Usually in these pages, it would be a realisation by The Blackstone Group that would be analysed. However, news arrived last month of a deal where the counterparty to a Blackstone transaction deserves the attention.
The joint owners of a holding company called EPN Investment Management sold a portfolio of 47 US shopping centres for $1.428 billion to a joint venture between Blackstone and the property manager of the assets, DDR Corporation, marking the successful culmination of 18 months of value creation and a little bit of market luck. Both have translated into a roughly $240 million profit on EPN’s original investment.
EPN is a commercial property venture set up in 2009 by Central and Eastern European mall developer and manager Plaza Centers with its parent company, Elbit Imaging of Israel. The joint venture signed a co-investment agreement with Eastgate Property, a US real estate subsidiary of private firm NCH Capital, which traditionally specialises in making Eastern European investments set up by entrepreneur Georg Ruhr.
The resulting $200 million EPN Real Estate Fund won a $31 million commitment from Israel’s largest insurance company, Menora Mivtachim Insurance.
The EPN vehicle was specifically set up to capture US real estate opportunities, and such an opportunity arrived in the middle of 2010, when the firm sensed a bargain to be had from the recapitalisation of Macquarie DDR Trust, a publicly traded Australian trust that controlled 48 American malls, including Shoppers’ World in Massachusetts. EPN invested $116 million of equity in Macquarie DDR Trust, resulting in EPN becoming the largest shareholder with 47.8 percent of the units. The company was renamed EDT Retail Trust, although DDR continued to manage the assets. By March 2011, EPN had launched an off-market takeover bid for the remaining units. It bought the outstanding units for a further $242 million of equity, meaning it paid around $360 million to gain full control of the 48 malls.
EPN believed it had found a bargain and was content to hold the assets for a few years until yields benefited from a US upswing and the asset management expertise of the owners. However, the US commercial property market rebounded faster than the fund had anticipated, presenting a sale opportunity.
Ran Shtarkman, president and chief executive officer of Plaza Centers, noted that the firm and its partners had repositioned the portfolio, reduced the level of debt, moved management from Australia to the US, improved letting, lengthened the lease maturities and refinanced more than $500 million in loans. “The yields went down to a level that we originally thought we would sell it at in a few years’ time. It has been an amazing deal for us as well as Blackstone,” whom he insisted would profit nicely from the investment over time.
Furthermore, the deal has left all the partners in EPN in a profitable position. Not only did the venture recoup its $360 million investment to purchase of the trust’s units, but the sale price also covered the existing debt on the properties and the payment of a $26 million dividend a few months ago, as well as providing the partners with a roughly $240 million profit. The venture also expects that rental income until it closes the deal will be around $18 million.
Plaza Centers’ share in EPN is around 23 percent, meaning it will realise a profit of around $53 million. Those proceeds will be used to first decrease the firm’s debt load, and the surplus will be used to invest in new projects in its theatre of operation, namely Central and Eastern Europe. Another 23 percent of the profits will go to Plaza’s parent, Elbit, and 46 percent will go to Eastgate. The remaining eight percent belongs to Menora Mivtachim Insurance.
At its heart, the investment has proven to be a classic opportunistic-style transaction, consisting of a privatisation at a bargain price, the subsequent re-jigging of the asset management, implementation of value creation strategies and corporate refinancing, topped off by the ultimate sale at good (albeit fortuitous) timing, which was ahead of plan. However, when it comes to Plaza Centers, Shtarkman does not like to describe the company or its deals as opportunistic. He points to the firm’s 15 years of real estate know-how and 30 realised projects, and that no other developer has built more shopping and entertainment centres in the Central and Eastern Europe region.
Still, Shtarkman admits: “Originally, when we did the deal, we didn’t think we would enhance the value and sell it after one-and-a-half years.”
In the meantime, Plaza Centers and its partners will not be buying any assets at a low yield anytime soon. “We are definitely looking for opportunities in the markets where we can find high yields and bargain prices, improve the company, enjoy the rents and watch the yields go down. This is something that can definitely happen again.”