Hastings and Orscheln Shopping Center

After: 
Before: 

950 N. Westwood Blvd., Poplar Bluff, MO

The Challenge

This property was formerly occupied by a Kmart department store that had closed operations but remained obligated on its lease. Kmart, in turn, had sub-leased the property to two regional sub-tenants, Hastings Entertainment, Inc. and Orscheln Farm & Home, on short-term leases. The property was on a long-term land lease and the future viability of Kmart was in question due to the company's deteriorating financial condition with widespread rumors of an imminent bankruptcy filing. In addition, the submarket was very small, the real estate market was flat, and the property suffered from a need for significant capital improvements and repair, including a new roof, HVAC units, and parking lot. Given the uncertain status of the Kmart, the deteriorating physical condition of the property, and their uncertain short-term sub-leases, both Hastings and Orscheln were actively looking to relocate their stores. If Kmart declared bankruptcy or if one or both sub-tenants vacated the property, the value of the already distressed property would be severely diminished.

Opportunity Identified

In what would have been viewed as an undesirable situation, Capstone saw opportunity and substantial unrealized value stemming from three areas: the low property basis at below-replacement cost, the below-market rental rates being paid by the existing sub-tenants and the solid retail location with additional developable land. Capstone believed that, properly managed, these three factors afforded strong upside potential in the event that Kmart cancelled its lease obligations in bankruptcy, even with the downside of a smaller pool of buyers given the land lease. In addition, a risk premium would be realized if Kmart merely remained on the lease and continued to pay rent.

Results for Capstone Investors: 25% IRR since 2001

Capstone acquired the property at an advantageous price due to the uncertainty surrounding Kmart, the land lease and the property’s physical condition. Capstone immediately initiated discussions with Hastings and Orscheln at both the local and corporate levels to discover and formulate a plan to immediately address the needs of the sub-tenants to assure them so they would not vacate the property. Capstone also quickly established a working relationship with officers at Kmart Corporation to keep apprised of their intentions at the property in the event of a corporate reorganization and retained bankruptcy counsel to plan for a possible bankruptcy filing by Kmart. When Kmart declared bankruptcy and cancelled its lease, Capstone quickly purchased Kmart’s tenancy interests in the property, canceling the short-term sub-leases and executing new, more favorable long-term leases with Hastings and Orscheln at higher rental rates. As a condition of executing the new leases, landlord performed needed capital repairs and improvements to the property. The property was refinanced in 2004 returning capital to Capstone's investors and then sold in 2007 at a strong profit.