Business context and reporting period
DDR Corp.’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013. The company operated shopping centers and also originated or acquired loans secured by shopping centers. The filing’s registrant is DDR Corp.; the supplied filing text does not identify SITE Centers Corp. as the registrant.
At quarter-end, DDR reported an economic interest in 435 shopping centers and more than 115 million square feet of gross leasable area. Portfolio occupancy was 91.7%, up from 90.5% a year earlier. Average annualized base rent per occupied square foot was $13.77, compared with $13.80 a year earlier.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $217.1 million | $190.7 million | $425.9 million | $379.3 million |
| Net loss attributable to DDR common shareholders | $36.0 million; $0.11 per share | $44.5 million; $0.16 per share | $36.8 million; $0.12 per share | $66.5 million; $0.24 per share |
| FFO attributable to common shareholders (non-GAAP) | $80.0 million | $78.1 million | $162.5 million as stated in MD&A | $137.8 million |
| Operating FFO attributable to common shareholders (non-GAAP) | $86.1 million | $71.6 million | $172.1 million | $138.4 million |
| Cash flow from operations | Not separately presented for quarter | Not separately presented for quarter | $163.5 million | $103.6 million |
| Cash flow from investing | Not separately presented for quarter | Not separately presented for quarter | $(252.7) million | $(242.1) million |
| Cash flow from financing | Not separately presented for quarter | Not separately presented for quarter | $99.8 million | $116.4 million |
Q2 revenue increased 13.8% year over year; first-half revenue increased 12.3%. The filing attributes much of the first-half rental-revenue growth to acquisitions, with additional contributions from comparable properties and development or redevelopment assets. Reported first-half FFO is $162.5 million in the MD&A summary and $162.4 million in the reconciliation; the difference appears to be rounding or presentation.
Rental operating expenses for the first half included $67.6 million of operating and maintenance, $55.1 million of real estate taxes, $37.5 million of impairment charges, $39.9 million of general and administrative expense, and $138.3 million of depreciation and amortization. Segment net operating income was $120.7 million in Q2 2013 versus $93.6 million in Q2 2012; this is a reported segment measure, not a GAAP operating margin.
At June 30, 2013, total indebtedness was $4.44 billion, up from $4.32 billion at December 31, 2012. Cash and cash equivalents were $41.7 million. Revolving credit facilities totaled $815 million; after $34.7 million outstanding and $10.9 million of letters of credit, reported borrowing capacity was $769.4 million. Total assets were $8.13 billion and total equity was $3.33 billion. Management reported compliance with debt covenants. Debt to total market capitalization was 0.44 to 1.0, compared with 0.46 to 1.0 a year earlier.
Material changes versus prior comparable periods
- Common-shareholder net losses narrowed year over year, in part because 2013 had smaller discontinued-operations losses and lower impairment charges than 2012. The comparison was also affected by a $39.3 million gain on change in control recorded in 2012, versus $1.1 million in 2013.
- First-half operating cash flow rose by $59.9 million, which management primarily attributed to acquired properties and lower settlement of accreted debt discount, partly offset by working-capital changes.
- First-half investment cash outflow increased, principally due to greater real estate acquisitions, partly offset by lower advances to joint ventures.
- Occupancy improved by 1.2 percentage points from June 2012. DDR reported positive Q2 leasing spreads of 12.8% on new leases and 7.7% on renewals.
- DDR issued $300 million of 3.375% senior notes due 2023, issued $150 million of 6.25% Class K preferred shares, and redeemed $150 million of 7.375% Class H preferred shares. The Class H redemption resulted in a $5.2 million charge to common shareholders for unamortized issuance costs.
Outlook, commentary, risks and unusual items
Management gave no general earnings or FFO guidance. It expected the approximately $1.46 billion Blackstone transaction, under which DDR would acquire sole ownership of 30 joint-venture power centers, to close in Q4 2013 subject to customary conditions. Funding was expected to include cash, assumed and repaid mortgage debt, existing preferred equity and mezzanine financing, $300 million of senior-note proceeds, and expected proceeds from forward sales of 39.1 million common shares. The forward sales were expected to be physically settled by October 31, 2013. In July 2013, after quarter-end, DDR acquired two power centers for $258.5 million and assumed a $139.4 million mortgage.
Management described a strategy of selling lower-quality assets and reinvesting in “Prime Assets,” while maintaining conservative underwriting and reducing leverage. It expected approximately $132.2 million of net spending on significant wholly owned and consolidated development projects during the remainder of 2013, and approximately $129.8 million of net spending by unconsolidated joint ventures. These are project spending estimates, not company earnings guidance.
- Joint-venture and transaction exposure: Unconsolidated joint ventures had $4.1 billion of third-party debt. Coventry II-related loans included defaults and past-due obligations; DDR stated it did not intend to fund partners’ contributions or their share of debt maturities. Some joint-venture debt maturities were due or past due in 2013. Closing the Blackstone acquisition and repayment of related financing remained contingent.
- Litigation: Coventry sought at least $500 million in damages. A court dismissed most claims in April 2013, but limited contract claims remained and appeals were pending. DDR recorded no loss provision, stating a loss was not probable or estimable, and said it did not expect a material adverse effect. Separately, DDR described a dispute and related litigation following the alleged diversion of approximately $11 million of vendor-payment funds by Oxford and its affiliates; Oxford disputed amounts allegedly owed.
- Credit and refinancing: DDR had no consolidated debt maturities in the remainder of 2013, but $356.2 million of mortgage debt matured in 2014. Management said refinancing alternatives appeared viable while cautioning that future financing might not be available on favorable terms or at all.
- Other notable exposures: A $9.8 million loan was more than 90 days past due and no longer accruing interest; a $4.3 million reserve had been established. A 100-basis-point increase in short-term rates was estimated to increase six-month interest expense by about $1.7 million for DDR and $1.0 million for its proportionate share of joint ventures. Management expected approximately $6.6 million of additional interest expense over the next 12 months from swap-related reclassification and amortization.
- Accounting and non-GAAP measures: Impairments included $37.5 million in continuing operations for the first half. FFO and Operating FFO are non-GAAP measures; the filing cautions they are not cash flow, liquidity, or amounts available for dividends or debt service, and adjustments may recur.
Important facts for investors to verify
- Whether the Blackstone acquisition closed as expected, its final funding mix, debt assumed or repaid, and the settlement and dilution effects of the forward share sales.
- Progress on the 2014 mortgage maturities, available revolver capacity, covenant compliance, and the effect of incremental borrowing on leverage and interest expense.
- Occupancy, comparable-property rent growth, leasing spreads, tenant credit and retention, and whether acquisition-led revenue growth translates into durable operating cash flow.
- Developments in Coventry II defaults, the Coventry litigation and Oxford-related claims, including any change in potential losses, guarantees, or required funding.
- Reconciliation of the $162.5 million FFO figure in MD&A to the $162.4 million reconciliation, and continued comparison of FFO with GAAP results and operating cash flow.