BEACHWOOD, OHIO — As part of what DDR Corp. (NYSE: DDR) calls a “strategic transformation,” the shopping center REIT has approved a plan to spin off a portfolio of 50 assets — including 38 continental U.S. assets and all 12 of its properties in Puerto Rico — into a separate publicly traded REIT to be named Retail Value Trust (RVT). The gross book value of the assets in the RVT portfolio is approximately $3 billion.
“We believe that these two distinct companies with two distinct business plans will appeal to a much broader pool of investors than the combined DDR today,” said David Lukes, president and CEO of Beachwood-based DDR, during an investor conference call late Thursday afternoon. “This strategy adds value for all of our stakeholders and maximizes both our growth and optionality well into the future.”
Specifically, the RVT portfolio consists of 38 high-quality, lower-growth assets in the continental U.S. and all 12 assets in the Puerto Rico portfolio. The properties within the RVT portfolio in the continental U.S. are mostly located in suburbs outside metro areas. Common tenants include Bed Bath & Beyond, Michaels, Kohl’s and T.J. Maxx.
The remaining company, known as the “New DDR,” will focus exclusively on the continental U.S. and allow the company to pivot to growth through redevelopment and opportunistic acquisitions, according to Lukes. Including joint ventures, the New DDR will own a total of 236 properties with a gross book value of $6.3 billion.
Assets with traditional/specialty grocers account for 40 percent of the New DDR’s portfolio with average reported sales of $641 per square foot, according to an investor presentation accompanying the announcement. Including mass merchants with a grocery component, 70 percent of the New DDR’s portfolio is anchored by a food component.
“Perhaps the most important part of this strategic transaction has been for us to ask ourselves which DDR assets we would most like to own as a public company for the long term. New DDR is exactly that portfolio,” said Lukes.
The formation of RVT represents an opportunity for investors to capture the difference between public and private market values among those DDR assets that management believes have been the most discounted by the public markets, according to Lukes. The new entity also buys the company time to better position its assets for sale in hurricane-ravaged Puerto Rico.
“RVT will seek the most shareholder-friendly remedy for Puerto Rico. Insulating the New DDR from this geography’s NOI volatility will provide us the time and flexibility to find the right buyers at the right price,” said Lukes. “If credible buyers do not emerge, RVT will be able to internalize management and become a low- or even no-leverage going concern focused on owning and operating best-in-class Puerto Rico assets.”
RVT expects to file its initial Form 10 registration with the U.S. Securities and Exchange Commission in the first quarter of 2018. The spinoff is expected to be complete during the summer of 2018. The transaction does not require shareholder approval. It is expected that three of DDR’s current directors will leave the board to join RVT’s board of directors upon completion of the transaction.
RVT will be capitalized with committed mortgage financing of $1.35 billion from Credit Suisse, J.P. Morgan and Wells Fargo. Proceeds will be used to repay debt at DDR.
Shareholders of DDR will receive shares of RVT via a taxable pro rata stock distribution. While the New DDR’s dividend will be adjusted to reflect the smaller size of the company, DDR expects that shareholders will recognize the value of the difference through regular dividends as well as return of capital by RVT over time.
Goldman Sachs & Co. LLC is serving as lead financial advisor to DDR, while Credit Suisse and Wells Fargo Securities LLC/Eastdil Secured LLC are also serving as financial advisors. Jones Day is providing legal counsel for DDR.
DDR’s stock price closed at $7.96 per share on Thursday, Dec. 14, down sharply from $14.80 per share one year ago.
— Kristin Hiller