Developers Diversified Realty Corporation (now SITE Centers Corp.) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 8, 2010. The company was a REIT focused on owning, leasing, managing and developing shopping centers. Its portfolio included 541 shopping centers and six business centers; shopping-center occupancy was 88.0%, versus 87.1% a year earlier.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $198.8 million | $195.7 million | $600.8 million | $595.2 million |
| Net loss attributable to common shareholders | $24.9 million | $148.4 million | $156.8 million | $308.7 million |
| Basic and diluted loss per share | $0.10 | $0.90 | $0.65 | $2.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $211.0 million | $216.7 million |
Revenue increased 1.6% in the quarter and 0.9% year to date. Higher occupancy and rent per occupied square foot (up to $12.95 from $12.59) accompanied modest revenue growth. Nine-month rental operating expenses rose 15.6%, chiefly reflecting $65.5 million more impairment charges. Nine-month FFO attributable to common shareholders was $32.7 million, compared with an FFO loss of $116.6 million; Q3 FFO was $37.1 million versus a loss of $90.1 million. These are non-GAAP measures. Operating FFO was $63.2 million for Q3 versus $74.5 million, and $193.4 million year to date versus $235.4 million.
At September 30, total assets were $7.88 billion and total consolidated debt was $4.40 billion, down from $5.18 billion at December 31, 2009. Cash and cash equivalents were $21.3 million, with $14.4 million of restricted cash. Nine-month investing cash flow was $9.3 million and financing cash flow was negative $225.1 million. The company reported compliance with its debt covenants and estimated $511.5 million of borrowing capacity under replacement revolving facilities, net of reported borrowings and letters of credit. Common dividends declared were $0.02 per share in each of the first three quarters.
Material changes and unusual items
- Results improved substantially against 2009, but comparisons reflect unusually large prior-year charges. Nine-month 2010 continuing-operations impairments were $78.2 million; total impairment charges across continuing and discontinued operations and joint ventures were $143.0 million, versus $247.2 million in 2009. The company also recorded $14.6 million of nine-month losses on Otto-family-related equity warrants and only $0.3 million of net debt-retirement gain, versus $198.2 million of warrant losses and $142.4 million of debt-retirement gains in 2009.
- The company recognized $54.3 million of impairments on Russian development land after changing its investment plans and determining additional capital would require outside funding. It also recorded impairment charges on assets marketed for sale.
- After a court-appointed receiver took control of the Mervyns joint venture assets, the company deconsolidated the venture in Q3 and recorded a gain of approximately $5.6 million. The venture’s $155.7 million non-recourse mortgage was in default and matured October 1, 2010. Its results were classified as discontinued operations.
- Effective January 1, 2010, new VIE consolidation rules led to the deconsolidation of another entity and a $7.8 million cumulative-effect reduction to accumulated distributions in excess of net income.
- The company issued $300 million of 7.5% senior notes due 2017 and $300 million of 7.875% notes due 2020; issued 53.0 million common shares for $454.4 million gross proceeds; and repurchased approximately $256.6 million of senior notes during the first nine months. In October it refinanced revolving facilities, which mature in February 2014, and repaid $200 million of its secured term loan. In November it issued $350 million of 1.75% convertible notes due 2040.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided. Management described improving leasing activity, including 14 new large-box leases totaling 397,000 square feet in Q3, but noted that many signed leases had not yet commenced paying rent; expected junior-anchor leasing was not expected to materially affect revenue until late 2011 or early 2012. Management cited continued deleveraging, asset sales, selective development spending and extending debt maturities as priorities. It anticipated adequate operating cash flow for scheduled obligations, recurring tenant improvements and REIT dividends, while noting refinancing and financing availability were not assured.
Key risks include 2011 consolidated maturities: the remaining term loan, $180.6 million of notes, and approximately $210 million of mortgage debt. Joint ventures had substantial maturities and refinancing uncertainty; the company’s proportionate share of their 2011 maturities was $250.7 million. Coventry-related joint ventures involved defaults, extensions and guarantees; the company reported approximately $39.7 million of Coventry II payment guarantees and a fully reserved $66.9 million advance. Coventry litigation sought at least $500 million plus punitive damages; management disputed the claims and did not expect a material adverse effect, but outcome was uncertain. A separate California tenant verdict was affirmed on appeal; an $11.1 million provision was recorded. Other risks include retail tenant failures, occupancy and rent recovery, interest-rate exposure, asset-sale losses, and international currency and development exposure.
Important facts for investors to verify
- Whether signed leases convert to occupancy and rent, and whether occupancy and rents continue to improve.
- The timing and refinancing or repayment of 2011 debt maturities, and the company’s actual available revolver capacity and covenant headroom.
- Potential joint-venture funding needs, defaults, guaranty exposure and outcomes of Coventry-related proceedings.
- Further impairments or sale losses, particularly on Russian development land, non-prime assets and suspended projects.
- How much of the improvement in GAAP loss and FFO reflects recurring property performance rather than impairments, debt transactions, warrant remeasurement and deconsolidation effects.