University Colorado 2.0

Introduction

Before commencing the presentation, the speaker extends gratitude to Cornell for the opportunity to compete and to the judges for their time and feedback. LREI (Lampard Real Estate Investments) acknowledges that their investment in the Spanish market has been delayed due to uncertain economic conditions. However, as Spain recovers from the global recession, LREI identifies a promising investment opportunity with potential for significant value and profit for its investors, particularly related to its second fund.

Overview of the Deal Profile

The speakers provide a comprehensive overview of the critical components of the deal profile and contextualize the macroeconomic and local market conditions in Spain. Following that, the focus shifts to the unique tenant strategy and various financial considerations including scenarios and sensitivity analysis related to the proposed deal.

Deal Structure and Key Players

Major Players

  • Lampard Real Estate Investments (LREI): The buyer of the property.
  • Sol Invorzones: The seller of the asset.
  • Mercado de Fuencarral (MDF): The property in question; a nine-story mixed-use asset with retail space on the lower three floors, totaling 2,400 square meters, indicated on their presentation in green.

Property Description

MDF is identified as having the highest and best use as a flagship store due to current market trends. Sol is expected to deliver the asset in white box condition in two weeks, largely driven by their motivation to sell, given MDF's low occupancy rate of 60% and high turnover of 33%.

Financial Overview

Cap Rates

LREI conducted a base case analysis with a going-in capitalization (cap) rate of 6.8% and anticipates a going-out cap rate of 5.6%. The cap rates reflect market volatility and associated risks.

Market Analysis

Location and Foot Traffic

MDF is situated on Calle De Fuencarral, a major shopping thoroughfare, and is highlighted in red on their presentation map. Nearby attractions include Grand Via, which hosts foot traffic of approximately 21,000 pedestrians per day. The proximity to metro stations is also significant for increasing the value perceived by tenants and investors alike.

Investment Climate

Retail opportunities are flourishing in Spain, especially in 2015, driven by positive indicators including consumer price index (CPI), household consumption, and a decline in unemployment rates. Notably, January 1 saw the lifting of the Urban Lease Act of 1965, effectively abolishing rent controls, allowing tenants to negotiate rental terms more closely aligned with market prices.

Investment Volume

In 2015, investment volume is projected to significantly increase, with foreign investors accounting for around 50% of total volume, highlighting the global interest in the Spanish retail market.

Tenant Considerations

Tenant Discussions

Zara

  • Internationally successful retailer with a strong Spanish presence but restrictive lease terms that limit profit potential.

Decathlon

  • Affordable athletic retailer entering the Spanish market, with favorable lease terms. However, brand equity for new entrants would be challenging.

Topshop

  • Strong international brand interest; proposed as the ideal tenant contingent upon obtaining a corporate guarantee. Negotiating a 10% profit participation clause alongside the lease could incentivize Topshop while maximizing return potential.

Overall retention on the investment would deliver a projected Internal Rate of Return (IRR) of 23.8% if Topshop is secured; if not, Decathlon could be considered as an alternative with a higher projected IRR of 28.5%.

Financing Strategy

Debt Financing Considerations

When assessing financing options, the team determined that options A and B, which are a debt fund and a CMBS loan, are not viable due to an initial lockout period. Therefore, the recommendation is to purchase the property using 100% equity. Specific stratagems include:

  1. A requirement of $15,000,000 additional capital to secure the property.
  2. Allocation of $1,500,000 for reserves to improve the asset's facade and undertake necessary tenant improvements.

Financial Recommendations

The analysis anticipates a conservative disposition price of €32,400,000 with an exit cap rate of 5.6%, derived from approximations based on retail cap rate yields over a ten-year Spanish government bond.

Sensitivity and Risk Analysis

The analysis exhibits the volatility of cap rates based on the market and projected IRR as determined through various leasing strategies and economic factors such as demand, supply, and inflation. A focus on how minor changes in cap rates can significantly influence returns was emphasized.

Conclusion

The overarching narrative is based on strengthening economic indicators leading to favorable conditions for investment strategies, especially for retail spaces such as Topshop in the Fuencarral district. The proposed strategy sees a one-year holding period as conducive for maximizing returns through developed leasing strategies, ultimately projecting a profit of €10,700,000 for the fund.

Q&A

Several key points were raised during the question and answer segment, focusing on tenant choice between Decathlon and Topshop, the rationale behind the one-year hold, and discrepancies between risk assessments and their conservative financial approach alongside tenant strategy.

This document comprehensively captures the investments, tenant strategies, and market conditions discussed during the entire presentation, offering a foundational tool for further understanding of LREI's operational strategy.