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Inland, Morgan Stanley Continue JV Trend

In a bid to take advantage of institutional capital’s interest in real estate investment Inland Western Retail Real Estate Trust Inc. entered into a definitive agreement to form a $1 billion joint venture with an unnamed pension fund advised by Morgan Stanley Real Estate. The venture will acquire power, community and grocery-anchored neighborhood shopping centers in major metro areas throughout the United States.

The pension fund will contribute 80 percent of the equity to the venture, with Inland Western providing the remaining 20 percent.

Inland Western has done these kinds of ventures before, but previously its pairings were focused on development rather than acquisition. The deal will enable Inland to grow its asset management business, a popular tactic among retail REITs that enables them to boost returns more than by making straight acquisitions. Institutional funds typically have lower return thresholds than REITs, which means they don’t mind paying the cap rates prevalent today—currently in the 6 percent range.

REITs, meanwhile, can increase their return by putting less equity in the deal and by reaping management fees as part of the ventures. That enables REITs to get a more acceptable rate of return in the 7 percent range or higher, says Joseph French, national director of retail with the real estate investment brokerage firm Sperry Van Ness. Meanwhile, the REIT can put little or no money down when acquisitions are made through such partnerships because they provide retail management services.

“This kind of arrangement provides REITs with a source of capital, assets that they normally wouldn’t be able to participate in and property management fees to support the people that they have [on staff],” French notes.

Inland Western would not discuss its targeted return rates. But a spokesman for the company called the partnership a “perfect marriage, of sorts,” since Morgan Stanley has been aiming for some time to invest in power and community shopping centers. Morgan Stanley did not return calls for comment.

“[It] underscores our commitment to evolve towards an increasingly asset management-based platform as we continue to refine and execute our growth strategy,” said Inland Real Estate senior vice president and director of asset management Michael O’Hanlon in an official statement.

In a survey completed by the Real Estate Research Corp. (RERC) earlier this year found that investors expected going-in cap rates in the 5.3 percent to 7.5 percent range for retail properties, and average pre-tax yields of 8.3 percent. Neighborhood/community centers received the highest rating in the sector for investment conditions, followed by power centers and regional malls. By contrast, a survey completed at the beginning of 2003, found that pension funds expected going-in cap rates ranging from 8.9 percent to 9.5 percent for retail properties, with pre-tax yields of 10.8 percent to 11.7 percent.

Inland Western’s current portfolio consists of 306 properties totaling more than 45 million square feet, in multi-tenant shopping centers and single-use, net-leased units. Of those, $500 million worth will be contributed to the new venture.

Another $500 million worth of assets will come from the venture’s new acquisitions, with a particular focus on the East and West Coasts, as well as on the Southeast and the Southwest. The Southeast and Southwest regions have more product available than the Northeast and are currently experiencing market growth, French points out. “There is a large movement from the north to the south right now and as more and more businesses relocate there, it makes perfect sense to concentrate on [buying assets there],” French says. At the moment, the partners don’t have a timeframe for the acquisition plan.

Inland Western currently owns 68 centers totaling 8.8 million square feet in the Southeast and 66 centers totaling 8.4 million square feet in the Southwest, including the states of Arkansas, Oklahoma and Texas. The company also operates 58 centers totaling 9.1 million square feet in the West, 42 centers totaling 10.2 million square feet in the Midwest and 72 centers totaling 8.6 million square feet in the Northeast.

As of December 2006, Inland Western had investments in four joint ventures, encompassing 18 existing properties, but all four focused on development. The Morgan Stanley partnership will be its first venture to focus on acquisition and asset management.

--Elaine Misonzhnik

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