COVER STORY, JUNE 2004

THE REIT GOES ON
Real estate investment trusts in the West cover the small details to deliver large results.
Brian A. Lee

For some insight into the development and acquisition approaches of the West’s major real estate players, Western Real Estate Business profiled three of the foremost real estate investment trusts (REIT) in the region — Federal Realty Investment Trust, Arden Realty and Regency Centers. The following details each REIT’s commercial real estate focus, investment strategy and target markets in the West.

Regency Centers

Amerige Heights is a 417,000-square foot retail center developed by Regency Centers in Fullerton, California.

Based in Jacksonville, Florida, Regency Centers develops, acquires, owns and manages grocery-anchored, neighborhood shopping centers throughout the United States. The 41-year-old company boasts of a $3.2 billion portfolio, which consists of 262 quality shopping centers across 46 metropolitan markets totaling nearly 30 million square feet. In fact, Regency Centers has a presence in 18 of the 25 biggest markets in the country. The retail REIT operates 132 properties in California, Arizona, Washington, Oregon and Texas.

“We are extremely bullish on the West, particularly from a development standpoint,” says Thomas McDonough, senior vice president for Regency Centers. “Acquisitions are quite competitive at this time.”

Regency Centers targets high-growth and infill markets with “upper-middle and above” average household incomes. The REIT looks to acquire shopping centers anchored by the top two grocers in the market. For new developments, the company focuses on the leading grocers or top tenants in a given retail category, such as Barnes & Noble and Borders Books & Music.

McDonough says that Regency Centers’ goals are to acquire $200 million and develop $400 million of retail space per year. “In the western United States, the share of that total would be approximately $50 million to $75 million per year in acquisitions and development starts of approximately $200 million per year,” he adds.

Regency Centers, which became a REIT in 1993, has already had a busy 2004. The company is currently developing the 368,000-square-foot Falcon Ridge in Fontana, California. Situated near the 15 freeway, Falcon Ridge will be anchored by Stater Bros. and Target. Also under construction is the 260,000-square-foot 4S Ranch in Rancho Bernardo, California. It will be anchored by a Ralphs.

Regency Centers’ projects that have already been completed this year include the 442,000-square-foot Slatten Ranch in Antioch, California, featuring Target, Mervyn’s, Barnes & Noble, Bed Bath & Beyond, Sport Chalet and Cost Plus; the 181,000-square-foot Valencia Crossroads in Valencia, California, anchored by Whole Foods Market and Kohl’s; and the 97,000-square-foot Westridge, also in Valencia, anchored by Albertsons and Beverages and More.

Arden Realty

6060 Center Drive is located in Howard Hughes Center, Arden Realty’s 70-acre office campus in west Los Angeles.

Based in west Los Angeles, Arden Realty owns and manages approximately 19 million square feet of office space across 45 Southern California submarkets, from Kern County to San Diego.

The largest office landlord in Southern California, Arden Realty maintains a portfolio of 129 properties consisting of 215 buildings with a 283,000-square-foot project under development. The company’s core competencies include leasing, property and asset management, construction, development and acquisition.

Arden Realty searches for development and acquisition opportunities in its four target markets in Southern California — west Los Angeles, north Los Angeles, Orange County and San Diego. The office REIT will build upon its presence in these areas provided that a project, property or submarket exhibits the following conditions: low vacancy, the potential for rent increases due to employment growth and population movement, a minimal amount of developable land and a significant barrier to entry. The company seeks stabilized properties as well as value-added opportunities with potential lease-up.

“Arden continues to actively pursue marketed transactions in areas we believe have long-term growth potential,” says Howard Stern, chief investment officer for the REIT. “However, competition remains fierce. It is not uncommon now for deals to go through three or four rounds of competitive bidding. We prefer projects at least 100,000 square feet [in size] with a minimum investment price of $20 million, but we’ll evaluate other investments outside of this criteria on a case-by-case basis.”

Perhaps the most visible of Southern California’s large-scale office developments is Arden Realty’s Howard Hughes Center, a 70-acre campus in west Los Angeles that is seen by approximately 500,000 daily commuters on the 405 freeway. Since 1999, the REIT has developed nearly 1 million square feet of office space on the property including the build-to-suit headquarters for Univision and three contemporary Class A buildings and plazas. When complete, the Howard Hughes Center will comprise more than 2.7 million square feet of office, retail and entertainment uses.

Stern notes that the current Southern California office market exhibits some interesting dynamics. The flurry of investment activity has sent prices up and cap rates down, with Class A office product trading in the 7 percent range and Class B product in the 8 percent range. “With a greater stockpile of capital that still needs to be placed, the market appears to have considerable momentum to counter rising interest rates,” he says. “This heated investment market has resulted in many investors putting huge premiums on properties with diverse tenant mixes and stable cash flows despite their replacement cost analysis.”

As a result of the frenzied marketplace, Arden continues to aggressively pursue non-marketed deals. The office REIT does this by leveraging its strong relationships with brokers and property owners. “In addition to strong capital resources and our ability to conduct thorough due diligence within a short time period, Arden is offering alternative structures, which may include operating partnership units as partial consideration,” Stern says.

In the long term, Arden Realty aims to maximize its growth and earning potential through asset management as well as market focus. Through its capital recycling program, the company sells non-strategic real estate assets or secondary/tertiary market holdings that do not fit within its investment strategy and recycles the proceeds into higher quality development or acquisition opportunities.

Federal Realty

Founded in 1962, Federal Realty Investment Trust specializes in the ownership, management, development and redevelopment of shopping centers and street retail properties in metropolitan markets throughout the Northeast, Mid-Atlantic region and California. Federal Realty’s portfolio contains approximately 16.9 million square feet of retail space.

“Our strategy is to grow earnings through innovative leasing and merchandising of our properties, the strategic redevelopment of existing assets, and the acquisition of neighborhood and community shopping centers in our core markets that have growth potential through redevelopment or re-merchandising,” says Jeff Berkes, senior vice president and chief investment officer for the Rockville, Maryland-based REIT.

With a regional office in San Jose, California, Federal Realty maintains a Golden State portfolio of approximately 2 million square feet of retail space in San Diego, Los Angeles and the San Francisco Bay area. Currently, the REIT is actively seeking to acquire community shopping centers in these markets, which offer solid demographics and high barriers to entry.

In 2003, Federal Realty invested more than $37 million to redevelop retail properties within its portfolio. The substantial investment funded upgrade opportunities such as the addition or expansion of grocery anchors, the reconfiguration of existing retail space and the construction of additional tenant space. In the last 12 months, Federal Realty has also invested $222 million in the acquisition of five shopping centers.

One of those shopping centers is Westgate Mall in San Jose. In late March, Federal Realty acquired the 637,000-square-foot shopping center for $97 million from a private owner. Through the re-leasing of current below-market retail space and taking advantage of potential long-term redevelopment opportunities, the REIT expects to increase the value of the property. Ninety-eight percent leased at the time of sale, Westgate Mall contains strong national tenants such as Safeway, Target and Barnes & Noble.

“Federal Realty’s goal is to be a dominant retail landlord in strategic metropolitan California markets much like we are on the East Coast,” says Berkes. “By acquiring additional properties in the San Francisco Bay area as well as Los Angeles and San Diego, we can enhance our operating platform, thereby allowing us to better leverage our West Coast leasing and operations team. In addition, we are actively looking to acquire high-quality shopping centers with significant earnings growth potential through re-leasing and/or redevelopment.”

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