As Seen in CFO Studio Magazine Q2 2017 Issue
-BY MARTIN DAKS-
Malls are facing challenges, but General Growth Properties CFO Michael Berman can’t stop seeing the potential
Every morning, when Michael Berman gets up, the 58-year-old CFO of Chicago-based General Growth Properties, Inc. (GGP) is eager to get to the office.
“There are an unbelievable variety of issues,” says Berman, who oversees the capital markets, finance, accounting, tax, and external communications functions of GGP. He joined the publicly traded real estate investment trust—which owns, develops, and operates mostly high-end regional shopping centers across the United States— in December 2011. Routinely ranked as one of the largest REITs in the world, with a market capitalization of more than $20 billion, GGP has a portfolio that includes high-end shopping destinations like Honolulu’s Ala Moana Center and Las Vegas’ Fashion Show.
Of course, Berman deals with the usual frustrations and challenges that publicly held companies face—costly and increasingly complex SEC reporting and Sarbanes-Oxley (SOX) requirements among them—and there are marketplace challenges also, including millennials’ online shopping habits. Retail real estate is capital-intensive, so CFOs like Berman are particularly sensitive to interest rates. But he brings an investor’s eye and deep experience to all these concerns.
Regarding interest rates and the potential for an increase, he says, “We approach each property’s financing issues separately. If it’s a new property that’s being financed, we may look for a floating rate with some rate protection. If it’s a mature, stable one, we may seek financing with a 10-year maturity, so our total debt rollover—and interest rate exposure— is about 10 percent a year.”
Berman’s educational background gives him a unique perspective on the intricacies of shopping center investing and operations: He received his Bachelor’s degree from the State University of New York at Binghamton and a JD from Boston University School of Law, after which he worked as an attorney for two years before going back to school to earn an MBA from Columbia University.
His 30 years of experience in the legal, real estate, and financial industries also carry plenty of clout. Prior to joining GGP, Berman served as Executive Vice President and Chief Financial Officer of Equity LifeStyle Properties, a Chicago-based REIT owned by legendary investor Sam Zell. From 1989 through 2002, Berman was in the investment banking department at Merrill Lynch & Co. (now part of Bank of America). During his time there, Berman was involved in numerous capital market and advisory transactions, including the IPOs of Equity Residential Properties; Vornado, Inc.; and Equity Office Properties.
Berman seems to have taken elements from each of his previous incarnations— the attention to detail of an attorney, the nerve of an investment banker, and the strategic abilities of a finance pro—and marinated them until he achieved just the right balance.
An Unusual Deal
“There’s a different rhythm to investment banking,” Berman observes. “At the end of each year, you close the books and start the next one with a blank slate. But working for a REIT is like rafting down a river: The river never ends. Sometimes it’s calm, and at other times it’s white-water turbulent, but either way, you’ve got to be flexible, rethinking and re-strategizing on the go. The energy required to succeed is enormous because the only way to stay ahead of your competition is by continually improving.”
That can mean freshening the product by investing in mall design and other improvements. Berman and his team work closely with GGP’s operational and other departments to uncover opportunities, tracking and responding to consumer and other trends. GGP also takes innovative steps, like the September announcement that the company has joined a consortium that includes Authentic Brands Group and Simon Property Group in acquiring the global trend-focused apparel and accessories retail brand, Aéropostale, whose primary market is millennials. The move saved Aéropostale, a tenant of GGP and Simon, from liquidation and will likely preserve approximately 500 of the brand’s stores.
The partners in the consortium are an interesting mix. Simon Property Group is a global company involved in retail real estate ownership, management, and development, and thus is a direct competitor of GGP. Authentic Brands Group owns intellectual property associated with well-known fashion, sports, celebrity, and entertainment brands, Marilyn Monroe, Elvis Presley, Muhammad Ali, Shaquille O’Neal, and Prince; as well as established menswear names Hart Schaffner Marx and Hickey Freeman. But an innovative approach is particularly important in the retail segment, where traditional department stores still make up about two-thirds of mall anchors but “are not the traffic drivers” they used to be, according to a report by Green Street Advisors, a real estate research firm.
For example, retailers like Macy’s, Nordstrom, Kohl’s, and Sears are anchor tenants at some General Growth Properties malls, but Macy’s has announced that it plans to close about 100 stores in 2017; while the other three retailers have all suffered some sales slumps and/or closed a number of stores. The Green Street report notes, though, that “high-end malls” have some positive redevelopment options.
Curating Malls
Berman says that GGP is on top of things.
“Our approach is to curate our mall, ensuring that we’ve got the right mix of retailers,” Berman says. “Of course there’ll be changes—retailing is dynamic and some anchors and others will come in, while some will rotate out. But we keep a close watch on things, and when we get space back, we’re nimble about replacing it.” That’s reflected in the REIT’s total mall occupancy figures, which rose from an already impressive 94.9 percent in 2012 to 96.5 percent at the end of 2015.
“As CFO, I don’t often get directly involved in leasing negotiations,” he explains. “We have more than 100 experts in that, and more than 50 involved in developing our properties. But my team and I understand the operations and we support them with resources and discussions.”
Looking ahead, Berman explains that while technology is greatly impacting the way people shop, it is actually a misconception to think that e-commerce is a threat to regional shopping center owners and operators like GGP.
“Successful retailers need an omni-channel distribution system, which is why we’re seeing e-commerce companies, like Warby Parker and ModCloth, open physical stores,” he reports. “Remember, there is a total of $4.6 trillion in retail sales per year, and less than 4 percent is attributed to pure e-commerce retailers. GGP is positioned very well, and we’re confident in our ability to deliver results for shoppers, retailers, and investors.”
He’s also up to the challenges. “My job is not just numbers and accounting,” Berman explains. “The people I work with and otherwise deal with make it fun and challenging, because this job is a mix of finance, coaching, encouragement, and management skills. The thing is, it’s really a team effort, on many levels.”
