Feldman Equities investing in distressed retail properties.

With financing abundantly available at record low interest rates, Feldman Equities has been very successful recently with a strategy of investing in second-tier mall and distressed retail properties that require a turnaround strategy.

Currently, the second tier mall is a category that is out of favor with most potential purchasers of commercial property. This herd mentality has enabled Feldman to acquire such assets at attractive prices and consequently Feldman is achieving above average returns. The reason that most buyers have avoided the second tier mall category is based upon the concern that power centers and larger regional malls continue to increase market share at the expense of the mid size and smaller enclosed mall. While this concern is warranted in many cases, Feldman is proving that there is a niche for the smaller and mid-sized mall.

Typical candidates for this turn-around strategy are malls of 500,000 SF and above that require equity investments ranging from $5 million to $30 million. One of the major benefits of investing in this category of real estate is that after all acquisition and renovation costs are factored in, the total project cost is still well below total replacement cost.

Because these properties can be acquired far below replacement cost, they hold tremendous upside potential through the implementation of a major renovation plan and an aggressive leasing campaign to attract new tenancy.

The key to such campaigns is to seek out specialty retailers and merchandisers that don't compete with power center merchants or traditional mall based department stores. For example, Feldman Equities has recently signed leases or pad deals with five new tenants at its Foothills Mall property in Tucson, none of which compete with the traditional mall or power center. Some of these tenants are: Crescent Jewelers (a discount jeweler), As Seen on TV (a specialty retailer), Just Sports (sports memorabilia), Fox and Hound (a British pub and restaurant), and Wilson's Leather (a factory outlet specialty retailer).

At Feldman Equities, we believe that each of these properties has their own redevelopment solution, provided that the demographics are right. More specifically, Feldman Equities looks for secondary and tertiary locations that are undergoing major population growth. For example, given the very high rate of growth that Tucson is experiencing, the Foothills acquisition gives Feldman the opportunity to own a mall in what may likely become a major market within the next five years. The strong population growth gives Feldman greater exiting liquidity for the property if it elects to sell the mall.

The Feldman strategy involves attracting the right tenant mix of premium factory outlets and specialty retailers which offer higher end designer label products at sharply discounted prices, combined with an entertainment anchor such as a multiplex theater and a series of upscale restaurants.

Feldman Equities also looks to fill its malls with a series of junior anchors such as Linens 'N Things, Saks Off Fifth, Nike Factory Outlet, Ross Stores, etc. This strategy solves three problems at the same time. First, the mall is less dependent on the large department stores that have been steadily losing market share to the specialty discounters. Second, by filling the mall with a series of smaller junior anchors, the solvency of the mall is less threatened by the potential bankruptcy of a department store, or a decision by a department store to shut down a particular location. Third, by installing multiple junior anchors, the mall has a better chance of attracting a wider array of shoppers.

In addition, attracting brand name tenants, filling in "dead spots" in the mall with poor pedestrian circulation, and filling in missing tenant categories, are all parts of enacting a successful and comprehensive leasing plan.

In addition to renewing existing high-volume and profitable tenants at the best possible market rents, this re-leasing process also includes weeding out unhealthy, low volume or unprofitable stores in a proactive way that allows failing tenants to cut their losses by buying out of their leases and applying the resulting short-term income towards incoming tenant inducements.

But attracting the right tenant mix is just part of the turnaround strategy. Effective property management and capital investment are also key to a mall's success. These investments vary from project to project, but include improving interior and exterior signage and injecting life into dead areas of a property, whether it is through special promotions, entertainment or filling vacancies with temporary users. For example, at its Tucson property, Feldman allowed a restaurant to open in a very quiet section of the mall, placing its tables directly in the middle of the mall with a full time piano player.

The successful mall turnaround may also include improving visibility of key tenants, constructing new entrances or implementing ways to improve shopper circulation throughout the property. It also involves management support of intensive marketing programs geared to the local trade area and promotional activities that assure a constant flow of events occurring at the mall, such as musical performances, sports promotions, radio station events and hosting other civic and charitable functions. Typically, Feldman subsidizes the mall's marketing fund by $250,000 per annum or more over and above the tenant's contribution.

Feldman Equities is confident that discount retail malls will continue to be successful through a possible recession era, as tightened disposable personal income will migrate to these discount retailers vs. the high-end retailers. However, the opportunity for investing in these malls at relatively affordable prices may be waning, as prices of these assets are beginning to rise, marking down yields.