Scott Wolstein: Benderson Acquisition Expands DDR's Relationships with Top Tenants

In one fell swoop, Developers Diversified Realty Corp. became the third-largest owner of retail space in the U.S. and the biggest owner of grocery-anchored, power and community centers.

In March, the Cleveland, Ohio-based real estate investment trust (REIT) gobbled up the privately held assets of Benderson Development Co. Inc., an owner/operator of community retail centers, in a transaction valued at about $2.3 billion. The acquisition will add 110 retail assets and 18.8 million sq. ft. to its collection of retail strip centers.

DDR's portfolio now includes 470 retail properties totaling more than 100 million sq. ft. of space. NREI recently talked with Scott Wolstein, CEO of DDR, about the acquisition, the timing and its impact on the company and the industry.

NREI: Why did the firm acquire the Benderson portfolio now?

Wolstein: We consider the Benderson portfolio to be the best-quality privately held portfolio available in today's market. The acquisition expands our relationships with our top tenants, strengthens our position as one of the largest landlords to the nation's most successful retailers and improves the value of our overall franchise by adding leases with three of the top tenants in the United States: Wal-Mart, Home Depot and Target.

Also, more than 80% of the portfolio's gross leasable area (GLA) is located in New York and New Jersey, where we currently own less than 100,000 sq. ft. and 2.7 million sq. ft., respectively. The transaction fits well with our national platform and diversifies our geographic exposure, giving us a dominant position in these states.

NREI: The transaction greatly increases DDR's investment in grocery-anchored centers. How will the volatility among grocers (i.e., the emergence of Wal-Mart and the discounters' increasing presence in the marketplace) affect the strength of the DDR portfolio?

Wolstein: The transaction increases our exposure to Tops Market, which is headquartered in Buffalo and is the dominant grocer in these markets. Their stores, which average 65,000 sq. ft., are sized right and are in very good condition.

NREI: The firm has made several large acquisitions in recent years, including JDN Realty in 2003 and Burnham Pacific Properties in 2000. What did you learn from those experiences that you can apply to this acquisition?

Wolstein: Over the last few years, we have gained significant experience regarding the integration of large portfolios into our operating and leasing platforms and have already begun to address several organizational issues. We have conducted an in-depth review of our operating needs and we anticipate hiring approximately 70 individuals, primarily in accounting and finance, legal, leasing and property management. While we expect General & Administrative (G&A) expenses to increase on an absolute basis, we project that G&A as a percent of revenues to decrease because of the efficiencies afforded by the transaction.

NREI: There has been some negative analyst coverage on the deal. For example, Morgan Stanley views the transaction pricing as “high given the quality of the assets involved.” What are your thoughts?

Wolstein: Response from analysts has been very positive, with many confirming their overweight status and buy recommendations. Goldman Sachs, among others, has since maintained its rating for Developers Diversified as the top pick in the REIT sector.

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