SITE Centers Corp. (then DDR Corp.) — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports quarterly results. The registrant is identified throughout the filing as DDR Corp. Its business was owning, leasing, developing and managing open-air shopping centers.
Business context and operating performance
- At year-end, the portfolio comprised 273 shopping centers, including 137 held through joint ventures, with approximately 92.2 million square feet of total GLA. Portfolio occupancy was 91.1%, down from 93.3% in 2016; average annualized base rent per occupied square foot rose to $15.77 from $15.00.
- Management attributed lower occupancy mainly to anchor-store closures and tenant bankruptcies, including Sports Authority, Golfsmith and hhgregg, and to asset sales. The five largest tenants represented 15.4% of aggregate annualized base rent; TJX was the largest at 4.3%.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $921.6 million | $1,005.8 million |
| Net income (loss) attributable to common shareholders | $(270.4) million | $37.6 million |
| Diluted earnings (loss) per share | $(0.74) | $0.10 |
| Funds from Operations (FFO), attributable to common shareholders | $256.8 million | $466.2 million |
| Operating FFO, attributable to common shareholders | $432.4 million | $468.4 million |
| Cash flow from operating activities | $410.4 million | $460.7 million |
| Cash flow from investing activities | $478.6 million | $473.0 million |
| Cash flow used for financing activities | $(833.5) million | $(927.0) million |
- Revenue declined $84.2 million, primarily reflecting dispositions; comparable-property base and percentage rental revenue decreased slightly. Same-store NOI at the Company’s share was essentially flat at $524.4 million versus $524.3 million, excluding Puerto Rico and specified non-comparable items.
- Consolidated NOI was $637.0 million versus $692.4 million. The filing does not provide a single comparable GAAP operating-margin measure.
- Total consolidated indebtedness was $3.85 billion, down from $4.49 billion. Cash and cash equivalents were $92.6 million; undrawn revolving credit availability was reported at $1.0 billion. Debt to total market capitalization was 0.50:1.0 versus 0.43:1.0.
- Weighted-average debt maturity increased from 3.9 to 5.3 years. At year-end, 89.7% of consolidated debt was fixed-rate; a 100-basis-point increase in short-term rates was estimated to add about $4.0 million to annual Company interest expense, plus $2.0 million for its proportionate share of joint-venture debt.
- Common dividends were $0.76 per share for 2017, unchanged from 2016. About 81.4% of 2017 distributions were classified as return of capital for tax purposes.
Material changes and unusual items
- 2017 GAAP results included $340.5 million of real-estate impairment charges, compared with $110.9 million in 2016; $61.0 million of valuation allowances on preferred investments in two Blackstone joint ventures; $66.4 million of debt-extinguishment costs; $17.9 million of executive-transition and restructuring charges; and a $10.8 million valuation allowance on a Puerto Rico prepaid tax asset.
- The fourth quarter included $280.1 million of impairment charges; common-shareholders’ loss for the quarter was $226.4 million, or $(0.62) per diluted share.
- Hurricanes Irma and Maria caused significant damage and business disruption at the Company’s 12 Puerto Rico properties. The Company recorded $5.9 million of hurricane casualty and impairment loss, received $8.5 million of business-interruption proceeds in 2017, and estimated total insurance claims of $150 million to $175 million. Repair costs, timing and insurance recoveries remained uncertain.
- Asset sales generated $677.8 million in 2017, including land sales and loan repayments; 32 Company shopping centers were sold, with a $161.2 million net gain. The Company also completed a recapitalization of a 52-center joint venture and sold additional assets through joint ventures.
- Management reported positive 2017 leasing spreads: 11.1% on new leases and 5.2% on renewals, or 6.0% blended. The new-lease spread was affected by a Puerto Rico anchor lease; excluding that lease, management reported a 15.9% new-lease spread.
Outlook, strategy and risks
- DDR announced plans to spin off 50 assets, including all 12 Puerto Rico properties, into a separate REIT, Retail Value Inc. (RVI), targeted for summer 2018. The assets represented 16 million square feet of Company-owned GLA and $2.9 billion of gross book value at year-end. Completion was subject to regulatory, board and other conditions, with no assurance of timing or completion.
- In February 2018, RVI entered into a $1.35 billion mortgage loan secured by the planned spin-off portfolio. Proceeds were used in part to repay existing mortgage debt and senior notes. This subsequent transaction materially affects the post-year-end capital structure.
- Management’s priorities included reducing leverage, recycling capital through dispositions, extending debt maturities, leasing and redeveloping retained assets, and pursuing selective acquisitions. It expected organizational changes to reduce annualized stabilized G&A by approximately $6 million.
- Key risks include retail tenant bankruptcies and store closures, e-commerce and shifting consumer behavior, occupancy and reletting pressure, concentration of rental income, interest rates and refinancing, joint-venture and preferred-investment exposure, uncertain Puerto Rico recovery and insurance proceeds, and execution and value risks associated with the RVI spin-off and asset-sale program.
- The Company stated it was in compliance with debt covenants at December 31, 2017 and expected to remain compliant. Management described scheduled maturities as manageable after early-2018 transactions, but refinancing and disposition proceeds were not assured.
- Legal proceedings were not expected by management to have a material adverse effect. The filing identifies no specific quantitative earnings or revenue guidance for 2018.
Important facts for investors to verify
- Whether the RVI spin-off was completed on the contemplated terms and timeline, and the resulting distribution, debt allocation and retained-company portfolio.
- Actual Puerto Rico repair costs, insurance recoveries and payment timing, property reopenings, and the effect on rent and occupancy.
- Subsequent occupancy, tenant bankruptcies and leasing spreads, especially at anchor spaces and upcoming lease expirations.
- Progress on asset sales and debt reduction, including realized sale prices, remaining maturities, liquidity and covenant headroom.
- Performance and collectability of the $277.8 million net preferred investments in the Blackstone joint ventures, including any further valuation allowances or repayments.
- Reconciliation of GAAP losses with FFO and Operating FFO; these are non-GAAP measures and do not represent cash available for dividends or debt service.