In the first half of the year, it seemed retail REITs announced joint ventures on an almost daily basis. But will the recent troubles in the debt market make this once-popular investment play more difficult to pull off?

If recent deals are any indication, the volume may be slowing, but such partnerships are not disappearing entirely. On Sept. 19, for example, Orlando, Fla.-based National Retail Properties, Inc. (NNN), a REIT that operates a 9.3-million-square-foot portfolio of freestanding single-tenant retail assets, announced plans to target $220 million in acquisitions in partnership with an affiliate of Crow Holdings Realty Partners IV, L.P., a Dallas-based privately-held real estate investor.

The partners will focus on convenience store properties, with NNN taking a 15 percent stake in the deal. Citigroup analyst Jonathan Litt praised the venture, saying it will lower NNN's dependence on the equity markets and raise its going-in yields to 10 percent from 8.5 percent compared to if it had done the deal alone.

These types of joint ventures have become a REIT staple because they raise capital, but keep REIT balance sheets clean. REIT managers have also hit upon a particularly attractive formula when partnering with banks, pension funds and institutional funds that generate higher returns than doing an investment solo. The structure calls for the fund to front most of the money with REITs contributing minority equity positions. In exchange, the REITs identify portfolios for the fund and manage and lease the properties. Along the way they collect fees in addition to sharing the return generated by properties in the portfolio. Moreover, they stand to get healthy promotes after return thresholds are met. In all, this model delivers higher returns for REITs than the 5 percent or 6 percent returns available on straight acquisitions.

Since the beginning of 2007, retail REITs have announced 28 joint venture transactions with institutional investors, according to data from Charlottesville, Va.-based research firm SNL Financial. By comparison, 2002 saw a total of 13 joint venture deals in the sector, with only two or three of those involving institutional players. The majority of the transactions involved other REITs.

The reason for the shift is in the past two years, institutional investors realized that partnering with REITs on real estate transactions brings in higher returns than investing in commingled funds and separate accounts, says Brad Case, vice president of research and industry information with NAREIT. Three recent academic papers, produced by professors at the Massachusetts Institute of Technology and the University of Chicago, show that when institutional players put their money into REITs, they get annual returns of approximately 13 percent, compared to returns of 9.9 percent for direct investment in real estate, Case points out.

Meanwhile, joint ventures save REITs from having to issue more stock or take on uncomfortably high debt levels when doing acquisitions, according to Jason Lail, senior research analyst in the real estate research group of SNL Financial. Plus, the long-term management contracts that come with these ventures set the REITs up with steady revenue streams for several years. "I've never heard of a REIT being terminated as an asset manager in these deals," Lail says.

However, the structures of the ventures announced this year vary slightly from the types of transactions REITs were doing a few years back. In 2002, when Chicago-based General Growth Properties, Inc. partnered with the Teachers' Retirement System of Illinois for a $634 million acquisition spree, the partnership was a 50/50 joint venture, the standard arrangement at that time. Today, most REITs limit stakes to 30 percent or less, according to Andy Sucoff, chairman of the real estate practice group with the national law firm Goodwin Procter LLP. Sucoff, who represents both REITs and institutional investors in joint venture agreements, says the majority of deals get split 85/15 or 80/20, an assertion that SNL data bears out.

The amount of leverage joint ventures employ also has declined in recent years, according to Dennis Gershenson, chairman of the board and president of Ramco-Gershenson Properties Trust, a Farmington Hills, Mich.-based shopping center REIT with a 19-million-square-foot portfolio.

The private investors Ramco-Gershenson used to partner with two or three years ago had a higher tolerance for risk and took on 70 percent to 75 percent of leverage. Ramco's current institutional partners, including Heitman LLC and ING Clarion Partners LLC, prefer a more modest level of risk and cap leverage at 65 percent.

Because of their lower debt and risk preferences, institutional investors will also accept lower yields, Gershenson says, targeting returns of between 9 percent and 11 percent for core assets. Private investors, in contrast, tend to look for what he calls a "power yield," anywhere from 13 percent to 16 percent.

Another noteworthy trend is the emergence of partnerships with several institutional players at once, a strategy that increases the amount of available acquisition capital and spreads the risk even further, between three or four parties, instead of the traditional two, according to Lail. In June, for example, Beachwood, Ohio-based shopping center REIT Developers Diversified Realty Corp. formed DDR Domestic Retail Fund I with a consortium of institutional investors to target a $1.5 billion portfolio of shopping centers.

The deal, split 80/20, was the first of its kind for Developers Diversified, according to David Oakes, the firm's CFO. According to the terms of the 10-year agreement, Developers Diversified will receive asset and property management fees; leasing, construction management and ancillary income; and a promote above the 9.5 percent leveraged threshold return. "The structure of this deal provided us with a very high quality core portfolio of real estate, a portfolio we were interested in owning," Oakes says.

The Developers Diversified deal, however, was signed in June, before credit markets imploded, making REIT stocks take a tumble and, in the aftermath of the sub-prime debacle, forced investors to become wary of any real estate-related risk. Pension and insurance funds tend to be cautious investors. Will they still find joint ventures attractive in the aftermath of the credit crunch?

Probably not as much as before, says Lail. He notes in September only three joint ventures were announced, including National Retail Properties. That's half the number announced in August. The situation in the credit markets certainly played a role, Lail adds.

"We've seen imminent activity come screeching to a halt," he says. "People are afraid to move right now, they are afraid to get into the water."

Others, however, say that with vast amounts of institutional money still waiting to be deployed, the drop in activity is more of a temporary setback than a permanent trend. Faced with 180 basis points to 200 basis points spreads on 10-year Treasuries, investors want to figure out what kinds of properties they should be targeting now, Gershenson says.

"As far as we are concerned, there has been no loss of interest, either with our current partners or with people who contacted us to do joint ventures [in the future]," he says. "The issue is whether the dynamics of these transactions are still the same."

-- Elaine Misonzhnik