In 1976, Harald von Scharfenberg expanded the German investment firm BVT from its Munich headquarters to the United States. Initially, BVT focused on acquiring grocery-anchored shopping centers for private German investors. But in 1997, von Scharfenberg partnered with Frank Pridgen, an Atlanta-based businessman, to add joint ventureto BVT's already thriving acquisition business. Today, these two legs of the company's U.S. operations rely on a successful combination of conservative selection criteria and aggressive purchasing strategies to boost the earnings of BVT and its investors.
David Ballew heads the Atlanta-based acquisition leg of BVT's U.S. operations. In this capacity, he leads the Retail Investment Fund (RIF) program, which purchases grocery-anchored neighborhood shopping centers for German investors. Through its relationship with Hypo Vereinsbank, the second-largest bank in Germany, the RIF program makes rapid cash purchases of dominant shopping centers in select target areas. Currently, the primary markets for the RIF program include the mid-Atlantic and Southeast, as well as Texas, Arizona and Colorado.
"We target the high-growth areas," Ballew explains. "We also need to focus on areas with high name recognition for our German investors. For example, Germans love Florida and Denver because they vacation there. We started our focus in Florida and expanded in what I call an 'opportunity axis.' We have gone all the way up the eastern seaboard as far north as Connecticut and as far west across the Sun Belt as Arizona. If the cap rates change we may move into Southern. That's a market I would really like to be in, but it's a very expensive one."
A property must meet stringent requirements to fit within the parameters of the RIF program. "We only buy the No. 1 or No. 2 grocer in a particular trade area," Ballew notes. "We want to own the dominant grocer and the dominant center in any trade area in which we operate. These represent the cream of the crop, the trophy shopping centers."
Population numbers important To attract BVT's interest, Ballew explains, properties must also be in major metropolitan areas, urban in-fill locations, or planned communities. They must have between 75,000 and 150,000 total sq. ft. BVT requires anchor tenants with investment-grade credit and a minimum of 15 years left on the lease.
The RIF program also insists upon a strong tenant mix. "We're very careful," notes Ballew. "In a given center, our national anchor will have very good credit, and then we may have a smaller national credit tenant like a Blockbuster. But we're not buying shopping centers with a lot of small shops."
Why does BVT focus on grocery stores? "Because we're buying only very stable investments for our investors," Ballew explains. "We're buying the best products, for which there is always a demand."
A growing portfolio Through the RIF program, BVT buys a group of geographically diversified grocery-anchored shopping centers and packages them into a fund or a portfolio. "First, we pay cash for them, and then we syndicate through Hypo Vereinsbank and our Munich office. Finally, we syndicate each fund to private German investors. The initial placement fee for our investors is $50,000. Once the funds are syndicated, we will go back and put about 40% debt leverage on a particular fund."
All of the RIF funds are managed out of the Atlanta office. Currently the RIF program has 30 centers comprising seven separate funds. According to Ballew, RIF will establish funds eight and nine in June and July of this year.
The velocity of the RIF program continues to increase, according to Ballew. "We have a revolving-forward funding commitment from our partner Hypo Vereinsbank of approximately $150 million to $200 million annually that we have to place."
Vertical integration at its best The Capital Partners Development program (CPD) is the second leg of BVT's U.S. business. Headed by John Joyce, executive vice president, CPD is primarily focused on joint venture development with experienced shopping center developers. Some of the most prominent developers include Sembler Co., Steiner + Associates, the Pederson Group, Paradise Development Group, GBT Realty, and LefMark of Florida.
The development partners' role in these joint ventures is to provide the equity for projects through German investors. Since 1997, BVT has raised and placed more than $115 million as equity in CPD transactions. Through their joint ventures, the development partners have also participated in the development of more than 400 sq. ft. of constructed or planned retail space.
Like the RIF program, BVT's development program has strict criteria for inclusion. CPD only works with developers who are undertaking programs in BVT's primary geographical markets. Those developers must also work with the No. 1 or No. 2 retailers in the market for that area and product type. Unlike the RIF program, grocery-anchored projects are not their exclusive focus. Some of their many non-grocery businesses include Target, United Artists, Lowe's, and Old Navy.
Joyce works separately from but is always cognizant of Ballew's enterprises in acquisitions. "We do have a breadth of product. However, the desire - clearly the intent - is that our primary focus would remain on doing neighborhood-anchored shopping centers as a feeding conduit to the acquisition side," Joyce says. "We're not restricted to developing that type of property, so that gives us a little more flexibility. Still we do not want to travel too far away from David's program because in the end we all benefit by being a source for his product needs.
"The genius of our development program," Joyce continues, "was really a function of trying to control our destiny, trying to control product levels. Clearly, the joint venture development programs we undertook around 1997 were with developers who were building grocery-anchored products that have since been acquired by the RIF program."
Recently the development program has increased its involvement with non-grocery retailers. However, according to Joyce, the plan is to increase grocery-anchored joint ventures to half if not more of the total number of developments. "We have about six Publix food stores that we will undertake in 2001 that will clearly be product for the RIF programs," Joyce notes. "We will swing back into that kind of focus here shortly."
This relationship between the RIF and development partners programs is, in Joyce's words, "vertical integration at its best."
Why German investors According to Ballew, the bank stepped up the development program about a year ago because it was so popular with German investors. The subscription syndicated to private German investors for the CPD was over-subscribed even before the prospectus was complete.
"Here's the difference between the European investor and the American investor," Ballew explains. "Europeans are happy with a 4.5% return. They think that's wonderful. In a particular development, if we do not receive between a 12% to 15% return, then we don't want to be developing there. We are guaranteeing our investors 7.5% to start and up to 10% on the tail end. That is a significant increase from what their expectations are, and that's why the program has been so successful."
Both the enthusiasm and the investment returns are similar on the RIF side, though with a different style of investor. "The RIF program is appealing to the bond type of investor. This is very stable. It's inflation-proof. It's recession-proof. It's e-commerce-proof. People are always going to want to pick out their own produce. We have a guaranteed investment return that is scaled over, say, a 10-year period that is between 7% and 10%, and we have never missed a distribution or had to make up a distribution."
BVT also has a full tax department that accommodates all its German investors. According to Ballew, BVT files 35,000 1040NR (non-residential) U.S. tax returns on each year. This service makes U.S. business transactions easier for BVT's investors.
Virtual shopping experiment While BVT does not foresee e-commerce as a serious competitor to brick-and-mortar grocery stores, Ballew and Joyce say BVT is experimenting with integrating an Internet business plan into its traditional development model. At one Publix in South Florida, for example, customers will be able to order items through a website and schedule a time to pick them up. Ballew describes this as a "virtual express lane moving a step beyond the self-scanning lanes."
"It's really focused on facilitating the express lane. It's not intended to store the product. It's strictly a distribution outlet. The product itself is coming from the main store. The whole theory is convenience and execution at a much faster rate. The question will be if the cost of providing that service can support the volume of sales that come out of that facility," Joyce notes.
Aside from trends in the virtual world, Joyce and Ballew see a continued trend toward development in urban in-fill areas, including more multilevel vertical projects. "Land values have increased so much. What we would ordinarily fit on a footprint will not support the cost of the land anymore," Ballew explains. "So we have to fit twice as much product on that land. I think that's one of the primary trends I have seen."