DDR Corp. (identified in the filing; reporting period ended March 31, 2016)
This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparisons to the first quarter of 2015. DDR owned or had interests in 352 shopping centers totaling approximately 113 million square feet; the operating portfolio was 93.3% occupied. The filing describes a shopping-center REIT focused on leasing, acquisitions, development and redevelopment, and loan investments.
Financial results and position
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Revenue | $254.4 million | $258.8 million; down 1.7% |
| Net income (loss) attributable to DDR | $45.6 million | $(243.8) million |
| Net income (loss) attributable to common shareholders | $40.0 million; diluted EPS $0.11 | $(249.4) million; diluted EPS $(0.69) |
| FFO attributable to common shareholders (non-GAAP) | $114.5 million | $13.2 million |
| Operating FFO attributable to common shareholders (non-GAAP) | $114.2 million | $107.1 million |
| Cash flow from operations | $81.9 million | $62.7 million |
| Cash and cash equivalents at period-end | $23.7 million | $22.4 million at December 31, 2015 |
| Total debt at period-end | $5.03 billion | $5.14 billion at December 31, 2015 |
Rental operating expenses, excluding impairment, were $73.0 million; reported net operating income was $181.4 million. The year-over-year earnings swing primarily reflects $279.0 million of impairment charges in Q1 2015, rather than a comparable-sized improvement in recurring operations. Q1 2016 results also included $14.4 million of equity income from joint ventures, mainly reflecting DDR’s share of a joint-venture asset-sale gain, and a $12.4 million gain on real estate dispositions.
Investing activities provided $96.6 million, including $186.7 million of real estate and joint-venture disposition proceeds, partly offset by $59.9 million for an acquisition and $46.9 million for development and improvements. Financing activities used $177.2 million, including repayment of $240.0 million of senior notes, partly offset by $140.0 million of net revolving-credit borrowings. The common dividend declared was $0.19 per share.
Material changes and operating performance
- Revenue decreased by $4.4 million year over year, primarily reflecting dispositions; minimum rents and tenant recoveries declined, while fee and other income increased.
- DDR acquired a Phoenix power center for approximately $60.5 million and sold five shopping centers and other assets for $189.4 million. A joint venture separately sold 11 assets for $170.5 million.
- Portfolio occupancy was 93.3%, versus 93.2% a year earlier. Average annualized base rent per occupied square foot rose to $14.58 from $14.02.
- First-quarter leasing covered approximately 1.9 million square feet. Reported pro rata leasing spreads were 19.5% on new leases and 8.7% on renewals.
- Operating FFO increased $7.1 million year over year, which management attributed primarily to the transactional impact of investment activity. FFO’s much larger increase was heavily affected by prior-year impairment adjustments.
Liquidity, debt, outlook and risks
At March 31, 2016, DDR had $350.0 million drawn on its $800.0 million revolving facilities, with $448.9 million of stated borrowing capacity available after letters of credit, plus $23.7 million cash. The company reported compliance with debt covenants. Its debt-to-total-market-capitalization ratio was 0.42. It repaid $240.0 million of 9.625% notes at maturity during the quarter. Remaining 2016 consolidated debt maturities were $112.8 million; unconsolidated joint ventures had $665.2 million of 2016 maturities, of which DDR’s proportionate share was $33.3 million.
Management said it intended to continue recycling capital from assets with lower growth potential into “Prime” properties, pursue development and redevelopment, reduce leverage, extend debt duration, and improve liquidity and financing flexibility. It expected to bring at least $190 million of development investments into service during 2016, net of outlot-sale proceeds, and described development spending as discretionary. No formal earnings or FFO guidance is provided in the supplied filing text.
Principal risks include retail tenant weakness, store closures and bankruptcies; competition and changing shopping habits; the ability to refinance debt or obtain financing on acceptable terms; variable interest rates; development execution and costs; joint-venture partner and refinancing risks; and economic and government-debt uncertainty in Puerto Rico. Puerto Rico represented 7.6% of consolidated portfolio annualized revenue. Three unconsolidated joint ventures were classified as VIEs but not consolidated; DDR’s investment exposure was $415.0 million, and one arrangement included a conditional funding commitment of $4.7 million. Management said pending legal matters were not expected to have a material adverse effect. No new risk factors were reported in this filing.
Key facts for investors to verify
- Separate recurring operating trends from prior-year impairments, 2016 disposition gains, and joint-venture sale gains when assessing earnings and FFO.
- Confirm the availability and terms of revolving-credit capacity, upcoming consolidated maturities, and joint-venture refinancing progress.
- Monitor occupancy, lease spreads, rent growth, tenant credit quality, and leasing capital requirements, particularly as 2016 leases expire.
- Assess exposure to Puerto Rico and any deterioration in tenant demand or local economic conditions.
- Review the company’s leverage-reduction and asset-recycling execution, planned development spending, and the assumptions underlying management’s outlook.