03/14/2012

EPN Poised for Retail Spree in 2nd-Tier Cities

After clearing its shelves with a blockbuster sale to a Blackstone partnership, EPN Group plans to restock by investing up to $1.3 billion in retail properties within 18 months.

In pursuit of opportunistic returns, the firm intends to avoid the dozens of buyers chasing small to mid-size deals on the coasts. Instead, it will look in less-prominent markets for solid properties with untapped potential. It targets large-scale, complex transactions between $200 million and $1 billion believing they can offer the juiciest returns because few investors compete for them.

There has been relatively little investor activity in secondary and tertiary markets in recent years, and EPN believes those areas are ripe for investment. Instead of making a play for a Miami shopping center that offers a 5.5% capitalization rate, the firm would rather scoop up top retail properties in markets such as Kansas City or Minneapolis at 8.5% capitalization rates.

The Skokie, Ill., firm is a relatively new retail player. It was founded in 2009 as an affiliate of Elbit Imaging, a Tel Aviv conglomerate. It made a splash by acquiring EDT Retail Trust and its 48 shopping centers last year and then striking a deal in January to flip all but two of them to New York-based Blackstone and DDR of Beachwood, Ohio, for $1.4 billion. EPN invested about $330 million of equity and stands to earn a net profit of $210 million when the sale closes in June.

Chief executive Alexander Berman has roots in the mall sector: He most recently served as senior vice president at General Growth Properties, where he led overseas investments. EPN will invest in malls, but is open to retail properties of all types, including power, lifestyle and grocery-anchored centers. It wont rule out big purchases in other asset classes if opportunities arise.

EPN declined to comment on its fund-raising efforts, but investors have been told the company is in the process of raising $500 million to $750 million of equity for its first closed-end, commingled fund.

The firm will typically use leverage of about 65%, which could ultimately give it up to $2.1 billion of buying power. It plans to deploy $250 million to $500 million of equity within 12-18 months. Besides outright purchases, it will take partial stakes in properties, pursue debt plays that lead to ownership and form joint ventures.

EPN seeks returns in the mid-to-high teens, but not by turning around broken properties. It plans to invest in high-quality assets, with occupancy around 85%, and add value via renovations and aggressive leasing and management. The thinking is that more investors will eventually conclude there is too much capital chasing too little product in prime areas and will migrate to lesser markets where EPN will be poised to profit from sales.

While avoiding troubled assets, EPN seeks situations in which the owner is under pressure to sell, whether due to excessive debt or other factors unrelated to asset quality. For example, a family going through a generational shift may want to liquidate its holdings or find an operating partner. Or one member of a joint venture may be seeking an exit. Often such sellers dont want to go through a wide marketing process and deal with dozens of bidders. The firm also plans to tap contacts with top executives at publicly traded companies that might be interested in going private or selling blocks of properties.

Its about developing relationships, hanging around the hoop and being able to execute quickly when an opportunity arises, said William Cohen, EPNs vice president and acquisitions chief. The leadership team also includes John Behling, who handles asset management as senior vice president, and Jeff Rothbart, vice president of capital markets.

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