Developers Diversified Strikes $890M Deal to Sell Stake in 13 Centers

In an $890 million deal, Developers Diversified Realty Corp. is selling an 80 percent interest in a 5.9 million-square-foot portfolio to an institutional investor, the Cleveland-based retail REIT disclosed this morning. Developers Diversified expects to reap $260 million in proceeds from the deal, which is scheduled to close in mid-December, the company said in a statement today. Of that total, $170 million will be available at closing. Developers Diversified anticipates receiving the balance of the proceeds during the first half of 2009. “The principal use of the proceeds will be to de-leverage (the company’s) balance sheet,” noted Sean Pattap, lead REIT analyst for Developers Diversified at Fitch Ratings. The REIT has not yet specified the locations of the shopping centers, which it described as 13 stabilized assets located in the United States. Pattap said this morning that the portfolio represents a broad geographic spectrum. All told, the properties account for slightly over 3 percent of Developers Diversified’s 159 million-square-foot portfolio, which encompasses 45 states plus Puerto Rico and Brazil. es plus Puerto Rico and Brazil. Developers Diversified’s statement did not name the joint-venture partner for the $890 million deal, but the sale is consistent with the REIT’s existing strategy. “The company–even prior to this transaction–does have a sizable joint-venture platform,” said Steven Marks, a Fitch Ratings managing director. Some 381 properties representing about $10 billion in current book value in Developers Diversified’s portfolio are held in joint venture, Pattap noted. The REIT’s existing joint-venture partners include an affiliate of Macquarie Group Ltd., the Sydney-based financial services company. It may also be noteworthy that financing for the giant deal required a significant amount of debt. Third-party financing accounts for 50 percent of the price and mezzanine debt will make up 20 percent for a total 70 percent loan-to-value ratio, Pattap explained. Equity accounts for the remaining 30 percent. As reported by CPN on Tuesday, Developers Diversified said this week that it expected to avoid major problems from the disappearance of the California-based Mervyns chain. Developers Diversified and an affiliate of Macquarie Group own 38 of the stores, which the joint venture bought in 2005 for $407 million. However, the leases are structured with enough credit enhancement to provide a buffer against default or bankruptcy, the company said this week. This morning the company also said that it would not be paying a fourth-quarter dividend this year in order to comply with minimum REIT payout requirements. Common-stock dividends for next year are expected to be $1.50 per share. Developers Diversified said the revisions to its dividend share policy would yield $80 million in additional capital. During the third quarter, Developers Diversified cinched 176 new leases and 289 lease renewals totaling 2.8 million square feet, the firm said today. Same-store net operating income edged up 1.8 percent compared to the third quarter of 2007. Fitch’s review of Developers Diversified’s financial situation projects that the firm’s liquidity will be at the break-even point for 2009, Pattap said.