Michael Glimcher: Musings of a REIT Maven

Investor appetite for income has made commercial real estate investment trusts, many of which own regional shopping malls, among the hottest stocks this year. As of Oct. 29, Glimcher Realty Trust (GRT) racked up the biggest return of the bunch, rising 183.4 percent to top Bloomberg's ranking of commercial REITs. Glimcher, which started out as a lumber and building-supply company in 1959, has grown into a publicly traded, $741 million company that owns 27 properties, mostly regional malls, across 14 states. On Dec. 2, Bloomberg Businessweek reporter David Bogoslaw spoke with Chief Executive Michael Glimcher about the company's move to develop higher-end malls through partnerships with such investors as Blackstone. This is an edited version of their conversation.

David Bogoslaw: Glimcher Realty has said it prefers to use cash to pay down debt and for growth rather than to increase its dividend to prerecession levels. What's the priority now—paying down debt or buying new properties?

Michael Glimcher: We're looking at them equally. We want to continue to deleverage, to be in the middle of a 50 percent to 60 percent debt-to-capital range. We're at the higher end of that range now. If we were going to raise equity to do a new acquisition, ideally half the money would go into the new opportunity and half would go to pay down debt.

You recently bought out your partner's 50 percent interest in the Scottsdale Quarter shopping mall in Arizona and completed the $245 million acquisition of Pearlridge Center in Honolulu. [Glimcher has a 20 percent equity stake in Pearlridge; the rest is owned by Blackstone Real Estate Advisors.] Are these joint ventures the model for future growth?

I see us growing with partners, like we did with Pearlridge. We're an equity investor, but we're also the manager of the assets. We can leverage our platform by getting management fees and leasing fees, and we're getting higher-quality assets with sales of $500 per square foot and 99 percent occupancy. We are actively looking at opportunities with Blackstone. We'd consider 25/75 percent joint ventures with institutional partners and are looking at assets typically better than our average assets, preferably in the top quartile of our portfolio's sales-per-square-foot range. And we'd like to see occupancy of 90 percent or above. The fees help [offset] the fixed cost of our operating platform. We already have an accounting staff, a legal staff, and a sales staff. You don't incrementally have to add that much more as far as head count goes to be able to handle additional assets.

How many new malls do you plan to open in 2011?

It could be 10, it could be one, and it could be zero. There aren't that many great opportunities, so it's important that the ones we're working on get done.

U.S. clothing and general merchandise sales have been flat or moving slightly higher for five months, but they still aren't as strong as overall retail sales. What's your take on the overall consumer climate?

Retail is always about what's new, but I don't see anything new in terms of concept. A lot of concepts are—I won't say played out, but mature. When you talk to major nationwide U.S. retailers, they all want to open stores overseas, in Europe and Asia. They aren't interested in new locations in the U.S. But there's an influx of foreign retailers in the U.S. H&M is the biggest one for us. [The Swedish company has stores in two Glimcher malls, in Scottsdale Quarter and an outlet store in Jersey Gardens.] We see a lot more opportunities with them as they're growing. There's an Australian retailer called Cotton On that realized they had no more room to grow in Australia. So far they have one store in our Puente Hills mall in the Los Angeles area. We're working on other opportunities with them. They're looking at Florida and California, since their merchandise caters more to warmer climates.

Do non-U.S. retailers want to open stores in any particular parts of the U.S.?

They will go to the top 10 metro markets and work their way down to the smaller markets. We are typically in their second round of expansion. We don't get any of their first 10 to 20 stores. We don't get the greatest, latest, newest thing. The good news is if they're going to fail, it's probably going to be with their first 20 stores, not their first 100 stores. So by the time we get them, they're more proved, and their new locations have a better chance to succeed.

Are you seeing any U.S. retailers more confident about opening new stores in the U.S.?

Urban Outfitters (URBN), whose specialty brands include Anthropologie and Free People, is opening more stores. The Canadian company Lululemon (LULU) is doing a nice amount of expansion, and their sales are strong. But I don't see anyone out there saying, "I need to open 50 to 100 stores this year."

It has been little more than a year since the first phase of Scottsdale Quarter opened, and you've already bought out your partner's stake. Do you want to increase your equity position in the Pearlridge mall?

It's possible we'll go to a higher equity position at Pearlridge [eventually]. Blackstone typically has a five-year holding period, and we like to stay in assets for 10 years. We're the most logical buyer of Blackstone's interest in five years, and we'd be interested in staying in that asset longer than five years. We may not buy all their interest. We may bring in another [institutional] partner. This model of joint venturing works for us. It lets us put capital out there, and the income from management and leasing fees makes for better returns for us. We're going to make more money owning a half of two properties than we would owning 100 percent of one property, assuming they are similar types of assets.

Are you looking for different kinds of anchor stores to drive higher rents in your malls?

Most of our malls have three anchors—usually a Macy's, a J.C. Penney's (JCP), and a Sears (SHLD). We're seeing more retailers like T.J. Maxx (TJX) starting to open stores. Anchor stores by and large own their own real estate or get it for free. They don't pay rent. There are no department stores as anchors in the Scottsdale Quarter mall. The anchor is a 10,000-square-foot Apple (AAPL) store. Bringing in a better retailer like Apple raises your sales per square foot significantly. We're focused on taking our average sales per square foot over $400 [from an average $355 currently].

Another draw at Scottsdale Quarter is a 40,000-sq.-ft. theater being opened by IPic Entertainment. It's all digital, and people will pay a 50 percent premium ticket price. It will have a bar, so after 7:00 p.m. you have to be 21 years old to get in. Instead of paying $10 for a ticket, you'll pay $15, but for that price, you'll get a bigger chair that can recline, and you can bring a cocktail into the theater with you. [Six iPics are under development, and the one in Scottsdale Quarter will be the first to open, in mid-December.]

What has become really important in Scottsdale is restaurants. The new center we're opening in increments has 400,000-sq.-ft. of retail space, 100,000 of which is restaurants. Restaurants typically do well above [the average] retail sales level. Scottsdale is a great submarket for restaurants. It has a huge daytime population of 250,000 people and is one of best residential areas in terms of population density and household income. The icing on the cake is you have thousands of hotel rooms within a five-mile radius. It's a unique circumstance.

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