GIC’s $1.2bn partnership proves some retail remains attractive to institutional money

The Singaporean sovereign fund has teamed up with a REIT, a hedge fund and an alternative investment manager to bet on pricing dislocation in US retail.

Retail might be scrambling to survive amid the disruption wrought by the coronavirus pandemic, but certain institutional investors have not turned their backs on the sector entirely.

The New York-listed REIT RPT Realty has formed a core net lease retail real estate platform with Singaporean sovereign fund GIC, hedge fund Zimmer Partners and investment manager Monarch Alternative Capital. The initial equity commitments from all the JV partners total $470 million, and the platform is targeting between $1.2 billion and $1.3 billion of acquisitions over the next three years. GIC is the largest investor in the partnership.

RPT Realty’s early discussions with GIC, which previously invested in a $412 million shopping center JV with the REIT in 2019, are believed to have started as long ago as last March, when the coronavirus was officially labeled a pandemic.

The new platform will have a board comprised of directors from RPT, GIC, Zimmer and Monarch, and all material decisions, including future acquisitions, will require its unanimous approval.

With this large-scale platform, the investment partners are aiming to capitalize on the dislocation and pricing inefficiencies in specific parts of the retail property market. Lee Kok Sun, chief investment officer of real estate at GIC, said in a press statement that as a long-term investor, GIC believes “there are opportunities in the retail net lease sector to acquire high-quality assets with strong tenant credit at attractive pricing.”

Some of these opportunities will be acquired from the offset. The platform is to be seeded with 42 single-tenant, net-lease retail assets in open-air shopping centers in US metropolitan areas, valued at $151 million.

“The proof of concept is if you look at how debt stacks are created. This platform is similar; there are different credit profiles amongst a lot of shopping centers,” Brian Harper, president and chief executive at RPT Realty, told PERE. “The cap rate spread between triple-net and multi-tenant shopping [centers] has never been wider, even pre-pandemic. But the pandemic has widened it even more.”

In Harper’s view, the spread could be as much as 300-500 basis points, depending on the shopping center. “If you look at the $100 million deals, and there is a grocer or a wholesale club out in the front, I can spin those off at a 5 or 6 cap rate. RPT and our shareholders could be owning the rest of the center for a double-digit cap rate. [And] the cashflow is still 65 percent investment-grade, small shop in nature and has good annual growth. It shows you that, for centers at $80 million or higher in value, there is great dislocation.”

The partnership also appears to be unusual in its choice of partners, with hedge fund capital committing to the strategy alongside long-term institutional investor GIC. Asked if there could be a mismatch in return expectations from the different pools of capital, Harper said there was alignment among the partners to grow the platform.

“For this unique opportunity, people were able to go down the spectrum of returns,” he said. “If you see where the triple-net companies are trading in the public markets, they are at 4 caps or low 5s. So, there is huge upside potential to be able to curate one of the purest, best fundamentals, real estate triple-net REITs. We are not hampered by legacy theaters or gyms. This is built for the resilience of essential retailers.”

Harper also added that, as part of the transaction, both Monarch and Zimmer Partners would be given preferred equity, which “helps their returns.” Indeed, according to the firm’s investor presentation, RPT will invest up to $70 million in preferred equity that will be a component of Zimmer and Monarch’s equity commitment, which will earn a fixed return of 7 percent.

This latest bet on retail, however, comes at a time when the sector is witnessing a rapid and continuous fall in deal volume. According to transactions data firm Real Capital Analytics, January 2021 saw a faster pace of transactions decline than “any other time in 2020 during the worst parts of the pandemic.” Around $1.4 billion in US retail transactions were completed in January 2021, a 73 percent year-on-year decline. Over the past 12 months, $35.8 billion in retail deals were concluded, a 46 percent drop from the previous 12 months.

Harper does not believe all retail should be treated with the same negative brushstroke. While he agrees there will be some fallout from the structural shifts triggered by the pandemic, and a “lot less retail gross lettable land in five years,” he thinks that impact will be mostly felt by the mall operators.

“While the malls are taking a lot of the negative headlines, open-air has actually benefited greatly from covid,” he said. “You look at the balance sheets of a lot of retailers pre- and post-covid, and some of these retailers are now going public. They have huge cash infusions. This has shown you cannot fundamentally just focus all on logistics. You have to have both.”