Bottoms Up
May 1, 2009 12:00 PM, By Jennifer Popovec
Investors savor higher cap rates and a lack of competition.
Focusing on food anchors
Of course the operative word here is “safe” — and that's why food- and drugstore-anchored centers are once again the favored property type within retail. In fact, food- and drugstore-anchored centers account for more than 70 percent of retail properties that have traded within the past three months, according to Real Capital Analytics. Case in point — all 17 of Inland's retail acquisitions this year have been grocery-anchored centers.
Although power centers and lifestyle centers have been popular acquisition targets over the past three to four years, most active buyers now consider those assets risky investments. Power centers have lost their allure primarily because of concerns about the long-term health of the retail tenants. For example, Linens 'n Things and Circuit City have shuttered stores, leaving millions of square feet of vacant space across the country. Power center owners who are dealing with dark stores have no obvious replacement tenants. “The list of retailers that make an investor wince outnumbers the list of retailers an investor would be interested in,” says Tony D'Ambrosio, a member of Colliers Spectrum Cauble's Atlanta-based investment services team.
Investors are shying away from lifestyle centers for much the same reason. Additionally, co-tenancy concerns make these assets even less attractive. Lifestyle centers are particularly vulnerable to co-tenancy issues since developers and owners routinely accepted stringent co-tenancy provisions from national retailers such as Banana Republic, Coldwater Creek and Victoria's Secret, among others. In contrast, at neighborhood centers and regional malls, landlords only granted co-tenancy requests to anchors. As many of these traditional lifestyle center retailers close stores, co-tenancy provisions are triggered, resulting in several store closures instead of just one or two.
Desirable debt
Aside from the fact that investors feel confident about the “necessity retail” aspect of food- and drugstore-anchored centers, these properties also are at the right price point for most investors — under $25 million. Since loan-to-value ratios have dropped, and lenders are requiring more equity from their borrowers, smaller “bite-sized” deals are more attractive to investors, Montgomery says.
Although the most prolific buyer today, Inland, is an all-cash buyer, most investors are still using debt to finance their acquisitions. However, the only investors that can obtain debt are the ones that are willing and able to put up their balance sheets as collateral.
The Jaffe Corp., for example, took on a partial recourse loan from a regional bank to acquire Ormond Towne Square. Like many other investors, the firm previously financed acquisitions using debt from portfolio lenders and conduits. Yet Jaffe says he is willing to accept the bank's terms because there are attractive acquisition opportunities today.
Similarly, Warrendale, Pa.-based H.L. Libby Corp. also used recourse bank debt to acquire Henderson Square, a 165,929-square-foot center located in Henderson, N.C. Shadow-anchored by Wal-Mart and anchored by Belk & JCPenney, the center was acquired for $8.3 million.
Unlike most investors, Libby Corp., which owns 20 shopping centers totaling three million square feet, actually prefers bank debt because of the flexibility it offers with prepayments and value-added situations. The firm is borrowing at 300 to 400 basis points over LIBOR, which is under 5 percent today.
Other successful buyers have sought out deals with assumable loans or seller financing. For example, America's Realty LLC has acquired 16 shopping centers totaling more than $200 million so far this year, and 60 percent of the deals have been financed by the seller, according to president and CEO Carl Verstandig.
The Pikesville, Md.-based investor, which focuses on low- to mid-priced retail and owns 178 centers in 10 states, acquired 25 centers in 2008 and 28 centers in 2007. It has purchased most of its properties from REITs and other institutional owners including Regency Centers Corp., Vornado Realty Trust, Kimco Realty Corp. and GE Real Estate.
Distressed sellers
Even distressed sellers are willing to offer seller financing. General Growth Properties along with Centro Property Group and DDR are well-known distressed sellers, but there are other operators selling assets to raise money to pay off debt maturities on other assets, some of them nonperforming.
And these owners are often selling at very attractive prices. Consider DDR's sale of Ormond Towne Center to the Jaffe Corp.: Although Jaffe declined to disclose the purchase price, local experts say the grocery-anchored center sold for $20 million — about 50 percent of what the asset should have sold for given the in-place tenants and NOI — because DDR needed cash.
Similarly, Centro Properties and its joint venture partner JPMorgan Investment Management sold New London Mall in New London, Conn., for $40.7 million. Cedar Shopping Centers Inc. acquired the 260,000-square-foot center at a 7.7 percent cap rate, according to John Williams, managing director of Savills LLC, the New York City-based firm that brokered the sale. Williams says the grocery-anchored center had attractive assumable financing, which helped it sell at a higher cap rate than other similar properties. However, he notes that the same center would have traded for 100 basis points lower just 12 months ago.
Libby Corp. also benefited from Centro's distress by buying Henderson Plaza at about a 10 percent cap, Libby says. “We never thought we would see the day when centers like this sell at 10 percent cap rates and above,” he says. “For companies like ours, that have been waiting and complaining about people overpaying on deals, now is the time to strike.”
While Libby understands why investors are “scared” of retail right now, he doesn't agree with their decisions to remain idle. “Yes, retail is going to be under pressure for a while, but you can't just sit around because the economy stinks,” he says. “Today is the buying opportunity of a lifetime.”
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