Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DDR > SEC Filings for DDR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for DDR CORP

Form 10-Q for DDR CORP


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides readers with a perspective from management on the Company's financial condition, results of operations, liquidity and other factors that may affect the Company's future results. The Company believes it is important to read the MD&A in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2011, as amended, as well as other publicly available information.

Executive Summary

The Company is a self-administered and self-managed Real Estate Investment Trust ("REIT") in the business of owning, managing and developing a portfolio of shopping centers. As of September 30, 2012, the Company's portfolio consisted of 458 shopping centers (including 210 shopping centers owned through unconsolidated joint ventures and three shopping centers that are otherwise consolidated by the Company) in which the Company had an economic interest and one office property. These properties consist of shopping centers, lifestyle centers and enclosed malls owned in the United States, Puerto Rico and Brazil. At September 30, 2012, the Company owned approximately 116 million total square feet of gross leasable area ("GLA"), which includes all of the aforementioned properties. At September 30, 2012, the aggregate occupancy of the Company's operating shopping center portfolio in which the Company has an economic interest was 91.3%, as compared to 86.3% at September 30, 2011. The average annualized base rent per occupied square foot was $13.79 at September 30, 2012, as compared to $13.76 at September 30, 2011. The Company owned 450 shopping centers and five office properties at September 30, 2011.

Net income applicable to DDR common shareholders for the three-month period ended September 30, 2012, was $13.3 million, or $0.04 per share (basic and diluted), compared to net loss applicable to DDR common shareholders of $50.0 million, or $0.18 per share (basic and diluted), for the prior-year comparable period. Net loss applicable to DDR common shareholders for the nine-month period ended September 30, 2012, was $53.2 million, or $0.19 per share (basic and diluted), compared to net loss applicable to DDR common shareholders of $52.1 million, or $0.20 per share (basic) and $0.28 per share (diluted), for the prior-year comparable period. Funds from operations applicable to DDR common shareholders ("FFO") for the three-month period ended September 30, 2012, was $112.7 million compared to $34.7 million for the prior-year comparable period. FFO applicable to DDR common shareholders for the nine-month period ended September 30, 2012, was $250.5 million compared to $180.2 million for the prior-year comparable period. The increase in FFO for the nine-month period ended September 30, 2012, primarily was due to organic growth, shopping center acquisitions, the gain on change in control of interests related to the Company's acquisition of assets from unconsolidated joint ventures and a decrease in impairment charges of non-depreciable assets recorded partially offset by the write-off of the original issuance costs from the redemption of the Company's 7.50% Class I cumulative preferred shares ("7.50 % Class I Preferred Shares"), the effect of the valuation adjustment associated with the warrants that were exercised in full for cash in the first quarter of 2011 and the loss on debt extinguishment related to the Company's repurchase of a portion of its 9.625% senior unsecured notes in 2012.


Table of Contents

Third Quarter 2012 Operating Results

During the third quarter of 2012, the Company continued to pursue opportunities to position itself for long-term growth while also lowering the Company's risk profile and cost of capital. The Company continued making progress on its balance sheet initiatives; strengthening the operations of its Prime Portfolio and recycling capital from non-prime asset sales into the acquisition of prime assets (i.e., market-dominant shopping centers with high-quality tenants located in attractive markets with strong demographic profiles, "Prime Portfolio" or "Prime Assets") to improve portfolio quality. The Company continues to carefully consider opportunities that fit its selective acquisition requirements and remains prudent in its underwriting and bidding practices.

Significant third quarter 2012 transactional activity included the following:

Acquired $328.2 million of Prime Assets including two assets from its unconsolidated joint venture partners $120.0 million of which was funded with the issuance of 7.9 million of its common shares;

Completed the disposition of $12.1 million of non- Prime Assets, of which DDR's pro-rata share of the proceeds was $7.5 million;

Issued $200.0 million of its newly designated 6.50% Class J cumulative redeemable preferred shares ("6.50% Class J Preferred Shares"); and

Redeemed all of its outstanding 7.50% Class I Preferred Shares.

The Company continued its improvement in operating performance and internal growth in the third quarter of 2012 as evidenced by the number of leases executed during the quarter, the increase in the occupancy rate and the continued upward trend in the average annualized base rental rates. The Company leased approximately 2.9 million square feet in the third quarter of 2012 including new leases and renewals. The newly executed leases of 1.2 million square feet was the second highest level of quarterly leasing volume by square footage in Company history. The aggregate occupancy of the Company's operating shopping center portfolio increased to 91.3% at September 30, 2012, as compared to 86.3% at September 30, 2011. In addition, the Company's total portfolio average annualized base rent per square foot increased to $13.79 at September 30, 2012, as compared to $13.76 at September 30, 2011. The weighted-average cost of tenant improvements and lease commissions estimated to be incurred for new leases executed during the third quarter of 2012 remained low at $2.44 per rentable square foot over the lease term.


Table of Contents

Results of Operations

Continuing Operations

Shopping center properties owned as of January 1, 2011, but excluding properties under development or redevelopment and those classified in discontinued operations, are referred to herein as the "Comparable Portfolio Properties."

Revenues from Operations (in thousands)



                                         Three-Month Periods
                                         Ended September 30,
                                          2012          2011        $ Change       % Change
 Base and percentage rental revenues   $  139,333     $ 125,533     $  13,800             11 %
 Recoveries from tenants                   43,170        40,566         2,604              6 %
 Fee and other income                      22,480        20,992         1,488              7 %

 Total revenues                        $  204,983     $ 187,091     $  17,892             10 %

                                               Nine-Month Periods
                                               Ended September 30,
                                               2012           2011         $ Change         % Change
Base and percentage rental revenues (A)     $  404,947      $ 376,982      $  27,965                7 %
Recoveries from tenants (B)                    128,142        125,726          2,416                2 %
Fee and other income (C)                        58,986         60,408         (1,422 )             (2 )%

Total revenues                              $  592,075      $ 563,116      $  28,959                5 %

(A) The increase is due to the following (in millions):

                                                         Increase
                                                        (Decrease)
              Acquisition of shopping centers           $      21.7
              Comparable Portfolio Properties                   4.5
              Straight-line rents                               3.2
              Development or redevelopment properties          (1.4 )

                                                        $      28.0

The following tables present the statistics for the Company's operating shopping center portfolio affecting base and percentage rental revenues summarized by the following portfolios: combined shopping center portfolio, office property portfolio, wholly-owned shopping center portfolio and joint venture shopping center portfolio:

                                                    Shopping Center             Office Property
                                                     Portfolio (1)               Portfolio (2)
                                                     September 30,               September 30,
                                                  2012          2011          2012          2011
Centers owned                                        458           450             1             5
Aggregate occupancy rate                            91.3 %        86.3 %        52.6 %        79.5 %
Average annualized base rent per occupied
square foot                                      $ 13.79       $ 13.76       $ 17.03       $ 12.46


Table of Contents
                                                    Wholly-Owned              Joint Venture Shopping
                                                  Shopping Centers                  Centers (1)
                                                   September 30,                   September 30,
                                                 2012          2011            2012              2011
Centers owned                                       245           264               210             184
Centers owned through Consolidated joint
ventures                                            n/a           n/a                 3               2
Aggregate occupancy rate                           91.6 %        86.5 %            90.9 %          86.1 %
Average annualized base rent per occupied

square foot $ 12.92 $ 12.32 $ 14.83 $ 15.65

(1) In 2012, excludes shopping centers owned through the Company's joint venture with Coventry Real Estate Fund II ("Coventry II Fund"), which are no longer managed by the Company and in which the Company's investment basis is not material. In 2011, excludes shopping centers owned by unconsolidated joint ventures in which the Company's investment basis is zero and in which the Company is receiving no allocation of income or loss, which includes certain Coventry II Fund investments.

(2) In October 2012, the Company sold its one remaining office property.

(B) Recoveries were approximately 88.2% and 87.3% of reimbursable operating expenses and real estate taxes for the nine-month periods ended September 30, 2012 and 2011, respectively. The percentage of recoveries from tenants increased primarily due to the increase in occupancy. The increase in recovery revenue primarily is attributable to newly acquired assets.

(C) Composed of the following (in millions):

                                                                     Three-Month Periods
                                                                     Ended September 30,
                                                                                      (Decrease)
                                                             2012         2011         Increase
Management, development, financing and other fee income     $ 10.2       $ 11.2       $      (1.0 )
Ancillary and other property income                            6.9          7.3              (0.4 )
Lease termination fees                                         5.3          2.5               2.8
Other miscellaneous                                            0.1           -                0.1

                                                            $ 22.5       $ 21.0       $       1.5

                                                                     Nine-Month Periods
                                                                     Ended September 30,
                                                                                      (Decrease)
                                                             2012         2011         Increase
Management, development, financing and other fee income     $ 33.2       $ 35.2       $      (2.0 )
Ancillary and other property income                           19.8         20.8              (1.0 )
Lease termination fees                                         5.8          3.9               1.9
Other miscellaneous                                            0.2          0.5              (0.3 )

                                                            $ 59.0       $ 60.4       $      (1.4 )

The decrease in management, development, financing and other fee income in 2012 is largely the result of the expiration of the management contracts by their own terms with the Coventry II Fund as of December 31, 2011 (see Off-Balance Sheet Arrangements). These contracts generated


Table of Contents

approximately $2.3 million in gross fees related to the Company's management, development and leasing of the assets in 2011. During 2012, the Company executed lease terminations on four Rite Aid spaces, three of which have been released.

Expenses from Operations (in thousands)



                                      Three-Month Periods
                                      Ended September 30,
                                       2012          2011        $ Change        % Change
    Operating and maintenance       $   32,389     $  32,051     $     338             1 %
    Real estate taxes                   25,795        25,039           756             3 %
    Impairment charges                   8,258        46,168       (37,910 )         (82)%
    General and administrative          18,547        17,954           593             3 %
    Depreciation and amortization       61,276        53,511         7,765            15 %

                                    $  146,265     $ 174,723     $ (28,458 )         (16)%

                                         Nine-Month Periods
                                        Ended September 30,
                                         2012          2011        $ Change        % Change
  Operating and maintenance (A)       $   96,765     $ 100,278     $  (3,513 )          (4)%
  Real estate taxes (A)                   76,525        74,938         1,587             2 %
  Impairment charges (B)                  90,161        50,835        39,326            77 %
  General and administrative (C)          56,691        65,310        (8,619 )         (13)%
  Depreciation and amortization (A)      184,176       158,513        25,663            16 %

                                      $  504,318     $ 449,874     $  54,444            12 %

(A) The changes for the nine-month period ended September 30, 2012 compared to 2011, are due to the following (in millions):

                                               Operating                                  Depreciation
                                                  and               Real Estate               and
                                              Maintenance              Taxes              amortization
Comparable Portfolio Properties              $        (3.2 )       $        (2.5 )       $          9.4
Acquisitions of shopping centers                       2.6                   4.0                   14.9
Development or redevelopment properties               (2.9 )                 0.1                    1.4

                                             $        (3.5 )       $         1.6         $         25.7

The decrease in operating and maintenance expense for the Comparable Portfolio Properties primarily related to a decrease in snow removal expense, utilities expense, and other property related expenditures. The decrease in the development or redevelopment properties is primarily due to decreased expenses primarily associated with the cinema and entertainment operations located at the Company's shopping centers. The increase in depreciation expense for the Comparable Portfolio Properties is attributable to accelerated depreciation charges related to changes in the estimated useful life of certain assets that are expected to be redeveloped in future periods.

(B) The Company recorded impairment charges during the three- and nine-month periods ended September 30, 2012 and 2011, primarily related to land and shopping center assets marketed for sale. These impairments are more fully described in Note 12, "Impairment Charges and Impairment of Joint Venture Investments," in the notes to the condensed consolidated financial statements included herein.


Table of Contents
(C) General and administrative expenses were approximately 4.7% and 5.3% of total revenues, including total revenues of unconsolidated joint ventures, managed properties and discontinued operations, for the nine-month periods ended September 30, 2012 and 2011, respectively. The Company continues to expense certain internal leasing salaries, legal salaries and related expenses associated with leasing and re-leasing of existing space.

During the nine-month periods ended September 30, 2012 and 2011, the Company recorded charges of $1.0 million and $11.0 million, respectively, as a result of a termination without cause of executives, including the Executive Chairman of the Board in 2011, the terms of which were pursuant to employment agreements, as applicable.

Other Income and Expenses (in thousands)



                                      Three-Month Periods
                                      Ended September 30,
                                      2012           2011         $ Change        % Change
  Interest income                   $   5,661      $   2,460      $   3,201           130 %
  Interest expense                    (55,245 )      (55,921 )          676            (1)%
  Loss on retirement of debt, net          -            (134 )          134          (100)%
  Other (expense) income, net          (1,884 )          181         (2,065 )      (1,141)%

                                    $ (51,468 )    $ (53,414 )    $   1,946            (4)%

                                                 Nine-Month Periods
                                                 Ended September 30,
                                                2012             2011          $ Change        % Change
Interest income (A)                          $    9,829       $    7,679       $   2,150            28 %
Interest expense (B)                           (165,768 )       (168,471 )         2,703            (2)%
Loss on retirement of debt, net (C)             (13,495 )           (134 )       (13,361 )       9,971 %
Gain on equity derivative instruments (D)            -            21,926         (21,926 )        (100)%
Other (expense) income, net (E)                  (7,143 )         (4,825 )        (2,318 )          48 %

                                             $ (176,577 )     $ (143,825 )     $ (32,752 )          23 %

(A) The weighted-average interest rate of loan receivables, including loans to affiliates, at September 30, 2012, was 8.5%. The increase in the amount of interest income recognized is primarily due to the preferred equity investment in the unconsolidated joint venture with an affiliate of The Blackstone Group L.P. ("Blackstone") (see Sources and Uses of Capital).

(B) The weighted-average debt outstanding and related weighted-average interest rates, including amounts allocated to discontinued operations, are as follows:

                                                       Nine-Month Periods Ended
                                                             September 30,
                                                        2012                2011
   Weighted-average debt outstanding (in billions)   $       4.2           $   4.3
   Weighted-average interest rate                            5.3 %             5.6 %

The weighted-average interest rate (based on contractual rates and excluding convertible debt accretion and deferred financing costs) at September 30, 2012 and 2011 was 4.8% and 5.1%, respectively.


Table of Contents

Interest costs capitalized in conjunction with development and redevelopment projects and unconsolidated development and redevelopment joint venture interests were $3.5 million and $9.9 million for the three- and nine-month periods ended September 30, 2012, respectively, as compared to $3.3 million and $9.4 million for the respective periods in 2011. The Company ceases the capitalization of interest as assets are placed in service or upon the suspension of construction activities.

(C) For the nine-month period ended September 30, 2012, the Company repurchased $60.0 million aggregate principal amount of its 9.625% senior unsecured notes due 2016 at a premium to par value.

(D) Represents the impact of the valuation adjustments for the equity derivative instruments issued as part of the stock purchase agreement with Mr. Alexander Otto and certain members of the Otto family. The valuation and resulting gain primarily related to the difference between the closing trading value of the Company's common shares from January 1, 2011, through March 18, 2011, the exercise date of the warrants. Because all of the warrants were exercised in March 2011, the Company no longer records the changes in fair value of these instruments in its earnings.

(E) Other income (expenses) were composed of the following (in millions):

                                                       Nine-Month Periods
                                                      Ended September 30,
                                                      2012            2011
         Litigation-related expenses                $    (3.5 )      $  (2.0 )
         Note receivable reserve                           -            (5.0 )
         Debt extinguishment costs, net                  (0.6 )          0.3
         Settlement of lease liability obligation          -             2.6
         Transaction and other expenses                  (3.0 )         (0.7 )

                                                    $    (7.1 )      $  (4.8 )

In June 2011, the Company sold a note receivable with a face value, including accrued interest, of $11.8 million for proceeds of $6.8 million. This transaction resulted in the recognition of a reserve of $5.0 million prior to the sale to reduce the loan receivable to fair value.

In 2010, the Company established a lease liability reserve in the amount of $3.3 million for three operating leases related to an abandoned development project and two office closures. The Company reversed $2.6 million of this previously recorded charge due to the termination of the ground lease related to the abandoned development project in the first quarter of 2011.

Other Items (in thousands)



                                                Three-Month Periods
                                                Ended September 30,
                                                2012            2011         $ Change        % Change
Equity in net income (loss) of joint
ventures                                     $    5,486       $ (2,590 )     $   8,076          (312)%
Impairment of joint venture investments         (26,111 )           -          (26,111 )        (100)%
Gain on change in control of interests           40,645             -           40,645           100 %
Tax expense of taxable REIT subsidiaries
and state franchise and income taxes               (264 )         (291 )            27            (9)%


Table of Contents
                                            Nine-Month Periods Ended
                                                  September 30,
                                              2012               2011         $ Change        % Change
Equity in net income of joint ventures
(A)                                       $      16,966        $ 15,951       $   1,015             6 %
Impairment of joint venture
investments (B)                                 (26,671 )        (1,671 )       (25,000 )       1,496 %
Gain on change in control of interests
(C)                                              79,993          22,710          57,283           252 %
Tax expense of taxable REIT
subsidiaries and state franchise and
income taxes                                       (812 )        (1,008 )           196           (19)%

(A) The increase in equity in net income of joint ventures for the nine-month period ended September 30, 2012, compared to the prior-year period is primarily a result of higher income from the Company's investment in Sonae Sierra Brasil in 2012, as discussed below, partially offset by a gain recognized in 2011 from the sale of assets held in unconsolidated joint ventures, of which the Company's share was $10.9 million.

At September 30, 2012 and 2011, the Company had an approximate 33% interest in an unconsolidated joint venture, Sonae Sierra Brasil, which owns real estate in Brazil and is headquartered in San Paulo, Brazil. This entity uses the functional currency of Brazilian reais. The Company has generally chosen not to mitigate any of the foreign currency risk through the use of hedging instruments for this entity. The operating cash flow generated by this investment has been generally retained by the joint venture and reinvested in ground-up developments and expansions in Brazil. The weighted-average exchange rate used for recording the equity in net income was 1.90 and 1.63 for the nine-month periods ended September 30, 2012 and 2011, respectively. The overall increase in equity in net income from the Sonae Sierra Brasil joint venture, net of the impact of foreign currency translation, primarily is due to a gain recognized on the strategic asset swap of two assets in the portfolio as well as shopping center development and expansion activity coming on line.

(B) The other than temporary impairment charges of the joint venture investments are more fully described in Note 12, "Impairment Charges and Impairment of . . .

  Add DDR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DDR - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.