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Wall Street's well-kept secret

Ramco-Gershenson makes a name for itself in the shopping center industry. Ramco-Gershenson Properties Trust may not be the most well-known REIT on Wall Street, but national retailers and lenders recognize the 45-year-old company as a key player in the shopping center industry.

The Southfield, Mich.-based REIT posted outstanding first-half results this year with a total return of more than 25%, whereas the REIT industry itself averaged only a 23% total return during the same period. However, this respectable showing did little to improve the company's market capitalization, according to the Morgan Stanley REIT Index, which ranks Ramco-Gershenson (NYSE: RPT) 120th among the 123 REITs it charts.

The shopping center industry displays a vastly different attitude toward Ramco-Gershenson, which has grown from 28 centers and total assets of $285 million when it became a public REIT in 1996 to 55 centers and $525 million in total assets today.

Ramco-Gershenson owns, develops, acquires and manages shopping centers. More than 70% of the company's portfolio, which totals 10.9 million sq. ft., is comprised of community centers. The balance includes power centers, regional malls and single-tenant properties.

In addition to going public, Ramco-Gershenson implemented other capital procurement strategies in the 1990s, a decade in which many forms of capital dried up for real estate development. "The access to capital and the ability to keep growing will distinguish the growth REITs from the REITs that don't grow in the future," notes Dennis Gershenson, president and CEO.

Creative methods of accessing capital have been the key to Ramco-Gershenson's growth. One of the company's capital-generating strategies was to form a joint venture last year with InvestCorp International, a global investment group that acts as a principal and intermediary in international investment transactions. InvestCorp's aggregate acquisition value is approximately $18 billion.

Even though capital is harder to come by in the public marketplace, the joint venture enables Ramco-Gershenson to keep growing through acquistion. "REITS were all looking for an alternative to public money about two years ago," Gershenson says. "The joint venture helped us become flexible and adapt to the changes."

In the upcoming nine months, the joint venture plans to buy $80 million in shopping center real estate from various sources, bringing the total value of its assets to $120 million. The venture's "off-the-balance-sheet" structure allows Ramco-Gershenson the luxury of investing considerably less equity on acquisitions versus acquiring and owning 100% of the assets.

Improvements will appreciate the properties' value. Plus, any joint venture acquisiton allows Ramco-Gershenson to generate additional income in the form of asset management, acquisition and management fees.

"If we acquired a shopping center today at a conservative capital rate of 9.5% or 10%, that would mean we would be getting an adequate, but not great return," explained Gershenson. "If you expand and lease-up the center, then the return could rise to as much as 12% or 13%. When you figure in the extra fees, it could eventually climb to a 20% to 25% return."

Real estate analyst Amy Young, a vice president with Deutsche Banc Alex.Brown in New York, approves of the approach. "This joint venture is the type of strategy that makes sense in today's environment."

Yet another method the company employs to access capital is re-leveraging expensive debt. Ramco-Gershenson closed a loan for 10 shopping centers with an existing lender in 1995. After it made significant improvements to those centers, Ramco-Gershenson went back to the lender to re-leverage.

"When the lender discovered we were at 45% to 55% of the loans, they then lent us up to 65%. So we wound up with more money that we used to pay down our most expensive debt," Gershenson explains.

45-year history The predecessor organization to today's Ramco-Gershenson was formed under the name of A&W Management Co., in 1955 by brothers William and Aaron Gershenson. In its 45-year history, the Gershenson organization established a strong foundation in the shopping center industry by developing more than 70 centers, primarily in the Midwest.

In 1975 William Gershenson's four sons - Joel, Dennis, Richard and Bruce, along with associate Mike Ward - assumed leadership responsibility. Each of the four sons has developed a real estate specialty that gives the company a comprehensive expertise in building, buying and managing shopping centers. Joel, chairman of the board, handles asset management; Richard, executive vice president and secretary, is in charge of construction; Bruce oversees acquisitions and dispositions; and Dennis supervises finance and is president and CEO. Ward, a long-time family friend, covers leasing and is executive vice president and COO.

In the late 1970s and early 1980s, much of Ramco-Geshenson's development thrust included more than 35 Kmart stores in major metropolitan markets. While Kmart remained a good client, Ramco-Gershenson saw the need to diversify. Consequently, the firm began building centers with office supply stores, grocery chains and other retail anchors.

In 1996, Ramco-Gershenson and 22 of its primary shopping centers merged with the mortgage REIT, RPS Realty Trust, and six of its respective properties to become RPT. Instead of transforming into a public company via the conventional process of issuing an initial public offering, Ramco-Gershenson and RPS went public by forming a reverse merger.

"RPS was a mortgage REIT that realized the wave of the future was in equity rather than debt," says Gershenson. "Because of market conditions, RPS wanted to go from a mortgage REIT to an equity REIT and we wanted to become a public company. It was a natural marriage. Rather than having our stock price determined by the marketplace in an IPO, the reverse merger allowed RPS and ourselves to establish the value of the stock from day one."

Gershenson sees the company continuing its innovative methods of raising capital to spur growth. "The only way you grow is access to capital," says Gershenson. "If you can't get that money in the public marketplace then you do it through a variety of vehicles such as selling assets, the formation of joint ventures, re-leveraging assets to reduce expensive debt and then judiciously using that capital where it reaps the greatest rewards."

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