Who is making money from struggling U.S. malls?
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[June 26, 2018]
By Richa Naidu and Carl O'Donnell
CHICAGO/NEW YORK (Reuters) - With its
lonely hallways, half-shut food court and out-of-order restrooms, the
River Oaks Center mall in suburban Chicago seems like an unlikely place
to make money.
But that is exactly what two little-known, family-owned investment firms
- Namdar Realty Group and Mason Asset Management - are doing here and
across the country.
With about 100 malls from New York to Utah now under their ownership,
the two funds have climbed quietly from anonymity to being among the
country's top-twenty mall landlords - thanks in large part to an
aggressive low-investment business strategy at many of the distressed
malls they have acquired over the past five years.
The approach has been aided by a slew of retail bankruptcies, and the
fast-changing consumer tastes in favor of e-commerce firms such as
Amazon.com Inc <AMZN.O>, offering these two investment firms brick and
mortar assets at bargain prices.
(For a graphic, click https://tmsnrt.rs/2wv7jcy)

About half the malls Namdar and Mason have acquired are similar to River
Oaks: properties with relatively low sales, sometimes in need of
redevelopment and typically located in underdeveloped neighborhoods.
More recently, the rest of their mall mix has consisted of healthier,
but not high-end, properties as the funds have been trying to improve
the quality of their assets.
A source with direct knowledge of Mason and Namdar's strategy said the
funds invest as little as possible on many of their properties, adding
the aim is to hold the assets, not redevelop them.
The approach is not without its detractors, namely mall tenants and some
government officials who were hoping to see more investment in their
malls once Namdar and Mason took control of the property. But in
locations like River Oaks, that investment has not come. "There has
definitely been a decline in traffic," said Vickie Bass, manager of the
Ashley Stewart clothing store at the mall. In interviews with Reuters,
Namdar and Mason said the upkeep was adequate and that they do not flip
malls, preferring to hold onto them. On occasion, they have sold their
least profitable properties to redevelopers.
"When you own 100 retail properties, of course you're going to have
people having complaints... if there are issues, we deal with them,"
Namdar President Igal Namdar said. "We have a very high retention rate
for our tenants, which shows us we are doing a good job." The low rent
Namdar and Mason ask for - sometimes only a couple of thousand dollars a
month - has helped keep down vacancies at their malls, according to
store managers and sources familiar with Mason and Namdar's strategy.

In order to improve the caliber of their tenants and portfolio, Namdar
and Mason told Reuters that they have increasingly been buying healthier
malls.
"We now want better quality assets, malls that are occupied, with
healthy ratios and diverse tenants," Igal Namdar said.
[to top of second column] |

A store vacancy sign
hangs at a property owned by Mason Asset Management and Namdar
Realty Group at Matteson Town Center in Matteson, Illinois, U.S.,
October 12, 2017. REUTERS/Richa Naidu

BUYING CHEAP
Igal Namdar, 48, and his wife's cousin, Elliot Nassim, 36, the respective
founders of Namdar and Mason, said they developed their investment strategy
after they started buying malls together in 2012.
Namdar, who got his start in real estate using money from his family's jewelry
business, said he clinched his first mall deal that year with Nassim by
acquiring Desoto Square Mall for $24.6 million from Simon Property Group Inc <SPG.N>,
after it defaulted on a $62 million loan.
A key aspect of Namdar and Mason's strategy is snapping up malls at very low
prices. Namdar and Mason told Reuters they have spent an average of $15 million
to $20 million to acquire retail properties in the past three years, a fraction
of what many of the malls cost to develop.
According to real estate data firm Trepp, Namdar and Mason bought 22 properties
that were being sold in bankruptcy auctions between the start of 2015 and the
end of 2017, paying an average of $5.3 million for each mall. This reflects a 92
percent discount to the value of the malls when they secured their loans,
according to Reuters calculations.
Namdar and Mason typically spend 20 to 50 cents per square foot on maintenance.
This compares to an average of about 60 cents per square foot that U.S. mall
owners spent on mall upkeep in the first quarter of 2018 among malls that
reported square feet for the period, according to National Council of Real
Estate Investment Fiduciaries.

Namdar and Mason have spent so little on the malls they have acquired, they
often yield a 10 to 16 percent capitalization rate, a gauge of the investment's
rate of return, according to real estate services firm Cushman & Wakefield's
head of capital markets Mark Gilbert.
This tops last year's average U.S. mall capitalization rate of 5.4 percent, and
even the 9 percent rate mall owners enjoyed on average in their 1990s heyday,
according to real estate research firm GreenStreet.
But Mason and Namdar's high-return strategy comes at the risk of friction with
local officials, retailers and shoppers.
"Over time, you do become what you're perceived. I think that in many respects
if they don't define what they're going to do with these malls in general, then
they may get defined by the bad ones," Gilbert said.
(Editing by Vanessa O'Connell and Edward Tobin)
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