About a week ago, word leaked that Benderson Development was buying back 11 properties it had sold to Developers Diversified at a 30 percent discount to what it sold the properties for in 2004. I speculated that a 30 percent discount to 2004 might represent a 50 percent discount to the 2007 peak. But I based that estimation by figuring out an average price per asset. Here is what I wrote:
The deal in 2004 between the companies works out to $122.34 per square foot. That is right in line with data from Real Capital Analytics. According to the firm, the average price on closed strip center deals in the first quarter of 2004 was $121.80 per square foot. However, values on strip centers didn't peak until the second quarter of 2007. Then, the average price on closed strip center deals was $180.69 per square foot. Similarly, the average cap rate on closed deals in the first quarter of 2004 was 8.3 percent vs. a low of 6.6 percent reached in the second quarter of 2007.
Per asset, the 2004 deal works out to about $21 million per property. If the $160 million to $175 million price range is correct, that puts the price per asset at between $14.5 million and $16 million. If you do the math, if the Benderson portfolio had traded at the peak of the market in 2007–at $180.69 per square foot–the total portfolio would have been worth $3.4 billion, or $30.8 million per asset. That means–potentially–that these assets traded about 50 percent lower than what they were potentially worth at the peak of the market.
That, admittedly, is far from the best way to figure out what was paid. Without knowing the square footage of the centers in question, you can't really figure out an average price per asset based on 110 properties on one hand and 11 on the other. Also, some of the properties in the full portfolio may have been really stellar assets that were worth more than the subset that got traded here.
Now, however, I have a little more information. I've gotten Real Capital Analytic's data on Buffalo, which includes estimates on five of the properties that changed hands in 2004 and in 2009. RCA's data puts the price paid in April 2004 at $96 per square foot per asset and puts the price on the current deal at $53 per square foot per asset. (One asset, however, shows up in RCA's data in 2004 at $12 per square foot.) Moreover, one of properties in the Buffalo market that was originally part of the 2004 DDR deal traded in January 2007 at $131 per square foot. In June 2007, another property from the 2004 deal traded at $138 per square foot, according to RCA's data. That was right during the stretch when the market peaked. However, two other properties from the 2004 portfolio also traded in June 2007, but only at $102 per square foot.
Put that all together and what do you get? The pricing drop from $96 per square foot to $53 per square foot represents a 45 percent discount to the 2004 price. The discount to 2007 is somewhere between 45 percent and 60 percent, based on the 2007 prices.
Now, what's clear in looking at the data is that RCA looks at the total deal price for a portfolio and averages that over every asset. So every asset in 2004 gets a $96 per square foot valuation. This cannot be the true value since I'm sure there are asset by asset differences. But it's the only data I've got to go by. I expect we'll get a better picture when the deal officially closes and DDR discloses more of the details about the transaction.
Here's the relevant data:
Assets sold in 2004 and 2007
- Tops Plaza, 67,992 sq. ft., April 2004, $6.5M, $96 per square foot
- Tops Plaza, 67,992 sq. ft., April 2007, $8.9M, $131 per square foot
- Hamburg Village, 92,934 sq. ft., April 2004, $8.9M, $96 per square foot
- Hamburg Village, 92,934 sq. ft., June 2007, $12.8M, $138 per square foot
- University Plaza, 162,686 sq. ft., April 2004, $15.6M, $96 per square foot
- University Plaza, 162,686 sq. ft., June 2007, $16.6M, $102 per square foot
- Tops D&L Plaza, 148,245 sq. ft., April 2004, $14.2M, $96 per square foot
- Tops D&L Plaza, 148,245 sq. ft., June 2007, $15.1M, $102 per square foot
Assets sold in 2004 and 2009
- Boulevard Consumer Square, April 2004, 708,442 sq. ft., $8.7M, $12 per square foot
- Boulevard Consumer Square, June 2009, 708,442 sq. ft., $37.8M, $53 per square foot
- Marshalls Plaza, 82,126 sq. ft., April 2004, $7.9M, $96 per square foot
- Marshalls Plaza, 82,126 sq. ft., June 2009, $4.4M, $53 per square foot
- Eastgate Plaza, 527,219 sq. ft., April 2004, $50.6M, $96 per square foot
- Eastgate Plaza, 527,219 sq. ft., June 2009, $28.1M, $53 per square foot
- Tops - South Park Plaza, 84,000 sq. ft., April 2004, $8.1M, $96 per square foot
- Tops - South Park Plaza, 84,000 sq. ft., June 2009, $4.5M, $53 per square foot
- Tops Transit Commons, 112,427 sq. ft., April 2004, $10.8M, $96 per square foot
- Tops Transit Commons, 112,427 sq. ft., June 2009, $6.0M, $53 per square foot
The original caveats I added to my first post on this deal still apply:
There are a lot of things we don't know about these assets. Are they healthy assets or do they need work? What do the current tenant rosters look like? Are the rents at market rates or lower? When do the leases come up for renewal? Did Developers Diversified sell these assets at a deeper discount than is truly reflective of market conditions out of a need to raise cash? Without this information it is hard to draw a full conclusion on what it means for the market. But the fact remains that this represents a massive drop in values from just more than two years ago. And the drop in value is larger than even the most pessimistic estimates have been for the peak-to-trough change in prices for retail real estate.