Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: DDR is a self-administered REIT engaged in acquiring, developing, owning, and operating shopping centers and enclosed malls. As of September 30, 2008, the portfolio consisted of 713 shopping centers and six business centers (including 329 owned through unconsolidated joint ventures) across 45 states, Puerto Rico, and Brazil. The aggregate occupancy rate was 94.5%.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $233.9 million | $703.3 million |
| Net Income | $38.5 million | $121.9 million |
| Net Income Applicable to Common Shareholders | $27.9 million | $90.2 million |
| Diluted EPS (Common) | $0.23 | $0.75 |
| Funds From Operations (FFO) to Common | $100.0 million | $298.7 million |
| Total Indebtedness | $5.91 billion (as of Sep 30, 2008) | |
| Cash and Cash Equivalents | ||
| Restricted Cash | $106.4 million (as of Sep 30, 2008) | |
| Revolving Credit Availability |
Liquidity: As of September 30, 2008, DDR had $30.2 million in cash and cash equivalents. The company maintains $1.317 billion in revolving credit facilities with $955.9 million outstanding, leaving approximately $356 million available. The company holds 300 unencumbered consolidated operating properties generating $350.9 million in annualized revenue, serving as a potential collateral base.
Material Changes vs. Prior Period
- Net Income Decline: Net income applicable to common shareholders decreased significantly for the nine-month period ended September 30, 2008 ($90.2 million) compared to the same period in 2007 ($192.9 million). This 53% decline is primarily attributed to a reduction in transactional income (gains on disposition of real estate dropped from $63.7 million in 2007 to $6.4 million in 2008) and the absence of promoted income from joint venture asset sales that occurred in 2007.
- FFO Decrease: FFO applicable to common shareholders for the nine-month period decreased 18.2% to $298.7 million from $365.0 million in the prior year, driven by the same reduction in transactional gains and asset transfers.
- Operating Expenses: Rental operation expenses increased by 7.9% for the nine-month period, primarily due to the inclusion of assets acquired in the February 2007 IRRETI merger and increased bad debt provisions (1.4% of total revenues in 2008 vs. 0.9% in 2007).
- Interest Expense: Interest expense decreased by 6.1% for the nine-month period due to lower short-term interest rates and the sale of assets in 2007, partially offset by new borrowings related to the IRRETI merger.
- Discontinued Operations: The company recorded a loss of $2.3 million from discontinued operations for the nine-month period in 2008, compared to a gain of $21.7 million in 2007, reflecting fewer asset sales and a loss on the disposition of a business center.
Guidance, Outlook, and Risks
- Dividend Policy Change: To enhance liquidity and reduce leverage, the Board of Directors approved the elimination of the fourth-quarter 2008 dividend. Additionally, the 2009 quarterly dividend is expected to be reduced to approximately $1.50 per share annually (down from the current run rate), resulting in an estimated $230 million in additional free cash flow to reduce debt.
- Capital Strategy: The company is focusing on de-leveraging through asset sales, retaining capital, and minimizing capital expenditures. Development spending has been dramatically reduced, and projects are being phased until sufficient pre-leasing and financing are secured. International development funding in Russia has been suspended pending market clarity.
- Market Risks: The filing highlights significant risks related to the disruption in global financial markets, which may limit access to financing or increase borrowing costs. The company notes that one rating agency reduced its debt ratings in October 2008.
- Legal Contingency: In October 2008, a jury returned a verdict against DDR in a valet parking lawsuit, awarding approximately $7.8 million in compensatory damages. The company recorded a charge for its best estimate of loss and is evaluating options for a new trial or appeal.
- Tenant Bankruptcies: The company is monitoring the impact of tenant bankruptcies (e.g., Mervyns, Linens 'N Things) but believes its portfolio of discount-oriented tenants remains stable. Vacancies from weaker tenants are viewed as opportunities to re-lease at higher rents.
Investor Verification Checklist
- Debt Maturities: Verify the company's ability to refinance or repay $56.6 million in consolidated debt and $66.5 million in unconsolidated joint venture debt maturing in late 2008, as well as $275 million in unsecured notes maturing in January 2009.
- Asset Sale Proceeds: Monitor the closing of the pending sale of 11 stabilized assets to a new joint venture, expected to generate approximately $260 million in net proceeds, to confirm the de-leveraging strategy.
- Legal Outcome: Track the status of the $7.8 million litigation verdict to determine if the accrual will be adjusted or if additional costs arise from appeals.
- Dividend Sustainability: Assess the impact of the reduced 2009 dividend policy on the company's REIT status compliance and cash flow coverage ratios.
- Joint Venture Liquidity: Review the status of the $18.5 million unconsolidated joint venture mortgage that matured in October 2008, which requires a paydown and extension negotiation with the lender.