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Shopping Centers Today -> March 2004
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GENERAL GROWTH PROPERTIES TURNS 50
HOW SERENDIPITY LED TO MALL EMPIRE
BY ANNA ROBATON
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| In 1954 the Bucksbaums, then grocers, built Town & Country Center after a developer dropped out. |
Seeking to turn the family grocery business into a chain, brothers Matthew and Martin Bucksbaum wanted to build a supermarket at a planned center in Cedar Rapids, Iowa.
“The developer of the project couldn’t get it together,” said Matthew Bucksbaum. “So he sold the land to us, and we became the developer.”
That was in 1954, but General Growth has repeatedly shown similar strategic flexibility since then, embracing critical changes that have helped propel it to the apex of the industry.
One such turning point occurred little more than a decade ago. Convinced that growth in the shopping center business would come no longer through development but through acquisition, the Bucksbaums for a second time took their private company public in 1993 to gain access to the capital necessary to compete in a consolidating industry.
General Growth first went public in 1972, but the stock languished, so the Bucksbaums liquidated the REIT and returned to running the company as a privately held mall manager and developer.
“No one paid any attention to REITs” during General Growth’s first stint as a public company, said Ralph Block, a REIT historian and owner of Westlake Village, Calif.-based Essential REIT Publications, which tracks the industry. “REITs were pretty much in the backwaters of the investment world. The Bucksbaums got tired of the fact that the market wasn’t valuing their company the way it should be valued.”
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| The 1960 opening of Duck Creek, in Bettendorf, Iowa, General Growth’s first department store-anchored mall. Matthew Bucksbaum, right, with daughter Ann (third from left). |
When the company returned to the equity markets, it owned 21 malls, nearly half of them in the Midwest. Today General Growth owns 136 malls and has a presence in 41 states, with about 40 percent of its holdings in the West, nearly 40 percent in the Northeast and Southeast, and the remainder in the central United States.
“We made the decision [in 1993] that if we were going to stay in this business, we had to have access to the public market for capital,” said Matthew Bucksbaum, the company’s 77-year-old chairman. He was CEO until July 1999, when he turned the reins over to his son, John. The younger Bucksbaum, now 47, grew up in the business and was groomed to lead the company by his father and his uncle Martin, who chaired the company until his death in 1995.
Over the past decade, General Growth has not only become one of the biggest players in the mall business, but also one of the best-performing. Since 1993 its funds from operations per share have grown about 16 percent on a compounded annual basis. In 2003 FFO per share rose by nearly 23 percent, while total FFO grew by 27.5 percent to $618.6 million.
This time around, investors have definitely taken notice. Last December, just before a three-for-one split, the stock traded at about $80 per share, almost quadruple the $22 per share price when it went public. For the five-year period ended last year, the stock outperformed the National Association of Real Estate Investment Trusts regional mall index, gaining 24.1 percent on a compounded annual basis, versus the index’s 21.4 percent.
What remains to be seen is whether General Growth can continue to deliver the kind of eye-popping earnings growth to which investors have become accustomed. Intense competition has resulted in a shrinking pool of potential acquisitions at, of course, rising prices.
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| A far cry from that first center in Iowa: GGP’s Stonebriar Centre, in Frisco, Texas, has six department stores, a third-level, multiscreen cinema and an NHL-size ice arena. |
“If rates start going up fast, General Growth will face a higher interest on its floating-rate debt, and this strategy might not be executed as well as before,” Oduma said.
John Bucksbaum concedes that it is a “huge challenge” to continue to increase earnings at the same rate, especially now that the company is significantly larger than it was not long ago.
But the company can continue to squeeze more income out of its existing portfolio (already 91.3 percent occupied), he says, and has an advantage in competing for acquisitions, because it is willing to take on properties that its peers might snub.
And more important than the company’s level of floating-rate debt, which can be locked in if rates start to rise dramatically, is its ability to pay its interest expenses from earnings, now more than two times the former, he says.
“We like to buy malls that we see the opportunity to improve,” he said. “While we may be paying a very full price, we have done our homework and we recognize that there are areas where we can improve these properties.”
In recent years General Growth has embarked on an ambitious effort to redevelop its properties to boost their appeal — and their occupancy levels and rents. It has spent a whopping $200 million a year on the effort and expects to continue at that rate for the next several years.
“When they buy, they make sure the economics are right and that they have some way to increase the cash flows of the malls they acquire,” said Block, the REIT historian.
Relying heavily on feedback from shoppers, the company has reconfigured many of its properties so that shops face both the exterior and interior. It has also added family-friendly rest rooms, children’s play areas and more restaurants.
The company has only a handful of development projects under way, the largest being in a market about which it has intimate knowledge. In late 2002 General Growth broke ground on Jordan Creek Town Center, a $200 million project in West Des Moines, Iowa, that includes an enclosed mall (1.2 million square feet) and a cluster of big-box and specialty tenants (about 400,000 square feet). General Growth was based in Des Moines for many years before it consolidated its operations in Chicago.
The project, which General Growth expects to open in August, is an effort to bring under one roof many of the amenities and some of the design elements that have characterized its redevelopment projects.
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“One of the real beauties of the mall is that, when treated properly, it is ever-evolving and generally the best real estate in any community,” John Bucksbaum said. “If you are willing to put the capital back into these projects, they can be kept viable for some time.”
And while other leading mall companies have focused on acquiring only trophy malls or those in major metro areas, General Growth has continued to expand its reach in middle markets. About a third of the company’s malls are located in major metropolitan areas, from Atlanta to Honolulu, and the rest are in middle markets, from St. Cloud, Minn., to Twin Falls, Idaho.
“Middle markets are more work,” said John Bucksbaum. “They are harder projects to deal with, whether it is leasing or marketing. But at the same time, they can be the most rewarding and profitable projects when done correctly.”
The company’s geographic reach, including its presence in Middle America, has helped set it apart from competitors in the eyes of big national retailers. In all, the company has about 16,000 retailers in its malls and often brings existing tenants into properties it acquires.
“General Growth understands that it is a big country, and that Middle America represents an opportunity,” said Alan Barocas, Gap’s senior vice president for real estate. “You are finding other developers who want to divest themselves of these middle markets.”
Indeed, General Growth has a long history in Middle America, starting with that first shopping center, Town & Country Center, in Cedar Rapids, Iowa, when the Bucksbaums serendipitously became developers.
In 1960 General Growth built its first mall anchored by a department store, the open-air Duck Creek Plaza, in Bettendorf, Iowa; five years later it built its first enclosed mall.
In 1972 General Growth’s holdings included hotels and office and apartment buildings. But on the advice of Warren Buffet, a board member at the time, the Bucksbaums shed those holdings to concentrate on the mall business.
“He liked franchises,” explained Matthew Bucksbaum. “He quickly picked up on the fact that in a middle market if you had Sears, J.C. Penney and the local department store, you had a franchise on the retail business in that community.”
When the company reverted to private in 1984, it sold most of its mall holdings to Equitable Real Estate Investment Management (which bought them on behalf of IBM’s pension fund), but continued to manage a large portion of them on a third-party basis. General Growth bought back some of the malls before going public anew.
“They always had a vision of what was going on in the financial community,” said George Puskar, former chief executive of Equitable Real Estate, which was sold in 1997 to Lend Lease Corp. “They were one of the first companies to go from public to private when the circumstances dictated it. And they knew when the market cycle shifted, and they went public again.”
Since then, several major acquisitions have bulked up the company. In 1994 General Growth was a 40 percent partner in the $1 billion acquisition of CenterMark Properties, and a year later it teamed up with several partners to buy Homart Development Co. from Sears, Roebuck and Co. for $1.85 billion. In 2002 General Growth paid $1.1 billion for JP Realty, the leading mid-market retail developer and manager in the country’s Western region.
While pursuing acquisitions, the company has sought to juice its earnings by growing nontraditional sources of revenue. It already collects more than $125 million per year, or about 10 percent of revenue, in rents from temporary tenants and carts and kiosks, up from $5 million in 1993.
“In the past the revenue all came from behind the lease line,” John Bucksbaum said. “Looking forward there will be more revenue opportunities outside the lease line. The common area has unlimited potential, in our estimation.”
The company is also exploring ways to generate more revenue through promotional efforts by companies that want to reach the millions of consumers who pass through its malls each year. It has already done joint marketing campaigns with PepsiCo. and Visa USA.
But not all General Growth’s experiments have been fortunate. In 2001 the company pulled the plug on a costly venture to put its malls on the Internet. Seeking to respond to the threat of e-commerce, General Growth invested in technology that would allow its tenants to advertise and sell their goods online and their customers to pick up purchases at the mall. It shelved the venture after spending about $65 million because of lackluster interest among retailers.
Still, there was nothing wrong with the concept, the Bucksbaums note.
“Today you are seeing retailers accept electronic orders, but the orders are being filled at the brick-and-mortar location,” said John Bucksbaum. “It was just [poor] timing from our standpoint. The idea is proving to be perfectly correct.”
In the eyes of many, General Growth has definitely overcome the stumble.
“Aside from their misstep with the Internet, they have delivered more than what they promised,” said David G. Shulman, a Lehman Bros. analyst.
Some might even say General Growth has delivered much more than its supermarket-owning founders initially expected.
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