Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR) (Note: Metadata listed "SITE Centers Corp." but filing content confirms DDR).
Filing Type: Form 10-Q (Quarterly Report).
Period Ended: September 30, 2009.
Business Overview: DDR is a self-administered REIT owning, managing, and developing a portfolio of shopping centers. As of September 30, 2009, the portfolio included 664 shopping centers and six business centers (including 318 owned through unconsolidated joint ventures). The aggregate occupancy rate was 87.1%, down from 94.5% in the prior year, primarily due to major tenant bankruptcies (Mervyns, Circuit City, Steve & Barry's, etc.).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $222.9 million | $669.7 million |
| Net Income (Loss) Attributable to DDR Common Shareholders | ($148.4 million) | ($308.7 million) |
| Diluted EPS (Common) | ($0.90) | ($2.11) |
| Funds From Operations (FFO) (Common) | ($90.1 million) | ($116.6 million) |
| Total Indebtedness | $5.17 billion (Balance Sheet) | $5.17 billion (Balance Sheet) |
| Cash and Cash Equivalents | $26.4 million | $26.4 million |
| Operating Cash Flow (9 Months) | N/A | $304.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 9.2% for the quarter and 8.3% for the nine-month period compared to 2008, driven by lower base rents and recoveries due to tenant bankruptcies and vacancies.
- Net Loss vs. Prior Income: The company reported a net loss of $148.4 million for the quarter, compared to net income of $24.7 million in the same period in 2008. For the nine months, the loss was $308.7 million versus income of $80.4 million in 2008.
- Impairment Charges: Significant non-cash impairment charges were recorded. For the nine months ended September 30, 2009, consolidated real estate impairments totaled $145.7 million, and unconsolidated joint venture impairments totaled $101.6 million. No such charges were recorded in the comparable 2008 periods.
- Equity Derivative Loss: A non-cash loss of $118.2 million (quarter) and $198.2 million (nine months) was recorded related to the "Otto Transaction" equity derivatives (warrants and forward commitments) due to mark-to-market adjustments.
- Debt Reduction: Total consolidated debt decreased from $5.87 billion at December 31, 2008, to $5.17 billion at September 30, 2009, a reduction of approximately $700 million achieved through asset sales, debt repurchases, and refinancing.
Guidance, Outlook, and Risks
- Deleveraging Strategy: Management is focused on lowering leverage and increasing liquidity. Strategies include retaining capital (reduced dividends), issuing equity (Otto Transaction and continuous equity program), repurchasing debt at discounts, and selling non-prime assets.
- Dividend Policy: The company adjusted its dividend policy to the minimum required to maintain REIT status. The Q3 2009 dividend was $0.02 per share (all cash), significantly lower than the $0.69 per share in Q3 2008.
- Financing Activities: In September 2009, DDR issued $300 million of 9.625% senior unsecured notes. In October 2009 (subsequent event), the company secured a $400 million loan secured by 28 shopping centers.
- Risks and Contingencies:
- Covenant Compliance: While compliant as of September 30, 2009, the company notes reduced financial flexibility due to the economic downturn. Continued declines in retail/real estate could lead to covenant violations.
- Legal Proceedings: A jury verdict in October 2008 found DDR liable for approximately $7.8 million in damages plus $1.5 million in fees regarding a valet parking dispute; the company is appealing. Additionally, Coventry Real Estate Fund II filed a lawsuit in November 2009 seeking damages of at least $500 million alleging breach of contract and fiduciary duties.
- Joint Venture Defaults: Several Coventry II Fund joint ventures have defaulted on loans or failed to meet covenants, though DDR has limited recourse in most cases.
Investor Verification Checklist
- Debt Maturities: Verify the status of refinancing for $375.2 million of unsecured notes and $384.1 million of consolidated mortgage debt maturing in 2010.
- Equity Derivative Valuation: Review the fair value assumptions for the Otto Transaction warrants and forward commitments, which caused significant non-cash losses.
- Asset Sales Pipeline: Confirm the status of non-prime assets under contract for sale and the pricing terms, as proceeds are critical for deleveraging.
- Legal Exposure: Monitor the outcome of the Coventry II lawsuit and the valet parking appeal, as these represent significant potential liabilities.
- Occupancy Trends: Track re-leasing activity for spaces vacated by bankrupt tenants (Mervyns, etc.) and the resulting rental spreads.