SITE Centers Corp. quarterly report, Q3 FY2013

Business context and reporting period

DDR Corp. (the registrant named in the filing) reported unaudited results for the quarter and nine months ended September 30, 2013. The filing describes a shopping-center REIT operating in the United States, Puerto Rico and Brazil. The request identifies SITE Centers Corp.; that name does not appear as the registrant in the supplied filing text, so verify the entity and filing match.

Financial and operating highlights

• Q3 rental revenue and tenant recoveries increased, but expenses rose faster: rental operating expenses were $180.8 million versus $136.7 million. Q3 included $24.1 million of impairment charges, compared with $2.6 million.
• For nine months, investing used $395.5 million and financing provided $122.9 million; cash increased by approximately $4.1 million, before exchange-rate effects.
• At September 30, the $815 million revolving facilities had $42.9 million drawn and $10.9 million of letters of credit, leaving $761.2 million of borrowing capacity. The company reported compliance with debt covenants.
• Portfolio occupancy was 92.1%, up from 91.3% a year earlier; annualized base rent per occupied square foot was $14.00 versus $13.79. Comparable-property occupancy was 93.1%.

Changes versus prior comparable periods

• Q3 common-shareholder results shifted from income to a loss, primarily reflecting higher property expenses and impairments and the absence of the prior-year $40.6 million gain on change in control of interests.
• Nine-month common-shareholder losses narrowed year over year. FFO rose slightly, while Operating FFO increased more substantially; management cited organic growth and net acquisitions as key drivers.
• Nine-month revenue grew 12.1%, with management attributing most of the increase in base and percentage rents to acquisitions, alongside comparable-property growth.
• Debt rose by $276.9 million from year-end 2012, while reported cash remained modest. The company issued $300 million of 3.375% notes due 2023 and completed common- and preferred-equity transactions.

Outlook, risks and unusual items

• Management emphasized acquiring higher-quality “Prime” centers, selling non-prime assets, improving portfolio quality and lowering leverage and cost of capital. It reported strong leasing demand, positive rental spreads and a favorable outlook for quality retail locations, but gave no specific earnings or FFO guidance in the supplied text.
• In October 2013, after quarter-end, DDR acquired its partner’s interest in 30 shopping centers in a transaction valued at approximately $1.46 billion. It assumed $792.9 million of mortgage debt, repaid $139.0 million of it at closing, and used debt and common-equity proceeds to help fund the deal. The company expected to record a gain on change in control; the filing does not provide a clear amount.
• Management expected approximately $6.7 million of higher interest expense over the next 12 months from interest-rate-contract reclassifications and amortization. A 100-basis-point increase in short-term rates was estimated to add about $2.5 million to company interest expense for the nine-month period, plus $1.5 million for its proportionate share of joint-venture expense.
• Impairment charges for nine months were $66.8 million, including $54.1 million in continuing operations and $12.7 million in discontinued operations. Management said assets marketed for sale drove much of the impairment activity.
• A Coventry-related lawsuit sought at least $500 million plus punitive damages. A court dismissed most claims in April 2013; limited contract claims remained and appeals were pending. No loss provision was recorded because management did not deem a loss probable or estimable.
• Separately, DDR alleged that a service provider diverted approximately $11 million intended for vendors. The provider asserted that about $5 million was allegedly owed; DDR disputed the claim and pursued litigation. The filing does not state a clear estimated financial exposure for this dispute.
• Other risk factors include retail tenant and economic conditions, refinancing and interest-rate risk, joint-venture funding and debt defaults, foreign-currency exposure, development execution, and potential asset-sale losses. The company disclosed $352.6 million of mortgage debt maturing in 2014 and no unsecured maturities until May 2015.

Most important facts for investors to verify

• Confirm that this DDR Corp. 10-Q is the intended filing for the requested SITE Centers Corp. entity.
• Review the October 2013 30-center acquisition’s final financing, debt assumed or repaid, share issuance, and realized accounting gain.
• Assess whether occupancy, rents and leasing spreads translate into sustainable cash earnings after impairments, interest expense and capital needs; distinguish GAAP results from non-GAAP FFO measures.
• Verify debt maturities, covenant headroom, available revolver capacity and the effect of rates on consolidated and joint-venture obligations.
• Track developments in the Coventry litigation, the service-provider dispute, troubled Coventry II joint ventures, and assets held or marketed for sale.