Glimcher Finds Gold in Malls With 38% REIT Return
Michael Glimcher has made quite a comeback. His company, Glimcher Realty Trust (GRT), hit bottom in 2008 as it struggled under $1.7 billion of debt.
That April, Glimcher called his employees into a conference center for a pep talk, Bloomberg Markets magazine will report in its August issue. He told them to focus on their jobs, not on predictions of gloom and doom. By November, Glimcher Realty’s stock was trading below $1 a share, from a 2005 peak of $29.63.
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“We had investors thinking we weren’t going to be around,” recalls Glimcher Realty’s 45-year-old chairman and chief executive officer, perched on a couch at his headquarters in Columbus, Ohio.
Glimcher and Chief Financial Officer Mark Yale went to work whittling down the company’s debt-to-total-capitalization ratio, bringing it to 45 percent in the first quarter from 87 percent in the first quarter of 2009. Private-equity giant Blackstone Group LP added $60 million to Glimcher Realty’s coffers by purchasing parts of two malls in March 2010. The real estate investment trust also sold 26.7 million shares at $3.75 apiece in September 2009 to help get through the recession.
Today, Glimcher Realty ranks among the world’s best alternative investments. Its shares, which traded at $11 on July 8, rewarded investors with an annualized return of 38 percent from March 31, 2010, to March 28, 2013. That compares with 17.3 percent for the Bloomberg REIT Large Cap Index (SPX) and 12.7 percent for the Standard & Poor’s 500 Index.
Glimcher was the best performer in Bloomberg’s REIT Regional Mall and REIT Retail indexes during that time. It was also the No. 2 U.S. REIT among those with market values of $1 billion or more, behind Extra Space Storage Inc. (EXR), which had an annualized return of 49.8 percent in the period.
“He has done an impressive job of taking an overlevered balance sheet and making it more flexible and adding to the equity base,” says Cedrik Lachance, an analyst at Green Street Advisors Inc. in Newport Beach, California.
Since 2009, Glimcher Realty has raised more than $1 billion in capital through equity and asset sales and joint ventures. As the economy has rebounded from the financial crisis, Michael Glimcher has spruced up a company his father, Herbert, built with properties that included McDonald’s and stores such as Kmart.
Glimcher, who took over as CEO in 2005, paid $105 million in January for University Park Village in Fort Worth, Texas. The airy plaza, featuring stores from Apple, fashion and home retailer Anthropologie, and natural cosmetics purveyor Origins, generates average sales per square foot of more than $800, almost double Glimcher’s $453 per square foot in the 12 months ended on March 31.
U.S. real estate is back, and real estate investment trusts are thriving. REITs were born in 1960, when President Dwight D. Eisenhower signed legislation creating a vehicle to give small shareholders, not just the wealthy, a chance to invest in income-producing property through real estate companies.
Publicly traded REITs soared as investors hunted higher returns amid near-record-low interest rates. The average dividend yield on the Bloomberg REIT Large Cap Index was 3.6 percent at the end of June, outpacing a yield of 2.5 percent for U.S. Treasury 10-year notes and less than 1 percent for money-market funds.
Investors like REITs because, by law, they must pay out at least 90 percent of taxable earnings to shareholders as dividends. To qualify as a REIT, a company is required to invest at least 75 percent of its assets in real estate and get 75 percent of its gross income from rents or interest on mortgages from financing properties. REITs pay no corporate income taxes.
With a U.S. recovery under way, landlords are attracting tenants and collecting more in rents as people return to work and spend at malls. REITs are taking advantage of low rates to expand and refinance loans.
“It has been a great run,” says Sam Lieber, CEO of Alpine Woods Capital Investors LLC in Purchase, New York, which manages the Alpine Funds and has $5 billion under management. “People looking for yield and growth should be able to sleep reasonably well.”
Glimcher, who calls himself a worrier, may still have restless nights. When the economy slows, demand for spaces in malls and offices wanes while companies curb expansion.
REITs have slid since late May as the yield on the 10-year Treasury note climbed to 2.74 percent on July 5 from 1.93 percent on May 21. The Bloomberg REIT Large Cap Index fell 11.5 percent during that time.
“The chief risk here is not necessarily the pace of economic growth; it’s some sort of element of surprise in the capital markets,” says Matt Richmond, a fund manager at Des Moines, Iowa-based Principal Financial Group Inc., whose real estate investing arm has about $45 billion under management.
Michael Glimcher wants to break into the mall elite inhabited by his fellow Midwesterners.
CEO David Simon, who turns 52 on Aug. 20, took over as chairman at Simon Property Group Inc. (SPG) from his father, Melvin, and his uncle, Herbert. The two men had been co-chairmen at the Indianapolis-based company, the biggest REIT by market value.
Simon Property was No. 3 among companies in Bloomberg’s REIT Regional Mall Index, with a 27.3 percent annualized return from March 31, 2010, to March 28, 2013.
CEO Robert Taubman, 59, succeeded his father, A. Alfred, as chairman of Taubman Centers Inc. (TCO) in Bloomfield Hills, Michigan, the fourth-biggest mall REIT by market value. Taubman Centers was No. 2 in the regional mall index, with a 28.9 percent return.
These mall operators, along with Chicago’s General Growth Properties Inc. (GGP), which filed for bankruptcy protection in 2009 and emerged the next year, and Macerich Co. (MAC) of Santa Monica, California, enjoy higher average sales per square foot than Glimcher. That’s an indicator of the quality of their properties and their ability to raise rents.
Glimcher, the No. 7 U.S. mall REIT by market value, operates in some small locales, such as Heath, Ohio, and Harrisburg, Pennsylvania, that have historically generated lower sales figures.
Glimcher started at the company in 1991 after earning a political science degree from Arizona State University in Tempe. He’d planned to stay for a few years and then go to law school, with the ambition of becoming a U.S. senator -- an idea he hasn’t entirely dismissed for sometime down the road.
“I would love to serve,” he says.
At age 37, Glimcher took over as CEO with the economy and real estate markets in the final stages of their climb. He sold off community shopping centers anchored by grocery or discount stores such as Wal-Mart to focus entirely on malls. He added the chairman title two years later in 2007; Herbert remains chairman emeritus.
Glimcher recalls the scene that helped persuade him to buy University Park Village in Fort Worth.
“We go on a Monday morning at 10,” he says. “You don’t expect a lot on Monday at 10 at a retail venue. The parking lot is filled with luxury SUVs, and there are Range Rovers, and there are Mercedes,” says Glimcher, a fitness buff who runs 5 miles (8 kilometers) a day at least five days a week and drives a Range Rover himself.
Glimcher is trying an added twist with a property in Arizona. He and a developer plan a 275-unit apartment building at Scottsdale Quarter outside Phoenix. The 540,000-square-foot (50,000-square-meter) center already features offices, restaurants, a movie theater and stores, including home furnishings shop West Elm. It generates almost $1,200 a square foot in sales.
Glimcher Realty took advantage of favorable interest rates to cut some debt in February. It closed on a $225 million, 12-year mortgage loan for Polaris Fashion Place mall in Columbus, using the funds to repay a $125.2 million loan and putting the rest toward reducing its credit facility.
The company decreased the average rate on its debt to 4.74 percent in the first quarter from 5.09 percent a year earlier, according to a regulatory filing.
Other REITs are doing the same.
“They’re making sure their balance sheets are absolutely rock solid,” says Thomas Bohjalian, a portfolio manager at New York-based Cohen & Steers Inc., which had $49 billion under management at the end of March.
Glimcher says his father created a driven, entrepreneurial culture -- a spirit that buoyed the company when the financial crisis hit.
“No one knew when it was going to end, and no one knew what was around the corner,” says Glimcher, who talks with his father almost every day.
The joint venture with Blackstone in 2010 was a milestone.
“It put a lot of confidence in the marketplace behind us that they wanted to be in business with us,” he says. “We were down and we got back up, and then we started running.”
Glimcher expects that confidence to propel the company. He told 250 employees in January that their work was only partly done: They still needed to break into the upper echelon of mall owners.
“Let’s not walk around celebrating being in the middle,” he recalls saying. “It’s halftime.”
Glimcher, whose shares in the company were valued at about $15 million in early July, says it has been a great few years to be a mall owner.
“Retail is a mix of art and science,” he says. “There’s a finite group of people out there who know how to do it.”
The number of people who can do it while delivering annualized returns approaching 40 percent is even smaller. By that measure, Glimcher has already joined the real estate elite.
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