Gary J. Skoien saw the handwriting on the mall, so to speak. As CEO of the newly launched Horizon Group Properties (HGP), Skoien knew strategic changes were needed to rescue a portfolio of 13 outlet centers, which by his own account were "weaker-performing malls."
Plagued by dwindling revenues, shifting consumer tastes and stiff competition, the portfolio of the Chicago-based company comprises weaker properties left out of the original Horizon Group's 1998 merger with outlet REIT Prime Retail Inc. In that deal, Baltimore-based Prime Retail acquired 33 outlet centers.
So, when New York-based Prime Capital Holding came calling with its recent proposal to merge with HGP, the advantages of being under Prime's umbrella became obvious. (Prime Capital Holding and its subsidiary, Prime Capital Funding LLC, are not affiliated with Prime Retail.)
The prospects of access to Prime Capital's expanded capital base, including assets of $40 million plus a potential cash contribution of up to $50 million, sent HGP stock to 5 1/4 on the day the merger was proposed, up 1 3/8 from 3 7/8 the previous day.
"There was a positive sense that the company has more value than was reflected in the markets," Skoien says of the proposed merger.
HGP tenants also greeted the news warmly, says Gary Duncan, HGP's senior vice president of leasing. "They see it as a sign that we are strengthening our position in the marketplace by not having to go to outside sources for funding," he says.
Rescue mission HGP includes the most problematic of the original Horizon Group's stable of outlet malls: a portfolio of 2.9 million sq. ft. in 13 malls and one power center, plus two outlet center management assignments.
Even before the Prime Capital merger was proposed, Skoien was optimistic. He started a rescue mission, backing his confidence with an early infusion of $1.5 million in capital improvements.
Skoien is counting on other assets, too. "What should be most compelling to stockholders," he notes, "is the experience and quality of the people we have assembled."
Portfolio management muscle comes from several HGP team members who are closely aligned with the Prime Group real estate family. In addition to being HGP chairman, president and CEO, Skoien also is executive vice president of The Prime Group Inc.
Serving on the company's board is Michael W. Reschke, chairman of Prime Group Realty Trust. Also on the HGP board is another well-known Chicago real estate figure, Norman Perlmutter, chairman of the board of Heitman Financial Ltd.
The proposed Prime Capital merger will change HGP's original intent not to elect REIT status, according to Skoien. For Prime Capital, REIT status makes sense, especially from the shareholders' viewpoint. HGP, which started with 2.7 million shares of common stock, would grow by 11 million shares with the merger.
Strategy attuned to markets HGP's strategy is to maintain its centers as outlet malls only when the market makes sense for it to do so. Other centers in the portfolio are being transformed into hybrids of outlet and traditional retailers.
For example, Horizon Outlet Center in Tulare, Calif. - located between Fresno and Bakersfield - will remain an outlet center. HGP plans to add another 80,000 sq. ft. to the Tulare center by late 1999. "What's key for its success as an outlet mall is that it is in a large market and we can keep expanding its size," says Skoien.
Conversely, HGP's Traverse City center in Michigan is relatively small (120,000 sq. ft.) and is located in a smaller trade area. There, HGP is pursuing a strategy of mixing classes of retailers. "A couple of other traditional centers in the vicinity have declined, so we have been able to get some of these traditional tenants," Duncan explains. "The mix of outlet and non-outlet type stores fits this marketplace."
HGP is also capitalizing on the trend of specialty retailers moving closer to traditional outlet territory. Medford Outlet Center, an HGP mall outside Minneapolis, had been a sleeper until Cabelas, a high-end outdoor hunting and fishing store, opened a 160,000 sq. ft. outlet store a mile away.
Medford has been the beneficiary. HGP cooperates in a co-marketing program with Cabelas that includes a shuttle bus between the two sites. "There is plenty of opportunity for us to pull in family shoppers," Duncan says. "One member of the family shops at Cabelas while the others head to Medford."
Horizon plans to transform a Kentucky outlet mall into an old-fashioned clearance center. Meanwhile, it plans to attract more local, community-based retailers into its Holland, Mich., outlet center.
Creating these kinds of mixtures is not risky as far as the consumer is concerned, says Skoien. At the company's Traverse City mall, for example, shoppers tend to view The Gap outlet there as a regular Gap store. "They go to that store and then they go to the new computer store that's not an outlet," he says. "In the consumer's mind, it ends up being the same kind of retail."
Occupancy shows early increase HGP has only one full quarter of results available, but Skoien is nevertheless buoyed by a 1.6% increase in occupancy at HGP centers during the third quarter of 1998. Average occupancy hit 82%, a jump of 4.4% from January 1998 figures.
HGP centers have an occupancy range of 80% to 95%; average outlet center occupancy exceeds 95% nationally, according to the ICSC. Still, Skoien remains upbeat about his firm's worth.
"It's very early to figure out the real value of the company," he says, "but one way to look at it is to take our last quarter earnings, 41 cents a share, and multiply it times the accepted outlet industry multiple, which is about 7 or 8. This valuation method would put our stock at about $12 a share."
Another benchmark number in outlet mall sales is $200 per sq. ft. (the 1997 industry average was $220). Although Skoien acknowledges the $200 threshold and is pleased that a few of HGP's centers have exceeded that mark, he accepts the notion that some centers will never achieve it.
"But," he argues, "they may work just fine as a mixed outlet community center - for example, our center in Traverse City. They'll make a nice profit and we'll have good returns."
Skoien points to increased emphasis on the performance of existing centers. "Six or seven years ago, if you had a center that was not performing well, the focus was on the pipeline of building new deals," he says. "Companies sometimes failed in that they tended not to pay as much attention to the difficult centers as they should have. This was a big part of the way the industry was operating."
Today is a different story. "We're concentrating on making difficult properties operate profitably," he says.
Toward that end, Skoien has decentralized the company's marketing program. Instead of marketing all the centers from the Muskegon, Mich., headquarters of the former Horizon operation, individual regional managers are responsible for marketing three to five malls.
HGP committed $600,000 to subsidize the marketing plan in an effort to crank up sales at the centers. "With only a few weeks of results to go on," Skoien reports, "at least six of the eight centers receiving subsidized marketing funds are showing positive results."
Urban strategy In another strategic move, HGP plans to acquire and redevelop shopping centers in downtowns and neighborhoods of cities and older suburbs. The vision is to create centers that mix traditional and value-oriented retailers, an approach consistent with a general movement of outlet malls toward cities.
As one of its first urban projects, HGP is negotiating to buy a failed regional mall in Grand Rapids, Mich. "It's a difficult property that's seen better days," Skoien says. "But it gives us an opportunity to buy it at an extreme discount, reposition it and put in some retail that belongs there. Grand Rapids has been under-retailed for its size."
In addition, the company is eyeing a property in an older Chicago suburb. The big city doesn't scare Skoien, even after losing out recently in a proposal to redevelop a high-traffic Chicago Loop corner. Skoien and his team are open to becoming involved in projects that involve Tax Increment Financing funds and other government financing mechanisms, grants or subsidies.
"We're very bullish about Chicago," he says. "Part of it is that Chicago is our home, but part of it is the redevelopment and residential growth downtown and in the neighborhoods."
The type of city product that HGP creates is important to Skoien. "When you see a lot of urban redevelopment, it's often basically just putting suburban strip malls into urban settings," he says. "We are trying to create centers where retailers are willing to have a different mindset from their traditional, car-oriented marketing. We want retailers that are willing to see the advantages of population density - a population that walks or takes public transportation to a shopping center. Parking will always be a component, but I'd hate to be in a position where all we are building is urban strip centers."
Skoien expects the redevelopment program to take a year to begin showing real activity. Meanwhile, in 1999, HGP will concentrate on its most immediate mission: focusing on its current assets.
"We have a big investment in the malls," he says, "and they have to be turned around."