Continuing a trend that began last year, retail REITs are continuing to sell non-core assets, retail and non-retail properties alike, in a quest to right-size company portfolios. This pruning is not the run-of-the-mill recycling of assets common among REITs and, instead, is a direct outcome of the credit crisis, according to REIT analysts.
“Post-Great Recession, retail REITs–and REITs overall--have been a lot more focused on selling assets,” says Alexander Goldfarb, managing director of Sandler O'Neill + Partners LP. “One of the takeaway lessons from the credit crisis was that if you can sell assets that do not fit your purpose you should do so. REITs realized that they tended to hold onto too many assets.”
While retail REITs generally want to keep assets, even those that are non-core, because of the net operating income they provide, the credit crisis cemented the theory that higher-quality assets tend to withstand difficult economic conditions better than lower quality assets.
“During a crisis, lenders only are going to lend on the highest quality assets,” Goldfarb points out. “Owners are not going to get full value for lower quality assets–they’re less valuable to lenders–and they’re probably going to be more impacted by an economic downturn.”
Kimco Realty Corp. has been one of the most active sellers in the retail REIT sector, Goldfarb notes. The New Hyde Park, N.Y.-based REIT has sold 53 non-core retail assets totaling $289.3 million since 2010 including 31 in 2011. Proceeds from the 2011 sales were quickly put to work with the acquisition of 10 properties in core markets for an aggregate purchase price of $204 million.
“We are committed to continuing to sell our nonstrategic shopping centers, which will upgrade our portfolio and permit us to concentrate on superior properties in our core markets,” said Kimco President and CEO Dave Henry during the REIT’s most recent earnings call.
The New Hyde Park, N.Y.-based REIT plans to dispose of another $250 million worth of non-strategic properties this year, in addition to about $250 million in non-retail properties. And, it’s off to a rollicking 2012.
During the first quarter it sold 15 shopping centers during the first quarter for $215.4 million. Of that total, 13 properties totaling nearly 1.2 million square feet were considered non-strategies properties.
“The recycling process both continues and will be continuous,” said Kimco’s COO Mike Pappagallo during its most recent earnings call. “This is not a one-shot initiative. And the asset decisions are driven by each regional president's assessment of their own portfolio strengths and weaknesses.”
Pappagallo pointed to the REIT’s Southeast and Florida region: in 2011, Regional President Paul Puma and his team sold 10 properties with five more dispositions slated for the first half of 2012. Combined, the properties represent about 1.2 million sq. ft. and $8 million of NOI. The total sale proceeds of $95 million have partially funded the $133 million of the region's purchase of new centers that will generate about $9.5 million in NOI, he adds.
During Kimco’s earnings call, Henry said the company is looking to expand its footprint in 30 core markets that are consistent with some of the larger MSAs with strong demographics. “We are going after where we have already scale, where we have presence, where we have long-term relationships and we like the long-term prognosis,” he noted.
Last year, Kimco acquired 17 retail assets in its core markets. This year, it’s already purchased a handful of properties including Woodbridge Shopping Center in suburban Houston and Bell Camino in suburban Phoenix for an aggregate price of $17.4 million.
Other retail REITs have also worked on focusing portfolios on core markets and assets.
In the first quarter, DDR Corp. disposed of 11 assets for aggregate proceeds of $45 million, of which DDR's share was $34 million. An additional $87 million of assets are currently under contract for sale, of which the company's share is $82 million.
In turn, DDR spent $47 million to acquire the Brookside Marketplace in Chicago, a large format power center totaling 561,000 sq. ft. that is currently 90 percent leased. DDR is also under contract to acquire the majority of the EDT Retail Portfolio in a transaction valued at $1.43 billion, through a joint venture with an affiliate of the Blackstone Group L.P.
Another high-profile example is General Growth Properties, which spun a portfolio of its class-B assets into Rouse Properties Inc. late last year. The new firm recently made its first acquisition.
In addition, in February, Westfield Group sold a 45 percent stake in 12 U.S. malls to the Canada Pension Plan Investment Board.