SITC

Business Context and Reporting Period

Company: Developers Diversified Realty Corporation (DDR)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and nine months ended September 30, 1999

Business Overview: DDR is a Real Estate Investment Trust (REIT) engaged in acquiring, expanding, owning, developing, managing, and operating neighborhood and community shopping centers, enclosed malls, and business centers. As of September 30, 1999, the portfolio included 113 operating properties with an in-place occupancy rate of 95.6%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4.5% ($2.8 million) for the quarter and 17.9% ($29.8 million) for the nine-month period compared to 1998. This growth was driven by new leasing, re-tenanting, and the acquisition of 35 shopping centers in 1998 and 1999.
• Net Income: Net income rose 9.3% for the quarter and 15.2% for the nine-month period. Increases in net operating revenues and equity income from joint ventures were partially offset by higher depreciation, interest, and minority interest expenses.
• Expense Increases: General and administrative expenses increased 43.2% year-over-year for the nine-month period, attributed to growth, headquarters relocation, and a $0.8 million severance charge. Interest expense increased 19.5% due to higher debt levels supporting acquisitions and development.
• Debt Structure: Total indebtedness increased from $1.0 billion at year-end 1998 to $1.08 billion. The company repaid $40.1 million in convertible debentures and utilized proceeds from a $75 million preferred partnership unit issuance to reduce variable rate borrowings.

Guidance, Outlook, and Risks

• Capital Allocation: The company maintains a conservative debt capitalization policy. It has authorized a $200 million common share repurchase program, having purchased approximately $21.6 million of shares in open market transactions between October and November 1999.
• Development Pipeline: Significant development activity is ongoing, including three wholly-owned centers scheduled for completion in 2000 and eight joint venture projects with a projected aggregate cost of $342.2 million.
• Dividend Policy: The quarterly dividend was increased to $0.35 per share. The payout ratio for the first three quarters of 1999 was approximately 61.8% of FFO, a decrease from 67.9% in the prior year, allowing for capital retention for growth.
• Risks and Contingencies:
  • Market Risk: 26.8% of debt is variable rate; a 100 basis point decrease in rates would increase the fair value of fixed-rate debt liabilities.
  • Year 2000 Compliance: The company believes critical IT and non-IT systems are compliant, with total project costs estimated at $110,000.
  • REIT Qualification: The company must make distributions to maintain REIT status; failure to qualify would result in adverse tax consequences.
  • Tenant Concentration: Performance is dependent on the financial condition of major tenants, particularly discount department stores and supermarkets.

Investor Verification Checklist

• Verify the occupancy rate of 95.6% and the average annualized base rent of $9.02 per square foot as reported in the MD&A.
• Confirm the status of the $200 million share repurchase program and the impact of the $21.6 million buyback on outstanding share count.
• Review the details of the $75 million preferred partnership unit issuance and its effect on the debt-to-equity ratio.
• Assess the progress and funding status of the $342.2 million joint venture development pipeline.
• Monitor the company's ability to maintain investment-grade credit ratings given the increase in total indebtedness to $1.08 billion.