Developers Diversified Expects to Quickly Re-Tenant Vacated Mervyns Stores

As bankrupt retailer Mervyns prepares to close its remaining 149 stores, Developers Diversified, owner of 38 of those leased stores in a joint venture with Macquarie DDR Trust, said it anticipates escaping major fallout from the retailer’s demise. The partners prepared for trouble when they acquired the stores for $407 million in 2005. Upon purchasing the properties, Developers Diversified and Macquarie DDR leased them back to Mervyns under 15-year triple-net lease agreements featuring an aggregate annual rental rate of $30.5 million and an annual rent increase of 2 percent. The joint venture had configured the leases to provide sufficient credit enhancements in the event that Mervyns defaulted or went into bankruptcy. Twenty-seven of the properties are in California, accounting for 1 million square feet of retail space in metropolitan Los Angeles, and 500,000 square feet in the San Francisco area. Five of the assets are located in Arizona, while Nevada is home to another five stores and Texas is home to a single store. The partners were thinking ahead when they made the purchase, carefully choosing the aforementioned sites specifically for their quality, desirable locations and, prophetically, potential appeal to other retailers. The joint venture’s careful picking is apparently proving to have been a wise move. News of Mervyns’ bankruptcy filing emerged in July and, already, Developers Diversified has seen a significant amount of interest in the sites–most of which are in high-quality market-dominant community centers and regional malls–from other retailers with higher credit quality. Additionally, there is the possibility that Mervyns will sell some of its leases to third parties, which would relieve Developers Diversified of the need to immediately re-tenant. In addition to choosing the Mervyns stores carefully, Developers Diversified also protected itself and the joint venture from any potential Mervyns bankruptcy with two letters of credit: a non-refundable $25 million letter of credit from the seller of the portfolio, and a $7.5 million letter of credit provided by Mervyns as security deposits on its leases. Despite its grave financial troubles, Mervyns has paid its rent at the Developers Diversified properties through the close of October. Headquartered in Cleveland, Ohio, Developers Diversified owns and manages approximately 730 operating and development properties accounting for 157 million square feet of space in 45 states, as well as Brazil, Canada, Puerto Rico and Russia. As of the close of the third quarter, the company’s portfolio was 94.5 percent leased. Additionally, Developers Diversified recently reported that, despite bankruptcies among some of its major tenants–Mervyns, Linens N’ Things and Goody’s–it anticipates continued positive net operating income growth in 2009. Sydney, Australia-based Macquarie DDR is a REIT that operates under the management of Developers Diversified and an affiliate of Macquarie Group Ltd., an international investment bank and manager of real estate funds.