Developers Diversified Realty's (DDR) acquisition of 110 retail properties totaling 18.8 million square feet from Benderson Development Co. continues the transfer of private retail assets to publicly held real estate investment trusts. And at $2.3 billion, the transaction is the largest that Cleveland-based DDR has ever pursued.

But the dealing between Benderson and DDR may not end when this sale closes in mid-May. In fact, the REIT has found a potential pipeline for future development. Benderson still owns some 23 million square feet around the country — 65 percent of it is retail — and it's developing 5 million square feet in Florida.

“The sale lets us focus on development, which is what we do best,” says Rex Burgher, senior vice president of development for Benderson, which moved its headquarters to Sarasota, Fla., from Buffalo, N.Y. “When the time's right, [the companies] will get together and maybe make another deal.”

The transaction will increase DDR's portfolio to 100 million square feet across 44 states, and it will give the REIT a presence in New York where it owns less than 100,000 square feet. While Benderson's assets generally mirror DDR's holdings in size, age and tenants, the rents are different. Benderson's small-store rents lag DDR's by some 16.5 percent, but DDR intends to increase the rents over time and to use its existing tenant base to fill out the properties. DDR also owns some larger mixed-use properties such as The Pike at Rainbow Harbor in Long Beach, Calif. (above).

Ultimately, DDR will wholly own 60 percent to 70 percent of the Benderson properties. To help finance the deal, the company is considering combining 10 percent of the Benderson assets with some of its existing properties — for a total value of between $500 million to $750 million — to its joint venture with Australia-based Macquarie Bank Ltd.

Partnering Up

Plus, the REIT likely will sell 37 Benderson grocery-anchored centers to a different joint-venture buyer. “Our preferred form is actually a contribution or sale where we retain an interest in the assets,” says Scott Wolstein, chairman and CEO. “We think there is a significant opportunity for joint ventures on pools of assets from this portfolio.”

Analysts, however, think the price, which represents an 8 percent cap rate, is too high, especially when compared with DDR's acquisition of JDN Realty last year at a price that represented a 10 percent cap rate. Wolstein dismisses the concerns: He says the cap rate is in line with the market.