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Madison Marquette


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Presentation on Retail Industry

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Madison Marquette

  1. 1. Retail Real Estate Market Overview By Walter Bialas Vice President of Research Madison Marquette
  2. 2. Recession Rumored at the End of 2007 is Now Official <ul><li>Re-benchmarked data show 1.9M jobs lost in 2008 </li></ul><ul><li>Last 3 months — 1.2M jobs lost </li></ul><ul><li>November jobs declined 533,000 </li></ul><ul><li>Broad pull back across most industries </li></ul>
  3. 3. Unemployment Rising Rapidly <ul><li>Unemployment now at 6.7% </li></ul><ul><li>Highest rate in 15 years (since October 1993) </li></ul><ul><li>Consensus is that rate will hit 8.0% in coming months </li></ul><ul><li>Continued job erosion has economists re-vamping forecasts </li></ul><ul><li>Rate could rise to over 9.0% </li></ul>
  4. 4. Economic Uncertainty Has Driven Consumer Confidence to Historic Lows <ul><li>October saw confidence at lowest level ever </li></ul><ul><li>Slight re-bound in November is not material </li></ul><ul><li>Conference Board sees a “recovery” at sustained levels above 80 </li></ul><ul><li>Recovery not likely until last half of 2009 </li></ul>
  5. 5. Retail Spending Outlook Impacted <ul><li>Close relationship between home prices and retail sales historically </li></ul><ul><li>Past price appreciation fueled the “feel good” spending boom </li></ul><ul><li>Consumer retrenchment is both economic and psychological </li></ul><ul><li>Consumer turnaround not expected until home prices stabilize </li></ul>
  6. 6. Shopping Center Sales Decline After Extended Run-Up <ul><li>Recent consumer spending cutbacks not seen in tech-bust recession </li></ul><ul><li>Consumer loss of confidence fueling frugality </li></ul><ul><li>Data does not reflect inflation </li></ul><ul><li>Trading down is now common </li></ul><ul><li>Retailer over-expansion now evident in sectors </li></ul>
  7. 7. Department Stores Continue to Struggle to Find Customers <ul><li>Sector decline still underway </li></ul><ul><li>After some stability between 2003 and 2006, sales declines are steady </li></ul><ul><li>Competitive pressures continue to mount from discounters and other sectors </li></ul>
  8. 8. Discounters and Supercenters Enjoying Sustained Sales Growth <ul><li>Sector has consistently gained market share </li></ul><ul><li>Organic growth has fueled significant gains </li></ul><ul><li>Current economy favors the sector as consumers trade down </li></ul>
  9. 9. Apparel Sector Slowing with Economy <ul><li>Consumer focusing on needs versus wants </li></ul>
  10. 10. Big Ticket Items Particularly Hurt <ul><li>Sales declines tied to housing bust </li></ul><ul><li>Needs versus wants dictate purchases </li></ul>
  11. 11. Retailers Consolidate and Restructure to Find Solid Base <ul><li>Closings in 2008 top 5,600 </li></ul><ul><li>Level not seen since the consolidation wave of the 1990s </li></ul><ul><li>Tenants cutting back expansion plans </li></ul><ul><li>First half of 2009 will see an acceleration in closings and filings </li></ul>
  12. 12. Some of the More Notable 2008 Announcements <ul><li>No significant tenant concentrations in portfolio </li></ul><ul><li>Limited impact of closures to Madison Marquette portfolio </li></ul>ANNOUNCED STORE CLOSINGS SELECT RETAILERS AS OF DECEMBER 2008             Retailer Stores Closing Status Ann Taylor 117 Re-Structuring Banana Republic 25 Re-Structuring Circuit City 155 Chapter 11 Club Libby Lu 78 Re-Structuring Disney Stores 98 Chapter 11 Fashion Bug / Lane Bryant / Catherine's 146 Re-Structuring Foot Locker 60 Re-Structuring Friedman's Jewelers 377 Chapter 11 Linen's n Things 371 Chapter 11 Mervyn's 149 Chapter 7 Pacific Sunwear 154 Re-Structuring Sharper Image 96 Chapter 11 Starbucks 600 Re-Structuring Steve & Barry's 276 Chapter 7 Talbots Kids / Talbots Mens 78 Re-Structuring Tweeter 94 Chapter 11 White Hall Jewelers 355 Chapter 11 Wilson's Leather 103 Chapter 11 Zales Jewelers 105 Re-Structuring TOTAL 3,437 --—
  13. 13. Retail Projects Under Construction Beginning to Slow <ul><li>Difficult to find project financing </li></ul><ul><li>Net absorption lagging deliveries </li></ul><ul><li>Tenants cutting back expansion plans </li></ul><ul><li>Tenants driving deals that are not economical </li></ul>
  14. 14. Retail Vacancy Rising as Tenants Retrench <ul><li>3Q vacancy 6.6% nationally </li></ul><ul><li>Not all announcements closed </li></ul><ul><li>As additional retailers reposition during 2009, vacancy likely to top 7.2% </li></ul><ul><li>Firmer line between good and marginal locations </li></ul><ul><li>Lack of development pipeline should begin to reduce vacancy in late 2009 </li></ul>
  15. 15. Transaction Volume Back to 2001-2002 Levels <ul><li>The hot deal market in 2004–2006 over-heated in 2007 </li></ul><ul><li>High flow of capital drove underwriting standards to win deals </li></ul><ul><li>Risk not adequately modeled </li></ul><ul><li>Shift in pricing has investors waiting for stability </li></ul><ul><li>Gap between sellers and buyers beginning to shrink </li></ul>
  16. 16. Cap Rates Beginning to Readjust to New Economy <ul><li>As of October cap rates for strip centers averaged 7.24% </li></ul><ul><li>Reflects an increase of 43 bps in the last 12 months </li></ul><ul><li>Historically, the spread between 10-year treasuries and cap rates has been 450 to 500 bps </li></ul><ul><li>As of October, the spread has risen from a low of under 200 bps to 343 bps </li></ul><ul><li>Outlook is for this spread to return to 500 bps before stabilizing around 350 bps </li></ul>
  17. 17. Market Over Correction <ul><li>September and October saw dramatic declines in REIT values </li></ul><ul><li>REITs overall were trading at 85% of their NAV: Shopping centers declined to 79% and regional malls were at 71% </li></ul><ul><li>Since 2000 this ratio was in the range of 100% to 105% </li></ul>
  18. 18. REIT Dividend Yields Out of Sync <ul><li>REIT dividend yield is now 8.18% </li></ul><ul><li>This reflects an increase of 350 bps since the pre-bubble economy </li></ul><ul><li>The spread between REIT yield and 10-year treasuries has grown to over 450 bps </li></ul><ul><li>Historic spreads have been consistently in the range of 50–100 bps </li></ul><ul><li>Even during post-tech bust, this spread only ran 300–350 bps </li></ul>
  19. 19. Recent Retail REIT Performance <ul><li>Stock prices down 50-plus percent </li></ul><ul><li>Some impacted by high debt loads and no ability to refinance in frozen credit markets </li></ul><ul><li>Some impacted by active development pipelines </li></ul><ul><li>All impacted by perceived market risks to portfolios from tenant retrenchment </li></ul>PERFORMANCE SUMMARY SELECT RETAIL REITS AS OF DECEMBER 3, 2008 (Millions)                     Stock Price (Per Share) Current Equity Cap Enterprise Value Total Debt (YE 2007) Implied Cap Rate 1/ REIT Ticker 4-Dec-07 Current Price Decline General Growth Properties GGP $45.84 $1.33 97% $490 $24,840 $24,350 10.5% Macrerich MAC $76.29 $11.32 85% $862 $6,625 $5,763 9.5% Simon Property Group SPG $94.44 $46.36 51% $10,469 $27,688 $17,219 8.0% Taubman Centers TCO $52.51 $21.57 59% $1,144 $3,845 $2,701 8.0% Acadia Realty Trust AKR $25.28 $13.13 48% $433 $951 $518 8.0% Federal Realty Trust FRT $81.37 $52.32 36% $3,085 $4,723 $1,638 8.5% Pennsylvania REIT PEI $32.53 $3.96 88% $156 $2,431 $2,274 10.6% Regency Centers REG $65.52 $31.40 52% $2,198 $4,206 $2,008 10.5% 1/ Implied cap rate based on Wall Street analyst reports from the end of October to early November.