Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: DDR is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in acquiring, developing, owning, leasing, and managing shopping centers and business centers. As of December 31, 2001, the portfolio consisted of 193 shopping centers and 37 business centers (including 56 properties owned through joint ventures) across 39 states, with significant concentrations in Ohio, Florida, Missouri, and California.
Key Financial Metrics
| Metric | 2001 | 2000 | Change |
|---|---|---|---|
| Total Revenues | $322.2 million | $287.6 million | +12.1% |
| Net Income | $92.4 million | $100.8 million | -8.4% |
| Net Income (Common Shareholders) | $65.1 million | $73.6 million | -11.5% |
| Funds From Operations (FFO) | $135.5 million | $129.3 million | +4.8% |
| Earnings Per Share (Diluted) | $1.17 | $1.31 | -10.7% |
| Total Debt | $1.31 billion | $1.23 billion | +6.6% |
| Cash Flow from Operations | $174.3 million | $146.3 million | +19.2% |
| Occupancy Rate (Wholly-Owned) | 94.5% | 95.2% | -0.7% |
Material Changes vs. Prior Period
- Strategic Merger: The most significant event was the May 14, 2001, merger with American Industrial Properties (AIP). DDR acquired 39 properties (31 industrial, 6 office, 2 retail) after AIP sold 31 industrial assets to Lend Lease. This consolidation contributed $22.0 million to base rental revenue but increased interest and depreciation expenses.
- Revenue Growth: Total revenues increased by $34.7 million, driven by the AIP merger, new leasing, and the completion of nine shopping center developments. Base rental revenues rose 12.3% to $227.2 million.
- Net Income Decline: Despite revenue growth, net income decreased by $8.4 million. This was primarily due to a $5.1 million decrease in gains on the disposition of real estate (compared to 2000) and a $2.9 million impairment charge related to a retail tenant liquidation.
- Debt Levels: Total debt increased to $1.31 billion, reflecting the AIP merger and funding for acquisitions and developments. The debt-to-total market capitalization ratio remained conservative at 0.44 to 1.0.
- Dispositions: The company sold various assets in 2001, generating approximately $65.2 million in proceeds, which were used to repay revolving credit facilities.
Guidance, Outlook, and Risks
- Dividend Outlook: In February 2002, the Board increased the quarterly dividend to $0.38 per share (from $0.37), representing a 2.7% increase. The company intends to maintain a conservative payout ratio to retain capital for growth.
- Growth Strategy: Management plans to continue growth through selective acquisitions, development, and expansion. The company is currently expanding five wholly-owned properties and four joint venture properties.
- Key Risks:
- Tenant Bankruptcy: Kmart, the company's second-largest tenant (2.7% of base rental revenue), filed for Chapter 11 bankruptcy in January 2002. Management does not expect significant losses due to low rent rates and strong locations but notes potential re-leasing risks.
- Legal Contingency: A $9.0 million judgment (plus fees) was entered against the company in September 2001 regarding a movie theater lease dispute. Management believes the verdict will likely be reversed and has not recorded a loss provision.
- Interest Rate Risk: Approximately 25% of consolidated debt is variable rate. The company uses interest rate swaps to mitigate this risk, converting $200 million of variable debt to fixed rates.
Investor Verification Checklist
- Kmart Exposure: Verify the status of the 26 Kmart leases (2.3 million sq. ft.) and the company's re-leasing strategy following the bankruptcy filing.
- Legal Judgment: Monitor the appeal process of the $9.0 million movie theater lawsuit to assess potential future cash outflows.
- AIP Integration: Review the performance of the newly acquired AIP industrial and office assets and the progress of the strategic disposition program for these non-core assets.
- Debt Maturities: Confirm refinancing plans for the $157.6 million in debt maturing in 2002 and the $376 million revolving credit facility maturing in 2003.
- Impairment Charges: Assess the $2.9 million impairment charge recorded in 2001 and monitor for similar risks with other tenants facing financial distress.