DDR Corp. (now SITE Centers Corp.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. Financial amounts are in U.S. dollars.
Business context and operating performance
DDR was a shopping-center REIT engaged in owning, developing, leasing and managing retail properties, as well as making shopping-center-related loans. At quarter-end, its portfolio included 445 shopping centers, including properties held through joint ventures, with more than 115 million square feet of gross leasable area. Portfolio occupancy rose to 91.3% from 89.8% a year earlier. Average annualized base rent per occupied square foot was $13.74, down from $14.08 a year earlier but up from $13.66 at December 31, 2012.
Management described its strategy as recycling capital from non-prime properties into prime assets, strengthening operations and lowering leverage and cost of capital. The company acquired two shopping centers for an aggregate $81.4 million during the quarter and sold seven properties. It reported leasing 2.1 million square feet; comparable new-lease and renewal spreads were 11.9% and 7.5%, respectively.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $210.8 million | $190.6 million |
| Income from continuing operations | $6.2 million | $0.2 million |
| Net income (loss) attributable to DDR | $6.3 million | $(15.1) million |
| Net income (loss) attributable to common shareholders | $(0.7) million; $0.00 per share as reported | $(22.0) million; $(0.08) per share |
| Operating cash flow | $53.3 million | $33.9 million |
| Investing cash flow | $(87.8) million | $(64.7) million |
| Financing cash flow | $22.3 million | $6.2 million |
Revenue increased 10.6%, principally reflecting acquisitions, which added $12.2 million to base and percentage rental revenue, and $3.0 million of growth in comparable properties. Rental recoveries also rose; fee and other income declined by $1.3 million. Operating expenses increased $20.2 million, including higher depreciation and amortization, impairment charges and real estate taxes.
FFO attributable to common shareholders, a non-GAAP measure, increased to $82.5 million from $59.7 million; Operating FFO rose to $86.1 million from $66.8 million. Management attributed FFO growth to organic growth and acquisitions, while the prior-year comparison included a $5.6 million debt-retirement loss. The filing cautions that FFO is not cash flow, liquidity or cash available for dividends.
At March 31, 2013, cash and cash equivalents were $18.9 million and total debt was $4.354 billion, compared with $4.319 billion at year-end 2012. The company reported $613.6 million of available revolving-credit capacity after borrowings and letters of credit. Debt represented 42% of total market capitalization, versus 48% at March 31, 2012. The weighted-average interest rate on debt outstanding during the quarter was 5.1%; management reported compliance with debt covenants.
Material changes, outlook and risks
- In January 2013, DDR amended its revolving facilities and secured term loan. It reported no significant consolidated secured debt maturity until April 2014 and no other unsecured maturities until May 2015; $357.9 million of mortgage debt was due in 2014.
- After quarter-end, DDR issued $150 million of 6.25% Class K preferred shares and redeemed $150 million of 7.375% Class H preferred shares. It expected a $5.2 million non-cash charge to income attributable to common shareholders in Q2 from writing off issuance costs.
- After quarter-end, DDR acquired its partner’s 85% interest in five prime power centers for $93.9 million and issued 2.5 million common shares for gross proceeds of $45.0 million. It also reported an April refinancing at a joint venture.
- DDR projected approximately $192.7 million of net spending on wholly owned and consolidated development/redevelopment projects for the remainder of 2013, and approximately $195.6 million of joint-venture project expenditures. Management said joint-venture development spending outside Brazil was not expected to be significant for the rest of 2013. No specific earnings or FFO guidance was provided.
- Potential asset sales under agreements subject to contingencies could result in an aggregate loss of approximately $18 million if completed on terms negotiated through April 30, 2013. The company had not recorded an impairment for these assets at quarter-end.
- Unconsolidated joint ventures had $50.3 million of past-due mortgage debt at quarter-end, of which DDR’s proportionate share was $1.1 million; some Coventry II loans were in default. DDR reported $13.4 million of joint-venture lender-related funding commitments and $8.2 million of Coventry II partial-payment guarantees.
- DDR reported one loan of $9.8 million more than 90 days past due, with no interest accrual and a $4.3 million reserve. It also reported $254.1 million of loans and advances to certain unconsolidated entities and/or partners, including a $155.3 million preferred-equity investment carrying a 10% distribution rate.
- In the Coventry II litigation, the court dismissed most claims in April 2013, including fraud, misrepresentation and several contract claims; remaining claims concerned certain prior management agreements. The original complaint sought at least $500 million. DDR recorded no loss provision, stating a loss was not probable or estimable.
- DDR terminated its Oxford Building Services agreement after learning that approximately $11 million intended for vendors had instead been used to repay Oxford-affiliate financing. Oxford entered Chapter 11; it claimed approximately $5 million was owed, which DDR disputed. DDR filed suit against related parties.
- Management cited retail-sector, tenant-credit, economic, interest-rate, refinancing, development, joint-venture, foreign-currency and litigation risks. A 100-basis-point increase in short-term rates was estimated to increase quarterly interest expense by approximately $1.2 million for DDR and $0.5 million for its proportionate share of joint ventures.
Important facts for investors to verify
- Whether occupancy, rent trends and positive leasing spreads continued, and how portfolio growth compares when acquisitions and dispositions are separated from comparable-property performance.
- Cash available for dividends and investment after debt service, preferred dividends, development spending and asset sales; FFO is not a substitute for operating cash flow.
- Debt maturities, refinancing progress, covenant headroom and the actual cost and proceeds of the preferred-share exchange and equity issuance.
- Whether the past-due/defaulted joint-venture debt, guarantees, partner funding shortfalls and the reserved loan exposure require additional support or impairments.
- Outcomes and potential financial exposure from the Coventry II and Oxford disputes, and whether contemplated asset sales close or produce the disclosed potential losses.