IF THESE WALLS: Betting with the house

In one of its biggest post-financial crisis real estate buys, the California Public Employees’ Retirement System went to Las Vegas this fall to put money on a 31-foot showgirl, zombie burlesque shows and Britney Spears.

The US’s largest public pension plan purchased the Miracle Mile Shops, a 200-store mall on Sin City’s strip, through Institutional Mall Investors, its partnership with real estate investment manager Miller Capital Advisory, based in Skokie, Illinois. Data provider Real Capital Analytics reported a sale price of $1.1 billion.

Built by Trizec Properties, the retail center opened with a Moroccan theme in 2000 as the Desert Passage Mall – including an hourly indoor thunderstorm – to complement the adjacent Aladdin hotel. That hotel went bankrupt and when it was sold to a joint venture comprising Starwood Hotels & Resorts and Planet Hollywood in 2003, a trio of investors bought Desert Passage next door.

Bahrain money manager Investcorp, California-based developer Tristar Capital and New York-based real estate investor RFR Holdings teamed up to buy the mall for $240.5 million with plans to put $130 million into improvements, according to RCA. They changed the Desert Passage’s theme to Los Angeles, fitting with the new Planet Hollywood hotel and casino next door, and re-opened the space as Miracle Mile Shops in 2007.

While Investcorp sold its stake years ago, the remaining duo have likely seen outsize returns by weathering the global financial crisis and Las Vegas’s eventual comeback. Following renovations and a replenishing of its tenants, the 475,000-square-foot mall is home to four theaters, with resident pop performers Britney Spears and Jennifer Lopez, 13 restaurants and a tattoo parlor, in addition to retail.

Local media reported that Desert Passage had about $545 in sales per square foot in December 2002, now up to about $850, according to Miller.

The tenant mix ranges from fast fashion retailers such as H&M to beauty retailers including Sephora and MAC Cosmetics. Those seeking a break from the sights and sounds of Sin City can find respite – for a price – at an aqua-massage parlor or at a nail salon. The combination of retailers and significant food and beverage options have made Miracle Mile Shops one of the top 10 busiest malls in the country, according to the sellers’ statement.

The shopping center may also be the most glamorous of CalPERS’ recent acquisitions and is the pension fund’s biggest post-recession purchase in the US mall space. Miller Capital and CalPERS formed IMI in 2003 to purchase regional and super-regional malls, building a platform worth $4.7 billion and with a three-year net internal rate of return of 21.9 percent as of March 31, according to CalPERS’ first quarter investment report.

IMI is capitalizing on an expanding tourism-dependent market in Las Vegas. Visitor volume and gambling revenue are on track to reach new post-financial-crisis highs in 2016 and retail sales were up 2.6 percent quarter-on-quarter, according to a second quarter report from Colliers International.

Other investors are also betting on Vegas retail. In March, Dallas-based investment manager Invesco Real Estate teamed up with mall developer Simon Property Group to buy The Shops at Crystals for $1.1 billion from MGM Resorts International. That property caters to more affluent shoppers than Miracle Mile Shops, with 10 luxury retailers including Louis Vuitton and Gucci and an upscale seafood restaurant.

No matter the target demographic, these recent Sin City mall investors are all hoping that what happens in Vegas does not stay there, but rather translates into returns.