Michael Chow/The Republic The partners behind Vestar Development Co., Rick Kuhle (from left), David Larcher, Paul Rhodes, Peter Thomas and Lee Hanley, have kept their business afloat in the downtrodden economy.
Vestar Development Co. knows how to survive and thrive in the harshest real-estate climates. The relatively low-profile Phoenix-based shopping-center developer cut its teeth in the savings-and-loan crisis of the early 1990s that sent commercial real-estate values through the floor and wiped out many of its competitors.
Vestar Development Co. knows how to survive and thrive in the harshest real-estate climates. The relatively low-profile Phoenix-based shopping-center developer cut its teeth in the savings-and-loan crisis of the early 1990s that sent commercial real-estate values through the floor and wiped out many of its competitors.
Through savvy negotiating, Vestar was able to line up a deep-pocketed partner that allowed it to scoop up bargain real estate, forge key relationships with retailers and grow while other companies stood on the sidelines.
It's a scenario that Vestar is poised to repeat during the current down real-estate cycle -a downturn that industry analysts say is even deeper and more prolonged than the one two decades ago.
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Vestar has formed key relationships with powerful real-estate investment firms such as Equity One Inc. and Rockwood Capital LLC that have allowed it to refinance key projects and take advantage of record low real-estate prices by making strategic acquisitions.
"Vestar is one of the premier retail developers on the West Coast," said Jeff Olson, Equity One's CEO. "We have known the Vestar principals for almost twenty years, and we are delighted to be working with them again."
A $280 million deal with Rockwood in December allowed Vestar to refinance its 1.3 million-square-foot Tempe Marketplace shopping center and buy out its initial partner in the project, DLJ/Credit Suisse.
An approximately $100 million partnership in January with Equity One and Rockwood allowed Vestar to refinance its troubled Canyon Trails Town Center project in Goodyear and acquire two distressed shopping centers in California.
Vestar President Rick Kuhle said the company will continue to seek acquisition opportunities while it waits for demand to return for shopping-center construction.
"For the time being, we see ourselves as an acquirer," he said.
Kuhle said Vestar expected to make $350 million in acquisitions this year and $500 million next year. The company is looking for opportunities in Arizona, California, Nevada, Texas and other states, Kuhle said.
Like other shopping-center developers in the mid- to late 2000s, Vestar got out ahead of the houses in the sprawling new subdivisions on the outskirts of metro Phoenix and in Southern California.
In the past, the rooftops always filled in around the shopping centers that Vestar opened in growth areas.
This time, foreclosures, the recession and falling values caused many new homes to fall vacant and others never to be built. Newly completed projects such as Canyon Trails Towne Center in Goodyear, Queen Creek Marketplace in Queen Creek and Oro Valley Marketplace have struggled to become fully leased.
Projects on the drawing board such as Maricopa Towne Center in Maricopa, Sycamore Farms Towne Center in Surprise and Kingman Crossing in Kingman have been put on hold until the market improves.
Projects could be delayed as long as five years in some areas, Kuhle said.
The company also has seen the value of the dozens of shopping centers' interests, which the company holds, decline substantially, along with rents at those centers.
Lee Hanley, Vestar's chairman and CEO, said, "These are very challenging times."
The recession's impact on Vestar was lessened somewhat by the fortuitous 2006 sale of an interest in 17 shopping centers, including the huge Happy Valley Towne Center in Phoenix, to UBS Realty Investors.
The transaction refreshed Vestar's balance sheet and gave it a cash cushion as it was heading into the downturn.
"It was very fortunate in that regard," Hanley said.
Crash at takeoff
This isn't the first time that Vestar has seen tough times.
The company was launched near the end of a lavish commercial building boom that had been financed by the reckless lending practices of the nation's savings-and-loan industry.
Founding principals Hanley, Kuhle, David Larcher, Paul Rhodes and Peter Thomas borrowed $100 million to buy the commercial-building division of Tucson's Estes Homes in 1989 just as the boom was about to end in a spectacular bust.
Hanley, a University of Arizona graduate who worked at real-estate brokerage CB Commercial, was recruited by homebuilder Bill Estes in 1977 to set up a non-residential development operation as an adjunct to Estes' Tucson homebuilding business.
Hanley recruited Larcher, Kuhle, Rhodes and Thomas, and 12 years later, when Estes was looking to sell the commercial division to raise money, the five men stepped up to the plate.
The deal included 35 commercial properties developed by Estes Development Co., including the 1.2 million-square-foot Scottsdale Pavilions project at Pima and Indian Bend roads, arguably the nation's first power center.
The Vestar partners at first couldn't believe their bad timing as they watched commercial real-estate values plunge in metro Phoenix and around the country.
But their outlook soon would change.
Their acquisition was financed by the pension plan of Chicago-based Ameritech Corp., one of the seven so-called "Baby Bells" created with the government's breakup of AT&T in 1984.
Ameritech was looking to expand its portfolio of real-estate investments in the West and become Vestar's capital partner in the venture instead of a mere lender. As a result, Vestar had access to a vast amount of capital at a time when there was virtually no conventional money available for real-estate developments and acquisitions.
"Out timing turned out to be very fortuitous," Hanley said.
Ameritech's deep pockets enabled Vestar to make key acquisitions at bargain prices and to form key relationships with retailers who still were looking to expand.
Vestar helped bring Walmart to Southern California, building the retailer's first six stores there while many other developers couldn't finance such projects.
Focus on retail
Estes had developed office buildings, warehouses and hotels, but the Vestar partners decided to limit their activities to retail projects.
"We were very good at shopping centers and not that good at offices and hotels," Hanley said.
After Scottsdale Pavilions, Vestar went on to refine the power-center concept with massive lifestyle centers such as Tempe Marketplace in Tempe and Desert Ridge Marketplace in Phoenix.
Fellow metro Phoenix retail developer Marty De Rito, who in 2008 bought Scottsdale Pavilions from Vestar for $88 million, said, "Vestar is one of the best shopping-center developers in the West. They are very focused, and they are very good at what they do."
In Southern California, Vestar's area of focus outside metro Phoenix, the company has built innovative projects such as the Long Beach Towne Center near Los Angeles and the College Grove Shopping Center in San Diego. The Long Beach Towne Center converted an old Navy hospital and surplus military-housing site into an award-winning shopping center. In San Diego, Vestar redeveloped a derelict shopping center into a top retail destination.
"It's refreshing to deal with gentlemen," Vince Coughlin, Long Beach's former property services manager, said in a 2000 Arizona Republic story on Vestar. "They're very straightforward and aboveboard. If there are problems, they deal with them."
Executive Vice President David Larcher said that about 40 percent of the company's development activity has been focused in Southern California, principally the San Diego and Los Angeles areas and 60 percent in Arizona.
Vestar is one of the top five retail developers in the West and among the top 15 nationwide. When the business was organized in 1989, the principals decided to limit the development to areas that could be reached by a "one-hour America West Airlines" flight from Phoenix.
"That pretty much limited us to Phoenix, Tucson, Los Angeles, San Diego and Las Vegas," Larcher said.
Vestar actively developed in the Las Vegas area in the early 1990s but got out midway through the decade.
"We didn't understand Las Vegas and thought it was overpriced and ready to tank," Kuhle said.
While the market eventually did tank, it wasn't for another 10 years. Vestar missed out on a decade of explosive Las Vegas growth in one of its few tactical misses.
'Build and hold'
Vestar has developed 22 million square feet of retail space in hundreds of shopping centers over the years. It still has an ownership interest in about 18 million square feet of that.
"Our philosophy is to design, build and hold," Hanley said.
Many other privately held retail developers have to sell their finished projects to move on to the next ones. But in Vestar's case, a string of deep-pocketed capital partners has allowed the company to hold on to an interest in existing projects while continuing to build.
Those partners include Ameritech Pension Trust, Lend Lease Real Estate Investments of Australia, Credit Suisse First Boston and, more recently, Rockwood Capital and Equity One Inc.
Continuing to have an interest in the center allows the company to maintain the integrity of the development plus enjoy an income stream from the rents. It also strengthens the relationship the company has with its retailer tenants.
Some of its most challenging projects have been in California, where retail development sites are scarce.
"In California, it's all infill and special situations," Larcher said, noting that projects can take much longer to get off the ground there than in Arizona, where retail sites are more available.
But there have been challenges in Arizona.
Scottsdale Pavilions was one of the first major commercial developments to be built on land owned by a Native American tribe, the Salt River Pima-Maricopa Indian Community. Tempe Marketplace was developed on land so polluted it was designated a Superfund site by the U.S. Environmental Protection Agency. Because Vestar retains an ownership of management interest in most of its shopping centers, the company also maintains an active role in the surrounding communities.
"We've involved in Boys and Girls Clubs, chambers of commerce and economic development groups wherever we go," Larcher said.
Vestar Development Co.
What: Developer of large-format retail centers.
Headquarters: Phoenix.
Founded: 1989 with a management-led buyout of Tucson's Estes Development Co.
Principals: Lee Hanley, Richard Kuhle, David Larcher, Paul Rhodes, Peter Thomas.
Employees: 75.
Assets: $1 billion.
Properties owned or managed: 28.
Square feet owned or managed: 20.2 million.
Signature properties: Tempe Marketplace, Tempe; Desert Ridge Marketplace, Phoenix; Scottsdale Pavilions, Scottsdale; Long Beach Towne Center, Long Beach, Calif.; District at Tustin Legacy, Tustin, Calif.
by Max Jarman The Arizona Republic Apr. 17, 2011 12:00 AM
Retail developer Vestar hopes to repeat feat of 1990s, acquire distressed properties for a song
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