U.S. Realty / Compass Acquisition
In the acquisition of the Barstow Shopping Center, Realty Mogul will be partnering with established real estate players in the market - specifically, the co-sponsors U.S. Realty Partners and Compass Acquisition Partners.
U.S. Realty Partners
U.S. Realty Partners ("USRP") is a real estate investment company specializing in the acquisition, asset management, development and redevelopment of high quality retail properties located in strategic metropolitan areas of the western United States.
USRP focuses on anchored retail properties in markets with strong demographics, high barriers to entry, and achieve competitive risk adjusted returns for our investors and partners. Its team takes pride in its vast shopping center experience, extensive market knowledge, disciplined underwriting and excellent history of efficient execution.
Compass Acquisition Partners
Compass Acquisition Partners ("Compass") is a privately capitalized real estate investment firm focused on the acquisition of commercial real estate properties in select markets throughout the western United States. Compass has successfully executed an investment strategy based on a disciplined acquisition effort, an efficient renovation process and strong property management through their operating partner, Cirrus Asset Management. Its current portfolio includes over 4,300 apartment units and several retail and industrial properties, with a combined value of approximately $415 million.
Its managing principal, John Walsh, is a seasoned real estate professional who is the driving force providing overall direction to Compass and managing investor relations. He leads a team with experience in acquisitions, finance, asset management and property management. John has more than 30 years of experience in the successful execution of an opportunistic investment strategy that emphasizes acquisitions of well-located properties and value maximization through intensive property management.
Compass utilizes a highly proactive and disciplined investment approach. Markets with favorable demand characteristics such as job and population growth, demographic shifts and positive legislation are pursued. In addition, markets with supply constraints receive more favorable underwriting. Markets with signs of oversupply such as surplus land, changes in zoning and increases in building permits are avoided.
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Jay Kerner - CEO of U.S. Realty Partners -
John Walsh - Principal of Compass Acquisition Partners
Jay Kerner is the CEO of U.S. Realty Partners, a regional commercial real estate operating company and consulting firm focused on high quality properties in California and Arizona. He has over twenty seven years of experience in the acquisition, operation, development, leasing and management of retail, multi-family, office and mixed use properties.
Mr. Kerner was formerly Regional Director of Capital and Counties, U.S.A., a privately held real estate investment trust with 2.5 million square feet of retail, office, multi-family and mixed use properties organized as a subsidiary of Capital Shopping Centre Group, London (a publicly traded FTSE 100 company; CSCG.L). In addition to his duties overseeing acquisitions, dispositions, financing, and operations, he was a key executive involved in the sale of the company to Equity One (NYSE; EQY) in 2011 for more than $600 million. Prior to that, he was Senior Director of Acquisitions for Federal Realty Investment Trust, a public REIT with more than 19 million square feet of high quality mixed use and retail properties in the best markets in the U.S. (NYSE: FRT). Mr. Kerner was also President of Kerner Management and Investments, a regional shopping center operator and developer, for more than 10 years. Over his career, he has been personally involved in more than $1 billion in commercial real estate projects.
Mr. Kerner is a graduate of UCLA with a degree in Business & Economics. He is a member of the International Council of Shopping Centers and has served as a speaker at past events. In addition, his is a licensed California Real Estate Broker and General Contractor. Mr. Kerner is also the author of Chasing Yield: an Individual Investor’s Guide to Passive Commercial Real Estate Investments.
John is a Founding Principal of Compass Acquisition Partners. He is the driving force that provides overall direction to the firm and manages investor relationships. He has over 21 years of experience in the commercial real estate industry as an investment broker at Marcus & Millichap and in that time he has demonstrated unrivaled knowledge of the market as well as an commitment to maximizing the value of our portfolio. His expertise is clearly evident from his established reputation as one of the most knowledgeable and experienced real estate professionals in the industry. He is also recognized as one of the most respected resources for market information, and has been a featured speaker at several industry conferences and continues to be one of the most sought after speakers in the industry. John earned his B.S. and Master of Real Estate Development from the University of Southern California.
At A Glance
| Investment Strategy: | Buy and Hold |
| Hold Period: | 3-5 years |
| Total Project Budget: | $9,085,000 |
| Property Type: | Retail |
| Net Rentable Area: | 110,100 square feet |
| Distributions to Realty Mogul 15, LLC: | 8% preferred return with excess cash flow and appreciation shared 75/25 |
| Purchase Cap Rate: | 7.8% (based on in place income) |
Investment Details
U.S. Realty Partners and Compass Acquisitions ("USRP" and "Compass" respectively) plan to acquire and reposition Barstow Shopping Center, a 110,100 square foot, Vons-anchored center located in Barstow, CA less than one mile from Interstate 15, a transportation hub between Southern California and Las Vegas. In addition to Vons, Barstow Shopping Center has a diverse tenant base comprised of several large national chain retailers including Big 5 Sporting Goods, 99 Cents Only Store, Radio Shack, and Allstate Insurance.
Realty Mogul investors are being provided the opportunity to invest in Realty Mogul 15, LLC. Realty Mogul 15, LLC will be making an investment in Barstow Retail Partners LLC, which will hold title to Barstow Shopping Center.
USRP and Compass will handle all aspects of the investment including acquiring the property, completing a strategic repositioning and lease-up program, and ultimately selling the asset. They will be responsible for leasing up the remaining vacant space with a dedicated local leasing agent and focused property management team. USRP and Compass also intend to complete a minor facade upgrade to the existing shop tenant spaces to modernize the center. This facade upgrade will help achieve higher rents, bringing tenants to market rent as leases reach the end of their current term. As existing leases renew, USRP and Compass also plan to recapture common area reimbursement leakage. In addition, they will seek to add a new pad building (for use as a fast food chain restaurant or fuel station) on the corner parcel in front of Vons. The new pad building addition is allowed under the Vons lease but will require city approvals; the process to obtain the necessary approvals will be started immediately after the property is acquired. The potential income from this addition is not currently included in the estimated financials, as the likelihood of developing the pad site is still unknown. In the event the pad site is developed, investor returns may increase.
USRP and Compass plan on holding the property for 3-5 years before exiting the investment but the hold period may be longer or shorter. Realty Mogul investors have the opportunity to participate as equity stakeholders and earn a share of the cash-flow and appreciation. Investors can expect to receive quarterly updates and quarterly distributions, with the first distribution expected during the first full month post-closing.
Barstow Shopping Center represents a unique opportunity to invest in a stabilized grocery anchored shopping center with several existing national retail tenants, all under long term leases. The property has existing, in-place cash flow with minimal tenant rollover over the investment term, and offers investors value-add potential through a concentrated lease-up and potential expansion program.
Investment Highlights
- Established Grocery Anchor with Historically Strong Sales: Vons is the dominant supermarket in the immediate area. It has been operating on this site for the past 50 years and recently renewed a new 10-year lease with two (2) five-year options to extend through 2033. Vons had 2012 sales of $12.9 million ($341 psf) which equates to a low 2.3% total occupancy cost.
- Major National Retailers with Long Term Leases: In addition to Vons, Barstow Shopping Center has a diverse retail tenant base comprised of local retailers and large national tenants including Big 5 Sporting Goods, 99 Cents Only, Radio Shack and Allstate Insurance. Big 5 Sporting Goods and 99 Cents Only Store each have five years remaining on their initial lease terms, with four (4) five-year options.
- Upside Potential From Lease-Up of Vacant Space: There is currently one junior anchor vacancy of approximately 13,000 square feet located adjacent to the 99 Cents Only Store. When the space is leased, the property's occupancy will increase to 100%. USRP and Compass intend to fill this vacancy by utilizing a focused local leasing team dedicated to identifying a suitable tenant. In addition, many of the in-line shop tenants have been operating at the property for several years and their rents have not increased as much as market rents in the area. In-line rents currently average 72% of market and since several of these leases are expiring in the next three years, there is an opportunity to roll the tenants to market rental rates for additional cash flow. With the planned minor upgrade to the facade of existing shop tenant spaces and the pending lease expirations of these in-line tenants, USRP and Compass intend to capitalize on the opportunity by increasing the rents of existing tenants to market rates and thereby increasing the income of the property.
- Value-Add Potential Through Pad Expansion: There is an opportunity to add a new pad building or fuel station on the corner parcel in front of Vons. This is allowed under the Vons lease, but will require city approvals. The additional pad building or fuel station may significantly add to the overall net operating income and value of the property. This potential additional income is not currently included in the estimated financials.
- Experienced Sponsorship: USRP and Compass will be co-sponsors in this transaction. USRP is a regional real estate investment company specializing in the acquisition, asset management, development and redevelopment of high quality retail properties located in strategic metropolitan areas of the western United States. Jay Kerner has over 29 years of experience in the acquisition, operation, development, leasing and management of retail, multi-family, office and mixed-use properties. Over his career, he has been personally involved in more than $1 billion in commercial real estate projects. Compass is a privately capitalized real estate investment firm focused on the acquisition of commercial real estate properties in select markets throughout the western United States. Their current portfolio includes over 4,300 apartment units and several retail and industrial properties, with a combined property value of approximately $415 million.
Risks and Risk Mitigation*
- Super Walmart: Walmart is currently located approximately 1.2 miles from Barstow Shopping Center and has operated there for many years. Walmart may construct a Super Walmart at their current location in the future, which would increase the size of the store and the variety of food products sold. This could potentially have an impact on the sales volume for Vons and other retail tenants in Barstow Shopping Center. This risk is partially mitigated by the following: Vons has indicated that a future Super Walmart in Barstow would not alter their commitment to the operation of the existing Vons store at Barstow Shopping Center and that any effect on sales will likely be short term, 99 Cent Only Store is a deep discounter and is also not likely to be affected, and Big 5 Sporting Goods offers an extensive selection of sporting goods, many of which will not be available at a Super Walmart.
- Potential Safeway Company Sale: Recently Safeway publicly announced that it is considering a sale of the entire company to Cerberus Capital Management LP (“Cerberus”). Vons is a wholly owned subsidiary of Safeway. Cerberus is a private equity investment company that owns many companies including Albertson’s supermarkets and the Jewel/Osco chain. The sale of Safeway is not certain, but if it does take place there is no anticipated material impact on the Vons supermarket at the Barstow Shopping Center. This location is well established, profitable and has a low occupancy cost of approximately 2 percent of sales.
- Lease Up of Vacant Space: There is a risk that the leasing team will be unable to lease the one 13,312 square foot vacancy. This would have an impact on future cash flow and projected value for the property. This risk is partially mitigated by a longer projected lease-up period - USRP and Compass anticipate that the leasing team will procure a suitable tenant to lease this space within 18 months of purchasing the property. In addition, they intend to retain Carol Randall of Lee & Associates, who is a very experienced and active commercial real estate leasing broker, to market the space. She is the current leasing agent for the property that procured the Big 5 Sporting Goods and 99 Cent Only tenants for the center.
- Rising Interest Rates: The Federal Reserve has announced plans over time to methodically reduce the amount of stimulus it would inject into the U.S. economy. This could potentially lead to rising interest rates and have an effect on the future value of the property. This risk is partially mitigated by the steadily increasing rental rates and income for the property that should be beneficial in offsetting the effects of future interest rate increases. In addition, the investment will also be capitalized by a long term (10 years) fixed rate loan, which will not be impacted by rising interest rates.
- Interest-Only Financing: This transaction employs interest-only financing. By delaying principal payments, interest-only mortgages can make refinancing more difficult at maturity and increase risk of the investment opportunity.
*The above is not intended to be a full discussion of all the risks of this investment. Please see the Risk Factors in the Investor Document Package for a discussion of additional risks.
| Address: | 1270 &1300-1354 East Main Street Barstow, CA 92311 |
| Year Built: | 1963-1968 |
| Current Occupancy: | 88% |
| Net Rentable Area: | 110,100 square feet |
| Parking: | 500 stalls 4.29 spaces per 1,000 square feet |
| Access: | Signalized access via Yucca Avenue and four curb outs off E. Main Street |
| TENANT NAME | SQUARE FOOTAGE |
|---|---|
| Vons (Safeway) | 37,586 |
| 99 Cents Only | 18,691 |
| Big 5 Sporting Goods | 14,078 |
| Daily Stop | 4,674 |
| Radio Shack | 3,325 |
| Barstow Jewelry and Loan | 3,280 |
| Barstow Management (Coin Laundry) | 3,122 |
| Shear Madness | 2,445 |
| CVH Medical Services | 2,400 |
| Strategy Realty | 2,331 |
| Allstate Insurance | 1,798 |
| Dental Office | 1,430 |
| Rigoberto Bro's Restaurant | 848 |
| Barstow Barber (Joe's Barber) | 780 |
| Wells Fargo (ATM) | 0 |
The center was constructed between 1963 and 1968 and features pylon signage and signalized access via Yucca Avenue in addition to 950 feet of frontage and four curb cut outs off E. Main Street. The property is bisected by Yucca Avenue, with Vons on the southwest corner of E. Main Street and Yucca Avenue and the 99 Cent Only Store, Big 5 Sporting Goods, and remainder of the property is on the southeast corner of E. Main Street and Yucca Avenue.
The property also features a recently repaved parking lot with 500 stalls and additional income potential through a developable pad site on the northeast corner of the Vons parcel with direct street frontage. USRP and Compass will be acquiring the property for $73 per square foot, which is below an estimated replacement cost of $125 to $130 per square foot.
Major Tenants
- Vons is a supermarket chain headquartered in California with 325 stores operating under the Vons and Pavilions banners. It is a wholly-owned subsidiary of Safeway Inc. (NYSE: SWY), the second largest supermarket chain in North America. Most stores offer a wide selection of food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral and pharmacy. Vons is both the lead anchor tenant in Barstow Shopping Center and the largest tenant, occupying 37,596 square feet (32%) of the leasable area. Vons has operated at this site for 50 years and has recently renewed its lease for an additional 10 years (expires 7/31/2023). The current lease has two (2) five-year options to extend through 2033.
- 99 Cents Only is a deep-discount retailer based in California with 238 stores in California, 44 in Texas, 33 in Arizona and 17 in Nevada. The chain carries name-brand and private-label food and beverages, health and beauty aids, household goods, hardware, toys, stationary, party and seasonal goods at low price points in convenient, attractively merchandised stores. Over 50% of the company's revenues come from sales of food and beverages, including produce, dairy, deli and frozen foods. 99 Cents Only occupies 18,691 square feet (16%) of the leasable area in Barstow Shopping Center and has five years remaining on its initial lease term (expires 1/31/19) with four (4) five-year options through 2039.
- Big 5 Sporting Goods ("Big 5") is a leading sporting goods retailer in the western United States, operating 420 stores in 12 states as of September 29, 2013. The company offers athletic shoes, apparel and accessories as well as a selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, snowboarding, and roller sports. Big 5 occupies 14,078 square feet (12%) of the leasable area in Barstow Shopping Center and has five years remaining on its initial lease term (expires 1/31/19) with four (4) five-year options through 2039.
- Radio Shack is a franchise of electronics retail stores headquartered in Texas with over 7,000 store locations throughout the United States, Europe, South America and Africa. In addition to selling a variety of electronic merchandise, Radio Shack is one of the top retailers in wireless, offering AT&T, Sprint, Verizon and Boost Mobile phone and carrier options. Radio Shack currently occupies 3,325 square feet (3%) of the leasable area in Barstow Shopping Center and has approximately four (4) years remaining on its initial lease term (expires 1/1/18).
A market report, site plan, current rent roll, lease expiration schedule, and overview of major tenants are attached below the map on the right hand side of this page. Please note that the martial arts studio, Dr. Dallas, and DiNapoli's Restaurant are not included in this transaction.
Barstow Shopping Center is strategically located in the principle retail market in Barstow, along E. Main Street less than a mile from Interstate 15, the main highway linking Southern California to Las Vegas. Main Street has a daily traffic count of over 30,000 cars and Interstate 15 has a daily traffic count of over 80,000 cars. The center draws demand from the greater Barstow area as well as those traveling from Southern California to Las Vegas and the Mojave River.
City of Barstow Overview
Barstow Shopping Center is located in Barstow, California, a city in the northern portion of San Bernardino County, part of the Inland Empire region. Barstow's location, roughly halfway between Los Angeles and Las Vegas and proximate to Interstate 15 and 40 as well as Highways 58 and 247, have made it a major transportation hub in San Bernardino County. It is estimated that more than 60 million people travel through Barstow annually. BNSF and Union Pacific railroads serve the area and each has its own classification yard within Barstow. The BNSF classification yard is the largest rail yard west of Kansas City.
Barstow offers an abundant labor force of approximately 90,000 workers and is also home to two military bases, the city's top two employers. The National Training Center at Fort Irwin, whose daily post population of more than 15,000 depend on Barstow for most of their housing, shopping, and entertainment; and the Marine Corps Logistics Base which employs more than 2,000 workers. Additionally, the $2 billion Fort Irwin Solar Project will be the largest renewable energy project in the Department of Defense's history and will create jobs both during construction and long-term plant operations.
Inland Empire/Barstow Retail Overview
Barstow's residential growth and location in one of the most active transportation corridors in California has spurred significant retail growth in the area, including a 65,000-square-foot retail expansion to the Tanger Outlet mall that hosts national outlet brands such as Coach, Ann Taylor, Gymboree, Aeropostale, Lucky Brand Jeans, American Eagle, Banana Republic, Claire's, Calvin Klein and others.
The Inland Empire Retail Market continues to improve in 2013 with vacancy rates remaining steady and absorption picking up in the last three quarters. The Inland Empire's retail vacancy rate decreased in the third quarter 2013, ending the quarter at 8.7%. Over the past four quarters, the market has seen an overall decrease in the vacancy rate, with the rate going from 9.0% in the fourth quarter 2012, to 8.9% at the end of the first quarter 2013, 8.9% at the end of the second quarter 2013, to 8.7% in the third quarter 2013. For a detailed market report see the attachment below the map on the right hand side of this page.
