Secondary Strategy
Stonemar Properties is acquiring retail centers in growing secondary and tertiary markets.
Jaime Lackey

Stonemar purchased Crossroads Center in Jonesboro, Arkansas, in November 2007.

Stonemar Properties is establishing its retail portfolio by going after sometimes overlooked properties in sometimes overlooked markets.

“We understand the patterns in secondary and tertiary markets, and that is where our competitive advantage lies,” says Emmet Austin, chief investment officer of the New York City-based company.

Throughout the country, the same retailers cluster around each other, he explains. Certain tenants tend to congregate around Wal-Mart; other co-tenants are drawn to Target, Home Depot and other big box stores.

“Our knowledge base continues to build on itself,” says CEO Jonathan Gould. “We are growing a portfolio that includes many of the same tenants in different high-quality secondary markets. This helps us get a good handle on the tenants’ businesses and to create strong working relationships with tenants. This also gives us insight into the tenants’ views of the markets.”

Stonemar and Kimco Realty Corporation purchased a 261,000-square-foot center in Owensboro, Kentucky, for $19 million in November 2006.

Additionally, he notes, there are very similar patterns as to where malls and power centers are located in smaller cities.

Stonemar, which was founded in 2002, has participated in equity transactions totaling more than $825 million with interests in more than 11 million square feet of retail properties in 20 states. The company’s partners include REITs and established funds.

Stonemar and its partners are looking to invest $150 million to $200 million in 2008 and grow the portfolio by approximately 1 million square feet.

“But we are not under pressure to achieve acquisition goals,” Austin says. “We are in a position to find deals we like, not deals we have to do.”

Jonathan Gould, CEO of Stonemar Properties.

Stonemar acquires only a small percentage of the properties it researches. In 2007, the company reviewed more than 10 million square feet of retail space and purchased approximately 550,000 square feet.

The due diligence process involves looking at macroeconomic indicators. “We stay away from markets dominated by single industries or markets that are dominated by one employer,” Gould says. “We want to be located in places with diverse economies.”

“We want to see a good story to the town,” Austin adds. “There should be positive momentum as far as the economy is concerned.”

The due diligence takes into account traffic, demographics and the size of a trade area. Centers in smaller markets can draw from 30 to 40 miles away, Gould explains.

They are looking for high-quality properties with 50 to 75 percent credit tenants. When conducting lease reviews, they like to see tenants that have been at a center for 5 to 10 years.

Acquiring mature properties with solid credit tenancy and good sales is a fairly low risk real estate investment, Gould says. “Certainly lower than a turnaround situation or a repositioning play.”

Austin adds, “Most of the properties we buy are 90 to 95 percent leased. Even if a tenant goes out, they’ve usually been there 10 years and, therefore, the rents are typically below market so we can capture the upside by increasing rental rates.”

Stonemar, in a joint venture with Kimco Realty, purchased the 355,000-square-foot Jackson Plaza in Cookeville, Tennessee, for $30 million.

For example, Stonemar and Kimco Realty Corporation purchased a 261,000-square-foot center in Owensboro, Kentucky, for $19 million in November 2006. The center is anchored by a SuperTarget, and tenants include T.J. Maxx, Goody’s and Shoe Carnival. At the time of the purchase, a former Toys “R” Us store was vacant; the space was backfilled by Best Buy. Additionally, a dark OfficeMax space was recently leased to PetsMart at a higher rent. Inline rents increased from the low teens to $18 to $20 per square foot.

“We now have a fully occupied center with substantially better credit and a much better balanced tenant mix,” says Gould of the Owensboro acquisition. “The demographics were strong but nothing eye-popping.”

“But the property is across from a regional mall,” says Austin, “and there is tremendous economic growth in the area. Approximately $1 billion is being invested in the industrial sector, and $550 million is being invested in a new regional healthcare facility. That type of investment trickles down into an area.”

Recently, Stonemar purchased two centers in Jonesboro, Arkansas, from Belz-Burrow Development Group for $16 million. Anchors include Hobby Lobby, OfficeMax, Pier 1 Imports, Shoe Carnival and Goody’s. Rents for the two largest stores are 50 percent below market, and one lease term for nearly 50,000 square feet expires in less than 3 years with no options.

One of the centers shares a parking lot with a Wal-Mart Supercenter, and is near the state’s largest mall (which opened in 2006) and the other is across the street from city’s former dominant mall (which is undergoing a major renovation).

“We just like the whole area. There’s a lot of population and corporate growth and solid economics overall,” Gould says.

These acquisitions are typical of Stonemar’s purchases. The company likes anchored or shadow-anchored strip and power centers adjacent to dominant regional malls.

Stonemar prefers off-market transactions, working directly with the sellers or working with independent brokers in the local markets.

The company has yet to sell any of its properties. Gould says, “We are prepared to hold any property for the long-term. We do look to sell some properties in the future, depending on whether they are core or non-core assets.”

In the meantime, Stonemar is looking for more investment opportunities, especially in Texas, Arkansas, North Carolina, Kentucky and Tennessee.

“We really like the South,” says Gould. “There is job growth in the secondary markets in the South. We seem to follow markets where auto manufacturers have opened or are about to open a plant.”

He adds, “We like these areas because they are less prone to economic ups and downs, and there is less speculation. There are more reliable patterns of economic growth and demographics.”