Telling a New Story

How does a publicly traded company handle unexpected events?

How should executives lead during a time of crisis?

Can established companies correct their course, navigate obstacles, and emerge from a trial even stronger than before?

These are the questions DDR Corp. has spent the past five years answering. The Ohio-based retail REIT started in the 1960s and went public in 1993. In the early 2000s, the company completed several acquisitions valued at more than $1 billion, dramatically increasing its portfolio and geographic footprint. Foreign investments followed, and things were looking good.

Then the recession hit.

DDR was highly leveraged. The company had many assets outside of its core property type. It had debt with short-term maturities. Investors became anxious as the recession deepened, and board members knew something had to change. They initiated a management change and elevated several executives, including current CEO Daniel Hurwitz, president and CFO David Oakes, and senior executive vice president Paul Freddo. Together with others such as executive vice president and general counsel David Weiss (who has been with DDR since 1999), the new leaders developed a comprehensive five-year strategic plan to reinvent and transform the company for long-term growth and stability. Ultimately, they identified three goals for DDR: First, refocus on core competencies and transform the company’s portfolio. Next, improve and overhaul its balance sheet. And, lastly, simplify its story and communicate its identity to the marketplace.

One of DDR’s competitive advantages has always been its deep expertise in retail, and many on the company’s leadership team come from a retail background. “We know this space like no one else, and we’ve spent years building great relationships with tenants,” says Weiss, whose wife owns two retail locations.

Leaders at DDR decided not to build or acquire smaller strip centers or neighborhood centers. They wanted instead to build a strategy around “power centers” by investing in prime properties in large, supply-constrained markets where high-credit, quality retailers dominate market share. “We concluded that we were not going to be everything to everyone,” Weiss says. “Instead, we focused on where we thought markets were moving the fastest and recalibrated our efforts to what consumers wanted.” DDR thus became laser-focused on the country’s top 50 metropolitan statistical areas (MSAs).

With that decision firmly made, in 2010, DDR began aggressively selling nonprime assets in its portfolio that no longer conformed to its power-center thesis. The
company then moved quickly to reinvest proceeds into prime shopping centers. The results began to show in 2012 and 2013: at the start of the process, DDR had 706 assets, and by the end of 2013, that number had fallen to 416. Additionally, the total number of markets that the company owned properties in dropped from 174 to 105 as it refocused its portfolio on core markets and the fastest-growing MSAs.

Eventually, average base rent across DDR’s portfolio began to increase, as did leased rates, and the company turned the corner and started acquiring properties again. This time, however, it used a disciplined capital-allocation approach and only acquired properties that fit within its new, narrower strategic plan. To find ideal properties well suited to its streamlined acquisition strategy, DDR leveraged existing relationships to find off-market deals. “We don’t only look at assets on day one but instead look to where we can add value based on what our retail partners are looking for,” Weiss says.  This new approach has also resulted in several redevelopment projects that will create additional value in the assets DDR already owns.

With the portfolio transformation under way, president and CFO David Oakes began helping the company tackle issues on its balance sheet. DDR reduced its leverage and took other steps to lower its debt-to-market capitalization ratio from 87 to 45 percent. And, it extended its average debt maturity profile from 2.7 to 4.5 years.

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The company also worked to simplify its story in the market. “Anything that didn’t directly enable us to achieve our goals was removed from our strategy,” Weiss says, adding that this included things such as foreign properties and certain joint ventures. For example, in 2006, DDR partnered with a Portuguese company on a portfolio of properties in Brazil. After developing 4 of 10 assets during its ownership period, the operating company went public and DDR owned a third of the venture. In March 2014, though, DDR reached an agreement to sell its ownership interest in Sonae Sierra Brazil—its entire Brazilian investment—to Alexander Otto (a major DDR shareholder) for $343.6 million. “His affiliates have many foreign investments,” Weiss says. “It was good timing for him and for us: he was looking for a long-term investment in Brazil, and we were looking to reallocate capital into our domestic portfolio.”

DDR’s exit from Brazil has not affected its presence in another south-of-the-states region: Puerto Rico. The company intends on keeping its 15 assets on the Caribbean island that is also an unincorporated US territory; those assets contribute approximately 13 percent of DDR’s annual net operating income. “We’ve been very successful on the island, where there’s a much different risk profile,” Weiss says, explaining further that US laws and currency make operations there less risky than in foreign and emerging markets.

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DDR has also revamped its joint-venture program and eliminated one-off projects. “We ask how everything fits our long-term strategy,” Weiss says. “We have a different story now, one in which we focus on long-term quality, not purely quantity.” The company has also begun investing only with “best-in-class” partners such as Blackstone, a global investment and advisory firm.

DDR and Blackstone developed a joint-venture platform in which Blackstone invests the majority of the equity capital and DDR manages, leases, and operates the acquired properties. Through this platform, DDR has also been able to continue to retain prime properties even when Blackstone has wanted to exit. In 2013, for example, DDR spent $1.46 billion to buy out Blackstone in 30 of the 44 assets in one joint venture. More recently, DDR and Blackstone announced the formation of their third joint venture in which they will acquire 76 properties from American Realty Capital, adding an extra 16.4 million square feet of prime power centers to their combined portfolio. Those additional power centers are located in key metropolitan areas, including Los Angeles, Houston, Denver, Chicago, Atlanta, Phoenix, and Washington, DC.

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Today, the strategy is working. DDR has emerged from the global financial crisis leaner but stronger than ever before. For Weiss, it has been a slow but worthwhile process. “We could have moved faster by selling our trophy assets in the down market, but we wanted to build around them instead,” he says.

He considers the past five years a success but knows there is more work to be done. DDR has increased the annual net operating income generated from its prime assets from 70 to 90 percent, but the company would like to see that figure reach 95. Additionally, average rent per square foot has gone from $12 to $14, with continued growth in the forecast. These numbers keep DDR optimistic, and to capitalize on them, the company will continue to be nimble and adjust its approach. “Our plan for change is no longer just a five-year plan,” Weiss says. “It’s become our strategic plan.”