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Wednesday, September 2, 2009

Ever Wonder How Dominant Big Box Discounters Really Are?

Developers Diversified Realty Corp. (DDR, $7.22) is a real estate investment trust (REIT) focused on the retail sector. We've known DDR since the 1990s and have been tracking DDR over the past six months, but don't have a position in the name.

Like many other REITs, shares are up smartly from March lows ($1.38 for DDR) on the company's efforts to issue equity to de-lever the balance sheet (levered approximately 11x EBITDA as of 6/30/09) and repurchase debt at a discount. The hope that the economy is stabilizing and soon to recover is no doubt also fueling the share price recovery. DDR's efforts are highlighted presentation from early June (link here):

However, although we own several REITs and believe the operating assets in many cases are more stable than the Market realized earlier this year, we think a cautious stance remains prudent. S&P downgraded DDR's debt to BB from BB+ with a negative outlook on 8/21/09 (link here) and short interest is ticking higher (source Nasdaq.com):

We're keeping an eye on DDR and a number of other REITs. In the meantime, what we really wanted to share is the below graph, also from DDR's June presentation:
We're not surprised by the trend -- probably obvious to most -- but we were surprised by the percentages. From nearly even in 1988 to almost 80% / 10% (*excluding 10% other). A dramatic and incredible divergence, with the big box discounters the big winners (which are DDR's primary tenants - see presentation for more color, if desired). Given current circumstances, we suspect the trend will only continue.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.
© 2009 Jeffrey Walkenhorst
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