SITE Centers Corp. quarterly report, Q2 FY2010

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Business context and reporting period

The filing is Developers Diversified Realty Corporation (DDR), a shopping-center REIT, for the unaudited quarter and six months ended June 30, 2010; it was filed August 6, 2010. The supplied company metadata says SITE Centers Corp., which does not match the registrant named in this filing and should be verified.

At quarter-end, DDR reported 581 shopping centers and six business centers. Shopping-center occupancy was 86.6%, down from 87.4% a year earlier, or 88.1% excluding former Mervyns locations. Average annualized base rent per occupied square foot was $12.96, versus $12.52.

Financial and operating results

Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.

  • Revenue: Second-quarter revenue was $202.0 million, up 2.3% year over year. Six-month revenue was $408.2 million, up 0.9%. For the first half, base and percentage rent increased 1.4%; management, development and other fee income declined 4.7%.
  • Profit and per-share results: Second-quarter net loss attributable to common shareholders was $97.1 million, or $0.39 per diluted share, compared with a $237.2 million loss, or $1.64 per share, in Q2 2009. First-half common-shareholder loss was $132.0 million, or $0.55 per share, versus $160.3 million, or $1.18 per share. The 2010 results included substantial impairments; comparisons also reflect prior-year debt-repurchase gains and changes in equity-derivative valuations.
  • FFO (non-GAAP): FFO attributable to common shareholders was a loss of $32.8 million for Q2 and $4.4 million for the first half, versus losses of $166.5 million and $26.5 million, respectively, in 2009. Operating FFO, another non-GAAP measure, was $65.0 million for Q2 and $130.2 million for the first half, compared with $73.5 million and $161.3 million.
  • Impairments and margins: Continuing-operations impairment charges were $129.7 million in Q2 and $131.8 million for the first half, compared with $48.2 million and $55.6 million in 2009. The filing does not provide a single consolidated operating-margin figure. First-half tenant recoveries equaled 70.3% of operating expenses and real estate taxes, down from 74.3%, primarily reflecting higher bad-debt expense.
  • Cash flow: First-half operating cash flow was $128.0 million, compared with $139.9 million in 2009; investing cash flow was positive $45.3 million versus $15.1 million; financing used $178.4 million versus $154.6 million. Cash and cash equivalents were $20.9 million at June 30, 2010.
  • Debt and liquidity: Total consolidated indebtedness was $4.638 billion at June 30, down from $5.179 billion at December 31, 2009. Revolving facilities had $650 million outstanding and $647 million available; DDR also reported approximately $0.7 billion in cash and line availability. Total liabilities were $4.923 billion. The company said it was in compliance with financial covenants at quarter-end.
  • Dividends and equity: Common dividends declared were $0.02 per share in each 2010 quarter, substantially below the $0.20 quarterly dividend in 2009. DDR issued approximately 47.9 million common shares in early 2010, raising net proceeds of about $383 million; substantially all equity proceeds were used to repay debt.

Material changes versus prior comparable periods

Revenue grew modestly, while occupancy remained below historical levels and the portfolio had fewer centers than a year earlier. Common-shareholder losses narrowed substantially, largely because 2009 included greater impairment and discontinued-operation losses and a larger adverse equity-derivative adjustment; the comparison is also affected by 2009 gains on debt repurchases. First-half impairment expense nevertheless increased in continuing operations. DDR reduced debt through asset-sale proceeds, equity issuance, debt refinancing and repayments, while cash flow from operations declined.

Outlook, commentary, risks and unusual items

  • DDR gave no specific earnings or revenue guidance. Management expected to continue deleveraging through the remainder of 2010 and into 2011, pursue asset sales, control discretionary spending and reduce reliance on short-term debt. It expected 2010 consolidated development, expansion, improvement and re-tenanting expenditures of approximately $84.9 million, with $51.9 million spent through June 30.
  • Management described leasing activity as strong and was encouraged by tenant demand, but characterized the economic recovery as fragile and uneven. It cited tenant bankruptcies, vacancies and bad debt as continuing pressures. Management expected operating cash flow to cover scheduled interest and principal payments, recurring tenant improvements and REIT-required dividends, while warning that financing alternatives could be more costly or unavailable.
  • The former Mervyns joint venture had received a default notice on a $179.8 million mortgage due in October 2010. It held $21.0 million of restricted cash, applied to the mortgage in July; the venture and loan servicer agreed to seek a receiver to manage and liquidate the assets. DDR anticipated that a receiver’s appointment could lead to deconsolidation.
  • DDR recorded major impairments tied to former Mervyns properties, Russian development land and assets marketed for sale. It said it was no longer committed to funding the Russian projects without third-party capital. Some prospective asset sales could produce about $15 million of losses if completed on currently negotiated terms; those assets were not impaired at quarter-end.
  • Revolving credit facilities were extended by one year to June 2011; renewal discussions were underway, and DDR expected smaller commitments, but gave no assurance the renewal would be completed. Subsequent to quarter-end, DDR repaid $149.1 million of unsecured notes in August 2010.
  • Material contingencies include Coventry litigation seeking at least $500 million plus punitive damages; DDR said it believed the claims lacked merit. A California tenant verdict was affirmed on appeal in July 2010; DDR had accrued $11.1 million and recorded a related second-quarter charge. The filing also describes joint-venture debt maturities and guarantees, including approximately $39.4 million of Coventry II guarantees and broader payment commitments.
  • Interest-rate exposure remains: the filing estimated that a 100-basis-point increase would add about $7.0 million to DDR’s interest expense for the six-month period, plus $0.7 million for its proportionate share of joint ventures’ expense. It expected approximately $5.4 million of additional interest expense over the next 12 months from interest-rate swaps.

Most important facts for investors to verify

  1. Confirm the registrant identity: this text is a DDR 10-Q, not a filing under the supplied SITE Centers Corp. metadata.
  2. Track the Mervyns loan default, receiver process, mortgage outcome and any resulting deconsolidation or further impairment.
  3. Check refinancing and renewal progress for the June 2011 revolvers and the status of near-term consolidated and joint-venture debt maturities.
  4. Monitor occupancy, leasing, tenant credit and bad-debt trends, especially the effect of former Mervyns vacancies.
  5. Assess the outcome and potential financial impact of the Coventry dispute and the affirmed tenant verdict, as well as joint-venture guarantees and other commitments.
  6. Distinguish GAAP losses from FFO and Operating FFO, and evaluate the effect of impairments, derivative revaluations, asset sales and share issuance on recurring performance and per-share results.