Retail AM Metrics/ Valuation
Currently working for a long term holder and we don't really monitor the performance closely, so I am curious what metrics does a LP or other short term operators use to evaluate a retail asset's performance?
The first few off the top of my head are operating ratio (but what's considered good vs. bad?) and DSCR as seen in case studies for all asset type.
DSCR is obviously good for general oversight of the property- ensuring the asset is operating in the green..
Cash on Cash % is the name of the game for longterm asset holders.
What would be the appropriate denominator if we've owned the land for decades?
I would love to hear someone else's opinion on this: but purely from an internal tracking standpoint I think it would makes sense to use a hypothetical equity scenario as the denominator-- Like 20-25% of the value of the asset (appraised value? cap rate based off comps?). This would give a good snapshot into what kind of returns a current investor would be achieving.
Are you interested in either the health as a retail asset or the investment returns? Both?
Also, do you have the type of asset? If you need to mark at market, the metrics to inform your approach to assign a cap rate will vary between a regional or power center versus a single tenant retail asset leased to Walgreens. For example, if it's a dynamic retail center, you may be more interested in Sales PSF (despite arguments this may be losing relevance), foot traffic, and other factors. If it's a Cleaners, Bank, Pharmacy, and small sandwich shop splitting a building, I don't think Sales PSF will matter as much - now maybe you're more focused on credit of the lessees.
Great question - I think from an operator perspective, we care about the health of the asset since the initial investment is from decades ago, it's almost irrelevant.
I would guess that for our LP, they would care more about the investment return?
Can traffic be translated to investment return somehow?
In my opinion, traffic is hard to use in connection with investment return today. There's more than one factor which drive NOI. Traffic is certainly involved in that bag of factors, but I don't think it's the most direct way. People say sales drive rents, and that is still the most relevant in my opinion. But, even then, the closest I'd get to involving sales and investment returns is calculating the property's economic sales psf, and that would be more useful to evaluate an asset(s) within in a portfolio, or a portfolio.
I think the simpler it's presented to a LP the better. You can fiddle around with different statistics internally but it's better not to volunteer a new metric created and introduced from a vacuum (first time) and then down the road discover some nuance that informs a conclusion which isn't accurate. Example, NOI over traffic - do you want it to be higher or lower? Traffic can be declining but the rents are above market and you have a high ratio!! But the leases are turning over vacant or at reduced rent. Conversely, traffic is booming at the Center, tenants are going gangbusters, and you keep renewing at higher rents but not at the pace of traffic growing because every lease isn't turning over every year, now you have a low ratio. But which asset would you rather own? I don't have any to suggest, and would be hesitant to volunteer something new to a LP.
Metrics from an operating perspective, calculate your Leasing Spreads, Sales PSF, Average Base Rent, Cost of Occupancy, see how your collections are (either monthly %s, or just generally find out what the property's AR sits at), understand traffic if you have that ability, and obviously your Occupancy.
But then again, what type of asset is it? Mall, strip center, building with three tenants, single retail tenant? That would impact the relevancy of each metric
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