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The Honolulu Advertiser
Posted on: Thursday, January 16, 2003

Maui mall seeks investors

By Andrew Gomes
Advertiser Staff Writer

After nearly a decade of financial losses, the partnership that owns the third-largest mall in the state, Maui's Queen Ka'ahumanu Center, has decided to seek new investors in the center.

Maui Land & Pineapple Co. and the state Employees' Retirement System, equal partners in mall owner Kaahumanu Center Associates, are finalizing an agreement with a real estate consulting firm to explore "recapitalization" of the partnership.

Scott Crockford, retail property vice president for Maui Land & Pine, confirmed the agreement but declined to identify the consulting firm or elaborate on its recapitalization effort.

The ERS, which last month held a closed-door meeting with trustees and legal counsel to discuss "issues" concerning Ka'ahumanu Center, said through Trustee Rick Humphreys that it could not comment on the action being taken.

One person familiar with the effort said options under consideration include one partner selling to the other, finding an investor to buy out one partner or finding an investor to buy out both partners.

The value of the center is difficult to peg. The partnership has a $60 million mortgage on the property. The partnership also lists total assets of about $70 million as of 2001, though that figure often differs from market value. The county's assessed value of partnership property is about $90 million, according to public records.

The exploration, which may not necessarily result in the center's sale, comes at a difficult time for each owner as they look for ways to reverse recent declines to their bottom lines.

Maui Land & Pine is a Kahului-based company with pineapple, resort and real estate operations. The company had accumulated a $3.5 million loss for the first nine months of last year after five consecutive years of profits.

Outgoing AOL Time Warner Inc. Chairman Steve Case became a majority shareholder in 1999 after paying about $40 million for a 41 percent stake in the company.

The ERS manages retirement benefits for 93,000 state and local employees, retirees and beneficiaries. Its investment fund has fallen from nearly $10 billion in 2000 to less than $8 billion last year largely because of stock market losses and pension payouts that are greater than incoming contributions. Some of its real estate investments also have been troubled.

Ka'ahumanu Center itself has been in a difficult position, fighting to attract and keep tenants and customers in what Maui Land & Pine calls an oversaturated retail market on Maui.

The mall has been a drag on earnings for both partners since at least 1995 when Maui Land & Pine, a public company, began reporting Ka'ahumanu Center results separately.

In the seven years from 1995 to 2001, annual partnership net losses totaled about $16 million, roughly $2 million a year. In addition, the partners advanced $3.4 million to cover mall cash-flow shortfalls during the same period.

In Maui Land & Pine's most recent financial report issued in November, the company said it expected to advance $1.3 million to the partnership to cover deficits from operations and capital expenditures last year.

Humphreys declined to characterize the partnership's performance, but said: "It's like any other investment: If it's satisfactory, we keep it. If it's not satisfactory we do something to change that."

The partnership was created in 1993 to pay for an ambitious $60 million renovation and expansion of the center, which was developed on Maui Land & Pine land by Dillingham Corp. in 1972.

Maui Land & Pine, which acquired the leasehold interest in the mall in 1985, contributed the mall and land to the partnership. ERS invested $31 million. Bank loans principally paid for the balance of the project, which was completed in late 1994.

The mall nearly doubled in size, from about 315,000 square feet to 572,000 square feet. But retail competition in Kahului and elsewhere on Maui was also growing.

Among the arrivals were Kmart in 1993, Costco in 1995, the 318,000-square-foot Maui Marketplace (anchored by Sports Authority, Pier 1 Imports, Old Navy and Borders Books & Music) in 1997, Shops At Wailea in 2000 and Wal-Mart in 2001.

Ka'ahumanu Center, with about 130 retail, entertainment, restaurant and service tenants, managed to keep occupancy in the mid-90 percent range, but lower tenant sales and tenant replacement costs hurt mall performance, according to Maui Land & Pine filings.

"The reduction in results from Queen Ka'ahumanu Center reflects the oversupply of retail commercial space on Maui," Maui Land & Pine said in a filing last year.

Greg Sheehan, a retail specialist and manager of real estate firm Commercial Properties of Maui LLC, said the increasing competition among centers has held down the rents landlords can charge and reduced the percentage rent paid by tenants.

"In one respect we don't have a lot of vacancy, but if we didn't have as much (retail) construction, rents would have probably gone up about 5 percent a year and profit margins would have been a lot higher," he said.

Sheehan said Maui's nonresort retail rents today are about where they were 10 years ago, if not lower. "It's supply and demand — the supply has met the demand for the most part," he said.

Maui Land & Pine, which also manages the mall, has tried to focus on improving operations by realigning mall management in 2001. But losses appear to have increased.

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.