The Australian buying spree in U.S. retail real estate shows no signs of abating. In what is the largest shopping center portfolio purchase ever, Macquarie Countrywide Trust, an Australian limited property trust, and frequent joint venture partner Regency Centers on Monday announced the purchase of 101 shopping centers from the California Public Employees Retirement System for $2.74 billion.

Regency has a 35 percent stake while Macquarie owns the rest. Regency officials said about 60 percent of the portfolio's purchase price would be leveraged. Regency plans to sell some of the weaker properties in its existing portfolio to pay for the CalPERS purchase. They also plan to sell about five 'less than Class A' development sites in the CalPERS portfolio, says John Delatour, managing director with Regency Centers.

The portfolio sale also seems to be part of CalPERS' new strategy to scale down its exposure to real estate as many fear the market can only go down after recent highs. Last December, CalPERS announced it would reduce its real estate allocation from 9 percent to 8 percent; roughly amounting to $1.7 billion.

Reaping the rewards of such a change is Countrywide Trust and Regency, which own one of the top shopping center portfolios in the country. In a three-mile radius of the acquired properties, average household income is $82,000 with population at 110,000. That population density is about 55 percent greater than Regency's existing portfolio, according to a Macquarie CountryWide Trust.

It also has NOI same store growth of 3.2 percent, which places it as the third highest in the country. Regency's current portfolio has NOI growth of 2.7 percent a year.

The portfolio currently has a 96 percent leasing rate and average rents per square foot of $20. The average rent per square foot for Regency's portfolio is about $16. However, Regency believes it can generate even higher cash flow from the project. "We intend to improve the project through retenating with some of our national clients," says Delatour.

During Tuesday's conference call, Regency President and COO Mary Lou Fiala said the company plans to remove troubled grocer Winn Dixie from one Northern California store and replace it with a Kroger.

Almost half of the 13-million-square-foot portfolio is located in California and the Baltimore/Washington area. Those two markets are less vulnerable to competition from Wal-Mart, which now controls 19 percent of the grocery business, according to a recent survey by Retail Forward.

The remainder of the portfolio is spread throughout the country in dense metropolitan areas such as Chicago, Philadelphia and Houston. This purchase brings the total number of shopping centers owned and managed by Regency to nearly 400 with 50 million square feet.

The CalPERS/First Washington purchase follows a recent flood of Australian capital into U.S. retail. Last year, Australian-based Centro Properties merged with Kramont Realty Trust in a $1.3 billion deal. Macquarie Bank, which manages the CountryWide property trust, also has another joint venture with Developers Diversified called Macquarie DDR Trust. The venture owns $1 billion worth of community centers in the U.S.

Regency and Macquarie have been partners dating back to 2001. The typical arrangement between the companies gives Macquarie majority ownership stakes their joint acquisitions. Regency retains lesser stakes and reaps management fees. Shares of the trust are traded in Australia.

The stock market seems to be mildly impressed with Macquarie and Regency's purchase of the portfolio. Regency's stock has gained $1 since Tuesday morning to trade at around $51.50 by Wednesday afternoon.

The recent flood of investment dollars from Australia is due to a law that requires employers there to set aside money for worker's retirements. Fund managers of these swelling pensions, which typically target real estate, have monies totaling almost $700 billion. Domestically, the funds have bought up most of the choice assets and are looking at international real estate for investment opportunities. This trend is aided by the weakness of the U.S. dollar, which helps increase returns in Australia.

The portfolio comes from another pension fund, CalPERS, which purchased First Washington Realty Trust in 2001 for $800 million. At the time, the company's portfolio stood at 60 centers.

"CalPERS is selling the properties to harvest what it thinks is an attractive growth and gain in the portfolio," says Halpert.

However, Calipers will continue to invest in shopping centers, says Halpert. It currently is under contract to buy two centers and is in negotiations to purchase another two.

-- David Koch