Recent Sales of Second-Tier Portfolios to Starwood, QIC, Show Strengtheing Investor Demand for Malls
Westfield Group's agreement last week to sell seven malls to Starwood Retail Group, an affiliate of private-equity company Starwood Capital Group, is the latest evidence that investors are willing to accept more risk as they look to acquire mall properties in off-the-beaten-path markets and locations.
The $1.64 billion purchase
is Westfield’s second sale of non-core malls to Starwood in the last 18 months.
In April 2012, Starwood purchased a 90% stake in seven shopping centers comprising about 6.6 million square feet from Westfield for $1.15 billion. This past March, Westfield sold stakes in six shopping malls in Florida for $1.3 billion to O'Connor Capital Partners.
In another recent example, QIC, one of Australia's largest institutional investment managers, recently completed seven joint ventures with Forest City Enterprises Inc. to invest in an eight-property regional mall portfolio valued at $2.05 billion. An eighth joint venture is scheduled to close by the end of September.
And this week, a filing issued by Blackstone-owned Brixmor Property Group Inc. for its anticipated $750 million IPO included a report by Rosen Consulting Group asserting that retailer demand for mall and shopping center space should ramp up as job and population growth spur more sales of necessity goods, and a recovering housing market creates additional demand for home goods and related products and services.
The Rosen further noted that limited new retail development over the next five years is expected to tighten retail market conditions and bring the potential for higher rents, a finding that mirrors earlier projections by CoStar economists.
The most recent quarterly retail subindex of the CoStar Commercial Repeat Sale Index (CCRSI) indicates that for the first time since before the recession, pricing in the broader national retail market is finally outpacing "prime metros" like New York City and San Francisco.
This suggests that investors are increasingly branching out beyond the best malls and shopping centers -- where there are few deals to be had -- into properties like the Westfield malls, which boast solid occupancy but are a step below the best malls in their respective trade areas.
"They may not be core locations, but they are generally well-performing assets," said Ryan McCullough, real estate economist for Property and Portfolio Research (PPR), CoStar's analystics and forecasting company.
For example, Belden Village, with 2012 inline sales of $441 per square foot, Franklin Park at $412 per square foot and Southlake, $410/square foot, are all doing better than average mall performance, despite the relative disadvantage of their non-core Midwestern locations, McCullough said.
At year-end 2012, Belden Village was 100% occupied, up from the 94% occupancy listed when the loan was securitized, according to Nomura Securities. Similarly, Southlake is now 98% occupied, up from 95% at securitization.
The transaction value of $1.64 billion is $120 million below the book value of the assets at the end of 2012, but with the rapid appreciation of well-performing mall properties, it's in line with the book values as of June 30, 2013, Westfield said.
Mall Investors See a Line in the Sand
"The feedback I'm getting from some of the bigger mall owners is that they want to focus on their core assets and make sure that their trophy properties remain trophy properties, so most are looking to offload non-core assets to varying degrees," Garrick Brown, research director for Cassidy Turley in San Francisco, tells CoStar.
The definition of what constitutes core and non-core properties may vary, but Brown believes average sales per square foot of $350 or greater is "a line in the sand" for many of the major players. The reason is the impact of e-commerce, he said.
"We are seeing more of the hard goods retailers out there slowing bricks and mortar growth, if not contracting outright, even as they shift much of their capital expenditure budgets to boost their e-commerce platforms," Brown said. "It really is about bricks and clicks now, not bricks versus clicks."
That being said, some of these non-core assets being traded off are going to see new owners willing to invest in upgrading them to compete with Class A centers in their individual markets, Brown added. Other buyers, however, will be happy to find deals on quality cash-flowing Class B shopping centers that are still holding their own.
"We are seeing lower cap rates on a lot of these deals simply because of the nature of the product being traded," he said. "Very little, if any of it, is distressed."
The Westfield/Starwood deal traded at a compressed capitalization rate and lower per-square-foot sales productivity relative to recent deals by Pennsylvania REIT and other peers, leading Ki Bin Kim, an analyst for SunTrust, to believe "this comp implies that U.S. mall REITs are undervalued."
For his part, Starwood's Scott Wolstein gave a clue about his firm's mall investment strategy in a statement after closing its first Westfield transaction.
"Shopping centers in the U.S. are undergoing a transformation as junior anchors, and value retailers are rethinking store size and distribution needs -- to the benefit of regional malls, including the ones we recently acquired from Westfield," Wolstein said. "We expect to build on this platform in the years to come."