Business context and reporting period
DDR Corp. (the registrant in this 10-Q; the request identifies the company as SITE Centers Corp.) reported the quarter and nine months ended September 30, 2017. It owned or managed shopping centers through wholly owned properties and joint ventures. At quarter-end, its portfolio included 286 centers, approximately 97 million square feet, 91.5% occupancy, and average annualized base rent of $15.53 per occupied square foot.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $227.4 million | $253.8 million | $704.0 million | $765.5 million |
| Net income (loss) attributable to common shareholders | $(7.4) million | $(66.0) million | $(44.0) million | $9.5 million |
| Diluted EPS | $(0.02) | $(0.18) | $(0.12) | $0.02 |
| FFO attributable to common shareholders | $46.3 million | $120.1 million | $161.7 million | $355.0 million |
| Operating FFO attributable to common shareholders | $111.2 million | $120.6 million | $328.5 million | $357.3 million |
Net operating income was $167.9 million in Q3 and $511.3 million for the nine months. NOI as a share of revenue was approximately 73.8% and 72.6%, respectively, calculated from reported segment totals.
Nine-month operating cash flow was $302.2 million, versus $351.0 million a year earlier. Investing activities provided $270.1 million, primarily reflecting property-sale proceeds; financing activities used $591.4 million. Cash and cash equivalents were $18.3 million at September 30.
Total consolidated debt was $4.018 billion, down from $4.494 billion at December 31, 2016. Total equity was $3.189 billion. The company reported $1.0 billion of available revolving-credit capacity at September 30; pro forma cash and revolver availability were $1.018 billion. Unconsolidated joint ventures had $2.7 billion of third-party debt, generally non-recourse, with limited exceptions.
Material changes versus comparable periods
- Nine-month revenue declined 8.0%; management attributed the decrease in rental revenue principally to property dispositions, partly offset by comparable-property growth and an acquisition. Occupancy was 91.5%, down from 93.0% a year earlier, while rent per occupied square foot increased from $14.72 to $15.53.
- Nine-month common-shareholder results shifted from $9.5 million income to a $44.0 million loss. Significant items included a $60.6 million reserve on preferred investments in two Blackstone joint ventures, approximately $66.4 million of debt-extinguishment and related costs, $16.6 million of separation charges, and $6.1 million of hurricane casualty and impairment loss. Higher property-sale gains and lower impairment charges partly offset these items.
- Nine-month Operating FFO declined 8.1% to $328.5 million. Management attributed the decrease primarily to the dilutive effect of using asset-sale proceeds to repay debt.
- Debt transactions included $800 million of new senior notes and $175 million of preferred shares, alongside repayment of $600 million of senior notes and other debt reduction. The company extended its revolving facility maturity to September 2021, with extension options, and reported an increase in weighted-average consolidated debt maturity to 5.5 years.
Outlook, management commentary and risks
- Management emphasized deleveraging, stronger liquidity, extending maturities, asset recycling, and disciplined capital allocation. It reported completing a portfolio review and said it expected organizational changes to produce approximately $6 million of annualized stabilized general and administrative cost savings.
- The company expected to bring at least $80 million of development into service during 2017, net of outlot-sale proceeds. It reported approximately $152 million invested in active consolidated redevelopment projects at September 30. The filing provides no clear earnings or revenue guidance.
- Hurricanes Irma and Maria significantly damaged the company’s 12 Puerto Rico properties. One center was severely damaged and not expected to reopen for the foreseeable future. At September 30, the company recorded a $64.8 million estimated property write-off and a $59.7 million insurance receivable; the net deductible impact was included in a $6.1 million casualty and impairment loss. It also reported $2.6 million of lost tenant revenue. Management estimated total insurance claims of $125–$150 million, but cautioned that repair costs, recovery amounts and timing were uncertain; an approximately $2 million business-interruption advance received in October was not included in third-quarter results.
- Retail-sector risks include tenant bankruptcies, e-commerce competition, occupancy and leasing pressure, and the company’s concentrated exposure to retail tenants. Puerto Rico’s economic and infrastructure conditions add uncertainty. Insurance recovery may be inadequate or delayed, and repair progress depends on utilities, materials and labor.
- The company reported compliance with debt covenants at September 30. It stated that available cash and revolver capacity were sufficient for debt maturities through 2018, while noting that refinancing and funding alternatives are not assured. Common dividends were $0.19 per share in each of the first three quarters; the board said it would continue to monitor the dividend policy.
Important facts for investors to verify
- Actual Puerto Rico repair costs, reopening schedules, business interruption and property-damage insurance recoveries, and the final accounting for damage and lost rent.
- Whether occupancy stabilizes or improves after tenant bankruptcies and asset sales, and whether positive leasing spreads persist.
- Progress on debt reduction, refinancing and maturity extensions, covenant compliance, and the effect of variable-rate debt and interest-rate changes.
- Recoverability of the remaining preferred investments in the Blackstone joint ventures and any future changes to the valuation allowance.
- Whether the stated cost savings and development plans are achieved, and how asset dispositions and lower debt affect recurring FFO and dividend capacity.
- Reconcile GAAP results with FFO and Operating FFO: these are non-GAAP measures, and the company cautioned that its Operating FFO adjustments may recur and may not be comparable with other REITs.