BARBARIANS AT THE MALL
Sep 1, 2006 12:00 PM, By Elaine Misonzhnik
Indeed, the new private owners can affect the retail real estate industry in two ways — in how they improve the performance of the chains they buy and in how they handle the real estate portfolios.
The high value of retail real estate certainly plays a role in the deal math; in some cases, like Sears, the estimated value of real estate the chains own or lease is actually greater than the company's total market capitalization. The same is true for Dillard's, an oft-mentioned buyout target.
A lot of mall-based retailers are sitting on undervalued leases and can make a profit by turning the property over to the developer or subletting it to another chain.
In some cases retailer real estate value has created incentive for developers to try and buy back space from struggling anchors. Simon Property Group, Macerich Co. and Westfield Group have all acquired excess stores from Federated this year.
If the vacancy is inside a mall, the owner might divide it into smaller portions and rent it out to several businesses. If it's a freestanding location in a downtown area, like the 611,000-square-foot Lord & Taylor flagship in New York, there's an opportunity to develop a new mixed-use project.
“There are definitely creative uses being done with all types of properties,” says Richard B. Hodos, president of New York-based retail services firm Madison HGCD. He points to epicenter, a project being developed by Gordon Group Holdings that is taking former department stores and dividing it into spaces for catalogues and online retailers that do not otherwise have large brick-and-mortar presences.
On the strip center side, after Supervalu, CVS and Cerberus Capital bought West Coast grocery chain Albertsons, the company announced that it would close 100 locations, representing about 16 percent of its property holdings. Other chains have been taking their space according to Clayton Jew, senior advisor with brokerage firm GVA Whitney Cressman. “We find that whenever an Albertsons locations comes up, we can typically find a replacement pretty easily.”
But even without selling it outright, valuable real estate can help investors to finance a portion of their purchase. They can use sale-leaseback transactions to capture the capital built up in real estate. Sale-leasebacks offer a number of advantages, including 100 percent financing, the freeing up of cash flow and the option to repurchase the stores at a future date. For example, Sun Capital Partners purchased ShopKo Stores Inc. for $1 billion in October 2005. Then, it sold most of ShopKo's real estate, encompassing 178 properties, to Spirit Finance Corp. in a $815.3 million sale-leaseback. It used the proceeds to pay $700 million in mortgage debt and a portion of the revolving credit facility.
“Financial companies tend to gravitate toward leasing the real estate rather than owning it,” says Chris Volk, president and CEO of Spirit Finance Corp. “Sale-leasebacks tend to be more efficient than straight debt, they reduce the equity requirements. And treasurers and financial investors like using them because they make their balance sheets more efficient.”
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