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June 13, 2014

Blackstone Adds DDR as JV Partner in Purchase of 76 Shopping Centers from ARCP

By Gail Kalinoski, Contributing Editor

Whittwood Town Center.  Perkowits and Ruth Architects.  Cole Rea

Blackstone Group has added a joint venture partner, DDR Corp., to its plan to buy 76 shopping centers from American Realty Capital Properties for nearly $2 billion, including assumed debt of $461 million.

The JV agreement comes three weeks after ARCP announced it was selling most of its multi-tenant shopping center portfolio to a Blackstone affiliate to pay for its recent Red Lobster sale-leaseback deal.

The sale is expected to close in the third quarter. An affiliate of Blackstone Real Estate Partners VII will own 95 percent of the JV and an affiliate of DDR will own the remaining 5 percent.  DDR, a Beachwood, Ohio-based owner and manager of shopping centers across the United States and Puerto Rico, will also invest up $300 million in the JV with a fixed dividend rate of 8.5 percent and will provide leasing and management services. The deal also calls for DDR, a REIT that owns and manages 396 shopping centers with 108 million square feet, to have the first right to purchase 10 of the assets.

The 16.4 million-square-foot portfolio primarily consists of power centers in Los Angeles, Houston, Denver, Chicago, Atlanta, Phoenix and Washington, D.C. The centers are 95.1 percent leased with retailers including Whole Foods, Trader Joe’s, The Fresh Market, Costco, Target, Walmart, Kohl’s, PetSmart, Dick’s Sporting Goods, Bed Bath & Beyond and TJX Cos. DDR said in a press release that the portfolio also contains eight vacant junior anchor boxes, more than 100 available small-shop units and more than 20 outparcel expansion opportunities.

“We expect to generate outsize asset-level growth by leveraging our operating platform, and have appropriately structured our investment to produce attractive risk-adjusted returns while securing access to acquisition opportunities in the future,” Daniel Hurwitz, DDR CEO, said in his company’s release.

Hurwitz said the firm has also identified more than 30 potential candidates for “Project Accelerate,” the initiative recently announced by DDR in which it pushes early termination of leases for struggling retailers so it can replace them with more successful stores. In the first phase, DDR identified 90 anchor locations, or 3.3 million square feet, and has already regained 550,000 square feet in 21 locations.

Goldman, Sachs & Co. and KeyBanc Capital Markets served as advisors to DDR on the transaction.

This is the third JV for DDR and Blackstone.  Last August, DDR and an affiliate of Blackstone Real Estate Partners VII, acquired seven shopping centers with a total of 2.4 million square feet from Regency Centers Corp. for $332 million, including $207 million of assumed mortgage debt and $28 million of new mortgage debt. In June 2012, DDR and the Blackstone real estate fund teamed up to buy 44 shopping centers from ENG Group for $1.43 million. In both cases, DDR owned 5 percent while Blackstone owned 95 percent of the assets. The retail REIT also negotiated the right of first refusal to later buy some of the shopping center assets.

ARCP had originally planned to spin off the portfolio into American Realty Capital Centers, a publicly traded REIT that would have been valued at $2.2 billion so it could focus on its single-tenant, net lease business. Most of the assets were acquired as part of the $11.2 billion merger with Cole Real Estate Investments, Inc. ARCP decided to sell the portfolio in late May, shortly after announcing it would buy 500 Red Lobster restaurant properties for $1.5 billion and lease them back to Golden Gate Capital, which is acquiring the chain from Darden Restaurants, Inc.

“This sale will allow us to accretively recycle the capital from our multi-tenant business into Red Lobster and our single tenant, self –originated acquisition strategy,” David Kay, ACRP president, said this week in a news release. “By retaining full optionality as we prepared to spin off our multi-tenant portfolio, we were able to identify this transaction, which will allow us to deliver attractive value to our shareholders and further clarify our single-tenant, net lease investment strategy.”

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