How to succeed in business with strategic turnarounds.

The mall landscape is littered with the names of once great department stores that have succumbed to bankruptcy or are in the middle of downsizing in an effort to keep afloat. Many malls have suffered substantially as Wal-Mart and Target continue to roll out their superstores. There are approximately 1,200 enclosed retail malls in America and a rough estimate is that one fourth of these malls are in trouble, at least to some degree. Some malls are witnessing eroding market share, while others are experiencing massive vacancies and foreclosure.

Feldman Equities has been very successful with a strategy of investing in distressed enclosed retail malls, which most real estate investors have avoided for reasons ranging from the fear of retail bankruptcies to the Wal-Mart juggernaut theory.

Typical candidates for the Feldman turnaround strategy are enclosed malls of 500,000 s/f and above, which require gross investments (including debt, equity and upgrade costs) ranging from $25 million to $150 million. In almost all cases, the total costs of acquisition and renovation result in a total redevelopment cost well below replacement cost and distressed malls are often in very good locations.

We approach each mall situation by coming up with a comprehensive strategic turnaround plan. The strategic plan almost always involves devising a strategy of "Wal-Mart proofing" the mall through an aggressive leasing campaign. The number one objective of the leasing campaign is to seek out new anchors and specialty retailers that don't compete with Wal-Mart or the typical power center down the block.

Our strategy involves attracting the right mix of specialty retailers that offer specialized products not available at Wal-Mart. The strategy also combines these specialty retailers with an entertainment anchor, such as a multiplex theater and a series of upscale restaurants.

In 2003, Feldman acquired the foreclosed Harrisburg Mall in Harrisburg, PA from Prudential Insurance for $17.5 million. Following a bankruptcy in 1999, the mall was put up for auction. There were no bids, so the mall reverted back to Prudential (the lender) who secured title to the mall with a total debt in excess of $45 million. Prior to our acquisition, the property was in grave danger of being demolished for land value.

Concurrent with the acquisition, Feldman signed two new anchor leases and renewed a lease with a third anchor totaling over 590,000 s/f. The new tenants include Bass Pro Shops, which signed a long-term lease for space vacated by former tenant Lord & Taylor. Bass Pro is renovating and expanding the former Lord & Taylor store to convert it into a spectacular super store consisting of approximately 225,000 s/f of fishing and hunting products. Excluding their flagship store, the Harrisburg store will be the largest Bass Pro store in the nation. Boscov's department store also signed a long-term lease for space occupied by former mall tenant JC Penney.

In addition, an existing tenant, Hecht's (a division of the May Company), made a long-term commitment to the mall and extended its lease to 2024. The expansions of Bass Pro and Boscov's will result in an overall mall size of over 900,000 s/f.

Bass Pro Shops is one of the strongest sporting goods retailers in the U.S. The typical Bass store averages over $400 per s/f per annum in sales. The key reason for this very high level of sales is the fact that Bass Pro Shops is also an entertainment destination. The Harrisburg store will feature a 40,000 gallon aquarium, rock climbing walls, waterfalls and an indoor shooting & archery range.

The typical store draws up to three million visitors annually. That figure will make it one of the largest tourist destinations in the state of Pennsylvania. Because of the new tourism-related jobs that will be created and the taxes that will be generated, Feldman arranged for a multi-million dollar grant from the state, as well as special tax incentives from the township, county and local school district. In addition, Feldman arranged for the Pennsylvania Department of Transportation to provide a direct exit ramp to the property from Interstate 83.

Feldman Equities also likes to fill its malls with a series of junior anchors with specialty products not found at Wal-Mart stores. This strategy solves several problems at the same time. First, by filling the mall with a series of "big-box" specialty retailers as anchors, the mall is less dependent on traditional department stores that have been steadily losing market share to the discount retailers. Also, 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 large department store or a decision by a department store to shut down a particular location.

Effective capital investments is also integral to the success of a mall turnaround. These investments vary from project to project, but include a) the renovation of the mall's exterior facade, (b) the renovation of the mall entrances, (c) an upgrade to the mall's common area corridors and lighting, (d) resurfacing of the mall's entire parking lot and (e) upgrading of the mall's signage.

In addition to renewing profitable high-volume tenants at the best possible market rents, the 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.

Successful mall turnaround also includes improving visibility of key tenants, constructing new entrances or implementing ways to improve shopper circulation throughout the property. It involves intensive marketing programs geared to the local trade area and promotional activities that assure a constant flow of events, such as musical performances, sports promotions, radio station events and other civic and charitable functions.

LARRY FELDMAN

PRESIDENT AND CEO FELDMAN EQUITIES