02/12/2010

DDR Drops Plan for Follow-Up CMBS Deal

Developers Diversified Realty has pulled the plug on its plan for a second round of financing via the commercial MBS market.

The fate of the proposed CMBS deal was sealed on Tuesday when the shopping-center REIT turned to the equity market, selling $304 million of common shares.

Late last year, Developers Diversified gave the moribund CMBS sector a big boost by conducting the first offering in 17 months. Goldman Sachs originated a $400 million loan for the Beachwood, Ohio, REIT in October and securitized it the following month.

Developers Diversified planned a follow-up offering this quarter of about the same size, via Citigroup. But now the company has decided not to proceed.

The REIT's chief investment officer, David Oakes, confirmed the decision on Wednesday. "We believe the CMBS market is still available for well-structured deals like ours, but we have not opted to pursue an additional CMBS transaction at this time," he said, declining to elaborate.

The move leaves the CMBS pipeline empty for now, although a handful of lenders are trying to build loan pools for conduit deals. The list includes Bank of America, Bridger Financial, Cantor Fitzgerald, Citigroup, Deutsche Bank, Goldman, J.P. Morgan and RBS.

Developer Diversified's first deal was fostered by the Federal Reserve's TALF program, which was designed to jumpstart frozen securitization markets. Under the program, formally known as the Term Asset-Backed Securities Loan Facility, buyers of top-grade securities can get low-cost loans from the Fed.

The REIT's deal was ultimately judged a success for the market, but it took months of behind-the-scenes work with the Fed to iron out standards and procedures. Because the Fed was lending taxpayer money, it was determined to build in adequate protections against bond losses. Some market players said the REIT was frustrated by all the red tape.

"I think DDR had too much invested in the first deal to walk away from it, so they stuck with it even though they didn't love the process," said one veteran CMBS lender. "It was probably torture on the documentation side, because it was TALF. The cash management and lockbox provisions were restrictive, and the reserve structure was onerous."

It's unclear if the REIT intended to make its second deal eligible for TALF. After the first deal, two other transactions came to market in rapid succession, but bypassed the Fed program - a $460 million offering by Flagler Development and a $500 million deal by Inland Western Retail Real Estate. Though they weren't TALF-eligible, the two transactions adopted some of the features incorporated in the Developers Diversified deal.

Developers Diversified has been moving to strengthen its balance sheet. In addition to this week's stock offering, it has sold $96 million of stock since last October via its "continuous equity program."

The company, which owns about 665 shopping centers in the U.S., Brazil and Canada, had $5.2 billion of consolidated debt at yearend, with an average outstanding debt maturity of three years. Some $329 million of unsecured debt and $43 million of mortgages are scheduled to mature this year. The REIT had about $530 million available under its revolving credit facility at yearend. It said it would use the proceeds of the stock offering this week to pay down debt.

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