DDR Corp. Form 10-Q Summary — Quarter Ended September 30, 2016
Entity note: The supplied filing is for DDR Corp., not SITE Centers Corp. It reports the quarter and nine months ended September 30, 2016; financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context and reporting period
DDR was a self-managed REIT focused on owning, leasing, developing, and managing shopping centers, with additional loan investments. At quarter-end it reported 343 shopping centers, approximately 112 million square feet of gross leasable area, and 93.0% portfolio occupancy. The company named Thomas F. August president and CEO in July 2016 and was reassessing its strategy.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $253.8 | $257.1 | $765.5 | $773.3 |
| Net income (loss) | $(60.1) | $59.8 | $27.2 | $(164.0) |
| Net income (loss) attributable to common shareholders | $(66.0) | $54.0 | $9.5 | $(182.4) |
| Diluted EPS | $(0.18) | $0.15 | $0.02 | $(0.51) |
| FFO attributable to common shareholders | $120.1 | $113.4 | $355.0 | $231.7 |
| Operating FFO attributable to common shareholders | $120.6 | $113.5 | $357.3 | $332.1 |
- Q3 included $104.9 of impairment charges on 19 shopping centers identified as short-term sale candidates. This was the principal reason for the quarterly GAAP loss.
- Nine-month operating cash flow was $350.0, compared with $300.9 in 2015. Investing activities provided $32.9, versus using $54.5; financing activities used $384.6, versus $246.4.
- Cash and cash equivalents were $20.7 at September 30, 2016. Total debt was $4,966.4, down from $5,139.5 at December 31, 2015. Debt fair value was reported at $5,236.9.
- Revolving facilities totaled $800.0; $310.0 was drawn and $1.1 of letters of credit reduced available borrowing capacity to $488.9. DDR reported compliance with financial covenants.
- Quarterly common dividends declared were $0.19 per share; nine-month declared dividends were $0.57 per share. The filing reports $218.8 of dividends paid in the nine-month period.
- Portfolio occupancy was 93.0%, compared with 93.3% at year-end 2015 and 92.8% a year earlier. Average annualized base rent per occupied square foot was $14.72, up from $14.48 at year-end 2015.
Material changes versus prior period
- Nine-month revenue declined $7.7 year over year, primarily reflecting dispositions, partly offset by comparable-property growth, acquisitions, and higher fee income.
- Nine-month GAAP results improved substantially from the prior-year loss, principally because impairment charges fell to $104.9 from $279.0. The company also cited lower interest expense and prior-year investment activity. This improvement should be distinguished from recurring property performance.
- Interest expense for nine months fell to $165.8 from $182.5; management attributed the decline to lower debt balances and repayment of higher-rate debt. Weighted-average debt was $5.0 billion at a 4.4% weighted-average rate, versus $5.3 billion and 4.9% in 2015.
- Comparable leasing remained positive: nine-month leasing spreads were 22.4% for new leases and 7.1% for renewals. The company executed 956 leases covering approximately 7.3 million square feet.
Outlook, management commentary, and risks
- Management identified deleveraging as a top priority and planned accelerated asset sales over a 12-to-18-month period. In October 2016, DDR sold 18 wholly owned operating assets for $483.5. Proceeds were expected to support debt reduction and portfolio priorities.
- DDR acquired two Prime power centers in 2016 for an aggregate gross purchase price of $146.8. It reported $479.2 of asset dispositions for the nine months ended September 30, of which its pro rata share was $336.6.
- No specific earnings or FFO guidance was provided. The board was still finalizing an updated strategic plan and would continue reviewing dividend policy.
- Management cited retailer demand, strong leasing activity, and a diversified tenant base, while noting exposure to tenant bankruptcies, retail competition and changing consumer behavior, economic conditions, interest rates, refinancing, and property-sale execution.
- Puerto Rico represented 7.5% of annualized consolidated portfolio revenue; management highlighted uncertainty around the island’s economy and government finances. The Sports Authority bankruptcy contributed to occupancy softness.
- Unconsolidated joint ventures had $641.1 of debt maturing in 2016, with DDR’s proportionate share of $32.1; DDR expected refinancing or extensions. The filing also notes joint venture and refinancing risks.
- Legal proceedings were not expected by management to have a material adverse effect. Disclosure controls were deemed effective, and no material control changes were reported.
Important facts for investors to verify
- Confirm that DDR Corp. is the intended registrant, given the request identifies SITE Centers Corp.
- Review the $104.9 impairment charge, assets designated for sale, sale pricing, and any subsequent impairment or disposition results.
- Track execution of the deleveraging plan, the October $483.5 sale proceeds and use, available revolver capacity, and 2017 debt maturities.
- Assess dividend sustainability against operating cash flow, capital spending, debt service, and REIT distribution requirements; FFO and Operating FFO are non-GAAP measures and are not cash available for dividends.
- Monitor occupancy, rent growth, tenant credit and bankruptcies, Puerto Rico exposure, and the expected loss of management fees from a joint venture planning asset dispositions around its July 2017 debt maturity.