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Music store blues

REITs mull Bush’s tax plan

Landlords, tenants say
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Mills shifts focus
to traditional malls

 ICSC NEWS
Budapest venue for
European conference

Leaders mull industry’s
future at Leading Edge

 MANAGEMENT & MARKETING
Open-air security

Terrorism to be topic
at ICSC security meeting

 DEVELOPMENT & LEASING
The mall as museum

Legacy Village: A lifestyle
center like no other

 FOCUS: MID-ATLANTIC &
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Crosland makes
mixed-use debut

Stephens brings vast project
home to North Carolina

Tired Raleigh mall makes
way for new center

Briefs

 RETAILING TODAY
Teen footwear purveyor
Journeys on a roll

Stein Mart: Upscale goods,
downscale prices

 INDUSTRY NEWS
Best Buy says ‘bye bye’
to scores of mall stores

More insurance upheaval
on way for industry

WTC ruling favors
Westfield America

 THE BOTTOM LINE
Will lenders mandate
environmental insurance?

 DEPARTMENTS
Update: Mills wins
hard-fought N.J. bid

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MILLS SHIFTS FOCUS TO TRADITIONAL MALLS

BY IAN RITTER

A Mills purchase: The Galleria at White Plains.

Few retail real estate developers have created as distinctive a brand as The Mills Corp., with its value megamalls. Now the company says its wants to do the same with conventional malls.

Late last year Mills announced that it was paying $621 million to buy six malls with an option to purchase stakes in two more. Mills also said that it would spend up to an additional $350 million to redevelop the properties over the next two to three years. In August the company even hired Jim Napoli, former head of leasing at Simon Property Group, as president of its operating division.

In the words of Mills Chairman and CEO Laurence C. Siegel, the company will be putting “the Mills touch” on the centers by adding movie theaters, skating facilities and children’s areas, and even a bit of value retail in some cases.

Mills wants to bring traditional malls into the 21st century, Siegel said.

“These just are terrific opportunities for us to buy a traditional portfolio and make some changes and show everybody what we think these projects should look like today,” Siegel told SCT.

Mills thinks it can take a traditional mall in a competitive market and improve traffic and sales by adding entertainment and value components, said Napoli. “It has to be [a mall] where we think adding some Mills elements will really boost the sales and the interest in the center,” he explained.

It isn’t just the traditional malls that Mills will be tweaking, however. The company plans to make changes to its megamalls, too, adding some full-price tenants to the lineup of off-price ones, Napoli said.

The value megamalls — a concept created by Siegel and Herbert Miller, the company’s former chairman — feature off-price retailers, manufacturers’ outlet stores, and large food and entertainment areas, usually spanning more than 1.5 million square feet of space on one level. They typically draw shoppers from a radius more like that of an outlet center (25 to 75 miles) than that of a super-regional mall (five to 25 miles).

Indeed, Mills spends considerable resources on putting the properties on the tourist route, boasting that Potomac Mills, for instance, rivals many of Washington, D.C.’s more traditional tourist destinations for the number of visitors it attracts.

Starting with the opening of Potomac Mills, Prince William, Va., in 1985, the company has built a total of 13 such projects, including its most recent, Colorado Mills, which opened in November outside Denver. Today these megamalls achieve average sales per square foot of about $330, according to the company.

The Mills concepts of the future may be a hybrid between value megamall and traditional mall, according to Craig Schmidt, a REIT analyst at Merrill Lynch. Behind this change is the desire of traditional tenants to get in on the high traffic at value megamalls at a time when few new traditional malls are being developed, as well as Mills’ need to scale down its megamalls in size as it enters smaller markets, he said.

“They’re going to do the traditional Mills, but they’re adding another layer to that,” Schmidt said. “I think it’s more a matter of adding to the mix.”

Siegel maintains that Mills will still not abandon its value megamall concept. The company could have as many as 35 to 40 more of these projects in the United States alone, he argues. The company has said that the size and scope of the projects could change, however, depending on the metropolitan area it enters. Mills has value megamalls under development in St. Louis and Toronto.

Though Mills is investing in traditional centers, the company says it is not abandoning its megamall concept. It opened Colorado Mills in November.

But there have been hints for some time that Mills was intent on branching out. In April the company got the green light from San Francisco city officials to proceed with development of The Piers 27-31, a waterfront retail-entertainment project. It also has a retail-leisure center under construction outside Madrid, Spain; is talking about building another outside Rome; and has proposed a similar concept for the New Jersey Meadowlands. In another deviation from the out-of-town megamall format, the company has received approval from city officials in Chicago to develop a downtown site in partnership with a spa operator. The details of that project remain sketchy. But in 1998 Mills opened the nightlife-focused retail-entertainment center Block at Orange in Orange County and had plans to open more. Thus far no such plans have been disclosed for any others, however, because the concept was not as successful as hoped, analysts suspect.

In September Mills bought the 1.5 million-square-foot Forest Fair Fashions mall, Cincinnati, a seemingly cursed property that had never prospered from the day maverick George Herscu and his L.J. Hooker Co. opened it in 1989. Mills is renovating the center, introducing cut-price tenants and plans to rename it Cincinnati Mills. The project marks the company’s first redevelopment of a mall into a Mills concept.

But the purchase of the six malls is Mills’ most dramatic departure yet from value megamall development, not least because the company plans to keep them primarily as full-price malls.

“We are starting from scratch,” said James Dausch, president of Mills’ development division. “We believed that if we could find a portfolio of traditional centers that we could start with, it would be worth doing.”

The company bought five of the centers from Toronto’s Cadillac Fairview Corp. In December it closed on the sixth, the 637,000-square-foot Riverside Square, Hackensack, N.J., which was owned by New York City-based Shopco Group. The deal has added 5.3 million square feet to Mills’ portfolio.

Besides Riverside Square, Mills is acquiring the 999,000-square-foot Broward Mall, Ft. Lauderdale, Fla.; the 757,000-square-foot Dover (Del.) Mall and the 52,000-square-foot Dover Commons Mall next door; the 909,000-square-foot Esplanade, New Orleans, La.; the 885,000-square-foot Galleria at White Plains (N.Y.); and the 961,000-square-foot Northpark Mall, Jackson, Miss.

Mills also has an option to become joint owner in two malls owned by Cadillac Fairview and Simon: the 1.3 million-square-foot Town Center at Cobb, Kennisaw, Ga.; and the 1.3 million-square-foot Gwinnett Place, Duluth, Ga., both outside Atlanta.

Along with the malls, Mills has bought a total of about 110 acres around them as part of its program of further development and expansion. The company will add a 120,000-square-foot Bass Pro Shop and a 126,000-square-foot Target to Esplanade, for example. Broward Mall will get two fashion department stores and an AMC theater, among other additions. Mills plans to expand Dover Mall by 500,000 square feet to make way for an NHL rink, a NASCAR track and other improvements. The other centers Mills purchased will receive similar additions.

Mills’ long time German investment partner, Kan Am, is expected to be a partner on these projects, though the percentage of funds it will contribute has not been determined, Siegel said.

For all the attention the new strategy is getting, however, this is not the first time the company has sharply shifted direction. Though value megamalls have been the Arlington, Va.-based company’s main focus since it went public and changed its name from Western Development in 1994, up to then it had only built and owned traditional community centers, something it continued to do until 1997. Even as late as 2000, Mills still owned a portfolio of 11 community centers from its Western Development days that it sold only that year.

In the future the industry will see acquisitions similar to the ones Mills recently announced, Dausch said.

“We have an acquisition program, and it’s one where we’re looking for the right center at the right price,” he said.

Salomon Smith Barney says Mills has a management team with a lot of experience in the traditional mall sector that can handle the company’s new strategy. With regard to the strategy’s execution, Salomon REIT analyst Ross Nussbaum points to the hiring of Napoli.

“Jim obviously has decades of experience leasing full-priced regional malls,” Nussbaum said.

But some analysts say the Mills management team could be stretched thin with all the company’s different projects.

“We’ve taken a wait-and-see approach,” Nussbaum said. “Mills has so much going on right now,” but “it’s a feasible strategy.”

A Morgan Stanley report made similar observations. “[Mills’] experience has been primarily with value-oriented centers, which we believe involve a different type of operating model than that for the acquired assets … its plate has never been fuller … we are concerned management is spread thin.”

Morgan Stanley analysts say they are pleased that the properties were bought at a cap rate of 9 percent, significantly higher than other recent high-profile transactions. General Growth Properties bought the Glendale (Calif.) Galleria at a rate of just under 7 percent, while analysts estimate Simon’s proposed acquisition of Taubman Centers at about 8 percent.

The report adds that it considers the acquired malls to offer good opportunities for redevelopment. “We believe [Mills’] entertainment-oriented and creative plans represent an attempt to address the ongoing weakening of traditional regional mall anchors.”

Dausch dismisses any reservations about the management’s ability to juggle all its malls.

“It’s the little company that could,” he said. “We’ve done things that people didn’t think we could. If we can get [the malls] at a fair price, then [the deals are] worth doing.”

This is the right moment for the company to start out in a new direction, Dausch said. “For the past five or six years, we had followed a strategy to essentially establish the Mills franchise,” he said. “Our strategy has succeeded. We’re developing it from a base that’s financially strong.”

The new strategy is a logical way for the company to grow, Siegel said. “We’re a development company, and we’re going to continue to be a development company.”