Great Acquisitions
Developers Diversified Realty's recent acquisitions have helped mold the company into a powerhouse landlord in the U.S.
Randall Shearin

Developers Diversified Realty (DDR) has made several major acquisitions over the last 3 years, molding itself into one of the largest community shopping center REITs in the nation. Beginning with the acquisition of JDN Realty in 2003, continuing with the acquisition of a portfolio of centers from Benderson Development in 2004, and finishing with a third portfolio from Caribbean Property Group in January 2005, DDR has added a significant number of properties to its portfolio.

Shopping Center Business recently spoke with Scott Wolstein, chairman and CEO; David Jacobstein, president and chief operating officer, and Daniel Hurwitz, executive vice president, of DDR to find out how the company is accommodating its new properties, as well as continuing on a path of new development.

The three acquisitions that DDR has made over the last 3 years equate to $4.5 billion in assets, bringing the total number of shopping centers owned and managed by DDR to 470, totaling 108 million square feet. The reason that DDR had for acquiring each of the portfolios differs. The JDN portfolio had a lot of opportunity for DDR to create value. JDN had a significant development pipeline and several high profile projects under construction. With occupancy lower than DDR's core portfolio and some properties not in top condition, there was also an opportunity for the company to redevelop some properties while improving others strictly through leasing. The Benderson portfolio was well stabilized, and presented an opportunity for DDR to expand into New York state and increase its presence in New Jersey. With occupancy levels slightly lower than DDR's core portfolio, DDR has improved that portfolio through leasing and redevelopment activity. In January, DDR closed on the acquisition of a 15-property, 5 million-square-foot portfolio of shopping centers from Caribbean Property Group (CPG), which it purchased for $1.15 billion. All of the assets are located in Puerto Rico; the acquisition makes DDR the largest landlord in Puerto Rico.

Puerto Rico is an incredible market. Retail space is scarce, and sales are astronomical across the board at all types of retailers. For DDR, the CPG acquisition represented an incredible opportunity: to bring its leasing power to a market that needs more retail.

“We had numerous conversations with retailers during the due diligence period and we've had numerous portfolio reviews since we've closed on the Puerto Rican portfolio,” says Hurwitz. “Tenant interest from U.S. retailers is very strong. We now have a very dominant ownership position on the island and we are able to provide opportunities for retailers for multiple units in multiple locations that may not have been available before.”

In 2004, DDR opened the 732,000-square-foot Centerton Square in Mt. Laurel, New Jersey, anchored by Target, Jo-Ann Stores, T.J. Maxx, Bed Bath & Beyond, DSW Shoe Warehouse, PetsMart, Costco and Golf Galaxy. Wegman's and Sports Authority are under construction and will open soon.

“Our agreement with PMI allows us time to become familiar with the assets and to become familiar with the island and the environment,” says Jacobstein. “We think it is the right combination at this point.”

“The Puerto Rico acquisition gives us an opportunity to put our toe in the water internationally,” says Wolstein. “We are investing in a different culture without investing in a different sovereign nation. This is a good first step towards international expansion.”

DDR's business model doesn't require the company to make huge acquisitions to sustain growth. If it continues to grow its existing portfolio, develop new properties and achieve more income through existing centers, then the company will achieve its earning projections. In 2005, DDR has focused on expanding its development and redevelopment program. The company has numerous projects underway across the country.

“Development and redevelopment is where we can get the highest returns in the current financial environment,” says Wolstein.

DDR has stepped up its efforts to acquire raw land for future development. It has hired people on both coasts to secure sites and seek out opportunities for new development.

The 475,000-square-foot Beaver Creek Commons in Apex, North Carolina, which DDR opened last year, is anchored by Super Target, Lowe's Home Improvement, Linens ‘n Things, OfficeMax and PetsMart.

In 2005 and 2006, the company will open several new shopping centers including The Shops at Midtown Miami in Miami, which will be anchored by Target, Circuit City, Linens ‘N Things, OfficeMax, PetsMart and Ross Dress For Less. Also under development is Mt. Nebo Pointe, a 360,000-square-foot Target, Sam's Club and Sportsman's Warehouse-anchored center in Pittsburgh. DDR and joint venture partner First Carolina Properties are under development with Beaver Creek Crossings, which is located adjacent to DDR's recently opened Beaver Creek Commons in Apex, North Carolina. The company has signed agreements for that center with Consolidated Theaters, Kohl's, Michaels, Dollar Tree, Ross Dress For Less, Bed Bath & Beyond, Circuit City, Old Navy and Dick's Sporting Goods. The company will also open Norwood Plaza, a 126,735-square-foot shopping center in Norwood, Massachusetts, and Freehold Marketplace, a 500,000-square-foot Wal-Mart and Sam's Club-anchored center in Freehold, New Jersey.

In addition to new development, DDR also has a lot of redevelopment and renovations underway in its existing portfolio. DDR self-funds ground-up development using its own balance sheet through retained earnings.

“There are tremendous opportunities in our existing portfolio as retailers continue to look for infill locations in markets where they have already had success,” says Wolstein.

DDR sold a number of assets to Macquarie DDR Trust (MDT), a publicly traded Australian Listed Property Trust and joint venture with Macquarie Bank, in 2004 and 2005 to raise capital for the Benderson and CPG acquisitions. The company maintains a percentage ownership in all the assets and earns fees for leasing and managing the shopping centers. While the company still had to issue equity debt to make the acquisitions, it was not as much as it would have had to issue had it not been able to recycle the capital through MDT, says Wolstein.

The 1.1 million-square-foot Phoenix Spectrum Mall in Phoenix is one of the redevelopment projects that DDR has underway with the Coventry II Fund.

With the Coventry II Fund, DDR has four redevelopment projects currently ongoing. They are: the 300,000-square-foot Totem Lake Malls in Kirkland, Washington; the 1.1 million-square-foot Phoenix Spectrum Mall in Phoenix; Ward Parkway Center, an 811,343-square-foot center in Kansas City; and Buena Park Downtown, a 1.1 million-square-foot center in Orange County, California. DDR and Coventry have also executed a forward commitment development agreement with David Berndt Interests to develop a 600,000-square-foot community center in San Antonio, anchored by Target, Lowe's and several medium size boxes, which will open later this year.

An aerial photo showing the site for DDR's The Shops at Midtown Miami.

“We think that these urban infill, mixed-use developments are going to be a big part of the business in the coming years,” says Wolstein. “They are easier to get entitled because they give communities what they want. They are also where the tenants want to be; they can access significant density in urban areas that they haven't been able to penetrate.”

In Kirkland, Washington, at Totem Lake Malls, DDR is planning a mixed-use development that is the redevelopment of an existing site in an infill location. DDR is also looking for other sites for this kind of development.

A rendering of DDR's mixed-use project The Shops at Midtown Miami, currently under construction in Miami.

DDR's program is winning over investors and the Wall Street community, generating total shareholder return of 39 percent in 2004. DDR has also outperformed its sector, the Morgan Stanley REIT index and most other indexes for the last 5 years. DDR has consistently been one of the leaders in innovative financial structures, and has continued to do so as the industry changes. Its creation of MDT is a prime example of this. When DDR went public in 1993, it had one of the largest IPOs of any community center REIT at the time, with $200 million raised. In 2004, the company issued $750 million in equity. Today, DDR has capitalization of $10 billion and MDT has capitalization of almost $2 billion.“When I think back to what community centers looked like in the 1960s when my father started developing Kmarts, and how the community center has evolved today, the industry has radically changed,” says Wolstein. “We've ridden the wave the whole way.”

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.