10 Million-Sq-Ft Portfolio Across 20 State to Change Hands In Transaction Seen as Big Bet on Retail Market Recovery
Private-equity kingpin Blackstone Group (NYSE: BX
) made its latest foray into commercial real estate
, joining forces with DDR Corp. (NYSE: DDR
) in a deal to acquire a shopping center portfolio from EPN Group, an affiliate of Tel Aviv-based Elbit Imaging Ltd. The transaction, which is expected to close in June 2012, is valued at $1.43 billion, including at least $950 million in assumed debt and new financings.
The open-air power center properties being acquired by the newly formed joint venture are spread across 20 state and total 10.6 million square feet, with 90% of the space leased.
Blackstone will own 95% of the venture with an affiliate of DDR owning the rest. DDR will invest $150 million in preferred equity and will continue to handle leasing and property management for the properties as it has for EPN Group and EDT Retail Trust, formerly Macquarie DDR Trust, which finalized the sale of the portfolio to EPN last summer. The agreement also gives DDR the right of first offer to acquire 10 of the assets under certain conditions.
EPN Group said the sale is subject to lender approval and certain other closing conditions following the completion of a shortened due diligence period ending Jan. 31.
The states with the largest concentration of properties involved in the transaction (ranked by annual base rent) are Massachusetts (12.7%), Ohio (10.6%), Minnesota (9.5%), New York (9.2%); Texas (6.9%); Illinois (6.4%); Florida (6.2%); Connecticut (5.3%); Colorado (4.9%) and Kansas (4.4%), according to mid-year 2011 financial from EDT Retail.
The top tenants (also ranked by annual base rent) include the TJX companies, Kohl's, PetSmart, Dick's Sporting Goods, Best Buy, Bed Bath & Beyond, JoAnn's, Old Navy, Walmart and Home Depot.
There was a slight discrepancy in the number of centers being sold, reportedly because the prospective seller counted the Riverdale Village shopping center in Minnesota as two properties. EPN reported the number at 47 shopping centers, while the joint venture reported that it’s acquiring 46 properties.
EPN acquired a 47.8% stake in EDT Retail and the portfolio for approximately $116 million in a recapitalization in 2010, and became the joint manager of the properties along with DDR. Last summer, EPN purchased the remaining stake for $242 million and privatized EDT Retail Trust, making it a wholly owned subsidiary. DDR has an intimate knowledge of the portfolio, having leased and managed all the assets throughout all the changes, in some assets dating back to 1995.
DDR President and CEO Daniel B. Hurwitz said the transaction "illustrates our access to off-market opportunities, while creative structuring enables risk mitigation and non-dilutive deleveraging. Lastly, this transaction enables the retention of significant fee income, and enhances our current ownership and future access to prime assets."
Alex Berman, EPN Group co-founder and CEO, described the sale of the EDT portfolio "a bittersweet event" for EPN Group.
"On one hand, we have enjoyed immensely our association with EDT and DDR, and wish well to Blackstone and DDR, two of the most prominent and sophisticated real estate investors. On the other hand, we are proud of EPN's ability to successfully acquire, create value and realize significant profit for our investors on a large and complex investment in a span of two years."
Despite the pending sale, EPN is not planning to exit the U.S. entirely. Berman said EPN Group sees further investment opportunities in the market and intends to continue raising funds for possible direct and joint-venture acquisitions.
The pending acquisition is being viewed as another major bet by Blackstone in a strong recovery in U.S. retail property values. In June of 2011, the private equity firm closed on its purchase of 585 shopping centers in the U.S. from Australia’s Centro Properties Group for $9.2 billion. That deal included Centro's U.S. property management platform, comprised of 18 offices and 600 employees. Then in December, Blackstone bought 36 shopping centers for $473 million from Equity One Inc. (EQY). The retail properties are located in the Atlanta, Tampa and Orlando markets, with additional assets located in North Carolina, South Carolina, Alabama, Tennessee and Maryland. Prior to that, Blackstone invested $500 million in General Growth Properties Inc. (GGP) as part of the mall owner’s emergence from bankruptcy in 2010.
Since peaking in the first quarter of 2010, the retail vacancy rate has steadily declined across the U.S., dipping under 7% in the fourth quarter of 2011 for the first time since 2008, according to CoStar Group's latest market analysis. Despite the challenging retail environment that saw several high profile retailers go under, the retail property sector has benefitted from several consecutive quarters of positive absorption and very little new construction.
Goldman, Sachs & Co. served as advisor to DDR on the acquisition. Citigroup Global Markets Inc. and Eastdil Secured, a subsidiary of Wells Fargo & Company, served as advisors to Blackstone and JP Morgan served as advisor to EPN.