Monday, July 16, 2018

Glass half-full on retail front: Puerto Rico malls adapt to new normal

By on June 14, 2018

Editor’s note: This report first appeared in the June 7-13 issue of Caribbean Business

Island malls grow dollars on arid terrain

As Puerto Rico finishes its second business quarter after Hurricane Maria, retail malls’ recovery efforts are becoming more evident. Likewise, those that have made bigger strides in their resurgence can serve as a contrast for locations that may be lagging behind.

An important factor appears to be related to how quickly malls were able to restart operations after the hurricane made landfall. Malls that swiftly resumed at least some level of functionality were able to quickly attract clients, who otherwise went to other places to make their purchases. Furthermore, given the reduction in stock at places to shop, the new clients filling the open malls served to counteract the hurricanes’ financial impact.

When looking at the recovery of towns’ retail bases, the effects from the hurricane must be contextualized within the island’s broader economic environment prior to the atmospheric event. Although not the only ones to address the topic, mall real-estate investment trusts (REITs) have stated in their filings with the Securities & Exchange Commission (SEC) that Puerto Rico’s economy and government-issued debt are risks in doing business on the island.

Hidden opportunities

While the hurricane’s damages to infrastructure and the subsequent delays in restoring nonintermittent electric service forced a reduction in operations, for Plaza Las Américas, Plaza del Caribe, San Patricio Plaza and the Mall of San Juan, the ability to quickly reopen some or most stores after the hurricane resulted in an increase in visitors, particularly those from more distant regions.

“We noticed we have been receiving visitors from more distant areas and municipalities, who prior [to the hurricane] did not visit us or visited us less frequently,” stated Lorraine Vissepó, spokesperson for Plaza Las Amércas and Plaza del Caribe, in a written statement.

Furthermore, Miguel González, vice president of operations for Caparra Center Associates, which manages San Patricio Plaza, explained that re-establishing a presence so quickly after the major storm also served to strengthen the mall’s bond and loyalty with its regular customers.

“The last part of September, and then October and November were excellent in terms of sales,” González explained. “Recovery of sales during the months post-Maria compensated for lost sales [revenue] during the days the retail stores were unable to operate. A majority of the establishments finished 2017 with better sales than in 2016.”

However, increased revenue was not the reality for all stores. The Kimco Realty Corp. mall REIT, in its annual report, stated: “For the year ended Dec. 31, 2017, the company [Kimco Realty] had a reduction in revenues from rental properties of $3.4 million related to lost tenant revenue and rent abatements resulting from the impact of Hurricane Maria.” Nonetheless, SEC filings indicate that many stores are still in the process of receiving their insurance claims, which would offset their losses from the hurricane damages. Kimco properties in Puerto Rico include the shopping centers Los Colobos, Ponce Towne Center, Rexville Town Center, Trujillo Alto Plaza, Western Plaza, Manatí Villa María S.C. and Plaza Centro.

Aside from sales, a long-term factor to monitor was stores’ reaction to the fact they were unable to open right away and how that affected retail companies considering Puerto Rico as a location to establish new retail operations. In particular, González explained that many U.S. chain stores were most concerned about establishing a business in Puerto Rico post-Maria. On the other hand, the Plaza Las Américas spokesperson indicated, while there initially were lots of concerns from off-island brands, the hurricane ended up delaying their plans rather than derailing them.

José Ayala, general manager of the Mall of San Juan, explained that this period has also been an opportunity to attract local brands to their products. Ayala pointed out that many stores that were extensively damaged did not necessarily leave, but just delayed their reopening. This was the case with H&M, Anthropologie and Urban Outfitters, which have scheduled their comebacks for the summer.

In terms of numbers, the Mall of San Juan reopened in October 2017 with 41 stores, which now has more than doubled and includes a roster of 16 locally owned stores.

Representatives from San Patricio Plaza, the Mall of San Juan, Plaza Las Américas and Plaza del Caribe were very emphatic that their strongest assets in the recovery process were the people and their disposition. Likewise, the consensus was that the lack of electricity represented a major hurdle in normalizing operations.

In the case of San Patricio Plaza and the Mall of San Juan, which had remodeling to complete and damages to address, respectively, both locations initially found it difficult to access required construction materials. Alfonso González, CEO of Caparra Center Associates, explained that in the beginning it was tough to even find steel or the tools to cut it, both essential elements in construction.

Not just about Maria

Malls’ recovery efforts not only included an assessment of damages but also addressed the island’s economic storm that has been brewing for more than 10 years. Many management companies have expressed concerns about the impact of the government’s debt if it is not properly restructured and measures are not taken to address the economic downfall, which rather than promoting growth, will further deplete Puerto Ricans’ spending power and increase outmigration.

While many malls were seeing positive-growth signs, others entered the national emergency with issues of their own. The audited March 30, 2017 financial statements from Downtown Development Corp., which manages a half-dozen malls, show total equities and liabilities of $5,458,948. This was a half-million-dollar reduction compared to the previous year. Downtown Development properties include Plaza Víctoria, Plaza Las Flores and Adjuntas Plaza shopping centers.

In addition, in its most recent financial statement, Downtown Development stated, “The Puerto Rico economy continues in distress. As a result, the company has lost many tenants and has had to renegotiate leases to reduce rent amounts.”

For larger mall REITs on the island, concerns are not related to current sales levels but rather on the sustainability of Puerto Rico’s economy and the risk that implies for their enterprises. Such is the case with DDR Corp. (formerly Developers Diversified Realty Corp.), the island’s largest shopping center management company. DDR Corp. properties include Plaza Fajardo, Plaza Walmart Guayama, Plaza Isabela, Plaza Cayey, Plaza del Atlántico, Plaza del Norte, Plaza del Sol, Plaza Escorial, Plaza Palma Real, Plaza Río Hondo, Plaza Vega Baja and Señorial Plaza.

“Inaccessible [or inoperable] utilities and other government services, or providing those services at a significantly higher cost, along with a continued economic downturn and increases in taxes, may result in the continuing or increased migration of Puerto Rico residents to the mainland United States and elsewhere,” states DDR Corp.’s 2016 annual SEC report.

The report also indicated that DDR Corp. continues to operate with a “decreased number of consumers in Puerto Rico. In addition, these remaining consumers may have less disposable income, which could result in declining merchant sales and an inability to expand or lease new space, pay rent or other expenses for new or existing operations, and will result in a general decline in prevailing rental rates.”

This scenario is forming along with DDR Corp.’s growing concern that the government is unable to meet its debt obligations.

Another assertion in DDR Corp.’s 2016 annual report is that Puerto Rico is mentioned as a location that could “be subject to damages from weather-related factors,” which include “an increase in sea levels or the frequency or severity of hurricanes and tropical storms.” The report was prepared seven months prior to Hurricane Maria.

The SEC filings from Urban Edge Properties, another large mall REIT, echo DDR Corp.’s concerns. However, Urban Edge’s report was for 2017 and was prepared after Hurricane Maria. Urban Edge Properties include Las Catalinas Mall and Outlets at Montehiedra.

“These factors have led to an ongoing emigration trend of Puerto Rico residents to the United States and elsewhere. The combination of these circumstances could result in less disposable income for purchases of goods sold in our centers and merchants’ inability to pay rent and other charges. Any of these events could have a negative impact on our ability to lease space with the terms and conditions we seek and could have a materially adverse effect on our business and operational results,” the 2017 Urban Edge annual report details, leaving “lasting stress on the island’s already strained economy and infrastructure.”

Urban Edge’s report also highlights that its two mall REIT properties on the island are under nonrecourse mortgages, which are secured by using the property as collateral, to “limit their economic exposure.” This is because, while nonrecourse mortgages may have higher interest rates than recourse mortgages, in the case of bankruptcy or default, the bank can only seize property that was used as collateral and would not be able to go after other properties of the mall REIT.

Concerns over the future of the government’s public debt are also shared by local mall management companies. The 2016 financial statements from Plaza Las Américas Inc. state, “Due to the multiple legal claims and negotiations regarding the public debt issued by the government of Puerto Rico, and existing uncertainties under [its] Title III [bankruptcy] process [under the P.R. Oversight, Management & Economic Stability Act], the fair-market value of securities may be significantly impacted.”

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