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Blackstone’s $9.4bn Centro deal confirmed

The deal means the world’s largest real estate opportunity fund - Blackstone Real Estate Partners VI - is getting closer to being fully committed. BREP closed on $10.9bn in April 2008.

Centro Property Group, the Australian Securities Exchange-listed retail property company confirmed today the $9.4 billion sale of its US assets to The Blackstone Group in one of the biggest deals since the global financial crisis began.

Centro confirmed the sale of its 600-strong US retail portfolio to Blackstone, as reported by the Wall Street Journal yesterday. The transaction is larger than other post-global financial crisis deals including the $6.8 billion recapitalisation of US retail REIT General Growth Properties, or the $3.9 billion recapitalisation of hotels business Extended Stay, both of which happened last year and involved Blackstone.

The deal also means that the world’s largest private equity real estate fund is coming closer to being fully invested. Blackstone’s $10.9 billion Blackstone Real Estate Partners VI was closed in April 2008. One source with knowledge of the matter said that capital in the vehicle was “getting low”.

Blackstone’s president and chief operating officer, Tony James, said during the firm’s fourth quarter and annual results last month that the fund was 70 percent invested and that plans for a follow-on vehicle had been hatched. That fund, expected to launch later this year, will also target around $10 billion in commitments.

Centro, which ran into financial difficulties in 2008 when it alerted the stock exchange that it was unable to meet substantial and immediate debt obligations, announced the sale today amid a wider restricting of the entire A$18 billion (€13.65 billion; $18.9 billion) business.

“Following a competitive market process, Centro and its managed funds have entered into a binding stock purchase agreement with BRE Retail Holdings, an affiliate of Blackstone Real Estate Partners VI, to sell all of their US assets and platform for an enterprise value of approximately $9.4 billion”, Centro said in the announcement.

The sale, which was agreed at a 1.3 percent discount to December 31, 2010 book values, should close during the middle of this year. The equity proceeds for Centro’s US assets, which were held in various vehicles including 380 assets held by REIT Centro Retail Trust, are $1.38 billion.

In addition to the sale of the portfolio, comprising approximately 600 properties (as of June 30,2010) across the US, Centro has also agreed the restructure of approximately 73 percent of the debt of its Australian business, which controlled 112 assets. The company has agreed a deal with lenders to cancel its debts in exchange for “substantially all Centro’s Australian assets”, effectively a debt for equity swap.That deal is subject to certain conditions.

In addition, Centro said $100 million would be provided for ordinary shareholders and “other stakeholders who are junior to the senior lenders”.

The third leg to Centro’s restructuring is the amalgamation of its Australian Funds, including its Centro Retail Trust, to form a new listed fund entity which would hold regional and sub-regional retail assets. Centro’s capital in this entity would be distributed to lenders as part of its debt restructuring strategy.

Centro’s chairman Paul Cooper said the measures taken should enable the company to “potentially allow Centro to return some value to its stakeholders”.

Centro placed the assets on the market late last year as part of a wider competitive market process that could have seen the entire business broken up and sold off, as it sought to repay its debt load of A$18.4 billion (€13.65 billion; $18.9 billion). While the better-performing 112 asset strong Australian portfolio attracted core investors, it was the US assets that attracted opportunistic buyers.

Centro’s troubles began after it announced it had failed to refinance $3.4 billion of debt in 2008, prompting its share price to plummet more than 90 percent. It since managed to convince its lender base to grant a number of maturity extensions.

Prior to the credit crunch, Centro was one of the more aggressive investors in retail real estate, particularly in the US where it paid steamy prices for assets including $5 billion for US REIT New Plan Excel Realty Trust in February 2007, just months before the crash. That deal inherited it 467 shopping centres in one fell swoop but the value of much of the assets fell meaning Centro was unable to meet its financing obligations. For a feature on the sale process, see the February issue of PERE.

Zoe Hughes contributed to this article.