DDR Corp. (the filing issuer; identified in the request as SITE Centers Corp.) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. The filing is issued by DDR Corp., an Ohio REIT focused on shopping centers, not under the SITE Centers name.
Business context and operating performance
At quarter-end, DDR had an economic interest in 385 shopping centers, including 148 held through joint ventures, with approximately 106 million square feet of GLA. The company acquires, owns, develops, leases and manages retail properties, and also makes shopping-center-related loans.
- Q3 revenue was $250.5 million, up $44.1 million (21%) from $206.4 million. Nine-month revenue was $744.9 million, up $143.8 million (24%) from $601.1 million. Management attributed most of the increase to acquisitions, with comparable-property growth also contributing; fee and other income declined.
- Portfolio occupancy was 92.8%, compared with 92.1% a year earlier and 92.6% at December 31, 2013. Average annualized base rent per occupied square foot was $13.65, versus $13.19 a year earlier (excluding Brazil assets from the comparison).
- For comparable leases signed in Q3, leasing spreads were 23.6% on new leases and 8.2% on renewals. DDR leased approximately 2.7 million square feet in Q3 and 8.8 million square feet in the first nine months.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $250.5m | $206.4m | $744.9m | $601.1m |
| Net income (loss) attributable to common shareholders | $63.0m | ($7.0m) | $107.6m | ($43.7m) |
| Diluted EPS | $0.17 | ($0.02) | $0.30 | ($0.14) |
| FFO attributable to common shareholders | $110.8m | $89.9m | $278.7m | $252.4m |
| Operating FFO attributable to common shareholders | $106.2m | $90.0m | $308.2m | $262.2m |
GAAP earnings benefited substantially from asset-sale and investment gains, including $57.1 million of Q3 discontinued-operations gains on real estate dispositions. Nine-month results included an $83.8 million gain on the sale of DDR’s Brazil investment and other transaction gains. FFO and Operating FFO are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Cash flow: Nine-month operating cash flow was $315.4 million, compared with $276.7 million in 2013. Investing activities provided $310.4 million, versus $395.5 million used in 2013, largely reflecting disposition proceeds. Financing activities used $577.7 million, versus $122.9 million provided in 2013, mainly due to higher debt repayments and lower financing proceeds.
- Debt and liquidity: Total consolidated debt was $5.236 billion at September 30, down from $5.295 billion at year-end 2013. Cash and equivalents were $134.3 million. The $815 million revolving facilities had $780.6 million of borrowing capacity available after outstanding borrowings and letters of credit. DDR reported compliance with debt covenants.
- Capitalization: Debt was approximately 45% of total market capitalization. The reported weighted-average debt interest rate was 5.0% for the first nine months; contractual-rate average, excluding specified accounting adjustments, was 4.8% at quarter-end.
- Dividends: Common dividends declared were $0.155 per share in each of the first three quarters of 2014. Nine-month declared common and preferred cash dividends totaled $185.4 million.
Material changes, outlook and risks
- DDR acquired the remaining 95% interest in seven Blackstone joint-venture power centers in September; the transaction was valued at $395.3 million. It also acquired five other centers during the first nine months for a combined gross purchase price of $299.9 million.
- In April, DDR sold its entire 50% interest in Sonae Sierra Brazil for approximately $343.6 million. The company also sold 23 shopping-center properties during the first nine months for aggregate proceeds of $439.8 million and recorded a $76.9 million net gain, excluding prior-period impairments.
- After quarter-end, a DDR/Blackstone joint venture acquired 71 shopping centers for $1.93 billion. DDR invested $19.6 million in common equity and $300 million in preferred equity bearing an 8.5% fixed dividend rate; Blackstone holds 95% of the common equity.
- Management described retailer demand and leasing activity as strong and pursued recycling capital from lower-growth assets into higher-quality power centers. It expected to place $250–$300 million of development and redevelopment investments into service during 2014, net of outlot sale proceeds. The filing does not provide formal earnings or FFO guidance.
- Interest-rate exposure remains relevant: a 100-basis-point increase in short-term rates was estimated to raise annualized interest expense by approximately $3.1 million for DDR and $0.6 million for its proportionate share of joint ventures. Swap agreements hedge part of variable-rate debt; DDR expected about $5.9 million of additional interest expense over the next 12 months from hedge-related reclassifications and amortization.
- Risks include tenant credit and retail-sector conditions, acquisition and development execution, refinancing and covenant compliance, interest rates, joint-venture exposures and potential impairment of development land. One $9.8 million loan was over 90 days past due and partially reserved; another loan was fully reserved. The company’s $66.9 million Bloomfield Loan to a Coventry II venture was fully reserved. DDR reported an October 2014 Coventry litigation settlement, subject to contingencies, and did not expect it to materially adversely affect its financial condition, results or cash flows.
Important facts for investors to verify
- Confirm the issuer and security identity: this 2014 filing is for DDR Corp.; reconcile that with the SITE Centers name in the request.
- Separate recurring property performance from gains on dispositions, the Brazil investment sale, and discontinued operations when assessing the sharp improvement in GAAP earnings.
- Review the underlying FFO and Operating FFO reconciliations and note that management says Operating FFO adjustments may recur.
- Assess the financing, leverage and returns of the October Blackstone joint venture, including DDR’s $300 million preferred investment and the venture’s debt.
- Monitor the delinquent and reserved loans, Coventry II exposures and joint-venture debt maturities; verify subsequent resolution and cash recovery.
- Check actual year-end development spending, leasing and occupancy results against management’s stated plans and the $250–$300 million expected investment placed in service.