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A Power Center REIT That's Poised To Profit

Summary

DDR has positioned itself as a leading owner of the larger power centers.

The market share battle favors the current off-price giants which benefit from barriers to entry through scale, buying experience, optimized supply chains, and merchant relationships.

DDR is intensely focused on increasing its rent per square foot that has yielded attractive earnings and dividend growth.

Yesterday, I wrote an article titled REITs That Have Risen From The Ashes in which I examined four companies that were hit extremely hard during the last recession. I explained that "when the storms died down in 2009, it became clear that much of the failures were due to leverage and precautionary equity issuances. Because REITs rely on bank financing, quite a few REITs opted to preserve cash in order to manage risks of the unknown."

One of the REITs that I referenced was DDR Corporation (NYSE:DDR), a dominant power center REIT with a market cap of around $6.29 billion. By definition, a power center is an unenclosed shopping center with a typical range of 250,000 square feet to 600,000 square feet of gross lease area that usually contains three or more big box retailers and various smaller retailers (usually located in strip plazas) with a common parking area shared among the retailers. (Source: Wikipedia)

When you consider the landscape of shopping center REITs today, many of them own and operate grocery-anchored centers and neighborhood centers; however, DDR has positioned itself as a leading owner of the larger, power centers. Here's how DDR and the peers compare based on overall market capitalization:

The Great Recession became the true "category killer," wiping out countless retailers and slowing growth in an industry that seemed invincible. The monstrous "power center" and most other forms of shopping came to a screeching halt, yet the retail consumer kept up - never underestimate the "kingdom of thing-dom" (as you can see below):

The Power Center REIT

While many of the so-called "category killers" were killed by tough economic times, the "power center" model survived. Much of the success of the "power" model has been driven by the evolution of the tenants (in the power centers).

While many department stores, like J.C. Penney (NYSE:JCP), and Sears (NASDAQ:SHLD) are losing market share, the value store discounters, like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are gaining ground.

In addition, many traditional grocery chains are continuing to fight with ultra-thin margins and the non-traditional chains (located in power centers) are gaining ground.

While demand is strong, supply of power centers per capita is declining for the first time (as illustrated below):

Also, as evidenced by the snapshot below, jobs and wages also influence the US consumer and their retail spending decisions over the long term:

…and will benefit from historically low underemployment and high consumption. Jobs and wages influence the US consumer over the long term.

In addition, new store opening plans continue to be robust:

In addition, new store opening plans continue to be robust:

Off-price concepts have significantly outperformed their full-price counterparts:

Off-price concepts have significantly outperformed their full-price counterparts:

Traditional department stores have recognized off-price opportunities and opened new concepts such as Saks Off Fifth, Macy's Backstage, Kohl's OffAisle, and Find @ Lord & Taylor. The market share battle favors the current off-price giants which benefit from barriers to entry through scale, buying experience, optimized supply chains, and merchant relationships.

DDR's top tenants include TJX (NYSE:TJX), Ross Stores (NASDAQ:ROST), and Burlington (NYSE:BURL). Here's a snapshot of the Top 20 tenants:

As you can see below, consumers continue to spread their grocery shopping across multiple channels:

Here is why DDR invests in Power Centers:

Here is why DDR invests in Power Centers:

The Evolution of DDR

As illustrated below, DDR's (formerly Developers Diversified) value plummeted in 2009 when the company was forced to cut its dividend from $2.64 per share (in 2007) to just $.08 per share in 2010.

That was a drastic dividend cut, but the company had no choice as it was forced to almost suspend payments as a result of high leverage and no access to capital. Since the end of the recession, and in around 2011, DDR has evolved the portfolio from smaller, lower quality assets into larger format prime Power Center properties.

As you can see below, DDR's average property size now exceeds 350,000 square feet:

Also, DDR's portfolio has moved up the quality...

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