SITC

Business Context and Reporting Period

Company: Developers Diversified Realty Corporation (DDR), a self-administered REIT focused on shopping centers.

Reporting Period: Quarterly period ended March 31, 2010 (Form 10-Q).

Portfolio Overview: As of March 31, 2010, the portfolio consisted of 597 shopping centers and 6 business centers (including 258 unconsolidated joint ventures). Aggregate occupancy was 86.4% (88.5% excluding Mervyns vacancies). The company adopted new accounting standards (ASC 810) effective January 1, 2010, resulting in the deconsolidation of one entity.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income to Loss: The company reported a net loss of $34.8 million attributable to common shareholders, a significant decline from net income of $76.8 million in Q1 2009. This shift was primarily driven by a $24.9 million loss on equity derivative instruments (Otto warrants) and a $71.5 million decrease in gains from the repurchase of senior notes.
• Debt Reduction: Total consolidated debt decreased from $5.2 billion (Dec 31, 2009) to $4.73 billion (Mar 31, 2010). This was achieved through the issuance of $300 million in new senior notes, $382.8 million in equity proceeds, and the repurchase of approximately $156 million in senior notes.
• Impairment Charges: Impairment charges on consolidated real estate assets decreased to $2.1 million from $7.3 million in the prior year period.
• Revenue Stability: Total revenues remained relatively flat, decreasing slightly by 0.5% year-over-year, despite a challenging retail environment.

Guidance, Outlook, and Risks

• Management Strategy: Management remains focused on deleveraging, extending debt maturities, and increasing liquidity. The company intends to reduce reliance on short-term debt and is actively marketing non-prime assets for sale.
• Capital Markets: The company successfully accessed capital markets in Q1 2010, issuing common equity and senior unsecured notes. Proceeds were used to repay debt and reduce revolver balances.
• Legal Contingencies:
  • Coventry Litigation: Coventry Real Estate Fund II sued the company seeking damages of at least $500 million alleging breach of contract and fiduciary duty. The company believes the allegations are without merit and has obtained a temporary restraining order preventing Coventry from terminating management agreements "for cause."
  • Tenant Litigation: The company is appealing a jury verdict in a Long Beach, California case regarding valet parking, with a liability provision of approximately $9.3 million ($7.8 million damages + $1.5 million fees) recorded.
• Joint Venture Risks: Several Coventry II Fund joint ventures have matured debt and are in default. The company has advanced $66.9 million to one such venture (Bloomfield Hills) and recorded a full reserve for this amount in 2009.
• Derivative Risk: The company holds equity derivative instruments (warrants) issued to the Otto family, which are marked-to-market and caused a significant non-cash loss in Q1 2010 due to stock price appreciation.

Investor Verification Checklist

• Debt Maturities: Verify the company's ability to refinance or repay approximately $299 million in unsecured notes and $248 million in mortgage debt maturing in 2010.
• Derivative Liability: Monitor the fair value of the Otto family warrants (currently $81 million liability) and the impact of future stock price movements on earnings.
• Litigation Outcomes: Track the status of the Coventry lawsuit and the Long Beach tenant appeal, as adverse rulings could result in significant cash outflows.
• Coventry II Fund Status: Assess the resolution of defaults in Coventry II Fund joint ventures and the potential for further capital calls or write-downs.
• Occupancy Trends: Monitor the re-leasing of Mervyns-impacted space and the impact of the broader retail downturn on rental spreads and occupancy rates.