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Urban Retail Properties has debt but still a viable real estate player
Monday, February 14, 2000 By Dan Fitzpatrick, Post-Gazette Staff Writer
Understanding Urban Retail Properties Co. means understanding the real estate industry's bust in the 1980s, its recovery in the 1990s and its current uncertainty.
Urban Retail's predecessor, JMB Realty Corp., was a high-flying real estate organization founded in 1969 by two University of Illinois roommates, Neil Bluhm and Judd Malkin. By persuading investors to pool their money and seek tax shelters in real estate syndications, Bluhm and Malkin undertook what the Chicago Tribune called "one of the great real estate buying sprees of all time." They purchased offices, hotels, resorts and shopping centers around the country.
At one point, their portfolio was 20 times that of the Trump Organization. What's more, Bluhm and Malkin were among the richest people in the United States, each with a net worth of $500 million. They accumulated too much debt, though.
When real estate values plummeted and tax shelters disappeared in the late 1980s and early 1990s, JMB had to give back some of its properties to lenders. It began shrinking. Part of that transformation involved the 1993 public offering of Urban Shopping Centers Inc., Urban Retail's parent.
JMB put its best retail properties in the Urban Retail portfolio and staffed the firm with former JMB executives. Bluhm and Malkin kept control, however. Together, they serve as Urban Retail's co-chairmen and still control portions of its stock.
JMB's unraveling forced Urban Retail to be more conservative.
Through careful acquisitions and third-party-management agreements, Urban Retail evolved into one of the largest retail managers in the country, leasing and managing 66 malls and 41 smaller shopping centers. It owns 22 of them partly or in total.
But Urban Retail is not without its challenges.
As a real estate investment trust traded on the New York Stock Exchange, Urban Retail's ability to buy property or handle new developments is partly a function of its stock valuation. Due to investors' sudden interest in technology stocks, shares of real estate investment trusts have plummeted during the past two years.
Unable to raise new money by issuing more stock, Urban and its competitors have been forced to dip further into debt.
Some industry observers are concerned about this trend. A strong real estate market can't last forever.
"This is as good as it gets," said Greg Andrews, an analyst who tracks Urban Retail for California-based Green Street Advisors. Managers of large commercial real estate companies, he said, "ought to be preparing for a time when it is not as good as this."
Where does Urban Retail stand?
The company's debt, depending on the source, is either in line with competitors' or among the highest in the industry.
Urban Retail's ratio of debt to its total market value was 60 percent at the end of 1999, according to the company, up from 51 percent at the end of 1998. Debt represents the amount of money lent to Urban Retail for acquisitions or new projects. Its total market value is a combination of total indebtedness and the value of its outstanding common stock.
But Andrews puts Urban Retail's debt in a different light. The analyst and his staff try to calculate the actual value of Urban Retail's real estate, instead of its total market value, to describe the company's exposure.
Based on that formula, Urban's leverage is 67 percent.
"It's pretty high," Andrews said.
Using Andrews' math, the average real estate investment trust has a debt ratio of 51 percent, Andrews said. Trusts that own malls average 62 percent.
For Urban Retail, "I would say there is not much room to add more debt," Andrews said.
Urban Retail officials could not be reached for comment.
But Andrews and several other analysts stressed that Urban Retail is on solid ground financially.
Despite the drop in share prices for real estate investment trusts, the industry is still fundamentally strong, and Urban Retail's malls are in good condition. Thus, one way to pay for new projects and raise cash is for Urban Retail to sell stakes in its top properties.
Financing part of the Market Place project should not be a problem, Andrews said. "It doesn't seem that the company is in such financial straits that it couldn't find the capacity for it."
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