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| DDR > SEC Filings for DDR > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
Quarterly Report
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.
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.
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 %
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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 %
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(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
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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
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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
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(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
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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 )
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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
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)%
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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 %
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(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
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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.
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)%
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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 %
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(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 %
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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.
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 )
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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)%
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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)%
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(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 . . .
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