Two Rouse malls: Oh gosh, how posh

THE BALTIMORE SUN

A new $550 million Mediterranean-style shopping mall, years in the making, will open its doors Friday in South Florida's posh Coral Gables community with a garden runway show by Chanel, followed by shopping in some of the most exclusive boutiques in the world.

The Village of Merrick Park mall has signed on eight retailers that will open their first U.S. shops or restaurants, including Ann Gish, Artefacto, Baldessarini and Cafe Ibiza. That's in addition to dozens of other small stores, Neiman Marcus and the Miami area's first Nordstrom.

The developer, Rouse Co., expects its newest project to join the elite collection of ritzy malls that capture the wealthiest shoppers in the nation.

Rouse will follow Merrick Park with a $1 billion expansion of its Fashion Show mall in Las Vegas on Nov. 1.

That mall will have room for eight new or expanded anchor department stores, more than any other mall in the United States. There will be catwalks for live shows and big screen TVs beaming the latest in haute couture. There will also be dozens of upper-upscale shops.

Fashion Show and the Village of Merrick Park show the newest face of Rouse.

"As a strategy, we've been pretty deliberate and clear since mid-1990s that our direction was a portfolio of quality," said Jerome D. Smalley, executive vice president and director of development at Rouse. "We wanted the top centers in the top markets. We identified opportunities that delivered to us those properties through acquisition, redevelopment of existing assets or new development. ... These two [malls] will go right to the top of our portfolio and the top of the industry."

Rouse has 53 retail centers around the country, with four more under construction and two undergoing renovations.

That number includes eight purchased in May from Rodamco North America NV for $1.5 billion. The purchase was considered expensive but a coup for Rouse and the two other companies that split Rodamco's assets. Among the upscale properties Rouse got was Water Tower Place in Chicago.

But retail experts agree that the Las Vegas and Coral Gables malls are like no others the company has developed or acquired in the past. And, despite the lackluster retail environment, especially for department stores, the malls are likely to join the nation's top performers.

Company officials are counting on the two to boost income for the Columbia-based real estate investment trust and further elevate Rouse's image in retail circles.

"Both projects are somewhat of a departure for the Rouse Co., as both are very upscale," said Steven B. Greenberg, president of the Greenberg Group Inc., a Hewlett, N.Y.-based real estate adviser to specialty retailers. "Their tradition has been to develop more middle- to upper-market regional malls. These two projects clearly are very upscale. ... They spent years finding appropriate sites. And they are absolutely right."

Greenberg was so sure of the Rouse malls' success that he recommended that his upscale clients open shops in them.

That's important to Rouse. If it is to earn a return on its investments, the company can't afford vacancies in its multimillion-dollar malls. They need an exclusive collection of shops to meet sales projections, the basis for the rent Rouse charges.

Fashion Show will have new or expanded anchors including Neiman Marcus, Saks Fifth Avenue, Macy's, Dillard's, Robinson-May, Nordstrom and Bloomingdale's Home. There will also be 130 new shops and restaurants. Lord & Taylor and a food court will open next year, all catering to 35 million annual visitors to the region, one of the fastest-growing residential areas in the nation.

Rouse will pay about $350 million of the development costs, with the remainder coming from the tenants. The company will spend $275 million on the Village of Merrick Park.

For its money, Rouse expects sales at Fashion Show to jump from $550 a square foot to $750 to $800 a square foot by its third year of operation. Merrick Park should do $600 a square foot in sales. Rouse's Smalley says those are conservative estimates but par for the nation's top-tier malls.

Rouse and some analysts think the malls will add to earnings immediately and continue to add as the properties mature.

Tenants will pay close to $90 a square foot in rent in some cases, which is expensive but not unusual for high-end malls, according to Mark Millman, of Millman Search Group, an executive search and retail consulting firm based in Owings Mills. Millman has worked to find senior-level managers for Rouse at Fashion Show.

Rouse has found tenants -- the majority of spaces are leased in both malls -- that cater to the wealthy and should be able to afford the rent, said Jennifer Millman, Millman's director of the shopping center division. In many cases, they are exclusive to the region, she said.

That helps the mall, but it also helps Rouse in general, she said. The company will sign the retailers up for premier spots in the new malls in exchange for their opening stores in some of Rouse's other malls, a common practice among mall owners, she said.

"This will benefit other Rouse properties," said Millman. "They're targeting the retailers that will be successful in Las Vegas and Coral Gables, but also in other Rouse properties."

This is how Rouse keeps sales, and rents, up across the board. And that overall income is what analysts focus on.

Louis Taylor, a Deutsche Bank analyst who follows Rouse, said he wants to see that all of the malls are rented at high enough rates to pay back what the company spends on them. In both cases, Taylor expects the new Rouse malls to contribute "a normal return for their malls and for the industry."

He expects funds from operations -- earnings before depreciation and amortization costs and a gauge of real estate investment trust performance -- to reach $3.80 a share this year and $4.20 a share next year, with 10 cents to 15 cents coming from the new malls. That's not bad considering that some new malls have no impact on earnings because the owner has to sell other assets to pay for acquisitions and developments, he said. Rouse used debt and cash and sold some assets.

Rouse estimates that about 60 percent of its net operating income comes from its retail properties, which it said is likely rise to about 70 percent as the company scales back its office and industrial division and growth in its community development division slows in coming years.

Rouse funds from operations were $3.62 a share last year. Analysts' consensus estimates are $3.84 for this year and $4.18 for next year.

"It's all about the economics," Taylor said.

Another Rouse analyst, David Fick, a managing director at Legg Mason Wood Walker Inc., was skeptical that the malls would contribute to earnings in the first couple of years. He said the malls will be good performers but that sales per square foot will not rise to the level Rouse once promised. Rouse came down from its initial projection that sales at Fashion Show, for example, would be at least $100 a square foot higher.

He said competition is a problem for both malls, with other luxury projects operating nearby. The competitive retail environment in Las Vegas has caused trouble for the $300 million Desert Passage, a retail complex attached to the Aladdin Resort & Casino. Traffic has failed to meet the expectations of merchants, who have complained to the media that it is a "deserted passage."

Fick also noted that department stores have been struggling for years and that upscale retailers have been hurt the most in the weakened economy.

"Tenants will stay and survive, but will they be happy paying those kinds of rents or will they come back to renegotiate the rents?" he said.

Rouse had considered the projects for years, said Smalley. Fashion Show's 20-year-old anchors needed to be overhauled to compete and grow. And in South Florida, it was the retailers who pushed Rouse to build Merrick Park.

The regional retail leader in Florida has been Bal Harbour Shops, between Miami and Fort Lauderdale, about 14 miles north of Merrick Park. Industry experts say Bal Harbour produces around $1,200 in sales per square foot, among the nation's highest. Neiman Marcus, a Bal Harbour anchor, thought demand was strong enough for another mall in Merrick Park.

Rouse began looking for land in the early 1990s. By 1996 the project was coming together. Most of the site was a municipal maintenance facility. Rouse won the development rights in public bidding. Coral Gables leases the land to Rouse for minimal rent and a stake in the mall.

Smalley said the project has overcome several hurdles. Rouse won a public referendum in the community, which often rejects development. The project also got a boost in March when Rouse reached a settlement in a 2-year-old lawsuit against Bal Harbour Shops that lifted a longtime ban on its tenants' opening shops in other area malls.

Arthur Weiner, a consultant helping lease Merrick Park, said a handful have signed leases in both malls.

"They only come for the right reasons; you can't trick these guys," he said of the retailers. "They know there aren't but four or five of these malls in the U.S."

Rita Brandin, vice president and senior development director for Rouse, has a similar sentiment about Fashion Show, where the redesign began in 1997.

Las Vegas, which is beginning to bounce back after the terrorist attacks in September last year put a damper on travel, expects convention and tourist business to pick up in the new year. And Brandin said she expects the amount of money visitors spend to continue increasing.

The average person spent $122.89 per trip in 1997 and $201.56 last year, according to the Las Vegas Convention and Visitors Authority. Rouse wants to give them a reason to spend their money at its mall.

"The opportunities for new development are limited," Smalley said. "But when one is able to find them and execute them well, they represent considerable value to Rouse, the tenants and the shoppers."

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