Business context and reporting period
DDR Corp.’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The company operated shopping centers in the continental U.S. and Puerto Rico; at quarter-end its portfolio comprised 241 centers, including 115 held through joint ventures, with 84.1 million square feet of total managed GLA. The filing predates the company’s later SITE Centers name.
On July 1, 2018, after quarter-end, DDR completed the spin-off of Retail Value Inc. (RVI), transferring 48 centers, including all 12 Puerto Rico properties. DDR retained a $190 million preferred investment in RVI and expects to manage its properties under management agreements.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $211.5 million | $236.2 million | $426.6 million | $476.6 million |
| Net income (loss) attributable to common shareholders | $(11.7) million | $23.2 million | $(74.2) million | $(36.6) million |
| Diluted earnings (loss) per share | $(0.07) | $0.13 | $(0.41) | $(0.20) |
| FFO attributable to common shareholders | $51.6 million | $93.1 million | $81.1 million | $115.3 million |
| Operating FFO attributable to common shareholders | $90.5 million | $108.8 million | $188.2 million | $217.3 million |
- For the first half, GAAP operating cash flow was $161.8 million, down from $209.7 million. Investing activities provided $325.1 million; financing activities used $474.7 million. Cash, cash equivalents and restricted cash totaled $106.8 million at June 30, including $32.1 million of cash and cash equivalents.
- Six-month same-store NOI increased 0.9% at 100% ownership and 1.3% at DDR’s interest. Management attributed the increase mainly to rent growth, recoveries and favorable bad-debt expense and tenant settlements.
- Portfolio occupancy was 90.8%, versus 91.1% at December 31, 2017 and 91.5% a year earlier. Average annualized base rent per occupied square foot was $15.93, up from $15.77 and $15.46, respectively.
- Reported total debt was $3.59 billion at June 30, versus $3.85 billion at December 31, 2017. This quarter-end balance included approximately $1.27 billion of RVI mortgage debt that transferred to RVI with the July 1 spin-off. Preferred shares totaled $525 million; total equity was $2.69 billion.
Material changes versus the prior comparable period
- First-half revenue fell about 10.5%, primarily reflecting property dispositions, lower comparable-property rents and recoveries, and lost Puerto Rico tenant revenue. Lower depreciation, general and administrative costs and property expenses partly offset the revenue decline.
- First-half GAAP loss attributable to common shareholders widened to $74.2 million from $36.6 million. Management cited $36.5 million of RVI spin-off transaction costs, $58.4 million of debt-extinguishment costs, and lower real-estate sale gains; the prior-year comparison included a substantially larger preferred-equity reserve.
- First-half Operating FFO declined to $188.2 million from $217.3 million. Management attributed the decrease primarily to the dilutive effect of asset sales, partly offset by lower G&A expense. FFO and Operating FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- In the first half, DDR sold 10 shopping centers and land for $314.9 million and recorded a $39.5 million net gain. Joint ventures sold 22 centers; DDR’s share of their gains was $9.3 million. DDR also repaid $900 million principal of senior notes, $452.5 million of mortgage debt and $200 million of term-loan debt, funded in part by a new $1.35 billion mortgage financing and asset-sale proceeds.
Outlook, management commentary, risks and unusual items
- Management expects the post-spin DDR to focus on continental U.S. assets, leasing, redevelopment and opportunistic investment, using proceeds from lower-growth asset sales in part to reduce leverage and fund investment. No specific earnings or revenue guidance was provided.
- Management said the board intended to adjust the 2018 common dividend policy following the spin-off, balancing free cash flow and REIT distribution requirements. The company had declared $0.38 per common share for each of the first two quarters, reflecting the one-for-two reverse stock split.
- At July 2, the company reported $925 million of available revolving-credit capacity; combined with $32.1 million of June 30 cash, this was expected to cover $96.0 million of pro forma debt maturities through July 2019. Management cautioned that refinancing and repayment plans are not assured. The company was in compliance with its debt covenants at June 30.
- Hurricane Maria damaged all 12 Puerto Rico centers. One center remained largely non-operational; 86% of leased GLA was open excluding that center (82% including it) as of July 25. DDR estimated about $150 million of property-damage claims and $25 million of business-interruption claims through June 30; insurance limits were approximately $330 million, subject to a combined $6 million deductible. A $49.2 million insurance receivable was recorded, and claim amounts and timing remain uncertain. Repairs were expected to be substantially complete by Q3 2019, subject to labor, materials and scope risks.
- Six-month impairment charges were $48.5 million, primarily on centers marketed for sale. The filing anticipated up to approximately $15 million of additional impairment in Q3 related to assets transferred in the RVI spin-off. The company also recorded a $63.4 million valuation allowance on preferred investments in Blackstone joint ventures; further changes could affect results.
- Key business risks include tenant bankruptcies and store closures, e-commerce and retail competition, lower occupancy and recoveries, asset-sale and redevelopment execution, interest-rate exposure, refinancing, joint-venture exposure, and the sufficiency and timing of hurricane insurance recoveries. A 100-basis-point increase in short-term rates was estimated to increase six-month interest expense by about $1.7 million for DDR and $0.9 million for its proportionate share of joint ventures.
- The filing reported no material expected adverse effect from pending legal proceedings; Item 1A reported no changes to risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Post-spin balance sheet and leverage: confirm the debt, cash, liquidity and preferred-investment position after the RVI transfer, rather than relying solely on June 30 consolidated balances.
- RVI preferred investment and management agreements: verify dividend, redemption, reimbursement and termination terms, and the value and timing of any recovery.
- Puerto Rico claims and restoration: track actual repair costs, insurance collections, business-interruption income and any further impairments.
- Operating trends: monitor occupancy, anchor-tenant vacancies, leasing spreads, tenant-improvement costs and same-store NOI after the portfolio separation.
- Capital allocation: verify the revised dividend policy, debt-reduction progress, asset-sale proceeds and redevelopment spending against management’s stated priorities.