CHARLOTTESVILLE, VA—There is no shortage of news of REITs spinning of, or considering spinning off, their retail operations in recent weeks and months. Last week it was American Realty Capital Properties, with its announcement of plans to separate out its shopping centers into a separate, publicly traded REIT valued at more than $2.2 billion. Vornado Realty Trust is contemplating a spinoff of its suburban shopping center portfolio, according to a report in the Wall Street Journal, citing unnamed sources. Also, Simon Property Group is spinning off some of its regional mall holdings and shopping centers into a company called Washington Prime Group.
Indeed, the trend is not limited to REITs: earlier this year Hess Retail Corp. filed plans with the SEC to spin off its gas station/convenience stores to shareholders, creating an independent company out of what currently is a wholly owned subsidiary of Hess Corp. Then there is Sears’ spin off its Lands’ End business, which has been set for April 4-to say nothing of the rumors that Sears is planning to separate out of some 200 Sears and Kmart stores listed on Seritage Realty Trust’s homepage into a separate REIT, as Finance & Commerce reported earlier this month.
So, evidence is ample that a trend is underway. Let’s talk about why.
Clearly these assets are performing. Free-standing retail has been the leading REIT sector year to date, delivering returns of 16.37%, according to NAREIT. Granted, the retail sector as a whole, which also consists of shopping centers and regional malls, is doing a more moderate 8.85%, but that is still a high level return, especially compared to the S&P 500′s gain of 0.96%.
In a new report, SNL Financial notes that at least in the case of ACRP, deleveraging is a driver. American Realty Capital Properties anticipates that its net debt will slide to $8.44 billion from $9.38 billion and it expects its ratio of net debt to 2014 estimated EBITDA to move down to 7.0x from 7.2x, it said.
“The company’s secured debt to total assets ratio is projected to decline by 90 basis points, while unencumbered assets as a percent of unsecured debt will increase 8 percentage points to 177%. American Realty Capital Properties’ weighted average interest rate is projected to be just 3.5% once the spinoff is complete, and only 7.1% of the company’s total debt will be variable-rate.”
Other REITs, such as Simon and Vornado, appear to be motivated by strategic reasons. Simon Property has flat out said wants to focus solely on its high-quality regional mall portfolio and is spinning off its lesser assets to do so. A similar motivation is suspected to be behind Vornado’s supposed spin off.
SNL also discussed what it believes to be the larger trend behind these developments in its note: the push to pure-play REITs, which has become more popular over the last year.
“In explaining the transaction rationale, American Realty Capital Properties pointed to the fact that it would become a pure-play net lease-focused entity after the spinoff, while the new REIT would be a pure-play shopping center-focused entity,” SNL said.
It is a trend that can be seen in other asset classes as well, SNL added, pointing to Ashford Hospitality Trust’s spinoff of Ashford Hospitality Prime. “The company hoped that the new REIT would be able to capture a higher-valuation multiple by sporting lower leverage and a higher-quality portfolio than the legacy company,” SNL said.