Dallas-based Crow Holdings Capital, the investment management business of developer Crow Holdings, has formed a joint venture with what is believed to be an undisclosed global sovereign wealth fund to recapitalize a portfolio of 173 retail assets across the US, PERE has learned.
The venture is being formed as part of a $1.8 billion recapitalization of two retail portfolios Crow Holdings Capital has been assembling since 2014. The two portfolios are held in Crow Holdings Retail Fund I, which raised a total of $295 million in 2015 and Crow Holdings Retail Fund II, which attracted $417 million in commitments in 2016.
Crow Holdings Capital used the funds to amass a portfolio of retail assets it described as “small-format, convenience-oriented, open-air, food and service shopping centers,” according to a release seen by PERE.
The properties are essentially one- to five-unit strip malls without a grocery anchor, Michael Levy, chief executive at Crow Holdings Capital, said. Because of the small size of each asset, the property type is unappealing to institutional investment on an individual scale, he noted. However, a portfolio at scale could be appealing to institutions because of the “cashflow characteristics, stability and growth,” Levy said.
“A typical center would have a Starbucks drive-through on one side, and it would have a Subway store on the other side. And in between there would be a cupcake store and a dry cleaner and a Verizon Wireless,” Levy said. “They’re everywhere. Meaning each asset is small but the asset class [so-called unanchored strip centers] in the aggregate is large.”
Between 2018 and 2022, an average of 4,365 unanchored strip centers under 25,000 square feet were traded per year, according to data from global brokerage CBRE. Average aggregate sales volume of the property type over the five-year period was almost $6.8 billion – including $9.8 billion in 2022 – but the average sales price per property in the same period was only $2.1 million.
Crow Holdings Capital had viewed an institutional sale or recapitalization as potential exit options for both retail funds, Levy said. The sovereign wealth fund has acquired all of the interests from the fund investors, with only Crow Holdings Capital’s GP interest in the funds rolling over into the new JV.
The fund investors were predominantly institutions like pensions, foundations and endowments, according to Levy. They include the Rhode Island State Treasury, North Carolina State Treasury, New Mexico Educational Retirement Board and Missouri Local Government Employees’ Retirement System, according to PERE.
The new capital infusion will allow Crow Holdings Capital to continue to expand the now-combined retail portfolio. The firm plans to grow the portfolio’s asset base by around $750 million, with $300 million of additional equity provided as part of the venture, PERE understands.
The strategy is value-add in nature, targeting the low-teens net returns typical of that risk-return profile. PERE data showed both funds were producing north of 9.1 percent net IRRs as of the end of June last year. The returns are predominantly driven by cashflow, Levy said.
Institutional leasing is where most of the value-add comes in, Levy explained. Many of the properties the firm has acquired have been stabilized, in that tenants are often in place. Crow Holdings Capital has been able to drive double digit rental growth through its relationships with national retail chains that help to fill any gaps and replace tenants that leave. Levy said these tenants are subject to rental rate increases over time.
The new investor will be expecting the firm to do more of the same. “This was not an ‘invest this and let’s flip this in three years.’ This was, ‘Let’s invest in this portfolio. Let’s keep doing this,’” Levy said. “Let’s accrete the return by doing more acquisitions [and] driving value through leasing.”