SITE Centers Corp. (then Developers Diversified Realty Corporation) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated financial statements. The filing identifies the registrant as Developers Diversified Realty Corporation.
Business context and operating results
The company owned, managed, and developed shopping centers. At quarter-end, its portfolio included 458 shopping centers and five office properties in which it had an economic interest; reported gross leasable area was approximately 126.4 million square feet, including third-party managed properties. Shopping-center occupancy rose to 89.1% from 86.6% a year earlier, while average annualized base rent per occupied square foot increased to $13.46 from $13.14.
Management reported 483 leases covering more than 2.5 million square feet signed in Q2. Average first-year rent on new leases was $16.80 per square foot, versus $11.84 in Q2 2010; estimated tenant-improvement and leasing-commission costs were $2.64 per rentable square foot over lease terms.
Key financial metrics
| Metric | Q2 2011 | Six months 2011 | Comparable 2010 |
|---|---|---|---|
| Revenue | $198.5 million | $399.7 million | $196.6 million Q2; $397.1 million six months |
| Net income (loss) | $(13.3) million consolidated; $(26.9) million attributable to common shareholders | $22.1 million consolidated; $(2.1) million attributable to common shareholders | Consolidated net loss: $(121.2) million Q2; $(147.8) million six months |
| Common-share EPS | $(0.10) basic and diluted | $(0.01) basic; $(0.09) diluted | Q2: $(0.39) basic, $(0.47) diluted; six months: $(0.55) basic and diluted |
| FFO attributable to common shareholders | $24.1 million | $113.2 million | $(32.8) million Q2; $(4.4) million six months |
| Operating FFO attributable to common shareholders | $64.4 million | $127.6 million | $65.0 million Q2; $130.2 million six months |
| Operating cash flow | Not separately stated for the quarter | $133.9 million | $128.0 million six months |
Six-month investing cash flow was $52.1 million and financing cash flow was $(190.1) million; cash and cash equivalents ended June at $15.4 million. Total assets were $7.67 billion and total consolidated debt was $4.21 billion, down from $4.30 billion at December 31, 2010. Total equity was $3.21 billion. The reported debt-to-total-market-capitalization ratio was 0.5:1.
At June 30, revolver capacity totaled $815 million, of which $170.6 million was drawn and $10.2 million supported letters of credit, leaving $634.2 million available. The company reported compliance with debt covenants. Fixed-rate debt was 86.6% of consolidated debt; a 100-basis-point increase in short-term rates was estimated to add about $2.8 million to the company’s interest expense for six months, plus $0.7 million for its proportionate share of joint-venture expense.
Changes versus the prior comparable periods
- Revenue increased 1.0% in Q2 and 0.6% for the six months. Higher rents and tenant recoveries were partly offset by lower fee and other income.
- Common-share losses narrowed substantially year over year, principally reflecting lower impairment charges and discontinued-operation losses, higher joint-venture earnings, and a $22.7 million gain on acquiring partners’ interests in two centers. These improvements do not represent equivalent growth in recurring operating performance.
- Consolidated impairment charges were $22.2 million for the first half, compared with $75.0 million in 2010. Operating FFO declined 2.0% to $127.6 million for the first half, with higher interest expense partly offset by property sales.
- Interest expense rose to $119.4 million for the first half from $111.8 million; management cited refinancing of lower-cost, shorter-term debt with higher-cost, longer-term debt, partly offset by lower debt outstanding.
Outlook, financing, and risks
- Management emphasized deleveraging, liquidity, longer debt duration, and selective capital recycling. June amendments extended the unsecured revolvers to February 2016 and reduced pricing to LIBOR plus 165 basis points. The secured term loan was reduced to $500 million and matures in September 2014, with a one-year extension option. The company also issued $300 million of 4.75% senior notes due 2018.
- The company expected to repay $88.7 million of convertible notes due August 2011 and approximately $6.2 million of mortgage debt using operating cash flow, revolver borrowings, and asset-sale proceeds. Management cautioned that refinancing or repayment on anticipated terms was not assured.
- Management forecast approximately $76.1 million of net 2011 spending on consolidated developments, redevelopments, and expansions; approximately $30.4 million had been spent by June 30. It described development spending as discretionary and said projects would be subject to underwriting and leasing requirements. No full-year earnings or FFO guidance is provided in the supplied filing text.
- Possible sales of assets under negotiation could result in an approximately $35 million loss if completed on current terms; no impairment was recorded at June 30. The company also had $531.2 million of recorded costs in land and projects where construction was suspended or had not begun, and warned that current-market dispositions could result in potentially material losses.
- Joint-venture exposure includes $71.1 million of loans and advances where partners had not funded their shares, including a $66.9 million Bloomfield loan fully reserved. Coventry II Fund properties faced defaults and lender-managed cash flows; the company disclosed approximately $38.8 million of Coventry-related payment guarantees and additional pro-rata funding obligations. Unconsolidated joint ventures had $3.9 billion of third-party debt.
- Coventry sought at least $500 million in damages in litigation. The company recorded no loss provision because it did not consider a loss probable or estimable and said it did not expect a material adverse outcome. A separate August 2, 2011 court order, after quarter-end, granted the company summary judgment that Coventry lacked a right to terminate management agreements for cause.
- Other unusual items included a $10.7 million executive separation charge, a $5.0 million reserve on a note sold below face value, and a $6.4 million write-off of preferred-share issuance costs following redemption of the 8% Class G preferred shares. The 10 million Otto Family warrants were exercised for $60 million; a separate 9.5 million-share offering generated approximately $130 million.
Important facts for investors to verify
- Reconcile GAAP common-share losses with FFO and Operating FFO, and assess how much reported improvement came from impairments, dispositions, and acquisition-related gains rather than recurring operations.
- Review the maturity and refinancing plan for the August 2011 convertible notes, and confirm available liquidity, covenant compliance, and subsequent debt activity.
- Assess the potential $35 million disposition loss, the carrying value and status of suspended development projects, and the adequacy of impairment assumptions.
- Track Coventry II defaults, guaranties, partner funding shortfalls, and litigation developments, including the post-quarter August 2 ruling.
- Evaluate occupancy and leasing trends against the company’s historical 92%–96% occupancy range, as well as interest-cost sensitivity and joint-venture debt exposure.