ICSC European Retail Property School

Creating an effective Business

Plan Workshop

Case Study “Prime Center”

Wednesday, July 9th 13:30 – 17:00Scandic Berlin Potsdamer Platz, Berlin, Germany

Zita Guerra / Bernd Huber

Zita Guerra

• Regional Manager in the Property Management company of SonaeSierra (Portugal)

• “ Abitur” in the German School in Lisbon• Degree in Business Administration and a Marketing MBA• Career start at Procter& Gamble (responsible for the Media

investments for all product categories)• Product Manager and Key-Account for hypermarkets at Electrolux• At Sierra since 1997:

– Marketing Manager– General Manager of Centro Colombo– 2005: General Manager at Sierra’s start-up operation in Germany

(Alexa/Berlin)– Coordination of several shopping centres around Portugal

• Teacher of the ICSC European Retail School since 2003• Mother of twins : )

Introduction

Bernd Huber, MRICS

• Almost two decades of R/E experience (broker, building administrator, developer, asset-, investment-, and expansion manager, Charted Surveyor)

• MD Reiter Immobilien Salzburg• Senior Portfolio Manager REDEVCO CE• External Senior Consultant to several developers • MD TRIO/DELTA Holding• Member of the Board of the IFA-Group• CEO of IMAG Real Estate Consultancy• Teacher of the ICSC ERPS since 2006

• Still learning something new every day

Introduction

Who are You?

What are the main contents of the Business Plan?

Which groups must collaborate in the drawing of an Business Plan?

What would you like to practice?

Introduction

The Business Plan establishesperformance projections based onimplementing the recommendations.

It sets the tone for an overall direction tomaximize value in the current and futureyears through leasing and merchandisingstrategies, consumer marketing,redevelopment opportunities, and capitalimprovements to the physical plant.

Definition of a Business Plan

• The Leasing Plan

• The Operational Plan

• The Marketing Plan

• The Redevelopment Plan

• The Financial and Capital Plan

The Components

• Start with a “BIG PICTURE”, Zoom In

• Delegate data collection

• Maintain a Schedule

• Keep an open mind

• Size only counts if you can make it happen (Big Plans Gather Dust)

The Essentials

Prime Center – Property description:

• Prime Center has about 20.000 m2 of GLA, • anchored by a hypermarket and has 24 shops (floor plan attached)• located in the outskirts of Vienna in an affluent and increasingly

popular area• positive census forecasts in population growth as well as in average

spending power• constructed prior to 1990 • the highway located directly adjacent • the improved access never came to life due to the Municipality

despite all the land and zoning issues had been clarified• typical Vienna customer will need around 30 minutes driving time • layout of the plot is rectangular and offers more than sufficient

parking • parts of the parking space are closed off to prevent non customers

parking as well as illegal littering

PRIME CENTER

PRIME CENTER - Property Layout

PRIME CENTER – Rent Roll

Unit Shop nr. Tenant Size (m2)

Sector of

Activity Contract term

Net Rent/

month (€)

Net Rent/

year (€)

Net Rent/

month/m2 (€) Comments

10 C&A 1.354 Fashion Dec-17 25.726 308.712 19

17 Casino Cleaners 70 Services Apr-17 2.450 29.400 35

5 CBD Bank 24 Services Dec-16 1.680 20.160 70

20 Flowers Flora 125 Services Dec-16 4.125 49.500 33

14 Golden Jewellery 230 Accessories Dec-15 3.450 41.400 15

4 H&M 1.053 Fashion Dec-17 22.113 265.356 21

3 Hard & Software Co. 360 Electronics May-14 9.000 108.000 25

8 Jake's Men Shop 509 Fashion June-14 20.360 244.320 40 Weak local apparel chain

1 Hypermarket 10.675 Hypermarket Dec-18 117.425 1.409.100 11

13 Intersport 750 Fashion Feb-21 13.500 162.000 18

25 Jake's Dinner 149 Restaurant Dec-14 5.960 71.520 40 Sublessors often changing

6 Jake's Leatherware 145 Fashion June-14 5.800 69.600 40 All Jake's contracts have a caped OPEX fee

7 Jake's Watches 135 Accessories June-14 5.400 64.800 40 Strong local chain

16 Jeans Point 352 Fashion Dec-16 9.504 114.048 27 Strong local apparel chain

21 JJ copymax 75 Services Dec-16 2.775 33.300 37

19 Kanton Kitchen 277 Restaurant Dec-16 12.465 149.580 45

22 Kenvelo 450 Fashion Feb-20 11.250 135.000 25

18 Angelo's Hairlaboratory 125 Services Sep-19 4.750 57.000 38

26 Mango 590 Fashion Dec-17 14.750 177.000 25 Seeks additional 150 m2

9 Okay Electronics 1.234 Electronics Aug-20 20.978 251.736 17 Fixed base rent, Turnover rent 9%

24 Papa Pizza 289 Restaurant Dec-16 11.271 135.252 39 Extraordinary Performance

12 Pete's Insurance Brokerage 99 Services June-15 5.940 71.280 60 Rent payment delay: 3 months

2 Stargate Coffee 75 Restaurant Dec-15 4.125 49.500 55

23 Telecom 3 275 Services May-17 9.625 115.500 35

11 (Vacant shop) 135 --- --- ERV € 35/m² p.m.

Current TOTAL 19.555 344.422 4.133.064 17,74

TOTAL incl. Vacancy (ERV) 19.555 349.147 4.189.764 17,85

PRIME CENTER - RENT ROLL AS OF 31.12.2013

Déjà-vu – the owner´s Strategy:

• Prime center was acquired by the French company Déjà-vu five years ago

• Déjà-vu as major French player in the distribution sector owns and operates several retail brands and chains

• the acquisition should serve the strategically planned step into the real estate investment market on international base

• the international expansion strategy was not followed consequently after the first acquisition by Déjà-vu

PRIME CENTER

Trendy Center – the competition:

• soon after buying Prime-Center, “Trendy Center”, opened• Trendy Center has double the size of Prime Center, a good

access to the main highway, and some major anchor tenants (Zara, 8 screen multiplex cinema, Media Markt and a big supermarket)

• opening of Trendy Center was a major event in the region, supported by massive advertising and promotional campaigns

• the tenants of Trendy Center have a top sales performance even in the 1st year of operation

• the tenants even volunteered to do a testimonial campaign for another center being opened by the same owner company in another part of the country

PRIME CENTER

Prime Center Management:

• is composed by the center manager (Mr. You) and charming Marketing assistant (Mrs. High Heels)

• Mr. You was hired ten years ago • he knows all the tenants and his personal lives details• he knows that the center is not well maintained, but that is not

his fault, • once tried to convince the owner to invest some money in

general painting but immediately declined• he knows that the tenants do not accept to pay higher service

charges• Vacancies are permanently handled the same way: Mr. You calls

his friend in downtown, who manages a real estate agency, and the briefing is always the same: “I do not care who it is, as long as it enters quickly and pays at least 15€/m2.”

PRIME CENTER

Prime Center Management:

• Mrs. High Heels had a great life until opening of Trendy Center

• Only activity was development of posters (every 3 months) to be put on the center doors announcing the opening schedule and the hypermarket promotions

• since Trendy Center opening increasing pressure by the own tenants and the Déjà-vu board

• last Board meeting Monsieur Boss (Déjà-vu’s CEO) played the U2 song “ With or without you…”.

• Mr. You decided to show that he is the best man for the turnaround job.

PRIME CENTER

Prime Center Turnaround Strategy:

• the next Board meeting is scheduled for next week

• CEO Monsieur Boss expects a presentation of a Business Plan for Prime Center assuming two scenarios: hold or sell

• this means Mr. You will have - among others - to calculate the center value and find ways to increase it

PRIME CENTER

• you will assist Mr. You in the preparation of a business plan for the upcoming Board Meeting

• assignment to a working groups by lecturers

• Business plan must be in structured and written presentation including a short description of the status quo, the response to questions 1 – 6, and all related financial and time issues

• 60 min time for the preparation and the mandatory written presentation

• 15 min time for the presentation in front of the owner

• the owner will ask questions during and after your presentation

Task:

1) What is the average annual rent per m2 for the entire Center (calculate the ERV of the vacancy with € 35/m²)? Are all units in line with your expectations? What stands out, what are the key opportunities/threats?

2) How would you analyze and describe the tenant mix of the Center? What are the key challenges? What is missing? What is overrepresented? How would you improve it, including mix layout, and which Marketing tools would you use to guide you?

3) Mrs. High Heels does not have any idea what to propose in terms of Marketing activities. Can you help her?

4) Mr. You decided to propose an investment plan for Prime Center. Which should be his priorities?

Questions:

5) Calculate the actual value of the Center (as is) on the base of a market capitalization yield of 6,25%. Assume that 1,5% of the Center income must be spent for non-recoverable costs (see capped operating expenses of Jake stores). If possible reflect also the vacancy in unit 11 with expected 6 months; the unit will be let on shell-and-core basis, and you are doing the letting yourself (therefore no further value deductions necessary).

6) Indicate the current value impact of the not reimbursable (capped) operating expenses.

Questions:

7) Rework the tenancy schedule based on following assumptions:

All Jake`s shops except the Watch store are refurbished, reconfigured, and re-rented resulting in an average of €35/m2 for the total area. All marketing and refurbishment costs are borne by the new tenants. The same applies for the vacant unit and the office area which will be connected. The Golden Jeweler will be replaced with another retailer based upon the aforementioned conditions. Mango will expand to Unit 25 and total lease can be renegotiated to market rent.

8) Recalculate the value of the property assuming that all new lease contracts are already effective, all running costs are now recoverable, and the improvement in the tenancy structure justifies for a downward yield shift of 50 base points in the capitalization rate.

Questions:

• The Value of the property is calculated by the IRV-Formula (Income (Net Operating Income) divided by Rate (capitalization rate in %) equals the Value).

• A “yield shift” indicates a change of the capitalization rate and denominates the extent of the change according the following ratio: 1% equals 100 basepoints.

• Assume that Jake`s stores and the vacancy can be re-rented at a base rent of 35€/m2. Hard & Software & Co will only renew for the same rent.

Notes:

WHAT WILL YOU TAKE BACK?

WHAT WAS YOUR LEARNING MOMENT?

Conclusion

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