3 Deals Around $1 Billion

Realty Income Buys In to Bellagio

Realty Income and Blackstone Real Estate Investment Trust have agreed to a joint venture that will own 95% of the Bellagio Las Vegas. MGM Resorts International will retain a 5% interest. Upon the expected closure of the deal in the fourth quarter of 2023, Realty Income will put in $950 million. Breaking that down, $300 million of common equity will acquire a 21.9% indirect interest in the property from BREIT, while BREIT will retain a 73.1% indirect interest. Another $650 million will get Realty Income a yield-bearing preferred equity interest in the joint venture.

Realty Income specializes in freestanding net lease properties. The 77-acre Bellagio has 26 years remaining on its triple-net lease, which includes 2% rent escalations for the next six years, rent escalations capped at 3% for years seven through 16 and rent escalations capped at 4% through the rest of the term. The property also has $3 billion of debt.

Based on contractual rent, retail makes up 82.5% of Realty Income’s portfolio and industrial forms 13%, but the REIT has done a gaming deal before, acquiring the Encore Boston Harbor Resort and Casino from Wynn Resorts in December in a $1.7 billion sale-leaseback.
Now, the Bellagio deal takes the company into a new style of investment. “We are pleased to initiate our credit investment platform through a preferred equity investment in the Bellagio joint venture,” said president and CEO Sumit Roy. “Credit Investments are a natural adjacency to our traditional business, allowing us to provide additional value to our clients while leveraging our core competencies in transaction sourcing and structuring and real estate and credit underwriting and monitoring.”

The Bellagio has 4,000 guest rooms and suites across two towers, 157,000 square feet of gaming space, 200,000 square feet of meetings and event facilities, a spa, a gym, a pool, iconic fountains, Michelin-starred restaurants and luxury retail.

URW Refinances Century City Mall

Unibail-Rodamco-Westfield is tapping the commercial mortgage-backed securities market to refinance its $2 billion Westfield Century City property in Los Angeles. The Europe-based mall owner, which has been selling off its U.S. properties to focus on Europe, will sell to the securitization market $925 million in bonds backed by the 1.4 million-square-foot mall. The property is worth $2 billion and is anchored by Bloomingdale’s, Macy’s and Nordstrom. URW will get $906.5 million of equity out of the deal, and the remainder will recapitalize the property and fund reserves. The deal places a 7.25% cap rate on the property.

Regency Centers Closes Urstadt-Biddle Acquisition

Tenant demand for U.S. open-air centers nearly tripled in the second quarter, driving vacancy in the sector down to 5.3% and pushing the average rent up 4.5% year over year to $22.72 per square foot, according to JLL and CoStar. Tenants like Burlington, Crunch, Five Below, Piggly Wiggly, Planet Fitness, Publix and Trader Joe’s moved into more open-air space than they vacated, 6.4 million square feet more to be exact.

A tight supply helps. About 3.7 billion square feet of open-air center space exists in the U.S., including the 1.8 million that opened during the first quarter. Another 10.9 million square feet is under construction. Among the coming properties is Regency Centers’ $87 million SunVet in Holbook, New York. The Long Island project will convert a vacant mall into a 168,000-square-foot, Whole Foods-anchored open-air center.

Grocers, off-price retailers, medical uses and pet services are the top categories of new leases being signed at Regency Centers’ portfolio of 406 open-air centers, according to Alan Roth, executive vice president of national property operations and East region president.  Across its portfolio, Regency also has 1 million square feet of leases under either negotiation or letter of intent. Deals are getting bigger and longer with more space and more time included, Roth added.

There’s another factor keeping empty space from the market: The amount of open-air space vacated by retailers decreased 3.7% from the first quarter to the second quarter, according to JLL, indicating that tenants may be opting to renew rather than vacate.

Phillips Edison & Co.’s 98%-occupied portfolio of 274 open-air centers definitely saw strong renewals in the second quarter, according to president Devin Murphy. For renewals signed during the second quarter, the average rental rate was 17.7% higher than the leases they replaced, an all-time-high for Phillips Edison, he said on an earnings call. “We see leasing demand from restaurants, health and beauty and medical,” he stated.

Which cities’ commercial property sectors are most likely to thrive despite climate change? CBRE’s North American City Sustainability Study 2023 assessed 66 North American cities for the risk to property value of climate-related disasters, adaptation measures, and transition risk. Transition risk is the cost of retrofitting to meet net zero goals and policies expressed as a percentage of building value and is based on the level of investment in climate change solutions undertaken by the city, according to CBRE senior research analyst Vincent Planque.

10 Cities Where Property Values Will Endure

• Austin, Texas
• Boston
• Denver
• Montreal
• New York
• Ottawa
• San Francisco
• Toronto
• Washington, D.C.
• Winnipeg

All 10 have pledged to be carbon neutral or achieve net zero greenhouse gas emissions by 2050. Eight have Building Performance Standards in place to reduce emissions gradually, and those standards should allow them to achieve emissions targets faster than other cities.

Six of the 10 cities’ physical climate risks are below average, and eight have low baseline water stress, defined as demand outstripping supply. Over the past five years, six have improved air quality and four have decreased heating degree days. Heating degree days generally equates with the number of days a building requires heating, which requires more energy than cooling.

Dick’s Sporting Goods is revving the engine of its House of Sport experiential concept, which launched in 2021. In the past two months, it has opened nine House of Sport stores — in Texas, Iowa, Illinois, Virginia, North Carolina, New York and Pennsylvania — bringing the total to 12. Each store is approximately 100,000 square feet and features in-store experiences like climbing walls, multiple golf simulators and multisport cages. Some also have fields attached for open play, clinics, league space or ice rinks in the winter.

Sneakerheads are spending less these days, according to Foot Locker. Sales at the company’s stores that have been open for at least a year dropped 9.5% year over year in the second quarter, the company said, owing in part to lack of exciting new product and to the impending end of a moratorium on student loan payments. In March, the footwear and apparel retailer said it would close 400 mall locations through 2026 to focus on its best-performing 2,400 units.

Forever 21 will sell its merchandise on fast-fashion e-commerce giant Shein. The partnership also will enable Shein shoppers to return and exchange their online purchases at Forever 21’s 560 stores worldwide. Financial terms of the deal were not disclosed, but Shein is buying a 33% stake in Forever 21’s parent, Sparc Group, and Sparc is taking a minority stake in Shein. Sparc is a joint venture of mall landlord Simon and licensing firm Authentic Brands Group. Most [Forever 21] customers are in physical stores,” Authentic Brands CEO Jamie Salter said. “Most of their customers are digital.” Shein has about 150 million active customers around the world.

The Fresh Market, a supermarket chain owned by Chile-based Cencosud, plans to add 22 stores in the next 24 months. This would grow its store base by 14% from 160 stores to 192. The company’s sales at stores that have been open at least a year increased by 1.2% year over year in the second quarter.

Macy’s Inc. is growing off-mall this year with four new stores based on its smaller Market by Macy’s and Bloomie’s concepts. The first, branded simply as Macy’s, opened this month in Highland Grove, Indiana, 35 miles southeast of Chicago. The other three stores will open in the fall in Boston, Las Vegas and San Diego. While sales at Macy’s Inc. stores that have been open at least a year declined 7.3% in the second quarter, such sales grew at smaller stores, CEO Jeff Gennette told CNBC.

Private equity firm Roark Capital Group has agreed to acquire sandwich chain Subway from the company’s founders. Terms were not disclosed, but Subway had announced it was seeking a buyer that would pay around $100 billion, according to The Wall Street Journal. Roark Capital has a large portfolio of restaurant investments, including stakes in conglomerates Inspire Brands and Focus Brands Group. Roark's investment will help Subway expand from 37,000 restaurants to 60,000. Most of the new locations will open in international markets.

Diversified Restaurant Group, one of the chain’s largest Taco Bell franchisees at 325 locations, opened a Taco Bell Cantina at Westfield Oakridge Mall in San Jose, California. Taco Bell Cantina is a more upscale version of the fast-food chain and also serves alcoholic beverages.

Retailers Report on ORC in Q2 Earnings

Retailers blamed organized retail crime and other kinds of shrink for profit shortfalls in the second quarter. Dick’s Sporting Goods lowered its full-year profitability expectations after second-quarter earnings fell short due to shrink caused by theft or errors. On an earnings call, president and CEO Lauren Hobart called the problem “an increasingly serious issue impacting many retailers.” Meanwhile, at Macy’s Inc., the loss of goods from theft, misplacement or other mistakes will hit a record in 2023 for the second year in a row. The retailer is moving high-theft items away from store entrances, among other measures. Target, too, cited theft as a problem. “Safety incidents associated with theft are moving in the wrong direction," CEO Brian Cornell said on an earnings call. Walmart was not immune either. “Shrink has increased a bit this year,” Walmart U.S. president and CEO John Furner said on earnings call. “It increased last year. It’s uneven across the country.”

—Additional reporting by Commerce + Communities Today editor-in-chief Amanda Metcalf