2011 – 2nd Quarter Update


We have been busy the last 8 months, acquiring over 400,000 square feet of retail space, including a 118,000 square foot community center which we just closed late last month in a suburb of Little Rock, AR and a 34,000 square foot neighborhood center in Columbus, Ohio two weeks ago. We also are closing this week on a 65,000 square foot grocery anchored center in New Mexico and have another 200,000 square feet of shopping centers under contract which we are reviewing.We have raised over $28M in equity, secured over $26M in non-recourse financing at an average interest rate below 5.5% and our basis in our existing portfolio is under $42 per square foot, well below replacement cost. Our projected average project level IRR is over 25%, based on a 5-year hold, with a 2.5 ROE.Our existing tenant roster includes such notable tenants as Talbot’s, Chico’s, Jos. A. Bank, Famous Footwear, J.C. Penney, Dollar Tree, Payless Shoe Source, CATO, Hibbett’s and Big Lots. We have recently signed new leases with TJ Maxx and Old Navy and we will sign new leases shortly with with ULTA, Jo-Ann’s Fabrics and Panera Bread. Our portfolio is geographically diverse, including four states including Ohio, Arkansas, New Mexico and Oklahoma. Virtually all our properties are grocery anchored.

I have attached several graphs depicting some overall macro information relating to the retail real estate market.

The US retail real estate sector performed well in the 2nd quarter 2011 buoyed by strong consumer spending. Reports by the Commerce Department in early August showed retail sales rose in July by .5%, the most in four months and June was revised upwards to .3%. Companies from Home Depot to Macy’s not only beat estimates on earnings, but revenues as well. See below a sample of results from public retail corporations as evidence.

According to Garrick Brown, the Research Director ChainLinks, the largest retail advisory firm in the US, “retailer demand and deal activity is actually up substantially in the second quarter in every market that we track. Not one of the more than 50 major US markets that we surveyed reported decreased demand levels over the past year.”

At the same time, new retail space deliveries are down substantially to only 7.4M square feet in the 2nd quarter in comparison, the 4th quarter 2007 had over 80M square feet of deliveries.

According to Shopping Center Today magazine, the national vacancy rate held steady for the 2nd quarter at 7.1%. Nearly 11.1M square feet were leased, up from 10.4M square feet in the 1st quarter. Better numbers were also mitigated by the large blocks of space returned to the marketplace by Blockbuster and Border’s following their respective bankruptcies. Please see selected vacancies by market below:

Little Rock-7.6%

Despite the absorption of new space, overall rental rates are still declining. According to CoStar, a leading retail research firm, national retail rental rates declined to $14.74 psf from $14.84psf with lifestyle centers being the weakest, with a decline of $.94 from the 1st quarter. These centers also suffered the largest vacancy increase to 8.9% from 8.6% over the same time period.

Investment sales of retail centers continued their positive momentum into the 2nd quarter with the number of transactions actually eclipsing pre-recession highs. Also interesting is the percentage of these sales which are considered “distressed sales” have decreased 28% in 2011. While transaction volumes in total dollars are down substantially from the peak in 2007, they are up threefold from the lows in 2009.

Capital is flowing back into the retail sector, however the CMBS market did take a step back in August with the rest of the public markets due to rating agencies either downgrading public debt or refusing to rate new issuances. Most experts believe that this is a temporary issue, which will improve after Labor Day.

While 10-year treasury yields have decreased substantially to near 2%, interest rate spreads have widened, actually increasing borrowing costs in some instances. We also believe that this is a temporary situation and will level off after recent extreme volatility. At this time, retail real estate investments offer returns of at least 500 basis points higher than 10 year treasury yields.

In summary, as consumers continue to spend and developers continue to delay new deliveries until rents justify the cost of new construction, especially in secondary markets, retail fundamentals should continue to improve. Capital will also continue to accelerate into the retail sector and the largest beneficiary will be the secondary markets, which in recent years has all been shut off from a lending perspective. We believe these attractive, well anchored properties in secondary markets will outperform Class A properties in top market, which have experienced “bubble” pricing over the last two years.

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