When hedge-fund investor Edward Lampert engineered the Kmart Holding Corp. takeover of Sears, Roebuck & Co. (see news story on page 10), he articulated a strategy to reverse the long slide of Sears. The plan? To use Kmart locations, in strip malls and power centers to move the retailer out of the traditional enclosed mall to “where the Best Buys, Targets and Home Depots are.” In other words, the all-American department store (Sears and its counterparts) will no longer be the anchor that draws the consumers to the mall.

This is not news to anybody in the mall business. “I think the feeling is that traditional enclosed malls are in decline,” says Karl Bjornson, a retail specialist for Kurt Salmon Associates. “They aren't being built like they used to and they're not as popular as the new lifestyle centers.”

If you are a retail REIT with a portfolio of enclosed malls, like Chattanooga, Tenn.-based CBL & Associates Inc., you can't take this lying down — you need a strategy. The idea, which was hatched around 2001, is sort of the opposite of what Lampert has cooked up for Sears: Instead of taking the mall anchor out to the strips, power centers and lifestyle centers, CBL, which has 61 Sears stores in its portfolio, is bringing the stores that anchor those types of developments into its malls.

CBL has enhanced its properties by adding major national retailers as nontraditional anchors. Almost all of its new anchors are split between four non-department store retailers: Linens ‘n’ Things, Barnes & Noble, Dick's Sporting Goods and Steve & Barry's, a university sportswear store that has branched out into other lines of clothing.

To enhance its 67 enclosed malls, located mostly in the Southeast and Midwest, CBL employs an aggressive policy of recruitment with major retailers. Using trade shows and other opportunities, the company reaches out to nontraditional retailers. “What we will do is have a series of meetings where we review our entire portfolio with retailers and discuss opportunities,” says Stephen Lebovitz, CBL president.

The first set of nontraditional anchors were built in May 2003 with the opening of a Linens ‘n’ Things at Parkdale Mall in Beaumont, Texas, and a Steve & Barry's in Cincinnati's Eastgate Mall. CBL is now set to have a total of 22 nontraditional anchors in its enclosed malls by 2005.

Of these unconventional anchors, about 16 required some addition to an enclosed mall. Five replaced closed anchors, and many were built on new pads. In some cases, new space was created by adding an extension to reconverted store space. “It's a combination of recapturing small shop space and taking advantage of excess parking in order to pop a building out,” says Lebovitz. “That's the main way we add new anchors.”

For example, at the Panama City Mall in Florida and at the Foothills Mall in Maryville, Tenn., CBL relocated existing tenants and built additions to assemble spaces of 25,000 and 30,000 square feet for Linens ‘n’ Things and TJ Maxx, respectively. To bring Dick's Sporting Goods to the Fayette Mall in Lexington, Ky., CBL built a two-level, 80,000-square-foot shell, part of a 140,000-square-foot expansion that will accommodate seven additional stores. Construction on the extension won't be completed until October 2005.

In the case of former anchors leaving empty space, however, CBL will sometimes buy back that property from the retailer. For example, at the East Towne and West Towne malls, both in Madison, Wis., CBL bought space back from Saks' Boston Store and converted it into Dick's Sporting Goods and smaller shops.

Unlike traditional mall anchors such as Sears or JCPenney's, which usually own their spaces, most of CBL's new retailers lease their space from the company. “Some of these boxes are just 25,000 square feet,” says Lebovitz. “They aren't large companies and usually don't have the capitalization to own their real estate.”

That could be a problem for some of the new nontraditional anchors, because mall rents tend to be “significantly higher” than at standalone sites or strip centers, says Bjornson. However, the trade-off is increased traffic and sales from the mall.

Good Sports

Even as department stores have lost favor and other formats have attracted consumers, the traditional enclosed malls retain an advantage that can't be underestimated. Growing up with the sprawling suburbs, they are located on prime real estate along major highways — often in more convenient, high-traffic locations than the more remote spots where big-box retailers and specialty chains like Linens ‘n’ Things congregate.

In some cases, the smaller nontraditional anchors can't fill an entire space left vacant by a larger department store. For example, when a Dick's Sporting Goods was added at Madison's West Towne Mall, it didn't quite fill the space from a former Saks' Boston Store. The leftover space allowed the owners to bring on additional retailers such as Coldwater Creek, Cache and a new Build-A-Bear.

One retailer that works well with the different size constraints of CBL's vacancies or additions is Steve & Barry's University Sportswear. Originally selling just university wear, the Port Washington, N.Y.-based company has expanded to offer different types of clothes for all age groups. This range of merchandise allows the retailer to be flexible in the type of space it can occupy. It can take a smaller space just for its university sportswear or fill a larger area with apparel for men, women and children.

“They can take a space ranging from 35,000 square feet to 100,000 square feet,” says Lebovitz. “They are more atypical than the other retailers, which have a fixed store size.” For instance, the Steve & Barry's store at Regency Mall in Racine, Wis. is 99,000 square feet, while the store at Huntsville, Ala.'s Madison Square Mall is only 30,000 square feet.

Besides adding nontraditional anchors to their properties, mall owners such as CBL have learned that certain stores lumped together can form a combined anchor. “I don't think we necessarily always look at one single store as an anchor, when you can also have a cluster of stores to serve as draw,” says Lebovitz.

Higher-end retailers, such as Cold Water Creek, Williams-Sonoma and the Pottery Barn, can create a quasi-anchor and a lifestyle mix for a mall.

Whether the addition of big-box, nontraditional anchors to CBL's malls will bring success remains to be seen. However, the company reported third quarter earnings for 2004 of $1.30 per share, about 8 to 9 cents greater than analyst estimates.

These results, and the company's strategy in expanding its centers and filling anchor space, have been greeted warmly.

“Successful development skills do not materialize overnight,” wrote Smith Barney REIT analyst Jonathan Litt in a recent report. “Over its 50 year history, CBL has been able to effectively combine ground-up development of regional malls in smaller markets, redevelopments of existing centers and opportunistic acquisitions to generate a high return on capital.”

But Lebovitz cautions placing responsibility for higher earnings on the new anchor spaces. “They haven't been open that long,” says Lebovitz. “Our sales have been up 4 percent to date. We can't trace it to one factor. We can't say how much is tenant mix and how much is the economy.”

However, other mall owners who have used a similar approach say the strategy definitely works. The Mills Corp. also has actively sought nontraditional anchors for its malls. During the third quarter of 2004, Mills added a 100,000-square-foot Wannado/Kid City to its Sawgrass Mills property in Sunrise, Fla.

Mills Chairman and CEO Laurence Siegel attributed the use of nontraditional anchors to the higher earnings per square feet, which increased 6.3 percent in a one year period to $355.

“One of the keys to this strong performance has been our ability to constantly enhance our properties through the additional of exciting new tenants,” said Siegel.

CBL maintains that bringing new and different anchors is really just about adding diversity.“We can bring more traffic and increase sales by offering our customers the best retailers available,” says Lebovitz.

RETENANTING

PROBLEM:

CBL & Associates, owner of 67 enclosed malls primarily in the Southeast and the Midwest, has seen other formats siphon away traffic. A big downer in malls — in terms of appeal, revenue and valuation — has been the lurking shells of dead department store anchors.

SOLUTION:

CBL has successfully recruited nontraditional anchors. They include Linens ‘n’ Things, Barnes & Noble, Dick's Sporting Goods and Steve & Barry's, an up-and-coming retailer that provides collegiate sportswear. These tenants fill dead space and bring greater diversity to malls.

BUZZ:

Because most of these anchors lease space, the mall operator benefits from rents. The tenants pay higher rents than off-mall, but enjoy higher sales. CBL plans to use this strategy at two regional malls it bought in November for $250 million. One, Northpark Mall in Joplin, Mo., has two empty anchor pads formerly occupied by Montgomery Ward and Shopko.

DATA:

CBL reported third quarter earnings of $1.30, an increase of 14 cents, or 12.1 percent, over last year. The company won't say how much boost it gets from new anchors. Mills, which has used similar tactics, says record tenant sales of $355 per square foot in the third quarter were partly due to the addition of nontraditional tenants.

SOME NONTRADITIONAL CBL ANCHORS

Shopping Center Anchor
Rivergate Mall Linens ‘n’Things
Panama City Mall Linens ‘n’Things
Midland Mall Barnes & Noble
Brookfield Square Barnes & Noble
Eastgate Mall Steve & Barry's
Madison Square Steve & Barry's
Regency Mall Steve & Barry's
East Towne Mall Gordman's
The Lakes Dick's Sporting Goods
Citadel Dick's Sporting Goods
Randolph Mall Cinemark