Bondholders will soon learn if New Jersey mall investment pays off

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Bondholders who helped build New Jersey’s long-awaited American Dream megamall entertainment and shopping complex will soon find out if their high yield bets will pay off.

The retail and entertainment hub is set to open its doors in late October, 15 years after ground was broken by its original developer, Xanadu. The project was stalled by the 2008 credit crisis.

The 3-million-square-foot complex in East Rutherford, which is about 55% entertainment and 45% retail, is opening amid a far different retail landscape than existed in the mid-2000s, as malls around the country struggle with competition from increased online shopping.

Goldman Sachs led a $1.1 billion tax-exempt revenue bond transaction in June 2017 backed by a payment-in-lieu-of-taxes agreement between Triple Five Group and the borough of East Rutherford. The unrated deal consisted of $800 million in limited obligation revenue bonds and $287 million of grant revenue bonds supported by anticipated sales tax revenue.

Dan Berger, senior market strategist at Refinitiv’s Municipal Market Data, said overall demand for high-yield debt drove pricing on the American Dream bonds due in 2050 to nearly 120 cents on the dollar compared to their initial price of 102.8 cents on the dollar during recent trading. American Dream bonds maturing in 2027 were trading at plus 185 basis points with some of the longer maturities at 195 bp levels, according to Berger.

“They are still trading with a relatively high spread,” Berger said. “The market is indicating some trepidation with these bonds.”

Bondholders were given a site visit of American Dream on Sept. 11 in advance of the October opening. Daniel Solender, partner & director for Lord, Abbett & Co.’s municipal bond group, an owner of American Dream bonds, said the fact that most of the mall is leased bodes well for the development’s success, but investors will monitor revenues closely after it opens.

“Since this is a combination retail mall/entertainment facility, it doesn’t really fit into the same category as most of the malls in the country which are mostly retail so there are not a lot of similar projects to compare it to other than the other two similar malls that the owners have,” said Solender of Triple Five, which also runs the Mall of America in Minneapolis and Canada’s West Edmonton Mall. “It is starting to move from the building stage to the opening stage and now investors can monitor real numbers for how it does rather than just hypotheticals.”

Entertainment will come first at American Dream. The attraction will open in four phases starting Oct. 25 with an NHL-regulation ice rink and Nickelodeon Universe, which is being billed as the Western Hemisphere’s largest indoor theme park. The water park is set to debut on Nov. 27 with the indoor ski slope scheduled to open on Dec. 5. The mall’s 350 retail stores won’t open until March 2020.

Triple Five put the balls in motion for the bond sale by securing $1.6 billion in private construction loans from JPMorgan.

In the 2017 bond deal, the Wisconsin-based Public Finance Authority was conduit issuer for New Jersey Sports & Exposition Authority, which operates the Meadowlands District where the megamall is located. Triple Five was previously planning to issue taxable bonds through the borough of East Rutherford and NJSEA, but because of market shifts instead opted for the tax-exempt route through the PFA.

“It is a big positive that there is a firm opening date and that they anticipate having a good amount of the mall up and running when it opens,” Solender said. “Since it is mostly the entertainment that is opening at the start with most of the retail stores opening next year, they should be able to gradually move to full capacity which should help them prepare for full usage in the future.”

American Dream planners project more than 40 million annual visits that will draw from more than 19.5 million residents in a 50-mile radius and New York City’s large tourism base of more than 65 million yearly visitors. Bondholders were pitched about unique entertainment aspects of the project, highlighted by the DreamWorks indoor water park, Nickelodeon Universe, the ski facility and an outdoor observation wheel with views of the nearby Manhattan skyline. The group also runs the Mall of America in Minneapolis and West Edmonton Mall, which also blend shopping and active entertainment.

It may not be easy for everyone to get there. Many visitors are likely to drive there on already congested nearby roads and highways.

Buses are the public transit option, even though New Jersey Transit built a rail spur and station for events at next-door MetLife Stadium, where the football Giants and Jets play. New Jersey Transit is planning to launch an express bus service to the mall from the Port Authority Bus Terminal in Manhattan that will run every 30 minutes. The agency will also run buses every half hour from its Secaucus Junction train station.

Lisa Washburn, managing director at Municipal Marketing Analytics, has noted concerns about the American Dream bonds because of the increasingly online nature of retail at the expense of brick-and-mortar stores. She said the phased rollout of the mall and a lack of transportation infrastructure heightens the risks.

“My skepticism regarding the long-term success of the project remains fully intact and the fact that the project is now opening in phases doesn’t help that, particularly with retail scheduled to open in March 2020 after the holidays,” Washburn said. “It makes me wonder how committed or solid the retail participants are to the project.”

Janna Chernetz, senior New Jersey policy analyst for the Tri-State Transportation Campaign, said a coordinated transportation plan is important for American Dream to be a success because visitors will be traveling from all directions. Chernetz said American Dream needs to market public transportation options to avoid traffic congestion being a deterrent. She also urges Triple Five to make sure NJ Transit has the necessary financial resources for demands the American Dream project is putting on the cash-strapped agency.

“It’s a gamble to assume people are going to be using public transportation for something like this,” Chernetz said. “It only has a chance of working to mitigate the congestion if it is convenient for people to use.”

Former Gov. Chris Christie projected shortly after the American dream bonds sold that the project would generate $3.5 billion in tax revenue for New Jersey over the first 20 years of operation. He said the revenues would include more than $2 billion in sales taxes and over $1.5 billion of corporate business taxes, income tax, as well as hotel tax and occupancy fees.

Triple Five representatives did not immediately respond for comment on expectations for the mall’s debut and the decision to open in phases. The company referenced an HR&A Advisors study in 2017 investor road show documents saying that the development would generate $2.1 billion in total sales taxes over the first 20 years of the project, of which 25% would be earmarked toward the state. The study also stated an expectation for $86 million in annual sales tax revenue.

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Unrated bonds Revenue bonds Wisconsin Public Finance Authority New Jersey Sports and Exposition Authority New Jersey