On Friday mornings, Chief Executive Jeff Olson and his team at Equity One sit down and go through every vacancy in the 145 shopping centers spread largely across Florida and the Southeast.The goal of the meetings is to keep close tabs on renewals, potential new tenants in the pipeline and any tenants at risk of going out of business. This kind of coordination is particularly critical in these economic times where tenant turnover is rising.
The North Miami Beach real-estate investment trust’s South Florida properties have some of the highest tenant turnover rates, but the good news is that there’s still demand for retailers looking for more locations in this market. The picture isn’t as bright in markets like Naples, Fort Myers and Tampa, where turnover is slightly lower but demand is significantly less.
”Overall the balance of power between the landlord and the retailer is more equally distributed than it was a couple of years ago,” Olson said. “We do have less leverage than we did.”
In his first interview since taking over the helm at Equity One in 2006, Olson talked with The Miami Herald about how the company is faring in these challenging economic times.
Q: How do you see the struggling economy and the residential real-estate meltdown impacting your business?
A: It’s clearly a more difficult market to lease these days than it was two or three years ago. We’re seeing more tenant turnover. It’s happening with the weaker tenants that may not have made it to begin with, even in a stronger economy.
We’re more active today on a leasing front than we were a few years ago, in part because we have better vacancies to fill. But there is down time. The down time has an impact in the short-term on your numbers. Over the long-term, if you can release it to a better operator at a higher rent, it will increase the value of that property.
I feel pretty good about where we stand today. Our balance sheet is our strong suit. What got most people in trouble during past real-estate recessions was leverage. We’re in a position where our leverage ratio is less than 40 percent, which is conservative by any standard.
When you couple that with the relationships that we’ve formed with two outside investors, we feel that we have a lot of capital to put to work as the market becomes more opportunistic. We strategically have placed ourselves in this position knowing that there would be a time when the balance sheet would really matter. Today is that day.
Q: You have recently formed several joint ventures. Talk about the strategy behind these and plans for expanding these partnerships.
A: The pension funds have a lower cost of capital than our own shareholders, so it allows us to buy stabilized shopping centers. It gives them an attractive yield, but we’re able to leverage our yield because we’re investing a very small portion of the equity, anywhere from 10 to 20 percent. Then we will earn management fees and other related fees on top of that which would boost our returns to north of 15 percent. We feel that this is a way for us to earn an outsized return for our shareholders and expand the company without taking on a lot of risk.
Today we have about $300 million in assets under management. We started the year with zero and we feel we have a number of partners who will allow us to grow that business substantially.
We haven’t put specific targets on it. We’re not going to quantify it because we don’t want to be acquiring for the sake of acquiring. Over the long run we expect it will be a business that will be in the billions.
Q: Why the decision to decentralize management and open offices in New York and California? What does that reflect about your strategy for growing the company?
A: Our mission is to be the leading retail real-estate operator, asset manager and developer in the most supply-constrained markets in the country.
We’d love to be in New York. We would love to be in California. Those markets offer similar characteristics to many of our markets in Florida in terms of where the retailers want to be. The retailer is our customer, and we want to serve their needs because of the relationships that we have with them.
We’re really listening to them and they’re telling us where they want to be. They want more stores in Florida. They want more stores in the New York metro area. They want more stores in Southern and Northern California. We’d like to use our relationships and talent and capital to expand into those markets, but also expand further inside the state of Florida.
Q: What kind of opportunities do you see for growth in Florida, particularly South Florida? Do you see opportunities for more two-story stores like the Kohl’s you are adding at Sheridan Plaza in Hollywood?
A: I love South Florida. It’s a very raw market. In Dade County, in particular, it’s one of the most undersupplied counties in the country for retail. We think the need for redevelopment throughout South Florida is tremendous, especially for some of the larger national tenants, who for the most part are under-represented in South Florida.
We think there are some immediate opportunities to densify existing shopping centers. Once the residential market comes back, we would reconsider adding residential to some of our sites. But it’s a tough market today.
If you have the right location, retailers will do nontraditional formats. I believe we can continue to do nontraditional formats at many of our sites in South Florida.
Q: How long do you foresee that this current downturn in the real-estate market might last?
A: I think we’re in the early stages. The credit markets are shut down. The consumer is stretched. We’re just starting to go from fear to pain.
There was so much capital in the system three years ago. It ran so hard and so fast. The REIT category went through five consecutive years when the stocks were up 25 percent annually. We’re just seeing a reversion back to the mean.
What I see coming will be an opportunity for those companies with capital. This time period will define which companies will be the dominant companies in our space over the next 20 years. There will be a lot of weeding out. There were many people who got involved in shopping centers looking for short-term returns. Now is the time when those companies that understand how to operate real estate and be intensive asset managers will differentiate themselves.
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