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Inland/Centro Deal Illustrates Attractiveness of Joint Ventures

Joint ventures continue to be a popular strategy for U.S.-based REITs to invest in new assets.

In the latest tie-up, Inland American CP Investment LLC, a wholly-owned subsidiary of Inland American Real Estate Trust Inc., entered a joint venture with Centro NP Residual Holding LLC, a subsidiary of Centro Properties Group, for the ownership of 25 grocery-anchored shopping centers located throughout the eastern United States. The transaction carries a $471 million price tag.

Inland has been holding a stake in the assets since late 2008, when it invested in a portion of a first mortgage loan secured by the properties. As the term of that loan ran out, Inland saw an opportunity to acquire an equity participation in the centers, according to Michael Podboy, vice president of asset management with Inland American Business Manager & Advisor Inc.

Inland is not disclosing how the joint venture is structured, but Podboy notes that the firm now holds the majority equity stake in the assets. Centro will continue to provide management and leasing services for the properties, but will require Inland’s consent when securing new loans or contemplating potential dispositions.

The 25 assets total 4.5 million square feet of space and include primarily class-A and class-B grocery-anchored shopping centers. The portfolio boasts an average occupancy rate of 91 percent, with tenants including Walmart, Publix, Best Buy, Kroger and T.J. Maxx, among others.

Going forward, these kinds of deals will continue to be popular as investors, eager to acquire quality retail properties, will have a hard time finding top assets on the open market, says David J. Lynn, managing director with ING Clarion Partners and author of “Emerging Market Real Estate Investment.”

Improving property fundamentals and increased liquidity in the credit markets make fire sales unlikely, at least for class-A and class-B centers, he notes. But over the next three years, many borrowers will face significant equity gaps when trying to refinance assets and that will present an opportunity for buyers flush with cash.

“This is a recapitalization and this will be the main investment opportunity going forward—making up these huge equity gaps that a lot of deals and portfolios have,” Lynn says. “Centro was very aggressive in their acquisitions and they over-levered and when the market moved against them they had a huge equity deficit. I think this deal is a win/win for both [Centro and Inland]. Centro needs the equity, and it’s a good portfolio and produces good income.”

Centro NP Residual and Inland American also closed a 10-year, $310 million CMBS loan secured by 24 of the centers. Goldman Sachs and J.P. Morgan provided the financing for the transaction. The term of the joint venture coincides with the maturity of the loan, according to Podboy. Inland expects above average returns from this transaction, he notes.

On a portfolio of this size and quality, an average investor would be looking at returns somewhere in the low teens, says Lynn.

“The overall theme here is bigger than just Inland and Centro,” Podboy says. “It is the fact that the CMBS markets are making a comeback. That benefits not only existing sponsors, but also potential equity partners, such as Inland. It allows for a more orderly, effective market.”

Though Inland would not disclose the terms of the loan, Podboy says they were more favorable than the current norm for the kinds of assets involved in the joint venture. Neither Inland nor Centro would reveal which properties were in the portfolio.

Centro NP Residual LLC plans to use the proceeds from the sale of the assets into the joint venture to pay off approximately $424 million in debt which was set to mature this December. The company declined to comment on the transaction.

Centro NP Residual is a subsidiary of Centro Properties Group under the Super LLC umbrella. Super LLC owns approximately 51 percent of Centro Residual LLC, while Centro NP owns 49 percent.

Inland American Real Estate Trust is a Maryland-based affiliate of Inland Real Estate Corp. that was formed in 2004 to acquire commercial real estate properties. As of March 2010, Inland American owned 730 retail centers, in addition to apartment buildings, office buildings and lodging and hotel properties. Overall, its real estate holdings totaled $11.7 billion. Most of that sum (83 percent or 945 assets) represented direct investment in core properties. Approximately 4 percent represented investments through joint ventures.

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