January 16, 2008

Intercontinental Real Estate plans to raise up to $400 million of equity this year for its open-end fund, more than doubling the size of the core-plus vehicle

Real Estate Alert

The U.S. Real Estate Investment Fund, launched in 2006, had $282 million of equity at yearend, according to investors.

The vehicle seeks a 10% net return, focusing on stabilized office, industrial, retail and multi-family properties. It also considers buildings with some vacancies or near-term rollover, as well as ones in need of minor renovations. Some higher-yielding opportunities are also considered. Leverage averages 50%.

In its most recent deal, Intercontinental recapitalized Parker Ranch Center, a 143,000-square-foot grocery-anchored shopping center in Waimea, Hawaii, by buying out fund operator CarVal Investors. Operating partner M&J Wilkow of Chicago remained in the ownership, increasing its stake to 10%, from 5%. The transaction, with an initial capitalization rate of about 6%, valued the property at $46 million. The occupancy rate is 91%. Leases on about 12% of the space roll over  by 2010. Rents are about $9/sf below the market rate of $31/sf on a triple-net basis.

The fund’s annual management fee ranges from 0.75% to 1.1%, depending on the size of the equity commitment, according to investors. After investors receive a 10% preferred return, Intercontinental gets 20% of additional profits.

Boston-based Intercontinental has also set up four closedend funds. Three are fully invested, while the $200 million value-added Intercontinental Real Estate Investment Fund 4 is
about 80% invested.

Market players say that while Intercontinental is focusing on the open-end fund, which could eventually have more than $1 billion of equity, it apparently has not ruled out raising other high-yield, closed-end funds down the road.

Intercontinental was founded in 1959 by Petros Palandjian as a general contractor. It began operating institutional-backed funds in 1996. Palandjian’s son, Peter Palandjian, has headed the company since 1993. Intercontinental’s portfolio is valued at more than $1.8 billion.