Federal develops formula for success


July 12, 1993|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

In 1989, Perring Plaza in Carney was a mess, and had been since its original anchor tenant, E. J. Korvette's, had gone out of business in 1980. Its layout was so bad that most of its stores were invisible from Joppa Road, and the merchants were near as lonely as the Maytag repairman.

Now the plaza is surging. Two hot retailing names -- Home Depot and Metro Food Market -- have moved into a completely reconfigured center, filling the parking lot and helping the other 13 stores. And since Lionel Kiddie City, a holdover tenant from before the conversion, announced June 2 it would go out of business, people have lined up for its space.

But the plaudits that Perring Plaza has won are par for Steve Guttman's course right now. The president of Perring Plaza's landlord, Bethesda-based Federal Realty Investment Trust, Mr. Guttman is watching the company he has led since 1980 ride the wave of Wall Street's current infatuation with real estate investment trusts.

But analysts who follow the company -- and even a respectful competitor or two -- say Federal is doing more than just going with the flow.

"I would love for BTR to be like Federal in a few years," said F. Patrick Hughes, president of BTR Realty Inc. in Linthicum, who said Federal is one of the models for his own company's pending switch from an incorporated company to a REIT. "They're one of the top-tier REITs. They're well-capitalized, they have good assets in good places, and they're well-managed. They've just produced."

Federal has produced. The stock is up 30 percent in the last year, the dividend, now $1.54 a share annually, continues to rise, and its capital base has been beefed up by $207 million in stock offerings over the past two years, which has let the company add mortgage-free shopping centers, cut its debt by about $82 million, and refinance remaining debt at lower rates. Analysts say Federal's recent success stems from the fact that management has avoided precisely the flaw of late-1980s real estate overreachers. They don't try to do too much.

"They stick to their knitting," said Gregory J. Whyte, an analyst who follows the company for Dean Witter Reynolds Inc. in New York.

The knitting has been strip shopping centers. Federal has 43 of them (plus one Virginia shopping mall and an apartment complex), mostly in the Mid-Atlantic states but with a few scattered as far south as Louisiana and as far west as Ohio. A move into Chicago is pending.

Federal usually looks for existing centers, rather than building new ones. And they're getting ready to look for a lot of them.

"There's a huge amount of real estate available for purchase and very few buyers are capitalized to take advantage," Mr. Guttman said. "There are no buyers. Returns are 10 percent and we can borrow at 4 1/2 percent. [In five years] I think we'll have 70 or 80 properties and $1.5 billion in assets."

Federal usually doesn't even buy the nicer strip centers. Glamour isn't their game. At places like Perring Plaza and Governor Plaza in Glen Burnie, Federal buys poor performers in good locations and has made a name for turning centers around. They also have a reputation for strong relationships with well-known value-oriented retailers such as Home Depot, Office Depot and T. J. Maxx.

"Their centers have become some of the best infill locations," said Mr. Whyte, explaining that "infill" means new development or redevelopment in areas that already have dense populations. "They remerchandise their centers, and remerchandishing is not just refurbishing. They create an entirely new center."

"We want to be in a place where there are tons of people, almost no land for new shopping centers, and where relatively few shopping centers exist," Mr. Guttman said.

Perring Plaza

Perring Plaza is one example, where the big tenants from before have been replaced and the look of the center transformed, giving Federal a 13 to 14 percent annual return on its investment, Mr. Guttman said. The same thing happened in Glen Burnie, after Federal in 1985 bought a center Mr. Guttman calls simply "Governor."

There was a supermarket so small Mr. Guttman can't even remember its name (Kash & Karry, it is discovered when he sends an aide to check), a hardware store, a small theater and a Murphy's Mart. All are gone now. Today the center is anchored by "category-killer" stores that are the current thing in retailing, including Office Depot and Syms' clothing, and a Holiday Spa that replaced another health spa that didn't do as well.

"They were both basically empty centers," he said. "We saw great pieces of land."

"Others have tried to do it, but they have really written the book," said Robert A. Frank, who follows REITs for Alex. Brown Inc. in Baltimore.

Everyone who follows Federal has always more or less agreed that they have a way with a piece of land. But not everyone has had as much admiration for the way they've handled their books.

Financial problems

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