Business Context and Reporting Period
Company: Developers Diversified Realty Corporation (DDR)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2003
Business Overview: DDR is a real estate investment trust (REIT) engaged in acquiring, developing, and operating shopping centers and business centers. The reporting period was significantly impacted by the March 13, 2003, merger with JDN Realty Corporation, which added 102 retail assets and approximately 23 million square feet of gross leasable area (GLA).
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2003) | Value (in thousands) | Prior Year (2002) |
|---|---|---|
| Total Revenues | $350,523 | $261,341 |
| Net Income | $148,775 | $72,352 |
| Net Income Applicable to Common Shareholders | $108,175 | $46,241 |
| Funds From Operations (FFO) to Common Shareholders | $154,181 | $116,387 |
| Cash Flow from Operating Activities | $187,449 | $158,001 |
| Total Indebtedness | $2,118,776 | $1,498,798 |
| Cash and Cash Equivalents | $18,474 | $16,371 |
Per Share Data (Nine Months 2003 vs 2002):
- Basic EPS (Common): $1.34 vs $0.73
- Diluted EPS (Common): $1.32 vs $0.72
- Dividends Declared (Common): $1.23 vs $1.14
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 34.1% ($89.2 million) year-over-year, driven primarily by the JDN merger ($49.1 million contribution), acquisitions of 13 shopping centers ($20.2 million), and new developments ($2.0 million).
- Profitability: Net income increased 105.6% ($76.4 million). This surge was fueled by higher revenues, a $26.1 million increase in gains on disposition of real estate, and a $12.0 million reduction in minority interest expense due to the redemption of preferred operating partnership units.
- Debt Expansion: Total indebtedness rose 41.4% to $2.12 billion, reflecting the assumption of $606.2 million in debt from the JDN merger and new borrowings to fund acquisitions and development.
- Impairment: A $2.6 million impairment charge was recorded in 2003 related to the projected loss on the potential sale of two shopping centers, compared to no such charge in the prior period.
- Accounting Adjustments: The company recorded a $10.7 million charge to net income applicable to common shareholders in 2003 (and a retroactive $5.5 million charge in 2002) related to the write-off of original issuance costs upon the redemption of preferred stock, per EITF Topic No. D-42.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Dividend Policy: The Board increased the quarterly common dividend to $0.41 per share. Management anticipates a conservative payout ratio of approximately 60% for the remainder of 2003 to retain capital for growth.
- Strategic Transactions: DDR announced the formation of the Macquarie DDR Trust (MDT), an Australian-based listed property trust. MDT will acquire an 81% interest in an 11-asset portfolio valued at approximately $730 million. DDR expects to receive $185 million in cash and retain a 14.5% equity interest.
- Development Pipeline: The company has 15 shopping center projects under construction with an estimated aggregate cost of $441.2 million, scheduled for completion in 2003 and 2004.
Risks and Contingencies:
- Legal Proceedings: A $9.0 million judgment (plus fees) was entered against DDR in 2001 regarding a movie theater lease dispute. The company has appealed and believes the verdict will be reversed; no provision has been recorded. An $8.0 million letter of credit has been deposited with the court.
- Market Conditions: Management notes a softening economy and increased competition, which may impact tenant sales and occupancy. However, the portfolio remains stable with high occupancy rates (94.0% for shopping centers).
- Interest Rate Risk: The company utilizes interest rate swaps to manage exposure. A 100 basis point increase in short-term rates would increase interest expense by approximately $4.9 million for the nine-month period.
- Accounting Standards: The company is evaluating joint ventures under FASB Interpretation No. 46 (FIN 46) regarding Variable Interest Entities (VIEs), which may require future consolidation of certain entities.
Investor Verification Checklist
- Merger Integration: Verify the realization of anticipated cost savings and operating efficiencies from the JDN Realty merger.
- Legal Contingency: Monitor the status of the $9.0 million movie theater litigation appeal and potential impact on financial statements.
- Debt Maturity Profile: Review the maturity schedule of the $2.1 billion debt load, particularly the $300 million unsecured bridge facility maturing in March 2004.
- FFO Sustainability: Assess the sustainability of the increased Funds From Operations (FFO) given the one-time gains on dispositions and the impact of preferred stock redemption charges.
- MDT Transaction: Confirm the closing of the Macquarie DDR Trust transaction and the receipt of the projected $185 million cash proceeds.