DDR Corp. Form 10-Q Summary
Issuer note: The supplied filing is for DDR Corp., for the quarter ended June 30, 2016. It does not identify SITE Centers Corp. as the registrant; verify that this is the intended filing.
Business context and reporting period
DDR was a REIT focused on acquiring, owning, developing, leasing and managing shopping centers, with a smaller loan-investment business. At June 30, 2016, its portfolio comprised 349 centers, including 158 held through joint ventures, totaling about 113 million square feet. Results below compare the second quarter and first six months of 2016 with the same 2015 periods. Dollar amounts are in U.S. dollars.
Financial performance and key metrics
- Revenue: Q2 revenue was $257.3 million, essentially unchanged year over year. First-half revenue was $511.7 million, down $4.4 million (0.9%).
- Profit: Q2 net income attributable to common shareholders was $35.5 million, versus $13.0 million; diluted EPS was $0.10 versus $0.03. First-half common-shareholder income was $75.4 million, versus a $236.4 million loss; diluted EPS was $0.21 versus a $0.66 loss.
- Key comparability item: The 2015 first half included $279.0 million of impairment charges. The 2016 first half also benefited from lower interest expense and a $13.5 million share of a joint venture’s gain on asset sales. GAAP earnings comparisons therefore include significant unusual and transaction-related effects.
- REIT operating measures: Q2 FFO attributable to common shareholders was $120.3 million, versus $105.0 million; Operating FFO was $122.4 million, versus $111.4 million. First-half FFO was $234.9 million versus $118.2 million, and Operating FFO was $236.7 million versus $218.5 million. These are non-GAAP measures and are not substitutes for cash flow or funds available for dividends.
- Property operations: Q2 segment net operating income was $185.5 million, versus $183.5 million. Portfolio occupancy was 93.5%, versus 92.8% a year earlier; average annualized base rent per occupied square foot was $14.63, versus $14.09. Comparable-portfolio leasing spreads for the first half were 22.5% on new leases and 7.8% on renewals.
- Cash flow: First-half operating cash flow was $232.7 million, versus $208.9 million. Investing activities provided $106.1 million, compared with using $63.7 million in 2015, reflecting higher disposition proceeds and lower acquisition and development spending. Financing activities used $343.3 million, mainly reflecting debt repayment and dividends. Cash and cash equivalents ended at $18.0 million, down from $22.4 million at year-end 2015.
- Debt and liquidity: Total consolidated indebtedness was $4.94 billion, down from $5.14 billion at year-end 2015. Debt to total market capitalization was 0.41:1, compared with 0.47:1 at June 30, 2015. The company reported $800 million of revolving facilities, $265 million drawn, and $533.9 million of borrowing capacity available after letters of credit. It was in compliance with debt covenants at quarter-end.
- Dividends: The declared common dividend was $0.19 per share for each of the first two quarters of 2016. First-half dividends paid were $143.7 million; the company said the board would continue monitoring dividend policy.
Material changes and management outlook
- DDR pursued portfolio recycling—selling lower-growth assets, investing in “Prime” centers and reducing leverage. In the first half, it sold eight properties and other assets for $247.5 million and acquired a Phoenix power center for $60.5 million. A joint venture separately sold 11 assets for $170.5 million gross proceeds.
- Management reported strong leasing demand, positive rental spreads and improving occupancy and rents. It expected to place at least $190 million of development and redevelopment investments in service during 2016, net of outlot-sale proceeds, while describing development spending as discretionary. No formal earnings guidance is stated in the supplied filing text.
- Consolidated 2016 debt maturities were $112.6 million; management expected to fund them with revolver capacity, asset-sale proceeds and/or operating cash flow, but gave no assurance refinancing or repayment would occur as planned. Joint ventures had $641.2 million of 2016 maturities, of which DDR’s proportionate share was $32.1 million; DDR expected the ventures to refinance, including through extensions.
- Risk factors include retail tenant credit and bankruptcies, economic and consumer-spending changes, competition and e-commerce, refinancing and interest-rate exposure, development execution, joint-venture risks, and Puerto Rico’s economic and government-debt challenges. Puerto Rico represented 7.6% of consolidated portfolio revenue on a 100% basis.
- After quarter-end, on July 11, 2016, Thomas F. August was named president and CEO, effective immediately; Christa A. Vesy was named interim CFO. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm issuer identity and that DDR Corp.’s 2016 filing is the intended document.
- Review the reconciliation and definitions of FFO and Operating FFO, and distinguish these non-GAAP measures from GAAP earnings and operating cash flow.
- Assess debt maturities, available revolver capacity, covenant headroom and the company’s ability to execute planned debt reduction and refinancing.
- Check the sustainability of dividends against operating cash flow, capital needs and REIT distribution requirements.
- Monitor joint-venture asset sales and maturities, the potential loss of management fees tied to 55 assets and the stated Puerto Rico exposure.
- Track leasing, occupancy, development spending and whether management’s portfolio-recycling strategy improves recurring operating performance.