Posts Tagged ‘REIT’
REITs vs Open Ended Funds
There is a great article in the current edition of REIT Magazine, by Michele Chandler, celebrating the 25th anniversary of the creation of REITs in Canada. Ms. Chandler does a great job explaining why Canada has a REIT system in the first place, and why Canada’s REITs came into being in 1993.
In short, Canada’s commercial real estate market collapsed in 1993, and open-ended funds were flooded with investors redeeming shares. The funds quickly appealed to the government which allowed them to suspend redemption. This, of course, led to liquidity problems for investors. The solution was to turn those funds into close-end REITs which would then be listed on the Toronto Stock Exchange. Investors could sell their shares on the exchange to gain liquidity. Today, the exchange has 38 Canadian REITs with total capitalization of about C$57.7 Billion as of the end of 2017.
This article illustrates one of the subtle but important benefits of REITs as opposed to a private equity fund or an open-ended fund — liquidity without having to sell off the underlying assets in a down market.
Share this:
Sears on life support
I write mainly about real estate, and while the glass has been more than half full these past few years, the recent announcements from Sears are troubling, to say the least. For those not keeping up with such things, In their most recent annual report, Sears made a “going concern” announcement, which essentially said that there is a reasonable chance they will not survive as a going concern for another year.
This is a massive problem, and the real estate issued will take years to sort out. Sears has announced some steps to try to address this, including selling off real estate, selling key brands (Kenmore, Craftsman) and shutting badly performing stores. However, they’ve already been doing this for years. Craftsman is now owned by Black and Decker, they’ve been shutting stores for over a decade, and they formed Seritage REIT several years ago (in no small part owned by Warren Buffett) to monetize their real estate holdings.
As of the most recent reports, Sears runs about 1500 stores in the U.S., mostly under the mastheads “Sears” and “K-Mart”. They employ 178,000 people, and had revenue of $22 Billion in 2016. They’re bleeding cash, losing about $1.2 Billion in cash in the past 2 years. Their net equity now stands at negative $3.8 Billion, according to recent reports. At an average store size of about 100,000 square feet, they operate about 150 million square feet of retail space, which will be a real problem to deal with. (I’m writing this while sitting in my office in Key West. There are 5 big “anchor tenants” of shopping centers in Key West. Three are groceries, and the other two are owned by Sears.)
Dumping 150 million feet of retail floor space into the market is a pain any way you look at it. Currently, new retail construction in America is about half that. However, this “new retail construction” includes a lot of stuff that doesn’t look like an old Sears or K-Mart store. Indeed, repositioning big-box and anchor tenants can be a daunting challenge, and often the best use is demolition of the structure and repurposing of the vacant site. Losing a big anchor retailer can blight an entire shopping center and need an entire large neighborhood.
One might suggest that a leaner, meaner Sears could be in the offing. In someone’s dream world, Sears and K-Mart might retrench to half their current size — say 700 or 800 stores. This is still a big problem, but at least kicks some of the cans down the road. I’m a real estate guy, not a retail guy, but I think the problems of running a small chain of big, diversified retailers is pretty obvious. Distribution, financing, and brand management will all die on the vine. No, Sears and K-mart have bigger problems. Sears tries to sell to a slice of the market that doesn’t shop much anymore (your grandmother) and K-Mart tried to be Wal-Marts scruffy little brother. Neither of these retail strategies work very well.
We’ll see how this turns out, but the complexity of a Sears bankruptcy will keep real estate consultants busy for years to come.
From a small northwestern observatory... 