Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR), a self-administered REIT owning and managing shopping centers.
Reporting Period: Quarterly period ended June 30, 2009 (Form 10-Q).
Portfolio Overview: As of June 30, 2009, the portfolio consisted of 682 shopping centers and 6 business centers (including 324 owned through unconsolidated joint ventures). Aggregate occupancy was 87.4%, down from 94.2% in the prior year, primarily due to major tenant bankruptcies (Mervyns, Circuit City, Steve & Barry's, Goody's, Linens 'N Things).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $222.6 million | $452.6 million |
| Net Income (Loss) Attributable to DDR | $(226.6) million | $(139.2) million |
| Net Income (Loss) to Common Shareholders | $(237.2) million | $(160.3) million |
| Diluted EPS (Common) | $(1.64) | $(1.18) |
| Funds From Operations (FFO) to Common | $(166.5) million | $(26.5) million |
| Total Indebtedness | $5.87 billion (as of June 30, 2009) | $5.87 billion (as of June 30, 2009) |
| Cash and Cash Equivalents | $29.5 million | $29.5 million |
| Operating Cash Flow | N/A | $194.4 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 8.2% for the quarter and 7.5% for the six-month period compared to 2008, driven by lower base rents and recoveries due to vacancy from tenant bankruptcies.
- Significant Non-Cash Charges:
- Impairment Charges: $107.0 million (Q3) and $117.9 million (YTD) recorded on consolidated real estate assets, largely related to Mervyns sites and assets held for sale.
- Equity Derivative Loss: An $80.0 million loss recorded in Q2 2009 related to the "Otto Transaction" (equity forward commitments and warrants) due to mark-to-market adjustments following a rise in stock price.
- Joint Venture Impairments: $40.3 million (Q3) and $41.1 million (YTD) recorded on unconsolidated joint ventures, primarily Coventry II Fund investments.
- Debt Repurchase Gains: The Company repurchased approximately $376.2 million of senior unsecured notes at a discount, resulting in a net GAAP gain of $118.5 million for the six-month period.
- Discontinued Operations: Significant losses in discontinued operations due to impairments and losses on disposition of real estate held for sale.
Guidance, Outlook, and Risks
Management Strategy (De-leveraging): Management is focused on reducing leverage and increasing liquidity through:
- Dividend Policy: Adjusted to minimum REIT requirements; Q1 and Q2 2009 dividends paid 90% in stock and 10% in cash to retain capital.
- Asset Sales: Sold numerous assets in H1 2009 generating ~$180 million; additional sales expected.
- Equity Issuance: Completed first tranche of "Otto Transaction" ($52.5 million); second tranche (~$60 million) expected in Q4 2009.
- Debt Management: Opportunistic repurchase of debt trading at discounts; refinancing of maturing debt.
Risks and Contingencies:
- Covenant Compliance: While compliant as of June 30, 2009, the Company notes reduced financial flexibility. Continued economic decline could lead to covenant violations, higher finance costs, or accelerated maturities.
- Joint Venture Defaults: Several Coventry II joint ventures have defaulted on third-party loans. The Company has paid certain guaranties and transferred assets to lenders (e.g., Ward Parkway Center).
- Legal Proceedings: Pending appeal of a $7.8 million jury verdict plus $1.5 million in fees regarding valet parking litigation in Long Beach, CA.
- Market Risk: Exposure to interest rate fluctuations on variable-rate debt, partially mitigated by $600 million in interest rate swaps.
Investor Verification Checklist
- Debt Maturities: Verify the Company's ability to refinance or repay ~$88 million of debt maturing in late 2009 and significant maturities in 2010-2012.
- Asset Sale Proceeds: Confirm the timing and pricing of anticipated asset sales, noting that some sales may result in accounting losses.
- Joint Venture Exposure: Assess the status of Coventry II Fund defaults and the Company's exposure to further capital calls or guaranty payments.
- Occupancy Trends: Monitor re-leasing success for spaces vacated by bankrupt tenants (Mervyns, etc.) and the impact on future rental revenue.
- Derivative Valuation: Review the fair value assumptions for the Otto Transaction equity derivatives, which caused a significant non-cash loss.