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DDR TO BUY PUERTO RICAN PORTFOLIO

BY BRANNON BOSWELL

Developers Diversified Realty Corp. is paying $1.15 billion to become the largest retail landlord in densly populated Puerto Rico. The Beechwood, Ohio-based REIT said it will buy 15 shopping centers in the U.S. territory from real estate services firm Caribbean Property Group.

The transaction, which the parties expect to close sometime during the first quarter, represents about 5 million square feet of retail space and bears a 7.4 percent cap rate. The properties range in size from the 132,383-square-foot Rexville Plaza to the 711,370-square-foot Plaza del Sol, both in San Juan.

“We view this portfolio as ‘lifestylelike,’ and therefore fairly consistent with Developers Diversified’s core competencies,” wrote Morgan Stanley analyst Matthew Ostrower in a report. “But the international angle involves new risks.”

The territory offers the competitive advantage of physical-entry barriers and the potential for long-term sales growth, as well as a consumer spending level that is on par with that in the United States.

Developers Diversified is not the first U.S. REIT to make a play in Puerto Rico. This year Simon Property Group paid $309 million for the Plaza Carolina, in San Juan. But Developers Diversified is grabbing Puerto Rico’s largest collection of retail assets under a single owner as the buyer of 15 of the island’s 50 largest centers.

The Caribbean Property portfolio is currently 97 percent leased. Major tenants include Caribbean Cinemas, Gap, Kmart, grocery chain Pueblo and Wal-Mart. “It appears that half of the assets in the portfolio are blessed with materially larger size and better sales productivity than the other half,” Ostrower wrote.

This deal follows just a few months after Developers Diversified secured financing for its $2.3 billion acquisition of the Benderson Development portfolio. To finance the Caribbean deal, Developers Diversified will use $300 million raised from the sale of its joint venture neighborhood centers, along with some $660 million in assumed debt. The rest of the funding will come from other asset sales, new debt financing and private equity.

Developers Diversified says it might sell some of the acquired properties to Macquarie DDR Trust, its joint venture with Australia-based Macquarie.