Blackstone Group LP (BX:US) is considering an initial public offering of its Brixmor Property Group shopping-center unit by year’s end, taking advantage of a stock-market rally as it starts to sell real estate assets.
A share sale as a real estate investment trust is possible by the end of 2013 or early next year, said two people with knowledge of the firm’s plans, who asked not to be identified because the process is private. Brixmor last week named a new financial chief, a move some analysts saw as presaging an IPO. The assets that form the core of Brixmor were acquired in the $9 billion purchase of U.S. shopping centers from Australia’s Centro Properties Group in 2011.
Brixmor, the second-biggest owner of U.S. community and neighborhood shopping centers, would be part of a first wave of large real estate sales by Blackstone after the credit crisis. The New York-based private-equity firm began telling investors in 2012 it anticipated major divestitures within two years, raising the prospect of IPOs including the Hilton Worldwide hotel chain, and sales of office buildings acquired in the $39 billion deal for Equity Office Properties Trust in 2007.
“The fundamentals in the shopping-center industry are pretty strong right now,” said Diane Wade, a senior analyst at CBRE Clarion Securities in Radnor, Pennsylvania, who covers retail, apartment and storage companies. “Shopping centers have done very well year to date and they’ve outperformed the overall REIT market. So if you were going to take somebody public, this would be an attractive time to do it.”
Brixmor manages about 600 properties totaling 94 million square feet (8.7 million square meters) in 39 states. Shopping centers are typically home to supermarkets, drugstores or discount chains and tend to be open air, versus enclosed malls with more upscale retailers. Brixmor’s are anchored mainly by grocers such as Kroger Co. (KR:US) or discounters such as TJX Cos. The New York-based company is the largest shopping-center owner after Kimco Realty Corp. (KIM:US), which is valued at $9.9 billion.
“Blackstone is beginning to monetize certain investments,” said Cedrik Lachance, a managing director and head of retail research at Green Street Advisors Inc. in Newport Beach, California. “Public-market values for strip centers are substantially higher than the private market, so that suggests Brixmor could be worth more in the public market than held privately.”
Publicly traded shopping-center REITs are trading at a 15 percent premium to what their assets, excluding debt, would fetch in the private market, he said.
Peter Rose, a Blackstone spokesman, declined to comment on a potential Brixmor IPO or real estate sales. The company hasn’t begun hiring bankers for a possible Brixmor stock sale, according to the people with knowledge of its thinking.
“We have told the market we expect in real estate a material pickup in dispositions over the next couple of years,” Jonathan Gray, Blackstone’s global head of real estate, said at the firm’s annual investor day May 3. “I would reaffirm that statement strongly today, given what we see out there in the marketplace.”
An IPO of Brixmor would mark the sale of assets mostly acquired after the financial crisis, showing the strong rebound in real estate values from their lows. An appraisal-based index compiled by Green Street shows commercial-property prices in April surpassed the peak. Another gauge, the Moody’s/Real Capital Analytics Commercial Property Price Index, as of March had recovered about 51 percent of its peak-to-trough losses. That measure is based on repeat-sales transactions.
The Bloomberg REIT Shopping Center index has more than tripled from a 2009 low and returned 36 percent in the past 12 months, compared with a 30 percent return, which includes dividends, for the broader REIT gauge.
Brixmor said May 13 that it hired Michael Pappagallo as its president and chief financial officer. He had been chief operating officer of New Hyde Park, New York-based Kimco. The hiring of a well-known public-market executive is a clue that Blackstone may be looking at an IPO, Lachance said.
“We are excited to have someone of his caliber join our team to oversee the positioning of our capital structure and continued financial performance as we prepare for the next steps of our evolution,” Michael Carroll, Brixmor’s chief executive officer, said in a statement announcing the move.
Pappagallo, 54, is scheduled to start his new job, which includes investor relations, today.
“The hiring of Mike Pappagallo was probably a signal that Brixmor is intending to go public,” CBRE’s Wade said. “He has a lot of capital markets experience.”
Shopping centers have become more popular with investors as retail demand improves. Average occupancy at U.S. shopping-center REITs was 93.6 percent at the end of 2012, the highest since 2008, and rental rates have grown for 12 straight quarters, according to Bloomberg Industries.
Brixmor’s occupancy across its portfolio was 90 percent as of March 31, unchanged from the previous three months, the company said May 17. Kimco’s was 93.7 percent in the first quarter.
The stable of potential buyers for Blackstone’s real estate also has grown as many investors, looking for higher yields than Treasuries (USGG10YR) offer, seek income-producing U.S. real estate and lenders are again willing to provide debt financing.
Blackstone has already begun selling retail assets. DDR Corp. (DDR:US) said last week it agreed to buy the firm’s 95 percent stake in 30 jointly owned shopping centers for $1.46 billion. The sale will bring a substantial profit on properties the buyout firm will have held for less than two years. Since the partners acquired the centers last June, DDR’s stock has jumped 35 percent, giving it more valuable currency to pay for assets.
On May 7, General Growth Properties Inc. (GGP:US) said Blackstone would sell its 23.4 million shares (GGP:US), equal to almost a 2.5 percent stake. The No. 2 U.S. mall landlord has gained about 75 percent since the company exited bankruptcy in November 2010.
Large public companies in the U.S. can borrow for about 3 percent and coupled with the rise in their shares, “we’re seeing them become much more acquisitive,” Gray, 43, said at the investor day.
“I would expect you’ll see us IPO or merge many of our assets into the public markets here in the U.S., and I think it may happen increasingly over time in Europe as well,” Gray said. “When it comes to our higher-quality assets, our office buildings, for example, in London and across the U.S. and the big coastal markets, I think you’ll see a number of sovereign buyers showing up as we move to sell these assets.”
The firm’s asset sales follow more than three years of net real estate purchases as Blackstone took advantage of the global credit crisis to acquire assets at discounts from sellers who couldn’t refinance. It has spent about $23 billion buying real estate assets since the credit crisis began, Gray said May 3.
The firm has invested about half of its record $13.3 billion property fund, he said. Blackstone has acquired more than 26,000 single-family homes for rent and has been purchasing industrial assets, including 15 warehouses in the Chicago area for about $110 million in April. It agreed to buy 23 industrial properties in southern Virginia and the Washington and Baltimore areas for $241.5 million, according to a statement today from the seller, First Potomac Realty Trust.
Blackstone’s own stock reflects the rebound in markets. The shares (BX:US) have doubled during the past year to $23.45, though are 24 percent below their IPO price of $31 in 2007.
“We’ve been in a long investing period, and we’ve just started harvesting really towards the latter half of last year,” Joan Solotar, a senior managing director at Blackstone, said at the investor day. “We begin this year with a real treasure trove of high-quality, high-value assets that we plan to sell down over the next several years.”
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