Like the Cerberus-led consortium, investors in grocery store mergers are having to switch up their game plans, both as to how they turn around the businesses and how they handle the real estate, experts say.
“The big (grocers) will continue to expand and there will be some LBOs, but the focus will be on operations,” said Jeff Edison, chairman and CEO of two Phillips Edison REITs, Cincinnati. ”There will be less new development and more investment in the existing stores.”
And, selling stores right away could cause the newly combined company's balance sheet to take a hit, causing private equity investors to suffer. That is why the Cerberus-led group isn't in a hurry like most of the same players were when they originally bought Albertsons in 2006.
Rather, the group will wait until the combined Safeway-Albertsons business is humming along. At that point, the real estate will sell for a higher price, especially since many of the stores are on the West Coast, according to people close to the transaction.
While the investment strategy might be in flux, institutional investors still want to invest in grocery-anchored shopping centers, money managers say.
“There is still solid interest in grocery-anchored centers in the U.S.,” said Matt Khourie, CEO of Los Angeles-based real estate money manager CBRE Global Investors. “It was an attractive product type during most of the downturn, there hasn't been a tremendous amount of square footage added, and most of the good properties are held by retail REITs. When grocery-anchored centers come to market, there is a lot of interest because there is significant demand and not a lot of supply.”
Even so, investors have to be careful, given the consolidation, Mr. Khourie said.
“When Safeway is bought by the owner of Albertsons, the risk becomes higher that some of the existing stores will become shuttered, since they cannibalize the other stores held by the parent company,” he said.
“Prudent shopping center investors also have to be very thoughtful and take care that the center they are buying is not near a new Wal-Mart or Target that could be competing for the grocery dollar and impacting the sales per square foot,” he said.
What's more, consolidation in the grocery business is increasing the risk in these deals for investors because there are fewer grocers that can anchor a shopping center, Mr. Edison said.
Institutional investors, appreciating the risk inherent in what was once considered the ultra-safe investment in grocery-anchored shopping centers, are once again investing in power centers, said David Oakes, president of DDR Corp., a retail REIT.
Power centers, which hadn't fared as well as grocery-anchored shopping centers during the downturn, are open-air shopping centers with multiple national anchors including discount department stores and warehouse clubs, according to DDR, a big power center investor.
“After several years of institutions having a bias against power centers, we are seeing more and more institutional investment in the power center world,” Mr. Oakes said.
DDR has partnered with Blackstone Group's real estate funds on power centers and, last year, DDR bought out Blackstone Real Estate Partners VII's joint venture interest in 30 power centers for $1.46 billion.
Mr. Oakes said DDR and Blackstone continue to buy power centers and other properties together.
Still, major institutional investors are not avoiding investment in grocery-anchored shopping centers; they're just becoming more selective, he said.
“The risk profile of a retail center with a 50,000-square-foot grocer and 50 small shops has been meaningfully underestimated,” Mr. Oakes said.
Mergers are important for grocers to obtain economies of scale and to run the combined companies more efficiently because revenue and margins are under pressure, he said.
“It gives them (grocers) a chance to survive for a bit to figure it out,” Mr. Oakes said.
“Eventually, traditional grocers will be closing stores because their market share is shifting elsewhere,” Mr. Oakes said. “The last-ditch effort from retailers is to spin off real estate. When grocers start pulling capital from real estate it is a signal that operations are down.”