Finally a market test valuation of Commercial Real Estate, which is not just hype and Merrill Lynch speculations. The Buffalo News reports that REIT Developers Diversified Realty (NYSE:DDR) is selling back 11 upstate New York shopping malls to the entity it originally purchased them from, Benderson Development Co., at a 30% discount to their 2004 purchase price.
In 2004 DDR acquired 110 properties from Benderson for $2.3 billion, an average price of $21 million, and is now selling back 11 of these for a total price of $160-$175 million, of roughly a $15 million average price, and a 30% discount. Not bad for Benderson which is buying back what it sold 5 years ago at 70 cents on the dollar.
And for all intents and purposes, this transaction was very opportunistic for DDR:
“It’s good that the ownership is going in the direction that it is,” said Michael C. Clark, director of retail tenant services at CB Richard Ellis in Buffalo. “There’s going to be a lot of markets in other parts of the country where they have portfolios for sale by different REITs and they don’t have someone like Benderson to step up.
“We’re pretty fortunate in terms of the market, in regard to that. How much better can you get than the folks that developed them and are intimately familiar with them and live and breathe here? They certainly know what they’re doing,” Clark said.
As Retail Traffic points out, this is very surprising as current estimates have been that retail properties would post at most a 40% decline from peak values achieved in 2007. A 30% discount from a 2004 price implies a significantly higher discount from the peak. RT calculated that the final closing discount from the peak is roughly 50%. As David Bodamer at RT points out:
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.
Notable is that DDR is raising cash in a non-equity offering form. Maybe Merrill has gotten to the saturation point where there is just not enough reverse inquiry into the phenomenally overpriced REITs.
Also, thanks to this market test, one will be able to recalculate what fair Debt-to-Market Value of Assets ratio is for the majority of mall REITs. The result will likely be a dramatic rise from previously consensual ratios, presenting yet another data point indicative of the REITs bloated overvaluations due exclusively to short squeezes.