Cedar Shopping Centers, Inc. - 10-Q Summary (Period Ended Sep 30, 2006)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2006, for Cedar Shopping Centers, Inc. (the "Company"), a Maryland corporation organized as a Real Estate Investment Trust (REIT). The Company focuses on the ownership, operation, development, and redevelopment of supermarket-anchored community shopping centers and drug store-anchored convenience centers. As of September 30, 2006, the portfolio consisted of 93 properties totaling approximately 9.9 million square feet of gross leasable area (GLA), located primarily in the Northeast and mid-Atlantic regions. The portfolio was approximately 91% leased.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenues | $31,929,000 | $92,229,000 |
| Net Income (GAAP) | $3,754,000 | $10,826,000 |
| Net Income Applicable to Common Shareholders | $1,785,000 | $4,919,000 |
| Funds From Operations (FFO) | $10,729,000 | $30,231,000 |
| FFO Per Common Share (Diluted) | $0.30 | $0.90 |
| Operating Cash Flow (9 months) | N/A | $22,945,000 |
| Total Debt (Mortgage + Revolver) | $656,668,000 | $656,668,000 |
| Cash and Cash Equivalents | $15,918,000 | $15,918,000 |
Debt Structure: Total mortgage loans payable were $441.5 million, and the secured revolving credit facility balance was $215.1 million. The weighted average interest rate on fixed-rate debt was 5.7%, while variable-rate debt averaged 6.8%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 55% for the quarter and 70% for the nine-month period compared to the prior year. This growth was driven primarily by acquisitions completed between January 2005 and September 2006, which added approximately 5.2 million square feet of GLA.
- Expense Increases: Operating expenses and depreciation/amortization rose significantly (60% increase in depreciation for the quarter) due to the inclusion of newly acquired properties and development projects placed in service.
- Interest Expense: Non-operating expenses increased 128% for the quarter and 130% for the nine-month period, reflecting higher borrowing levels used to finance acquisitions and higher short-term interest rates.
- Acquisition Activity: During the nine months ended September 30, 2006, the Company acquired nine shopping centers, the remaining interest in a tenth property, and five tracts of land for future development. Notable acquisitions included Shore Mall (NJ), Trexlertown Plaza (PA), and Shaw's Plaza (MA).
- Disposition: The Company sold its 20% interest in the Red Lion joint venture in May 2006, recognizing a gain of approximately $141,000.
Guidance, Outlook, and Risks
Liquidity and Capital Resources: The Company maintains a $300 million secured revolving credit facility (expandable to $400 million), with approximately $39.2 million available as of September 30, 2006. Liquidity is further supported by cash on hand and proceeds from registered deferred offering programs. The Company plans to fund future acquisitions and development through the credit facility, mortgage debt, and equity issuances.
Market Risk: The primary market risk is interest rate exposure on variable-rate debt ($260.4 million). A 1% change in interest rates would impact annual net income by approximately $2.6 million. The Company utilizes derivative instruments to hedge this risk when advantageous.
Forward-Looking Statements: Management anticipates continued growth through acquisitions and development but notes risks including tenant financial viability, availability of capital, interest rate fluctuations, and potential cost overruns in development projects.
Investor Verification Checklist
- Acquisition Integration: Verify the occupancy rates and lease-up timelines for the nine shopping centers acquired in the first nine months of 2006 to ensure projected revenue contributions materialize.
- Debt Covenants: Review the financial covenants of the $300 million revolving credit facility, specifically the leverage limits and the requirement that distributions be limited to 95% of Funds From Operations (FFO).
- Interest Rate Exposure: Assess the impact of rising interest rates on the $260.4 million of variable-rate debt and the effectiveness of current hedging strategies.
- Dividend Coverage: Confirm that FFO continues to cover the $0.225 per share common dividend and preferred distribution requirements, noting that dividends paid ($21.3 million for the nine months) exceeded net income applicable to common shareholders ($4.9 million).
- Development Progress: Monitor the status of the four development/redevelopment properties (668,000 sq. ft.), which were only 60% leased as of September 30, 2006.