Mammoth Solar Energy Deal for 200 Shopping Centers Nationwide

Like just about everything else in the collapsing real estate market, Real Estate Investment Trusts, or REITs, have taken a nosedive. No surprise: REITs are corporations that invest in real estate. Conventional wisdom has it that only those REITs holding rental housing, self-storage facilities and health-care properties will be left unscathed. A new deal just announced by Developers Diversified Realty Corp. (DDR), however, is turning that wisdom on its head and demonstrating how clean energy might be able to supply an unexpected economic jolt.

DDR is in the business of acquiring, developing, redeveloping, owning, leasing and managing shopping centers -- 713 of them are in their portfolio, to be precise. It's the largest concentration of shopping centers currently held by any publicly-traded REIT, and given the downturn in both real estate values and retail sales, that has translated into a frightening liability. As a result, its stock price fell of a cliff starting in October. It's now just under $7, though it had traded above $45 within the last 52 weeks.

DDR's steady earnings and occupancy rate of properties were not reassurance enough to investors. At September 30, 2008, the aggregate occupancy of the company's shopping center portfolio was 94.5%, as compared to 94.9% at September 30, 2007. The average annualized base rent per occupied square foot was $12.47 at September 30, 2008, as compared to $12.15 at September 30, 2007. Final quarter numbers are not yet available, and in the interim, the company has turned to a superpower to help it makes its case: the sun.

Developers Diversified Realty Corp. (DDR) is granting the energy firm SunEdison the rights to install solar energy systems at over 200 of its shopping centers nationwide. When completed, the solar systems will cover approximately 30 million square feet of rooftop for a potential capacity of up to 259 Mega Watts. DDR anticipates purchasing this power from SunEdison at below present utility company rates, both for common use areas, like parking lots, and for direct sale to tenant stores. It's hard to say yet whether this solar energy strategy will stabilize its financial prospects and calm skittish investors.  Neither SunEdison nor DDR would quantify the projected financial impact of the solar energy plan, but analysts are favorably impressed.

"Real estate companies using their rooftops to deploy solar energy panels makes perfect sense, and we would expect many more to do the same," says Paul Adornato, an analyst with BMO Capital Markets and a specialist in REITs with shopping center properties. "Considering the square footage owned by real estate companies, the incremental revenue derived from these sources would not be inconsequential.  Savvy real estate owners have always used their properties to generate ancillary income [...] deploying cell phone towers, selling advertising on just about any surface, adding sales kiosks to mall aisles, etc."

Traditionally, REIT's with shopping center properties have had a more difficult time than those with uniform office and industrial properties when applying for LEED (Leadership in Energy and Environmental Design) certification. The daunting logistics of corralling their tenants into a sustainable design practice has put them at a disadvantage. But firms like DDR are rising to the challenge. Last May, for instance, the company opened the 1.1 million-square-foot, mixed-use, Watters Creek at Montgomery Farm near Dallas, one of the few LEED-certified retail complexes in the entire state of Texas.

The rooftop leasing deal with SunEdison is only one in a long series of projects that DDR (and like minded REIT's like Macerich) have been pursuing to maximize the value of their holdings. As DDR's vice president of construction John Sabatos told Shopping Centers Today, the company is using storm water for landscape irrigation and pursuing a method for reusing the water discharged from air-conditioning units. According to their executive vice president of property management, John Kokinchak, the firm has also been moving away from incandescent lighting fixtures and has even started employing gas-electric security vehicles.

With all the talk in Washington about the wisdom of greening the economic recovery package, it seems like DDR has a convincing story to tell about the wisdom and hidden opportunity of clean energy solutions. Still, let's not forget that its business-model is hopelessly tied to the activity at the root of America's enormous, consumer-driven carbon footprint: shopping; and let's savor another irony, too. DDR's shares – at less than $7 – are available at an 80% discount below April prices. Now there's a sale that looks just like the ones retailers are running in shopping centers around the country.

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