NEW PRIORITIES IN ASSET MANAGEMENT CHRISTOPHER W. ROSCOE DIRECTOR AND RETAIL SECTOR HEAD CLARION PARTNERS

Transcription

1 NEW PRIORITIES IN ASSET MANAGEMENT CHRISTOPHER W. ROSCOE DIRECTOR AND RETAIL SECTOR HEAD CLARION PARTNERS

2 mobile.icsc.org

3 INTRODUCTIONS

4 MARKET OUTLOOK

5 Key Market Trends Demand Steady growth forecast: GDP expanding at 2.5% - 3.0% Expanding labor markets and consumer spending Shifting real estate demand based on socioeconomic trends Supply New supply lagging historic levels Obsolescence of growing percentage of existing space Capital Markets Increased demand for core real estate driven by strong US and foreign capital flows Strong yields compared to core pricing, resulting in attractive risk-adjusted returns

6 A Backdrop of Steady Growth Sets the Stage for Increased Demand 5% 5 4% 4 3% 3 Annual Real GDP Growth 2% 1% 0% -1% -2% -3% -4% Annaul Job Growth (Millions) -5% -5-6% -7% Employment (right) GDP (left) -6-7

7 Strong Sectors Drive Shift in Demand

8 New Supply Remains Well Below Historic Averages Obsolescence of existing space further increases demand for well-located, modern functional space

9 Rental Increases Following Occupancy Recovery Source: CBRE-EA, Reis, Clarion Partners Investment Research, November Note: The forecasted data was provided by Clarion Partners Investment Research, dated November Please see important information regarding forecasts and projections at the beginning of this presentation.

10 Key Trends Drive Changing Real Estate Market

11 Capital Markets Conditions Support Attractive Exit Opportunities

12 RETAIL MARKET OUTLOOK

13 U.S. Retail Market Outlook

14 Retail: Highest Risk-Adjusted Total Return

15 Total Retail Sales Are Now 17% Above the Prior Peak, Driven By Strong Job Gains

16 While Income and Wealth Inequality Are Reflected in Bifurcation in Retail Demand, Declining Fuel Prices Benefit All Consumers

17 E-commerce Expanding Rapidly at 16% Year-Over-Year And Now Accounts for 8.5% of Core Retail Sales

18 Store Formats Shrinking While Major Retailers Are Taking Less Space And Focusing on More Profitable Stores and Locations

19 Retail Growth Moderating With Growing Divergence Between Top and Bottom Retailers

20 Retail Fundamentals Strengthening Supported by the Lowest New Supply in 25 Years

21 Clarion s Focus: High-Street Retail, Market-Dominant Necessity/Value-Oriented Retail and Neighborhood and Power Centers

22 ECONOMIC CONCLUSIONS / SUMMARY

23 More tailwinds than headwinds Job creation and growth Solid corporate profits Housing market recovery Counter attack concerns of Unemployment rate still high Uncertainty of government regulations Fiscal policy Rising cost of debt capital

24 Back to Fundamentals this transition from cap rate compression to fundamental performance will increase the emphasis on asset management to enhance returns. This marks a significant shift from a dependence on cap rate compression for appreciation growth that has become ingrained in investment strategies across all property types. Availability of debt and equity capital is on the rise in Sources of capital all becoming more comfortable with improving market conditions. As space is continued to be absorbed with very little new supply, rents will start to push making development proformas begin to make sense.

25 The real estate recovery will gain momentum through Commercial real estate is reaching an inflection point where valuations will no longer be driven by capital markets. With cap rate compression beginning to wane, the focus is more on property fundamentals. The search for returns through cap rate compression will become the search for returns through improving property fundamentals and/or operational improvements.

26 NEW PRIORITIES IN ASSET MANAGEMENT

27 NEW PRIORITIES IN ASSET MANAGEMENT When we underwrite assets, we look at a lot of property and market information. There are 3 key pieces that will have a measurable affect on defining our asset management strategy: Bundle of Rights Health Ratio Analysis Lease Expiration Schedule

28 BUNDLE OF RIGHTS

29 BUNDLE OF RIGHTS REA s/ccr s/master Plan Communities Co-Tenancies Kick-Outs-Landlord/Tenant Anchor Tenant Zone of Control Easements Entitlements

30 BUNDLE OF RIGHTS (continued) Pads Zoning Go Dark Clauses Debt-Lender Approval ROFO s/rofr s

31 HEALTH RATIO ANALYSIS

32 ROSCOE'S RETAIL EMPORIUM Lease All-In Gross Sales Health TENANT Sq. Ft % Expiration Rent Sales PSF Ratio 1 TRADER JOHN'S 13, % 12/31/19 $ $ 10,000,000 $ % 2 JERSEY MARK'S 1, % 06/30/15 $ $ 1,750,000 $ 1, % 3 WALGOLD'S 12, % 10/31/16 $ $ 4,750,000 $ % 4 PARTY COUNTY 7, % 12/31/15 $ $ 1,250,000 $ % 5 BANK OF VEGAS 4, % 03/31/18 $ $ 2,250,000 $ % 6 LOCAL PIZZA GUY 1, % 03/31/18 $ $ 425,000 $ % 7 SALLY'S SALON 5, % 04/30/17 $ $ 2,000,000 $ % 8 CHRIS'S TACOS 1, % 01/31/16 $ $ 1,200,000 $ % 9 MIKE'S MEAT PIES 1, % 04/30/20 $ $ 500,000 $ % 10 BETTER BUY 35, % 07/31/16 $ $ 6,000,000 $ % 11 SUBURBAN OUTFITTER 15, % 09/30/17 $ $ 8,000,000 $ % 12 VICTOR'S SECRET 3, % 03/31/16 $ $ 1,000,000 $ % TOTAL 102, % $ 38,125,000 $ %

33 LEASE EXPIRATION SCHEDULE

34 Annual Area Expiration 80,000 sf 60,000 sf 40,000 sf 20,000 sf 0 sf '15 '16 '17 '18 '19 '20 '21 '22 '23 ' Annual Area Expiration Cumulative % Expiration

35 Annual Base Rent Expiration $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- '15 '16 '17 '18 '19 '20 '21 '22 '23 ' Annual Base Rent Expiration Cumulative % Expiration

36

37 VALUE CREATION

38 INVESTMENT CYCLE Acquire Asset Develop strategy to maximize value over a defined hold period. Hire capable property managers and leasing agents to assist with carrying out this strategy. Review and adjust strategy as necessary Property conditions Market conditions Capital Market conditions Sell and hopefully meet or exceed your client s return objectives.

39 PROPERTY VALUES IMPACTED BY External Sources Capital Markets Competition Changing Demographics Public Transportation

40 VALUE CREATION DRIVERS Tenant Mix Redevelopments Quantifiable vs Unquantifiable Value Additional Value Creation Methods

41 IMPORTANCE OF TENANT MIX Getting it right Demographics review Balancing act Local/Regional/National Small Shops/Sub-Anchors/Anchors Analyzing health ratios

42 IMPORTANCE OF TENANT MIX Getting it right Maximizing sales Maximizing rents Maximizing value

43 REDEVELOPMENTS Reasons for Redevelopement: Secure market position Meet consumer demand Update project

44 COMPONENTS OF A PRO FORMA Projected sales impact Projected market share changes Leasing assumptions Impact of new tenants/anchors Return on cost analysis incremental rent versus cost Cap rate impact Discounted cash flow analysis

45 PAD DEVELOPMENT EXAMPLE Assume the Following: Land 16,000 s.f. Original Cost $ 3.00/s.f. Market Value $12.00/s.f. Tenant Restaurant Term 10 Years Square Footage 6,000 s.f. Rent $20.00/s.f. Percentage 6% Expenses NNN TI s $12.00/s.f. Leasing Commission $ 4.00/s.f.

46 QUANTIFIABLE VALUE-ADD

47 ANALYSIS A (MARKET RETURN) This analysis outlines a typical developer construction proformaand is a quick check to a market driven return: Soft Costs (10%) $ 62,400 Hard Costs ($60.00/s.f.) $360,000 T.I. Contribution ($12.00/s.f.) $ 72,000 Land (Market $12.00/s.f.) $192,000 Construction Financing (Land & 10% for 10 months) $ 52,000 Leasing commission $4.00/s.f. $ 24,000 Total Project Costs: $762,400 Restaurant Rent: $120,000 Return on cost $120,000 / $762,400 = 15.74%

48 ANALYSIS B (MARKET RETURN) This analysis outlines your proformawith your original carrying value for land and no construction financing. Soft Costs (10%) $ 48,000 Hard Costs ($60.00/s.f.) $360,000 T.I. Contribution ($12.00/s.f.) $ 72,000 Land ($3.00/s.f.) $ 48,000 Leasing Commission ($4.00/s.f.) $ 24,000 Total Project Costs: $552,000 Restaurant Rent: $120,000 Return on cost $120,000/$552,000 = 21.74%

49 UNQUANTIFIABLE VALUE-ADD

50 NON-ECONOMIC EXAMPLE Assume the Following: Regional Mall: 1,350,000 square feet $18.15/s.f. NNN expenses (CAM, Tax, Ins) Annual Sales of $440.00/s.f.(Non-Anchor) You have a 4,500 Vacancy: Budgeted Rent: $45.00/s.f. NNN Budgeted TI: $15.00/s.f. Net Effective Rent: $42.60/s.f. NNN Proposed Rent: $55.00/s.f. gross Proposed TI: $45.00/s.f. Net Effective Rent: $31.33/s.f. NNN

51 ANALYSIS A (NET EFFECTIVE RENT) Proposed Deal Budgeted Deal Free Rent / Downtime Adjusted Leasing TI Allowance & Free Rent / Downtime Adjusted Leasing TI Allowance & Rent/PSF (Months) Rent/PSF Commission LL Cost Rent/PSF (Months) Rent/PSF Commission LL Cost Year 1 $ $ $ 77, $ 202, $ $ $ 94, $ 67, Year 2 $ $ $ $ Year 3 $ $ $ $ Year 4 $ $ $ $ Year 5 $ $ $ $ Year 6 $ $ $ $ Year 7 $ $ $ $ Year 8 $ $ $ $ Year 9 $ $ $ $ Year 10 $ $ $ $ Average Rent $ Average Rent $ Effective Rent $ Effective Rent $ Proposed Year 1 Revenue Budgeted Year 1 Revenue Variance $ (169,062.00) Proposed Total Revenue $ 1,406, $ (9,787.50) Forecasted Total Revenue $ 1,913, $ (159,274.50) Variance $ (507,574.50)

52 VALUE BENEFIT Net effective rent decreased by: $11.28 Year 1 income decreased by: $159,275 Total income decreased by: $507,575 Where is the value? Gross sales prior = $440.00/s.f. Gross sales 4 years after = $600.00/s.f. Increase of $160/s.f.in gross sales in 4 years! Over $100M additional spent at your center!

53 ADDITIONAL VALUE CREATION METHODS Land Assemblage Marketing/Events Security and Cleanliness

54 HOLD/SELL DISCUSSION Comment on short-term, medium-term, and long-term hold strategies. Supplement short-term, medium-term, and long-term hold strategies with a financial analysis (discounted cash flow). Review major events with respect to the property and market within the short-term, medium-term, and longterm strategies.

55 Opportunities Outlet centers A malls capital partner with operator Mixed use Urban in-fill city center opportunities Suburban in-fill city center opportunities High street Dominant traditional grocery anchored neighborhood/community centers Redevelopment opportunities Newer power centers that are right sized Ethnic market opportunities

56 A few thoughts on trends going forward Menswear Fast Fashion E-Commerce/On-Line/Internet Electronic Sales Big Food Square Footage Formats Lack of Development Supply Traditional Grocery Stores Made in the USA Activewear apparel Outlets/Factory Stores Non-Traditional Uses Urban Retail

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