Buoyed by this positive sentiment, as well as a strategically targeted interest in undervalued assets, Emira now has nine retail centres spread across the south and southeast of America. In partnership with The Rainier Companies, a Texas-based private commercial real estate investor and operator, Emira holds a 49% stake in close on 240,000m2 of GLA with its US partner holding the balance of 51%.

Danny Lovell, managing principal of Rainier, addressed a gathering of South African investors in Johannesburg at the end of October. Introducing him, the CEO of Emira, Geoff Jennett, reminded his audience that a similar session had been held just over a year ago. Now, with a greater critical mass in its US portfolio, the company was ready to share more information with interested parties. Geoff referred briefly to Emira’s recent decision to reduce its offshore investment exposure in Australia. It has cut its stake in Growthpoint Properties Australia (Goz) by almost a half, to approximately R550 million. Geoff says, “Our stance with Growthpoint in Australia is that the asset is full and overvalued so we have lightened our hold there.” He believes the US sub-sector which Emira is focused on is undervalued. It made sense therefore to recycle capital into this sector. “The company has increased its US exposure and once overvalued we’ll lighten our load. We’ve discussed this with Rainier. We need to make the best and right business decisions. It’s not just about investing in the US.

The partnership with Emira is clearly an important one to Rainier. Danny notes that they have increased their staff complement and intend to ensure that their performance as strategic investors with a retail bias remains paramount. The company has US$2.5 billion in commercial real estate investments and targets assets in the mid-south and southeast of the US where there is solid income growth and a lower cost of living. “Nationally unemployment is at a 50-year low at 3.5% and job growth is likely to increase. Vacancies are down amongst almost every asset class. Most analysts are targeting at least 18 months in the current cycle. The south and south-east are growth areas and while the percentage change in average wages per state may not be as high in North Carolina as in California, for example, the cost of living is less.”

Danny explains that the company’s thesis is to buy grocery-anchored assets in dominant secondary and tertiary markets. “We have major cities which are known as MSA’s (metropolitan statistical areas). Outside of these we have sub-tier or secondary cities, and there are maybe 100, even 200 of these where we would look for centres. We don’t have a cut-off point. It’s about looking for the best grocery-anchored centres in secondary markets.” Major market retail is centred in New York, Los Angeles, Boston, Washington DC, Miami and Chicago. In 2016 Wall Street started a push to liquidate non-core assets, says Danny, as fears of a retail Armageddon, in which Amazon would dominate and brick and-mortar would die, swept the country. But this hasn’t happened in his view. “There have been significantly more store openings than closures over the last 12 months. We’ve
targeted non-major market retail where acquisition prices are good and where year on-year there is 30% more volume in retail
asset sales as opposed to a 10% decrease year-on-year in major market retail asset sales volume. Many companies believed that if they sold secondary market assets they could buy into major markets and push rentals. Their target was 3% but they hit 1.8% because rentals in those markets were already inflated. We were not competing to buy in that market. Now we’re seeing more competition (in our field) with prices increasing. We believe our thesis from three years ago is being proven out and Retail will continue to be proven out. If interest rates stay low we’re moving in the right direction. We think there is still runway in the retail sector.” With US online sales stacked at 11% of total retail sales and growth in e-commerce penetration slowing, there’s still a robust 89% of retail happening in brick-and-mortar stores. Danny believes many US retailers are beginning to figure out the e-commerce game and continue to evolve by improving on their customers’ experience and reinventing their business models. In some cases retail footprints are shrinking as stores downsize and possibly push the consumer online, while new stores continue to open on a net basis. In other cases retailers are leveraging their footprint to fulfil e-commerce sales.

Technology continues to disrupt and shape the retail landscape, with smartphones and AI being used to trigger sales via personalisation and augmented reality, amongst other drivers.

Globally, consumers continue to crave immediacy once they decide to purchase, and are willing to pay for it. Amazon Prime Air has recently launched in the US in a bid to fulfil the desire for fast shipping. Danny explains that Prime Air is able to roll out country-wide delivery of specific items in just 30 minutes, using either drones or road vehicles.

The giant changes wrought across the retail landscape by technology pose risks and challenges to brick-and-mortar retail, but for now occupancy remains high with a national average of 92%. Rainier’s US portfolio tops this at 97.51%, and in the south where Emira has targeted its acquisitions, the national figure is 94%. Nationally, power centres have the highest occupancy levels, supporting the strategy being followed, notes Danny. “We believe our thesis is statistically sound. Yes, there are industry risks, no question. Knowing the difference between the right centre and the wrong centre, between right and wrong retail is critical. We buy the best Class A+ open-air power centres with a grocery store located on a parking lot or in close proximity to one. We target secondary or tertiary market because of pricing, buying at an 8,5 or 9 cap, and we want market dominance. What is the best power centre? It’s where retailers want to be. It’s where growth is located.

It’s where rentals are not overpriced. We want a centre which a retailer would choose to consolidate in if he had five stores, for example, and decided to consolidate them into one. We don’t go for the second or third best. We’ve turned down hundreds of centres over the years which look good on paper but are not the best centres.” In choosing a centre for purchase, current tenancies are scrutinised via disciplined due diligence procedures. The presence of a grocery store is non-negotiable, the view being that this retail component has shelf-life and is a category in which e-commerce won’t trend at such a pace. High online purchase retailers are not favoured, hence books, shoes, high fashion and video games are not likely to be found in these centres.

While restaurants are a bit more expensive to put in, they’re viewed as “infectious” and are welcome as tenants. Danny does not deny that there can still be tenant disruptions and bankruptcies in spite of stringent due diligence practices, so it is imperative that strategic leasing and asset management interventions are in place. “We track tenants. We monitor them. If you buy the right centre, you can backfill these disruptions and retenant,” Danny affirms. “We’ve stayed bullish on our thesis. Statistically it’s the best occupancy at present. In our partnership, it’s working.”

The Emira-Rainier portfolio has centres in Ohio, Indiana, Florida, Missouri, Oklahoma and Texas, which has the best-performing economy in the country. The portfolio’s largest asset by dollars is in fact situated in “the lone star state”. Both the largest centre of close on 45,000m2 and the smallest centre of 17,550m2 are in Ohio. Highly specific population demographics are not earmarked when purchasing. “We want centres in growth areas where incomes of US$60,000 to US$80,000 are the norm. Most of our centres are in locations of around US$100 000,” comments Danny.

The top 15 tenants across the portfolio include businesses such as TJ Maxx, AMC Theatres – a cinema chain, Academy Sports, Petsmart, Kohl’s and Burlington – both department store chains, Office Depot, Conn’s Appliances and Party City. All of the top 15 are strong national credit tenants which means that payment of their rental is guaranteed in the event of store closure. “It’s about finding the right deals and the right relationships,” Danny says. “How long can we do what we’re doing? At Rainier we believe there’s a lot more left in this thesis.”

For Emira, the co-investment model with Rainier is viewed as a well-judged strategy to increase its international diversity while moderating the risk of investing offshore. “In addition,” says Geoff, “investing in developed markets fulfils our mandate as a diversified REIT.” A+