RealEstateFlux

Centro’s plans to raise capital were dealt another blow this week as its agreement to sell a portfolio of U.S. retail properties was terminated.

FT.com | Peter Smith | September 15, 2008

Centro, which has a large portfolio of shopping malls in the US, Australia and New Zealand, said in July it had agreed to sell 29 of the 31 properties in the Centro America Fund to a private real estate investment advisor for A$735m (US$592m), at a 10 per cent discount to book value.

After six extensions in the last year, Centro Properties Group has approached its Lenders with a new plan in the hopes of getting more time. Centro is floating the idea of offering a hybrid security to its Lenders allowing them to swap debt for equity in the company. The problem is that this would further dilute the value of existing shareholders, who have already lost 96% of the value of their stock since December 2007.

The initial thrust of Centro’s turnaround strategy was to offload assets, and it has already sold 29 US properties for $714 million according to the Wall Street Journal. Yet Centro is now saying that they will need to obtain new equity commitments in the firm to stay afloat, and Blackstone and others have considered options including breaking off what is left of their US portfolio. Yet looking into the bottom of Q3 2008, Centro believes it is unlikely that new equity can be closed in time to comply with its Lender’s late September and Mid December deadlines.

IHT | August 25, 2008

“While banks have provisioned for their exposure to date, it would be of some concern to lenders that neither asset sales or an equity injection is a near-term possibility,” said a hedge fund manager who asked not to be named because he was not authorized to speak to the news media. Centro said it had begun preliminary talks with its bankers on converting a portion of its debt into some form of hybrid security.”

The Wall Street Journal | Andrew Harrison | August 26, 2008

“Centro will look to obtain debt extensions from its lender group, and has started talks with lenders on terms, the company said. Centro’s Australian lenders include Australia & New Zealand Banking Group, Commonwealth Bank, National Australia Bank and St. George Bank Ltd. Foreign lenders include J.P. Morgan Chase & Co. and Bank of America Corp.”

In a move designed to protect its turf, Walgreens has launched a competing bid for Longs. Given the prior shareholder dissent and now a competing bidder for Longs, CVS’ original deal is in jeopardy.

Los Angeles Business Journal | September 15, 2008

If the deal goes through, Walgreens would acquire Walnut Creek-based Longs’ retail drugstores in California, Nevada, Arizona and Hawaii. The acquisition would include Longs’ prescription benefits management subsidiary, RxAmerica, LLC.

Longs’ shareholders are reportedly looking to scuttle the merger with CVS due to what they believe is an undervaluation of the firm and it real estate.

The Wall Street Journal | Heidi N. Moore | September 5, 2008

“Longs’ largest stakeholder, the investment firm Advisory Research, has renewed calls for the Walnut Creek, Calif., drugstore chain to release details about its real-estate holdings. Longs owns as much as 20% of its 500 stores, and where it doesn’t own, it holds long-term leases struck long before real-estate prices boomed…Investors say that means Longs should be fetching more than the $71.50 offered by Woonsocket, R.I.-based CVS.”

Retailers nationwide are facing the strain of shrinking consumer spending, especially now that  tax rebate checks have already been spent. Therefore, the news of a significant consolidation amongst retail drugstore operators invites questions about possible redundant locations and possible store closures. Reports indicate that CVS is not considering any closures in the near term.

CPN | Michael Fickes | August 13, 2008

“In one of the year’s notable retail acquisition announcements, Longs Drug Stores Corp. has agreed to be acquired by Woonsocket, R.I.-based CVS Caremark for $2.9 billion or $71.50 per share. The purchase price includes the assumption of Longs’ outstanding debt. “

Globe St. | Brian K. Miller | August 13, 2008

“As part of the integration of the Longs chain into CVS, Ryan said CVS will look to relocate 10% to 15% of the Longs stores in Northern California that aren’t already well-located to freestanding locations “if we can find them, but there’s no rush,” he said. In addition, he said CVS would look to learn a little something from Longs about its general merchandise business, which accounts for more of the stores’ overall sales than CVS stores, and use that to improve operations at its existing CVS stores in California. “

A rash of commercial foreclosure news has hit the markets, including a Deutsche Bank loan on The Drake property in New York, a Gramercy Capital loan on Cupertino Square in Silicon Valley, and the Riverton House project in Harlem. Yet these are examples of mismanagement and overleverage at the height of the market rather than a significant new trend in commercial foreclosure rates. According to Bloomberg and REIS data, the US market with the highest commercial foreclosure rate in 2Q 2008 was Chicago at 0.34% - hardly a significant trend.

Take for instance the Cupertino Square mall in Silicon Valley - mall owners took out a $195 million construction loan from Gramercy Capital two years ago at the peak of the cycle. Now that markets and mall operations have contracted, and presumably because the project couldn’t obtain further financing, Gramercy is looking to seize assets and make its investors whole. This is poor strategy, not a sign that responsible retail operators will start defaulting at any significant rate.

Another sterling example of an overextension is the foreclosure by Deutsche Bank on the $510 million loan collateralized by The Drake in New York City, part of the remnants of the Macklowe portfolio. If Macklowe’s strategy at the time of the Drake acquisition wasn’t predicated upon capital appreciation, with the market already at a high water mark, this would not be a story today. But otherwise, it is a spectacular flameout that is read into for signs of a growing trend in commercial foreclosures. Yet the reality is that commercial foreclosures are still at very low rates.

It is remarkable that while Westfield Group and Simon Property Group are sizing up a tremendous growth opportunity in Europe, Centro Properties Group, with their vastly different capital structure, is selling large chunks of their portfolio at wholesale prices in a race to survive.

In answer to Simon Property Group’s disclosure last week of a 3.5% stake in UK retail REIT Liberty International, Westfield Group has announced their own 2.96% position in the firm. With Liberty coming into play and appearing more and more likely as a takeover target, Simon quickly answered on Tuesday by raising their stake in Liberty to 4.22%.

The real question is whether Simon and Westfield will work together in their bid for this choice UK retail portfolio, or if a bidding war will break out. The stakes are an irreplaceable foothold in the world of British retailing. Some of the highlights of the Liberty portfolio include London’s Covent Garden Estate, a prime tourist destination.

The Real Estate Flux market started with a 35% chance that Simon would be the eventual owner of Liberty’s holdings.

Analysts have noted that the acquisition of Liberty could only be a long term strategic maneuver rather than an attempt to capitalize on any share price discount to Liberty’s Net Asset Value (NAV). Prior to these recent disclosures, Liberty was trading below the NAV of its holdings, yet the stock has soared since the announcements, closing up 5.3% in Tuesday’s trading. Furthermore, the Financial Times reports that “A potential price for Liberty of about £12 a share was being talked about in the London market, a premium to the last stated net asset value of £10.95 per share.”

FT.com | Daniel Thomas | August 27, 2008

“Westfield bought 10.7m shares in June and July at an average price of 835p. The company said that the stake was being held for “investment purposes” and declined to comment further. Simon, likewise, has refused to comment on its intentions, although it is unusual for the company to build indirect stakes in rival developers. This is also its first investment in the British property market.”

Bloomberg | Simon Packard | August 26, 2008

“There’s a track record of takeover collaboration between the two companies,” said John Perry, an analyst at Deutsche Bank AG with a “sell” rating on Liberty. “This looks like positioning for something down the line.”

The Wall Street Journal |William Boston | August 27, 2008

“Both groups have now clearly pulled up a seat at the table,” said Merrill Lynch property analysts in a note to clients. “They could be either working together and looking to divide up the assets, or the move by Westfield could be a defensive move to try and keep new entrants out of this market.” Westfield is currently building the U.K.’s two largest malls. Its Westfield London project is scheduled to open in October and Westfield Stratford City on the grounds of London’s 2012 Olympic Games complex is targeted for a 2011 opening. Simon, based in Indianapolis, operates 323 U.S. properties and 51 in France, Italy and Poland but none in the U.K.”

Simon Property Group, the Indiana based retail REIT, has issued a mandatory disclosure after crossing the 3% ownership level of a British rival, Liberty International. While Simon already owns French, Italian and Polish properties, it is unusual for them to acquire a direct interest in a competing shopping center owner. Therefore, analysts speculate that the transaction is the precursor of a bid to acquire Liberty as a foothold in the English marketplace.

FT.com | Daniel Thomas | August 23, 2008

“Shares in Liberty fell sharply this month, when it revealed an unexpectedly high level of bad debt caused by its retail tenants’ going into administration. The move sparked similar takeover speculation about UK peers such as Hammerson, which also closed the day up 47p at 920p.”

Property Week | Mike Phillips | August 22, 2008

The main questions remain why now and why not a straight takeover bid?,’ JP Morgan property analyst Harm Meijer added. ‘We can think of two possible theories, although we must emphasise again that none of the companies mentioned have made comment. First, former chairman Mr. Gordon may not be willing to sell his 22% stake, but Simon gives a signal to Liberty that it is serious. Secondly, another company, for example Westfield, may have approached Liberty and Simon is acting as a white knight for now.’

Forest City’s first step in the planned 5.5 million SF redevelopment of this former US Naval complex is  a marketing pavilion situated to appeal to fans of the nearby Nationals Major League Baseball team. Total cost of this adaptive reuse project is expected to be $1.7 billion.

CPN | Barbra Murray | August 8, 2008

The Yards will ultimately feature 2,800 residential units for sale and for lease, 1.8 million square feet of office space, 300,000 square feet of retail space and a vast amount of green space. The project will involve the adaptive reuse of five historic industrial structures, one of which will become Foundry Lofts. In addition to Foundry Lofts, the first phase of The Yards will yield a retail center converted from another historic building, and a newly constructed office building.

The joint City-County board overseeing the Grand Avenue project put Related Cos. on notice that their patience has worn thin. Monday afternoon the board approved a penalty schedule which would impose a $250,000 fee per month if the project’s groundbreaking is delayed beyond February 15, 2009. Nelson Rising, the newly appointed CEO of Maguire Properties, presided over the City-County committee negotiating with Related. Clearly he is a sympathetic voice on the commission: “The credit markets make it impossible to obtain construction financing in the amount we defined” said Mr. Rising according to The Los Angeles Times.

“Should the project be delayed beyond February, the developer would pay $250,000 a month to the Los Angeles Grand Avenue Authority for a maximum of two years, as part of the deal approved today. If Grand Avenue has not started construction by February 2011, the authority has the right to renegotiate the deal.”

As of July 28 at 9PM PST, Real Estate Flux predicts a 60.3% chance that the project will go forward by February.  Check current market conditions here.

While retail developers and investors have fought through a barrage of worrisome market outlooks, San Francisco has provided a reason to believe. The City has earned a top spot in Marcus & Millichap’s mid year retail review.

California Real Estate Journal | Julie Nakashima | July 28, 2008

“San Francisco was the No. 1 market in Marcus & Millichap’s National Retail Index, leaping seven spaces to take over the top spot in the ranking, which takes into account employment growth, vacancy, construction, household formation and other factors. Two other Northern California markets made it into the top 10, including San Jose, which also rose by seven spaces to No. 3, and Oakland, which fell three positions to No. 7. Also in the top 10 were San Diego, unchanged at No. 6, and Los Angeles, up three spaces to No. 9. Orange County declined six positions to No. 13.”

CPN | Barbra Murray | July 23, 2008

The souring economy hasn’t altogether dampened development activity. In the Washington, D.C., suburb of Arlington, Va., news has emerged about three new office and mixed-use projects that will bring a total of 1.7 million square feet to an area just minutes from the District.

California Real Estate Journal | Kari Hamanaka | July 21, 2008

With the opening of the Manhattan Beach store, which sits on Rosecrans Avenue nearby a Trader Joe’s and a Bristol Farms, Tesco said it would continue with its expansion plans by hiring 750 employees over the next three months. “We’re demonstrating our commitment to be a great place to work, and we’re thrilled about our continued expansion in California, Arizona and Nevada despite tougher economic times,” said Tim Mason, Fresh & Easy chief executive officer, in a statement.