Institutional Investors Throwing Big Money Around Class A Quality Retail Property

Institutional Money Begins to Flow on A+ Retail Asset Sales, Joint Ventures

After what's seemed like an eternity of little or no action in the retail property investment arena, several major retail investment transactions north of $100 million have surfaced since October. Considering that news of retail property sale transactions higher than even $25 million have been few and far between for the past year, does this latest string of large deals signify the start of a recovery in retail investment sale transactional activity? Top retail capital markets executives at CB Richard Ellis, Jones Lang LaSalle, and Marcus & Millichap gave CoStar their opinion on the matter.

First, lets review the large deals that have surfaced recently:

• On Nov. 5, an investment group comprised of Crown Acquisitions, Goldman Properties and The Feil Organization, announced the acquisition of the retail portion of historic hotel, St. Regis New York, located at 2 East 55th Street at the corner of Fifth Avenue in Manhattan. Under the name GFC Fifth Avenue LLC, the group acquired the 24,700-square-foot retail space for $117 million, or approximately $4,736.84 per square foot, from hotel company, Starwood Resorts. In terms of sale price per square foot, this transaction marks the most expensive true retail asset acquisition in New York City since November of 2008. The retail space is 100% occupied by luxury retailers and this section of Fifth Avenue commands the highest retail asking rents in the City. Starwood said it sold the luxury retail space to streamline its business operations and pay down debt.



• On Nov. 5, Glimcher Realty Trust (NYSE:GRT) announced that The Blackstone Group would acquire a 60% interest in two of Glimcher's best malls -- Lloyd Center in Portland and WestShore Plaza in Tampa -- for approximately $62 million in cash and $130 million in assumed debt. The two malls are more than 94% occupied and generate strong tenant sales per square foot. This deal came shortly after Glimcher announced that its deal with Merlone Geier to sell Lloyd Center Mall outright for $192 million had been terminated. Michael Glimcher said the company had shopped the center, which resulted in "a number of backup offers from credible quality buyers." The gross value for the new joint venture is approximately $320 million, which coincidentally, is equal to the total amount Glimcher originally paid to acquire the two malls (it acquired Westshore in 2003 for $153 million and Lloyd Center in 1998 for $167 million). However, Glimcher still expects to realize $60 million in net proceeds from the transaction.



• On Oct. 29, Equity One acquired Westbury Plaza for $103.7 million from joint owners, Kimco Realty Corp. and DRA Advisors. The deal became the first 100% interest single shopping center acquisition, north of $100 million, to close since October of 2008. The 400,000-square-foot Walmart and Costco-anchored power center is 100% leased and located in a high traffic corridor with high barriers to entry in Nassau County, Long Island, marking Equity One's entry into the New York market. "The productivity of the tenants at Westbury Plaza is higher than any center I have seen in over 25 years in the acquisition business,” said Equity One President Tom Caputo.
  
  Westbury was put on the market for sale in May 2009, marketed by Eastdil. Equity One put the center under contract in early August. Kimco President David Henry said the company received more than 20 bids on the shopping center. "We've seen a substantial shift in the demand for high quality retail. The investors we meet with are definitely being much more aggressive today than they were, especially foreign institutions which have seen the value of their currency increase compared to ours and feel today is an excellent time to invest in high quality retail in the United States, especially with a hint of inflation down the road for good hard assets," commented Henry.



• A few days following this transaction, Kimco announced that it bought out the 85% interest held by its joint venture partner, DRA Advisors. Kimco paid $175 million from its existing credit facility, plus assumed $564 million in non-recourse mortgage debt to bring its ownership in the 21-shopping center portfolio to 100%. Kimco said the 5.2 million-square-foot portfolio is 94% leased and located in strong markets with primarily national discount tenant anchors.



• On Oct. 27, Regency Centers (NYSE:REG) sold an 80% interest in a 94%-occupied portfolio of eight grocery-anchored centers to the United Services Automobile Association (USAA) for $133.1 million at an overall 8.75% cap rate. Regency realized $103.5 million in net proceeds from the deal and prior to closing, the joint venture locked in a seven-year, interest-only mortgage for 50% leverage on the portfolio. Regency will receive fees to continue to maintain property and asset management responsibilities for the portfolio.



• On Oct. 26, Weingarten announced that German real estate fund manager, Jamestown, would acquire an 80% stake in six of its shopping centers in Florida and Georgia for $160 million. Plus, Jamestown would assume its share of a to-be-determined amount of debt on the portfolio, as the joint venture said it expects to close on a loan on four of the properties in the next couple months. Weingarten receives fees to continue leasing and managing the centers. Weingarten noted that it was originally looking for a JV partner for a 10-center portfolio, but as Jamestown reviewed the properties and pricing of each center involved, it became a six-center deal, which Weingarten calls a "reasonable transaction in the mid-eights cap rate."



• On Oct. 26, Cedar Shopping Centers, Inc. (NYSE: CDR) announced it was selling an 80% share in a 95% occupied portfolio of seven grocery-anchored shopping centers located in PA, MA and CT, to Canadian REIT, RioCan, for $101 million in cash plus $75 million in assumed debt. Cedar would continue to receive fees for leasing, management, and advisory services under the joint venture. The two formed an additional alliance under which they would continue to acquire grocery-anchored centers and RioCan could amass a 15% ownership stake in Cedar. Cedar said it expects the RioCan transactions to reduce its debt-to-asset ratio by more than 600 basis points.



• At the start of October, Macerich (NYSE:MAC ) announced that Chicago-based real estate investment management firm Heitman paid $167.5 million in cash plus and assumed about $167 of property level debt, to acquire a 49.9% interest in Macerich's Freehold Raceway Mall in NJ and Chandler Fashion Center in AZ. The malls among the best in Macerich's portfolio, with occupancy above 95% and $500 in tenant sales per square foot during 2008; which is 13.4% higher than Macerich's mall portfolio average. This joint venture transaction follows two similar deals Macerich has closed since July, which the REIT says is part of its "ongoing deleveraging strategy."
  
  In September, Macerich sold a 75% interest in its 97%-occupied Flatiron Crossing Mall in Colorado for $116 million in cash plus about $136 million in assumed debt to a fund managed by private equity firm, GI Partners. In late July, the REIT sold a 49% interest in its top performing mall in terms of tenant sales per square foot, Queens Center in New York, to Cadillac Fairview, a subsidiary of Ontario Teachers' Pension Plan. Under the joint venture, Cadillac paid Macerich $150 million in cash and assumed about $168 million in property level debt.
  
  Through these joint venture transactions, Macerich has sold portions of four of its best malls for $433.5 million in cash and reduced its share of property level debt by about $470 million. Plus, Macerich continues to hold a majority share in three of the malls and receives management and leasing fees for its continued work on all the properties.

The common link between all of these deals is that the retail assets sold are considered A or A+ quality, representing stability from solid occupancy, recession-resistant anchor tenants, and sought-after locations. Further, all of these institutional-level transactions required little access to debt markets, with buyers utilizing existing cash facilities and assuming in-place debt.

With the exception of the Westbury Plaza and St. Regis Hotel retail space deal, all of these transactions were joint ventures. Under most of these transactions, REITs sold partial interests in Class A shopping centers to private equity and real estate fund management entities, generating cash proceeds and reducing debt levels, while maintaining management of the centers for fee income.

Deal flow at this pace involving such pricey transactions, even on the institutional side, hasn't been seen in the retail real estate market for at least a year. For insight on this sudden resurgence in major sales activity, CoStar asked Kris Cooper, Managing Director of the Jones Lang LaSalle Retail Investment Sales team; George Good, EVP of CB Richard Ellis' Capital Markets Institutional Group; and Bernie Haddigan, Managing Director and SVP of Marcus & Millichap Real Estate Investment Services; to comment on what this deal flow means to the retail property investment marketplace.

All the experts cautioned not to look at this sudden flow of large deals as a sign that the general retail investment sales market will pick back up any time soon. However, Good said these deals "are definitely a sign that we're at least approaching something that's a little more stable, as opposed to a free fall or decline."

Cooper said these deals are "the first of a wave" of this type. "These REITs need cash because they have a tremendous amount of debt maturities coming up over the next 12-36 months. When they can get a cash injection with a passive JV partner, they love it. Plus, the JV partner gets into good product at great prices," he added.

"In buying real estate, there's offensive strategies and defensive strategies. Offensively, you're either buying for appreciation or cash flow. In the world today, most shrewd investors, with a few exceptions, aren't buying for appreciation as I don't see prices, rents or NOIs jumping," said Haddigan.

"I think most of these deals are defensive strategies. Because of the debt maturities these REITs have over the next 1-3 years, they're trying to bring in liquidity that gives the option to either pay down debt, put them in a better position to negotiate extensions with their lenders, or gain the ability to buy some better deals as the market improves down the road. So I'm not saying it’s a survival strategy, but there's a storm out there," said Haddigan. In looking at the value assigned to these retail sale transactions, Haddigan warned that partial interest deals sometime allow the parties to disguise what the full pricing of the asset would have been if the deal were outright.

Asked why we're seeing these institutional players doing deals now as opposed to the first half of the year, Haddigan said, "They've gone through the five stages of grieving -- denial, anger, bargaining, depression and acceptance. Earlier in the year, there was all this buzz about Obama and TARP and TALF. It's hard to know how deep and prolonged the downturn would be. So what I'm seeing now is a lot more acceptance from owners. I think there's just more sobriety out there than there was a while back. People were willing to hold on six months ago, but at this point, they don’t see any light at the end of the tunnel and decide they need out."

"Even though there is pent-up demand, nobody really wants to sell in this market," said Cooper. "I don't think there's been a perceived improvement. The economy has not really picked up in the retail commercial real estate industry yet; that will take place after you see tenants' sales increase and that hasn't happened yet," added Cooper.

The Equity One deal is an exception in today's market, said Cooper. "Equity One has a cash war chest now where they can acquire properties and the don't have tremendous debt needs or a whole bunch of debt maturities that are problems. So if you can buy class A product for 8% to 9%+ cap rates, go for it, I mean years ago they were paying 6%," he explained.

"What is coveted in today's market is prime locations and prime credit. With the St. Regis deal, for example, even in the worst of times, someone recognizes that there's significant intrinsic value there. The best locations are the last to go down and the first to recover," said Haddigan, adding, "Irreplaceable premium deals are going to trade."

Haddigan said Marcus & Millichap is "finally starting to see increasing amounts of better quality deals come on the market. The profile of the buyer in all those cases is someone who wants stable, high quality, infill deals and they're buying at 200bps above where they would have been 2-3 years ago at low leverage. There still is a lot of capital that will buy quality to park in their portfolio."

"One of the things that was really stopping deals from happening was that buyers couldn't figure out how much further the NOIs would decline, given the number of store closures, the rent reductions tenants were asking for, and the inability to do any new leases. So, looking at a deal a year ago, you saw the NOI declining, but you just didn't know how far it was going to go. Today, I think there's a lot more confidence on the buyer side, where buyers recognize their NOI a year from now may not be what it is today, but they feel more comfortable in predicting what the worst case scenario is," said Good.

"Sellers are finally bringing some good quality product to the market, but there's still not much" said Good. The sellers that are bringing the high quality product to market, said Good, are generally in a position of needing to raise cash, but not under duress. "They're raising capital in anticipation that things may not get better immediately. They recognize that there may be a little more of a trough here that they have to deal with, so sitting on some dry cash is a healthy and smart thing to do right now," he said.

Cooper said there is interest and demand out there for Class A product, but there's not much on the market. He added that most of the aforementioned deals were never officially on the market. "We've got at least 20 deals on the market and I have only one brand new center that's Class A," said Cooper.

"The problem is you have to have a seller that's willing to sell at a cap rate that's ridiculous compared to where it was just two years ago. Why would you sell a good grocery anchored center at an 8%+ cap rate today when that same center two years ago sold for a 6% cap? There's got to be a reason they need to sell, whether they need cash, they have a debt maturity coming up, etc. Otherwise, why not hold it for two years and wait out the cycle and sell it at a presumably lower cap rate," said Cooper. Buyers are wise to this issue, too, which puts the seller at a further disadvantage, said Cooper.

Good said that today's market "is a market where the higher quality properties have no shortage of buyers and the broken, distressed deals have no shortage of buyers either. Its that vast middle of the market where there is a lack of activity." Good added that, "on the institutional side, there's a lot of buyers out there for the A+ product, but it’s a very narrow box that they will ultimately pull the trigger on. There's plenty of buyers for the B stuff, too, but the problem is that they either can't get to an agreement with the sellers on what the under-writeable NOI really is or they can't get the financing."

On the cap rates these deals are closing at, Good said, "Certainly these cap rates are dramatically different than two years ago, but looking at it on a 10-year or 20-year history, they could even be considered aggressive."

So will activity pick up first on value-add retail transactions? Cooper says "There are more and more of those value add deals about to happen, but the flood gate has not opened up yet. We're in the market with a number of transactions that are value-add that I think will close in the first quarter of 2010."

Cooper said there is a "fair amount" of interest on the value-add deals, "presuming there is carryback financing provided. If you don't have that, unless it’s a small deal, let's say under $5 million, its really challenging to get it done." And while there's been a lot of talk of funds created to buy value-add deals, said Cooper, "the majority of the people that we see acting as buyers or trying to buy value-add are private, entrepreneurial money."

All of these experts are expecting that we'll continue to see more transactions of this type -- large, institutional deals involving joint ventures or assumable debt -- in the near future. As for when they're expecting to see the retail property sale transaction market pick up in general, they all said no one can be sure with the continued absence of debt capital.

Cooper said the financing market has come back "a little bit for the trophy deals," particularly with insurance companies starting to lend again to existing clients or clients they've wanted to have for a while. "Primarily, this financing is on rollovers, deals that are already in their pipeline, or trophy deals that are rock solid and the kind of loans they want to have in their portfolio. So, some of that market has returned."

Otherwise, said Cooper, there is some financing activity going on in the form of "seller carryback financing or smaller deals done through local banks with personal guarantees. However, there is still a ton of product not financeable out there. So 90% of the market is still not being impacted and the 10% that is, is what we're seeing in these recent transactions."

"In order to see a return to even the activity levels we had early in this decade, we're going to need to fill in that missing piece - the debt component," said Good. He added that currently, he's only seeing financing on two ends of the spectrum, "There's financing, generally from insurance companies, for the truly bullet proof A quality core properties and then there's financing for the true deep-discount, value-add, distress-type buys that are typically recourse financing from a banking relationship the borrower already has."

"There are a lot of people who want to do deals. There's a lot of 'looky-loos'. There's a lot of capital out there. There's a lot of offers that are happening but some of the offers are ridiculously low. There are a lot of funds that are anxious to do deals. So I think a lot of them are gravitating to the easier deals to assess. the A stuff…right now. The marginal stuff is still to difficult to underwrite right now and so I think a lot of that is just flailing," said Haddigan.

"No one really knows how deep and how long this is going to be. Most people seem to think that 2010 is not going to be any better than 2009. I think by the second half of 2010 we're going to see a lot more transactional velocity because people are just going to surrender to the fact that the market is not coming back to 2007 values until maybe the beginning of 2019. I think we're going to see yield requirements jump and prices go down," said Haddigan.

Looking ahead, Cooper expects to see "an uptick in transactional volume in 2010. I think you're going to start to see it trickle across with smaller deals in the first quarter of 2010 and then increase throughout the year."

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