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Shopping Centers Today -> September 2006
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FASB to redefine lease rules
The Financial Accounting Standards Board, which sets U.S. accounting rules, is about to change the way publicly held retailers and landlords report lease data to investors. The current U.S. leasing standards were established in 1976 and have become arcane, says FASB spokesman Leslie F. Seidman. Existing rules allow companies to report financial results based on how and when they report lease obligations, sources say. Along with the International Accounting Standards Board, the FASB is forming a committee to review the existing standards. The boards intend to present revised rules to their members for review by 2008.
“The goal is to develop principles that would faithfully represent lease transactions in the financial statements of lessees and lessors and would reflect similarities and differences in the wide variety of leasing arrangements,” Seidman said.
In a June 2005 report to Congress, the Securities and Exchange Commission estimated that current rules allow companies to keep about $1.25 trillion in future cash obligations off their balance sheets. The SEC recommends that both landlords and tenants report their economic interest in leased assets, in addition to assets and liabilities related to the lease payments.
Many retailers face large leasing accountabilities as a percentage of their market capitalization, according to research by Credit Suisse. These include CVS, OfficeMax and RadioShack. Last year the SEC chided chains for not recording rents and write-downs for store improvements evenly over the years of leases. The subsequent rush to restate earnings cut billions of dollars from the reported pretax earnings of over 150 companies, including Borders Group, Brown Shoe Co. and McDonald’s.
U.S. centers report robust 2Q
Shopping center rents continued to rise in the second quarter, though the absorption rate of new retail space appears to be slowing, according to New York City-based real estate data firm Reis.Mall rents increased 1 percent to $38.89 per square foot, the biggest quarterly gain in about three years, Reis reports. For its part, Simon Property Group’s regional mall portfolio showed a 2.8 percent increase in average base rents to $35.10 per square foot. Taubman Centers reported an average rent of $43.28 per square foot compared to $41.72 a year ago. Open-air center rents increased 0.9 percent over the first quarter, to $18.56 per square foot. Open-air landlord Kimco Realty Trust said first-quarter base rents increased by an average of 22.9 percent. Federal Realty Trust said rents grew 17 percent to $24.40 during its second quarter. Tenants absorbed 4.9 million square feet in the second quarter, up from 3.3 million 12 months previously, but still below the two-year average of about 7 million square feet per quarter.
Sale-leaseback guru Mort Fleischer back in the game
Mort Fleischer was in his mid-60s when GE Capital bought his sale-leaseback firm, Franchise Finance Corp., for $2.1 billion in 2001. After such a windfall, nobody would have faulted Fleischer, of Scottsdale, Ariz., for spending the rest of his days on the links. But the sale-leaseback market continued to beckon, and after his noncompete clause ran out, Fleischer paired up with former colleague Christopher Volk to form Spirit Finance Corp., a public REIT. “My health is good, I enjoy the work, and I think Spirit can add a lot of value to deals,” he said.
Though Franchise Finance focused on fast-food chains, Spirit Finance chases deals with “everything that has a square box,” he said. The partnership’s biggest transaction yet involved the buyout of Green Bay, Wis.-based ShopKo Stores. It paid $815.3 million to acquire ShopKo’s real estate and then entered into long-term, triple-net-lease agreements with affiliates of the operating company. Among the important things with these kinds of deals is solving the tax problem, Fleischer says.
If ShopKo had merely sold its real estate, it would have incurred a huge tax burden, so the answer was to carve the real estate out into a separate entity, he says. Spirit Finance then bought the property business. Since its founding in 2003, the company has raised about $1 billion in four offerings and used leverage to invest $2.6 billion.
The deal possibilities remain endless, he says, estimating that U.S.-based corporations have about $1 trillion of single-tenant real estate sitting on their balance sheets, of which only about $20 billion is in a net-lease format. “While we hold the real estate,” he said, “businesses can take advantage of our cheaper cost of capital and have more free cash flow.”
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