DDR Corp. (SITE Centers Corp.) — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2017. The filing is by DDR Corp. and covers its shopping-center REIT business. Unless noted, financial figures below are in U.S. dollars.
Business context and operating performance
At quarter-end, the portfolio comprised 309 shopping centers, including 151 held through joint ventures, with approximately 103 million square feet of gross leasable area. Portfolio occupancy was 92.3%, down from 93.3% at both March 31, 2016 and December 31, 2016. Average annualized base rent per occupied square foot increased to $15.27 from $14.58 a year earlier.
- The company executed 285 leases covering approximately 1.8 million square feet. Comparable new-lease and renewal spreads were positive at 2.8% and 6.3%, respectively; excluding one Puerto Rico anchor lease, the new-lease spread was 15.8%.
- Revenue declined partly because property dispositions outweighed growth from comparable properties, acquisitions and development. Tenant recoveries also weakened, with comparable-property recoveries falling to 92.8% of reimbursable expenses and taxes from 96.1%.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $240.4 million | $254.4 million |
| Net income (loss) attributable to common shareholders | $(59.8) million | $40.0 million |
| Diluted earnings (loss) per share | $(0.16) | $0.11 |
| FFO attributable to common shareholders | $22.2 million | $114.5 million |
| Operating FFO attributable to common shareholders | $108.5 million | $114.2 million |
| Cash from operating activities | $91.9 million | $81.8 million |
- Q1 included a $76.0 million valuation allowance against preferred investments in two Blackstone joint ventures, $22.0 million of property impairment charges and $11.5 million of separation charges. A $38.1 million gain on real estate dispositions partly offset these items.
- Rental operation expenses, including impairments, were $89.3 million versus $73.0 million in the prior-year quarter. General and administrative expense was $31.1 million, up from $17.9 million, primarily reflecting separation costs. Interest expense decreased to $51.8 million from $57.9 million. The filing does not provide a single comparable consolidated operating-margin measure.
- Cash used in investing activities was $19.4 million, compared with cash provided of $97.1 million in Q1 2016. Cash used in financing was $45.4 million versus $177.2 million. Cash, cash equivalents and restricted cash ended the quarter at $66.3 million.
- Total consolidated debt was $4.52 billion, up from $4.49 billion at year-end 2016. The debt-to-total-market-capitalization ratio was 0.48, versus 0.42 at March 31, 2016. Cash and cash equivalents were $19.7 million; revolving-facility borrowing capacity was $709.2 million, after $90.0 million outstanding and $0.8 million of letters of credit. The company reported compliance with debt covenants.
- Declared common dividends were $0.19 per share for the quarter; total common and preferred dividends paid were $75.3 million.
Material changes and unusual items
- The $76.0 million allowance related to preferred investments in joint ventures with Blackstone followed higher estimated capitalization rates and concerns about the collateral’s market values, including pressure on shopping centers anchored by big-box retailers. DDR stopped recognizing the 2.0% accrued payment-in-kind component of the preferred distribution in March; the 6.5% cash distribution remained unchanged.
- Unconsolidated joint ventures recorded $52.7 million of property impairments, contributing to DDR’s equity-method loss. DDR’s reported equity in joint-venture results shifted from $14.4 million of income to a $1.7 million loss.
- The company sold nine shopping centers and two land parcels for gross proceeds of $118.2 million and recorded a $38.1 million gain. It acquired a Chicago grocery-anchored center for $81.0 million. Operating revenue fell 5.5% year over year; dispositions reduced rental revenue by $17.1 million, partly offset by comparable-property growth.
- Management changed in March, naming David Lukes CEO, Michael Makinen COO and Matthew Ostrower CFO. The company also announced a restructuring eliminating 65 positions; it expected approximately $5 million in additional separation charges in Q2.
Outlook, risks and contingencies
- Management said it was updating strategy and remained focused on reducing leverage, strengthening the balance sheet and improving liquidity. No formal earnings guidance was provided.
- At March 31, scheduled consolidated debt maturities through April 2018, after specified extension options, exceeded available revolver capacity by $325.2 million. In April, DDR repaid $300 million of senior notes using its revolver and extended a $400 million term loan to April 2018. Management expected cash, operations, asset sales, revolver borrowings and potential new financing to meet needs for the next twelve months, but gave no assurance refinancing would be available.
- A joint venture had approximately $899 million of debt, with a July 2017 maturity; DDR estimated its proportionate share of potential additional capital to support refinancing at $40–$50 million. Refinancing and extension outcomes are not assured.
- Key risks include tenant bankruptcies and store closures, internet retail competition, lower occupancy and recoveries, rising capitalization rates and further impairments, financing and interest-rate exposure, joint-venture risks, and the Puerto Rico economic environment. Fourteen Puerto Rico properties generated 11.7% of consolidated revenue in the quarter.
- Management expected at least $80 million of development to be placed in service in 2017, net of outlot sale proceeds, while describing redevelopment spending as discretionary. It also expected $5 million of additional Q2 separation costs. These are expectations, not guarantees.
- Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the preferred-investment valuation allowance changes, and the timing and amount of cash recovery from the Blackstone joint ventures.
- Execution of the 2017–April 2018 debt refinancing and maturity plan, including the July 2017 joint-venture refinancing and any capital contribution required from DDR.
- Subsequent occupancy, tenant recoveries, leasing spreads and exposure to retailer bankruptcies, particularly following the reported anchor lease expirations and bankruptcies.
- Actual disposition proceeds and any resulting gains or additional impairments, alongside the effect of asset sales on recurring revenue and Operating FFO.
- Whether the planned strategy, development placements, dividend policy and restructuring costs evolve as described; Operating FFO is a non-GAAP measure and is not cash available for dividends or debt service.