WMT Walmart Inc

By Esther Fung 

Investors have been pulling back from retail real estate lately as online shopping continues to encroach on brick-and-mortar locations. But investors are still hungry for one category of retail property: grocery stores.

Small investors are buying up stand-alone retail sites that house Wal-Mart Stores Inc.'s smaller grocery stores in the South, eyeing the stable revenues being generated by the largest U.S. grocer.

Last week, an investor bought four buildings that house Walmart Neighborhood Market in Tennessee for $49.5 million from Chattanooga-based developer Hutton Cos. Another three buildings are currently in escrow for three separate buyers.

These buildings have so-called triple-net-lease structures, which are typically leased to single tenants such as McDonalds's Corp. or CVS Corp. Landlords simply own the buildings, while tenants under long-term leases of about 10 to 20 years manage the properties and pay the operating expenses and taxes. These real-estate holdings are seen to generate low but stable yields.

"The buyers are typically baby boomers and other high net worth individuals looking for something with no landlord maintenance," said Eric Carlton, senior vice president at Colliers International, a real-estate services firm.

The Wal-Mart locations each changed hands for $12 million to $15 million, prices that implied capitalization rates, a measure of yield, of 5.15% to 5.75%.

Wal-Mart is a creditworthy tenant with a strong brand name that attracts a lot of buyers that are "turning to coupon clipping," said Mr. Carlton, who is the broker representing Hutton in these transactions. Older investors of past generations clipped coupons to send to a utility company that offered bonds, and received quarterly checks.

Investors these days generally prefer retail real estate featuring tenants that are more resistant to competition from the internet, such as grocery stores, fitness centers, health clinics and laundromats.

Online grocery sales, for instance, accounted for less than 1% of the $1 trillion U.S. grocery retail market in 2016, making it one of the lowest online-penetrated categories in retail, according to Moody's Investors Service.

Grocery-anchored shopping centers are priced to deliver superior private-market returns compared with so-called power centers, said real-estate research firm Green Street Advisors in a recent research note. Power centers are open-air shopping centers that typically have off-price, apparel or office-supply retailers as tenants.

"It's been a profitable and high-profile assignment for us to invest in, build and now offer for sale these Wal-Mart occupied stores that have brought with them jobs, lower prices, and convenience to many communities where the closest grocery store was sometimes 100 miles or more distant from where customers live," said Karen Hutton, chief executive of Hutton Cos.

Hutton was one of the developers retained by Wal-Mart to build 30 sites two years ago, and another 15 sites are for sale, mainly in secondary markets in Louisiana, Alabama, South Carolina, Tennessee and Georgia.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

July 25, 2017 18:19 ET (22:19 GMT)

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