SITE Centers Corp. quarterly report, Q3 FY2011

Full document

Business context and reporting period

This is DDR Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2011, covering the three and nine months ended that date. DDR was a shopping-center REIT with 450 shopping centers and five office properties, and owned or managed approximately 130 million square feet of gross leasable area. The filing identifies the registrant as DDR Corp.; the request metadata names SITE Centers Corp.

Financial performance and position

  • Revenue: Third-quarter revenue was $196.4 million, up 1.8% from $193.0 million. Nine-month revenue was $590.1 million, up 1.1% from $583.5 million.
  • Profit and per-share results: Third-quarter net loss attributable to common shareholders was $50.0 million, or $0.18 per share, versus $24.9 million, or $0.10 per share, in 2010. Nine-month common-shareholder net loss was $52.1 million, or $0.20 per share, compared with $156.8 million, or $0.65 per share.
  • FFO: Company-reported FFO attributable to common shareholders was $8.1 million for Q3, down from $37.1 million; for nine months it was $121.3 million, up from $32.7 million. Operating FFO, a non-GAAP measure, was $67.4 million for Q3 versus $63.2 million, and $195.0 million for nine months versus $193.4 million. DDR cautioned that FFO is not cash flow or a measure of cash available for dividends or debt service, and was evaluating whether to restate FFO following NAREIT guidance on impairment treatment.
  • Cash flow: Nine-month operating cash flow was $224.7 million, versus $211.0 million. Investing activities provided $30.0 million, while financing activities used $253.2 million. Cash and cash equivalents at September 30 were $20.7 million.
  • Debt and liquidity: Consolidated indebtedness was $4.23 billion, down from $4.30 billion at December 31, 2010. Available borrowing capacity under revolving facilities was $578.4 million, with $226.4 million drawn and $10.2 million of letters of credit. DDR reported compliance with debt covenants. About 85% of consolidated debt was fixed-rate or effectively fixed through swaps; weighted-average debt interest rate for the first nine months was 5.6%.
  • Balance sheet: Total assets were $7.60 billion and total equity was $3.10 billion at September 30. Preferred shares outstanding totaled $375 million after redemption of the $180 million Class G issue.
  • Portfolio indicators: Shopping-center occupancy was 86.3%, down from 88.0% a year earlier; average annualized base rent per occupied square foot increased to $13.76 from $13.03. DDR reported 516 Q3 leases covering more than 2.5 million square feet; average first-year rent on new leases was $15.18 per square foot, versus $12.65.

Material changes versus the prior comparable period

  • Q3 common-shareholder loss widened chiefly because of $51.2 million of impairment charges, mainly tied to development land and assets marketed for sale. Nine-month impairment charges for continuing operations were $68.5 million, versus $59.3 million in 2010.
  • Nine-month results improved substantially year over year, reflecting lower discontinued-operations losses and impairment charges, a $22.7 million gain on obtaining control of two shopping centers, and favorable warrant valuation changes. These benefits were partly offset by higher interest expense, an $11.0 million executive separation charge, and a $6.4 million write-off of preferred-share issuance costs.
  • Interest expense rose to $175.2 million for nine months from $161.5 million. DDR attributed the increase primarily to replacing shorter-term, lower-rate debt with longer-term, higher-rate debt, partly offset by lower debt balances.
  • The June 2011 revolving-credit amendment reduced facility availability from $950 million to $750 million, extended maturity to February 2016, and reduced the LIBOR spread. The secured term loan was reduced to $500 million and matures in September 2014, with a one-year extension option.
  • DDR issued $300 million of 4.75% senior notes due 2018, raised equity through warrant exercises and a share offering, redeemed the Class G preferred shares, and acquired five shopping centers during the first nine months.

Outlook, commentary, risks and unusual items

  • Management described a strategy of selling non-prime assets and recycling proceeds into prime shopping centers, while controlling development spending and reducing leverage. No full-year earnings or FFO guidance was stated.
  • Management expected 2011 development and redevelopment spending of approximately $61.2 million; $42.7 million had been spent through September 30. Two development projects and seven redevelopment projects remained underway. Management said active construction had been deferred on projects with $483.7 million of recorded costs; disposal at current market values could result in potentially material losses.
  • A proposed asset exchange with Glimcher was expected to close in Q4 2011, subject to conditions: DDR planned to sell Town Center Plaza for approximately $139 million and acquire Polaris Towne Center for approximately $80 million, including assumed debt. DDR estimated a gain of about $60 million on the sale, subject to change and completion.
  • Other potential property sales under negotiation could generate an aggregate gain of approximately $85 million, potentially offset in whole or in part by an estimated $15 million loss on other sales. Management cautioned that transactions might not close on the contemplated terms or timing.
  • Economic and operating risks include occupancy below historical levels, tenant failures or bankruptcies, refinancing and interest-rate exposure, joint-venture funding needs, international currency and development risks, and the availability of financing. DDR reported $409.2 million of unsecured notes and $110.7 million of mortgage debt maturing in 2012; it said revolving capacity was sufficient to fund maturities as they came due.
  • A Coventry II Fund lawsuit seeks at least $500 million in damages plus punitive damages. DDR said it believed the claims were without merit; no loss provision was recorded because a loss was not considered probable or estimable. The company also disclosed joint-venture loan defaults, a fully reserved $66.9 million Bloomfield loan, and payment guaranties, including approximately $33.9 million for Coventry II projects.
  • The former Executive Chairman’s termination resulted in an $11.0 million charge; approximately $8.3 million remained accrued at quarter-end. A $9.3 million loan was more than 90 days past due on interest and matured in September 2011; DDR continued to accrue interest, expecting collection based on collateral value.

Important facts for investors to verify

  1. Review the impairment assumptions and proposed dispositions of the Yaroslavl and Brampton development interests, and determine whether further write-downs or sale losses could arise.
  2. Assess the quality and sustainability of reported FFO and Operating FFO, including the company’s stated review of NAREIT impairment guidance and the non-GAAP adjustments.
  3. Confirm the status and financing plan for 2012 maturities, covenant headroom, and the company’s ability to maintain liquidity while reducing leverage.
  4. Track shopping-center occupancy, leasing rents, tenant capital costs, and tenant credit trends against management’s stated improvement expectations.
  5. Monitor the Glimcher exchange and other contingent asset sales, as well as the Coventry litigation, joint-venture defaults, guaranties, and past-due loan exposure.