SITC

Business Context and Reporting Period

Company: Developers Diversified Realty Corporation (DDR) (Note: Metadata listed "SITE Centers Corp." but filing text confirms DDR).

Filing Type: Form 10-Q (Unaudited Quarterly Report).

Period Ended: March 31, 2009.

Business Overview: DDR is a self-administered REIT owning, managing, and developing an international portfolio of shopping centers. As of March 31, 2009, the portfolio included 694 shopping centers and 6 business centers (including 327 owned through unconsolidated joint ventures). Aggregate occupancy was 88.3%, down from 94.5% in the prior year, largely due to anchor tenant bankruptcies (Mervyns, Circuit City, etc.).

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income attributable to common shareholders decreased 61.5% year-over-year. This decline is primarily driven by a $72.6 million gain on the repurchase of senior notes in Q1 2008 which did not recur, offset by a $72.6 million gain on debt repurchases in Q1 2009. However, Q1 2009 results were negatively impacted by $10.9 million in impairment charges on consolidated assets and a $5.8 million loss on a joint venture disposition.
• Revenue Growth: Total revenues increased 7.4% to $236.1 million, driven by a 7.4% increase in minimum rents and 6.8% increase in tenant recoveries, despite a 6.8% drop in base rental revenues from the core portfolio due to vacancies.
• Debt Repurchases: In Q1 2009, the company repurchased $163.5 million of senior unsecured notes at a discount, generating a net GAAP gain of approximately $72.6 million (reduced by $7.5 million due to new accounting standards).
• Impairments: Recorded $10.9 million in impairment charges on two consolidated shopping centers being marketed for sale. Additionally, recorded a $5.8 million loss related to the write-off of an equity investment in a joint venture (Coventry II) following a "friendly foreclosure" of a Kansas City property.
• Dividend Policy: Adjusted dividend policy to the minimum required for REIT status. Q1 2009 common dividend was $0.20 per share (paid partially in stock), compared to $0.69 per share in Q1 2008.

Guidance, Outlook, and Risks

• De-leveraging Strategy: Management is focused on reducing leverage through retained capital (reduced dividends), asset sales (sold 7 assets for $65.8 million in Q1), equity issuance (Otto Transaction), and debt repurchases.
• Otto Transaction: Entered into an agreement to sell 30 million common shares and warrants to the Otto Family for approximately $112.5 million. The first tranche (15 million shares) was expected to close in May 2009.
• Liquidity and Covenants: The company was in compliance with all financial covenants as of March 31, 2009. However, management notes reduced financial flexibility due to market dislocation. Revolving credit facility availability was approximately $61 million.
• Joint Venture Risks: Several Coventry II joint venture projects faced maturity defaults. The company provided payment guarantees totaling approximately $35.9 million for these projects but stated it would not fund partners' capital contributions.
• Legal Contingency: A jury verdict in October 2008 found the company liable for approximately $7.8 million in damages plus $1.5 million in attorney fees regarding a valet parking dispute. The company is appealing.
• Accounting Changes: Adopted SFAS 160 (Non-Controlling Interests) and FSP APB 14-1 (Convertible Debt) in Q1 2009, resulting in retrospective adjustments to prior period financials.

Investor Verification Checklist

• Debt Maturities: Verify the company's ability to refinance or repay approximately $183 million of consolidated debt maturing in 2009 and $1.3 billion of revolving credit facilities maturing in 2010.
• Otto Transaction Closing: Confirm the closing of the equity sale to the Otto Family and the receipt of the expected $112.5 million in proceeds.
• Asset Sales Pipeline: Monitor progress on the sale of additional assets (aggregate value >$500 million in discussions) to fund debt reduction.
• Joint Venture Defaults: Track the resolution of defaults in Coventry II joint ventures and the potential impact of the $35.9 million in payment guarantees.
• Occupancy Trends: Monitor re-leasing efforts for vacant anchor spaces (Mervyns, Circuit City) and the impact on future rental revenues.
• Legal Appeal: Follow the status of the appeal regarding the $9.3 million total liability verdict in the Long Beach, California litigation.