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June 30, 2017  

Citi to Lead Loan for Recap of DDR Centers

A Madison International Realty partnership has tapped Citigroup to lead a $750 million debt package that will finance the recapitalization of a large shopping-center portfolio in the Eastern U.S.

Citi will supply more than half of the proceeds, with Morgan Stanley kicking in the rest.

The two banks will originate three loans on the 7.6 million-square-foot portfolio — two with floating rates and the other with a fixed rate. Some of the debt could be securitized in a stand-alone deal, and some packaged in one or more conduit offerings.

New York-based Madison has agreed to buy an 80% stake in the 52-property portfolio from a joint venture between DDR and a group of pension funds. DDR, a REIT in Beachwood, Ohio, will retain a 20% stake and stay on as the operator, while the pension funds will exit the ownership structure. The deal values the portfolio at about $1.3 billion. Eastdil Secured is advising on the recap and arranging the financing.

The three loans are roughly the same size. The fixed-rate loan is backed by 13 properties. One floater is collateralized by 21 properties and the other by 18 properties.

The portfolio consists mostly of grocery-anchored properties and power centers. The biggest concentration, about 40% of the total space, is in Florida. Other centers are scattered throughout other parts of the Southeast, including the Atlanta area, as well as New York, Massachusetts and Ohio. Many have Publix grocery stores as an anchor tenant.

The average occupancy rate is north of 90%. Most rents are below market rates, giving the partnership an opportunity to increase revenue as leases roll over.

DDR assumed the properties in 2007 via its $6.2 billion takeover of Inland Retail Real Estate of Oak Brook, Ill. A few months later, DDR transferred 63 of Inland’s shopping centers into the newly formed DDR Domestic Retail Fund 1, which was capitalized mostly by a group of pension funds. DDR financed the properties with $968.5 million of debt. Of that, the largest chunk was an $885 million, interest-only loan originated by LaSalle Bank, Deutsche Bank and Wachovia on the 52 properties backing the new loan. It was carved up and securitized in three pooled commercial MBS offerings (CGCMT 2007-C6, COMM 2007-C9 and WBCMT 2007-C32). The mortgage, which has a current balance of $882 million, matures on July 5.

The 52 centers produced $74.3 million of net operating income last year, their best performance since 2008, when they generated $78.6 million, according to a servicer report.

In an earnings call in February, DDR chief executive Thomas August said that in Madison, the REIT had found “a partner whose business objectives were more consistent with ours” than its existing pension-fund partners. DDR executives said the company would retain a right of first refusal to buy the properties if Madison opts to sell its majority stake in the future.