Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2001
Business Overview: DDR acquires, expands, owns, develops, manages, and operates neighborhood and community shopping centers, enclosed malls, and business centers. As of June 30, 2001, the portfolio included 194 shopping centers (39.3 million sq. ft.) and 38 business centers (4.6 million sq. ft.).
Key Event: On May 14, 2001, DDR completed a merger with American Industrial Properties (AIP), consolidating 39 remaining AIP properties (industrial, office, and retail) into DDR's financial statements following a sale of 31 industrial assets to Lend Lease.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2001 |
6 Months Ended June 30, 2001 |
|---|---|---|
| Total Revenues | $78,595 | $153,697 |
| Net Income | $29,305 | $51,823 |
| Net Income Applicable to Common Shareholders | $22,490 | $38,193 |
| Earnings Per Share (Diluted) | $0.40 | $0.69 |
| Funds From Operations (FFO) | $33,212 | $65,608 |
| Cash Flow from Operating Activities | N/A | $81,220 |
| Total Indebtedness | $1,402,144 | $1,402,144 |
| Cash and Cash Equivalents | $8,301 | $8,301 |
Liquidity: As of June 30, 2001, DDR had $171.5 million available under its revolving credit facilities and $8.3 million in cash. The debt-to-total market capitalization ratio was 0.47 to 1.0.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.2% ($6.6 million) for the three months and 9.0% ($12.7 million) for the six months compared to 2000. This was driven by new leasing, the AIP merger, and acquisitions/developments.
- Net Income Volatility: Net income increased 56.6% for the three-month period but decreased 8.6% for the six-month period. The six-month decline was primarily due to a $4.4 million decrease in gains on the disposition of real estate compared to 2000.
- Expense Increases: Interest expense rose 11.5% for the six months ($4.2 million increase) due to higher debt levels from acquisitions. Operating and maintenance expenses increased 28.9% for the six months, partly due to non-recoverable expenses and bad debt provisions.
- Occupancy: In-place occupancy rate was 95.0% at June 30, 2001, up from 94.8% in 2000. Average annualized retail base rent per leased square foot increased to $9.71 from $9.20.
Guidance, Outlook, and Risks
Management Commentary:
- Dividends: The quarterly dividend per common share was increased to $0.37 in March 2001. The payout ratio for the first half of 2001 was approximately 63.2% of FFO.
- Development Pipeline: Significant development activity continues, including projects in Meridian, ID; Everett, MA; Kildeer, IL; and Princeton, NJ. Joint venture development projects have an aggregate projected cost of $351 million.
- Strategic Dispositions: DDR intends to implement an orderly strategic disposition of the industrial and office assets acquired from AIP.
Risks and Contingencies:
- Market Risk: Primary exposure is interest rate risk. Approximately 75.8% of debt is fixed-rate; the remainder is variable, partially hedged via $200 million in interest rate swaps.
- Tenant Risk: Dependence on major tenants; bankruptcy of tenants (e.g., HomePlace) can create vacancies, though the company notes leasing activity remains strong.
- REIT Compliance: Must maintain REIT status, requiring significant distributions to shareholders.
- Environmental: Potential liabilities related to environmental regulations.
Investor Verification Checklist
- AIP Merger Integration: Verify the financial impact and integration progress of the 39 AIP properties consolidated in May 2001.
- Disposition Strategy: Monitor the timeline and proceeds from the planned strategic disposition of AIP's industrial and office assets.
- Debt Maturity Profile: Review the maturity schedule of the $1.4 billion total indebtedness, specifically the $339.2 million in variable-rate debt.
- Development Costs: Track actual costs versus projected costs for the $351 million in joint venture development projects.
- Occupancy Trends: Monitor occupancy rates and rent escalations, particularly in light of tenant bankruptcies mentioned in the filing.