As department stores continue to lose market share, mall owners are purging weaker-performing assets from their portfolios, a strategy The Rouse Co. has aggressively pursued for a decade. During that stretch, the Columbia, Md.-basedand management firm, founded in 1939, has sold its interests in 40 aging centers.
It's also been a selective buyer. Since 1993, Rouse has acquired 16 high-performing properties in select markets with strong demographics. Rouse's latest move came this spring, when the company sold six properties in the greater Philadelphia area to Pennsylvania Real EstateTrust for $548 million. Rouse simultaneously purchased a 50 percent interest in Christiana Mall in Newark, Del., from New Castle Associates. Rouse's Thomas DeRosa talks to Matt Valley, editor of our sister publication, National Real Estate Investor.
MV: What's at the heart of your disposition strategy?
DeRosa: In an environment where sales are declining and retailers are struggling, what worries a mall operator is retailers vacating space, and an inability to collect the target rents. We believe that we are significantly better positioned than most companies in the industry because we have sold off that lower-productivity space. If you're the Gap, AnnTaylor, or any national retailer, when you look to rationalize your business you're going to be closing stores in less productive locations. We feel that we are less vulnerable to store closures than we were in 1993.
MV: What's the state of your portfolio today?
DeRosa: We score malls on an A, B, C basis, with A malls generating more than $400 per square foot. Back in 1993, about 65 percent of our mall portfolio would have fallen into the C category. Today, based on we've done to the portfolio in terms of acquisitions and dispositions, it's flip-flopped. Now only 10 percent of our assets are falling into the C category, and 90 percent are As and Bs, with the highest percent being A malls (58 percent).
MV: In the intensely competitive shopping center space, how does Rouse stand out from the crowd?
DeRosa: We're a community development company, not a pure-play mall company. Although the biggest component of revenue for Rouse comes from retail, we look for our malls to be the town center. Take Staten Island Mall, for example. Staten Island is a borough of Manhattan with a population of 550,000. To drive off and back onto the island, you have to pay $7 in tolls. So, where do people shop? They shop at Staten Island Mall. It's the only show in town, it's the center of the community, and that's our property.
MV: Why do we see so few U.S.-based shopping center owners doing business overseas?
DeRosa: It's clearly a higher risk to go outside the U.S. The retailing business is not an easy business. In the U.K. the lease structure is much different than in the U.S. It's typical to have 30-year leases in London; in the U.S. we have 10-year leases. The basic legal structure of many [European] countries gives certain rights to the lessee, which can make it hard on the lessor. You have to decide as a public company if you are willing to take on that risk and whether you can get a superior return for your shareholders.