By Michael Fickes

Scott A. Wolstein has served as chief executive officer of Developers Diversified Realty Corporation (NYSE: DDR) since the company became a REIT in 1993. In 1997, he was elected chairman by the board.

After a decade of Wolstein's leadership, DDR ranks as the nation's largest community shopping center REIT and the fifth-largest REIT according to equity market capitalization. DDR's portfolio contains 470 properties spanning 102 million square feet. Equity market capitalization has grown from $827 million at the end of 1999 to $3.7 billion today. Revenues, too, have risen steadily—from $304 million in 1999 to $522 million in the second quarter of 2004.

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AGE: 51 FAMILY: Married, with four children EDUCATION: A graduate of the Wharton School at the University of Pennsylvania and University of Michigan Law School FAVORITE SPORTS TEAMS: Cleveland Indians, Ohio State Buckeyes, Cleveland Cavaliers PARTICIPATION SPORTS: Skiing, bicycling, golfing TRAVEL: Anyplace sunny—the water, the desert FAVORITE MOVIES: "Animal House" and "The Graduate" FAVORITE BOOKS: Historical novels by James Clavell, Leon Uris and Herman Wouk COMMUNITY ACTIVITIES: Former president of the board of trustees of the United Cerebral Palsy Association of Greater Cleveland; the Great Lakes Theater Festival; the Park Synagogue; the Convention and Visitors Bureau of Greater Cleveland; chairman of the State of Israel Bonds; Red Cross; Cleveland Tomorrow; Greater Cleveland Partnership; Leadership Cleveland; and Cleveland Development Partnership

According to Wolstein, growth has come from a strategy that goes beyond traditional acquisitions and includes active development and aggressive financial management. Recently, Wolstein talked to Real Estate Portfolio about DDR's growth strategies and the plans for the future.

Portfolio: DDR seems to focus on development projects more than most REITs. What do you see that others don't?
Wolstein: That's true. In the retail world, we are probably the most prolific developer. We have about $1 billion in our development pipeline. Development gives us the opportunity to add unique, new assets, to improve the quality of existing assets, and to get the highest return on our invested dollars. Right now, for example, acquired properties tend to provide returns in the range of 7 percent to 8 percent, while development properties return in the range of 12 percent.

Portfolio: The investment community seems to approve of your development activities. Your stock was trading at just over $42 during the first quarter of this year, up from around $11 in 2000.
Wolstein: It wasn't always that way. When we went public, development was a dirty word in the capital markets, and we had a lot of explaining to do when we approached investors. I think we've been successful in explaining that if you were going to be in the retail business you should be in development. Development keeps us in front of retailers looking for expansion opportunities.

Portfolio: Like traditional mall department store anchors that have been looking at community center locations?
Wolstein: Yes, indeed. In the last two years, we have made eight department store deals: two with May Company stores, two with J.C. Penney, and one each with Sears, Macy's, Dillard's and Belk. These deals have been among the earliest in this trend. Other community center owners are now beginning to do the same thing. These tenants want to be in community centers.

Portfolio: A number of DDR acquisitions have had a development focus as well. Earlier this year, for example, you acquired the Benderson Development Company, which was the largest private developer of shopping centers in North America.
Wolstein: And you can say the same thing about our acquisition of JDN Realty Corporation in 2003. JDN was an Atlanta-based company and a significant player in development. These acquisitions supercharged our development pipeline.

Portfolio: What kinds of financing strategies are necessary to support these kinds of acquisition and development programs?
Wolstein: If a REIT wants to be a growth vehicle, it must be able to access capital beyond what equity investors provide. You also have to access equity from public and private sources as well as domestic and foreign sources. We look to all of these sources of capital.

To finance core property acquisitions, for example, we form joint ventures with entities such as Prudential, DRA Advisors, and the Kuwait Financial Center. Recently we formed a listed property trust in Australia called Macquarie DDR Trust (MDT) to help fund core acquisitions. MDT investors are interested in stability with modest growth and have a strong appetite for our product. We chose Australia because, right now, the cost of capital there is lower than it is in the U.S.

Portfolio: Could you talk about the series of opportunity funds DDR has organized?
Wolstein: We form private equity funds to supply capital to the value-added component of our business. We have raised $330 million of equity in our Coventry II Fund. We plan to leverage this to $1 billion for acquisitions and redevelopments that will be carried out over the next couple of years. In terms of private equity, we've been ahead of the curve. This is our second Coventry Fund. We formed the first one almost five years ago, before anyone else was doing it.

Portfolio: How do MDT and Coventry affect your strategies for public offerings?
Wolstein: There is no effect. A public offering is simply one more way to raise funds. In the near term, most of the public equity that we access will find its way into development deals that we will own entirely. The balance will fund our co-investment pieces in MDT and Coventry.

Portfolio: What other fund raising techniques do you employ?
Wolstein: Every year, we go through our portfolio and evaluate each asset. Will it contribute to or detract from our growth strategy? Properties that don't fit our long-term strategy go into a disposition portfolio. In addition, when the capital markets perform like they have during the past year and cap rates fall, we sell interests in some core assets. This is a way of pulling money out and redeploying it into assets that produce higher returns.

That's essentially what we did with MDT. We sold $1 billion in assets into MDT at cap rates in the mid-7 percent range. Now we can reinvest that money into assets that produce higher returns.

We don't just sell properties that we don't want; we also sell pieces of properties that we want to stay associated with. This kind of active portfolio management finances our business efficiently and produces the highest returns for shareholders.