ABuyer’s Market

Money shrunk, credit disappeared and stocks plummeted—but 2008 was a surprisingly positive year for the five fastest-growing acquirer companies. Granted, the amount of square footage amassed by the real estate companies identified by

Also notable is the fact that this year’s fastest-growing acquirers’ category is dominated by newcomers: Cole Real Estate Investments with 4.8 million sq. ft.; Casto with 1.7 million sq. ft. and Phillips Edison & Co. with 1.1 million sq. ft. Returning to the list is Inland Real Estate Group, with 3.1 million sq. ft., and Regency Centers, which last appeared on the fastest-growing acquirers’ list in 2005 and now earns a spot with only 457,000 sq. ft.

However, given the turmoil in the marketplace, two of the companies that have been top-five placers for a number of years, Developers Diversified Realty and Kimco Realty, declined to participate in the 2008 survey.

Also absent from the list of 2008 acquisitions activity are the huge portfolio buys and corporate mergers that characterized previous years, and conspicuously not present on the 2008 acquisitions lists are regional malls or large enclosed shopping centers. Instead, the 2008 buys focused on smaller, grocery-anchored properties, open-air centers and freestanding, single-tenant properties—smart-money bets, with established infill positions, considerably less risk and strong long-term potential.

No. 1: Cole Real Estate Investments 

Making its debut on the Chain Store Age fastest-growing acquirers’ list, Phoenix-based Cole Real Estate Investments purchased single-tenant, freestanding, net-lease assets with leases that typically run 15 to 20 years.

“Our strategy is to acquire the best properties for long-term performance—locations with high access, high visibility and strong traffic,” explained Michael Stubben, Cole’s VP portfolio management. “We don’t do malls, but look at power centers that have a row of retailers in single-tenant spaces.”

“It is also significant that more than 99% of our leases are with the parent company—we aren’t signing leases with franchisees or LLCs; the corporate entity is on the hook for the lease,” Stubben noted.

Sale-leaseback transactions gained popularity in 2008, and the trend continued into 2009 as traditional credit financing opportunities have dried up.

“Sale-leasebacks are an excellent way for a company to raise capital, and being a buyer in this environment puts us in a position to take advantage of those opportunities,” said Stubben. “There are a lot of distressed sellers and public REITs with debt coming due, so we can provide aggressive offers with attractive terms that are being accepted at prices we are very pleased with.”

The consensus from Cole: The company’s strategy has not changed, but opportunities are changing and getting even better.

No. 2: Inland Real Estate Group 

Joseph Cosenza, Inland’s vice chairman and president, gleefully recounted his company’s tenacious acquisitions strategy. While other companies sit fearfully on the sidelines, Oak Brook, Ill.-based Inland is the proverbial energizer bunny of opportunistic real estate purchases.

In 2008, Inland invested $3 billion in real estate, of which $900 million involved retail properties. Two of the most impressive acquisitions were open-air centers in burgeoning suburbs, each with populations in excess of 54,000 people within a 5-mile radius.

“We paid $69 million for The Streets of Indian Lakes, which opened last year in Hendersonville, Tenn., with one of the best cap rates I’ve seen in eight years,” stated Cosenza. “Poplin Place, which was built in 2006 and is just outside Charlotte, N.C., was another great buy. We took over a loan on the property that cost us about $40 million.”

As for Inland’s acquisition of 143 Sun Trust Bank branches, Cosenza likened this portfolio coup to buying monopoly pieces. “These are very accessible, drive-up corner lots with average rents of $23/sq. ft. It’s great real estate, and if the bank leaves, it would be easy to re-tenant or sell. Between the 2008 acquisitions and 291 Sun Trust branches acquired in 2007, we own 434 of their branches, and I wish we had the entire portfolio.”

Inland ended the year with the Dec. 31 closing of two sale-leaseback transactions for The Home Depot’s new distribution centers, and Cosenza noted they are continuing to look at additional sale-leaseback opportunities with the home-improvement retailer.

No. 3: Casto 

Columbus, Ohio-based Casto, which has an established presence in its home state as well as in the Carolinas and Florida, rises to the fastest-growing list through a single portfolio transaction of 10 retail centers in Puerto Rico.

“Our decision to enter Puerto Rico was driven by the opportunity to partner with Commercial Centers Management, with which we had several joint-venture properties in the States and which is, we think, the best retail real estate operator on the island,” Tony Martin, Casto partner, explained. “Commercial Centers was the original owner of all but one of the properties in the portfolio, and they have a strong and knowledgeable history of Puerto Rico real estate.”

Acknowledging that the real estate world has changed vastly since this deal closed in January 2008, Martin remained optimistic, suggesting, “The key now is having a significant amount of equity to deploy, which we do, and we are aggressively looking at acquisitions in our target states and Puerto Rico.”

Casto focuses primarily on grocery-anchored or lifestyle centers, specifically those with heavy entertainment and restaurant merchandising. In Florida, the company prefers the Gulf Coast region (Orlando through Naples), and in the Carolinas, it gravitates to markets around established cities.

No. 4: Phillips Edison & Co. 

The strategy for Cincinnati-based Phillips Edison & Co. is to acquire underperforming grocery-anchored centers. However, John Bessey, VP acquisitions and dispositions at Phillips Edison, acknowledged that the definition of “underperforming” has evolved.

“An underperforming, or value-add, shopping center in today’s market is one having vacancy,” he explained. “In the past, I would have described it as one that needed physical work—spaces re-combined or torn down. Now, it is a function of merchandising the center for the population it serves.”

Common denominators for the company’s 2008 acquisitions were that all were in growth markets, all were anchored by the No. 1 or No. 2 grocer in the market, and all had a traditional shopping center layout with no design irregularities.

In times of economic disruption, Bessey observed, there’s a flight toward quality—to properties where there are better demographics, higher household incomes, higher sales volumes from tenants and less risk or fewer variables to manage.

“The flight to quality for us means going to large metropolitan areas that show population growth and that have higher barriers to entry so an infill location is harder for competition to out-position,” he said. “This is the most significant buying opportunity in my 20 years in the business. For a company like us, that operates and executes at the property level, this is a very exciting time. We have $300 million to invest over the coming months, but we want to be extremely thoughtful with where we place capital.”

No. 5: Regency Centers 

Similarly, Barry Argalas, senior VP and head of transactions at Regency Centers in Jacksonville, Fla., reiterated that “Yesterday’s investment criteria are not today’s investment criteria.”

“The investment criteria today is to look for dominant, infill shopping centers that have a competitive advantage in their trade area and are anchored by best-in-class retailers,