KKR Entering Outlet Business With $131.5 Million Purchase

KKR & Co. is entering the outlet-center business with an agreement to buy Legends Outlets Kansas City for $131.5 million, gaining a retail property in a popular tourism district for less than replacement cost.

The investment firm was the winning bidder at a Jan. 25 foreclosure auction in Kansas City, Kansas, according to U.S. District Court records. The other bidders were Tanger Factory Outlet Centers Inc., Macerich Co., DRA Advisors LLC and outlet developer Craig Realty Group.

Legends Outlets has 1.1 million square feet (102,000 square meters) of retail space and a 14-screen movie theater, according to the Kansas City Convention & Visitors Association website. Opened in 2006, it’s part of the Village West development that includes the Kansas Speedway. The tourism district that it’s in draws more than 12 million visitors a year, according to the website.

KKR is betting that the outlet center will draw shoppers because it’s near such attractions as the auto racetrack, a major-league soccer stadium and a minor-league baseball field, said Ralph Rosenberg, head of real estate at KKR. Legends is located next to a Nebraska Furniture Mart store that has annual sales of more than $400 million and attracts between 2 million and 5 million visitors a year, according to Katie Rager, a spokeswoman for the furniture chain, owned by Warren Buffett’s Berkshire Hathaway Inc.

“Kansas City has created a destination area,” Rosenberg said in an interview. “There are high barriers to entry with similar projects.”

Premium Outlets

Karen Maurer, a spokeswoman for Santa Monica, California-based Macerich, declined to comment. Quentin Pell, a spokesman for Greensboro, North Carolina-based Tanger, said he wasn’t aware of efforts by the company to buy Legends Outlets. Craig and David Luski, chief executive officer of New York-based DRA, didn’t return calls seeking comment.

Premium outlets, which include more red-carpet designers than conventional outlet centers, have grown by exploiting consumers’ desire for brand-name fashion and household goods while helping retailers boost sales and pay lower rents.

“The consumer mentality has shifted since the recession to be substantially more value-focused and the outlets respond to that demand,” said Cedrik Lachance, a managing director and head of retail research at Green Street Advisors Inc., a Newport Beach, California-based property-research firm. “The outlet business is one of the best real estate businesses.”

The Legends stores have average sales of about $400 per square foot, Rosenberg said. By comparison, Tanger’s average sales per square foot in the third quarter, the latest period for which figures are available, was $381, the company said in October.

‘Double That’

KKR and its partner RED Legacy, led by a co-founder of the property’s developer, plan to invest $40 million of their own cash and borrow the rest of the $131.5 million purchase price, Rosenberg said.

“It would cost double that to build today,” he said.

KKR intends to bring in more designer apparel outlet stores, add kiosk vendors and spend more money on advertising to increase sales, Rosenberg said. Current tenants include factory stores from Nike Inc., Ralph Lauren Corp. and Saks Inc. The largest tenant is a Dave & Buster’s Inc. restaurant.

Built by Phoenix-based RED Development as The Legends of Village West, the open-air center was decorated with tributes to famous Kansans such as President Dwight Eisenhower. RED sold the property in 2007 to a Morgan Stanley group for about $215 million. The property was collateral for a $137 million loan that was bundled into bonds and sold by Lehman Brothers Holdings Inc. After the financial crisis hit, the so-called lifestyle center was converted into an outlet center.

Retail Vacancies

The Legends complex has a vacancy rate of about 5 percent, Rosenberg said. The Kansas City metropolitan area had a retail vacancy rate of 9 percent in the fourth quarter and the national rate was 6.8 percent, according to Washington-based research company CoStar Group Inc.

KKR’s purchase is scheduled for completion on March 14, Rosenberg said. The firm will own 95 percent of the center and RED Legacy will operate it and own the rest, he said.

Legends would be the seventh deal for KKR’s real estate unit since Rosenberg joined as the firm’s first head of real estate in March 2011. Six of the deals have been in the U.S. and one in Europe. They include a residential development in Williston, North Dakota. When the Legends deal is completed, KKR will have committed about $400 million of equity since Rosenberg’s arrival.

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