DDR Corp. Form 10-Q Summary
Entity and period: The supplied filing identifies the registrant as DDR Corp., an Ohio REIT that owns, develops, leases and manages shopping centers and makes shopping-center-related loans. It covers the quarter and six months ended June 30, 2014; the interim financial statements are unaudited. The request metadata names SITE Centers Corp., so the issuer identity should be verified.
Financial performance
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $253.7 | $207.7 | $506.8 | $406.9 |
| Net income (loss) attributable to common shareholders | $67.8 | ($36.0) | $44.6 | ($36.8) |
| Diluted EPS | $0.19 | ($0.11) | $0.12 | ($0.12) |
| FFO attributable to common shareholders, non-GAAP | $82.1 | $80.0 | $167.9 | $162.5 |
| Operating FFO attributable to common shareholders, non-GAAP | $101.3 | $86.1 | $202.0 | $172.1 |
| Cash flow from operating activities | Not presented for quarter | Not presented for quarter | $201.1 | $163.5 |
- Q2 revenue increased about 22%; six-month revenue increased about 25%. Management attributed much of the growth to acquisitions, with comparable-property rental growth also contributing. Reported six-month net operating income was $336.5 million, versus $276.4 million a year earlier.
- GAAP earnings improved substantially, but were materially affected by the $83.8 million gain on the sale of the company’s Brazil investment. Q2 continuing-operations income was $68.8 million; six-month continuing-operations income was $40.9 million.
- Six-month investing cash flow was a $261.9 million source, compared with a $252.7 million use in 2013, primarily reflecting asset-sale proceeds. Financing activities used $190.3 million, including $117.9 million of dividends paid. Cash and cash equivalents were $359.3 million at June 30, versus $86.7 million at year-end 2013.
- Total debt was $5.33 billion at June 30, 2014, versus $5.29 billion at December 31, 2013. The company reported $350 million of preferred shares and a debt-to-total-market-capitalization ratio of 0.44 to 1.0. Cash plus available revolver capacity was approximately $1.13 billion, including $775.5 million of borrowing capacity after outstanding borrowings and letters of credit.
Operating trends and changes versus prior periods
- Portfolio occupancy rose to 92.8% at June 30, 2014, from 91.7% a year earlier and 92.6% at year-end 2013. Average annualized base rent per occupied square foot was $13.50, compared with $12.92 a year earlier, excluding Brazil assets from the comparison.
- DDR reported 6.1 million square feet leased during the first half. For comparable second-quarter leases, rental spreads were 18.8% on new leases and 7.5% on renewals.
- Revenue growth was accompanied by higher costs: six-month depreciation and amortization rose to $208.3 million from $132.7 million, and interest expense rose to $125.2 million from $105.8 million. The company attributed much of the expense increase to acquisitions and depreciation on acquired or redeveloped assets.
- Six-month FFO grew about 3%, while Operating FFO grew about 17%. Both are non-GAAP measures; management cautions they are not cash flow, liquidity, or amounts available for dividends or debt service.
- DDR acquired four shopping centers for a gross purchase price of $264.8 million and sold 16 properties during the first half. It also sold its 50% interest in Sonae Sierra Brazil for approximately $343.6 million, recording the $83.8 million gain.
Outlook, risks and unusual items
- No specific full-year earnings or FFO guidance is provided. Management said it expected to place at least $100 million of development and redevelopment investments into service during 2014, net of outlot-sale proceeds, and described further development spending as discretionary.
- A newly formed joint venture with Blackstone had agreed to acquire 76 shopping centers in a transaction valued at $1.975 billion, expected to close in Q3 2014. The proposed structure included assumed debt, new financing and equity; DDR expected to invest up to $300 million in preferred equity carrying an 8.5% fixed dividend.
- After quarter-end, DDR repaid $304.2 million of secured mortgage debt in July, using $27.6 million held in escrow toward repayment. Management reported no unsecured maturities until May 2015 and no consolidated mortgage maturities until September 2015 as of August 1, 2014. It stated that it expected to remain in compliance with debt covenants, but refinancing is not assured.
- Impairment charges totaled $34.3 million for the first half, including $24.6 million in continuing operations and a $9.1 million charge on a joint-venture investment. A second-quarter impairment primarily related to Canadian development land the company decided to sell.
- Unconsolidated joint ventures had $2.8 billion of mortgage debt. DDR disclosed past-due or defaulted Coventry II-related loans and expected the joint venture to pursue asset sales or financing; DDR said it did not intend to fund partners’ capital contributions or their share of debt maturities. The company’s reported proportionate share of certain lender funding obligations was $5.1 million.
- Remaining Coventry II litigation claims were described by management as immaterial and without merit; no loss provision was recorded because a loss was not considered probable or estimable. DDR and defendants reached a settlement in separate Ohio litigation in July 2014.
- Management cited retail-sector competition, tenant financial health, economic conditions, interest rates, refinancing and development execution as risks. It reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm that this DDR Corp. filing corresponds to the intended SITE Centers Corp. issuer and security.
- Separate recurring operating performance from the Brazil-sale gain and other adjustments; review the definitions and reconciliations for FFO and Operating FFO.
- Verify the closing, financing and final economics of the proposed Blackstone joint-venture acquisition and DDR’s planned preferred-equity investment.
- Review subsequent debt repayments, upcoming maturities, covenant headroom and the status of past-due joint-venture loans and guaranties.
- Assess whether occupancy, leasing spreads and rent growth can offset higher interest, depreciation, impairment and redevelopment costs.