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INTERNATIONAL PARTNERS HELP U.S. DEVELOPERS BOOST RETURNS

By Dees Stribling

The U.S. accounts for about $150 billion of the $470 billion in real estate investments worldwide, says the Washington, D.C.-based Association of Foreign Investors in Real Estate. Finding good U.S. retail properties can be difficult, though, so foreign investors look for domestic partners. And U.S. owners seeking a healthier return on assets may find such hookups to be just the ticket. “Mall ownership is so concentrated in the United States that it’s difficult for foreign institutional investors to make direct investments in them,” said Marshall A. Loeb, COO of Columbus, Ohio-based Glimcher Realty Trust. Glimcher has a partnership with Oxford Properties Group, the real estate investment arm of the Ontario Municipal Employees Retirement System. “They can buy REIT shares, and they do, but linking up with an owner through a joint venture is usually the best way to facilitate direct investments.”

The Glimcher-Oxford venture is still fairly new. Its first acquisition was the Puente Hills Mall, in City of Industry, Calif. Glimcher bought the mall last year for $170.1 million and then transferred it to the joint venture. Going forward, the partnership may buy as much as $1 billion in retail real estate on a leveraged basis, Loeb says.

Joint ventures offer foreign investors a ready-made infrastructure. “Part of what the overseas investor is buying is access to the partner’s platform, which might include management, leasing and a built-in relationship with national retailers,” said Loeb.

These partnerships bear advantages for U.S. owners as well, of course, especially now that cost of capital is creeping upward. “Forming joint ventures with overseas partners is a widespread and growing trend,” said Glenn J. Rufrano, CEO of New Plan Excel Realty Trust, a New York City-based REIT specializing in community and neighborhood centers.

Last year New Plan agreed to sell 69 of its roughly 400 centers for nearly $1 billion to Galileo America, a subsidiary of an Australian property trust. At the time, Galileo was in a partnership with Chattanooga, Tenn.-based CBL & Associates Properties. The New Plan properties were folded into the existing venture, and New Plan bought CBL’s interest in the partnership, including its property management contracts. “The J.V. arrangement is popular with American owners for a number of reasons,” Rufrano said, “especially because asset prices are high, and in fact the returns on many assets aren’t high enough to cover the cost of money in the public markets. By using your own capital, you might erode shareholder value, so what you need is a partner with lower-cost funding.” Loeb cites joint ventures as an important part of Glimcher’s competitive strategy. “We can bid and lose against people with a lower cost of capital, or we can avail ourselves of lower-cost capital as a way to be a little more competitive in the acquisition environment and improve the quality of our portfolio,” he said.

The American partner stands to collect fees. “Property management and asset management fees are almost always built into the deal,” said Joseph G. Padanilam, senior vice president of acquisitions and dispositions at Developers Diversified Realty Corp., which has two partnerships with overseas investors. “That allows you to use your expertise to build shareholder value.”

DDR’s venture with Australian investors, called Macquarie-DDR Trust, has been buying community centers and other properties aggressively since 2003. The venture now owns about $2.5 billion worth of U.S. retail property. In 2004 DDR contributed 13 grocery-anchored centers valued at a total $204 million to a partnership put together by Kuwait Financial Centre, a publicly traded Kuwaiti company.

Some U.S. partners in joint ventures see more-subtle but equally profitable rewards in these structures. “When we look at a J.V., it isn’t because we can’t raise capital publicly, and we don’t see it as a major source of fee income,” said Jeff Berkes, senior vice president and chief investment officer of Rockville, Md.-based Federal Realty Investment Trust. In 2004 Federal Realty teamed up with Clarion Lion Properties Fund to buy shopping centers on the East Coast and in California. (Clarion Lion Properties Fund is actually something of a hybrid — a foreign-domestic partner — because it is managed by ING Clarion Partners, the U.S. real estate management affiliate of Dutch conglomerate ING Group.) “We did it to expand the types of properties we own in our core target markets and to expand the universe of properties that we buy. The more property you own in a market, the better chance you have of getting additional deals done, the better relationships with tenants you have, and the better you’re able to spread your operating costs over a greater number of properties.”

Ventures frequently begin through the efforts of intermediaries. “There’s a lot of competition to invest in U.S. properties, and often an overseas investor feels that they need a relationship with an investment bank to facilitate a partnership,” said Stephen D. Lebovitz, president of CBL & Associates Properties. “In the case of Galileo’s J.V. with us, Merrill Lynch had worked closely with them previously.”

Berkes points to the usefulness of matchmakers in the joint venture process. “We probably could have found a partner on our own, but we decided it would be less trouble and expense to hire someone to arrange it for us,” he said.

Like any complicated real estate agreement, joint ventures with foreign investors come in a variety of structures. Sometimes the partnership is shaped by regulatory or other considerations back in the partner’s home country.

Oxford owns slightly less than half of its joint venture with Glimcher, for instance, because tax law in Canada stipulates that Canadian entities must own no more than half of such a venture. “Capital partners usually own more, but that wasn’t possible in this case,” said Glimcher’s Loeb. “We’re doing well with this structure, but eventually we might find another partner to own another piece of the J.V., because for us, owning a smaller piece would mean higher returns. The fee stream is the same whether you own 50 percent or 20 percent.”

More typical is DDR’s partnership with its Kuwaiti investors. DDR maintains a 20 percent interest in the properties and will continue day-to-day management of the assets. DDR earns an asset management fee of 6.25 percent of net operating income, as well as fees for property management, leasing and development.

Like most joint ventures, partnerships with foreign investors typically have exit strategies, though most of the deals are still relatively new and the partnerships still in place. CBL is a little unusual among owners in that it has actually exited a partnership with an overseas investor. According to Lebovitz, the exit was smooth. “It worked well for three years,” he said. “We decided to sell because an opportunity arose, both for us and Galileo. Galileo had the opportunity to buy a major portfolio from New Plan, and it would have been a conflict had we continued our J.V. with them, so we negotiated a price and sold our interest to New Plan, which proved to be an opportunity for us. It worked out for all three parties.”

Lebovitz says there’s a good probability that his company could be involved with another joint venture partner. “Possibly an overseas investor,” he said. “There are a lot of solid investors looking for this kind of deal from all over the world, and our experience on the whole was good, so we’re open to it again.”