Feldman Equities

Feldman Equities has been very successful with a strategy of investing in distressed enclosed retail malls. Most real estate investors have avoided mall turnaround plays for a variety of reasons, ranging from the fear of retail bankruptcies, to the Wal-Mart juggernaut theory.

The mall landscape is littered with the names of once great department stores that have succumbed to bankruptcy or are in the middle of down-sizing in an effort to keep afloat. Many malls have suffered substantially as Wal-Mart and Target continue to roll out their superstores. There are approximately 1,200 enclosed retail malls in America and a rough estimate is that one fourth of these malls are in trouble, at least to some degree. Some malls are witnessing eroding market share while others are experiencing massive vacancies and foreclosure.

Typical candidates for the Feldman turnaround strategy are enclosed malls of 500,000 square feet and above that require gross investments (including debt, equity and upgrade costs) ranging from $25 million to $150 million. In almost all cases, the total costs of acquisition and renovation result in a total redevelopment cost well below replacement cost.

Although distressed malls can be acquired and renovated at far below replacement cost, these malls are often in very good locations. We approach each mall situation by coming up with a comprehensive strategic turnaround plan. The strategic plan almost always involves devising a strategy of "Wal-Mart proofing" the mall through an aggressive leasing campaign. The number one objective of the leasing campaign is to seek out new anchors and specialty retailers that don’t compete with Wal-Mart or the typical power center down the block.

Our strategy involves attracting the right mix of specialty retailers which offer specialized products, not available at Wal-Mart. The strategy also combines these specialty retailers with an entertainment anchor such as a multiplex theater and a series of upscale restaurants.

The following is an example of how Feldman executes its strategy: In 2003, Feldman acquired the foreclosed Harrisburg Mall in Harrisburg, PA from Prudential Insurance. Concurrent with the acquisition, Feldman signed 2 new anchor leases and renewed a lease with a 3rd anchor totaling over 590,000 sq. ft. The new tenants include Bass Pro Shops, which signed a long term lease for space vacated by Lord & Taylor. Bass Pro is renovating and expanding the former Lord & Taylor store to convert it into a spectacular super store consisting of approx. 225,000 sq. ft. of fishing and hunting products. Excluding their flagship store, the Harrisburg store will be the largest Bass Pro store in the nation. Boscov’s department store also signed a long-term lease for the former Penney store.

In addition, an existing tenant, Hecht’s (a division of the May Company – NYSE: MAY), made a long term commitment to the mall and extended their lease to 2024. The expansions of Bass Pro and Boscov’s will result in an overall mall size of over 900,000 square feet.

Because of the new tourism-related jobs that will be created and the taxes that will be generated, Feldman arranged for a multi-million dollar grant from the state of Pennsylvania, as well as special tax incentives from Swatara Township, Dauphin County and the local school district. In addition, Feldman arranged for the Pennsylvania Department of Transportation (PENNDOT) to provide a direct exit ramp to the property from Interstate 83.

The purchase price, including buildings & land was $17,500,000 or $20.88/sq. ft.

History of the Harrisburg Mall: Kravco built the mall in 1969 and then sold it to a publicly traded trust controlled by Kravco & Equitable Life. Following EQK’s bankruptcy in 1999, the mall was put up for auction. There were no bids, so the mall reverted back to Prudential (the lender) who secured title to the mall with a total debt in excess of $45,000,000. In May 2001, JC Penney vacated their store (this store has just been leased to Boscov’s).
Prior to Feldman’s acquisition, the JCPenney vacancy, combined with the Lord & Taylor vacancy, brought the mall to an effective occupancy of 50%. The property was in grave danger of being demolished for land value. The following is a summary of the transaction:

The following is another example of how Feldman executes on its strategy: Feldman Equities signed contract to acquire the Foothills Mall in late 2001. Foothills Mall is a mid-sized mall with a series of junior anchor tenants: Linens ‘N Things, Saks Off Fifth Ave., Barnes and Noble, a large Nike Factory Outlet store, Ross Dress for Less and a 15 screen Loews Cineplex Theatre.

Foothills Mall is located in one of the hottest growth markets in the United States, in the northwest suburbs of Tucson. However, the mall previously suffered from lackluster shop sales. In spite of mediocre shop sales at the time the mall was purchased, the mall was home to one of the most successful movie theatres in the state of Arizona.

During any given week, the Loews cinema is attended by tens of thousands of patrons. However, the bulk of these patrons enter and exit directly through the theater’s existing parking lot entrance and most theater patrons never enter the mall. With the objective of sharply driving up tenant sales, Feldman Equities concluded a very creative real estate deal which involved providing $4,000,000 to the theater operator, Loews Cineplex, in order to facilitate conversion of the theater to full stadium seating. In exchange, the existing parking lot entrance will be closed off, and the only entrance to the Loews Theater will be through the mall. The conversion to modern stadium seating is expected to boost box office attendance, and the redirecting of all of Loews patrons into the interior of the mall, is expected to have a dramatic effect on overall mall pedestrian traffic. As a result, shop sales throughout the mall are expected to increase sharply.

Over the last several years, when terrorism and war threatened and travel seemed risky, when the economy faltered and the stock market swooned, here's what Americans did: They went to the movies. Last year, Americans went to the movies, and went again, and then went some more. In 2003, America’s love affair with the movies continued unabated, with ticket sales approaching the $10 billion mark despite continued uncertain economic times. Our strategy assures that the Loews Cineplex at the Foothills Mall will continue to be the finest movie facility in Tucson, and an entertainment destination for years to come.

In addition, in just 2 years, Feldman Equities has arranged for the development of 5 of 6 available pad sites at the 508,000 sq. ft entertainment and retail center, creating over 50,000 sq. ft. of new retail space for tenants such as Thomasville Furniture, Fox & Hound Smokehouse, Compass Bank, Starbucks and the Arizona Central Credit Union. Occupancy at the Foothills Mall has climbed up over 97 percent, with predominantly national credit tenants, and comparable shop tenant sales are growing at double digit rates.

In addition to the renovation of the Loews Cineplex, two new mall expansions were constructed at Foothills consisting of 26,000 square feet. The expansion areas were leased to Famous Footwear, a discount shoe retailer, Payless Shoes, Radio Shack, EB Games and a series of smaller specialty retailers. The mall is also undergoing a major renovation of its food court and the food court entrance, and its northwest entrance. Selected mall corridors and ceilings were also upgraded for greater customer visibility. A new entrance was built at the mall’s south end, and an all new sign package was being installed at the mall’s entrances, including a 28 foot main entrance sign with an LED reader board.

A few of the key highlights regarding Foothills Mall are as follows:

Feldman also likes to fill its malls with a series of junior anchors with specialty products not found at Wal-Mart. This strategy solves 3 problems at the same time. First, by filling the mall with a series of "big-box" specialty retailers as anchors, the mall is less dependent on traditional department stores that have been steadily losing market share to the discounters. And by filling the mall with a series of smaller junior anchors, the solvency of the mall is less threatened by the potential bankruptcy of a large department store, or a decision by a department store to shut down a particular location. Second, by converting the movie theater to stadium seating and redirecting the patrons inside the mall, the mall has a distinctively different, "Wal-Mart proof" entertainment oriented make-up. Third, the cinema anchor has attracted a major base of restaurant tenants such as Outback Steak, Applebee’s, and a host of other local and regional restaurant operators.

Attracting the right tenant mix is just part of the Feldman turnaround strategy. Effective capital investment is also key to the success of a mall turnaround. These investments vary from project to project, but include a) the renovation of exterior façade of the mall, (b) the renovation of the mall entrances, (c) an upgrade to the mall’s common area corridors and lighting, (d) the mall’s entire parking lot will be resurfaced and re-striped and (e) the mall’s signage will be significantly upgraded.

In addition to renewing profitable high-volume tenants at the best possible market rents, the re-leasing process also includes weeding out unhealthy, low volume or unprofitable stores in a proactive way that allows failing tenants to cut their losses by buying out of their leases and applying the resulting short-term income towards incoming tenant inducements.

Successful mall turnaround also includes improving visibility of key tenants, constructing new entrances or implementing ways to improve shopper circulation throughout the property. It also involves intensive marketing programs geared to the local trade area and promotional activities that assure a constant flow of events occurring at the mall, such as musical performances, sports promotions, radio station events and hosting other civic and charitable functions.

FELDMAN EQUITIES BACKGROUND

Seventy years and two billion dollars of completed commercial real estate projects are two statistics which tell only a part of the Feldman Equities, Inc. story.

In 1900, a young Russian immigrant by the name of "H.J." Feldman arrived in the United States. H.J. arrived in Chicago during the bitterly cold winter of 1902 and got employment at the American Car and Foundry yards. His first week’s wages went towards buying a pair of eyeglasses which he bought from a local street vendor and what was left over paid for his food and shelter. In the following years he saved his money and by 1910, "H.J." was in business for himself. During the "Roaring Twenties," he became one of the largest plumbing contractors in New York City and as the firm expanded, contracts were taken on that included general construction of residential and commercial buildings.

In 1950, the company was awarded a multi-million dollar contract to rehabilitate the Sampson Air Force Base located in Geneva, New York. Shortly after the commencement of the construction, the government expanded the scope of the project due to the impending Korean War and the Feldman family was contracted to commence renovation of 550 buildings on a "crash program." Aside from working factories overtime, the Air Force assisted by flying materials to the project, and the construction went on "around the clock."

The company then went on to build Nike and Atlas Missile bases, atomic energy facilities of all types, sewage and water treatment plants, hospitals, residential, office and industrial buildings. One of the better known projects built by the Feldmans were the three main terminal buildings at O’Hare Airport, which were completed in eleven months throughout a Chicago winter, and for which the city of Chicago paid the firm a substantial bonus.

By 1960, the company was run by HJ and his four sons, including Ed Feldman (Chairman Emeritus and head of acquisitions). In 1960, the company was listed as one of the top 10 general contracting companies in the country. Then, in 1962, the Feldman family began a transition to real estate development and, although they continued to perform construction work, they did so only for projects owned and developed by the Feldman family.
Over a 20 year period, the Feldman family built, owned and managed over 3 million square feet of office and retail space primarily located in the New York metropolitan area.

In 1985, the original family business, then led by each of the four Feldman brothers split into four separate entities. Feldman Equities, Inc. was formed in 1985 by Larry Feldman & his father Ed Feldman. During this period, Feldman Equities developed several major properties in the metropolitan New York area, including a 40 story office tower in Manhattan known as Tower 45. Over the last 20 years, Larry Feldman, together with his father Ed and his partners Jim Bourg and Scott Jensen have developed or acquired over 6 Million sq. ft. of office & retail properties with an aggregate value in excess of two billion dollars.

Following the early 1990's recession, Feldman Equities, Inc. expanded its real estate portfolio by entering into joint ventures with several corporate and private investors including partnerships with GE Capital, George Soros, Morgan Stanley and the Carlyle Group. Many of these investors made above market returns from Feldman's turnaround strategy of buying and renovating under performing property. Many of these investors continued or increased their investment in the Company's initial public offering in 1997.

In October of 1997, the company was renamed Tower Realty Trust, Inc. and was reorganized as a Real Estate Investment Trust. The Company was listed on the New York Stock Exchange (NYSE symbol: "TOW"). Tower was a major owner and manager of office and retail property. Including property owned outside of New York, Tower owned 4.6 million square feet of office space, including 50 acres of land under development in Phoenix, Arizona as an office park. In addition, Tower managed 1 million square feet of retail space.

Larry Feldman, age 49, was the Chairman and CEO of Tower Realty Trust. In May of 1999, Tower was sold for approximately $700 Million in cash, stock and debt to an entity controlled by Reckson Associates Realty Corp. ("NYSE: RA"). Reckson is also a publicly traded REIT listed on the New York Stock Exchange. Although Tower has been fully absorbed by Reckson, Larry and his father, Ed, together with their partners Jim Bourg and Scott Jensen, have resumed operations under their old banner as Feldman Equities.

Feldman Equities, Inc. owns an enclosed mall in Tucson, Arizona which is undergoing a highly successful expansion, renovation and lease-up program. Recently, Feldman Equities acquired an enclosed regional mall in Harrisburg, Pennsylvania. The most notable fact regarding this acquisition is the fact that Feldman signed over 590,000 of leases upon the closing of the transaction, consisting of 2 new anchor tenants.

Feldman leases and manages all of its properties, which are located in Arizona, Florida and Pennsylvania. Feldman Equities presently owns and manages office and retail property in excess of 2.3 million square feet, and Feldman owns land for future development.