By Peter Grant
Turbulence in the retail sector is hitting executives working
for the top mall companies where it hurts: in their wallets.
Senior management teams at the country's largest mall owners,
including Simon Property Group Inc., GGP Inc. and Macerich, are
taking cuts to their compensation as they navigate an industry
beset with struggling retailers and increasing competition from
online shopping.
The slide in compensation among retail landlords is unusual in
the corporate world. Executives at companies in other sectors are
less likely to feel the pain of a rough patch because their pay
isn't as closely tied to stock performance.
But the real-estate investment trust industry is ahead of most
other sectors in designing pay plans to align the interests of
shareholders and management, according to according to Jeremy
Banoff, a senior managing director with FPL Associates LP, a
compensation-consulting firm that focuses on the real-estate
industry.
As a result, when stocks fall, it is more likely that
compensation cuts result, he said. "The rest of the world is
playing catch-up," Mr. Banoff said.
Indianapolis-based Simon, the country's largest mall owner with
stakes in more than 325 properties, took the rare step of
eliminating stock grants tied to the company's long-term
performance for top executives, according to its proxy statement
filed with the Securities and Exchange Commission.
Simon did this because of "the challenging business conditions
in the retail industry that the company is facing," according to
the proxy statement. A spokeswoman for Simon declined to comment
beyond what was written in the filing.
Executives at other big mall owners suffered because their
compensation is tied to the performance of their share prices,
which have been hammered during the past 18 months as investors
have fled the sector.
For example, Macerich chief executive Arthur Coppola had a
target compensation package -- including base salary, annual
incentive and other benefits -- potentially worth $12 million in
2016. But because the company's stock price dropped, Mr. Coppola
was on track to receive only $5.7 million of that, according to the
company's proxy filing.
"That's the way the stock plans are structured," said Macerich
Chief Financial Officer Thomas O'Hern in an interview. "When the
stock is down, we suffer from a compensation standpoint."
The retail sector was facing problems even before the e-commerce
revolution. Rampant development left the U.S. with far more malls
than it needed by the time the last recession hit.
A decade later the country is still considered "overstored" and
Americans are doing more than 8% of all shopping online, creating
enormous headaches for mall owners on the demand side. Space has
emptied as big retailers like Macy's Inc., J.C. Penney Co., Bebe
Stores Inc. and Sears Holdings Corp. have closed stores across the
U.S.
Up until now most of the pain has been suffered by the
lower-quality malls, which have taken the greatest hits to
occupancy and rents. More these properties are being sold at steep
discounts or going into default.
But the cuts in compensation show that the pain is now spreading
to the owners of the highest quality malls. These popular malls,
usually in higher-income areas, have done a good job thus far of
keeping rents and occupancies from falling and replacing closing
stores with new tenants, according to analysts.
For example, Simon earlier this year reported its occupancy was
95.6% at the end of the first quarter, unchanged from a year
earlier. Base minimum rent was $51.87 a square foot, an increase of
4.4%, Simon said.
"Not everyone will be replenishing their wardrobe from their
cell phone...while binge watching Netflix," said a recent report on
the retail REIT sector by Green Street Advisors.
But the shares of the top mall companies haven't been immune to
investor concerns that the internet's impact on bricks-and-mortar
shopping could get much worse. "The severe negative sentiment
surrounding retail real estate has sent many retail REIT share
prices into a free fall," the Green Street report said.
Last year, retail REITs rose only 0.95% while the broader equity
REIT market gained 8.63% and the S&P 500 increased 11.96%. This
year retail REITs are down 10.4%, compared with up 5.6% for the
REIT market and 11.6% for the S&P 500.
The downdraft is hitting companies with top regional malls as
well as those that own shabbier properties. For example, Simon owns
such trophies as the Forum Shops at Caesars in Las Vegas; Sawgrass
Mills in Sunrise, Fla. And Woodbury Common Premium Outlets in
Central Valley, N.Y. Its shares are down 9% this year.
Part of the pressure on retail REITs is coming from short
sellers, who bet share prices will fall. So-called short interest
on Simon jumped to $2.3 billion in June from $870.9 million in
November. Over the same period, short interest trades in GGP
increased to $1.4 billion from $424 million, according to data from
S3 Partners, a financial analytics firm.
Many companies in the corporate world also use stock price
performance but to a lesser degree than REITs, Mr. Banoff said.
This is partly because the real-estate industry has long had a
focus on rewarding managers for increasing the value of their
properties, he said.
At GGP, Chief Executive Sandeep Mathrani took a cut of more than
$1 million based on a number of metrics including the company's
stock performance, according to Kevin Berry, GGP's head of investor
relations. The company revamped its compensation program following
a negative vote by shareholders last year on a nonbinding "say on
pay" resolution.
The impact on Simon executives' pocketbooks was greater because
of the company's elimination of its stock grant program last year.
David Simon, the company's chief executive, was awarded stock
valued at about $9.5 million from that program each of the previous
three years, according to Mr. Banoff of FPL.
Other members of Simon's executive team were awarded stock
valued at $2.5 million or $3 million from the program in previous
years. In 2017, no grants will be awarded, according to the
company's proxy
--Esther Fung contributed to this article.
Write to Peter Grant at peter.grant@wsj.com
(END) Dow Jones Newswires
July 26, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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