THE WATCH LIST NEWSLETTER 1

A WEEKLY NEWSLETTER FOCUSING ON CHANGING MARKET CONDITIONS, COMMERCIAL REAL ESTATE, MORTGAGES AND CORPORATIONS PUBLISHED BY COSTAR NEWS

IN THIS WEEK'S ISSUE:

The JCPenney/Sears Effect Part I: Retail REITs Target Malls for Pruning Portfolios ........................................................................ 1 The JCPenney / Sears Effect Part II: Retail Center Owners, Tenants Seek Out Growth Opportunities Through Repositionings ..... 4 Taking Stock of Landlords Following JCPenney’s Plan To Close 33 Stores ..................................................................................... 7 Simon Property To Spin Off New Retail REIT ................................................................................................................................... 9 Vornado Becomes Latest To Spin Off REIT Into Crowded Strip Shopping Center Field ................................................................. 10 CBL Planning Major Restructuring of its Mall Portfolio .................................................................................................................... 12 Pricing Becoming More Attractive for Large Regional Malls ............................................................................................................ 13

The JCPenney/Sears Effect Part I: Retail REITs Target Malls for Pruning

Portfolios As These Major Anchors Become Outdated and Outmaneuvered, Retail REITs Struggle to Reposition

Their Portfolios

There was a time not so long ago when no self-respecting mall would consider opening without JCPenney or Sears as one of its major department store anchors. Today, the nation’s major shopping mall/center REITs are doing everything possible to dump as much of their holdings containing the once unstoppable retailers in favor of what they see as higher-producing properties with growth potential. As a result, the market is now flooded with opportunities to pick up B- and C-rated malls in secondary and tertiary markets across the country. The REITS don’t come right out and say they’re discarding their JCPenney/Sears holdings. They couch it by using such terms as "non-core," "Tier 3," "bottom-half" and "underperforming." But make no mistake, they’re largely talking about malls anchored by the two troubled retailers. Glimcher Realty Trust this month announced plans to sell three to four of its malls to raise $200 million to $300 million of capital. The REIT hired Eastdil Secured, a subsidiary of Wells Fargo & Co., to list and market 13 of its regional shopping malls with the goal of selling three or four. They identified the 13 properties that will be listed for sale without publicizing their retail anchors. According to CoStar's information, 10 of the 13 malls have both JCPenney and Sears as anchors; two have one or the other and only one has neither. "The idea behind listing the larger portfolio is that we don’t want to guess or assume, which properties the market will be most interested in," explained Michael Glimcher, chairman and CEO of Glimcher Realty. "By offering a larger selection, we believe that we’ll be in a best position to maximize the element pricing and execution of our strategy." The 13 retail centers combined generate average sales per square foot in the mid $300s. "We would like to have a portfolio doing in excess of $500 a foot delivering 3% to 5% growth," Glimcher said.

MARK HESCHMEYER, EDITOR WWW.COSTAR.COM MAY 5, 2014

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Could it sell more of the 13 properties than three or four? Sure. "We are evolving; we are more than midway through our evolution; and it’s step by step. This is a very measured process, so it’s three to four assets, it’s not a massive portfolio today but if it gets a little bit bigger, it’s certainly something we would consider but don’t have to do," Glimcher said. In addition to the 13 malls that Glimcher will start marketing, the REIT has been shopping another one since the start of the year: the Eastland Mall in Columbus, Ohio. It too has JCPenney and Sears as anchors. In the case of this property, if the REIT doesn’t find a buyer in the next month or two, it plans to allow the mall to go back to the loanholder on $40 million note. The lender could then pick it up for about $28 per square foot. "We believe dispositions represent an important part of our three-tiered approach to remixing our assets and establishing a higher quality mall portfolio," Glimcher added. "We are optimistic about the current market environment and believe this disposition plan allows us to continue to build upon our success, ultimately making us a stronger company."

AGING POPULATION, AGING MALLS

So what’s gone wrong with once-celebrated retailers of a bygone generation that their landlords want to ditch them as fast as they can? "There are a few factors, in my view, that impact the current [mall] repositioning trend," said Jim Carr, president and CEO of Vistacor LLC, a real estate services firm in Norfolk, VA. "In the 1970s, Sears and JCPenney pushed the growth of shopping malls, which were mainly attended by post WWII families. By the early 1980s, Sears was the largest retailer in the world." "But in the second half of the1980s and into the 1990s the Baby Boomers were growing up and at the peak of their consuming activities," Carr continued. "They influenced the 'category killers' like Toys R Us or Best Buy and discounters like TJ Maxx, which collectively laid waste to Sears - as did upstart Walmart." "It also laid waste to the enclosed shopping malls that were part of the Sears/JCPenney growth plan and ushered in the era of the ‘power center,’ " said Carr. "Add to this the loud ‘thunk’ everyone heard in 2008 as total retail sales fell off a cliff (in relative terms), dropping about 10% for the first time in anyone's memory. That really shook the markets for retail space. That caused everyone from Nordstrom's to Family Dollar (to) look hard at their business model. Even the most recent phenomenon, the ‘lifestyle center,’ is losing tenants like Coldwater Creek and others," Carr said. Steven Blair, senior vice president of Strategic Property Associates in Foothill Ranch, California, said that the major factor driving the repositioning, either through spinoffs or dispositions, of retail shopping centers is the rapidly changing retail landscape. "Shopping center owners, especially those owners with large mall holdings, realize that the malls which are not centrally located in their respective retail markets are becoming rapidly out dated," Blair said. "A number of these malls are anchored by tenants such as JCPenney or Sears." And softening retail sales among such aging retailers is bad news for shopping center owners. "In a number of cases," Blair said, "these tenants are not owned by the shopping center owner but owned by the company themselves, or have extremely favorable long term leases, leaving the owner with little control or options for these spaces. Some of these non-owned anchors can take as much as 40% of the net rentable space."

THE MARKET FOR B- AND C-RATED MALLS

Another reason why the big mall owners are choosing to sell off Class B- and C-rated malls, is that it appears now is a good time.

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According to data from CoStar COMPs, the number of 3- and 4-star rated (i.e. mostly Class B) shopping centers sold in 2013 was the highest in years, totaling $50 billion in volume, up from $35 billion in each of the previous two years. Prices on those properties have bounced around quarter to quarter from a low of $100 per square foot to a high of $160 per square foot. The average sale price for such properties in the first quarter of this year is about $140 per square foot. Sales of CoStar’s 1- and 2-star rated (i.e. mostly Class C) shopping centers are following the same pattern. Sales volume soared in 2013 to $35 billion from around $20 billion in each of the two previous years. Sales prices in this group also bounced around quarter to quarter from a low of about $75 per square foot to a high of $175 per square foot. First quarter 2014 sales averaged about $125 per square foot. According to the REITs, there is quite a bit of investor interest in B mall segment. To attract those investors, Glimcher, in particular, identified malls that have average retail sales of approximately $300 per square foot, noting that such malls are easier to finance and can be refinanced through a CMBS securitization. Below that retail sales threshold, financing options are still available but more limited, the company said. The strength of the investor activity may not be favoring Sears and JCPenney-anchored centers, however. According to CoStar COMPs data, sales of malls with one or the other or both of these two tenants have held fairly steady at around $1.5 billion a year for each of the last two years, well down from the sales of such properties in 2011. The average price per square foot has fallen dramatically, from $189 in 2011, to $85 in 2012, $76 in 2013 and $72 in the first quarter of this year. This week, CBL & Associates, a Chattanooga-based retail REIT announced that it contracted to sell its 489,030-square-foot, JCPenney- and Sears-anchored Lakeshore Mall in Sebring, FL, for $14 million, or just about $29 per square foot. The mall also includes Kmart as an anchor, another Sears-owned company. The buyer was not identified and the deal is expected to close in May. In January, a CMBS loanholder foreclosed on another CBL-owned property: the 1.08 million-square-foot, Sears- and JPenney-anchored Citadel Mall in Charleston, SC, for $65 million or about $60 per square foot. The types of buyers interested in malls anchored by the two tenants has changed over the past couple of years. In 2011, major institutional investors represented the bulk of the buyers. However, as prices have come down, private individual investors have made up the bulk of the buyers since 2013.

ASSESSING AT RISK SPACE

REIT analyst Ki Bin Kim of SunTrust Robinson Humphrey, estimates that U.S. mall REITs have 16.6% of their gross leasable area leased to JCPenney and Sears, but only 8.9% of that space is considered to be ‘at-risk,’ according to Kim. "Assessing the quality of the of ‘at-risk’ JCP/Sears space is more important than simply summing the quantity of GLA (gross leasing area) because having a JCP/Sears lease in a high quality center can be an opportunity to create value vs. risk," Kim said. "Many of the Sears/JCP leases pay practically minimal rents of $2 to $4 per square foot. If this space happened to be vacated (and re-leased) at a higher quality mall, it could provide measurable upside." "Overall, we estimate that U.S. malls are well situated to absorb JCP and Sears store closures, as long as it doesn’t occur at the same time, overnight," the SunTrust Robinson Humphrey analyst said. Kim considers mall REITs that have the lowest ‘at-risk’ exposure to be Taubman Centers, Westfield U.S., Simon Property Group, Macerich and General Growth Properties, in that order. In assessing their exposure, the majority

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of JCP/Sears leases in their portfolios are generally located in higher-quality malls, in space that has a higher likelihood of being re-leased at a better economic rent. "Conversely, Kim added, "we estimate that CBL & Associates, Rouse (a GGP spin-off), Washington Prime Group (Simon Property Group's selection of malls to be spun off) and Pennsylvania Real Estate Trust are at relatively more risk, in order of most to least risk," Kim said.

The JCPenney / Sears Effect Part II:

Retail Center Owners, Tenants Seek Out Growth Opportunities Through

Repositionings Mixed-Use Centers and Gateway Markets Represent the Future for Owners and Tenants

Like other major retail REITs across the country, The Macerich Co. (NYSE:MAC) has moved aggressively to dispose of its JCPenney- and Sears-anchored centers. Over the last several years, the one-time retailing pioneers that drove the spread of shopping malls have been hit hard by changing consumer preferences, shopping patterns and shifting demographics around their locations. "Although we had already substantially improved our portfolio, we decided in 2013 to pursue a strategy of further upgrading our asset base by disposing of additional non-core assets, those with lower sales productivity and slower-growing net operating income (NOI)," Arthur M. Coppola, chairman and CEO of Macerich, wrote to stockholders this spring. "We successfully disposed of eight malls and one office complex during 2013 and generated gross sales proceeds of $856 million." Unlike competitors GGP and Simon Property Group, Macerich decided not to separate its core and non-core malls through a spin-off or corporate reorganization. "We elected not to follow this strategy because we wanted to retain the proceeds from our non-core dispositions to benefit our stockholders by investing those proceeds into our proven centers and new centers," Coppola said. With respect to JCPenney and Sears, Coppola believes his company has substantially reduced the relative risk from JCPenney and Sears stores in its portfolio through the recent disposition program. During the past quarter, Macerich sold Lake Square Mall in Leesburg, Florida (with JCP and Sears as anchors); Rotterdam Square in Schenectady, New York (Sears); and Somersville Towne Center in Antioch, California (Sears and Kmart). The total sales proceeds were $34.1 million. The average tenant sales-per-square foot of these centers was $244. Following the dispositions, 89% of Macerich’s net operating income (NOI) is now generated from properties that average sales in excess of $600 per square foot and are located in some of the most densely populated and fastest-growing markets in the U.S. The profile of Macerich’s current portfolio is described as the prototype of where some in the industry see as the future of the shopping mall market. The second largest loan in a new CMBS this spring from Goldman Sachs (GS Mortgage Securities Trust 2014-GC20) is on the Greene Town Center, an open-air, mixed-use lifestyle center in Beavercreek, Ohio, about 10 miles southeast of the Dayton central business district.

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The retail property backing the $90 million loan measures 566,634 square feet of retail space and includes 143,343 square feet of office and 206 residential units. The center is anchored by a Von Maur department store, which signed a 130,000-square-foot ground lease, and Urban Active Fitness, which leased 51,414 square feet. According to Fitch Ratings in its presale CMBS report, this retail center is considered to have a competitive edge over its primary competitors: The Dayton Mall and The Mall at Fairfield Commons, both of which have Sears and JCPenney as anchors. Retail tenants have been fleeing the competing malls. The following stores have closed at one or both of those competitors and remained open or relocated to Greene Town Center: Eddie Bauer, Stride Rite, Talbot’s, Express, Gap, Ann Taylor Loft, Chico’s and CJ Banks. The movement among popular retailers toward mixed-use and lifestyle centers is likely to continue and possibly accelerate. According to the popular eatery The Cheesecake Factory, virtually every shopping center landlord wants to put restaurants in their centers. "I know that some of the larger groups out there are remodeling at least 20% of their spaces," said Cheesecake Factory David Overton chairman and CEO. "They are adding on, there are lots of things happening, they are adding condos, they are adding businesses, they are adding offices. A lot of these centers are going to be multi-used and they are going to be perfect for a restaurant like ours." However, Overton added, "The B and C malls are another story. We are not in them, thank goodness, that’s not our problem."

WEEDING OUT FALTERING MALLS

Some of the lower-quality properties anchored by both JCPenney and Sears are leaving owners, potential buyers, lenders and existing retailers with a lack of confidence in properties with few attractive options for re-leasing the space. REIT’s try to sell them because their low sales drag down the sales numbers they report corporately and more importantly, the cost of re-leasing them creates a huge strain on the portfolio where higher rents in A properties are otherwise achievable. However, that doesn’t mean that the big REITs are abandoning or neglecting all such properties. Analysts at Morgan Stanley Research noted that Simon Property Group recently refinanced West Ridge Mall via a $53.9 million loan securitized in a new CMBS loan this spring (COMM 2014-CCRE16 Mortgage Trust). The mall is one of the first among those Simon previously identified to spin off to be refinanced, making it an interesting case study. "This is especially true since our previous analysis suggested that West Ridge Mall may be difficult to refinance," Morgan Stanley analyst Richard Hill said. West Ridge Mall was previously encumbered with nearly $65 million and Morgan Stanley had previously projected a valuation of $68.9 million. The mall was subsequently re-appraised at $67.8 million, which suggested $20 million or more of equity would be needed to refinance on a standalone basis, Hill said. Instead, Simon used a creative strategy of pooling the property with another nearby strip center it owned (West Ridge Plaza) that was previously unencumbered. "This refinancing strategy may demonstrate a commitment by (Washington Prime, Simon’s newly formed spin-off company) to certain assets that fit their target profile. Consider that the West Ridge Mall property is the only traditional regional mall within approximately 45 miles of Topeka, Kansas,” Hill said.

FINDING EMERGING BUYERS

"The solution owners of these slow-dying centers must be searching for is a significant player coming along to purchase the spinoff, or a select portfolio of properties that has the ability to execute a different retail strategy or other use for the property effectively changing the real estate play," noted Steven Blair of Strategic Property Associates." Not an easy task and one that will take innovation, not a greater fool."

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So what prospective buyers are most likely to take on the challenge? Gerald Divaris, chairman and CEO of Divaris Real Estate in Virginia Beach, Virginia, said it could still be other REITs. "There are various REITs in the market, some of whom look for acquisitions in tertiary markets," Divaris said. "Depending on cap rates, they could be buyers for some of these properties. In particular Divaris said there are 'value creation' buyers who acquire properties that no longer fit the required profile of their owners. "These buyers purchase properties to re-position and re-tenant the property, before taking it back to market," he added. In those cases, the location of the real estate still may be attractive to other users, such as specialty food, medical, education and service businesses. These are the types of companies that are most actively back-filling these properties, he added. Other retail executives and industry analysts said many of these centers can be adapted to fill a need for mixed use space housing local or regional tenants within a smaller or less populated trade area. Some of these properties are true de-malling projects and may only have a future as something totally different. In such cases, propsective buyers are most likely private equity 'value-add' or 'opportunistic' real estate funds. The exact nature of the buyer for any given property will depend on the risk associated with the specific property, which will depend on the business health of the remaining tenants and attractiveness of the center’s location. "For example, if the center is entirely reliant on Sears for drawing traffic, then a total re-positioning may need to be contemplated," said George A. Pandaleon, president of Inland Institutional Capital Partners in Oak Brook, IL. "In fact, the real estate may be better off converted to another use like education, medical, or even self-storage." However, if Sears or JC Penney is one of four to five otherwise strong anchors, then the repositioning effort may be less intense. "In fact, to the extent that a landlord has the ability to re-capture a slower Sears or JCPenney box within an otherwise vibrant center, this could be an opportunity to boost the center’s long term rate of return," Pandaleon added. "In that case, replacement tenants could include discount stores such as Target. If the opportunity appears attractive enough, the REIT may decide not to sell the center and instead re-position the mall itself."

THE CASE OF SOUTHLAKE MALL

One such buyer with that in mind is Vintage Real Estate of Los Angeles, which acquired the 1 million+ square-foot Southlake Mall in Morrow, Georgia, a suburb of Atlanta, last month for $37.1 million or a little less than $37/square foot. Anchored by Macy’s, Sears and the Morrow Center, the city’s events venue, the mall posts annual sales of over $100 million. General Growth Properties, who filed for bankruptcy in April 2009, bought the mall in 1997 and renovated it in 1999. In 2007, General Growth Properties placed $100 million of debt on the property. The lender foreclosed on the mall in February 2013. Southlake Mall was initially appraised at $80 million in July 2012 with an updated appraisal in May 2013 of $58 million, according to David Ro, a director with Fitch Ratings. “The wide-range of values speaks to the difficulty in pricing distressed, second-tier mall assets,” Ro said. “Despite these pricing challenges, steady demand for these assets has emerged. With large institutional owners unwilling to hold and stabilize these properties; smaller, more nimble investment shops continue to show interest in acquiring assets at discounted values to justify the risk of acquisition and redevelopment.” Vintage has immediate plans for significant capital investments to bring in new tenants and restaurants and upgrade the common areas in Southlake Mall, said Fred Sands, chairman of Vintage..

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Vintage will redevelop the adjacent 160,000-square-foot building vacated by JCPenney in 2011 which it is under contract to purchase. This building, visible from I-75, opens directly into the mall’s center court. “We plan to completely transform this space and bring in tenants currently missing from the mall’s ideal merchandising mix such as fashion retailers and popular restaurants,” Sands said. Foreclosed regional malls such as Southlake Mall typically endure a several-year period of capital constraint leading up to and during the foreclosure process, Sands pointed out. Vintage sees an opportunity to make significant physical renovations and operational improvements at Southlake Mall that will dramatically improve the customer shopping experience, increase foot-traffic and tenant sales and ultimately create jobs for the surrounding community. Sands indicated that the goal for Vintage Real Estate is to acquire three or four malls or shopping centers per year. He stated, “We have a great broker network and we make sure to support them on any off-market opportunities. After all, those are the people that are going to bring us the deals.”

BUYERS SEE BRIGHT FUTURES

REITs spinning off or selling non-core assets in secondary markets is nothing new, it’s the pace of change that is accelerating, Kris Cooper, managing director of JLL’s retail investment sales group told CoStar News. "The major factor driving the sales of non-core retail assets is simple, the centers just don’t fit into REITs (investment) strategy today like they did 10 years ago," Cooper said. "It’s no secret REITs continue to target gateway markets for their acquisitions. But, that doesn’t mean that these centers in secondary markets aren’t performing or won’t have eager buyers." "We’re seeing assets come to market that have strong cash-on-cash returns, and are a top-producing center in their region and there are plenty of buyers out there for these assets and debt is readily available, allowing these centers to be acquired with leverage. We expect private equity to be the primary buyers of these centers," Cooper said. "The future is bright for these centers, he added. "A local or regional buyer can do a great job leasing up the vacant space because they are flexible when it comes to tenant requirements. They’re known for thinking creatively, and have the ability to uncover different, and non-traditional uses for the space."

Taking Stock of Landlords Following JCPenney’s Plan To Close 33 Stores Not Surprised, Landlords Have Already Planned for Redevelopment of Affected Properties

Original Publication Date: Jan 17, 2014 As part of its turnaround efforts, J. C. Penney Company Inc. will be closing 33 underperforming stores across the country this spring. The closings will result in the elimination of approximately 2,000 positions. These actions are expected to result in an annual cost savings of $65 million, beginning in 2014. Remaining inventory in the affected stores will be sold over the next several months, with final closings expected to be complete by early May. “As we continue to progress toward long-term profitable growth, it is necessary to reexamine the financial performance of our store portfolio and adjust our national footprint accordingly,” said Myron E. (Mike) Ullman, III, CEO of Plano, TX-based JCPenney. Meanwhile, the company is continuing its plans to open a new store location later this year at the Gateway II development in Brooklyn, NY.

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One landlord affected by the closures, CBL & Associates Properties Inc. had obviously prepped for the news and already has announced future redevelopment/replacement plans for the four JCPenney anchor locations in its portfolio that are part of the planned closures. “One of our most attractive investments coming out of the recession has been to improve the performance of our properties through redeveloping underperforming anchor locations. The opportunities created by the four JCPenney closures announced today fit perfectly with that objective,” said Stephen Lebovitz, president and CEO of CBL & Associates. “While we have been encouraged by JCPenney’s recent improvements in sales and traffic, we have been anticipating certain store closures to occur.” “We have been proactively engaging in discussions and gauging retail demand with this in mind and are pleased to announce strong interest for the locations expected to close in 2014,” Lebovitz said. “Our next steps will be to move forward with negotiations with retailers and finalize redevelopment plans.” “The list of retailers interested in these specific locations includes sporting goods, arts and crafts and other box retailers, as well as a traditional department store for one location, all of which will enhance the performance of the malls overall,” he added. JCPenney locations in the CBL portfolio slated for closure are at Hickory Point Mall in Forsyth, IL; Janesville Mall in Janesville, WI; Wausau Center in Wausau, WI; and Northgate Mall in Chattanooga, TN. The stores aggregate approximately 499,000 square feet and $1.4 million in gross annual rent. JCPenney will continue to pay rent until lease expiration. The Northgate Mall store is leased from a third party and CBL will work with the building owner to facilitate its redevelopment. CBL”s proactive stance in the face of JCPenney closings is a positive for the REIT, according Fitch Ratings. However, the closures are in four of CBL's lower-productivity assets. The redevelopments face execution risk given potentially lackluster retailer demand at these locations, as well as upfront capital expenditures and related downtime in redeveloping the assets, which can ultimately weigh on credit metrics. Simon Property Group has two malls impacted by the closings, but Fitch said the impact will be minimal as the two affected malls are slated to be spun-off into a newly created entity later this year. JCPenney is also closing an 118,000-square-foot JCPenney store at PREIT’s Exton Square Mall in Exton PA. PREIT said it is looking forward to incorporating the JCPenney building into its planned redevelopment of the mall which is also expected to follow the recapture of an existing Kmart location. "This is a tremendous opportunity for PREIT. Having control over the JCPenney and Kmart locations will allow us to reposition Exton Square Mall by capitalizing on the stellar demographic profile of the area, which is the best in our portfolio," said PREIT CEO Joseph Coradino. "PREIT has a strong track record of replacing department stores, having successfully replaced nine in the past nine years. We look forward to sharing the details of our plans for Exton Square Mall in the near future and demonstrating the value creation proposition this presents." Still, the closings are not a good thing for the other affected centers. Lea Overby, CMBS strategist at Nomura Securities, said 11 stores included on the closure list have either direct or indirect exposure to CMBS collateral, of which nine are included in legacy CMBS and two are included within CMBS 2.0/3.0. “Of the 11 stores with exposure to CMBS, JCPenney serves as collateral for seven loans, and non-collateral for four loans,” Overby reported. “We believe that the closure of the JCPenney at each of these locations is likely to significantly increase the likelihood of default. With the exception of the two malls owned by CBL, the properties are generally owned by smaller mall operators that may be less able to provide the capital necessary to reposition these boxes.” “In addition, the locations are primarily in tertiary markets, decreasing the likelihood that the sponsor will be able to find a replacement tenant,” she said.

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Marielle Jan de Beur, managing director and head of CMBS and real estate research at Wells Fargo Securities, said JCPenney’ s store closure list is relatively short in the context of its portfolio of 1,100 stores. “One reasonable inference is that more closings are likely to follow,” Jan de Beur said. “The closings focus on leased properties. Only two of the 33 properties are owned. We believe the Bristol Mall and Lincoln Plaza Center locations are owned by J.C. Penney, based on CoStar data and Loopnet data.”

PLANNED STORE CLOSURES

Shopping Center, City, State

Selma Mall, Selma, AL

Arrow Plaza, Rancho Cucamonga, CA

Chapel Hills Mall, Colorado Springs, CO

Meriden Square, Meriden, CT

Lake Square Mall, Leesburg, FL

Gulf View Square, Port Richey, FL

Muscatine Mall, Muscatine, IA

Stratford Square Mall, Bloomingdale, IL

Hickory Point Mall, Forsyth, IL

Five Points Mall, Marion, IN

Marketplace Shopping Center, Warsaw, IN

The Centre at Salisbury, Salisbury, MD

Westwood Plaza, Marquette, MI

Northland Mall, Worthington, MN

Singing River Mall, Gautier, MS

Natchez Mall, Natchez, MS

Butte Plaza Shopping Center, Butte, MT

N/A, Cut Bank, MT

Vernon Park Mall, Kinston, NC

Burlington Center, Burlington, NJ

Phillipsburg Mall, Phillipsburg, NJ

Wayne Towne Plaza, Wooster, OH

Exton Square Mall, Exton, PA

Laurel Mall, Hazleton, PA

Washington Mall, Washington, PA

Northgate Mall, Chattanooga, TN

Bristol Mall, Bristol, VA

Military Circle Mall, Norfolk, VA

Forest Mall, Fond Du Lac, WI

Janesville Mall, Janesville, WI

Lincoln Plaza Center, Rhinelander, WI

Cedar Mall, Rice Lake, WI

Wausau Mall, Wausau, WI

Simon Property To Spin Off New Retail REIT Shopping Center Giant to Focus on Global Portfolio of Larger Malls, Including Mills and Premium Outlets

Brands

Original Publication Date: Dec 17, 2013 A plan by Indianapolis-based Simon Property Group (NYSE: SPG) to spin off its strip centers and smaller enclosed malls into a publicly traded REIT separate from its super regional shopping malls has drawn largely good reviews from Wall Street. The spin-off REIT, called Washington Prime Group, is expected to own or have an interest in 54 strip centers and 44 malls totaling 53 million square feet in 23 states when the transaction closes in second-quarter 2014. Each of the malls being allocated to the new spin-off REIT generates annual net operating income of $10 million or less. Simon said the spin-off will result in higher sales per square foot, NOI growth and occupancy for its topline SPG entity, while maintaining the retail REIT's massive scale, conservative leverage and portfolio of high-quality assets. Washington Prime Group's initial year NOI is estimated to be in excess of $400 million and its initial year funds from operations are estimated to be $300 million, or $0.80 per share. Occupancy of the prospective REIT's strip centers is 94.2% and 90.4% for the malls as of Sept. 30. In a release, Simon said it has made a "substantial recent investment" in Washington Prime Group's assets. Wall Street analysts greeted the announcement with relative enthusiasm, along with an "I told you so" moment for at least one REIT watcher. Throughout 2013, especially after publicly traded REIT shares turned volatile in the middle of the year, REIT analysts repeatedly stressed “focus” and “clarity” in defining how REITs can differentiate and increase shareholder value during the current phase of the real estate cycle, marked by improving property fundamentals and stability and continued low capital costs.

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"A consistent theme among some of the more transformative deals recently is the narrowing of a REIT’s focus. This has taken a number of forms - acquisitions, dispositions, spin-offs, joint venture buy-ins and asset trades," Citi analyst Michael Bilerman said in a September report to investors. “Simon’s formidable asset base is not receiving full value in the markets," and by selling a portion of its lower productivity malls and the entire shopping center portfolio, the company could highlight the value of SPG’s higher quality malls and outlets, Bilerman noted two months ago. A bullish Bilerman claimed the moment following the announcement, describing the proposed spinoff in a Dec. 13 note as Simon’s "2-for-the-price-of-1 holiday stocking stuffer." "Consistent with [Citi’s earlier] view, we are very supportive of the announced transaction that provides Simon shareholders with two companies that should be able to produce more value over time than as one company together, and effectively lifts the dividend by 10%." While maintaining an independent management team and board of directors, the new company will maintain strong ties to Simon. Richard Sokolov, Simon's president and chief operating officer and member of its board, will also become chairman of the Washington Prime Group board. SPG Chairman and CEO David Simon will also serve as a director. Simon's strip center management team will become employees of Washington Prime Group, and Simon's property management services will continue to manage Washington Prime Group properties. The announcement Friday, made on the 20th anniversary of Simon's initial public offering, "will unlock the potential of the strip centers and malls" to be owned by the new company, David Simon said. "We believe we are creating a new company that has both a strong Simon heritage and all of the requisite tools to grow its business and succeed. At the same time, this transaction allows Simon to focus on our global portfolio of larger malls, Mills and Premium Outlets while maintaining our considerable scale and conservative leverage profile."

Vornado Becomes Latest To Spin Off REIT Into Crowded Strip Shopping

Center Field Original Publication Date: Apr 16, 2014 Executing a move that’s been in the works since last summer, Vornado Realty Trust (NYSE:VNO) announced a plan to spin off its non-Manhattan portfolio of 81 strip shopping centers and four malls into a new publicly traded REIT. The strip shopping centers are located mostly in the Northeast, with the malls consisting of the Bergen Town Center in Paramus, NJ; Monmouth Mall in Eatontown, NJ; and two malls in suburbs of San Juan, Puerto Rico. The 85 properties total 16.1 million square feet and had average occupancy of 95.5% at year-end 2013. As CoStar reported a couple weeks ago, the move by retail REITs to simplify their business plans and raise capital to reduce leverage is driving proposals by retail REITs such as Vornado, Simon Property Group and American Realty Capital Properties to launch pure-play spin-offs for their strip centers, shopping centers and smaller enclosed malls. Blackstone took Brixmor Property Group Inc. (NYSE:BRX) public last fall under a similar strategy. Vornado’s plan was first reported in the Wall Street Journal in March. The company proposal to spin off the shopping centers into a REIT with estimated net operating income of about $200 million in 2014 was approved by Vornado’s board of trustees.

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In his jocular annual letter to shareholders, VNO founder and CEO Steve Roth name-checked his granddaughters in coming up with the slogan, “you’ve got to spin it to win it.” Spinoffs have become “popular sport these days,” principally to separate B and C malls and isolate risk from struggling retailers Sears and JCPenney, said Roth, noting that “if an anchor leaves an A mall, most times it creates an opportunity. But, if an anchor leaves a B or C Mall, it could remain empty forever and begin or hasten a death spiral.” Most companies doing this are in a single asset class, but Vornado’s objective is to separate two very different businesses via a tax-free spinoff: Northeast strip shopping center, leaving VNO’s unique, world-class Manhattan and Washington office and retail business, Roth said. “These businesses have been together for legacy reasons, but have no real operating synergies,” Roth said. “By separating, we intend to create two focused pure plays.” Jeffrey S. Olson, currently CEO of Equity One Inc., will be the new company’s chairman and CEO, and Robert Minutoli, executive vice president of Vornado’s retail segment, will move aboard the new REIT as its COO. “The spin makes strategic sense, in our view, providing a choice of more focused opportunities for investors, and Jeff is a perfect leader,” said Citi REIT analyst Michael Bilerman in an investor note, adding that VNO’s portfolio generates two-thirds of its pre-tax and depreciation earnings from it NYC properties (48% office, 19% street retail) and 24% from Washington, D.C. office. Intriguingly, Roth again referenced the possibility, while remote, of the company’s street retail business as another standalone company. VNO currently owns 2.4 million square feet of street retail in Manhattan in 55 properties, including those at the base of its office buildings, with rents considerably below market value, Bilerman noted. Vornado’s retail management team and personnel will also remain with the new company, and Steven Roth, chairman of the board and CEO of Vornado, will serve on the board of directors of the spinoff company. The parent company believes that the retail portfolio will be well positioned to deliver “both internal growth through active asset management and redevelopments and external growth through acquisitions and selective new developments,” Vornado said in a release. The portfolio has an average population of 149,000 within three miles and an average household income of $71,000. The average base rent is $18.75 per square foot, compared to the median of $15.66 per square foot for competing companies. Vornado plans to dispose of 20 small retail assets valued at approximately $100 million which do not fit the new company’s strategy. VNO will also retain Beverly Connection and Springfield Town Center, which are under contract for disposition. VNOs business after the dispositions and spin-off will be highly concentrated in New York City and Washington, DC, and comprised of high-quality office portfolios and the largest, most valuable portfolio of Manhattan street retail assets. The entities plan to treat the pro rata distribution of the spin-off company’s shares to Vornado common shareholders and Vornado Realty LP common unit holders as a tax-free spin-off for tax purposes. Vornado anticipates maintaining its current annualized dividend of $2.92 per share through the combination of Vornado’s and the new company’s dividends. The registration statement for the spin-off is expected to be filed with the Securities and Exchange Commission in the current quarter, with share distribution expected to be completed in the fourth quarter, subject to certain conditions. Goldman, Sachs & Co. and Morgan Stanley are Vornado’s financial advisors and Sullivan & Cromwell LLP is legal advisor in connection with the proposed transaction.

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CBL Planning Major Restructuring of its Mall Portfolio Original Publication Date: Apr 16, 2014 CBL & Associates Properties, Inc., one of the largest owners and developers of malls and shopping centers in the U.S., has embarked on an aggressive plan to jettison under-performing shopping centers and redeploy the proceeds into higher-growth properties with the goal of doubling its NOI per year. CBL owns or manages 91 regional malls/open-air centers and 150 retail properties located across 30 states and totaling 86.9 million square feet. As part of the restructuring announced this week, the Chattanooga-based REIT plans to dispose of nearly 15% of its portfolio over the next few years. “We are in the early innings of a transformation to a higher growth portfolio,” said Stephen Lebovitz, president and CEO. “We plan to achieve this through targeted divestitures of stable, but lower-growth malls and non-core properties over the next several years, as well as accretive investments in higher-growth assets. We will pursue these opportunities to create value within our existing portfolio through redevelopment and expansion, as well as through new developments and selective acquisitions.” The REIT outlined the following goals and objectives: Position the portfolio to produce sustained same-center net operating income (NOI) growth of 2% to 4%, increasing from the current range of 1% to 2%; Increase the percentage of mall NOI generated from its Tier 1 and Tier 2 assets from 78% for 2013 to more than 90% over the next several years through divestitures and investments in higher growth centers; and Upgrade both inline shops and anchor retailers through redevelopment and re-tenanting. Last quarter, CBL segmented its malls into three tiers based on sales per square foot: putting malls with sales of over $375 per square foot in the top tier, malls with sales of $300-375 per square foot in tier two and those with sales below $300 per square foot in the bottom tier. While the CBL’s Tier 2 malls lagged the top tier last quester, the REIT chalked it up to higher costs from its tenant upgrade strategy which produced a short-term drag on NOI growth at several centers, the company said. “Looking forward, we are projecting a stronger growth rate from our Tier 2 assets as the benefits of our re-tenanting strategy take effect,” Lebovitz said. “While most of our Tier 3 malls are stable properties with a solid future in their respective markets, their growth profile is more appropriate for a privately owned portfolio with a focus on yields and cash-on-cash returns.” CBL has identified 21 malls and centers for disposition. This portfolio represents roughly 15% of its total NOI with an estimated value between $1 billion and $1.25 billion. “We would like to make significant progress on this initiative over the next 24 to 36 months,” Lebovitz said. “It is at the top of our list of corporate priorities.” Lebovitz said the REIT does not expect to be net acquirers of new properties. Instead, it intends to focus on upgrading the performance of its existing portfolio and getting back to its core competencies of redevelopment and new development, with only a few selective acquisitions. “The results will minimize dilution and create a portfolio that is positioned for growth,” he said. The company also expects to use proceeds from the disposition to retire some near-term maturing outstanding debt.

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Last year, according to Lea Overby and Steven Romasko, research analysts for Nomura Securities International, CBL divested $220 million of lower-growth assets and deployed over $200 million in higher-growth properties. In a continuation of that strategy, earlier this year the firm completed the foreclosure on Citadel Mall, which served as collateral for a $67 million CMBS loan. “In addition to the REO Citadel Mall, we find 50 CMBS loans with CBL as a sponsor, including four of the firm’s non-core assets,” the analysts noted. “Based on the firm’s previous track record and its desire to exit these assets, we believe that the risk of default is elevated for the non-core loans. In addition, given the firm’s desire to increase the set of unencumbered assets, we believe it is likely that many of the 21 disposition candidates are also securitized in CMBS.” Nomura said it has identified 13 malls that may be candidates for disposition by CBL. Those centers have occupancy of 90% or below, report net cash flow debt service coverage of 1.30x or less, or are on the master servicer’s watch list. According to Michael Bilerman, head of the real estate research team at Citibank, the plan carries meaningful execution risk, for both the asset sales at targeted prices as well as the reinvestment of proceeds at reasonable returns. However, Bilerman views CBL’s plans to earmark another four malls for foreclosure valued at $349 million as a positive. “Though we wish CBL started this process much earlier, like peers, the company could have potentially handed back more assets if significant secured debt hadn’t already been paid off as the company migrated towards an unsecured strategy,” he said. “Overall, a better quality portfolio should improve CBL’s growth profile and prove more defensive against future headwinds from department store closings and threats from e-commerce.” Including the foreclosures and dispositions Citibank expected the REIT to be able to reduce debt by about $950 million ($590 million from the sale of properties and $349 million from potential foreclosures).

Pricing Becoming More Attractive for Large Regional Malls Rouse Properties Inc. Acquires Two Malls for $292.5 Million

Original Publication Date: Dec 16, 2013 Last week, Rouse Properties finalized its acquisition of a pair of malls located in Richmond, VA, and Salisbury, MD, for a combined purchase price of $292.5 million from affiliates of The Macerich Co. The price continues the trends of increased buying of 800,000-square-foot and larger regional malls at falling prices. Andrew Silberfein, president and chief executive officer of Rouse Properties said the two centers were key additions to its portfolio of dominant, middle market regional malls. "These malls both serve expansive trade areas with limited enclosed mall competition, supporting strong inline and anchor sales volumes," said Silberfein. "The acquisition will diversify Rouse’s geographic presence with Maryland and Virginia representing our 20th and 21st states. We see opportunities at both malls to apply our strong platform to substantially improve the malls’ economic metrics, merchandising mix and tenant quality.” The dollar volume of deals for malls larger than 800,000 square feet was up this year from last year by $250 million not including Rouse’s latest deals to $4 billion, according to CoStar COMPs data. The average sales price has declined from about $280/square foot at the start of 2012 to just about $130/square foot. Macerich has been one of the big sellers of malls this year. It has disposed of eight assets year-to-date 2013 totaling $560 million, generating $466 million of equity. It is currently under contract to sell two more assets: Lake Square Mall in Leesburg, FL, and Somersville Towne Center in Antioch, CA.