Developers Diversified Realty Corporation History

Company Perspectives:

Developers Diversified Realty ... The nation's leading developer, acquirer and operator of market dominant community centers.

Key Dates:

1965:

Bertram Wolstein begins building shopping centers.

1992:

The company is incorporated as a real estate investment trust.

1993:

An initial public offering of shares is made.

1997:

Wolstein retires.

2002:

JDN Realty Corp. is acquired.

2004:

Benderson Development Company is acquired.

Company History:

Developers Diversified Realty Corporation (DDR) is a real estate investment trust (REIT) based in Beachwood, Ohio. It primarily develops, acquires, leases, and owns open-air neighborhood shopping centers ranging in size from 250,000 square feet to one million square feet and featuring at least two major anchor tenants, such as national or regional supermarkets or big-box retailers Wal-Mart, Target, Home Depot, or Lowe's. To a lesser degree, the REIT also is involved in enclosed mini-malls, lifestyle centers, and business centers. DDR's portfolio consists of some 460 retail centers and 40 business centers for a total of more than 100 million square feet of real estate. DDR shares trade on the New York Stock Exchange.

Company Roots Dating to the Late 1950s

DDR grew out of the Developers Diversified group of companies founded by Bertram L. Wolstein. He was born during the 1920s in East Cleveland, the son of a cloth cutter who grew up under modest circumstances. When he was just 12 years old he went to work to help support his family. As a teenager he delivered newspapers, worked in a fruit market and drugstores, and was a concessionaire at Cleveland Indians baseball games. The United States was soon engaged in World War II and Wolstein joined the Navy when he was just 16 years old. After being discharged he was at loose ends, uncertain what career to pursue. Taking advantage of the GI Bill, he studied accounting at Cleveland College of Western Reserve University. Then in 1953 he earned a law degree from Cleveland Marshall School of Law. He found legal work in the real estate field through an uncle and practiced law for a few years before deciding to become involved in property development. In 1959 he began building single-family homes, which were in great demand in the years after World War II when returning servicemen started families and fled to the country's new suburbs, including Wolstein's developments called Heritage and Heritage Hill. His first homes were priced at $17,000.

When the housing market collapsed, Wolstein in 1965 turned his attention to commercial real estate and the building of Kmart stores. His first Kmart was completed in Eastlake in 1967, and his new line of business took off. Wolstein was an old-school operator who relied on hunches as much as demographic studies. Known as a tough negotiator and difficult to work for, he was a man who prided himself on never asking someone to do something he would not do or had not already done. By the 1970s he was a wealthy real estate mogul and a Cleveland legend, at least in shopping center industry circles. In the late 1970s he bought the Cleveland Force professional indoor soccer team, which he ran successfully for a decade, and received far greater public recognition for his efforts than he had in real estate. He once told reporters, "I had been a successful developer for many years and all it got me was seven yawns."

Wolstein would be joined in his business ventures by his son, Scott Alan Wolstein, after he graduated from the University of Pennsylvania's Wharton School of Business in 1974 and earned a law degree from the University of Michigan in 1977, where he graduated cum laude. The Wolsteins expanded their real estate interests during the 1980s. By 1987 Developers Diversified owned shopping centers, mostly connected to Kmart stores, in 32 states, worth a total of $700 million. (At this stage the developer began switching over to Wal-Mart stores as the Kmart chain began to falter.) The company also spawned affiliates to become involved in residential, mixed-use, industrial, and hotel developments. But with the collapse of the real estate market in the early 1990s, Developers Diversified, like many real estate companies, found it difficult to fund new projects. After building ten shopping centers in 1990, the Wolsteins built just one in the next two years. Like a growing number of developers, they tapped into a new source of funding, the little-used REIT structure.

Development of the REIT Structure in the 1960s

REITs had been established by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock, and they were also subject to regulation by the Securities and Exchange Commission. Unlike other stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that severely limited the ability of REITs to retain internally generated funds. During the first 25 years of existence, REITs were allowed to own real estate only, a situation that hindered their growth because third parties had to be contracted to manage the properties. Not until the Tax Reform Act of 1986 changed the nature of real estate investment did REITs begin to become truly viable. Limited partnership tax shelter schemes that had competed for potential investments were shut down by the Act: Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. Separately, the Act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, the REIT form was still not fully utilized. In the second half of the 1980s the banks, insurance companies, pension funds, and foreign investors (especially the Japanese) provided the lion's share of real estate investment funds. The resulting glutted marketplace led to a shakeout that hampered many real estate firms. With properties available at distressed prices in the early 1990s, REITs finally became an attractive mainstream investment option and many real estate firms, starting in 1993, now went public to become roll-up vehicles in different segments of the industry. Developers Diversified was one of a number of companies to take the plunge, electing to focus on its neighborhood shopping center portfolio.

In November 1992, Developers Diversified Realty Corporation was incorporated in Ohio. The new REIT then made an initial public offering (IPO) of shares, priced at $22 each, in February 1993, and on that same day they began trading on the New York Stock Exchange. The offering raised $176 million, which was then used to buy some 50 shopping centers owned by Developers Diversified Group. Almost all of them were anchored by the likes of Wal-Mart, Kmart, or a J.C Penney store, and 95 percent of their space was leased. Bert Wolstein served as chairman of the board and Scott Wolstein took over as CEO. Their plan was to build the REIT through acquisitions, targeting shopping centers across the country that were new and well located, but lacked access to the financing the developers needed to pay off their expiring construction loans. There was no lack of candidates that fit this description, as DDR would begin the process of reviewing more than 200 shopping centers.

Within a matter of weeks of its IPO, DDR made its first acquisitions, paying $15.7 million to add a shopping center in Virginia and another in North Carolina. The REIT completed another 15 acquisitions in 1992, altogether spending about $150 million on acquisitions for the year. In 1993 the REIT posted revenues of $54.6 million and net income of $13.6 million. DDR continued to roll up shopping centers in 1994, adding another 14 properties at a cost of $183.1 million, thereby adding 3.2 million square feet of space. The company also was expanding some of its properties and engaged in development projects in Ohio and Pennsylvania. When 1994 came to a close, DDR saw its revenues improve to $82 million and net income to $21.1 million.

DDR enjoyed a solid 1995, acquiring another 20 properties. The major deal of the year was the $500 million purchase of the Homart Community Center Division of Sears Roebuck & Company. DDR picked up ten power centers plus 19 adjacent parcels of land. DDR spent another $81.6 million in 1995 to add ten shopping centers in South Carolina, Florida, Alabama, and Michigan. In addition, DDR completed expansion projects on 12 of its shopping centers and concluded a handful of development projects. As a result, the REIT finished the year with 19.3 million square feet of leasable space and revenues topped the $100 million mark, reaching $107.8 million. Net income for the year totaled $25.5 million.

DDR's expansion pace dropped off significantly in 1996. The REIT spent almost $100 million to acquire five shopping centers located in Arizona, Minnesota, Indiana, Texas, and Oregon. DDR continued to expand some properties and to develop projects in Canton and Aurora, Ohio, and also commenced development on three more shopping centers in Ohio and a fourth in Kansas. Also of note, in 1995 DDR completed a secondary stock offering, netting $75.4 million, used mostly to pay down debt. For the year, DDR posted revenues of nearly $131 million, while net income almost doubled the previous year's total, approaching $50 million.

In February 1997, 70-year-old Bert Wolstein decided to step down as DDR's chairman, turning over the title to his son. It was not a matter of retirement, more a dissatisfaction with the nature of running a public company, which he explained was "too structured, too bureaucratic" for his taste. As he told the Cleveland Plain Dealer at the time of his leaving, "In a public company, you can't buy land and put it on the shelf because every dollar you invest has to make a return. ... I was a bit of a speculator. Finding the right piece of land at the right time at the right price has always been my forte." He also chafed at catering to shareholders and Wall Street analysts, once telling a reporter, "Working and meeting with analysts and having them tell you how to run a business they know nothing about didn't fit with my personality." Instead, to remain active in real estate, he formed Heritage Development Company to buy and develop golf courses. In 1998 he also attempted to return to professional sports, heading an investment group interested in landing a new

Scott Wolstein carried on with the travails of running a public company. In 1997 DDR expanded 13 of its properties and spent $281.6 million to acquire eight shopping centers in Arizona, Ohio, Minnesota, Maine, Colorado, Arkansas, and New Jersey. The company also arranged $800 million in financing for additional acquisitions in a joint venture with Prudential Real Estate Investors. Some of that money was put to use in 1998 when DDR acquired 41 properties. Of note was the purchase of the shopping center portfolio of the Sansone Group of St. Louis, Missouri, a deal that added 15 properties and strengthened DDR's position in the St. Louis market, where 13 of the properties were located. DDR also picked up Sansone shopping centers located in Cedar Rapids, Iowa, and Springfield, Missouri. Later in the year, DDR entered the Salt Lake City market by purchasing the nine-shopping center portfolio owned by Hermes Associates of Salt Lake City. Furthermore, in 1998 DDR made an investment in American Industrial Properties (AIP), a REIT that specialized in industrial properties, and DDR also transferred five light industrial properties it had picked up along the way to AIP.

Structural Changes in the Late 1990s

As DDR grew into a large operation, Scott Wolstein had to make some changes to run it effectively. He established a human resources department and hired someone to head it, and also brought in other executive talent. In addition, he formed an asset management group, with regional asset managers, to pay closer attention to each property in the portfolio, which at this point numbered 159 shopping centers. The task of monitoring the assets had simply grown beyond the capability of DDR's 11-member executive committee. Although the REIT completed just one acquisition in 1999, a 50 percent interest in a Phoenix shopping center, it spent another $46.6 million expanding 14 properties and completed construction on five shopping centers.

DDR entered the new century as a prosperous concern, yet the price of its stock was sluggish, primarily due to the unglamorous nature of strip shopping centers. Regardless, the REIT continued to grow on a number of fronts. In 2000 it was especially active in California, establishing a permanent office there in August, then a month later announced it was spending $355 million to acquire 15 West Coast properties from Burnham Pacific Properties, Inc. DDR expanded its holdings in the Southeast in 2002 by acquiring JDN Realty Corp., in a $1 billion transaction adding 81 properties in 19 states as well as projects under development by JDN. DDR completed an even larger acquisition in 2004, paying $1.5 billion plus the assumption of $800 million in debt for Benderson Development Company, a Florida-based firm with 110 shopping centers located in 11 states. Most of the properties, however, were in New Jersey and New York. The deal was of strategic importance because it greatly expanded DDR's limited presence in the New York market.

DDR's portfolio now exceeded 450 shopping centers located in 44 states. But the REIT also was looking beyond the United States for future growth. In November 2004 it made its first deal outside of the United States, agreeing to pay $1.15 billion to acquire 15 shopping centers in Puerto Rico from Caribbean Property Group. DDR also began looking at acquisition opportunities in Mexico and Canada, where many of its major tenants had stores and had plans for further expansion. Although some of the REIT's chief competitors also were interested in these emerging markets, there was every reason to expect DDR to land its fair share of properties and continue its steady growth.

Principal Subsidiaries: DDR Management L.L.C.; DDR Realty Company; JDN Development Company, Inc.

Principal Competitors: CBL & Associates Properties, Inc.; General Growth Properties, Inc.; New Plan Excel Realty Trust, Inc.

Further Reading:

• Bullard, Stan, "Baby REIT Embarks on Hunt for Properties," Crain's Cleveland Business, March 29, 1992, p. 3.
• ------, "DDR Turns an Eye to Mexico," Crain's Cleveland Business, November 15, 2004, p. 4.
• ------, "Diversified, Indeed! Wolstein Firm Travels New Avenues," Crain's Cleveland Business, June 8, 1987, p. 1.
• Frango, Alex, "Cleveland REIT Plans to Purchase 110 Retail Centers," Wall Street Journal, April 1, 2001, p. B6.
• Lubinger, Bill, "'Aces Are in Their Places' for Real Estate Trust DDR," Plain Dealer, September 14, 1999, p. 1C.
• ------, "Departing on a Successful Note," Plain Dealer, February 26, 1997, p. 1C.
• Lubinger, Bill, and Alana Baranick, "Bert Wolstein, Shopping Center Magnate, Dies at 77," Plain Dealer, May 18, 2004.

Source: International Directory of Company Histories, Vol.69. St. James Press, 2005.

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