COMING SOON: Keep watching for details!

Some $350 million in shopping-center acquisitions are in the future for the newly hatched joint venture between Federal Realty Investment Trust and Clarion Lion Properties Fund. The venture, which reported in mid-July, brings to Rockville, MD-based Federal an opportunity to grow a portfolio of stabilized assets as opposed to value-added opportunities, which accounts for both the REIT’s mainline strategy and its current 16.9-million-sf portfolio, says president and CEO Donald Wood. In an exclusive interview, Wood recently detailed the courtship and marriage of the two entities and explained what the future holds for the newlyweds, especially as the interest-rate environment–and possibly consumer spending habits–begins to shift. How long were you talking to Clarion before shaking hands?

Wood: We were looking at doing a joint venture with an institutional partner for about a year, and Clarion was among the people who were interested. How did they rise to the top of the pile?

Wood: There were about four entities on the shortlist, but it always comes down to people, and we felt very comfortable with the folks running the fund at Clarion. But we also liked that we would be their primary retail partner and the process by which they were going to approve deals. This is a discretionary fund, and we believe that decisions will be made very quickly. Even with the first couple of opportunities we’ve taken to Clarion, they have proved that the process is very smooth and quick. So when will we start to hear about first acquisitions?

Wood: I hope very shortly. We intend to have this first venture filled within 24 months, but to do that we need to be very aggressive in identifying the right acquisitions for the fund. We certainly hope to close on the first properties this year. The acquisitions are going to be a departure from your traditional value-enhancement plays.

Wood: That’s the key difference between Federal’s use of its own equity and what Federal will use the venture as a vehicle for. Basically, our existing portfolio has a higher internal growth rate than most if not all of our competitors. The only way to find assets with that high an internal growth rate is if they do have value-enhancing opportunities in them, redevelopment, retenanting and so on. We’ll use our own equity for those. More stabilized, institutional-quality assets without a large redevelopment component are perfect for the venture. Your geographic reach remains the same: the two coasts. What about the great no-man’s land between?

Wood: We didn’t do this venture to expand our geographic reach but to fill in those markets we know best and have the greatest growth potential. In our view, that’s Boston to Washington, Northern California and Southern California. We’re not interested in going into the Southeast or the central part of the country. We don’t know them particularly well, and I for one am a strong believer in better performance in your own backyard. Why now?

Wood: Our business plan is all about exploiting our existing portfolio by redeveloping or retenanting to get the best growth. It’s also about key acquisitions that have that redevelopment potential. But that left us with a hole. We weren’t able to acquire assets we would love to own but didn’t have those growth characteristics. The venture fills in the last piece of our business plan. What’s the ownership breakdown?

Wood: We own 30%, they own 70% and we get a fee for managing those assets. Why not create an internal division instead and reap 100% of the cash flow?

Wood: I’m a big believer in focus and exploiting what you do best. We have leasing, acquisition, redevelopment and management teams that are second to none. They should remain focused on exactly what they’re doing now rather than using them to help set up a new division. The capitalization of the assets–through a joint venture or our own equity–doesn’t matter to them. They keep doing their job, and we capitalize assets however we feel best matches the quality of the asset. Where will Federal be in a year?

Wood: We’re very comfortable projecting that our company will grow its earnings in the neighborhood of 8% or greater per year over the next several years. Could rising interest rates and more sluggish retail performance curb your enthusiasm?

Wood: No. And I can say that interest rates over the past few years were as low as they were because we’ve had a sick economy and they’ve been subsidized by the government. The reduction of that subsidy has been happening only because of an improving underlying economic condition. To that extent, interest rates will rise, and that’s just normal and something any healthy real estate business can accommodate. And that ultimately is a vote of confidence for the power of consumer spending.

Wood: Absolutely. I cannot see the day when the need in this country for a safe, attractive shopping environment for necessity-based retail won’t be a mainstay.

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