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Shopping Centers Today -> September 2001
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GGP COPES WITH TECH SETBACK
By Dave Bodamer
When General Growth Properties (GGP), Chicago, said in July that it would dissolve its technology development division — and take a $65 million hit to earnings — the ramifications rippled throughout the industry, sending a message to real estate developers that they should plan their future technology endeavors carefully.
Analyst response to the move has been consistent. The consensus is that GGP had solid reasoning for pursuing the plan, but made a mistake in letting the situation go as far as it did, illustrated by the size of the write-off. However, analysts say they still view GGP favorably and are encouraged that the company has maintained its long-term funds from operation (FFO) targets.
“The rationale for doing what they did is understandable, but it represents a significant mistake nonetheless,” said Matthew Ostrower, a REIT analyst with New York City-based Morgan Stanley Dean Witter. “It shows they were trying very diligently to protect themselves from the effects of technology, but they didn’t plan as well as they could have and should have put more effort in controlling expenditures.”
GGP is not including the write-off in its funds from operations (FFO) figures this year, counting the cost as an extraordinary item in its earnings reports. That decision has left the company on track for its FFO targets. In fact, less than two weeks after it announced the write-off, GGP reported second-quarter FFO of $1.09 per share, which exceeded analyst’s expectations by $0.01.
The company’s technology development program also included approximately $60 million spent on wiring its centers by building high-speed Internet infrastructure in its malls and for routers, servers and other equipment. The hardware is still in place and GGP will not write off those costs.
Ostrower said he believed the $65 million write-off should be included in GGP’s FFO figures. The charge would come to about $0.81 per share if included. That would have lowered GGP’s second-quarter FFO per share from $1.09 to $0.28. However, GGP is not including the charge in its FFO, only in its earnings reports.
Contributing to the problem for GGP was, and continues to be, the slow acceptance of technology on the part of the retailers.
It has become apparent that retailers do not see broadband applications as essential to current operations, John Bucksbaum, CEO of GGP, said in a statement.
“Retailers are at different points along the adoption curve,” he said. “All retailers recognize that technology is going to have to be part of their standard operating procedure. We fully expect that all will eventually incorporate it in one degree or another.”
“The future is in applications,” Bucksbaum said. “We have created the infrastructure to run those applications. Going forward we will be hopeful that retailers and their partners will be developing software to make their stores more efficient and more productive. We very much believe that this is the future.”
Christopher J. Niehaus, a managing director of New York City-based Morgan Stanley and head of its real estate investment banking group, agreed with Bucksbaum’s assessment on all counts.
Niehaus agrees that retailers are not ready to accept broadband applications as crucial, but said he believes the day will come when they will.
“I do believe broadband for malls will carry on,” Niehaus said. “It’s an important service that retailers should embrace. … [The money GGP invested in hardware] may still end up being a good investment.”
GGP had been operating separately from MerchantWired, a similar effort started by Simon Property Group, Indianapolis, and backed by seven other REITs. GGP had developed a range of applications and services for retailers at its malls including distance learning programs, videoconferencing capabilities, faster credit card authorizations and scheduling.
Bucksbaum said these programs are all in use by some of its tenants. He emphasized that although GGP had decided it no longer made sense to be an application developer, the company still strongly believes retailers will eventually adopt these technologies.
GGP began its technology program two years ago, during a time when the Interne’s influence on the shopping center industry was beginning to be determined. GGP attempted to get in on the front end of the movement by providing software and wiring for its tenants. It also began to develop Mallibu, which was supposed to virtually recreate its centers online, enabling customers to have the same purchasing options as at its malls.
Bucksbaum added that GGP would consider backing MerchantWired if the opportunity presented itself. However, the companies have not talked about that possibility yet.
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