As the market for retail properties becomes more bifurcated, real estate investment trusts and other property owners are shifting their strategies to capitalize on changing consumer trends.
Here, we talk with RPAI’s Mike Hazinski and Matthew Beverly, who are responsible for acquisitions and dispositions across the portfolio, about the company’s repositioning strategy and how they’re executing it.
At your recent Investor Day, RPAI spent time talking about how the real estate market is bifurcating. Can you explain this concept and how you are positioning the portfolio?
Mike Hazinski: We have seen a gradual change in shopping patterns, as customers choose where and how to spend their time. The most successful retail properties meet one of two consumer needs: shopping convenience or shopping experience.
Highly successful convenience retail centers are typically characterized by higher density, stronger barriers to entry and superior access and exposure. These convenience destinations offer customers amenities such as groceries, quick-service restaurants and service-oriented retailers. These properties provide one-stop shop options and therefore have lower shopper dwell times.
At the other end of the spectrum, customers are choosing to spend a significant amount of time at centers that offer unique shopping experiences. These assets are typically located in areas with affluent demographics and strong daytime populations, and often provide environments where people live, work, shop and play. These experiential assets offer a high concentration of restaurants and wide array of retailers and entertainment options, translating into higher shopper dwell times.
However, the characteristics of successful convenience and experiential retail projects are not mutually exclusive. These asset types share attributes such as strong barriers to entry, compelling household demographics, and superior access and exposure. Moreover, the most successful convenience and experiential retail centers are the dominant sites in their respective sub-markets. It’s these types of assets that we are focused on acquiring in our target markets.
How can you create long-term value by shifting the types of properties you own?
Mike Hazinski: Owning quality underlying real estate, whether convenience or experience-oriented retail centers, gives us significantly better rental pricing power. This is due to lack of supply of dominant retail sites coupled with robust tenant demand. More specifically, we are confident that convenience and experiential retail centers, when combined with a dominant leasing and operating platform, will translate to higher rents and retention rates, less downtime, more tenant backfill options and fewer concessions.
Additionally, we believe operating shopping centers is a local business and building scale in these target markets creates operating leverage by increasing our visibility within our markets. This scale is a significant advantage when interacting with all market participants, including tenants, brokers, vendors and municipalities. Further, it allows RPAI’s leasing and operating team to focus exclusively on these markets to execute redevelopment, densification and repositioning opportunities in order to meet changing shopping patterns and drive long-term value.
Can you discuss your acquisition and disposition strategy and the goals behind it?
Matt Beverly: Shortly after RPAI went public in 2012, we announced a plan to narrow our focus from more than 80 markets. To date, we have identified 10 target markets that include Seattle, Phoenix, Houston, Austin, Dallas, San Antonio, Atlanta, Chicago, Washington, D.C./Baltimore and New York (Metro). As of our Investor Day in September, we had exited eight states and 26 markets, and we are redeploying that capital into the markets we’ve identified, recently seeing a lot of traction in Washington, D.C./Baltimore and Seattle.
Our goal is to continue to find and harvest attractive acquisition opportunities. Since our first Investor Day in 2013, we have redeployed $1.3 billion into our target markets and have improved our geographic concentration by 3.3 million square feet. Additionally, our portfolio refinement continues to show its strength with current operational performance, as well as increasing redevelopment opportunities.
We also have a strong disposition pool, generating a same store NOI of 3.0% in 2015, and a leased rate of 95.1%, with $580 per square foot in grocery sales. Our non-target market (disposition) portfolio is high quality and is simply non-core to us for geographic reasons. Our disposition program remains balanced as we seek to exit markets opportunistically while reducing risk within our portfolio. Therefore, we believe we will continue to be a net seller in 2017 and 2018 as we continue to take advantage of these market opportunities.
You’re in the midst of executing a five-year plan. Can you tell us where you are and what’s next?
Matt Beverly: In 2017 and 2018, we expect to sell approximately $1.5 billion in non-target assets and redeploy as much as $850 million into high-quality, multi-tenant retail assets in our target markets. By the end of 2018, RPAI will have completed almost $5 billion in transactions since 2013 and will then have approximately 90% of our annual base rent in our 10 target markets, essentially completing our portfolio realignment.
Matthew Beverly joined Retail Properties of America, Inc., in 2014 and currently serves as Senior Vice President, Director of Investments. In this role, Mr. Beverly is responsible for both acquisitions and dispositions in the Eastern Division. Mr. Beverly joins RPAI from General Growth Properties, Inc., (NYSE:GGP) where he served as the Vice President, Investments since 2008.
Mike Hazinski joined Retail Properties of America, Inc., in 2007 and currently serves as Vice President, Director of Investments. In this role, Mr. Hazinski is responsible for both acquisitions and dispositions in the Western Division. Since joining RPAI, Mr. Hazinski has executed more than $2.7 billion in transactions encompassing acquisitions, dispositions, debt financing and joint venture equity. Prior to his current position, Mr. Hazinski was responsible for the asset management of RPAI’s institutional joint venture portfolio.