THOUGHT LEADERSHIP, UPDATES, WHITE PAPERS & BUSINESS RESOURCES
Portfolio optimization tools and predictive analytics will help navigate the road ahead.
Two weeks ago, Tango posted a Forbes article on its LinkedIn site written by Walter Loeb. The article discusses Sears and its restructuring owned property through sale leaseback to Seritage Growth Property REIT; generating over $3 billion in capital. That same week, a WSJ article by Suzanne Kapner described Macy’s investors pushing for a sale leaseback of its three main flagship stores valued at almost $7 billion, following that Monday’s announcement of Hudson’s Bay selling 40 of the best stores of Kaufhof in Germany to Simon Properties for $2.7 billion. One of Tango’s Big Box clients, also confirmed they, too, had recently started research on their Owned property portfolio.
This is an old trend, but why the new push? Analysis done by Real Capital Analysis from ICSC Shopping Centers Today provides insight into the high value of class A properties and why some retailers are cashing in:
“The issue of quality versus quantity has been consuming industry experts as the retail sector continues to see a lack of quality properties coupled with an abundance of liquidity…. There is still not as much attractive product as the market wants.” ~ Ben Thypin RCA Director of Market Analysis
Lions, Tigers and Bears
Now we know why retailers are utilizing sale leaseback strategies – because prime real estate is in demand and liquidity is high. But the question then becomes, what will Big Box retailers use all that cash for? Most likely they are preparing to fend off the Lions, Tigers, and Bears on the road ahead….
Lions (Lease Accounting Standards)
New Lease Accounting rules will take effect in 2018, so the window to prepare and find mitigating strategies is slowly closing. Big Box retailers with a greater percentages of leased properties will see a sudden shift on the balance sheet with an increase in liabilities.
That being said, selling off a few choice properties for a multi-billion defense fund in order to buy back stock and keep value up is not an unreasonable hedge. The few additional lease liabilities this will create will be incremental compared to the total portfolio. If they’re going to take a hit they might as well do it all at once and get some much needed capital out of it. Just hope investors don’t want increased dividends and make a run for it.
Tigers (Technology & Competition)
Technology continues to be a double-edged sword for Big Box retailers. Using science fiction to paint a not too far off possibility, Rob Beschia recently quoted a future scene where big box retailers are turned into mini-distribution centers for drones and self-driven cars that deliver goods to your home.
This may sound like fantasy, but Amazon is already testing out home delivery, and retailers like Wal-Mart are looking at smaller footprint stores. Technology is increasing competition in how retailers differentiate. As Loeb notes in his article, Sears home goods is facing competition from Home Depot, Lowes, J.C. Penney, Kohl’s and Macy’s…. with online purchasing competition continuing to grow.
Retailers must also invest in improving technology internally to guarantee customer security through upgrades of infrastructure and protection of customer data. In addition, more systems and data processing will be needed to understand customer habits and trends, to localize and to quickly adapt to changing habits of Millennials; all of which will require capital investments.
Technology is, however, improving the customer experience and helping retailers position stores as ‘concept stores’ for seamless customer engagement through all forms of media and technology. This also requires investment.
Be it for a fleet of drones or improving in-store experience, here again having some additional capital in the bank will benefit retailers for little additional cost.
Bears (Bearish Economy)
Although Q1 2015 Retail Sales (minus motor vehicles) is down -1.0% over last year, May saw a rebound, with many projections calling for 4-6% positive growth in 2015. With improved consumer confidence and a 3.5% GDP projected increase in the US, this may be the one bright spot on the path ahead.
Yet past 2015, this utopia may be short lived. Instability in Europe continues with Greece and a destabilized Ukraine. The potential of creeping inflation leading to rate hikes by the Fed. As energy costs rebound and a strong dollar continues to climb, inflation may continue to increase. As Reuters noted a week ago, “in the 12 months through May, the core CPI rose 1.7 percent.” 2016 will also see instability in a US election, with investments on temporary hold until the dust settles in Washington. If the lack of market liquidity makes it more costly to leverage assets or acquire loans, having a stockpile of cash makes good sense with the number of unknowns in the future of the global and US economies.
With the glut of B-level property, A-Level is at a premium and it’s a seller’s market. The sale leaseback option provides Big Box retailers with much needed capital to survive the threats ahead without increasing debt. This provides ample capital to reinvest in existing locations, improve technology and buy back stock if any or all three significantly decrease stock value.
Investment in customer and location predictive analytics and portfolio optimizations can help identify inefficiencies in Big Box portfolios. Tango recently announced a partnership with UberMedia that provides customer trip patterns centered on store visits. With focused shopping pattern data, Big Box retailers can identify how far customers are traveling from and to, and who are the better co-tenants to have close by.
This rich trade area data will help drive critical real estate capital investment strategies for retailers, such as where to invest in new stores, which existing stores to remodel / relocate, and which stores to close. Answers to these critical questions are going to become more important especially to Big Box retail as competition for retail dollars becomes even greater.
Note: Deloitte Center for Financial Services 2015 Commercial Real Estate Outlook was also used for reference.