Taubman Centers Inc. has turned over the keys t0 Regency Square in Richmond, Va., transferring title of the 1970s-era regional mall to a mortgage lender on behalf of LNR Partners LLC as the asset’s special servicer.
The Bloomfield Hills, Mich.-based REIT, which also owns and operates Stony Point Fashion Park in the Richmond market, has been relieved of $72.2 million of debt obligations plus accrued interest associated with Regency Square on a loan originally worth $82.5 million.
In addition, the company expects to recognize in the fourth quarter of 2011 a non-cash accounting gain estimated to be in excess of $45 million, representing the difference between the book value of the center's debt and other obligations extinguished and the net book value of the property.
Taubman, which has owned the 820,000-sq.-ft. property since July 1997, stopped paying the mortgage on it last June, according to Karen MacDonald, the REIT’s director of communications. The mortgage had an original stated rate of 6.75 percent plus a 4 percent default rate and was originally scheduled to mature in November 2011.
MacDonald says that Taubman decided to let the property go back to the lender because the cashflow from the shopping center wasn’t covering the interest expense on the loan. She adds that the REIT did not try to work with the special servicer to avoid losing the property.
“Most REITs have been in the same situation and have surrendered properties,” says Gerard V. Mason, executive managing director of Savills. “The tipping point comes when you have a property that requires additional, yet it’s not worth the debt it has on it. Why would Taubman or any other owner invest more money in a center when it’s never going to provide a return on that investment? You want to get the dead wood off the books.”
In the third quarter of 2009, Taubman announced it would recognize an impairment charge of $59 million for Regency Square, which experienced declining net operating income and increasing capital expenditure requirements. Subsequently, the company’s board of directors concluded that it was in the best interest of the company to discontinue itssupport of Regency Square.
Regency Square is an anchored by two Macy's, JCPenney and Sears. Other tenants include Aldo, Charming CHARLIE, Sephora and Forever 21. Although Taubman declined to disclose specific numbers regarding Regency Square’s occupancy and retail sales, industry experts says the property is generating less than $250 per sq. ft.
“When the sales per sq. ft. get that low, it’s usually a death knell for a mall,” Mason says. “The bottom line is that Regency Square is an old format, and there are plenty of other options for shoppers. Richmond is over-retailed, and this property is bookended by two newer spectacular properties: Forest City’s Short Pump Town Center and Taubman’s Stony Point Fashion Park. In a way, Taubman cannibalized it own center when it opened Stony Point, and frankly, I don’t think there’s a lot of hope for Regency Square.”
While Regency Square managed to hold its own against the new centers before the recession, Mason says it has suffered a significant decline over the past three years. Moreover, he notes that Richmond has at least three other regional mall properties that are languishing in addition to Regency Square.
“We did not anticipate the saturation of retail in the Richmond market, coupled with the economic conditions and the effect it had on the moderate customer,” MacDonald says, adding that Regency Square is one of two properties that Taubman has surrendered to lenders in the past several years, according to MacDonald. The other property was The Pier Shops in Atlantic City.
Taubman, with the blessing of its special servicer, put Regency Square on the market in mid-2011. “Right now, there are not a lot of buyers for B and C malls, and Regency Square is clearly in that category, although it does still have functioning anchors,” Mason notes. “The pricing for assets like Regency Square is very discounted and usually far below the debt on the properties.”
“Taubman recognized that it’s better to cut its losses and focus on the good center it has in the market,” Mason says. “Allowing Regency Square to go back to the lender was a reasonable decision, and I think Wall Street looks favorably upon the decision because it’s the responsible thing to do.”
LNR Partners LLC has hired Jones Lang LaSalle to lease and manage the mall, and Taubman will work with the firm for a one-month transition period.