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Blackstone’s Purchase of Equity One Portfolio Signals Confidence in Retail Assets

The Blackstone Group L.P.’s acquisition of 36 shopping centers from Equity One Inc. should spell good news for retail property owners.

The deal means that Blackstone, a private equity firm that has developed a stellar reputation for savvy investment plays, believes that valuations in the retail sector are destined to rise, according to David J. Lynn, managing director with Clarion Partners.

On Sept. 26, Equity One Inc., a North Miami Beach, Fla.-based REIT, announced that it entered an agreement to sell 36 shopping centers in Southeastern U.S. to Blackstone Real Estate Partners VII for $473.1 million. The centers total approximately 3.9 million square feet of space and are located in Georgia, Florida, North Carolina, South Carolina, Alabama, Tennessee and Maryland. As of June 30, the portfolio had an occupancy rate of 91 percent and generated net operating income of approximately $35.4 million for the 12 months prior.

Blackstone created Blackstone Real Estate Partners VII earlier this year with the goal of investing up to $10 billion in distressed and undermanaged assets, assets with broken capital structures and other properties likely to be sold at a discount.

Given that the Equity portfolio attracted multiple bidders, the $473 million price tag likely reflects the current market value of the centers, according to Jim Sullivan, managing director of REIT research with Green Street Advisors, a Newport Beach, Calif.-based consulting and advisory firm. The hitch is that given current economic uncertainty, market value is a very amorphous term.

“These are people who know real estate cycles and valuations very well,” Lynn says of Blackstone. “And I think that retail is still in recovery, so they are kind of buying at the right part of the cycle. Part of [the attraction] is that these are more necessity-based retail formats in markets that in general are doing better than the rest of U.S. But we are also at the beginning of another growth spurt in retail and if you are going to buy, you want to buy at a discount, so it’s probably a good period to do that.”

So far in this market cycle, private equity buyers have been gravitating toward multifamily acquisitions, since multifamily has shown a strong recovery from the downturn and is poised for further growth, according to Peter Slatin, editorial director with Real Capital Analytics, a New York City-based research firm. Private equity buyers have been looking more closely at retail assets this year, but few actual transactions have taken place thus far, adds Sullivan. Blackstone has been among the first to jump into the retail sector, with already one large acquisition under its belt.

In June, Blackstone closed on the purchase of the U.S. portfolio of Centro Properties Group, an Australian property owner that ran into debt problems after credit collapsed in late 2008. In that transaction, Blackstone paid $9.4 billion for 585 neighborhood and community shopping centers totaling 92 million square feet, marking the largest investment sales transaction in the retail sector since General Growth’s acquisition of Rouse Co. in 2004.

“I just think the Equity deal is a great vote of confidence in retail at the right price; it says Blackstone does not want to stop with Centro, it wants to go further in this area,” says Slatin. “Clearly, they want more and they feel there is money to be made.”

Equity One Inc. plans to use proceeds from the sale to retire its debt, in addition to funding its redevelopment pipeline, investing in new acquisitions and other corporate purposes. At the end of the second quarter, the company’s debt to total market capitalization ratio stood at 37.9 percent, 230 basis points below the level recorded in the first quarter but 60 basis points above the 37.3 percent ratio at year-end 2010.

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