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Deal feast in grocery-anchor land

Two recent deals highlight the hot demand for grocery-anchored centers. In late September, Edens & Avant and Samuels & Associates finalized their purchase of 36 shopping centers in New York, New Jersey, Pennsylvania and New England from Konover & Associates. Then in early-October, Cleveland-based Developers Diversified Realty and Atlanta-based JDN Realty Corp. announced a $1.02 billion merger agreement.

This latest deal is particularly big news, since it will make DDR the second-largest shopping center REIT in the country. The deal between DDR and JDN is valued at $1.02 billion, based on Friday, Oct. 4 closing prices, $584 million in assumed debt and $50 million of preferred stock. Both boards have unanimously approved the transaction. The deal provides for each JDN shareholder to receive 0.518 shares of DDR stock per JDN share. After the deal closes in first-quarter 2003, DDR will have a total market capitalization of more than $5 billion.

Following the merger, DDR will own or manage 442 shopping centers in 44 states with 77 million sq. ft. of space, including 15 million sq. ft. from the JDN merger. DDR will also acquire 20 properties with about 7 million sq. ft. of space now under development by JDN, as well as a development pipeline of 17 properties with 3 million sq. ft, for a total estimated cost of $220 million.

“We expect this transaction to be approximately 5% accretive to consensus estimates of funds from operations (FFO) for 2003 on a leverage neutral basis, with further accretion as JDN's development projects become fully operational in 2004,” says DDR's president and COO, David Jacobstein. “We expect an overall capitalization rate on the transaction of approximately 9.8%, or 10.6% after adjusting for the impact of approximately $80 million in non-income producing land and outparcels.”

“In our view, the merger continues to add significant strength to the DDR story, already one of the strongest stories in the shopping center REIT universe,” says Richard C. Moore, an analyst with Cleveland-based McDonald Investments. “The near-term and long-term outlook for retail real estate, in our minds, remains particularly strong.”

But while DDR is getting bigger, Konover & Associates, based in Farmington, Conn., is selling the bulk of its existing retail centers, instead focusing on its construction business (Konover Construction Corp.) and on Konover Development Corp.'s pipeline of 30 potential development projects.

Boston-based Samuels & Associates has responsibility for redeveloping, leasing and managing 17 of the jointly acquired centers. Columbia, S.C.-based Edens & Avant, which operates 18 grocery-anchored Necessity Retail Centers in strategic markets in New England, will operate the remaining 19 centers in the region acquired from Konover.

“The partnership of Edens & Avant and Samuels & Associates is well-positioned for this venture,” says Jodie W. McLean, president and chief investment officer of Edens & Avant. “In addition to allowing us to expand an already positive relationship between our two companies, we believe the venture provides an extraordinary opportunity for our retailers and shoppers in New England, New York, New Jersey and Pennsylvania.”

“Based on our 20 years of history of successfully developing and managing grocery-anchored shopping centers throughout New England, joining forces on this acquisition with Edens & Avant is the next logical step in our growth,” says Steve Samuels, president of Samuels & Associates.

Individual property closings should conclude by January 2003.

Next year also bodes well for the sector as a whole. “Weaker consumer spending may not directly lead to weaker operating metrics in shopping centers,” says Steve Sakwa, a retail analyst with Merrill Lynch in New York. “Historically, shopping center total returns as measured by NCREIF have generally been stable with little volatility in either direction. In bearish times, it is better to own shopping center assets than other property types. Ultimately this advantage wanes when other asset classes enter more promising “recovery” phases. At this junction, those more promising phases are too far in the future to make the switch, in our opinion.”

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