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DDR > SEC Filings for DDR > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for DDR CORP


8-Nov-2013

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, 2012, 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 acquiring, owning, developing, redeveloping, expanding, leasing and managing shopping centers. In addition, the Company engages in the origination and acquisition of loans and debt securities collateralized directly or indirectly by shopping centers. As of September 30, 2013, the Company's portfolio consisted of 431 shopping centers (including 203 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. These properties consist of shopping centers, lifestyle centers and enclosed malls owned in the United States, Puerto Rico and Brazil. At September 30, 2013, the Company owned almost 117 million total square feet of gross leasable area ("GLA"), which includes all of the aforementioned properties. These amounts do not include 26 assets that the Company has a nominal interest in and has not managed since January 1, 2012. At September 30, 2013, the aggregate occupancy of the Company's operating shopping center portfolio in which the Company has an economic interest was 92.1%, as compared to 91.3% at September 30, 2012. The Company owned 458 shopping centers (including 210 shopping centers owned through unconsolidated joint ventures and three that were otherwise consolidated by the Company) and one office property at September 30, 2012. The average annualized base rent per occupied square foot was $14.00 at September 30, 2013, as compared to $13.66 at December 31, 2012 and $13.79 at September 30, 2012.

Net loss attributable to DDR common shareholders for the three-month period ended September 30, 2013, was $7.0 million, or $0.02 per share (basic and diluted), compared to net income attributable to DDR common shareholders of $13.3 million, or $0.04 per share (basic and diluted), for the prior-year comparable period. Net loss attributable to DDR common shareholders for the nine-month period ended September 30, 2013, was $43.7 million, or $0.14 per share (basic and diluted), compared to net loss attributable to DDR common shareholders of $53.2 million, or $0.19 per share (basic and diluted), for the prior-year comparable period. Funds from operations attributable to DDR common shareholders ("FFO") for the three-month period ended September 30, 2013, was $89.9 million, compared to $112.7 million for the prior-year comparable period. FFO for the nine-month period ended September 30, 2013, was $252.4 million, compared to $250.5 million for the prior-year comparable period. The increase in FFO for the nine-month period ended September 30, 2013, primarily was due to organic growth and net shopping center acquisition activity as well as a reduction in impairment charges of non-depreciable assets and the loss on debt retirement related to the Company's repurchase of senior unsecured notes recorded in 2012, partially offset by the gain on change in control of interests recorded in 2012.


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Third Quarter 2013 Operating Results

During the third quarter of 2013, 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, which are referred to as "Prime," "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 2013 and other recent transactional activity included the following:

Acquired $258.5 million of wholly-owned Prime shopping centers;

Closed on a new unconsolidated joint venture with an affiliate of The Blackstone Group L.P. ("Blackstone") that acquired a portfolio of seven Prime power centers with a total value of $332.0 million;

Completed the disposition of $137.9 million of non-Prime Assets, of which DDR's pro-rata share of the proceeds was $103.8 million and

Acquired, in October 2013, its joint venture partner's interest in 30 Prime Assets ("Blackstone Acquisition") from DDR's previously existing joint venture with an affiliate of Blackstone funded through a combination of a portion of the net proceeds from the issuance of unsecured debt and common equity upon the settlement of the Company's forward equity offering, the repayment of a preferred equity interest and a mezzanine loan and the assumption of existing mortgage debt.

The Company continued its trend of consistent internal growth and strong operating performance in the first nine months of 2013 as evidenced by the number of leases executed during the third quarter, the increase in the occupancy rate and the upward trend in the average annualized base rental rates.

The Company leased approximately 3.0 million square feet in the third quarter of 2013, including 210 new leases and 233 renewals for a total of 443 leases. For the nine months ended September 30, 2013, the Company leased approximately 7.8 million square feet for a total of 1,335 leases. Less than 1.1 million square feet of total GLA leases (or 2.1% of total average annualized base rent) expiring in 2013 remained as of November 1, 2013, compared to the 6.1 million square feet of total GLA expiring in 2013, determined as of December 31, 2012.

The Company continued to execute both new leases and renewals at positive rental spreads. At December 31, 2012, the Company had 1,466 leases expiring in 2013 with an average base rent per square foot of $16.94. For the comparable leases executed in the third quarter of 2013, the Company generated positive leasing spreads on a pro rata basis of 14.5% for


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new leases and 7.0% for renewals. The Company's leasing spread calculation only includes deals that were executed within one year of the date the prior tenant vacated and, as a result, is a good benchmark to compare the average annualized base rent of expiring leases with the comparable executed market rental rates.

The aggregate occupancy of the Company's operating shopping center portfolio increased to 92.1% at September 30, 2013, as compared to 91.5% at December 31, 2012 and 91.3% at September 30, 2012. In addition, the Company's total portfolio average annualized base rent per square foot increased to $14.00 at September 30, 2013, as compared to $13.66 at December 31, 2012, and $13.79 at September 30, 2012.

The weighted-average cost of tenant improvements and lease commissions estimated to be incurred for new leases executed during the third quarter of 2013 remained low at $3.80 per rentable square foot over the lease term. The Company generally does not expend a significant amount of capital on lease renewals.

Results of Operations

Continuing Operations

Shopping center properties owned as of January 1, 2012, 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,
                                                 2013          2012        $ Change
     Base and percentage rental revenues      $  151,539     $ 134,342     $  17,197
     Recoveries from tenants                      48,443        41,839         6,604
     Fee and other income                         19,386        21,096        (1,710 )

     Total revenues                           $  219,368     $ 197,277     $  22,091


                                                 Nine-Month Periods
                                                Ended September 30,
                                                 2013          2012        $ Change
     Base and percentage rental revenues(A)   $  440,211     $ 389,732     $  50,479
     Recoveries from tenants(B)                  140,896       123,953        16,943
     Fee and other income(C)                      58,934        57,369         1,565

     Total revenues                           $  640,041     $ 571,054     $  68,987


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

                                                          Increase
               Acquisition of shopping centers           $     38.0
               Comparable Portfolio Properties                 10.4
               Straight-line rents                              1.5
               Development or redevelopment properties          0.6

                                                         $     50.5

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, wholly-owned shopping center portfolio and joint venture shopping center portfolio:

                                                              Combined Shopping
                                                            Center Portfolio (1)
                                                                September 30,
                                                            2013             2012
  Centers owned                                                 431             458
  Aggregate occupancy rate                                     92.1 %          91.3 %
  Average annualized base rent per occupied square foot   $   14.00 (2)     $ 13.79




                                                    Wholly-Owned                   Joint Venture
                                                  Shopping Centers              Shopping Centers(1)
                                                    September 30,                  September 30,
                                                2013            2012           2013             2012
Centers owned                                      225             245             203             210
Centers owned through consolidated joint
ventures                                           N/A             N/A               3               3
Aggregate occupancy rate                          92.3 %          91.6 %          91.9 %          90.9 %
Average annualized base rent per occupied
square foot                                    $ 13.34 (2)     $ 12.92       $   14.81 (3)     $ 14.83
Comparable Portfolio Properties:
Aggregate occupancy rate                          93.1 %          92.6 %           N/A             N/A
Average annualized base rent per occupied
square foot                                    $ 13.07         $ 12.63             N/A             N/A

(1) 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.

(2) Increase primarily was due to the Company's strategic portfolio realignment achieved through the recycling of capital from non-prime asset sales into the acquisition of Prime Assets as well as continued leasing of the existing portfolio at positive rental spreads.

(3) Decrease within the joint venture portfolio primarily was due to the impact of exchange rate fluctuations with the Brazilian Real, the sale of assets in Brazil and the inclusion of the BRE DDR Retail Holdings I assets in 2012.

(B) The increase in Recoveries from tenants primarily was driven by the impact of acquisition properties. Recoveries from tenants for all properties on a blended basis were approximately 89.0% and 89.2% of reimbursable operating expenses and real estate taxes for the nine-month periods ended September 30, 2013 and 2012, respectively.


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

                                                  Three-Month Periods
                                                  Ended September 30,
                                                                              Increase
                                                   2013           2012       (Decrease)
 Management, development and other fee income   $     10.3       $  10.2     $       0.1
 Ancillary and other property income                   8.0           6.8             1.2
 Lease termination fees                                1.0           4.0            (3.0 )
 Other miscellaneous                                   0.1           0.1              -

                                                $     19.4       $  21.1     $      (1.7 )


                                                   Nine-Month Periods
                                                  Ended September 30,
                                                                              Increase
                                                   2013           2012       (Decrease)
 Management, development and other fee income   $     31.2       $  33.1     $      (1.9 )
 Ancillary and other property income                  21.1          19.5             1.6
 Lease termination fees                                6.2           4.5             1.7
 Other miscellaneous                                   0.4           0.3             0.1

                                                $     58.9       $  57.4     $       1.5

The decrease in management, development and other fee income for the nine-month period ended September 30, 2013, compared to the comparable period in 2012, largely is the result of a decrease in the number of properties owned by the Company's unconsolidated joint ventures. This fee income is expected to decrease as a result of the Blackstone Acquisition that closed in October 2013 (see Sources and Uses of Capital).

Expenses from Operations (in thousands)



                                            Three-Month Periods
                                            Ended September 30,
                                             2013          2012        $ Change
          Operating and maintenance       $   34,728     $  31,287     $   3,441
          Real estate taxes                   28,541        24,668         3,873
          Impairment charges                  24,136         2,560        21,576
          General and administrative          19,246        18,547           699
          Depreciation and amortization       74,141        59,620        14,521

                                          $  180,792     $ 136,682     $  44,110

                                              Nine-Month Periods
                                             Ended September 30,
                                              2013          2012        $ Change
        Operating and maintenance(A)       $  101,412     $  93,215     $   8,197
        Real estate taxes(A)                   82,940        73,326         9,614
        Impairment charges(B)                  54,134        44,692         9,442
        General and administrative(C)          59,123        56,691         2,432
        Depreciation and amortization(A)      211,200       178,535        32,665

                                           $  508,809     $ 446,459     $  62,350


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(A) The changes for the nine-month period ended September 30, 2013, compared to the comparable period in 2012, are due to the following (in millions):

                                             Operating         Real        Depreciation
                                                and           Estate           and
                                            Maintenance       Taxes        Amortization
 Acquisitions of shopping centers          $         5.7     $    6.9     $         25.4
 Comparable Portfolio Properties                     1.4          2.6                3.9
 Development or redevelopment properties             1.1          0.1                3.4

                                           $         8.2     $    9.6     $         32.7

The increase in depreciation expense for the Comparable Portfolio Properties and the development or redevelopment properties is attributable to a combination of accelerated depreciation charges related to changes in the estimated useful life of certain assets that are expected to be redeveloped in future periods and assets placed in service in 2012.

(B) The Company recorded impairment charges during the three- and nine-month periods ended September 30, 2013 and 2012, related to its shopping center assets marketed for sale. These impairments are more fully described in Note 13, "Impairment Charges and Impairment of Joint Venture Investments," in the notes to the condensed consolidated financial statements included herein.

(C) General and administrative expenses were approximately 4.9% and 4.7% of total revenues, including total revenues of unconsolidated joint ventures, managed properties and discontinued operations, for the nine-month periods ended September 30, 2013 and 2012, respectively. The Company continues to expense certain internal leasing salaries, legal salaries and related expenses associated with leasing and re-leasing of existing space.

Other Income and Expenses (in thousands)



                                           Three-Month Periods
                                           Ended September 30,
                                           2013            2012         $ Change
       Interest income                  $    6,691      $    5,661      $   1,030
       Interest expense                    (57,936 )       (53,724 )       (4,212 )
       Other income (expense), net          (2,282 )        (1,868 )         (414 )

                                        $  (53,527 )    $  (49,931 )    $  (3,596 )


                                            Nine-Month Periods
                                           Ended September 30,
                                           2013            2012         $ Change
       Interest income(A)               $   20,365      $    9,829      $  10,536
       Interest expense(B)                (166,990 )      (161,203 )       (5,787 )
       Loss on debt retirement(C)               -          (13,495 )       13,495
       Other income (expense), net(D)       (3,288 )        (7,100 )        3,812

                                        $ (149,913 )    $ (171,969 )    $  22,056

(A) The weighted-average interest rate of loan receivables, including loans to affiliates, was 9.0% and 8.5% at September 30, 2013 and 2012, respectively. The increase in the amount of interest income recognized in the first nine months of 2013 primarily is due to the preferred equity investment in the


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unconsolidated joint ventures with affiliates of Blackstone. The interest income from the preferred equity investment is expected to decrease as a result of the Blackstone Acquisition that closed in October 2013 (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,
                                                           2013        2012
        Weighted-average debt outstanding (in billions)   $   4.5      $ 4.2
        Weighted-average interest rate                        5.0 %      5.3 %

The weighted-average interest rate (based on contractual rates and excluding convertible debt accretion and deferred financing costs) at September 30, 2013 and 2012 was 4.8%.

Interest costs capitalized in conjunction with development and redevelopment projects and unconsolidated development and redevelopment joint venture interests were $2.0 million and $6.8 million for the three- and nine-month periods ended September 30, 2013, respectively, as compared to $3.5 million and $9.9 million for the comparable periods in 2012. 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 at a premium to par value.

(D) Other income (expense) was composed of the following (in millions):

                                                         Nine-Month
                                                       Periods Ended
                                                       September 30,
                                                      2013        2012
             Transaction and other expenses, net     $ (2.4 )    $ (3.0 )
             Litigation-related expenses               (1.2 )      (3.5 )
             Debt extinguishment gain (costs), net      0.3        (0.6 )

                                                     $ (3.3 )    $ (7.1 )

Other Items (in thousands)



                                                       Three-Month Periods
                                                       Ended September 30,
                                                      2013             2012           $ Change
Equity in net income of joint ventures              $   3,780        $   5,486        $  (1,706 )
Impairment of joint venture investments                    -           (26,111 )         26,111
Gain on change in control of interests                     -            40,645          (40,645 )
Tax expense of taxable REIT subsidiaries and
state franchise and income taxes                         (406 )           (263 )           (143 )


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                                                       Nine-Month Periods
                                                      Ended September 30,
                                                     2013             2012           $ Change
Equity in net income of joint ventures(A)          $   5,543        $  16,966        $ (11,423 )
Impairment of joint venture investments(B)                -           (26,671 )         26,671
Gain on change in control of interests(C)              1,066           79,993          (78,927 )
Tax expense of taxable REIT subsidiaries and
state franchise and income taxes                      (2,481 )           (798 )         (1,683 )

(A) The decrease in equity in net income of joint ventures for the nine-month period ended September 30, 2013, compared to the comparable prior-year period, primarily is a result of lower net income from the Company's investment in Sonae Sierra Brasil in 2013, as discussed below, and impairment charges recorded on several assets. For the nine-month period ended September 30, 2013, impairment charges were recorded at six shopping centers of which the Company's proportionate share was approximately $7.5 million.

At September 30, 2013 and 2012, 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 Sao Paulo, Brazil. This entity uses the functional currency of Brazilian Real. 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 the operation of the joint venture including ground-up developments and expansions in Brazil. The weighted-average exchange rate of the Brazilian Real to U.S. Dollar used for recording the equity in net income was 2.10 and 1.90 for the nine-month periods ended September 30, 2013 and 2012, respectively, which represents a 10.5% increase. The overall decrease in equity in net income from the Sonae Sierra Brasil joint venture, net of the impact of foreign currency translation, for the nine-month period ended September 30, 2013, as compared to the comparable period in 2012, primarily is due to the sale of three shopping centers in the fourth quarter of 2012 and a gain recognized on the strategic asset swap and partial sale of two assets in the portfolio in the first quarter of 2012, partially offset by expansion activity coming on line as well as increases in parking revenue and ancillary income.

(B) The other than temporary impairment charges of the joint venture investments are more fully described in Note 13 "Impairment Charges and Impairment of Joint Venture Investments," in the notes to the condensed consolidated financial statements included herein.

(C) Since January 1, 2012 through September 30, 2013, the Company has acquired its partners' interests in ten shopping centers (five assets in each of 2013 and 2012). The Company accounted for these transactions as step acquisitions. Due to the change in control that occurred, the Company recorded an aggregate net gain associated with these transactions related to the difference between the Company's carrying value and fair value of the previously held equity interests.

Discontinued Operations (in thousands)



                                                             Three-Month Periods
                                                             Ended September 30,
                                                             2013             2012          $ Change
Income (loss) from discontinued operations                $       742       $ (3,640 )      $   4,382
Gain (loss) on disposition of real estate, net of tax           8,701           (176 )          8,877

                                                          $     9,443       $ (3,816 )      $  13,259
. . .
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