Can the same company operate its own malls and serve as a third-party manager for competing owners in the same market? It's a question that has come to the fore in recent years as more mall owners are expanding their management services to properties outside their portfolios.
The recent purchase of Chicago-based Urban Retail Properties by Simon, Westfield and Rouse from Rodamco North America put this question in sharp relief. Though the three mega-REITs were mainly interested in Rodamco's trophy malls, the deal included Urban — the largest U.S. third-party manager with more than 41 million sq. ft. of retail space under management in 23 states. Urban's client list includes property formats ranging from community centers to mixed-use projects.
But Urban's triumvirate of new owners moved quickly to eliminate the appearance of any conflict of interest, transferring oversight of the new malls acquired in the Rodamco deal to existing, in-house management teams. The new owners then promoted Ross Glickman, an industry veteran and formerly Urban's president of leasing, to CEO, and R. Webber Hudson, another long-time Urban veteran, to president of leasing.
“We have no relationship with the Rodamco properties anymore, except for a Westfield joint venture near Los Angeles,” explains Glickman. “We have carte blanche to go out and build our business despite what Westfield, Simon and Rouse themselves might own. Their ownership of Urban Retail Properties creates no roadblocks for us.”
Under Glickman, Urban Retail reasserted its aggressiveness, securing management contracts for such diverse retail developments as the 1.3 million-sq.-ft. Randhurst Shopping Center in Mount Prospect, Ill., the 1.4 million-sq.-ft. The Shops at Lincoln Square in Bellevue, Wash., and as leasing agent for Tattersall Park, a mixed-use development on 78 acres in Birmingham, Ala.
When Urban Retail was part of Rodamco, the latter's corporate model closely resembled that of General Growth Properties Inc., in that the parent company owned both a portfolio of properties and a third-party management arm. The current structure is slightly different because the ownership is three companies, each with its own portfolio. In any variation, it's definitely been a winning formula, although oddly enough, few other REITs try to wear both hats.
General Growth, which claims to be the largest third-party manager of regional malls in the United States, owns more than 88 million sq. ft. of retail in addition to the 40 million sq. ft. it manages for other owners. In a June 2002 bonanza, the Chicago-based REIT's Third Party Mall Management division snapped up management, leasing and marketing contracts from nine different institutional investors.
With all of that space under the General Growth umbrella, it's inevitable that the company owns and third-party manages centers in the same city. But General Growth says it's not an issue. “We have a separate, independent, third-party management group,” explains Libby Lassiter, a senior vice president with GGP Third Party Management. “We do not commingle staff with the owned properties. Our staff is dedicated entirely to the management of these malls.”
Obviously, GGP Third Party Management clients assume their malls will get complete attention not compromised by the fact that General Growth may also own properties in the same market. “There is never a question that our group is not 100% focused on our third-party properties,” Lassiter stresses.
Some competitors think otherwise. “General Growth owns a number of malls in Houston and it is also actively bidding for other mall properties where it would seem to me to be a direct conflict with its own stuff,” says Joe Dubuc, director of business development for Insignia/ESG in Houston. “There is a competitive advantage for them, and a competitive disadvantage for an owner who does not know any better.”
When pitching new business, Dubuc says he doesn't hesitate to paint a scenario where General Growth already owns properties and that those properties will get a first look. “General Growth wears an ownership hat and a third-party management hat and I'm not sure at the end of the day who gets more attention, but I think it's the ownership hat.”
The third-party conflict of interest is out there, observes Patrick O'Leary, a managing partner with Chicago-based L&H Real Estate Group, “but it doesn't seem to register on anyone's radar screen.”
Like Dubuc, O'Leary says the potential conflict is something he always brings up when bidding against General Growth or Urban Retail.
L&H, formerly Landau & Heyman, has been in the shopping center business since 1933, owning, leasing and today managing about 9 million sq. ft. of space. Insignia third-party manages about 17 million sq. ft. of retail space that at any given time includes 5 million to 6 million sq. ft. of enclosed malls, the latter of which is usually owned by institutional or corporate and private investors. Although much smaller than Insignia, L&H targets the same customer. A typical project for L&H would be a large mall in Indiana, which it manages on behalf of a major insurance company.
Companies such as Insignia and L&H usually bump against GGP Third Party Management and Urban Retail Properties in the institutional field. For example, Urban Retail boasts such clients as JP Morgan Investment Management, MetLife, Commonwealth Realty Advisors, State Teachers Retirement System of Ohio, Lend Lease Real Estate Advisors and Walton Street Capital. Meanwhile, GGP Third Party Management's clients include Citicorp, Equitable/Merrill Lynch, Massachusetts Mutual Life, Oaktree Capital, Wells Fargo and Whitehall Street Real Estate Funds.
Much smaller than Urban Retail and General Growth, privately owned Rosen Associates Management Corp. (RAMC) in Jericho, N.Y., has opted for a similar business model. RAMC owns, invests in and manages more than 7 million sq. ft. of retail properties in 28 states.
Naturally, RAMC supports the view that one company can own and third-party manage properties in the same market. “It would be unfair to say if I own a mall in one place that I shouldn't manage someone else's,” says Michael Winters, RAMC's vice president of acquisitions and finance. “It's more effective to do so because of economy of scale.”
At any one time, RAMC manages three to five malls, usually smaller centers that require a lot of hands-on, entrepreneurial talent. “Our expertise lies in special cases,” says Winters. “In these economic times, people are more bottom-lined focused and tend to be more concerned about retaining tenants and managing expenses, so they have been shopping around,” Winters adds. “We've had a lot more opportunities presented to us.”
So have the bigger companies. “Most of the business that has come to us,” says Lassiter, “is due to our reputation and size. If someone needs third-party management on regional malls we are going to get calls no matter what. The market has been very active for the first six months of this year.”
Urban Retail has added approximately 13 million sq. ft. of retail properties to its third-party management portfolio over the past two years. “We are going after owners that really need to run their assets and don't have anything in-house to do so and don't anticipate bringing this discipline in-house,” says Glickman. That should preclude Urban Retail from going after Westfield, Simon or Rouse business.
Urban Retail has created a Chinese wall between itself and the owning REITs, says Glickman. “The owners of Urban have no right to proprietary information on any of our clients. They can not ask for expiration dates, volume, anything that is proprietary. We have purposely conflicted ourselves out of any of these types of situations and we have been able to convince clients to that effect. We have had no defections from our ranks and we are out procuring new business.”
General Growth's third-party boom
Chicago-based General Growth Properties' status as a mall owner hasn't hurt its portfolio of third-party managed properties. In fact, the REIT recently added approximately 7 million sq. ft. of institutionally-owned regional malls to its list of clients. The company's Third Party Mall Management division now includes 40 million sq. ft. of GLA in 49 malls in 25 states.
The newly added General Growth Third Party Management malls include: Fiesta Mall, Mesa, Ariz.; The Hanover Mall, Hanover, Mass.; Stratford Square Mall, Bloomingdale, Ill.; Garden City Center, Cranston, R.I.; Sandburg Mall, Galesburg, Ill.; Marquette Mall, Michigan City, Ind.; Auburn Mall, Auburn, Maine; Adrian Mall, Adrian, Mich. and Ford City Mall, Chicago.