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REIT rivals link to bring fast Net access to centers

By Dave Bodamer

In an unprecedented display of partnership among rival developers, seven shopping center companies headed up by Simon Property Group have banded together to bring high-speed cable Internet access to all 400 of their properties by the end of this year.

Called MerchantWired, the program’s infrastructure will enable retailers to subscribe to a secure Internet portal through which they can link to their own headquarters, suppliers and customers. While there are few applications for the infrastructure now, the idea behind the venture is to eventually allow centers and their tenants to explore and develop services for the future.

The MerchantWired group, which grew out of a Simon effort originally called Tenant Connect, will spend about $140 million this year, with Simon funding about 50% of that cost. Taubman Centers, Bloomfield Hills, Mich.; The Rouse Co., Columbia, Md.; Urban Shopping Centers, Chicago; Westfield America, Los Angeles; Westcor Partners, Phoenix (the only non-REIT in the group); and The Macerich Co., Santa Monica, Calif., have each purchased an ownership stake in the start-up venture.

Simon said it is funding the bulk of the project because it has more centers than the other REITs and because the program was its idea. The leaders of the venture, including President James R. Giuliano III and Executive Vice President Robert Covington, are former Simon executives. MerchantWired is also headquartered at Simon Property Group’s offices in Indianapolis.

MerchantWired is first building a nationwide, high-speed communications network by wiring the centers in each member company’s portfolio. The retailers gain access to corporate offices, customers at home and the Internet at large. The venture’s transmission relies on broadband technology that is at least 10 times faster than some of the satellite connections that retailers are currently using.

The technology also allows for simultaneous voice, data and video transmission. So far about 130 shopping centers have been equipped and another 200 are in the process. However, only a few merchants are actually employing the service to date.

“The network is working,” said Covington. “A handful of retailers are using it, and 25 more are looking to take advantage.”

One of the more practical benefits of MerchantWired is that it will greatly speed up electronic transactions. Credit-card verifications would take two seconds or less using the MerchantWired infrastructure, compared with the 20 to 30 seconds it can take with a dial-up.

Each store will determine how to use MerchantWired, but possibilities include the ability to link to suppliers and institute quicker order-fulfillment systems, customer e-mail service or multimedia videos to lure passersby.

The infrastructure will enable retailers to install kiosks in the stores or throughout the shopping center that give customers Internet access. The idea here is that a store could cut back on its in-house inventory and allow customers to order goods from its online store that they could then have delivered to their home or else pick up at the store on a subsequent visit. With this sort of system in place, a store could still record a sale on an item that it might not normally have in stock.

However, very few retailers have moved to take advantage of the infrastructure thus far, and some Wall Street analysts have questions about whether MerchantWired will be able to generate any revenues for member REITs. MerchantWired was planning to address those concerns at a special meeting in early September.

“The fact that REITs have gotten together is positive for the industry. I have not seen this level of coordination before,” said Ross Nussbaum, an analyst at Salomon Smith Barney, New York City. “There are some economies of scale at work that may cut the costs compared to each REIT trying to do it on its own. Most tenants will use it to access their own [company] databases and perhaps initiate some type of customer interaction.

“We have no idea what the revenue potential is right now,” Nussbaum added. “None of the companies involved have been able to answer that question yet.”

Covington estimates that MerchantWired will bring high-speed access to between 350 and 400 shopping centers by the end of 2000, covering each REIT’s portfolio. Ultimately, the venture hopes to land other shopping center owners as clients starting next year and wire up to 1,200 centers.

MerchantWired has strategic partnerships with Cisco Systems, IBM and Intermedia Communications to provide hardware, installation and design services.

While the idea has been embraced by shopping center tenants and REIT investors, the wiring project has brought some steep costs. In early August, when some of the partner REITs were reporting second-quarter and half-year results, they said earnings had been adversely affected because of the investment in the project.

This up-front investment by the developers will cut into their funds from operations for 2000 and 2001, at the very least, according to statements made in their most recent quarterly reports. Simon anticipated it will record between a $0.03 and $0.05 loss per share during the next two years in relation to the venture. Taubman Centers did not record any growth when compared with last year’s funds from operations, partly because of its investment in MerchantWired.

“Our profit modeling is very good,” Covington said. “We’re not being a drain on any member’s financials.”

Noticeably absent from the MerchantWired coalition is the nation’s second-largest regional mall REIT, General Growth Properties (GGP), Chicago. CEO John Bucksbaum said that although he’d like to see the industry working in unison, GGP’s goals do not mesh with MerchantWired’s. GGP wants to provide applications to retailers in addition to infrastructure.

“We may not be part of MerchantWired, but what’s important is that we work on what’s going to benefit retailers the most,” Bucksbaum said. GGP and MerchantWired are sharing information, he added.