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HOW EDENS & AVANT GREW ... AND GREW

BY ANNA ROBATON

Humble beginnings (1953 photo).

When Edens & Avant prevailed over dozens of potential buyers to acquire 36 centers from Farmington, Conn.-based Konover & Associates last fall, it did far more than just bolster its position in New England.

The $275 million deal with Konover signaled how serious a competitor the Columbia, S.C.-based firm, which less than a decade ago was a regional shopping center developer in the Southeast, has become in a relatively short time.

Since 1995, when the privately held company began to position itself for rapid growth, Edens & Avant has increased the value of its shopping center assets more than eightfold, to about $2.2 billion from about $250 million.

“In a very short time, they have morphed from being a smaller, regional real estate developer into a national powerhouse in acquisitions and development,” said Steven B. Samuels, president of Boston-based Samuels & Associates, a shopping center ownership, leasing and development firm that operates in New England. Samuels & Associates is a joint venture partner with Edens & Avant in half of the 36 former Konover centers.

Today Edens & Avant, the largest firm in the industry to focus exclusively on grocery-anchored centers, is among the 50 biggest shopping center owners in North America. As of last August it was No. 24, with 202 centers comprising 18.8 million square feet of owned gross leasable area (GLA), according to the most recent ICSC ranking. By the end of January, its portfolio had grown to 223 centers comprising 23 million square feet of owned GLA in 20 eastern U.S. states. Among open-air center owners, Edens & Avant is now one of the 10 largest, competing with such big public companies as Kimco Realty Corp. and Regency Centers Corp.

“They are clearly a highly respected competitor to companies like Kimco, Weingarten [Realty Investors] and New Plan [Excel Realty Trust], particularly in the Southeastern United States,” said David Fick, a managing director at Legg Mason Wood Walker, the Baltimore, Md.-based financial services firm.

Despite this explosive growth, the firm, founded in 1965 by industry pioneer Joe Edens, isn’t resting on its laurels. It adopted a five-year plan last spring that calls for increasing the value of its portfolio to $3.5 billion. Edens & Avant plans to have about $1 billion worth of assets each in the Southeast, mid-Atlantic and Northeast regions.

At the beginning of the year, the company, which has grown through a combination of ground-up development and acquisitions, already had almost $1 billion in assets in the Southeast and about $700 million in the Northeast. It has the furthest to go in the mid-Atlantic, where its holdings are valued at about $500 million.

“They have been one of the most successful firms in the acquisition of grocery-anchored centers,” said William J. Beckeman, a partner at Finard & Co., a Burlington, Mass.-based commercial real estate services firm. “Only a handful of firms have been successful at buying more than one property at a time.”

Though Edens & Avant has participated in the scramble over the past couple of years to buy grocery-anchored centers (considered a stable asset class in uncertain economic times), it’s no newcomer to the sector. Edens grew up in the food retailing business and had a long history of developing grocery-anchored centers before deciding to focus exclusively on them.

His father, Joe Edens Sr., and his uncle, J. Drake Edens, founded Edens Food Stores in Columbia, S.C., during the Great Depression. The business grew from a small fruit store into a supermarket chain. It was acquired in the 1950s by the Winn-Lovett supermarket chain, which eventually became Jacksonville, Fla.-based Winn-Dixie Stores, one of the biggest supermarket operators in the country.

The younger Joe Edens worked in the family business through high school, doing everything from bagging groceries to waiting on customers. After college, he struck out on his own, becoming one of the first U.S. commercial real estate developers to build grocery-anchored centers. His first, the 70,000-square-foot Edens Plaza, Columbia, S.C., opened in 1966.

Edens & Avant’s rapid ascent can be traced to steps Edens took in the mid-1990s to prepare his company for expansion beyond its home turf and for greater competitiveness in a sector where many other players were going public to access growth capital.

Among other things, he consolidated the company’s asset ownership interests, operating businesses and affiliated entities into one entity that would attract investment capital. And attract capital it did, winning over some major pension funds that have invested in the firm itself rather than its individual properties.

The company’s first big break came in 1997, when the State of Michigan Retirement System made a private equity investment of $146 million. In 2000 Edens & Avant attracted two more big backers when the New York State Teachers’ Retirement System and the JPMorgan Fleming Strategic Property Fund, a pension trust fund, invested a combined $250 million. The funds declined to comment on what attracted them to the company, and Edens & Avant would not say what returns they have seen on their investments.

Rather than vie with competitors that were spreading out across the country, Edens & Avant opted to focus on the eastern United States, quietly pushing beyond the high-growth markets of the Southeast into the higher-density, higher-income markets of the mid-Atlantic and Northeast.

As a child Joe Edens (right) bagged food at his father’s South Carolina-based grocery chain (seen here in a 1929 photo), later founding the development firm.

Building a critical mass there, the company figured, would not only diversify its portfolio in terms of demographics, but also boost its appeal to retailers and its clout as a landlord.

“Our view is that tenant decisions are still regional decisions,” said CEO Terry S. Brown, 41, who as an outside financial adviser before joining the company helped Edens craft his growth strategy. “By choosing the East Coast and its three contiguous regions, we get some benefit from that.”

Brown had been chief executive of Andersen Corporate Finance; he joined Edens & Avant as CEO last April, when Edens, 61, now chairman, relinquished the position to put a succession plan in place. Edens also promoted Jodie W. McLean, 34, to president (see story). McLean came to the firm in 1990 and within seven years became chief investment officer, a position she still holds.

In 1998 Edens & Avant began pushing beyond the Southeast, paying more than $300 million to buy 22 centers, the bulk of them to the North, from Samuels & Associates, which continued to lease and manage the properties.

As a partner in the recent Konover deal, Samuels & Associates will manage and redevelop 18 centers that it jointly owns with Edens & Avant, including several anchored by the Rocky Hill, Conn.-based Ames discount store chain, which is liquidating its assets. Edens & Avant will manage the eight most stable centers in the bunch and sell the remaining ones, because they are outside its target markets. It will use the proceeds to acquire and develop more centers in New England.

Today the company’s prototype center is a 125,000-square-foot open-air center anchored by a grocery store of up to 60,000 square feet. The remaining in-line space is leased to tenants that range from hair salons to shoe stores to restaurants. The company markets it properties, which are designed to provide basic goods and services to local consumers, as “Necessity Retail Centers.” In 1998 it even trademarked the term “necessity retail.”

“We were ‘necessity retail’ when necessity retail wasn’t cool,” quipped Brown.

Now, however, Edens & Avant’s focus on grocery-anchored centers is something of a mixed blessing. The company has been a successful acquirer, but it must continue to compete in an environment that has far more buyers than sellers, which has fueled a price run-up.

Moreover, grocery-anchored centers may fall off their perch in the coming years, observers say. Many supermarket chains have undergone big expansions recently, in response to competition from both within their industry and other types of merchants, including Wal-Mart and other big discount chains, that have moved into the grocery business. Experts say these competitive pressures, along with slowing sales growth, may bring some consolidation among supermarket chains.

“With national grocery store sales increasing just three and a half percent [in 2001] following a couple of years of 5 percent growth, and given the growth of competing formats, it’s hard to imagine there won’t be some casualties,” says a recent study by Finard.

But Brown says he’s confident that the leading supermarket chains have taken the necessary steps to protect their market share. Edens & Avant, he adds, has sought to minimize its exposure to any fallout by bringing in only the leading supermarket operators in its three eastern regions as anchors.

Meanwhile, new development has become increasingly difficult in some of Edens & Avant’s target markets, especially New England, where developers face a dwindling pool of desirable sites and heavy local regulation.

To gain an edge in site selection and other decisions requiring a strong understanding of local markets, the firm has decentralized its operations by opening numerous regional offices. In addition to its home office, Edens & Avant now has regional headquarters in Boston and Washington, D.C., and 10 additional management offices throughout the country. A home court advantage is useful in places like New England, where active developers count on entry barriers to help protect their centers from competition.

“Day-to-day real estate decisions are made at the ground level by real estate professionals,” said McLean. “Our people are empowered to make good real estate decisions and to make them quickly.”

The company plans to devote more of its resources in the near future to new development and redevelopment, as opposed to big portfolio acquisitions like the Konover deal, said Brown.

For all this growth, Edens & Avant relishes its status as a private company. According to Brown, without the short-term earnings pressures that competitors who went public in the 1990s face, Edens & Avant has more freedom, whether to acquire centers that will take time to turn around, such as some of the former Konover properties, or to undertake ground-up development projects.

“We have a much greater focus on long-term value creation than on quarter-to-quarter earnings pressure,” he said.

Still, he won’t rule out the idea of taking the company public someday. “We are structured and financed so that we could easily and quickly make that transition.”

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