Blackstone Makes Big Bet on Retail With $9.4B Acquisition of Centro Assets

A little more than four years after conducting the largest ever commercial real estate buyout with its acquisition of Equity Office Properties for $23.2 billion, Blackstone Group is at it again.

According to the Wall Street Journal, Blackstone has won the bidding for Centro Properties Group's 588 U.S. shopping centers in a $9.4 billion deal. According to Bloomberg, this is Blackstone's biggest deal since its July 2007 acquisition of Hilton Hotels.

Centro grew quickly during the industry's boom years in an acquisition frenzy fueled by debt. But it overextended and its complicated corporate structure didn't help matters either. Centro's woes first became apparent in late 2007 when the company revealed it was in danger of not being able to pay down or refinance $3.4 billion in debt by February 15, 2008.

The crisis led to a change in CEOs with Glenn Rufrano replacing Andrew Scott. (Rufrano has since moved on to take the helm at Cushman & Wakefield.)

For much of 2008 Centro limped along by refinancing pieces of debt and completing strategic asset sales. Late in the year, the firm announced plans to convert part of its debt into a “hybrid security” and eventually turned over a majority stake in the firm to its lenders. That effectively stabilized the situation. But in the years since, it has continued to look for a long-term solution and recently began seeking a buyer of its U.S. retail portfolio.

The deal is also interesting because until now Blackstone has never been a major player in retail real estate. Last year the firm formed a joint venture with mall REIT Glimcher Realty Trust. That joint venture has acquired several assets since its formation. But claiming Centro's U.S. assets is a much more aggressive push. We had Centro as the fifth largest owner of retail real estate assets in our 2010 Top Owners rankings. Centro has shed some assets since then. Regardless, this suddenly makes Blackstone a major player in the space.

The big question now is what Blackstone's plans are. When it acquired Equity Office--a deal many see as symbolizing the peak of the commercial real estate bubble--Blackstone moved quickly to dismantle the portfolio in a series of smaller sales. As a result, it made out fine, although some of the firms that acquired assets from Blackstone ended up losing out.

With Centro, does Blackstone plan to be a passive investor and allow the existing team to continue to work on improving fundamentals at the firm's assets? Or is it looking again to flip the assets as quickly as possible? And how is it funding the acquisition? Private equity deals at the market's peak relied on massive amounts of debt. It would be a sign of the credit market's continued resurgence if Blackstone is able to line up a big financing package for this deal.

More details should come soon. We haven't yet seen official releases from Centro or Blackstone. (At Centro, there is only a short release about Centro Retail Trust requesting a halt on the trading of its stapled securities "pending an announcement of a potential transaction."

I'll post updates at the blog and at our Twitter feed as details come in.

Some WSJ story excerpts:

Debt-laden Centro Properties Group agreed to sell its 588 U.S. shopping centers to private-equity giant Blackstone Group LP for $9.4 billion in a deal that will allow Centro's Australian operations to continue as a stand-alone company, according to people familiar with the matter.

Blackstone prevailed in bidding against two other groups, one a partnership of Morgan Stanley Real Estate Fund VII and Starwood Capital and the other a partnership of NRDC Equity Partners and AREA Property Partners.


Blackstone's $9.4 billion bid exceeds the $8 billion of debt on Centro's U.S. portfolio, meaning Centro will get more than $1 billion from the deal to use in paring the debt on its Australian operations. Centro, based in Melbourne, owns 112 malls in Australia and New Zealand. The bid is only slightly less than the value Centro had pegged for the U.S. portfolio on its books.

For Blackstone, with $100 billion in assets under management, the deal is a huge bet on the recovery of U.S. retail property. Blackstone last year had bought stakes in a handful of U.S. malls and made a $500 million investment in General Growth Properties Inc., owner of 185 malls.

The Centro deal dwarfs those earlier forays into U.S. shopping centers by Blackstone. It brings Blackstone 588 strip centers across the U.S., most of them small centers anchored by grocery stores or big-box retailers.


Indeed, Blackstone paid a hefty price for the Centro portfolio, which U.S. retail-property executives long have considered inferior in quality to those of REITS such as Kimco Realty Corp. and Regency Centers Corp. Centro's U.S. centers were 87.7% occupied at the end of last year.

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