German Investor Buys Low, Takes $112M Stake in DDR

The U.S. REIT index plummeted 38 percent last year, leaving the door open for investors with access to funds to purchase shares at bargain basement prices, and Alexander Otto is taking advantage of the opportunity. Developers Diversified Realty Corp. has announced that it plans to sell 30 million common shares to Alexander Otto, CEO of Germany-based shopping center developer ECE Projektmanagement and a DDR shareholder, for $112.5 million. DDR entered into a binding purchase agreement for the sale of the shares to Otto and certain members of Otto’s family. Marking a 33 percent premium over the closing market price for DDR shares on Feb. 20, 2009, the Otto Family will pay $3.50 per share for the first 15 million shares. In the second round, the family will shell out $4 per share, marking a 52 percent premium over the aforementioned closing price. With the acquisition of the shares, the Ottos, who already own 6 million shares, will become DDR’s largest single shareholder, with a stake of over 20 percent. They could end up with an even bigger piece of the pie; as per the purchase agreement, the family will be issued five-year warrants providing the option to buy an additional 10 million shares at $6 each. Additionally, an affiliate of the family has agreed to make a $60 million, five-year secured mortgage loan to DDR at a fixed rate. A special meeting has been scheduled for April for DDR to get the green light on the deal from shareholders. If all goes as planned, the closing of the sale of the first 15 million shares will occur immediately after the shareholders give their approval, and the second half of the transaction will close within six months of getting the go-ahead from shareholders. DDR plans to use proceeds from the sale of the 30 million shares to decrease leverage and increase liquidity, a move that is appropriate for the current real estate market. In a recent report, Pramerica Real Estate Investors noted that, “For REITs, 2009 will be a good opportunity to hunker down and get balance sheets in order to get into position to prosper when the economy picks up and equity markets rebound.” DDR’s deal with Otto, however, is not a panacea. “The equity sale will expand the company’s share count by a whopping 25 percent, but by no means does it fix DDR’s balance sheet or ensure its survival,” analysts Jim Sullivan and Nicholas Vedder of Green Street Advisors wrote in a research note. “It does, however, buy the company a bit more time to deal with its balance sheet issues.” Real estate industry experts expect 2009 to be a rough year for most REITs. According to the Pramerica report, the goal for REITs this year should be to “to survive rather than thrive.” For DDR, the selling of its shares appears to fall into the “survive” category; for a handful of others, now is the time to lay the groundwork to “thrive” by capitalizing on discounted prices. CB Richard Ellis Realty Trust recently announced its second public offering in hopes of raising as much as $3 billion to acquire office, retail, industrial and multi-family properties in the U.S. and abroad. And earlier this month, Senior Housing Properties Trust revealed it had priced a public offering of 5.5 million common shares of beneficial interest at $17.30 per share; the REIT plans to use part of the proceeds to help finance pending acquisitions or future property acquisitions. Headquartered in Cleveland, DDR presently owns and manages over 720 retail and development properties totaling 159 million square feet in the U.S., as well as Puerto Rico, Brazil and Canada. Hamburg, Germany-based ECE, currently the owner of 111 shopping centers, leads Europe in the inner city shopping center market. And the Ottos have their fingers in many more pies. In North America, the family owns contemporary furniture and housewares chain Crate & Barrel, and along with the Paramount Group, they are in command of one of the largest privately owned real estate acquisition, development and management entities on the East Coast.