SITE Centers Corp. quarterly report, Q1 FY2011

Business context and reporting period

Developers Diversified Realty Corporation (DDR), a shopping-center REIT, filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The filing describes 476 shopping centers and five office properties, including joint-venture assets, with approximately 124.3 million square feet owned or managed. The filing’s registrant is Developers Diversified Realty Corporation; it does not identify the company as SITE Centers.

Financial performance and condition

Revenue was nearly flat, while rental operating expenses (including operating and maintenance, taxes, impairment, G&A, and depreciation) rose 9.3% to $154.2 million. Operating and maintenance expense increased 10.8%; G&A rose 26.2%, including a $10.7 million executive separation charge. Interest expense increased 7.4% to $60.2 million. The filing does not provide a single comparable operating-margin measure.

Reported earnings improved substantially but include a $21.7 million step-acquisition gain and a $21.9 million gain from warrant valuation changes, partly offset by the executive separation charge. The warrants were exercised in March, ending future fair-value remeasurement. Diluted EPS was particularly affected by the warrant-related adjustment; the filing reports basic EPS of $0.10 and diluted EPS of $0.01.

At March 31, total assets were $7.78 billion, total debt $4.27 billion, total liabilities $4.49 billion, and total equity $3.29 billion. Cash was $21.0 million. Revolving facilities totaled $1.015 billion, with $42.7 million drawn and $12.3 million of letters of credit, leaving $960 million of stated borrowing capacity. The company reported compliance with debt covenants. Debt was 86.2% fixed-rate; the reported weighted-average interest rate was 5.7% on fixed-rate debt and 1.5% on variable-rate debt.

Material changes versus the prior comparable period

• Shopping-center occupancy improved to 88.1% from 86.4%; average annualized rent per occupied square foot rose to $13.16 from $12.79. First-quarter new-lease rents averaged $14.17 per square foot versus $12.80 a year earlier.
• Operating cash flow increased by $16.1 million, which management primarily attributed to increased accounts payable and accrued expenses.
• Operating FFO declined to $63.2 million from $65.2 million, primarily due to higher operating expenses, partly offset by property sales.
• Debt fell modestly from $4.30 billion at year-end 2010 to $4.27 billion. The company issued $300 million of 4.75% senior notes due April 2018 and used proceeds in part to repay higher-cost debt and reduce revolver and term-loan borrowings.
• DDR acquired partners’ interests in two shopping centers, obtaining 100% ownership, and recorded the $21.7 million gain on remeasurement of its previously held interests.
• Sonae Sierra Brasil’s IPO reduced DDR’s effective ownership from 48% to approximately 33%; DDR received approximately $22.4 million from repayment of a related loan.

Outlook, commentary, risks and unusual items

Management cited improving leasing demand and retailer optimism, while noting continuing economic and tenant-credit risks. No full-year earnings or FFO guidance is provided. DDR expected approximately $80.5 million of net 2011 spending on development, expansion, improvements, and re-tenanting, of which $13.4 million had been spent by quarter-end. It expected to refinance its $550 million term loan, extended to February 2012, by year-end, but gave no assurance financing would be available on acceptable terms.

2011 consolidated maturities included $88.7 million of convertible notes due in August and approximately $71 million of mortgage debt; management expected repayment through operating cash flow, revolver borrowings, and asset-sale proceeds. Unconsolidated joint ventures had $641.6 million of mortgage debt maturing in 2011, including DDR’s stated proportionate share of $217.6 million. Management warned that refinancing or repayment may not occur as anticipated.

Significant joint-venture exposures include a fully reserved $66.9 million advance to a Coventry II venture, approximately $39.9 million of Coventry-related payment guarantees, and loans in default. Separate Coventry litigation seeks at least $500 million in damages; DDR recorded no provision because it considered a loss not probable or estimable and said it did not expect a material adverse effect. The ultimate outcome remains uncertain. The filing also notes that certain marketed asset sales, if completed on current terms, could produce approximately $10 million of losses.

In April 2011, after quarter-end, a 9.5 million-share forward sale settled for $130.2 million and DDR redeemed all $180 million of its 8.0% Class G preferred shares. DDR expected a second-quarter noncash charge of approximately $6.4 million related to the preferred shares’ original issuance costs.

Most important facts for investors to verify

• Separate recurring operations from the $21.7 million acquisition gain, $21.9 million warrant fair-value gain, and $10.7 million executive separation charge; assess Operating FFO alongside GAAP earnings and cash flow.
• Confirm the unusual basic-versus-diluted EPS difference and how warrant exercise and share issuance affect per-share results and dilution.
• Track refinancing and repayment of 2011 maturities, especially convertible notes, mortgage debt, and the term loan, as well as joint-venture maturities and defaults.
• Assess Coventry litigation, the reserved advance, guarantees, and potential JV funding demands against the company’s liquidity and stated non-recourse protections.
• Monitor occupancy, leasing spreads, operating-cost growth, planned capital spending, and potential losses on asset sales.