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Pat Kelly

Pat Kelly was the last marketing director for the Mall of Memphis. He is quoted in the article regarding measuring retail sales.

Mall owners: Performance indicators need standardization

Friday, August 24, 2001

Memphis Business Journal - by Tara Milligan

For the general public, there are certain clues to a retail property's performance in comparison to other local properties.

Property A is fully leased, but Property B has lots of empty bays. Property A is bustling with activity, while Property B has seen a decrease in traffic. Or it could even be that Property A simply looks new and well-kept, and Property B seems neglected.

But shopping centers large and small, as well as real estate investors, analysts, brokers and potential tenants, all rely on a single number to sum up the health of the property: sales per square feet.

"It is the single most important number when you are talking about the success of a shopping center," says Danny Buring, a retail broker with The Shopping Center Group of Tennessee.

The number is easy to figure out: Simply add together the sales figures of each tenant and then divide that total by the square footage of the entire shopping center.

But because of small differences in the way individual property owners count sales and even the square footage of a building, the sales per square feet figure has led to confusion about the true health of the shopping center market. Some analysts argue that the discrepancies in reporting have led to an under valuation of publicly-traded retail REITs.

However, a movement by seven of the country's largest mall REITs to standardize the way they report property sales per square feet could affect the reporting of the entire industry. The companies, including Simon Property Group, which owns Oak Court Mall and Raleigh Springs Mall in Memphis, have been exchanging information concerning the way each gathers information about their properties in order to arrive at the crucial number.

For example, most malls don't include large anchor stores in their reporting because anchors usually own their own space or have stipulated in lease agreements that they don't have to report sales. Some malls arbitrarily make their cutoff in reporting sales of stores larger than 10,000 square feet, while others don't include stores larger than 20,000 or 30,000 square feet.

Other discrepancies include the inclusion or exclusion of retail storage space, sales from kiosks and carts, or sales from food courts.

Pat Kelly, leasing manager for Mall of Memphis, says he doesn't include kiosk sales when talking about sales per square feet at that property. Kelly says kiosks at Mall of Memphis are about 54 square feet and some of them have sales of up to $200,000.

"In some cases, they're making as much as inline tenants, so they really skew the numbers," Kelly says.

The actual number itself is often very closely guarded by shopping center and mall owners. Sales per square feet of about $400 is considered to be a good number for a property, but owners don't generally advertise the sales per square feet of a specific property to the general public. Retail brokers and analysts are privy to the information, because shopping centers are trying to attract new tenants, capital funding or investors.

Michael P. McCarty, senior vice president of Simon Property Group, says the discussions of standardizing sales per square feet are a work in progress.

"The question is a personal one for each company," McCarty says. "I don't think there's any disagreement about whether or not companies agree that a standard reporting method is a good thing. The challenge is having them bring the companies into compliance, and, in some cases, it is not an easy task."

McCarty, who directs the International Council of Shopping Centers Research Advisory Task Force subgroup on standards, says the primary benefit of standardization is outside of the company. In fact, there will be some extra expense and manpower hours in changing reporting systems at the corporate level.

"But it is in the individual's best interest to have a standard," McCarty says. "I think it's a given that mall REITs are undervalued, but to what extent is in debate. I think it can only help our cause to further understand individual performance."

McCarty says the talks between the mall REITs have been informal, and no date has been set to resolve the issue.

"It's really up to every company to adopt a change and oversee it in its own environment," McCarty says.

However, Kelly says he does not see a quick solution to the discussions.

"I think it's one of those issues that's going to get debated to death just like politics and religion," Kelly says. "In the end, we might end up with the CBL (& Associates Properties) formula or the Simon formula. You could have four or five mutually exclusive ways of reporting."

If a standard is developed, McCarty says the results of the discussions could have ramifications throughout the shopping center industry. When private or small shopping center owners start to be held accountable by banks and investors for the same standard used by the largest REITs, an industry-wide standard will take form, McCarty says.

"I think probably that would be the end result," McCarty says. "Even small private companies from time to time go to institutions and ask for funds, and if the financial institutions hold them accountable to the standard that is set, they'll have no choice but to comply. And I think they'll be willing to comply."

Dan Poag, chairman and CEO of Memphis-based Poag & McEwen Lifestyle Centers, Inc., says his company is watching the debate with some interest. Poag & McEwen are the developers of the Saddle Creek shopping center in Germantown as well as several other properties around the country.

Whether or not his company would follow the mall REIT standard would depend on the outcome, Poag says.

"There are probably several hundred ways to come up with that number," Poag says. "As long as everyone agrees how to do it, then there's no problem."

Steven Levy, owner of Levy Commercial Realty, says he takes any sales per square feet numbers with a grain of salt when he's representing a tenant looking for retail space.

"Management wants to present the mall in the best light, and there's a certain amount of fluff out there," Levy says.

But he's learned over the years to look to other sources of information, from competitors to industry guides to distributors, to get a sense of sales per square feet of a property.

"It's amazing how much information is out there if you know who to call," Levy says. "And it won't be to the penny, but it'll give you an idea."

Levy and Buring both agree that standardizing the way shopping center owners calculate the number will lessen confusion within the market when comparing one center to another.

"You'll be able to look at one shopping center and another on an apples to apples basis," Buring says.

CONTACT staff writer Tara Milligan at 259-1728 or tmilligan@bizjournals.ccom