Oak Street Real Estate Capital is sponsoring $416.8 million in bonds secured by a newly acquired portfolio of retail, office and industrial properties net-leased to a chain of California-based grocery stores.
According to Moody’s Investors Service, the Chicago-based private real estate equity firm recently took out a first-lien mortgage, via arranger Wells Fargo, to partially finance its $694.7 million acquisition of the portfolio last November.
The portfolio consists of properties leased to 41 grocery stores, two warehouse/distribution centers and office buildings that serve as the headquarters for Modesto, Calif.-based Save Mart. Local media reports state Oak Street purchased the properties from Save Mart or its affiliate companies through a net-lease/buyback arrangement. Since its founding in 2009, Oak Street has focused on acquiring properties net-leased to investment-grade rated tenants subject to long-term leases, according to Moody's.
The Save Mart stores are located in 13 major metropolitan areas in California and Nevada.
The REMIC transaction, dubbed Wells Fargo Commercial Mortgage Trust 2021-SAVE, features five classes of senior and subordinate bonds, led by a $253.3 million Class A tranche with preliminary Aaa ratings from Moody’s. The capital stack also includes two interest-only tranches.
The notes are secured by the leasehold fee interests of the Save Mart leases. Each of the grocery stores serves an average area population of 295,363 (five square miles) with average median household incomes of $85,348.
A large cross-section of the stores are located in Northern California, with 21 locations in the metropolitan statistical areas of San Francisco and San Jose. While stores in major markets trend toward lesser cash flow and cap rate variability compared to secondary markets, Moody’s stated, these stores also “tend to be more liquid in nature” resulting in greater recovery in the event of default.
With $287.7 million in cash equity in the deal, Oak Street’s loan-to-cost ratio is 59.2%, according to Moody’s.
The partial interest-only loan has an initial two year term at an interest rate of 2.85% over one-month Libor, with five one-year extension options. Save Mart is tied to the properties under a unitary master lease agreement with an initial lease team of 16 years, or nine years past the fully-extended loan maturity.
Save Mart experienced a decline in earnings between 2017 and 2019, Moody’s report stated, although that “largely” coincides with about $190 million in corporate reinvestments in management structural changes as well as store-renovation capital.
Save Mart’s revenues also fell since 2018 due to a competitive price-cut strategy, a move which appeared to pay off in 2020 first-quarter results showing a 4.4% quarter-over-quarter increase in units sold, per Moody’s. Third-quarter sales were 17% above comparable 2017 figures, and earnings were improved 16.4% over the same period.
“Overall, performance has rebounded in 2020 as the tenant is beginning to reap the benefits of the various strategic investments over the last three years,” Moody’s report stated.
