SITE Centers Corp. annual report, FY2014

Business context and reporting period

This is DDR Corp.’s Form 10-K for the fiscal year ended December 31, 2014, with comparative results for 2013 and 2012. Although the request identifies SITE Centers Corp., the filing itself names DDR Corp. as the registrant. DDR was a self-managed REIT focused on owning, leasing, developing and managing shopping centers, and also originated or acquired shopping-center-backed loans. At year-end, it had an economic interest in 415 centers, including 189 held through joint ventures, with 118.1 million total square feet of GLA.

Key financial and operating metrics

Revenue increased 18.8%, primarily reflecting acquisitions. The filing reports shopping-center net operating income of $675.4 million; this is a segment measure, not GAAP operating income. Interest expense was $237.1 million, up from $214.4 million. Consolidated occupancy rose to 93.5% from 92.2%; U.S. portfolio occupancy was 93.5% versus 92.6%. Excluding the sold Brazil assets, annualized base rent per occupied square foot rose to $13.91 from $13.35. The company reported positive leasing spreads of 22.2% on new leases and 7.7% on renewals.

Year-end debt to total market capitalization was 0.43:1, compared with 0.47:1 a year earlier. Of consolidated debt, $4.807 billion was fixed-rate (including swapped debt) and $428.2 million variable-rate. The company had $20.9 million cash and $775.1 million available under revolving facilities, after borrowings and letters of credit. Joint ventures had $3.6 billion debt outstanding; DDR’s proportionate share was approximately $503.5 million.

Material changes versus the prior comparable period

• Common-share net income improved from a loss of $43.1 million to income of $91.3 million, substantially due to gains on sales and changes in control of interests, including the Brazil investment sale, and improved portfolio results.
• FFO decreased $12.9 million, while Operating FFO increased $53.7 million. Management attributed the divergence in part to asset dispositions, higher impairments of non-depreciable assets and executive separation costs; acquisitions and organic growth partly offset these effects.
• Impairment charges on consolidated real estate and discontinued-operation assets totaled $38.1 million, versus $72.6 million in 2013; impairment of joint-venture investments was $30.7 million, versus $1.0 million.
• Operating cash flow increased $46.3 million. Investing cash flow turned positive, primarily reflecting asset-sale proceeds, including the Brazil sale, and lower acquisition spending. Financing cash flow turned negative, mainly due to greater debt repayment and lower equity and debt issuance.
• Fourth-quarter 2014 revenue was $256.8 million; net loss attributable to common shareholders was $16.3 million, or $(0.05) per share. The quarter included $32.6 million of impairment charges.

Outlook, management commentary, risks and unusual items

Management described demand for quality retail space as strong, citing retailer expansion plans, 11 million square feet of leases and renewals signed, and value-oriented retailers gaining share. Its strategy was to recycle capital from non-core properties into market-dominant “Prime” power centers, improve leasing and occupancy, and pursue selective development and redevelopment. The company expected to place at least $200 million of development and redevelopment investment into service in 2015, net of outlot sales, and did not anticipate significant joint-venture development spending that year.

As of December 31, 2014, scheduled 2015 debt maturities were $959.0 million, including $350 million of convertible notes and $434.2 million of mortgage debt. In January 2015, DDR issued $500 million of 3.625% senior notes due 2025 and used proceeds to repay $350 million of unsecured term debt, $100 million of secured term debt and revolving-credit borrowings. Management said maturities were manageable, while noting refinancing was not assured. In January 2015, it also declared a first-quarter common dividend of $0.1725 per share, 11.3% above the first quarter of 2014; future dividends remain subject to Board discretion and financial conditions.

Notable items include the $343.6 million sale of the company’s entire Brazil investment, with an $83.7 million recorded gain; 35 property sales and other consolidated asset dispositions for $654.0 million; and a $5.4 million fourth-quarter charge related to the former CEO’s separation. David J. Oakes became CEO on February 10, 2015, while continuing as President and CFO. The Brazil sale involved a related party; the company stated that terms were negotiated at arm’s length and that interested directors recused themselves. A Coventry II Fund litigation settlement was signed in October 2014, subject to contingencies, and was not expected to have a material financial effect.

Principal risks include tenant distress, lease renewals and retail-sector change, including online competition; debt refinancing, interest-rate exposure and covenant compliance; joint-venture and development risks; impairment estimates; REIT qualification and distribution requirements; and environmental, weather, litigation and cybersecurity risks. Management reported compliance with debt covenants at year-end and effective disclosure controls and internal control over financial reporting. It also stated that ordinary legal proceedings were not expected to have a material adverse effect.

Important facts for investors to verify

• Confirm issuer identity: the supplied filing is for DDR Corp., not a registrant named SITE Centers Corp.; verify any desired company-name or corporate-history mapping.
• Review the earnings bridge and quarterly results: reported 2014 common income includes significant disposition and change-in-control gains, while continuing-operations EPS was $0.00.
• Reconcile FFO’s decline with Operating FFO’s increase, and assess the company’s stated non-GAAP adjustments; management cautioned that adjustments may recur.
• Check the post-year-end debt refinancing against the 2015 maturity schedule, remaining liquidity, and the maturity and put provisions of the $350 million convertible notes.
• Assess joint-venture leverage and the status of Coventry II loans, including loans in default or past due, alongside reported guarantees and support obligations.
• Review leasing concentration and expirations: TJX, Walmart and Bed Bath & Beyond represented 3.5%, 3.3% and 3.0% of aggregate base rent, respectively; wholly owned leases representing 8.2% of base rent were scheduled to expire in 2015.
• Verify development cost, timing and lease-up assumptions, impairment judgments, the settlement’s completion, and the Board’s subsequent dividend decisions.