"The transaction was purposefully structured to provide the joint venture with sufficient credit enhancements in the event Mervyn's defaulted or declared bankruptcy," DDR officials say in the press release. However, the company chairman and CEO admitted in the statement that more must be done to deleverage to survive in a tough credit market.

Mervyns filed for Chapter 11 protection in July, and is now holding liquidation sales at 149 locations in the West and Southeast. The officials say the company does not expect its financial results to be materially impacted, "due to the protections provided to the company by letters of credit aggregating over $32 million, and significant tenant interest expressed for the locations, currently occupied by Mervyn's, by numerous higher credit quality retailers." The terms contain a contingent purchase price adjustment secured by a $25-million letter of credit from the seller of the portfolio, available for re-tenanting purposes, as well as another $7.5-million letter of credit provided by Mervyns as security deposits on the leases.

The majority of these properties are in California, with nearly one million sf in the Los Angeles area and more than 500,000 sf in the San Francisco area. Of the remaining sites, five are in Arizona, five are in Nevada and one is in Texas.

The locations are infill areas that are hard to develop, officials say. "The company is confident of its ability to re-tenant the stores that it is able to recapture, and aware of several retailers that view the portfolio as an important opportunity to gain market share in markets that are difficult to penetrate," according to the statement. Company officials could not be reached to comment.

These buildings are leased to Mervyns for 15 years at an annual initial triple-net rental rate of $30.5 million, increasing at 2% annually. According to the release, DDR believes it has much interest from other retailers interested in buying or leasing the space, but it's possible that a company may acquire the leases through the bankruptcy proceedings, in which case the buyer would be responsible to pay the rent.

DDR's chairman says in the statement that he's learned first hand about the dangers of over-leveraging, "through an unfortunate series of margin calls relating to my significant investment in the shares" of the REIT. "While I believe we are positioned to meet all of our financial obligations over the next several years, I am extremely commited to taking additional proactive steps, making use of all necessary financial measures. To meaningfully reduce leverage," he says.

The trust also plans about $163 million of potential property sales and is significantly reducing spending for development, including the halt of all projects in Russia and Brazil, to await the return of better credit terms. The trust owns and manages about 730 retail and operating and development properties in 45 US states plus Puerto Rico, Brazil, Russia and Canada.

The REIT's total consolidated and joint venture debt maturing in 2010, without extension options, aggregates to about $2 billion, of which the company's share is $1.2 billion. "Notably, no significant maturities occur from February 2009 through April 2010, thereby providing considerable time to ensure that all future maturities can be appropriately addressed," officials say.

Instant Insights /

DDR Cuts Back, Says Mervyns Sites Are Fine

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