What the CFO Needs to Know: Real Estate
▲ Understand the assets covered by your leases: Taken together, leases are more than just one of a chain’s largest costs — they are the largest fixed expense, and they are fixed for the long term. As a rule, individual leases average seven to 10 years.
“Understanding that is critical,” said Michael P. Glimcher, chairman and CEO, Glimcher Realty Trust, Columbus, Ohio. “For a cost so large, you should have a strong knowledge about the assets covered by your leases.”
▲ See locations for yourself: Glimcher noted that while CFOs should staff real estate departments and rely on real estate experts when making decisions, they should get out from time to time and check out sites.
“Real estate happens in the field,” he said. “Go out and walk the property, drive the market and talk to experts. The savviest senior executives that I’ve met learn their real estate and evaluate pluses and minuses from a vantage point in the field.”
▲ Play offense and defense: A chain can manage a retail real estate portfolio proactively or defensively.
“Proactive management looks for growth opportunities,” said Mark Richardson, principal, Huntley, Mullaney, Spargo & Sullivan, a San Francisco-based real estate and financial restructuring firm. “Perhaps, for example, a certain trade area is attracting more of your customers and can support another store. Defensive management protects assets that are doing well and maximizes the time they can contribute to the brand,” he explained.
“Defensive management also trims poor locations out of a portfolio or looks for problems that have cropped up. Changes in a trade area, for example, could mean you need a smaller
store,” added Richardson, who recommends periodic portfolio reviews that look for proactive and defensive opportunities.
▲ Close problem units: A portfolio review with the real estate department or a consultant is likely to turn up good locations that are out-of-lease options coming up on expiration.
“Currently, good available locations can be hard to find, so those leases should probably renegotiate those leases now,” Richardson said. “Where rent costs are more than 33% of EBITDA before rent in any location, the bottom-line profit prospects for that store will be low or negative. Close them. Problem locations drag down the whole portfolio.”
▲ Utilize construction contracts: Stores may be scheduled for renovations or expansions, and that entails construction contract documents. You can develop your own with legal counsel, or purchase industry standard documents from the American Institute of Architects for a reasonable fee.
“The architecture, engineering and construction associations jointly developed these [industry-standard] documents, and industry players are familiar with them,” said Robert D. Benda, CEO, Westwood Contractors, Fort Worth, Texas, a national builder specializing in retail. “You and your attorneys can also tailor the documents for individual jobs.”
Industry-standard contract documents form an integrated suite. The prime contract, along with the subcontractor and vendor contracts (all of the many contract documents a project may require), employ the same concepts and language in order to avoid misunderstandings and conflicts of responsibility, Benda explained.
The industry-standard documents “also reflect a national legal perspective, making them less likely to conflict with local jurisdictional statutes,” he added.
Class A malls are hot, with quality space hard to find and rents rising aggressively for trophy centers, according to a report by Cassidy Turley, while older Class B centers are under pressure to upgrade lest they fall into the C sector, where vacancy is at the 10% level. For most retail real estate companies, redevelopment, as opposed to ground-up development, is the name of the game — with the exception of the outlet center sector and in cities. In general, landlords are working hard to create tenant mixes that give shoppers more reasons to visit, with a big emphasis on restaurants and other food purveyors, entertainment and beauty and wellness concepts.
Slate Retail REIT buys North Carolina shopping center
Toronto – Slate Retail REIT has entered into a binding agreement to purchase North Summit Square, a 99% occupied, 224,530-sq.-ft. grocery-anchored shopping center in Winston-Salem, North Carolina, for $15.8 million. The property is anchored by Sam’s Club.
"We are very excited to announce our first acquisition since listing on the TSX," said Blair Welch, CEO of Slate Retail. "We see several further opportunities to make accretive acquisitions of grocery-anchored centers in attractive markets."
Rite Aid brings wellness to Beverly Hills
Camp Hill, Pa. – Rite Aid is bringing some glitz, as well as health consciousness, to its newly reopened Beverly Hills store. On June 23, Rite Aid re-opened its Beverly Hills store with a major remodel that features its new wellness store design, as well as dining options.
"Since first introducing our wellness store design in 2011, we’ve worked tirelessly to ensure our stores provide the products and clinical pharmacy services to deliver on our mission of helping our customers achieve their individual wellness goals," said Ken Martindale, president and CEO of Rite Aid Corp. "Our North Canon Drive store is the latest example our ever-evolving Wellness Store format, featuring our most successful merchandising concepts, as well as new innovations, resulting in a one-of-a-kind shopping experience to the Beverly Hills community."
The scope of the Beverly Hills project included a total remodel and enlargement of the pharmacy; a reconfigured check-out area; the redesign of several key departments, including beauty and over-the-counter medicines and first aid; and the addition of a Fresh Day Café and patio area, where customers can enjoy Coffee Bean & Tea Leaf beverages, fresh baked goods, sandwiches and Rite Aid’s Thrifty ice cream.
The expanded beauty department now offers several new prestige cosmetic and skin care lines. Also new to the store is a Rite Aid Beauty Advisor who is specially trained to assist shoppers with all beauty brands Rite Aid carries through demonstrations and education.
While developing the design, significant consideration was given to the pharmacy department, the core of the company’s business. Upon entering the store, there is a direct path to the pharmacy, which has been cleared of merchandise and has an eye-catching design. Additionally, there is a private consultation room adjacent to the pharmacy, where Rite Aid pharmacists can have conversations with patients, administer immunizations and offer other clinical pharmacy services. Nearby, the Wellness Ambassador station; Wellness Ambassadors work closely with Rite Aid pharmacists to provide customers with access to information about over-the-counter medications, vitamins and supplements and Rite Aid programs and services.
"The Beverly Hills store is a great example of how we are aggressively evolving the Wellness store format to identify concepts that perform and can be broadly applied to future remodels and test new concepts, like our Fresh Day Café," Martindale said. "Going forward, we will continue to push the envelope in leveraging our Wellness stores to launch and expand innovative merchandising concepts, with the ultimate goal of delivering a more personal and engaging customer experience."
First introduced in 2011, Rite Aid’s wellness store format provides products, resources and information to help its customers and their families live healthier lives. To date, Rite Aid has continuously modified and enhanced the design of more than 1,300 stores nationwide. The company anticipates remodeling another 450 stores to feature its Wellness store format by the end of fiscal 2015.