Debt-laden Centro Properties Group agreed to sell its 588 U.S. shopping centers to private-equity giant Blackstone Group LP for $9.4 billion in a deal that will allow Centro's Australian operations to continue as a standalone company, according to people familiar with the matter. Blackstone prevailed in bidding against two other groups, one a partnership of Morgan Stanley Real Estate Fund VII and Starwood Capital and the other a partnership of NRDC Equity Partners and AREA Property Partners. Centro Chief Executive Officer Robert Tsenin declined to comment late Sunday. Blackstone's $9.4 billion bid far exceeds the $8 billion of debt on Centro's U.S. portfolio, meaning Centro will get more than $1 billion from the deal to use in paring the debt on its Australian operations. Centro, based in Melbourne, owns 112 malls in Australia and New Zealand. Blackstone's bid is only slightly less than the value Centro had pegged for the U.S. portfolio on its books. For Blackstone, with $100 billion in assets under management, the deal is a huge bet on the recovery of U.S. retail property. Blackstone last year bought stakes in a handful of U.S. malls and made a $500 million investment in General Growth Properties Inc., owner of 185 malls. The Centro deal dwarfs those earlier forays into U.S. shopping centers by Blackstone. It brings Blackstone 588 strip centers across the U.S., most of them small centers anchored by grocery stores or big-box retailers. Major retail landlords in the U.S. have reported slight gains in the second half of 2010 in occupancy, lease rates and tenant sales. The real estate investment trusts that own most of the best-quality malls and shopping centers in the U.S. are optimistic about a continued recovery with expansion from retailers such as Forever 21 Inc. and TJX Cos. Inc.'s T.J. Maxx and Marshalls. However, the industry continues to suffer store closings by others, such as bankrupt Blockbuster Inc. and Borders Group Inc. Indeed, Blackstone paid a hefty price for the Centro portfolio, which U.S. retail-property executives long have considered inferior in quality to those of REITS such as Kimco Realty Corp. and Regency Centers Corp. Centro's U.S. centers were 87.7% occupied at the end of last year. As a whole, U.S. retail-property values are on a rebound but still haven't fully recovered from the recession. Strip-center values, in particular, have increased by 34% since hitting their nadir in May 2009, according to Green Street Advisors Inc. Still, they remain 17% below their peak value from July 2007. Centro amassed its U.S. portfolio in a global buying spree led by since-ousted CEO Andrew Scott. Most of the U.S. portfolio was pieced together from Centro's acquisitions of New Plan Excel Realty Trust, Kramont Real Estate Trust and Heritage Property Investment Trust Inc. Centro was one of the first major commercial real estate holders to hit the wall when, in late 2007, it failed to refinance portions of its $16 billion debt as they came due. Since then, it has repeatedly won reprieves from its lenders to push back the due dates. But, late last year, it started soliciting buyout and recapitalization bids in an effort to resolve its fate before $5.5 billion of debt comes due in December. Centro still must contend with some of the debt coming due in December. Mr. Tsenin mentioned last week that some of the U.S. hedge funds that own that debt would be willing to covert it into equity in the Australian company.
CNP Price at posting:
15.0¢ Sentiment: Hold Disclosure: Held
