Developers Diversified Survives the Slump

Developers Diversified works toward smart, steady growth

By Michelle Jarboe, The Plain Dealer, May 22, 2010

BEACHWOOD, Ohio -- As Developers Diversified Realty Corp. recovers from the recession, the shopping center owner is unlikely to forget the lessons of a brutal financial crisis.

This time last year, the company's stock price barely topped $4 -- down from more than $70 per share in 2007. Empty stores peppered the company's shopping centers, hurt by big-box retailer bankruptcies. Risk-leery investors were shying away. And some analysts doubted whether the company could cut debt and raise money quickly enough to ensure its survival.

Yet the internationally known real estate company, founded in Northeast Ohio and based in Beachwood, has emerged from intensive care. Chalk part of that up to improved financial markets and a heartier economy, in which retailers are once again considering new stores. But Developers Diversified has made aggressive moves of its own, tapping nontraditional sources of cash, curbing development and installing a new chief executive officer.

As the economy rebounds, the company that became a poster child for real-estate risk now hopes to set another sort of example -- one of smart, steady growth, based on a strategy of creating long-term value instead of short-term gains.

"It's true that the industry historically has a short memory, and that often is discussed," said Daniel Hurwitz, who became president and CEO on Jan. 1. "But we don't.

"We went through a very difficult period of time. We have no intention of doing that again, and we will operate this company with discipline and focus and a keen sense of the history."

Northeast Ohio's real estate community is looking toward Las Vegas this week, as the shopping center industry gathers for an annual leasing conference that starts today.

Real estate companies, developers, retailers and leasing agents are converging at the Las Vegas Convention Center for three days of negotiating, networking and deal-making. And those meetings will have a rosier tint, now that the economy appears steadier, more financing is available and retailers have resumed their search for new store space.

That's a marked contrast to last year, when troubled financial markets and a choppy economy grounded developers and prompted retailers to cancel their trips. Attendance at the annual deal-making conference fell by 40 percent, according to the International Council of Shopping Centers, the trade group behind the event.

This year, expected attendance remains low -- up just slightly from last year at more than 30,000 people. But property owners and retailers are approaching the event with greater enthusiasm, intent on filling empty spaces and planning future expansions.

A few local companies will pitch new construction, including Bob Stark's planned retail project on the former State Road Shopping Center property in Cuyahoga Falls. But money for development remains scarce, and most property owners and managers are focused on existing properties. That presents a challenge for retailers, who already are planning for their 2012 store openings and are expecting that few new shopping centers will be available.

"It will be an industrywide concern as to how we're going to meet those growth plans going forward," said Paul Freddo, senior executive vice president of leasing and development for Developers Diversified Realty Corp.

Developers Diversified Realty Corp.

-- A real estate investment trust based in Beachwood.

-- Founded by Bert Wolstein in 1965 as Developers Diversified Group.

-- Went public in 1993. Traded on the New York Stock Exchange under the symbol DDR.

-- As of March 31, owned and managed 643 retail properties in the United States, Puerto Rico and Brazil.

-- Major tenants include Walmart, Target, Lowe's, Home Depot, Kohl's, T.J. Maxx, Marshalls, Publix Super Markets, PetSmart and Bed, Bath & Beyond.

-- Focused on leasing retail space and exploring redevelopment opportunities in the United States and Puerto Rico. Selectively developing projects in Brazil.

-- Grew through acquisitions until the recent real estate crisis. Now growing by filling empty stores, negotiating new leases, cutting expenses and selling less desirable shopping centers.

The shopping center owner, based in Beachwood, sent about 80 people to Las Vegas. That team will be courting retailers to fill vacant stores and assessing opportunities to improve some shopping centers to meet retailers' expansion needs. The company, which leased a record amount of space during the first quarter, works with tenants including Walmart, Target and T.J. Maxx -- brands that maintained appeal as consumers became more value-conscious.

Last year, retailers called and canceled appointments because they had decided to stay home, said David LaRue, chief operating officer for Forest City Enterprises Inc. This year, however, retailers have been reaching out to set up appointments with the real estate company, which is based in Cleveland and has properties throughout the country.

"We are hearing that retailers are indeed looking to grow," he said. "They do have the opportunity to move up from that B mall to an A mall, and they are going to be looking to improve their real estate position into the better shopping centers."

As of Friday, 1,000-plus attendees from Ohio, more than 400 of them from Northeast Ohio, had registered for the conference. Most were affiliated with real estate companies, developers and retailers. A few cities, including Canton, Medina, Westlake and Willoughby, also planned to send representatives to hobnob with retailers, chat with developers and explore opportunities for partnerships and projects.

Developers Diversified was founded in 1965 to develop Kmart-anchored shopping centers and went public in 1993. At its biggest in mid-2007, the company owned and managed about 800 retail properties. From its Ohio roots, Developers Diversified reached across the country and dipped into Brazil and Puerto Rico. And executives announced joint ventures to develop shopping centers in Russia, Ukraine and Toronto, Canada.

Real estate investment trusts, which pay out most of their taxable income to shareholders in the form of dividends, were hot. In February 2007, Developers Diversified's stock, listed under the DDR symbol on the New York Stock Exchange, traded above $70 per share.

But as signs cropped up that credit was tightening, investors lost their appetite for real estate. When major financial institutions foundered and the stock market tumbled in fall 2008, real estate investment trust stocks plummeted. Between the economic collapse and concerns about the company's debt, Developers Diversified's stock price fell below $1.50 a share by March 2009 -- a 98 percent drop from its peak.

"DDR was left in the gutter to die, effectively," said David Wigginton, a research analyst with Macquarie Capital USA Inc. "I think nobody wanted to touch the stock."

Traditional sources of real estate financing had disappeared, and the company was scrambling for cash. Meanwhile, Circuit City, Goody's, Linens 'n Things, Mervyns and Steve & Barry's -- all tenants at Developers Diversified centers -- went bankrupt and left large stores empty.

"There are lots of external factors that we could point to, that we could certainly say were out of our control," said David Oakes, a former Wall Street analyst and investment manager who joined the company in 2007 and became chief financial officer in February. "That said, I do think we have to own up to operating with a higher risk profile than we should have. . . . We went into an environment where the world got dramatically worse quite rapidly, and we weren't as well prepared for that as we could have been. And that falls on us."

The company slashed domestic development and tabled most of its international aspirations. When property sales proved challenging, executives pursued more unusual sources of capital. Last year, the Otto family of Germany acquired 30 million shares of the company's stock in a deal that made the billionaire real-estate family the largest individual shareholder.

In addition to bringing some much-needed cash, the Ottos demonstrated a major investor's confidence in the company's shopping centers -- just as investors were looking at the portfolio as "sort of a wounded duck," as Hurwitz puts it. The Otto family acquired additional shares in February, bringing its stake in the company to 23.3 percent as of Feb. 24, according to regulatory filings.

In November, Developers Diversified closed on a $400 million loan through a Federal Reserve program meant to revive the market for commercial real estate loans tied to multiple properties. Since then, as financial markets improved, the company has sold shares and issued notes, using the proceeds to reduce debt and address upcoming loan deadlines.

"We were pushed, and we were at the forefront of finding new sources of capital," Oakes said. "But we had to be creative to do it. At this point, the traditional sources are back, and you've seen us access those in some size over the past six months."

The company also has been leaving undesirable partnerships with other real estate investors and pruning its portfolio of lesser properties acquired during the real estate boom. As of March 31, the company owned and managed 643 retail properties.

Good team gets a new coach

Employees, analysts and investors weren't surprised last fall when Developers Diversified said that Scott Wolstein, the son of the company's founder, would be leaving the CEO's job.

A succession plan called for Hurwitz, the chief operating officer, to succeed Wolstein, and rumors about an impending change had been flying since the company's investor day in July. A change at the top was mandated, analysts said, in light of the drubbing the company took during the real estate crisis and some frayed relationships with investors.

"It's sort of like if you have a good team but you need a new coach," said Alexander Goldfarb, a senior real estate investment trust analyst at Sandler O'Neill + Partners in New York. "From a street perspective, it was necessary. . . . There needed to be some responsibility accepted and acknowledgment of that shift, and that's exactly what the company provided."

Wolstein became executive chairman of the company's board. And Hurwitz, a Connecticut native who joined the company in 1999, took the helm.

Analyst Rich Moore, who covers the company from Solon for RBC Capital Markets, described Hurwitz as one of the most talented executives in the real estate industry. Though Developers Diversified still faces significant challenges cutting debt and filling empty stores, Moore applauded the company's progress cleaning up its balance sheet, unloading lower-quality real estate and leasing spaces at its shopping centers.

"He's the right guy to run the company," Moore said of Hurwitz. "He's made a lot of changes, all for the good."

With the leadership transition, management of a real estate empire passed from a local family to a team of executives born and raised outside Greater Cleveland. In an interview, Hurwitz stressed his commitment to Cleveland and said that property sales and strategy changes will not diminish Developers Diversified's presence here. The company owns and manages 33 retail properties in Ohio and recently expanded its Beachwood headquarters, a project under way before the recession.

Developers Diversified employs 735 full-time workers, about 40 fewer employees than two years ago. During the recession, the company froze external hiring and eliminated some jobs. The cuts were much shallower than those at many large real estate companies, and managers tried to find new jobs for employees whose departments or positions were eliminated.

Moore, who has followed Developers Diversified for a decade, said changes in strategy and management helped craft a shift in the company's attitude, which he described as less aggressive and more collaborative.

"I think there's less bravado," Moore said. "I think there's more of a belief that it's important to get done what we say we're going to get done."

As of March 31, the company's total debt balance was $4.7 billion, down from $5.9 billion during the fourth quarter of 2008. The company hopes to reduce debt to $4.4 billion by the end of this year. As shopping-center mortgages approach refinancing deadlines, Developers Diversified is working out new terms, seeking extensions or selling some properties. And executives are focused on replacing short-term debt with longer-term loans.

Investors appear to be responding to this strategy and the team that is implementing it. On Friday, the company's stock closed trading at $11.11 per share, up 20 percent since the beginning of this year.

"Last year, everyone said, 'It's a very nice plan, but we don't even know if you can deliver on that plan,' " Hurwitz said, referencing investor surveys the company has conducted during the past 18 months. "This year, people said, 'That was a very nice plan, and really you've made tremendous progress. Keep going. Keep going.' "

Cleveland School District and Cleveland State University Launch Innovative K-12 School

May 13th, 2010

Internationally focused school to serve as a school of choice for Cleveland students and training ground for CSU education students

Today, the Cleveland Metropolitan School District and Cleveland State University announced a collaborative project to launch an on-campus kindergarten-through-12th grade school with a curriculum that is globally recognized for culture, innovation and high standards.

The school, Campus International School, is one of five ‘new and innovative schools’ outlined in the District’s Academic Transformation Plan. Campus International School will incorporate programs from the International Baccalaureate – a Swiss-based, education program renowned for its academic rigor and international curriculum, such as Chinese language classes.

Beginning this fall, the school will accept 120 students in kindergarten, first and second grades with plans to extend classes to the 12th grade by 2015. It will be housed in the First United Methodist Church at the corner of East 30th and Euclid Avenue.

Initially, there will be two classes in each grade consisting of 20 students. The school’s regional draw provides enrollment opportunities for CMSD students, the children of CSU employees and students and students throughout Cuyahoga County. A lottery will determine enrollment if demand exceeds availability.

Campus International School provides yet another educational choice and a university setting for its students. “This school will provide a unique educational experience that is currently unavailable throughout most of the region, and without the burden of tuition,” said Cleveland Schools CEO Dr. Eugene Sanders. “This will set a new urban standard in education, while allowing us to attract some of the best teachers available.”

Campus International School will provide a unique learning environment not just for the school’s young students but also for CSU education students, who will have immediate access to a teaching environment. Similar to a teaching hospital, University students will use the campus school as a hands-on training facility to enhance their classroom experience.

“This is truly a distinctive project on many fronts,” said CSU President Ronald Berkman. “This will provide the city with a unique, high-end education at no additional cost to the parents. But it will also provide the University with a venue to produce new, best-in-class teachers of the future.”

For Cleveland Mayor Frank Jackson, the project is a step toward reversing the flow of urban sprawl and drawing new families back into the city.

“For the City of Cleveland, the school represents a viable new option for younger families who want to live downtown,” Jackson said. “The first step of redeveloping any urban core begins with education, and this project sends a clear message that we are committed to bettering the community with students who will compete globally.”

Parents interested in enrolling their children can contact the CMSD Student Assignments Office at 216.523.6347, or visit www.csuohio.edu/k-12 for more information.

The International Baccalaureate offers programs of international education to a worldwide community of schools that develop intellectual, personal, emotional and social skills for students to live, learn and work in a rapidly globalizing world. The program serves 800,000 students at 2,800 schools worldwide.

Rates Drop Below 5%! Lowest Rates in 2010

Mortgage rates drop to lowest level this year

By Associated Press business staff

May 13, 2010

WASHINGTON -- Mortgage rates fell this week to the lowest level of the year, as rates fell on U.S. government securities. Fixed mortgage rates closely track interest rates paid on long-term Treasury bonds.

The average rate on a 30-year fixed rate mortgage dipped to 4.93 percent this week from 5 percent a week earlier, Freddie Mac said Thursday. It was the lowest level since mid-December, when rates averaged 4.81 percent.

The drop came as investors shifted money from risky European debt to safer U.S. securities. Bond yields fell as a result, and that lowered mortgage rates.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day.

The average fixed rate dropped to a record low of 4.71 percent late last year, pushed down by a campaign by the Federal Reserve to reduce borrowing costs for consumers. The program ended this spring, but rates have remained low, especially after fears that Greece's government would default shook world markets.

"In times of nervousness, everybody seeks the safe haven," said Greg McBride, senior financial analyst at Bankrate.com

The last time rates for 30-year fixed mortgages averaged less than 5 percent was the week of March 25, when they were 4.99 percent.

This week, the average rate on a 15-year fixed-rate mortgage was 4.3 percent, down from 4.36 percent last week.

Rates on five-year, adjustable-rate mortgages averaged 3.95 percent, down from 3.97 percent a week earlier. Rates on one-year, adjustable-rate mortgages fell to 4.02 percent from 4.07 percent.

The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount.

The nationwide fee for loans in Freddie Mac's survey averaged 0.7 of a point for 30-year loans 0.6 of a point for 15 year, 5-year and 1-year loans.