Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2007
Business Overview: DDR is engaged in acquiring, expanding, owning, developing, redeveloping, leasing, and managing shopping centers. As of June 30, 2007, the portfolio consisted of 708 shopping centers (including joint ventures) and seven business centers across 45 states, Puerto Rico, and Brazil.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $255.4 million | $476.3 million |
| Net Income | $127.4 million | $190.0 million |
| Net Income Applicable to Common Shareholders | $111.4 million | $160.2 million |
| Diluted EPS (Common) | $0.89 | $1.33 |
| Funds From Operations (FFO) to Common | $159.3 million | $265.4 million |
| Operating Cash Flow | N/A | $221.2 million |
| Total Indebtedness | $5.12 billion | $5.12 billion |
| Cash and Cash Equivalents | $46.0 million | $46.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 35.1% for the three months and 25.3% for the six months ended June 30, 2007, compared to the same periods in 2006. This growth is primarily driven by the February 2007 merger with Inland Retail Real Estate Trust, Inc. (IRRETI).
- Net Income Surge: Net income increased 61.9% (quarterly) and 47.9% (six-month) year-over-year. Significant contributors include a $54.0 million gain on disposition of real estate in the quarter and a $15.8 million income tax benefit from the reversal of valuation allowances.
- Debt Expansion: Total indebtedness rose from $4.25 billion at December 31, 2006, to $5.12 billion at June 30, 2007, reflecting the IRRETI merger and new financing activities.
- Joint Venture Income: Equity in net income of joint ventures increased significantly ($21.6 million for the quarter vs. $4.6 million in 2006), driven by gains from asset dispositions and promoted income.
Guidance, Outlook, and Management Commentary
- Strategic Transactions: Management highlighted the successful integration of the IRRETI merger and the formation of the DDR Domestic Retail Fund I, a $1.5 billion commingled fund. The company also sold a portfolio of non-core assets for approximately $600 million to improve portfolio quality.
- Capital Allocation: The Board authorized a $500 million common share repurchase program. Subsequent to the period end (July-August 2007), the company repurchased 1.2 million shares for approximately $59.3 million.
- Dividends: The quarterly dividend per common share was increased to $0.66 from $0.59 in December 2006. The payout ratio for the first six months of 2007 was approximately 62.6% of FFO.
- Development Pipeline: The company has approximately $1.07 billion in estimated funding for wholly-owned and consolidated developments, with a projected unleveraged return of approximately 10% on the aggregate pipeline.
- Risks: Key risks include general real estate market conditions, tenant bankruptcies, interest rate fluctuations, and the successful integration of acquired assets. The company utilizes interest rate swaps to mitigate exposure on variable-rate debt.
Investor Verification Checklist
- IRRETI Integration: Verify the progress of integrating the 316 properties acquired from IRRETI and the realization of anticipated cost savings.
- Asset Dispositions: Confirm the closing of the remaining $151 million in non-core asset sales expected in the third quarter of 2007.
- Debt Maturities: Review the schedule for the $64.5 million in mortgage loans and $97.0 million in unsecured notes maturing in 2007 to ensure refinancing plans are on track.
- Joint Venture Performance: Monitor the performance of the TIAA-CREF Joint Venture and DDR Domestic Retail Fund I, which represent significant portions of the current portfolio.
- Share Repurchases: Track the execution of the $500 million share repurchase program and its impact on earnings per share.