In the past seven years, Beachwood, Ohio-based Developers Diversified Realty (DDR) has seen its total square footage of shopping centers owned and managed increase 254%.
It's this phenomenal growth spurt that has kept the REIT's new president and COO, David Jacobstein, on his toes since he joined DDR a year ago. Jacobstein and his associates have retooled the company's agenda to reflect its current focus on development and redevelopment, rather than on acquisitions."The old structure was more typical of a smaller, entrepreneurial company," he says.
The 35-year-old company went public in 1993 as Developers Diversified Group, and shortly thereafter began an acquisitions spree that included the 4 million sq. ft. retail portfolio of Sears real estate subsidiary Homart Development Co. and an additional 4 million sq. ft. of community centers in three different states.
These days, with half a billion dollars worth of new projects in the pipeline, DDR is steered by high-powered investment committee.The group meets on a weekly basis to make key decisions regarding DDR's portfolio of 205 shopping centers, totaling 46.9 million sq. ft. of GLA. With properties in 39 states, the REIT employs 280 people, with a total market capitalization of $2.4 billion.
The Ratings Game "We have a well-oiled development machine,' says Jacobstein, referring to the DDR's strong institutional relationships with private pension funds such as Prudential, with which the Trust enjoys an $800 million development fund, and New York-based DRA Advisors.
In recent years many REITs have had to look outside the public equity markets for growth capital as the costs for that type of funding rise, says Jacobstein. DDR continues to grow by using private institutional money for joint ventures.
"We had the foresight to pursue this avenue of growth early on and to get the necessary source in place before public capital dried up," says Scott Wolstein, CEO, chairman of the board of directors, and financial manager.
"Of course, this means our capital structure has become more complex. There are more relationships that have to be managed but we also have more flexibility," Wolstein says.
Unfortunately, debt-raters don't view complicated financial joint venture arrangements as favorably. Standard & Poor's recently downgraded Developers Diversified Realty Corp.'s outlook to be negative, expressing concerns about the Trust's increasingly complex financial profile... and the effect of off-balance sheet ventures."
"Complicated can still be fine," says Richard Moore, a REIT analyst with Cleveland, Oh.-based McDonald Investments. "Joint ventures are an excellent way to spread the risk and raise capital." He says DDR has simplified its capital structure over the past year and eliminated the limited operating partnerships (convertible OP units) that previously made their earnings picture unclear. Subsequently, DDR's ratings should improve.
DDR stock is currently trading at $14.50 a share, but McDonald Investments has the stock targeted at $18 a share for the next year. "And it's worth every penny," says Moore.
Wolstein expects a significant boost in DDR's earnings as new projects under development come on line in the second half of this year. "We anticipate net reimbursement of approximately $50 million before year end."
Team Players DDR's development strategy is to team up with a local developer in a given geographic area who has already identified a site and will push through the local approvals to get the project leased and built. "Typically, our partners are merchant builders who lack the deep pockets to bring the project to fruition. We will often buy them out after the project is completed at a pre-negotiated cap rate," explains Jacobstein.
Power centers anchored by two or three large retailers such as a discount center, a home improvement center and an office supply store, flanked by category killers, make up the typical formula for the company's properties. The Centre at Hagerstown, a 750,000 sq. ft. project in Hagerstown, Md., slated to open this year, is typical of the company's prototype. Retailers including Wal-Mart Super Center, Home Depot and PetsMart complete the line-up of national anchor stores at the 40-store center, a $75 million joint venture with Petire Dierman Kughn (PDK) of McLean, Va.
"Our development capability has helped us to maintain important relationships with expansion-minded retailers," says Wolstein. For most of its tenants, DDR serves as the first or second-largest landlord. "We're a reliable source of new locations for retailers who want to grow. And there are still a lot of retailers with ambitious growth plans."
As executive vice president of DDR, Dan Hurwitz has been overseeing the lucrative leasing, development and asset management areas, since he came to his position exactly one year ago.
He points to the strong tenant relationships cultivated under the company's national tenant account program as key to the high occupancy rate of 95% currently enjoyed by Developers Diversified.
"Everyone who leases, from the chairman down to the field manager, has national account responsibility," says Hurwitz. "We encourage our leasing managers to form close, lasting relationships with retailers." DDR requires their managers to meet with account representatives on a frequent basis to keep their fingers on the pulse of the retailer's needs.
Within each quarterly portfolio analysis, reviewers look for over-achievers and under-achievers in terms of tenants and centers. DDR's proactive approach has resulted in average retail sales per sq. ft. in 1999 of $235, compared with the industry average of $196.
"The quality and size of our portfolio has created new opportunities to enter into relationships with temporary tenants, many of whom are interested in open-air centers for the first time,' says Hurwitz.
Boosting Revenue With stiff competition among retailers keeping their ability to pay higher rent in check, DDR is trying to generate new sources of revenue in creative ways.
Under Hurwitz's direction, DDR has announced an alliance with Shreveport, La.-based Praeses Corp. to market its portfolio to public communications companies, a deal that will bring state-of-the-art amenities to DDR's centers and increase public telephone revenue.
At the same time, DDR has signed a deal with Columbus, Oh.-based Tower Resource Management (TRM) to negotiate and administer telecommunications access rights at DDR properties. TRM will market the properties to wireless telecommunications service providers, and will seek opportunities for the construction of tower and monopole structures on non-revenue producing portions of centers.
"Increasingly, national tenants will be requesting services such as intra and internet access so they can react more efficiently to market conditions, inventory levels, and so forth," says Hurwitz. "We intend to stay ahead of the trend."
Strong management, good institutional and banking relationships, deep ties with national tenants and a large base of assets including many of the finest power and community centers in the United States, are qualities Jacobstein feels set DDR apart from many other REITs today. Currently, the company is expanding or renovating 11 centers where it expects to generate 12% or better return on investment, says Jacobstein. In addition, DDR's geographic diversity makes it less vulnerable to regional swings.
"Community and power centers have outpaced the sales performance of the shopping center industry as a whole throughout the 1990s," Wolstein says. "As long as we can continue to identify the successful tenant in the successful location in a given market we will continue to be successful ourselves."