This real estate investment trust prides itself on investing in properties with little risk and strong ROI. Cedar Shopping Centers’s approach to being a risk-averse REIT starts with having a market-leading supermarket in almost all of its properties, but it goes further than that. The company looks for stable road patterns, stable community residential patterns, relatively stable employment, and demographics that generally reflect $50,000 family incomes and 50,000 people within a three- to five-mile range of the shopping center.
With these investment parameters, it’s easy to see why Leo Ullman, chairman, president, and CEO of Cedar Shopping Centers, believes his company has perhaps the most defensive product of any within its REIT group. “We focus on ownership, management, and operation of supermarket-anchored shopping centers in the Northeast quadrant of the US,” he said. “By focusing on that specific segment, we continue to improve our balance sheet and our properties.”
To date, Cedar handles 132 properties—approximately 15.4 million square feet of gross leasable area. The company’s approach, whether a ground-up development, a redevelopment of an existing property, or the acquisition of an existing property, begins by looking for a leasing commitment with a supermarket that is dominant in the area. “We want to have the number one or number two supermarket in each market as our anchor,” Ullman said.
In Pennsylvania (the primary market for Cedar in recent years), Giant Stores of Carlisle, Pa. is strongest in the Greater Harrisburg area extending to Lancaster, York, Reading, etc., with nearly 50% of the market. Elsewhere in the Northeast, operators such as Stop & Shop in Massachusetts and Connecticut and Shop Rite, Weis, Redner’s, Price Chopper, Shaw’s, Farm Fresh, Acme, and Food Lion are major players in the company’s portfolio.
Finding out what supermarkets at are the top of their game requires a bit of research. Some statistics and studies are available to the public, as are financial ratings of supermarket chains, reports on area sales, and reports on individual store sales per square foot. Cedar also references supermarket publications where appropriate.
Over the years, Cedar has developed a substantial inhouse construction/development business that includes a president of development, development directors, and project managers. Development and redevelopment of primarily supermarket-anchored properties has historically been one of Cedar’s fortes.
“With our redevelopments, we like to take a tired property, turn the stores inside out in the case of a covered mall property, eliminate the interior, and create a strong community shopping center,” said Ullman. “We’ve also re-tenanted a number of properties by replacing smaller tenancies with a supermarket, for example, and, where possible, expanding an existing supermarket’s square footage.”
One such example is a property in Camp Hill, Pa. Although Cedar wasn’t the highest bidder at $17 million, it was awarded the property because it successfully redeveloped other properties in the area. The property had a tired, failed internal mall with a closed Montgomery Ward and a small Giant supermarket in the back. Cedar entered into an agreement to build a new 93,000-square-foot Giant where the Montgomery Ward was located, knocked down the existing building, and built anew. It then closed a number of stores, repositioned them, and brought in tenants such as Staples, Five Below, a dialysis center, etc.
“We also built outparcels for a 42,000-square-foot LA Fitness facility and an orthopedic medical facility of about the same size,” Ullman said. “We created a multifaceted operation with some medical, fitness, and retail tenants and, of course, a supermarket.”
The Camp Hill development, which now generates nearly $6 million of net operating income versus the $700,000 it earned before, is driven by the Giant supermarket tenancy. What was once a small store paying little rent became Giant’s first superstore prototype of nearly 95,000 square feet.
The supermarket now includes an internal coffee shop, babysitting services, a Wi-Fi room, community rooms, a cooking school, and a cool room where shoppers can keep their groceries and continue shopping at other stores. With a valet ticket, shoppers can drive into a portico and have their groceries brought to the car. “We also created a new front entrance and closed off the internal mall entrance for the Barnes & Noble store, which apparently had never been done,” said Ullman.
In general, Cedar works closely with its retail and supermarket tenants and their real estate operations. The collaborative relationship with Giant has been important for both parties.
“In most cases, Giant’s construction people design the store, and we build it,” Ullman said. In those cases, Cedar will work with Giant or other supermarket tenants to price the rent based on the cost of constructing the store. Cedar then bids the components of the construction project to arrive at the cost to build the store. Based on that estimate, the parties will fix the rent.
If the cost exceeds the target, the tenant pays the excess by additional rent; if it’s lower, the tenant benefits. “Often now, the supermarkets will build their own stores, in which case we enter into a ground lease and deliver just a pad site with the utilities brought to the site,” explained Ullman. “This further reduces the vertical construction risk and the financial investment in the property.”
In October 2009, Canadian retail REIT RioCan entered into a strategic alliance with Cedar through which RioCan agreed to a $50 million private placement investment to purchase approximately 14% of Cedar’s common stock. The $8.8 billion company, Canada’s largest REIT with nearly 300 shopping centers in Canada, was looking to invest in the US while Cedar was looking to de-lever its balance sheet and reduce its debt load.
In addition to the investment in Cedar’s stock, joint venture arrangements between Cedar and RioCan were completed when RioCan purchased 80% of seven shopping centers for a net cost of $66 million above the debt on those seven properties. “The combination of the joint venture arrangement and the stock purchase by RioCan gave us some considerable money to pay down our credit facilities,” said Ullman.
The two REITs have now closed on a number of property acquisitions across the Northeast with the same 80/20 ownership structure. Since January 1, 2010, Cedar and RioCan have jointly purchased approximately $350 million worth of new acquisitions.
With RioCan by its side, a strong balance sheet, and a history of relationships with lenders, owners, tenants, and brokers, Ullman said Cedar is in a strong position to close on almost any kind of retail property or a portfolio of almost any size financial commitment. Looking ahead, he expects Cedar to continue growing its net operating income and the quality of its assets and to increase shareholder values.
“We have a strong management team that’s been together for, in some cases, more than 30 years,” he said. “We’re very experienced in our business, and we very much like what we are doing.”
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