DDR Corp. (SITE Centers Corp.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing is issued under the name DDR Corp.; the supplied company metadata identifies SITE Centers Corp.
Business context
DDR operated shopping centers in the continental U.S. and Puerto Rico. At quarter-end, its portfolio comprised 258 centers, including 126 held through joint ventures, with approximately 89 million square feet owned or managed. The company was preparing to spin off 50 centers, including all 12 Puerto Rico properties, into Retail Value Inc. (RVI), targeted for mid-2018.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $215.1 million | $240.4 million |
| Net loss attributable to common shareholders | $62.5 million; $0.17 per diluted share | $59.8 million; $0.16 per diluted share |
| Cash from operating activities | $57.8 million | $91.9 million |
| FFO attributable to common shareholders | $29.5 million | $22.2 million |
| Operating FFO attributable to common shareholders | $97.8 million | $108.5 million |
| Same-store NOI at DDR’s ownership interest | $126.6 million; up 1.5% | $124.7 million |
Revenue fell 10.5%, primarily reflecting property dispositions and lower comparable-property revenue. The portfolio’s occupancy was 90.9%, versus 92.3% a year earlier; average annualized base rent per occupied square foot increased to $15.81 from $15.27. Net loss included $56.4 million of debt-extinguishment costs and $5.2 million of RVI transaction costs. Operating FFO declined despite lower G&A, principally because of the dilutive effect of asset-sale deleveraging. FFO and Operating FFO are non-GAAP measures, not substitutes for cash flow or GAAP earnings.
At March 31, total debt was $3.74 billion, compared with $3.85 billion at December 31, 2017. Cash and cash equivalents were $16.6 million and restricted cash was $49.3 million. Revolving-facility availability was $880 million; management stated cash and available capacity covered consolidated maturities through April 2019. The company paid $78.5 million of dividends during the quarter and declared a common dividend of $0.19 per share.
Material changes and financing
- DDR completed a $1.35 billion secured, interest-only mortgage financing for RVI-related properties. It bears interest at one-month LIBOR plus 3.15%, matures in February 2021, and has two conditional one-year extension options.
- Using loan proceeds and asset-sale proceeds, DDR repaid $900 million of senior notes, $452.5 million of mortgage debt and $200 million of an unsecured term loan. Debt-extinguishment costs included $28.4 million of make-whole payments.
- Variable-rate debt increased to 43.7% of consolidated debt from 10.3% at year-end 2017. A $1.35 billion interest-rate cap was obtained for the new mortgage. A 100-basis-point rate increase was estimated to raise quarterly interest expense by approximately $0.8 million for DDR, plus $0.5 million for its proportionate share of joint-venture debt.
- DDR sold four wholly owned shopping centers and land for $140.6 million, recognizing a $10.0 million gain. Joint ventures sold 11 centers; DDR’s share of their gain was $7.4 million. Total company and joint-venture dispositions reported in the executive summary were 15 centers and land parcels for $365.9 million gross, or $208.7 million at DDR’s share.
Outlook, risks and unusual items
- Management expected the RVI spin-off and asset-sale proceeds to support value realization and balance-sheet improvement, while identifying rent increases, lease-up, redevelopment and opportunistic investment as potential growth sources. These are expectations, not assured outcomes; the filing gives no quantified earnings or FFO guidance.
- Hurricane Maria materially affected Puerto Rico operations. DDR reported $3.8 million of lost rental revenue in Q1, partly offset by $2.0 million of business-interruption income. The company estimated approximately $150 million of property-damage claims and approximately $30 million of business-interruption claims through June 30, 2018, subject to change and insurer resolution. Repairs were expected to be substantially complete by Q3 2019; the filing cautions that timing, costs and insurance recovery are uncertain.
- Quarterly impairment charges were $30.4 million, mainly for four operating centers marketed for sale, versus $22.0 million a year earlier. A $4.0 million reserve was recorded on preferred investments in Blackstone joint ventures, compared with $76.0 million in Q1 2017; the associated valuation allowance could change.
- Management cited retailer bankruptcies, e-commerce competition, tenant occupancy and re-leasing costs, Puerto Rico’s economic and recovery conditions, execution of the spin-off and dispositions, refinancing access, interest-rate exposure, and joint-venture and insurance uncertainties as risks. DDR reported compliance with its debt covenants. It said pending legal matters were not expected to have a material adverse effect.
- The company adopted revenue-recognition and real-estate-sale accounting guidance in 2018 without material impact. It was evaluating the lease-accounting standard scheduled for 2019.
Important facts for investors to verify
- Whether and when the RVI spin-off closed, including final assets, financing arrangements and proceeds or costs.
- Subsequent progress on Puerto Rico repairs, tenant reopenings, claim recognition and actual insurance collections versus estimated claims.
- Debt maturity, covenant and liquidity developments, particularly the new mortgage’s debt-yield tests, extension conditions and required application of property-sale proceeds.
- Whether occupancy, rental spreads and same-store NOI trends persisted after dispositions and retailer bankruptcies.
- Reconciliation of GAAP results and operating cash flow with FFO and Operating FFO, including the impact of recurring or future transaction, impairment and debt costs.