Thursday, August 20, 2020

Meeting Change With Intuition

 

How do you make real estate decisions? Do you do it based on your feel for the market or are you data driven? Most investors I’ve spoken with over the years use a combination of the two. Some are more guided by “feel” and let the data confirm (or not) what they already believe. Others use data to drive them to markets and then use their “feel” to select the best property to meet their needs.

We use demographics to assess demand, we use market studies to assess supply (I hope you all rely on KeyPoint Partners’ GRIIDTM data) and we use leasing comps to gauge revenue potential. But what happens when historical data is no longer applicable to current markets?  Such is the case today, and it began in March as the country started shutting down in response to the Covid pandemic. Suddenly, the leasing comps we relied on from December no longer seemed appropriate for the deals we were working on in April. That STNL sale that closed in January – was it still a good comp for the property we listed in May? So what’s a real estate investor to do when historically reliable indicators no longer offer the reliability of the past? To find out, we spoke with several members of our local real estate community to gather their thoughts.

Aubrey Cannuscio, Partner/Chief Investment Officer at Linear Retail Properties, notes that “Linear has always made good use of market data in both its acquisition and leasing functions. Today, there is limited, critical data available to us and other market participants. There are few lease and sale comps which were negotiated and closed post-Pandemic and historical data is not as helpful as it used to be when analyzing investment opportunities.  Where are rents? Which tenants have paid their rent? Which tenants have acceptable credit? Our priority is to monitor the markets and collect current data (where we can) to support our valuation assumptions. Ultimately, investment decisions are based on an investor’s experience, access to data and instinct. The missing link today is post-pandemic data which is in limited supply.”

Jonathan Aron, KeyPoints Partners’ VP of Investment Sales, advises his clients, both buyers and sellers, to take a long-term view. “The value of a property is directly related to the long- term prospects for future income. While current metrics may have temporarily changed due to the pandemic, things will eventually return to a normal environment…or a reasonable facsimile thereof. Viewed in this context, historical metrics are still useful so long as their use is tempered by the current situation.”

Finally, for Michael Crawford, Senior Vice President at Rockland Trust, experience and feel for the market now have an outsized importance in underwriting as noted in his statement below: 

“Not unlike commercial real estate investors and potential purchasers, real estate lenders need to use data, such as rent rolls, cash flows, appraisals, etc... However, much of that data references a market, maybe from only a few months back, which might be far different than our markets today. No one can predict the future, but in the exercise of evaluating good value/bad value or acceptable risk in a loan, investors and lenders need to try to do just that. Most banks will tell you their lending windows are still wide open, but realistically, it depends upon the sponsor and the asset, which is a blend of product type, location, tenant mix and strength and lease maturities.”

Certain “facts” that we have been comforted by in the past have now changed. And no one knows if/when they will return to past “normalcy”. Lenders have always relied upon a mix of experience, analysis, and intuition to get comfortable with the risk profile of a loan. Today, however, a lender’s experience has become critically important as we have less relevant data to rely upon.” I asked Mike if he was aware of any lending institutions in the area giving their lenders new underwriting criteria and he was not aware of any doing so.

All in all, for those of us who consider ourselves to be data driven, during this time of rapid change, we are finding ourselves to be more reliant upon intuition and feel than we might normally be. 

Mark Becker, Partner/CFO,

MBecker@KeyPointPartners.com.


KEYPOINT PARTNERS COMPANY NEWS

 

NATIONAL NEWS

 The Commerce Department said retail sales rose 7.5% in June. Consumers stepped up spending at furniture, clothing, electronics and appliance, hobby, musical instrument, and book stores. Sales at restaurants and bars rose 20.0%. Online sales fell 2.4%. In July, sales. rose 1.2%, the Commerce Dept. reported, with sales up 22.9% in electronics and appliance stores. See sales reports BELOW..

ACCELERATING NEWS

 Capriotti’s Sandwich Shop plans to expand to 500 locations by 2025 through franchising. Capriotti’s has 100 US locations…Pet Supplies Plus will open 20 new stores this coming year, including its 500th location…Bruster’s Real Ice Cream opened 3 new stores and has 5 stores under construction. There are 200 Bruster’s in 21 states…Aurify Brands plans to reopen more than 40 Le Pain Quotidien units after purchasing the brand out of bankruptcy. The brand has 98 US units...Primark will open 5 new stores this year worldwide, including 2 US locations. Primark has 375 stores... Kum & Go opened its 1st new concept urban convenience store in Des Moines. The retailer will expand the concept to Denver, with 5 locations in other cities to follow. Kum & Go has 400 stores in 11 states…Big Blue Swim School is opening 3 swim schools in Louisville, KY. The company plans to open 1 location per year over the next 3 years. Big Blue has 5 locations in Chicago, 1 in Atlanta, and 80 units in development…Walgreens Boots Alliance has entered into a partnership with VillageMD to open 500 to 700 primary care clinics in more than 30 US markets during the next 5 years, with a plan to build hundreds after that…Meijer has opened 5 new locations in 4 states. Meijer operates 253 supercenters and grocery stores in 6 states... Whataburger is opening restaurants in Tennessee and Kansas City. There are 15 more openings this year, and 25 next year...RSG Group GmbH was selected as the winning bidder in a court-approved auction to acquire Gold’s Gym. With this acquisition the RSG Group will have over 900 locations on 6 continents. Gold’s Gym has just under 700 gyms…Tropical Smoothie CafĂ© has opened 43 new locations in 2020, with 35 opening since March 1. The company has signed 103 new franchise agreements this year in 25 states...Rue 21 will open 3 new brick-and-mortar stores this month in South Carolina, Tennessee, and Texas, bringing the chain’s store count to 673 in 45 states... Amazon is planning to open 3 grocery stores under its new, still-unnamed banner in the Philadelphia metro area by the end of the year.  Amazon is also planning conventional grocery stores in North Hollywood, CA, the Chicago suburbs of Oak Lawn, Schaumburg and Naperville, Seattle and Washington, DC, and plans to open Amazon Go grocery stores in Redmond, WN and Washington DC…Lidl opened a store in North Brunswick, its 10th store in New Jersey. Lidl plans to open 25 new stores by the end of next year, and opened its 100th US store in May…Fashion retailer Aritzia will be taking over the space formerly occupied by Dean and Deluca in the NYC’s Soho district. Aritzia has more than 95 locations...Aldi will open 70 new stores in the 2nd half of 2020, after recently surpassing 2,000 locations in 36 states. With the addition of 70 more stores this year, Aldi moves closer to a goal set in 2017 of 2,500 US stores by the end of 2022...Ulta Beauty expects to open 30 new stores in fiscal 2020. The retailer had paused its new store growth in the first quarter, but openings are expected to resume in August.  In addition, Ulta plans to permanently close 19 stores in the second and third quarter of 2020. As of May, the company had 1,264 stores across 50 states.. BJ’s Wholesale Club is opening 2 new locations in New York, its 220th and 221st locations. Both are due to open in early 2021.... Brooks Brothers will be sold to Authentic Brands Group and SPARC Group, a partnership with Simon Property Group, for $325 million. The company has more than 200 stores in the US and Canada, and 500 worldwide in 45 countries. Authentic Brands and Simon Property have teamed up to buy other well-known brands, including Frye, Juicy Couture, Aeropostale, and most recently Lucky Brand Dungarees, which filed for bankruptcy at the beginning of July.  As of May, Lucky Brand operated 112 stores and 98 outlet locations in North America... Marathon Petroleum has agreed to sell its Speedway chain to 7-Eleven. The transaction is expected to close in the first quarter of 2021 subject to closing conditions. Marathon Petroleum Corp. has 3,900 US stores.  7-Eleven Inc. has more than 9,300 US stores. and 71,100th worldwide...Sour Patch Kids is opening of its first-ever brick-and-mortar location, in Manhattan. The store will include a sweets bar, create-your-own candy mix station, and limited-edition merchandise...Sola Salon Studios signed agreements with 8 franchise groups that will bring 22 new locations to key US markets over the next several years…The Melting Pot Restaurants will grow by more than 30 franchise locations through the end of 2024…2 Texas Roadhouses and 1 Bubba’s 33 were opened during the 2nd quarter. Two more Roadhouses opened in July, with 4 more slated to open in the third quarter; another 8 will open by the end of the year...Dick’s Sporting Goods is opening 11 new stores in August: 4 namesake locations, 1 combination Dick’s/Golf Galaxy, 5 Dick’s Sporting Goods Warehouse Sale clearance outlets and 1 Overtime by Dick’s Sporting Goods. Following the openings, Dick’s will have 729 namesake stores, 96 Golf Galaxy stores, 10 Warehouse Sale stores, and 4 Overtime stores...FAT Brands purchased Johnny Rockets from an affiliate of private-equity firm Sun Capital Partners, Inc. for $25 million, its first acquisition since Elevation Burger in June 2019. Johnny Rockets currently has 325 locations, 9 of which are corporate units... Trader Joe’s is opening 4 new stores…Whole Foods opened new stores New York City, Colorado, Maryland, Washington, DC, and Austin, Texas....Retail Ecommerce Ventures acquired Modell’s Sporting Goods at a bankruptcy auction for $3.64 million.  The sale makes Modell’s a majority-owned subsidiary of REV. Among REV’s most recent acquisitions are Pier 1 Imports, Linens ‘n Things, Franklin Mint, and Dressbarn... Payless ShoeSource, which filed for bankruptcy protection last year and went on to close approximately 2,500 stores, unveiled its strategy to turn around the business, launch a new e-commerce site as well as a new retail prototype, and open 30 to 45 stores by the end of next year.

DECELERATING NEWS

 J.C. Penney plans to close 2 NYC stores: its location at Manhattan Mall in Herald Square and Kings Plaza in Brooklyn, with liquidation sales likely to begin next week…Bed Bath & Beyond plans to close about 200 stores during the next 2 years. The retailer operates a total of 1,478 stores. Authentic Brands Group LLC and Simon Property Group Inc. won a competition to supply financing to the retailer, offering an $80 million debtor-in-possession loan…Sur La Table, which filed for bankruptcy this month and said it would close over 50 of its 121 stores, has been sold for nearly $89 million to a joint venture between e-commerce investment firm CSC Generation and Marquee Brands LLC. According to court documents, the joint venture plans to keep at least 50 stores open....RTW Retailwinds, parent of New York & Company, has filed for Chapter 11 bankruptcy protection with plans to close many, if not all, of its 378 stores…The U.S. arm of Japanese retailer Muji has filed for Chapter 11. Muji is looking to close unprofitable stores and renegotiate leases in the Chapter 11 process.  The retailer has 18 US stores...The Paper Store filed for Chapter 11 protection in US Bankruptcy Court for Massachusetts. The retailer, hoping to secure a sale by late August, is not planning to liquidate. The Paper Store has 86 stores... PVH Corp. plans to shut down its 162-outlet-store Heritage Brands Retail business. Brands include Van Heusen, Izod, Arrow, Warner’s, Olga, Geoffrey Beene, Calvin Klein and Tommy Hilfiger. The stores are expected to stay open through mid-2021... Tailored Brands has filed for Chapter 11 bankruptcy protection. The retailer currently operates more than 1,400 stores under the Men’s Wearhouse, Jos. A. Bank, K&G, and Moores names...Ascena Retail Group, parent company of Ann Taylor, Loft, Lane Bryant, Justice, Cacique, Catherines, and Lou & Grey, filed for Chapter 11 bankruptcy protection. Ascena plans to permanently close a “significant” number of stores during its restructuring, and permanently close all stores across all brands in Canada, Puerto Rico and Mexico. It is shutting down Catherines entirely and plans to sell those intellectual property assets to City Chic Collective Limited. Last year Ascena wound down its Dressbarn business, shuttering more than 600 stores. Ascena currently has 2,800 stores...Neiman Marcus plans to close its store at Hudson Yards, NYC, the new retail, residential, and office complex, according to a court filing. The store opened less than a year ago. The 3-level, 180,000 s/f store served as the anchor for Hudson Yards’ retail complex... Lord & Taylor has filed for Chapter 11 bankruptcy protection and will close 19 US stores…Pret a Manger is pulling out of the Boston and Chicago markets and has closed 17 locations…California Pizza Kitchen has filed Chapter 11 protection…Dunkin’ will close 800 Dunkin’ stores by the end of 2020…Bootmaker Frye’s will shutter its entire fleet of 16 stores... Steak ‘n Shake is auctioning off 15 properties. Steak ‘n Shake’s total unit count has declined by 69 restaurants over the first half of 2020. 56 of those are corporate locations...Stein Mart filed for Chapter 11 bankruptcy protection and plans to permanently close most, if not all, of its 281 stores... Rent the Runway does not plan to reopen any of its 5 physical locations, in New York, Chicago, Boston, Washington, D.C., and San Francisco... Stage Stores has received court approval for its bankruptcy plan, which calls for the liquidation of all its stores and the wind down of the company…NPC International plans to close up to 300 Pizza Hut locations, after an agreement with the franchisor that will pave the way for a sale of the company’s remaining pizza operations.

NEW ENGLAND NEWS

 The Sears at the Square One Mall on Route 1 in Saugus will close, to be replaced by a massive Apex Entertainment Complex. Apex will move into the first floor of Sears... Kelly’s Roast Beef, a Boston-area icon, is looking to develop up to 20 franchise locations throughout South Florida...Hair Cuttery salons have closed throughout New England. Included are locations in Framingham and Worcester, MA, 13 salons in Connecticut, 2 in New Hampshire and 2 in Rhode Island. About a dozen other Hair Cuttery locations nationwide have also closed, and the remaining 750 locations were sold to HC Salon Holdings, Inc. in June.... Garbanzo Mediterranean Fresh will open later this year at Arsenal Yards in Watertown, MA. The company plans 3 more locations in the area over the next 5 years.

MALL NEWS

 PREIT’s most recently completed new project, Fashion District in Center City Philadelphia, was the last of its malls to re-open during the COVID-19 crisis. Now all 19 of its properties covering 22 million s/f are back in business.

RETAIL SALES REPORT

 NOTE: This month, because of store closings related to the pandemic, many chains have reported net sales, not comp store sales - or postponed reporting.




















Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

COMMERCE DEPARTMENT MONTHLY SALES

 The Commerce Department said June retail sales rose 7.5% last month after jumping 18.2% in May, the biggest gain since the government started tracking the sales in 1992. July retail sales rose 1.2 %.

Source: U.S. Department of Commerce - commerce.gov

TREASURY YIELDS

Treasury Yield Sources:  federalreserve.gov; ustreas.gov


CONSUMER CONFIDENCE INDEX

  The Conference Board Consumer Confidence Index® increased in June, after virtually no change in May. The Index now stands at 98.1 (1985=100), up from 85.9 in May.  The Index® decreased in July, and now stands at 92.6 (1985=100.

Source: The Conference Board - www.conference-board.org

PURCHASING MANAGERS INDEX

 Manufacturing grew in June, as the PMI® registered 52.6 percent, higher than the May reading of 43.1 percent. Manufacturing grew in July, as the PMI® registered 54.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws