Retailers : Closing Up Shop

Retailers are closing up shop. Here's why...

Another day, another retailer trimming its store count.

On Thursday, J.C. Penney (JCP) said that it will close 40 of its locations -about 4 percent of its stores-this year. Then Macy’s (NYSE:M) said it would close 14 stores in early spring. The announcements came one day after teen retailer Wet Seal (WTSL) said it will shutter about two-thirds of its 500-plus stores , and a bankruptcy judge in Delaware ruled that Deb Shops can shut down nearly 300 stores as part of its liquidation.

These are far from the only retailers whittling down their square footage.

When it filed for Chapter 11 bankruptcy protection last month, teen name Delia’s said it will seek court approval to close all of its stores.

Also last month, Aéropostale (ARO) said it would close 120 stores soon, a significant increase from the 40 or 50 it had originally planned. The company will also close about 125 of its P.S. by Aéropostale children’s stores by the end of the month.

Sears (SHLD), which is trying to turn around its performance after a string of declining sales reports, said last month it would accelerate the number of closings during the year, from 130 to 235.

And RadioShack (RSH), which is negotiating with lenders to gain approval to shutter 1,100 stores,said last month that it had closed 175 locations in 2014 .

Several macroeconomic factors are driving this push toward a smaller store base, analysts said. For one, retailers simply have too many stores, particularly as more consumers shop online. For another, the demographics no longer make sense for stores to exist in certain suburban locations, as more young Americans are flocking to cities and staying there longer.

But it’s more than just external factors. Many of the retailers closing stores are facing company-specific problems that in some ways forced them to downsize.

“When you have a fleet of 1,000 stores, you’re going to have some in lousy locations,” said Craig Johnson, president of Customer Growth Partners. “That’s a tiny subset of the issue.”

One of the biggest issues is that retail is simply overstored, Johnson said. He attributed this supply versus demand imbalance to the fact that retail sales growth has been too tepid to account for an increase in retail real estate. The situation developed even though 2014 saw limited new construction, according to Jesse Tron, a spokesman for the International Council of Shopping Centers.

“If we start most broadly, you have a retail sector that has basically been in slow-growth, no-growth mode for a number of years,” Johnson said. “Meanwhile, store square footage has kept expanding.”

Location also plays a role. Belus Capital Advisors analyst Brian Sozzi said suburban markets are particularly vulnerable, as more Americans move into cities. He used Target (TGT) as an example; although the discounter announced a round of store closures in November , it’s also opening new stores in urban markets.

Johnson added that mall-based locations are facing greater challenges than off-mall concepts, which are stealing share.


It should also come as no surprise that the rapid growth of the Web is causing a traffic decline at physical stores. Johnson said that for the merchandise category, online sales now account for about 13 percent of all retail sales.

While there are certainly external factors to blame, it’s important to note that the companies shuttering a large quantity of stores are also victims of their own mistakes.

For example, much of the trouble facing teen retailers is the fact that their target demographic no longer finds their product appealing. Instead, they’ve begun shopping at fast-fashion stores such as H&M (Stockholmsborsen:HM.B-SE) and Zara (Mercado Continuo: ITX-ES)-which, in contrast, are growing their U.S. square footage.


In a similar vein, Johnson pointed out that department stores’ woes are due, in part, to the fact that their overall share is shrinking. A few years ago, these big-box locations accounted for well over 10 percent of the retail market; now, it’s about 3 percent, he said.

“[J.C. Penney] has to shrink the size of its store base to fit the addressable demand that it can reasonably capture,” he said.

Not all store closings should be viewed as a sign of distress for the retailer. That’s because the beginning of the year is when most retailers evaluate their portfolios. According to preliminary estimates from ICSC, about 45 percent of last year’s announced store closings occurred in the first quarter.

Companies that close underperforming stores to strengthen their portfolio stand in sharp contrast to names such as RadioShack, which “need the store closures to stay alive,” Sozzi said.

Although analysts have long been calling for retailers to trim their square footage, it does come with pitfalls. Closing a store cannot only cause someone to switch to a competitor-it can also limit a company’s distribution network.


“If you’re aggressively closing stores, well now you can’t do this ship from store,” he said.

The past four years have seen the death of more than two dozen indoor malls, with another 60 teetering on the edge, according to data from Green Street Advisors that was first reported by The New York Times. But ICSC’s Tron said he does not foresee a year when the industry will post a net decline in retail space.

He added that occupancy rates were at 92.5 percent in the third quarter, which is back above prerecession levels.

“We kind of see this every year,” he said. [In the] first quarter a bunch of stores close and there’s a little bit of panic. And then new retailers emerge.”

Among new tenants filling these vacancies are gyms, minute clinics, clicks-to-bricks concepts such as Rent the Runway, and international retailers such as Primark. The latter signed a deal for space in seven Sears locations last year.

“For all these deaths there will be life,” Sozzi said.

Offshore Portfolio Tax Reduction


Boardwalk REIT Target $61

BEI.UN : TSX : C$59.88
Target: C$61.00

With a portfolio of 35,277 units, Boardwalk REIT is the
largest owner of rental apartments in Canada, with
dominant market positions in Edmonton, Calgary, Regina,
and Saskatoon. Some of Boardwalk’s other markets
include Montreal, Quebec City, London, and Windsor.
All amounts in C$ unless otherwise noted.

Real Estate — Real Estate Investment Trusts
Boardwalk reported FFO per unit of $0.79, up 8% from the $0.73 earned in
Q4/12, and above our estimate of $0.76. AFFO per unit for Q4/13 was $0.68, well
above the $0.62 earned in the year-ago period. For the full-year 2013, Boardwalk
reported FFO per unit of $3.21, up 12% from the $2.87 earned in 2012, and
above management’s most recently updated guidance range of $3.10-3.20.
The strong year-over-year growth in cash flow was driven primarily by solid
same-property NOI growth as well as interest expense savings from refinancing
maturing debt at lower rates. These were offset in part by an increase in G&A.
While Boardwalk has often been overly conservative in its guidance, we had
believed that the most recent range was realistic considering the cold winter and
recent cooling of fundamentals in Saskatchewan.
February monthly rental rate survey – rental rates modestly increase while use of
incentives shifts markets. For properties included in our survey, asking rental
rates generally increased month-over-month. The overall use of incentives
remained fairly stable compared to the prior month; however, the markets in
which incentives were used differed month-over-month. The use of incentives is
not surprising for the slower winter months, and the incentives being offered are
not overly material.
2014 guidance confirmed; distribution increased. Along with Q4/13 results,
management confirmed its 2014 guidance of FFO per diluted unit ranging from
$3.25-3.45, which implies growth of 4.4% at the mid-point. Our estimate of $3.44
equates to growth of 6.9% and sits at the high end of guidance. In addition, the
Board of Trustees approved a 3.0% increase in the monthly distribution to $0.17
per unit ($2.04 annualized) which equates to 68% of our 2014 estimate of AFFO.
We believe another distribution increase is possible later in the year.
Maintain HOLD rating and C$61.00 target price. We continue to utilize a 5.4%
cap rate to value Boardwalk’s portfolio, and our updated net asset value (NAV)
per unit estimate is $58.04, up from $57.80. Our target price of C$61.00 is based
on a modest premium to NAV, which combined with an annual distribution of
$2.04 per unit, implies a 12-month forecast total return of 5%. We continue to
rate Boardwalk REIT a HOLD.


Trusts for Tax Planning, Tax Avoidance, Estate Planning

It is not enough to earn gains in your portfolio – you have to retain that money by tax planning.

This article is reprinted from the February 8th  edition of The Tax Guru

Mitt Romney received a lot of negative attention when he revealed he had $200 Million dollars in trust funds in the Cayman Islands. Had he been elected his critics said he would have been the first American President to have a Swiss Bank account.

Trusts are widely used and available for a variety of purposes.

Common objectives for trusts are to place assets that are growing into the hands of trusts that will be taxed at a lesser rate than the settlor of the trust  thus such transfers reduce the estate tax liability,  protect property from creditors, and  avoid probate ( a trust as a legal entity cannot die). Many international clients are seeking to avoid the income tax or creditor scrutiny that attaches to public ownership.

The trusts are often set up as agreements to hold and control property without disclosing that the original owner is still in control.From the taxation viewpoint of the U.S. Revenue Service such control would mean the trust is not effective .

Placing property, money , shares in a trust can give immunity from estate taxes, resistance to probate, creditors and so on. Your goal is the transfer so that you do not own the property legally or beneficially and therefore creditors pursuing you cannot touch the trust – if they even learn of its existence.

Suppose that you want to set up a trust.You have assets that you want to protect – assets that may not be as large as the hedge funds of Mitt Romney but can maintain their growth and provide your family a greater future if left to grow.

Setting up the trust. The person  creating the trust is commonly known as the trustor, though you may sometimes see the terms settlor or grantor.

  • Objective of the trust. You use different types of trusts to achieve a variety of specific income tax and / or  estate-planning objectives. You can establish a single estate-planning objective,-others help you achieve more than one goal.
  • Property. After you place property into a trust, that property is formally known as trust property and is then removed from your use as an asset .If you – in the simplest case – give property to another person you will be unable to have it returned to you. In the divorce work I did this was a point brought  home to many an older, sadder  but wiser man.
    • Beneficiary. In your estate planning (your will, for example), a trust’s beneficiary (or, if more than one, beneficiaries) benefits from the trust in some way, usually because the person or institution will eventually receive some or all of the property that was placed into trust.
    • Trustee. (The person in charge of the trust is the trustee). You cannot have direction over a trust if you are arguing that the property of the trust is no longer in your control. The trustee needs to understand the rules for the type of trust he or she is  managing to make sure everything in the trust stays in working order. Use of a nominee shows control in another person and removes your name from the trust document
    • Rules. Finally, some of the rules that must be followed are inherently part of the type of trust used, while other rules depend on what is specified in the trust agreement. Your concern should be on the taxation of the trust – seeking to avoid the income being attributed to you and thus of no tax benefit .This is the dreaded attribution section of the tax codes you seek to avoid.

    To set up a trust you will require professional assistance. The legal language is a safeguard tested in courts over centuries but it is the arcane legalese unfamiliar to most. The scope and complexity will vary with the assets, how they are to be accumulated, management of the trust  and your objectives.The simplest document may only be a dozen pages long and a complex trust of stock market assets and cash may be several hundred pages because of the necessity of setting out nominee management and control. Thus setting up the trust will be several thousand dollars in consultant fees on a one time basis -then ongoing annual registration is about $ 1000 in most jurisdictions.

    For a no cost / no obligation consultation please email or call Jack direct at 604-858-3202 ( same time zone as Los Angeles).

Only Buy Real Estate Projects You Can See, Touch and Feel

I wrote the book on Real Estate – literally – ( How To Make Real Profits In Real Estate) . It makes me ill that investors buy on the basis of a billboard that says ” Donald Trump Will Build Here”. The Donald lends his name in return for your deposit money to a developer. I have listings in Canada that are proven profitable investments – sitting because investors want to tell their friends they are investing with Donald Trump or some new beach front in Panama. Common sense is highly valued because it is so uncommon.

Taken literally, “Buy what you see” leads you to conclude that you should invest only in real estate that is 100% complete, totally built-out, with all infrastructure and amenities in place.

If you’re an ultra-conservative investor or a retiree not interested in taking any chances, this safe-bet strategy can make sense.

However, the point of the advice is to help the would-be real estate investor get back to basics. To remind you of the fundamentals of real estate markets, cycles, and pricing.

If what you see at the time of your purchase is a plot of land with no improvements or infrastructure, then that’s what you’re buying…and that’s what you should pay for.

That’s the crux of the thing. Make sure that, whatever you’re buying, you’re paying a price that reflects the reality of the product at the time of your purchase.

“Buy what you see” does not translate to mean never buy pre-construction or raw land. It means to understand what you’re buying…so you can assess and accommodate for the risks…and so that you pay the price you should pay given what you’re paying for.

The trouble starts when investors forget this fundamental and are tempted into paying “something-there” prices…when there’s nothing there.

In Panama, for example, during the heyday of the pre-construction boom, people began paying prices that reflected potential values, not current, pre-built values. That’s not buying and paying for what you see. That’s buying and paying for what some developer is promising you. When you buy early, you should pay a price that reflects a discount compared with comparable completed projects.

Unfortunately, in Panama, as elsewhere through various boom and bust cycles, the developers got greedy…and the buyers, greedy, too, were led astray by promises of profit supported by claims from earlier buyers who had, in fact, bought at discounts to completed construction prices.

If your risk tolerance is low, then you want to follow the advice literally. Buy only what you see.

Tricon Capital Group Inc A Canadian Player In U.S. Housing

TCN : TSX : C$7.80
Target: C$8.50

Source: Interactive Data Corporation
Tricon is a leading asset manager focused on investing in North American residential real estate development and single family homes. The company has over $1.6 billion of assets under management and investments. Tricon’s investments are focused on four markets in Canada (Toronto, Vancouver, Calgary, and Edmonton) and a number of markets in the US including California, Phoenix, Atlanta, Houston, Charlotte, and South Florida.
All amounts in C$ unless otherwise noted.

Real Estate — Real Estate
Tricon reported Q3/13 adjusted diluted EPS of $0.12, up from $0.05 earned in the year-ago quarter, driven by cash flow earned from Tricon American Homes (the company’s single family home rental division), a fair value gain and performance fees associated with its Tricon IX investment, and one-time acquisition fees earned on its two new separate accounts. Of note, advisory fees paid of $4.6 million ($0.04 per share) were excluded in reported adjusted diluted EPS. Tricon’s Q3/13 adjusted EPS was also ahead of our estimate of $0.03. The significant positive variance to our estimate was due to several items, mostly arising from the Tricon IX transaction.
Acquisition of Tricon IX gives glimpse into principal investing strategy. During Q3/13, Tricon acquired a 68.4% interest in one of its funds, Tricon IX, for US$261 million. The remaining 31.6% ownership interest in Tricon IX continues to be held by the State Board of Administration of Florida. Notwithstanding that the acquisition of the 68.4% interest in Tricon IX impacted just half of Q3/13, this quarter’s results gave investors an up close view of Tricon IX’s cash flow generation potential, and also of Tricon’s opportunities in principal investing, in addition to its core asset management business.
Increasing target price to C$8.50, maintain BUY rating. We continue to value Tricon on a sum-of-the parts basis. Following Q3/13 results that gave us additional clarity on the potential investment income arising from the Tricon IX acquisition, we have greater confidence in ascribing value to this cash flow. We believe that Tricon remains well positioned to benefit from a U.S. housing recovery, which appears to be currently underway. We expect to see meaningful cash flow growth over the next few years as projects currently under development held within Tricon IX are completed and sold. Tricon is currently trading at an 8.1% discount to our updated NAV estimate. We are increasing our target price to C$8.50 (from C$7.15), in line with our updated estimate of NAV per share. Combined with an annual dividend of $0.24 per share (3.1% yield), our target price implies a 12-month total return of 12%. We continue to rate Tricon Capital Group Inc. a BUY.

Altus Group Limited

Toronto Stock Exchange, Toronto
Toronto Stock Exchange, Toronto (Photo credit: Wikipedia)

AIF : TSX : C$8.21
Target: C$11.00

Altus Group is a national provider of real estate consulting and advisory services in Canada. Services include property tax appeals, property valuation for acquisitions and public reporting purposes, provision of cost estimates for major development projects, and land surveying.
All amounts in C$

Investment recommendation

We reiterate our BUY rating and C$11.00 target price on Altus shares after GE Capital Real Estate announced that it is now using ARGUS Enterprise (AE). In our view, Altus is well positioned to benefit from the secular trend towards desired independent real estate advice and improved transparency on behalf of asset managers. By leveraging its dominant market position in Canadian RVA and Tax, we believe Altus can post impressive organic growth in the US. The company has solid momentum following major contract signings with CalPERS, PRIM, and now GE in the last ten months.
Investment highlights 
We view the deployment of AE by GE Capital Real Estate as a massive endorsement of the software’s value proposition to institutional asset
managers. With over $40 billion in global commercial real estate assets, we believe there could be further opportunities for Altus and ARGUS to
cross-sell consulting services and/or additional software packages to this major client.
Altus shares trade at 6.3x 2014E EBITDA, in line with the professional services group despite Altus’ attractive growth profile. Our one-year target price is based on 7.0x 2014E EBITDA plus $0.75 per share for Altus’ 26% equity stake Real Matters.
We see room for Altus’ valuation multiple to expand over time as the recurring revenue nature of the ARGUS business is recognised by the market. For example, ARGUS comps trade at 15x 2014E EBITDA. While we wait for a potential multiple re-rating, investors enjoy a 7.3% yield.

Dundee Industrial REIT

One Spadina Cres
One Spadina Cres (Photo credit: Wikipedia)

DIR.UN : TSX : 10.29
Target: C$11.25 

Dundee Industrial REIT owns a geographically diversified portfolio of industrial properties throughout Canada. The properties are predominantly multi-tenanted and include a mix of flex space, light manufacturing and warehouse & distribution space. The REIT’s portfolio is largely in major
Canadian industrial markets, including Calgary, the Greater Toronto Area, the Greater Montreal Area and the Greater Halifax Area.
All amounts in C$ unless otherwise noted.

With the creation of Dundee Industrial REIT, the Dundee real estate organization has now established a number of pure-play real estate investment trusts, including an international REIT and an office-focused REIT.
We believe that Dundee Industrial was created for two main reasons: 1) by selling its industrial assets, Dundee REIT became a pure play on the
Canadian office market, and 2) the creation of Dundee Industrial also provides a vehicle whereby Dundee can grow its industrial business.
Opportunity to consolidate Canadian industrial assets. Since its IPO in October 2012, Dundee Industrial has completed nearly $900 million of
acquisitions, highlighting the ability of the Dundee organization to rapidly source and complete both large and small transactions. We note that the
Canadian industrial real estate market is characterized by a lack of significant institutional ownership, and we expect Dundee Industrial to remain acquisitive in an effort to consolidate industrial properties.
Steady fundamentals and accretive acquisitions should lead to continued cash flow growth. We expect the REIT to remain acquisitive going  forward as it continues to consolidate industrial real estate across Canada. Further supporting cash flow growth, we expect same-property NOI to rise as rental rates are marked to market upon expiry. We are forecasting AFFO per diluted unit of $0.74 in 2013 and $0.82 in 2014. The REIT currently pays an annualized distribution of $0.70 per unit. This equates to a 2014E AFFO payout ratio of 85%.
Initiating coverage with a C$11.25 target price and BUY rating. Our target price of C$11.25 equates to a 3.0% premium to our NAV per unit estimate of $10.92. The modest premium reflects management’s ability to source substantial acquisitions, and manage a geographically diverse portfolio of multi-tenant properties.
Combined with an annual distribution of $0.70 per unit, our target price of C$11.25 equates to a 12-month forecast total return of 16%. We are
initiating coverage of Dundee Industrial REIT with a BUY rating.