21/8/01

Shopping For Shopping Centers

Dori Segal stopped by Pam's Coffee Shop in the Brantford Mall in Brantford, Ontario. The gal behind the counter was prompt and courteous (as people in this part of the world are); she smiled and thanked him, as she does to every customer. She had no idea who this fellow was.
    Segal, a youthful, ruggedly handsome man of 40 dressed in nondescript jeans and tee shirt (and even a bandaged thumb), could have been a truck driver for all she knew. In fact, she had just served the owner of this 32-shop center.
    The Toronto entrepreneur and his Miami-based partner Chaim Katzman left Tel Aviv to seek success in Canada and the United States at a time when North America's economy was in the doldrums. They embarked on a shopping spree - for shopping centers.
    With $5 million in their wallets, they spent wisely. They were disciplined, shrewd, conservative, never greedy, and never overextending themselves with heady expansion or outbranching.
    On the other hand, these landlords aren't penny-pinching cheapskates: their shopping centers - they bought some, and built others - are diligently maintained, efficiently managed, and intelligently planned. They're spotless, attractive, and thoroughly people-friendly. If the white lines in the parking lot need repainting, Segal is the first to notice.
    By the end of September, when the company closes its latest acquisition deal, Katzman and Segal will own 146 community shopping centers, whose total asset value will be $1.3 billion - all this in barely a decade.

THEIR COMPANY, Gazit-Globe of Tel Aviv, took a giant leap forward during the middle of last year, when they acquired controlling interest of Canada's Centrefund Realty Corp. for some $93m., increasing the company's annual rental revenue from $30m. to $140m., and its properties from 30 shopping centers to 100, increasing its land ownership from 3 million square meters to 13 million.
    After a series of buyouts and acquisitions, Gazit - through its subsidiaries Centrefund and First Capital in Canada, and Equity One and United Investors Realty Trust in the US - is now a major player in neighborhood and community shopping centers (not to be confused with shopping malls). The company concentrates its holdings in Canada, Florida and Texas; it plans to expand in the southeast US.
    A successful community shopping center is based on one or two good anchors. At Equity One's 33 properties (covering 3.3 million sq.ft.), 24 percent of the annual minimum rent is derived from supermarkets, 16% from other anchors, 30% from other creditworthy tenants, and 30% from local tenants.
    This mix of necessary goods and services generates recession-proof and 'Internet-proof' traffic, providing safe cash flow from creditworthy chain stores.
Centrefund accounts for a further 72 properties covering over 10 million sq.ft., with another 10 development sites on its ledger.
    Gazit-Globe, whose shares are traded on the Tel Aviv Stock Exchange, gives shareholders a steady stream of cash flow: dividends amount to about 5% per year, at least 64 cents per share in 2001. The share price has grown some 165% since June 1998.
With 42,000 community shopping centers throughout the continent, including 3,500 in Canada, Gazit's 140 may not seem like a lot, but it is the third-largest such company in Canada, third in Florida, and fourth in Texas.
    'We can't dominate the entire market,' Segal says. It's not like in Israel, he says, where you can be noticed after buying a couple of significant properties. Even where there seems to be a glut of shopping centers, Segal has his eye on plots of prime Southern Ontario land to build yet another string of stores.
    There's another reason why Segal and Katzman build and buy there, instead of here: 'The bureaucracy is easier. I wouldn't try to do this in Israel,' Segal says. 'It's very difficult to do business in Israel. Very difficult.'
    They are content to make a living from more modest community shopping centers, rather than upgrading to glitzier malls.
    CEO Katzman's first foray into the business was a decade ago, when he bought a 50,000 sq.ft. shopping center in Plaza del Ray, Florida. They still own that one, even though 'it doesn't really count for anything [in terms of size and profit], but we keep it for sentimental value.'
    When he bought it, the market was depressed, but Katzman was undeterred: people still need to shop. Therein lies their formula: almost all the centers are mid-scale, mid-sized, supermarket-anchored, with two or three large chain stores and most of the smaller shops catering to basic needs.
    'We're a low-cost, efficiency provider of everyday, staple items,' Katzman says, summing up the business's operating credo. Mind you, in upscale Palm Beach Gardens, where some homes front right on a yacht 'parking lot,' his Harbour Financial Center includes among its shops a yacht store. Around here, that's a staple item.
    More likely, though, you'll find a dental clinic in their centers; a fast-food eatery, cheap dollar store, department store, pharmacy, bank, electronics, hardware, toys, video rentals, and always a supermarket.
    And in the town of Davie, Florida, they have a drive- in wedding chapel.
SEGAL STARTS his day at 4:45 a.m., heading out to Toronto's exurbia. The president and CEO of Centrefund (Katzman is chairman), he personally inspects all the shopping centers in his purview, managing to visit each one every month or two. He doesn't just stay in his tony office high in Toronto's skyline and collect the rent, and he doesn't send errand boys to check things out.
    'When we first got into this, I was 28,' he tells a group of visiting Israeli journalists. We're in his plush van, a little unnerved that he's flying along at 140 kilometers per hour, and constantly looking at us in the back seats while he speaks. 'Katzman said at the time that real estate is a great business. For the first 30 years it's slow,' he grins, 'but after that....'
    He had been in diamonds, and Katzman was a lawyer, when both quit and pooled their money to start the business.
    'I grew up at Arlosoroff and Weizmann Streets [in Tel Aviv]; there was a Co-op on one corner, and burekas on the other corner.'
    He took us on a tour of southern Ontario shopping centers, each one of them architecturally stylish, immaculate, and diligently maintained. The centers they buy are given a face-lift when necessary, and after showing us numerous successful centers - all of them bustling with shoppers, at or near 100% rental capacity - he took us to a recent acquisition that hadn't yet been renovated. It is a disaster area, but Segal knows why, and he enthusiastically explains what had to be done to transform it.
    As Katzman later said on our tour of shopping centers in the Miami and Orlando regions, 'We always debate and argue among ourselves about how to improve a property. There's a basic formula, but that changes for each neighborhood.'
    Their work on a property in Pickering, Ontario, won them a municipal prize for the best-looking shopping center in the city.
    Noting the complete absence of graffiti defacing their centers, Segal talks about one place where they did have a problem. 'The center is near a school, and there was graffiti on the walls, so we spoke to the school about it, and donated a couple of computers. The problem was quickly solved.'
    Gazit-Globe bought out Centrefund last summer in a hostile takeover, but the term is ironic: the shareholders and tenants were anything but hostile.
    There had been allegations of graft, gross inefficiency and mismanagement by the previous owners. There was gleeful relief that ownership had changed. The new owners swiftly cleaned up the company and fired the management.
    It was a refreshing change: two Israelis taught Canadians a thing or two about efficiency and solid management.

The writer was a guest of Gazit-Globe on a tour of its properties.