Business context and reporting period
The supplied filing is DDR Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2012—not a filing identified as SITE Centers Corp. The filing describes a retail real estate investment trust focused on owning, developing, leasing and managing shopping centers. Unless otherwise noted, financial amounts below are in millions of dollars.
At quarter-end, DDR reported 458 shopping centers, approximately 116 million square feet of gross leasable area and one office property. The shopping-center portfolio occupancy rate was 91.3%, up from 86.3% a year earlier; annualized base rent per occupied square foot was $13.79 versus $13.76.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $205.0 | $187.1 | $592.1 | $563.1 |
| Net income (loss) attributable to DDR | $26.7 | ($43.0) | ($25.8) | ($21.1) |
| Net income (loss) attributable to common shareholders | $13.3 | ($50.0) | ($53.2) | ($52.1) |
| Basic and diluted EPS attributable to common shareholders | $0.04 | ($0.18) | ($0.19) | Basic: ($0.20); diluted: ($0.28) |
| FFO attributable to common shareholders (non-GAAP) | $112.7 | $34.7 | $250.5 | $180.2 |
| Operating FFO attributable to common shareholders (non-GAAP) | $82.9 | $67.4 | $221.3 | $195.0 |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $197.4 | $212.8 |
Revenue increased 10% for Q3 and 5% for the nine-month period. The filing does not provide a single comparable operating-margin measure. Nine-month investing cash flow was an outflow of $465.3 million, principally reflecting real estate acquisitions and investment in joint ventures; financing cash flow was an inflow of $247.5 million. Cash and cash equivalents were $20.2 million at September 30, 2012, versus $41.2 million at year-end 2011.
Total debt was $4.308 billion, compared with $4.105 billion at December 31, 2011. Total assets were $7.950 billion and total equity was $3.336 billion. DDR reported $692.9 million of available borrowing capacity, including available revolving facilities and undrawn term-loan capacity, and said it was in compliance with debt covenants. Management reported a debt-to-total-market-capitalization ratio of 0.46 at September 30, 2012, versus 0.56 a year earlier.
Material changes versus the prior comparable period
- Q3 common-shareholder results turned positive, largely alongside a $40.6 million gain from gaining control of joint-venture properties. The quarter also included a $26.1 million impairment of a joint-venture investment and a $5.8 million preferred-share issuance-cost write-off.
- Nine-month common-shareholder loss remained substantial. Total reported impairment charges were $132.5 million, including $90.1 million on continuing-operation assets and $26.7 million on joint-venture investments; discontinued operations also included impairment charges.
- Nine-month FFO rose to $250.5 million from $180.2 million, while Operating FFO increased to $221.3 million from $195.0 million. FFO includes significant gains and other adjustments and is not GAAP earnings or cash available for distribution.
- Occupancy rose five percentage points year over year. Management cited 8.6 million square feet of leasing activity during the first nine months and 2.9 million square feet leased in Q3, including renewals.
- DDR acquired its partners’ interests in five shopping centers for $339.5 million, recognized an $80.0 million gain on change in control for the nine months, and issued common shares to help fund acquisitions. Shares outstanding increased to 309.7 million from 277.1 million at year-end 2011.
- Operating cash flow declined to $197.4 million from $212.8 million for the nine months, while investing cash flow shifted from $30.7 million provided to $465.3 million used.
Outlook, management commentary, risks and unusual items
- Management emphasized portfolio quality, selective acquisitions, recycling proceeds from non-prime asset sales into prime properties, deleveraging and extending debt duration. It gave no specific earnings or FFO guidance in the supplied filing text.
- DDR said it had no consolidated debt maturities remaining in 2012 and no unsecured maturities until May 2015. It was planning for $392.3 million of consolidated secured debt maturities in 2013, including a proposed refinancing of a $350 million loan; refinancing plans were not assured.
- Management expected $73.6 million of development and redevelopment costs during the remainder of 2012, primarily related to Brazil joint ventures, and described development spending as discretionary. The company reported $47.0 million in construction commitments and $408.8 million of recorded costs on projects where construction had not started or was paused; sale of some such projects could result in material losses.
- Joint-venture and counterparty exposure is notable. At September 30, DDR’s unconsolidated ventures had $4.4 billion of third-party debt. Coventry II-related loans included defaults and past-due debt; DDR reported $107.8 million of matured, past-due joint-venture mortgage debt, of which its proportionate share was $13.6 million. DDR said it did not intend to fund partners’ contributions or their share of debt maturities.
- DDR recorded a $26.1 million impairment on its Coventry II Montgomery Farm investment after deteriorating lender-partner relations; the venture remained in monetary default on its construction loan. DDR said it had satisfied its remaining guaranty for that loan.
- A Coventry lawsuit sought at least $500 million plus punitive damages. DDR disputed the claims; its summary-judgment motion remained pending. No loss provision was recorded because management did not deem a loss probable or estimable, and it did not expect a material adverse outcome.
- Interest-rate exposure remains relevant: management estimated a 100-basis-point increase in short-term rates would add approximately $4.5 million of interest expense for DDR and $1.5 million for its proportionate share of joint ventures over the stated measurement period. The filing also expected approximately $6.6 million of hedge-related amounts to increase interest expense over the next 12 months.
- DDR issued $200 million of 6.50% Class J preferred shares and redeemed $170 million of 7.50% Class I preferred shares. It issued $300 million of 4.625% senior notes due 2022 and repurchased $60 million of 9.625% notes at a $13.5 million loss on retirement.
- The filing disclosed a $1.5 million out-of-period adjustment in Q2 2012 related to a prior-year purchase-price allocation error, which management said was not material to the periods affected. It also reported a possible aggregate loss of approximately $6 million if certain pending asset sales closed on negotiated terms.
Most important facts for investors to verify
- Confirm the issuer identity: the provided document is for DDR Corp., not SITE Centers Corp.
- Review the composition and recurrence potential of reported earnings and FFO adjustments, especially the $80.0 million nine-month change-in-control gain, impairments and preferred-share charge.
- Verify progress and funding for the 2013 secured debt maturities, and whether refinancing assumptions and covenant headroom remain sound.
- Track Coventry II loan defaults, guaranty exposure, the Montgomery Farm venture and the pending Coventry litigation.
- Assess whether occupancy and leasing improvements translate into durable comparable-property revenue and cash flow, given the decline in nine-month operating cash flow.
- Evaluate the effect of common-share issuance and preferred dividends on per-share results and distributions.