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WHAT ARE SALES PER SF?
DEPENDS WHO'S COUNTING

Seven REITs team up to devise standards

By Debra Hazel

Seven leading U.S. mall REITs have quietly been exchanging information on how they determine one of the most important measures of shopping center productivity — sales per square foot. Their goal is to create a standard formula for calculating the measure, making it easier for analysts and tenants to compare their companies. Senior executives at The Macerich Co., Simon Property Group, General Growth Properties, Taubman Centers, The Rouse Co., Westfield America and CBL & Associates Properties have been exchanging e-mails defining how they report their projects’ productivity, said David J. Contis, COO of Santa Monica, Calif.-based Macerich and an ICSC trustee.

"We’re trying to reach a consensus," he said. "We’ve found that there are only minor changes."

The group’s move follows an earlier attempt at standardization by the ICSC Research Advisory Task Force, which was seeking to coordinate reporting for the Monthly Mall Merchandise Index. But the fact that discrepancies exist among REITs and privately held shopping center companies on such basic terms as sales per square foot make comparisons difficult for analysts and other observers. At least one analyst cites those differences as a reason for what he said was an undervaluation of mall REITs. "The analyst and investor communities have been frustrated in general with the amount of disclosure mall REITs provide," said Ross Nussbaum, a REIT analyst with Salomon Smith Barney, New York City. "It’s one of the reasons retail REITs trade at a discount."

The most basic measure of a center’s value, sales per square foot, is predicated on the size of the project. Divide sales by square footage, and you have a figure. But various mall REITs calculate the sum differently. Some do not include stores larger than 10,000 square feet; others use a cutoff of 20,000 square feet, or even 30,000 square feet. Other questions, such as the inclusion or exclusion of retail storage space, also can affect the number. Another factor revolves around the reporting of comparable sales: Some companies report same-store figures (for retailers open more than a year), while others report comparable-center sums.

"You also have income from such things as the J.C. Decaux signage," pointed out Jay Habermann, REIT analyst for Credit Suisse First Boston, New York City, that may or may not be included.

Yet another discrepancy could include the reporting of sales in kiosks and carts, which provide extra selling space, but are considered part of the common area. CBL & Associates Properties, for example, includes kiosk income in its sales per square foot calculations, while Simon does not.

While acknowledging that adding specialty leasing sales to the total could inflate the sum, "They’re a small percentage of the total portfolio," said Gus Stephas, senior vice president and controller at Chattanooga, Tenn.-based CBL. "It all evens out when you have 51 malls."

Simon’s specialty leases, on the other hand, tend to run less than one year, and, therefore, are not included in comparable sales, observed Michael P. McCarty, senior vice president of Simon Property Group, Indianapolis, and the head of an ICSC Research Advisory Task Force subgroup on standards. But that could underreport a center’s effectiveness.

"They are not included in GLA, and often do not pay CAM, but there are million-dollar kiosks," said David Fick, REIT analyst for Baltimore-based Legg Mason Wood Walker. Add in what Nussbaum cites as the general trend toward secrecy from the still largely family-run mall REITs, and analysts are left scratching their heads trying to interpret varying standards to compare companies.

Lack of regulatory authority
The problem is that there is no regulatory authority that requires owners/managers to follow a standard. In 1999, after years of debate, the Washington D.C.-based National Association of Real Estate Investment Trusts (NAREIT) formulated a definition for funds from operations (FFO), another financial standard, yet even today, not all publicly held real estate companies follow it.

"To this day, it remains a contentious issue," observed Michael Grupe, senior vice president and director of research for NAREIT.

The Securities and Exchange Commission is of little help: It has strict rules of reporting, tending toward Generally Accepted Accounting Principles (GAAP), and forbids following any other format for documents. FFO is considered an alternative method. Yet most REITs do provide additional information to the financial community. "We take comfort in the fact that there is reconciliation between GAAP income and FFO," said George Youngman, NAREIT vice president of financial standards. "[The REITs] show the adjustments. Therefore, if they don’t follow the rule, the information is still there."

But the combination of analysts nudging and the need to be more open is pushing the industry toward standardization, said Contis, who is collating the information from his colleagues.

"A number of us are ICSC trustees and are very active," he said. "All of us wanted to talk the same numbers. The tenants and analysts are our customers, and we want to serve them. What makes this industry good is the transparency, and having common definitions helps this."

This isn’t the first attempt to standardize sales reporting. Companies giving information to ICSC’s Monthly Mall Merchandise Index have chosen to follow ICSC’s formula: total nonanchor mall sales divided by total occupied square footage. Simon changed its own reporting to accommodate that standard, created by a subgroup of ICSC’s Research Advisory Task Force, noted McCarty, who chaired the task force until January.

"The REITs report to us on a fairly standard basis. But when they report on their 10Qs, they do what they like," said Michael Baker, assistant director of research for ICSC. Not everyone is gung ho about standardization, however.

Because analysts basically are concerned with an individual company’s growth or decline, CBL’s Stephas argues, as long as they report their own numbers consistently from quarter to quarter, year to year, that should be enough.

"You also have to keep the region in mind," when making comparisons between companies in any case, he added.

Any change in reporting standards will be difficult, McCarty noted. Adapting to a new method of reporting sales per square foot will involve recalculating not just current figures but sums three years back.

"This means changing your basic accounting system. When we looked into it, it would cost into six figures," he said. "So far, no one has made that compelling argument that it would be worth it."

Many shareholders would be hard-pressed to approve such an expenditure simply to make analysts’ jobs easier. And the industry may argue that it’s the analyst’s job to go beyond straight numbers.

"I would not want to ignore the fact while it’s in every industry’s best interests to provide as much information as possible, analysts are paid to assess on the margin," Grupe said.

Contis and his colleagues have put no deadline on achieving a reporting standard. But the fact that the effort exists indicates that the industry is looking to increase its cooperation with the investment community.

The cost of change
"The industry has shown a willingness to change when physically and financially possible," McCarty said. "But change does not come cheaply." The question, NAREIT’s Grupe added, is what information beyond SEC requirements the industry can provide to enable investors and analysts to determine how a company and industry are doing. Standardization is comparatively easy for manufacturing firms, but businesses more dependent on human capital rather than tangible assets are much more difficult to quantify.

"You can apply consistency and standard measures, but companies — and industries — can be very different in many economic respects," Grupe said. "[There is] a need for standardization, but it’s never the be-all and end-all."

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