Buffett Invests in Net-lease REIT

Warren Buffett’s Berkshire Hathaway Inc. has invested $377 million for a 9.8 percent stake in Store Capital Corp., a net-lease REIT that focuses on service tenants such as day care centers, health clubs, restaurants and supermarkets. Less than a twenty percent of the REIT’s portfolio consists of traditional retail that competes with e-commerce, according to Bloomberg. Store Capital issued 18.6 million shares at $20.25/share to Berkshire Hathaway in a private placement. The REIT, which trades on the New York Stock Exchange, closed at $23.13/share today.

USHG Partners with Capitol Crossing

New York-based Union Square Hospitality Group (USHG) has partnered with Property Group Partners, the developer of the new five-building, 2.2 million square feet, mixed-use Capitol Crossing to develop a dining concept as an anchor tenant, according to PR Newswire. The first two buildings of Capitol Crossing (200 Mass. NW and 250 Mass. NW) are slated to deliver in 2018 and 2019 respectively each with about 32K sf of retail space.

Founded by Danny Meyer, USHG’s portfolio includes Union Square Cafe, Gramercy Tavern, Blue Smoke and Jazz Standard, among others. Shake Shack, another Meyer concept operated through a separate public company, has ten locations in the DC Metro area.

Capitol Crossing – Image: 3rd Street Tunnel Project

Wilshire Grand Center

At 1,100 feet, the Wilshire Grand Center is the tallest building west of the Mississippi River and the 9th tallest building in the United States, according to The Skyscraper Center. Owned by Seoul-based Hanjin Group (which is also the holding company for Korean Air), Wilshire Grand Center features two LED displays, each 42 by 60 feet and consisting of 250 million pixels. The building also has 2.5 miles of LEDs running up and down its spine. It is the anchor for an intended sign district along the Figueroa Corridor that will feature LED displays, some with advertising, according to the Los Angeles Times.

Wilshire Grand Center opened this week and is located on Wilshire Boulevard & South Figueroa Street in downtown Los Angeles. It has 67,000sf of retail space, 677,000sf of Class A office and 900 hotel rooms operated by InterContinental.

Wilshire Grand Center – Photo: Welding & Gases Today Online

Restaurant Industry Update – June 2017

Restaurants make up more than half of food spending today compared to about 25 percent in the 1950s, according to The Atlantic. Total locations in the fast-casual sector (chains such as Chipotle and Sweetgreen) grew by nine percent last year while same-store sales have been falling by about two percent annually. The “casual dining” sector (full-service restaurants with a per person price point between $15 and $25 such as Applebees, Chili’s and Maggiano’s) has seen both declining sales and declining traffic in part because of the increasing availability of made-to-order food options from grocers such as Whole Foods Market and Wegmans.

Although lunch and dinner traffic has been declining across the restaurant industry, breakfast sales are up eight percent in the last five years. Online restaurant sales (i.e. GrubHub), which currently account for about two percent of the restaurant market are projected to grow fifteen times faster than the rest of the restaurant industry through the end of this decade, according the report. Overall, the gap in spending between USDA designations of “food-away-from-home” (FAFH) (i.e. restaurants) and “food-at-home” (FAH) (i.e. grocery stores) has declined significantly since the 1950s.

FAFH Spending (brown) vs. FAH Spending (purple) – Chart: USDA via The Atlantic

Delaware Statutory Trust

A Delaware statutory trust (DST) is a legally recognized trust created under the laws of Delaware for business purposes and can be offered as replacement property for accredited investors seeking to defer capital gains taxes through a 1031 exchange. DSTs are separate legal entities, offering their trustee(s) limited liability.

Accredited investors are defined as individuals who earn an annual income of at least $200,000 and/or have a net worth in excess of $1 million. Entities are accredited investors if the entity’s assets are in excess of $5 million and/or each entity member is an accredited investor as an individual.

The following seven restrictions must be met in order for a DST to quality for a 1031 exchange:

  1. The trustee cannot accept contributions from either current or new investors once the offering is closed;
  2. The trustee cannot renegotiate the terms of the existing loans, or borrow any new funds from a third party (unless a loan default occurs as a result of a tenant bankruptcy or insolvency);
  3. The trustee cannot use the proceeds from the sale of its real estate to acquire new real estate;
  4. The trustee’s expenditures with respect to the property are limited to (a) normal repair and maintenance, (b) minor non-structural improvements and (c) those repairs and improvements required by law;
  5. Any reserves or cash held between distribution dates can only be invested in short-term government debt;
  6. All cash must be distributed on a current basis (other than necessary reserves);
  7. The trustee cannot enter into new leases or renegotiate the current leases unless it is necessitated by a tenant bankruptcy or insolvency and then only according to the terms of the master lease between the investors and the trustee.

The Cost of a Nordstrom Buyout

Nordstrom Inc.’s founding family is considering taking the luxury department store chain private. The Nordstrom family currently owns about 30 percent of the company’s shares and has a combined net worth of about $3.6 billion, according to the Toronto Star (citing Bloomberg Billionaires Index). They would need to raise an additional $5.65 billion to $8.19 billion to acquire the remainder of the company at $70/share which is an estimated buyout price that takes into account recent retail buyout multiples, according to the report (referencing estimates by Gordon Haskett Research Advisors). Nordstrom, Inc. currently trades on the New York Stock Exchange for about $48/share. There are 123 full-line stores and 215 Nordstrom Rack stores in the U.S., Puerto Rico and Canada.

Technology Erodes Cashier Jobs

According to the Bureau of Labor Statistics, six percent of American workers (eight million people) are retail salespeople and cashiers. Between 2014 and 2024, cashier jobs are expected to grow by only two percent, slower than the seven percent average for all other occupations. BLS cites advances in technology (i.e. self-service checkout stands) and increases in online sales as contributing factors.

Cost-Burdened Households

One-third of U.S. households paid more than 30 percent of their incomes for housing in 2015, according to Harvard University. Even though almost two-thirds of U.S. households own their homes, the number of cost-burdened renters outnumbers cost-burdened owners by three million. In both Las Vegas and San Jose, the incidence of cost-burdened households (households paying over 30 percent of their income for housing, including utilities) was 94 percent in 2015, according to the study.

Buying Power versus Retail Development

According to Bloomberg (citing CoStar research), between 2000 and 2017, buying power (calculated as a function of median income and population) outpaced retail development in only three of the 16 metropolitan areas noted in the chart below. In San Francisco, buying power per square foot of retail increased by 21 percent whereas in Cleveland, it declined by 26 percent.

Chart: Bloomberg – Source: CoStar Group