Executive Pay Falls for Big Mall Owners as Retail Storm Rages On

By Peter Grant Features Dow Jones Newswires

Turbulence in the retail sector is hitting executives working for the top mall companies where it hurts: in their wallets.

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Senior management teams at the country's largest mall owners, including Simon Property Group Inc., GGP Inc. and Macerich, are taking cuts to their compensation as they navigate an industry beset with struggling retailers and increasing competition from online shopping.

The slide in compensation among retail landlords is unusual in the corporate world. Executives at companies in other sectors are less likely to feel the pain of a rough patch because their pay isn't as closely tied to stock performance.

But the real-estate investment trust industry is ahead of most other sectors in designing pay plans to align the interests of shareholders and management, according to according to Jeremy Banoff, a senior managing director with FPL Associates LP, a compensation-consulting firm that focuses on the real-estate industry.

As a result, when stocks fall, it is more likely that compensation cuts result, he said. "The rest of the world is playing catch-up," Mr. Banoff said.

Indianapolis-based Simon, the country's largest mall owner with stakes in more than 325 properties, took the rare step of eliminating stock grants tied to the company's long-term performance for top executives, according to its proxy statement filed with the Securities and Exchange Commission.

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Simon did this because of "the challenging business conditions in the retail industry that the company is facing," according to the proxy statement. A spokeswoman for Simon declined to comment beyond what was written in the filing.

Executives at other big mall owners suffered because their compensation is tied to the performance of their share prices, which have been hammered during the past 18 months as investors have fled the sector.

For example, Macerich chief executive Arthur Coppola had a target compensation package -- including base salary, annual incentive and other benefits -- potentially worth $12 million in 2016. But because the company's stock price dropped, Mr. Coppola was on track to receive only $5.7 million of that, according to the company's proxy filing.

"That's the way the stock plans are structured," said Macerich Chief Financial Officer Thomas O'Hern in an interview. "When the stock is down, we suffer from a compensation standpoint."

The retail sector was facing problems even before the e-commerce revolution. Rampant development left the U.S. with far more malls than it needed by the time the last recession hit.

A decade later the country is still considered "overstored" and Americans are doing more than 8% of all shopping online, creating enormous headaches for mall owners on the demand side. Space has emptied as big retailers like Macy's Inc., J.C. Penney Co., Bebe Stores Inc. and Sears Holdings Corp. have closed stores across the U.S.

Up until now most of the pain has been suffered by the lower-quality malls, which have taken the greatest hits to occupancy and rents. More these properties are being sold at steep discounts or going into default.

But the cuts in compensation show that the pain is now spreading to the owners of the highest quality malls. These popular malls, usually in higher-income areas, have done a good job thus far of keeping rents and occupancies from falling and replacing closing stores with new tenants, according to analysts.

For example, Simon earlier this year reported its occupancy was 95.6% at the end of the first quarter, unchanged from a year earlier. Base minimum rent was $51.87 a square foot, an increase of 4.4%, Simon said.

"Not everyone will be replenishing their wardrobe from their cell phone...while binge watching Netflix," said a recent report on the retail REIT sector by Green Street Advisors.

But the shares of the top mall companies haven't been immune to investor concerns that the internet's impact on bricks-and-mortar shopping could get much worse. "The severe negative sentiment surrounding retail real estate has sent many retail REIT share prices into a free fall," the Green Street report said.

Last year, retail REITs rose only 0.95% while the broader equity REIT market gained 8.63% and the S&P 500 increased 11.96%. This year retail REITs are down 10.4%, compared with up 5.6% for the REIT market and 11.6% for the S&P 500.

The downdraft is hitting companies with top regional malls as well as those that own shabbier properties. For example, Simon owns such trophies as the Forum Shops at Caesars in Las Vegas; Sawgrass Mills in Sunrise, Fla. And Woodbury Common Premium Outlets in Central Valley, N.Y. Its shares are down 9% this year.

Part of the pressure on retail REITs is coming from short sellers, who bet share prices will fall. So-called short interest on Simon jumped to $2.3 billion in June from $870.9 million in November. Over the same period, short interest trades in GGP increased to $1.4 billion from $424 million, according to data from S3 Partners, a financial analytics firm.

Many companies in the corporate world also use stock price performance but to a lesser degree than REITs, Mr. Banoff said. This is partly because the real-estate industry has long had a focus on rewarding managers for increasing the value of their properties, he said.

At GGP, Chief Executive Sandeep Mathrani took a cut of more than $1 million based on a number of metrics including the company's stock performance, according to Kevin Berry, GGP's head of investor relations. The company revamped its compensation program following a negative vote by shareholders last year on a nonbinding "say on pay" resolution.

The impact on Simon executives' pocketbooks was greater because of the company's elimination of its stock grant program last year. David Simon, the company's chief executive, was awarded stock valued at about $9.5 million from that program each of the previous three years, according to Mr. Banoff of FPL.

Other members of Simon's executive team were awarded stock valued at $2.5 million or $3 million from the program in previous years. In 2017, no grants will be awarded, according to the company's proxy

--Esther Fung contributed to this article.

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

July 26, 2017 05:44 ET (09:44 GMT)