to plan. They’re adding approximately 235,000 square feet and are currently 85 percent pre-leased.”
NancyOnNorwalk could not find a definition of the Staten Island Mall in terms of its class. GGP describes it as a “premier shopping destination with privileged access to an affluent consumer base.”
Mathrani also mentioned leasing to Kidzania, described on its website as “world’s fastest growing experiential learning center for children,” in two GGP centers, the first locations for Kidzania in the United States.
“We look forward to doing more with KidZania,” Mathrani said.
“KidZania is not like other entertainment parks,” Kidzania’s website states. “We offer them useful knowledge, experiences and a chance to be independent.”
“Our view on the retail property landscape is that high-quality centers will continue to win and thrive in this environment. We see it every day in our leasing activity,” Mathrani said Monday. “…We’re experiencing demand from grocery stores, cinemas, innovative entertainment venues, fitness center, and the list goes on. GGP’s regional shopping center exhibit diversity of tenants and location, and access to 700,000 consumers per center compared to the other retail relative formats that offer diversity of location with concentration of tenants, reach about 300,000 consumers. Once again, GGP’s regional shopping centers exhibit diversity of tenants and locations.”
As an example of the value of a Class A mall, Mathrani said, “Payless Shoe announced bankruptcy. Thus far, we only have two closures of the 80-odd Paylesses that we have. Rue21 announced a list of 400 closures. Thus far, we only have 14, and so they tend to be in the lower-quality assets.”
“High-quality retail properties should continue to gain market share,” Mathrani said. “The divide between high-quality retail real estate and the rest is getting wider. The best centers are thriving and will continue to do so. As an owner of retail real estate, we must constantly evolve to attract tenants and customers. You see it in our leasing activity and the evolution of our tenant roster. Names at the top a decade ago have changed and have been replaced with tenants today that have an emotional connection with their customer and are profitable operating from our centers. Our centers have 400 national, 600 regional and 1,700 local. These are all unique tenants.”