Northwestern Mutual Forms Joint Ventures With Shopping Center Manager

Northwestern Mutual is participating in what is believed to be the largest U.S. shopping center recapitalization transaction of 2018.

The insurers is teaming up with Phillips Edison & Company Inc. (PECO), a retail real estate investment trust (REIT), to invest in 20 shopping centers that are anchored by grocery stores.

(Related: Two Big Mutuals Post 2019 Dividend Estimates)

PECO now owns all of the shopping centers.

Northwestern Mutual will get a stake in the centers by investing in two joint ventures with PECO. The two joint ventures are valued at $414.5 million.

One of the joint ventures is Grocery Retail Partners I (GRP I).

Through an investment in GRP I, Northwestern Mutual will acquire an 85% stake in a portfolio of 17 high-quality shopping centers in eight states. All of the centers, which are now owned by PECO, are anchored by grocery stores.

The 17-center portfolio is valued at $368 million.

PECO will keep a 15% stake in the portfolio. PECO will also provide asset management and property management services for the joint venture. PECO says it will use proceeds from the GRP I joint venture to pay off some of its debt, renovate properties, and buy more grocery-anchored shopping centers.

"Entering into this joint venture with Northwestern Mutual, one of the country's largest and most experienced commercial real estate investors, is a compelling illustration of the continued strength in grocery-anchored real estate," Jeff Edison, chairman of PECO, said in a statement. "We are thrilled to be forming a relationship with such a well-respected partner in Northwestern Mutual, and believe this further validates our position as the leading fully integrated operator of grocery-anchored real estate."

Rob Francour, portfolio director of commercial real estate acquisitions at Northwestern Mutual, said the joint venture with PECO creates an opportunity to invest in a portfolio of "necessity-based retail real estate." "We're confident these assets will produce consistent cash flow that complements our current commercial real estate portfolio," Francour said.

Northwestern Mutual has also entered in a separate joint venture with Phillips Edison Grocery Center REIT III Inc. (PECO III), Grocery Retail Partners II (GRP II).

Under the terms of the GRP II deal, Northwestern Mutual will get a 90% interest, valued at about $46.5 million, in three shopping centers in three states. Each shopping center is owned by PECO II, and each is anchored by a grocery store.

PECO III will keep a 10% stake in the assets.

PECO will continue to provide asset management and property management services for the shopping centers in the GRP II joint venture.

The New York City office of Holliday Fenoglio Fowler, L.P. acted as exclusive financial advisor to PECO and its affiliate in facilitating the formation of the two joint venture partnerships.

The HFF equity placement team representing PECO and PECO III included senior managing directors Steve Hentschel and Danny Finkle and senior director Sheheryar Hafeez along with senior managing directors Michael Joseph and Doug Bond.

HFF's Hentschel described Northwestern Mutual as being "one of the country's largest and most experienced commercial real estate investors."

The insurer's relationship with PECO reaffirms the high-quality nature of PECO's grocery-anchored shopping center portfolio, Hentschel said.

Editor's Note: Why This Matters to Annuity Agents

Life insurers use investments in real estate, mortgages, in mortgage-backed securities, and in other types of financial instruments tied to mortgages and real estate, to support annuities and other products that may pay benefits starting far in the future, or for long periods of time.

U.S. life insurers had about 22% of their $4.4 trillion in general account assets invested in real estate, mortgages and mortgage-backed securities in 2017, according to data from the American Council of Life Insurers' ACLI 2018 Life Insurers Fact Book.

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