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Deal of the Week

Developers Diversified Realty reached an agreement to sell 13 stabilized assets, comprising 5.9 million square feet of space, to a new joint venture with an unspecified institutional investor for approximately $890 million. According to the terms of the agreement, the institutional investor will retain an 80 percent ownership in the joint venture. Developers Diversified will hold a 20 percent ownership interest, in addition to receiving property management, development/redevelopment, leasing and ancillary income fees from the properties, as well as a promoted interest. The REIT expects to generate more than $260 million in net proceeds from the deal in the first half of 2009.

The transaction, scheduled to close in mid-December, comes when Developers Diversified is trying to shore up its balance sheet. As the credit markets remain frozen, the company faces $750 million in non-extendable 2009 debt maturities, in addition to $2 billion in 2010 maturities, according to a report from JP Morgan.

RBC Capital Markets analyst Rich Moore says, “I don’t think they are in all that bad a shape. Their balance sheet is basically healthy. The analysts have to look at 2010 and 2011 to find something to harp about. The joint venture will help them a great deal—it gets money in the door.”

According to RBC Capital Markets, Developers Diversified’s long-term fixed debt balance currently stands at $4.5 billion, while its floating debt balance is $1.4 billion. Meanwhile, the value of its stock has fallen 78 percent year-to-date, with Developers Diversified shares trading at $8.85 as of Tuesday morning. The company missed consensus analyst estimates by $0.11 per share in the third quarter, with FFO per share of $0.83.

“There are quite a few retail REITs that are more leveraged than they are, but they’ve been particularly punished recently,” says Joel Bloomer, a REIT analyst with Morningstar.

Developers Diversified’s debt to total market capitalization ratio stood at 57.4 percent in the third quarter of 2008, according to RBC Capital Markets. The company holds a lot of land through its joint ventures and has been aggressively pursuing international investments, as well as its relatively high short-term maturity load, might account for the current lack of investor confidence, Bloomer notes.

As a result, the REIT has resorted to some drastic measures to generate extra cash flow. It suspended expenditures on development projects in Russia and cut back spending on projects in South America and the United States. Last week, the company said that it would not pay its fourth quarter dividend to generate approximately $80 million this year and additional capital in 2009. (Developers Diversified already complied with minimum REIT payout requirements for the year, with an aggregate dividend of $2.07 per common share). The move will free up approximately $230 million in cash flow that will be used to bring down its leverage levels.

It is also examining asset sales and joint venture opportunities. Proceeds from any transactions will go toward debt repayment, says Michael W. Mueller, an analyst with JP Morgan.

During its third quarter conference call on Oct. 24, Developers Diversified’s CEO and chairman Scott A. Wolstein said the company’s first priority will be “enhancing liquidity” and bringing down leverage levels.

Analysts lauded the REIT’s swift response to the liquidity crisis. Developers Diversified has to act quickly to eliminate as much debt as possible considering the current credit climate, Bloomer says. He doubts that Developers Diversified will find itself in the same position as General Growth Properties, which is facing a possible sale as a result of its enormous debt load.

However, Bloomer says, “It’s a very small possibility. I think General Growth is being justifiably punished, [the company] is substantially more leveraged than Developers Diversified is.”

Developers Diversified executives did not return calls seeking comment in time for the publication of this article.

Other Notable Deals

Vornado Realty Trust agreed to purchase 8.0 million common shares of Lexington Realty Trust for $5.60 per share from Apollo Real Estate Advisors III, L.P. The shares, part of a block of 18.7 million being sold, feature 50 percent financing recourse solely to the shares purchased. Vornado already owns approximately 8.1 million common units of Lexington Master Limited Partnership, bringing its total stake in Lexington Realty Trust to 16.1 million common shares…The board of directors of Cedar Shopping Centers, Inc. approved the payment of a dividend of $0.22 per share on the company’s common stock. The dividend is payable on Nov. 20, 2008 to shareholders of record as of the close of business on Nov. 10. The annualized dividend rate equals a yield of 9.58 percent, based on the closing price of the company’s stock on Oct. 17, 2008…Wheeler Interests sold Smithfield Shopping Center, a 90,000-square-foot strip center in Smithfield, Va., to Cedar Shopping Centers for $9.4 million… Faris Lee Investments negotiated the sale of an 11,646-square-foot retail property in Palmdale, Calif. from Palmdale 2006 Co. to a private investor for $6.3 million.

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