Friday, 11 January 2013

Seeing value in the real estate

Judging by who joined with Cerberus Capital Management to fund the purchase of 877 stores from Supervalu along with buying up to 30 percent of its stock, this won’t be a corporate finance deal, but a real estate deal.

Or maybe it’s part two of a real estate deal that has so far generated outstanding returns.

Cerberus is a private equity fund manager, but the main business of three of its partners in Albertson’s LLC is real estate. These are firms Kimco Realty Corp., Chicago's Klaff Realty LP, and Philadelphia's Lubert-Adler Partners.

It’s the group that paid about $1.1 billion for the 661 stores of Albertson’s Inc. that no one else seemed to want in 2006, part of the same set of transactions that brought more than 1,100 stores to Supervalu.

Kimco is a publicly held real estate investment trust that owns interests in more than 135 million square feet of neighborhood and community shopping centers, a mostly unspectacular line of business.

And it has collected $245 million in distributions so far from its $51 million investment in the 2006 deal.

REITs don’t usually do that well on their deals.

Kimco told its investors’ Thursday that it's “excited about adding to our successful investment in Albertson’s.”

To real estate people, dying retailers that have some good underlying real estate are opportunities.

Investors call it “unlocking the value,” as the same site can be worth a lot more if you could only clear away the tired and failing grocery store that occupies it.

Once in control of a retailer, you can boot yourself and sublet or sell a given site for a more profitable use. Other avenues to wring out cash include refinancing the stores that sit on owned sites and renegotiating terms on leased sites.

That’s what happened after the 2006 deal for the 661 Albertson’s stores. The investors, through a company known as Albertson's LLC, closed some stores, sold stores to other operators and worked to improve operations and refinance those they kept. Some sites even became locations for retailers like Kohl’s.

Today Albertson’s LLC owns 192 grocery stores.

About 540 of the 877 stores in the new deal are on owned or ground-leased locations. According to a report on Kimco Realty by Stifel Nicolaus analyst Nathan Isbee, some of these sites will be sold, as retailer demand is strongest in urban or dense suburban locations where there are barriers to new shopping centers being built close by.

Isbee said that the investor group will also look to improve the performance of the acquired stores.

In 2006 Cerberus did recruit a good operator to run stores that it kept, CEO Bob Miller, a longtime retail executive. Miller will continue to serve in that role and take over leadership of the store chains that are to be acquired from Supervalu, and will chair’s Supervalu’s board.

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