(Updates with comment from analyst in fourth paragraph, seller in seventh.)
Jan. 11 (Bloomberg) -- Blackstone Group LP formed a partnership with DDR Corp. to buy 46 U.S. shopping centers for $1.43 billion from a unit of Elbit Imaging Ltd., expanding the private-equity firm’s wager on a rebound in retail leasing.
The Blackstone Real Estate Partners VII fund will own 95 percent of a venture formed to purchase the properties, with DDR owning the rest through an affiliate and continuing to manage them, the companies said in a statement yesterday.
The purchase, scheduled for completion in June, is the third recent investment in discount retail real estate for Blackstone, which became the second-largest U.S. owner of neighborhood and community shopping centers, after Kimco Realty Corp., with its June acquisition of 585 malls from Australia’s Centro Properties Group for $9.2 billion. The Centro portfolio was renamed Brixmor Property Group Inc.
“What Blackstone has been doing over the last year has been betting on an improvement in the retail climate and perceived mispricing of B-quality assets in the strip center industry,” Cedrik Lachance, a managing director at research firm Green Street Advisors Inc., said in a telephone interview from Newport Beach, California. “The pricing appears slightly favorable to the buyers.”
Peter Rose, a Blackstone spokesman, declined to comment beyond yesterday’s statement.
Elbit stock rallied 20 percent after the deal was announced. The retail centers are being sold by EPN Group, an affiliate of Tel Aviv-based Elbit that was formed in 2009 to buy U.S. real estate. The shares of Elbit, an investor in real estate and medical companies, have fallen more than 70 percent in the past year.
EPN decided to sell so it could realize a profit to show investors as it prepares to raise its second fund, Alex Berman, head of the Skokie, Illinois-based company, said in a telephone interview. Since taking control of the assets, EPN has replaced management, refinanced loans and increased occupancy and net operating income, he said. EPN stands to receive $553 million from the sale, compared with a $332 million investment, he said.
“If we stay in it longer, there’s certainly upside, and that’s the reason Blackstone and DDR are buying it,” Berman said. “But the rate of return we will be able to generate in later years would be lower than what we returned in the first two years.”
The purchase price includes assumed debt of $640 million and at least $305 million of new financing, according to the statement. DDR will invest $150 million in preferred equity in the venture and provide leasing and management services.
DDR also will have the right to make the first offer to acquire 10 of the properties under certain conditions, which it didn’t specify.
“This transaction enables the retention of significant fee income and enhances our current ownership and future access to prime assets,” Daniel B. Hurwitz, DDR’s president and chief executive officer, said in the statement. The Beachwood, Ohio, company owns stakes in and manages 538 discount centers with 134 million square feet in 41 states, Puerto Rico and Brazil.
U.S. shopping centers had their first net gain in occupied space in four years in the fourth quarter as consumer confidence and job growth began to strengthen, Reis Inc. said earlier this week. Landlords have struggled since the recession that ended in 2009 after weak sales drove more than a dozen retailers to file for bankruptcy protection and online competition grew.
The properties that Blackstone and DDR are buying have 10.6 million square feet (984,800 square meters) of space and are 90 percent leased. The largest tenants by base rent at the centers, located in 20 states, include TJX Cos., Kohl’s Corp. and PetSmart Inc.
DDR had owned stakes in some of the centers previously. In 2003, the company sold some interests to a unit of Macquarie Group Ltd., which listed the assets on the Australian Stock Exchange through the Macquarie DDR Trust. In 2009, DDR redeemed its equity interest in the venture in exchange for full ownership of three properties.
The trust was recapitalized and renamed EDT Retail Trust in 2010, with EPN providing a majority of the new equity capital and getting a 47.8 percent stake. EPN acquired the rest of the trust last August.
In December, Blackstone bought 36 shopping centers, mainly in Atlanta and in Tampa and Orlando, Florida, for $473 million from Equity One Inc. Blackstone also has made a series of acquisitions in upscale shopping malls, including a $500 million investment in General Growth Properties Inc. in 2010 as part of the U.S. mall owner’s emergence from bankruptcy.
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