Income Property Valuation Digest

A Professional Courtesy of:
Mark T. Kenney, MAI, SRPA, MRICS, MBA

207 Abbey Lane
Lansdale, Pennsylvania 19446
215-855-1800

300 E. Raleigh Avenue
Diamond Beach, New Jersey 08260
215-990-6663

www.ameri-val.com
Specializing in Real Estate Appraisal and Property Tax Consulting

SUMMER 2016

In This Issue:

Impact of Brexit on CRE
Retailers Considering Sale-Leaseback Deals
Sports Authority Closing All Stores
Recent Transactions
AVG Presenting at 2016 IAAO Annual Conference

Impact of Brexit on CRE

On June 23, 2016, the citizens of the United Kingdom voted to leave the European Union, known as Brexit, creating uncertainty that induced a sharp decline in global equity markets. According to research by Marcus & Millichap, the British currency fell dramatically, boosting the value of the U.S. dollar, and the quick re-deployment of capital to safer assets pushed U.S. Treasury rates to their lowest levels since 2012. Despite the short-term volatility resulting from this unanticipated outcome of the British vote, the risk to the U.S. economy should be limited.

According to the research brief, the U.K. receives only 3.9% of U.S. exports, so even a modest British recession resulting from the departure would minimally impact the U.S. economy. The broader EU takes in about 15% of U.S. exports, but the U.K. exit is unlikely to spark a substantive economic decline across the remaining 27 members of the union. Another potential hazard stems from the concentration of banking services in London with deep ties across the globe. However, central banks worldwide stepped in to backstop liquidity and reassure markets that banking systems will remain operational. In addition, U.S. banks recently passed their stress tests, providing assurances that they have sufficient liquidity to navigate choppier financial waters.

Following its meeting earlier this month, the Fed cited risks associated with the Brexit vote as a contributing factor in its decision not to raise rates at that time. With the outcome of the British vote decided, the potential for a July increase has been virtually erased, and the probability of September and December rate hikes has fallen significantly. In conjunction with the decline in Treasury rates and reassurances of liquidity, commercial real estate investors could benefit from low lending costs. Although lender spreads generally widened in the aftermath of the Brexit vote, interest rates remain highly favorable for investors.

According to Marcus & Millichap, the greatest downside risk remains that falling equity markets could create sufficient fear that investors begin a sell-off, similar to what happened at the beginning of the year. These contagion-related, fear-induced risks could weaken business and consumer confidence, slowing the economy and creating downside potential for the economy.

The Brexit will likely have little impact on short-term commercial real estate performance as few demand drivers will be influenced. Apartment demand in the second quarter appears quite robust, with positive demographics and long-run hiring momentum supporting the sector. The outlook for office and retail properties is more mixed, depending on how consumers and businesses perceive the news. Should confidence falter, demand for these property types could soften modestly, but restrained construction will remain an important factor supporting the performance of these asset types. Industrial properties are positioned to benefit from the Brexit as the strengthening dollar could lift imports of foreign goods, though potential downsides exist for U.S. manufacturers that export.

While the Brexit decision has elevated short-term uncertainty that will likely translate into greater investor caution, it could also potentially boost commercial real estate sales in the mid-term to long-term period. According to Marcus & Millichap, downward pressure on interest rates will benefit investors, while the appeal of hard assets with favorable yields could draw additional capital to the sector. The depth and duration of volatility surrounding the event will significantly influence the ramifications for investment real estate. However, barring an unanticipated major economic setback or consequences stemming from the Brexit, the prospects of significant downside risk are limited.

Retailers Considering Sale-Leaseback Deals

According to the Co-Star Group, despite a drop in the number of retail property sale-leasebacks in the first quarter of this year, there appears to be a substantial pipeline of deals building up as more retailers explore the option. Among those actively looking to sell off corporate-owned stores is Mattress Firm Holding Corp., which has begun selling 1,050 Sleepy's stores it acquired following a merger that closed in February. Fast-food chain Wendy's has identified about 315 owned eateries it plans to dispose of by the end of the year. Bloomin' Brands Inc., owners of Outback Steakhouse, agreed to a sale leaseback of 41 eateries and has another 215 restaurants it hopes to sell by early next year. The Bon-Ton Stores Inc. department stores is also exploring sale-leaseback opportunities as a way to pay down pending debt maturities.

The pipeline of retail property available for sale is such that Realty Income Corp. (NYSE: O) recently raised its guidance on the amount of acquisitions it expects to make this year. Realty Income Corp. has been one of the largest buyers of such properties over the last two years. The company raised its 2016 acquisitions guidance to $900 million from an initial estimate of $750 million. During the first quarter, the company completed $353 million in acquisitions and continues to see a strong flow of opportunities that meet their investment parameters. The company remains disciplined in their investment strategy acquiring just 6% of the deals evaluated, which is consistent with their average since 2010. The $900 million estimate does not take into account any as-yet unidentified large-scale transactions that may present themselves.

Second quarter sale/leaseback activity among retailers has already kicked off following a couple of large portfolio sales from Bob Evans Farms Inc. and Bloomin' Brands. Bob Evans sold and leased back 143 restaurants to subsidiaries of National Retail Properties Inc. (NYSE: NNN) and Mesirow Realty Sale-Leaseback Inc. National Retail Properties paid $160.8 million for a portfolio of 117 Bob Evans Restaurant properties; and Mesirow paid $36.4 million for a portfolio of 26 eateries, netting a gain of $164 million on the sale which it plans to use to pay down debt. As part of the transactions, Bob Evans Restaurants agreed to lease the locations for an initial term of 20 years, with five renewal options of five years each. The average price per property was around $1.35 million ($270/SF) and average purchase was for a 5,000¬square-foot building on about an acre of land. Rent is only about $75,000 ($15/SF) per property on average which is considered very safe, for both the tenant and the landlord.

Subsequent to the end of the first quarter of 2016, Tampa-based Bloomin' Brands also sold and leased back 41 of its stores, primarily Outback Steakhouses, to Realty Income Corp. for $141.4 million or about $3.45 million per eatery. It used a portion of the proceeds to pay down $87.6 million in debt. Given the attractive real estate environment and the high level demand for these properties, Bloomin' Brands intends to pursue additional sale-leaseback deals through a combination of individual as well as larger institutional transactions.

Bloomin' Brands still owns more than 600 Outback properties and 205 Bonefish Grill restaurants. Given the current pipeline, the firm expects to substantially complete the sale of the available portfolio by early 2017. The transaction is expected to unlock significant value. National Retail Properties said it looked at the recent Bloomin' Brands portfolio, but felt the cost per restaurant was a bit outside its range. However, the REIT said it would take a look at smaller portfolio transactions or one-off deals from Bloomin' Brands.

Sports Authority Closing All Stores

Sports Authority, the once-mighty sporting goods chain that filed for bankruptcy protection in March, is closing all its 450 remaining stores, where going-out-of-business sales began before Memorial Day. A group of liquidators that offered the winning bid for the debt-ridden company's assets at bankruptcy auction will sell off remaining merchandise in going-out-of-business sales at stores not already in the process of closing, according to a filing in bankruptcy court in Delaware.

The move comes after Englewood, CO-based Sports Authority could not reach agreement with lenders and creditors on a reorganization plan, and then failed to lure a bidder willing to buy most or all of its stores and operate them. Sports Authority previously said it would close 140 of its 450 stores, including the flagship Sports Castle in Denver, where a liquidation sale has been underway for weeks. But now the company says that all stores will be closed. Going-out-of¬business sales at stores where selloffs are not already underway will start about May 25 and end about Aug. 31, the filing said.

At one time, Sports Authority was the nation's largest sporting goods chain, but increasingly it has faced heightened competition from mainstream retailers like Dick's Sporting Goods Inc. (NYSE: DKS) as well as specialty and online merchants. The company confirmed in late January that it had laid off about 100 workers at its corporate office. And in February it said it would close a distribution center in Denver, sacrificing 72 jobs.

Sports Authority filed for Chapter 11 bankruptcy protection in early March amid debts topping $1 billion. In late April it gave up on trying to reorganize and instead focused on selling off most or all of the business, possibly to one or more rival chains. But no bidders emerged who were willing to take over the business. The liquidation team that won Monday's auction consists of Tiger Capital Group, Hilco Global and Gordon Brothers. Tiger and Gordon Brothers already have been involved in liquidating merchandise at the 140 Sports Authority stores previously marked for closure.

Recent Transactions

Nationwide, transaction volume for good quality retail properties continues to be strong. Here's a look at some of the recent deals:

In June 2016, The Shoppes at Valley Square, a 292,888-square-foot lifestyle center in Bucks County PA, sold for approximately $82 million. The property at Route 611 and Street Road in Warminster, was bought by a partnership involving Poag Shopping Centers, a Memphis, Tennessee company that focuses on lifestyle centers, and a real estate fund overseen by Ares Management of Los Angeles. The seller was Istar Financial Inc., a New York firm that had a loan on the center and ended up foreclosing on it and taking control of the property in 2012. The shopping center was developed nine years ago for $125 million by Metro Commercial Development. It was designed to be a walkable downtown, something the town lacked. It was built on 140 acres, which was one of the last undeveloped commercially zoned parcels of that size in Central Bucks County and winning over reluctant neighbors was a challenge at the time it was proposed. Ultimately, the project received approval from local officials.
In June 2016, Blackstone Group paid $270.8 million for Southpark Meadows, a 1.52 million-square-foot shopping center in Austin, Texas, and $30.7 million for Stassney Heights, a nearby strip center. The transaction is part of a recently closed $1.9 billion acquisition of 50 properties from RioCan, Toronto.
In June 2016, a joint venture entity affiliated with Hendon Properties, of Atlanta, and Birmingham, Ala.-based Harbert Management paid InvenTrust Properties Corp., of Chicago, $23.8 million for Westport Village, a 169,000-square-foot lifestyle center in Louisville, Ky. The center, which is currently 73 percent leased, includes nine multi-tenant buildings with three, two-level structures available for second-story office users.
In June 2016, Blackstone Real Estate Group acquired a Best Buy at 1801 Hempstead Road, Lancaster, PA for $8.57 million ($186/SF), courthouse records show. The 46,000-square-foot store, on 6.24 acres in Lancaster city, opened in 2009. Best Buy said that the sale has no impact on the store, which will operate as usual under a long-term lease as part of the Pitney Road Plaza shopping center. Other stores there include Lowe's, Members 1st and Mattress Warehouse. This Best Buy has had several owners in its brief existence. PREIT sold the Best Buy property in 2010 to a joint venture formed by Cedar Realty Trust and RioCan Real Estate Investment Trust. Two years later, Cedar sold its stake in the building to RioCan. Toronto-based RioCan announced last December it was selling its entire portfolio of 49 U.S. retail properties, including this Best Buy, to Blackstone for $1.9 billion, so it could concentrate on its Canadian holdings.
Blackstone Real Estate Group bought Exeter Commons in Exeter PA, a 361,000-square-foot center, from Cedar Shopping Centers, of Port Washington, NY, and RioCan Real Estate Investment Trust, of Toronto, for $75.6 million. Anchors are Giant Foods, Lowe's and Target.
In May 2016, WorkShop Development Inc. sold the land improved with a new BJ's Wholesale Club warehouse in the Canton MD area for $23.5 million ($260/SF). The buyer was Baltimore Wholesale D.S.T., real estate investors who make up a division of Oak Brook, Ill.-based real estate investment trust IRC Retail Centers, formerly Inland Real Estate Corp. The 90,300-square-foot BJ's opened in November on the site of a former paint company warehouse owned by Lenmar Corp. Baltimore-based WorkShop purchased the 6.59-acre site for $7.5 million in April 2015. The company tore down a portion of the building and paid for environmental remediation costs. BJ's long-term lease at the site made it attractive to out-of-town investors. Additionally, the new development in that quadrant with restaurants and retail just off Interstate 95 has transformed the area into a commercial-industrial hub in the area.
In April 2016, Retail Properties of America, which owns shopping centers from coast to coast, paid $66 million for Oak Brook Promenade. The Oak Brook-based real estate investment trust bought the property, a 183,000 square foot shopping center at 3051 Butterfield Road in the western suburb, at the end of March. It is the eighth Chicago-area property for the company, which also owns Gurnee Town Center and the Brickyard mall on Chicago's northwest side. Retail Properties, formerly part of the Inland Group, has been a busy buyer and seller of shopping centers, part of a strategy to refocus its portfolio on fewer markets. Last year, the company spent $463 million on acquisitions and sold $516 million in property, according to its annual report. The REIT expects dispositions to total $600 million to $700 million this year, and acquisitions to total $375 million to $475 million. Oak Brook Promenade includes 119,000 square feet of street-level retail space and 64,000 square feet of office space. Tenants include Arhaus Furniture, Kona Grill and McCormick & Schmick's. About 21,000 square feet, or 17 percent, of the retail space is available for lease, according to the company's website.
In April 2016, Merlone Geier Partners bought Capitola Mall, in Santa Cruz, CA, from Macerich for about $64 million. The sale includes 100 spaces for specialty stores and restaurants plus one anchor - Kohl's - but not the parcels owned by anchors Macy's, Sears and Target, where half the 97,000-square-foot space has been for lease. Stephen Logan, Merlone Geier's project director of development, had been assistant vice president for development at Macerich until last January.
In April 2016, El Paso, Texas-based Hunt Investment Management acquired the 98,550-square-foot Heritage Shops at Millennium Park, in Chicago, from Rye, N.Y.-based Acadia Realty Trust for $46.5 million. Tenants include LA Fitness Signature Club, McDonald's, Fifth Third Bank, Ann Taylor Loft, Lane Bryant/Cacique, Fannie May Candies, Intelligentsia Coffee and Sugar Bliss Cake Boutique.

AVG Presenting at 2016 IAAO Annual Conference

American Valuation Group, Inc. announced that Mark T. Kenney, MAI, SRPA, MRICS, MBA, President of American Valuation Group, Inc. has been selected to make a panel presentation on "Identifying and Allocating Intangible Assets" at the 2016 International Association of Assessing Officers' (IAAO) Annual Conference to be held in August 2016 at the Tampa Convention Center in Tampa, FL. He will be presenting along with Tim Wilmath, MAI, SRA, Chairman of the IAAO Special Committee on Intangible Assets, Mark Linné, MAI, SRA, Peter Korpacz, MAI, CRE, FRICS, Toni Viens, MAI and Gaylord (Jay) Wood, Esq.

In addition to national department store and big box tax appeal experience, American Valuation Group, Inc. was retained for appraisal and litigation support services involving the King of Prussia Mall, Mayfair Mall, Southlake Mall, Palisades Center, Westfield Trumbull Mall, Eden Prairie Center, The Maine Mall, Landmark Mall, Coral Ridge Mall, Glenbrook Square mall, River Ridge Mall, Quaker Bridge Mall, and Plymouth Meeting Mall tax appeal litigations. Mr. Kenney also appraised and consulted on the Mall of America, the largest mega-mall in the U.S. Mark T. Kenney, MAI, SRPA, MRICS, MBA, President of American Valuation Group, Inc., is the author of "Business Enterprise Value: The Debate Continues," and other shopping mall articles that appeared in The Appraisal Journal, a leading industry journal published by the Appraisal Institute.

American Valuation Group, Inc. is a leader in the appraisal of shopping malls and shopping centers, and specializes in property tax appraisal and litigation support nationwide.

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