Everybody has to eat
To shopping center developer Edens & Avant, that's more than a fact of life — it's the underpinning of a successful business plan.
In just eight years, the South Carolina-based private developer has gone from a small developer of strip centers and other types of real estate in the Southeast to a tightly focused owner and developer of grocery-anchored projects on the East Coast. Its holdings of $2.2 billion are nearly nine times what they were in 1995, and its gross leasable area of nearly 23 million square feet makes Edens & Avant the nation's 19th-largest shopping center owner, according to Retail Traffic's 2003 rankings.
So focused is Edens & Avant on grocery-anchored centers that it even came up with a trademarked phrase for the business — “necessity retail.” In addition to grocery stores, its centers typically include drug, office supply and some clothing stores.
“We aimed our strategy toward something we knew and had been successful in, and that we knew was in demand,” says CEO Terry S. Brown, who joined the company in 2002 from Andersen Corporate Finance, where, as chief executive, he advised Edens & Avant on financial matters.
The timing of the move proved just right. “There's been an evolution in how the industry looks at food and drugs, and there's a sophistication that wasn't there even 10 years ago,” notes Atlanta-based Bernard J. Haddigan, managing director of Marcus & Millichap and director of its national retail group.
Edens & Avant is no newcomer to the grocery business. Its founder and current chairman, Joe Edens, developed his first grocery-anchored center in Columbia, S.C., in 1966; eight years later the company owned two dozen such strips. Although grocery-anchored centers were always the company's bread and butter, Edens & Avant developed other properties along the way — from office buildings to homes.
But building relationships with powerful grocers proved to be the firm's forte, says Tony Colavolpe, senior vice president for Stop & Shop Supermarket Co., a major regional grocery with 334 stores in New England and the Mid-Atlantic region.
“They're a fairly important landlord to Stop & Shop and to our parent, Ahold. I view them as having more of a partnership relationship with us than a landlord relationship,” Colavolpe says. “They're willing to roll up their sleeves and help, and they recognize the importance of the supermarket in the equation.”
By 1995, nearly 30 years after Edens developed his first center, Edens & Avant had holdings of $250 million in a solidly Southeastern portfolio. Edens wanted to position the company for the future and expand it. But how? The company considered going public, as many other REITs were, but decided that such a move would work against its entrepreneurial grain.
Instead, it decided to renew its focus on grocery-anchored development. The company consolidated its business units into one operation, then took its case for financing to the capital markets.
“We went to the capital markets with the idea of only doing necessity retail,” says Brown, who, as financial adviser, was instrumental in lining up investors. Edens & Avant soon attracted institutions, including large pension funds like the State of Michigan Retirement System and the New York State Teachers' Retirement System, that were looking for the stable income generated by grocery-anchored centers. (Edens & Avant has historical unleveraged returns of 9 to 10 percent on its centers, Brown says.)
With financing in place, Edens & Avant expanded into the densely populated Northeast and Mid-Atlantic markets and created a regional headquarters in Boston and Washington. The company also opened more than a dozen other regional offices, believing that in the business is best managed locally. Its staff shot up from about 135 employees to 300.
Much of Edens & Avant's growth has come through acquisitions. Among the biggest were the $300 million purchase of 22 centers, most in the Northeast, from Samuels & Associates in 1998, and last year's $275 million acquisition of 36 centers from Konover & Associates.
“They've been very aggressive buyers, and very focused on the type of properties they want,” says Joseph French, senior investment advisor for Sperry Van Ness in White Plains, N.Y.
And smart ones. French notes that the Konover portfolio contained a number of Amesanchored properties at a time when the discounter was in its death throes. While others saw those leases as a negative, Edens & Avant “had the vision to see that the Ames stores would make ideal supermarkets.”
As for the Samuels acquisition, French says some in the industry scoffed at the price Edens & Avant paid. “But the market worked in their favor,” he says. “They sold off the individual properties that weren't in their core business, and they made a nice profit. When they paid such a high price, we all laughed. Now they're the ones who are laughing.”
Growth is still a high priority. Last year, management created a five-year plan to boost its portfolio to $3.5 billion, with about $1 billion each in the Southeast, Mid-Atlantic and Northeast regions. In the next 18 months alone, Edens & Avant wants to add at least $1 billion in properties to its portfolio. The company now owns 229 centers and manages 51 others through its third-party services operation.
To execute such growth, Edens & Avant execs say assembling a knowledgeable staff is crucial. “Hiring is the starting point,” Brown says. “We have a very specific culture, and we want people who want to be here — people who like change. Back in 1997 we were very entrepreneurial, and over that period of time we have beaten ourselves to death trying to remain entrepreneurial.”
In Boston, the company hired Joe Pierik away from CB Richard Ellis/Whittier Partners to serve as the Northeast region's vice president and brought in Elizabeth Furnelli, formerly of The Flatley Co., as vice president of retail leasing. In Washington, Steve Boyle, formerly of CB Richard Ellis, was hired as vice president of development for the region. Numa Jerome, formerly of Forest City Enterprises, was hired as vice president of leasing.
BUILDING AND BUYING
As the best centers become pricier, Edens & Avant has found quality properties harder to buy at a price that makes sense. As a result, “We've shifted quite a bit of our focus from acquisition to development,” Brown says. Over the next five years, Edens & Avant expects to focus 60 to 70 percent of its efforts on development and redevelopment.
Not that the company is through buying. In two or three years, Brown says, “You'll see us in another region of the U.S.” — a move that will be accomplished through acquisitions. He wouldn't say which regions are likely candidates.
But while grocery-anchored REITs have performed well in recent years, there are “some big risks on the horizon,” says Matthew Ostrower, an analyst with Morgan Stanley. Grocery store overexpansion and the threat from new superstore competitors such as Wal-Mart, Target and even drugstores make it likely that grocery REITs will face substantial consolidation in coming years, he says.
“I think clearly the grocery industry is in a hypercompetitive state today. I think you will see consolidation,” Brown says. But he says Edens & Avant has positioned itself well by working only with market leaders, who will perform well in a shakeout.
“At any point we have 10 to 15 new developments in process, and a significant amount of redevelopment,” he says. “The pace might slow a bit, but no more than the traditional ebbs and flows of business.
“We clearly are bullish about the long-term viability of the grocery industry in the United States,” he adds.
Edens & Avant wanted to finance an ambitious growth plan, but didn't want to go public.
The company refocused itself exclusively on “necessity retail.” Private investors supported the concept and funded the acquisitions and developments that made Edens and Avant a top player in grocery-anchored centers.
Growth can occur outside of public markets. Despite being private, Edens & Avant is one of the most aggressive developers in the country, expanding through ground-up projects and acquisitions.
Assets have grown to $2.2 billion today from $250 million in 1995. It owns 229 centers in 20 states, and chief executive Terry S. Brown says more expansion can be expected.