Bleak Quarter for DDR

Developers Diversified Realty Corp. (DDR - Analyst Report), a real estate investment trust (REIT), reported relatively weak third quarter results, with FFO (fund from operations) of ($90.1) million or (54 cents) per share compared to $96.7 million or 80 cents per share in the year-earlier quarter. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.


The decrease in year-over-year FFO was primarily due to the non-recurring charges of $164.6 million primarily related to the non-cash impairment charges and non-cash loss related to the Otto investment. Excluding one-time charges, FFO in the third quarter was $74.5 million or 44 cents per share.

Despite challenging market conditions, Developers Diversified executed strong leasing activities during the quarter. The company signed 146 new leases and 287 renewal leases spanning over 0.7 million square feet and 1.9 million square feet, respectively. The core portfolio of the company was 90.9% leased at the end of the quarter, compared to 94.5% in the prior-year quarter.

Overall rental rates decreased 3.5% on cash basis year over year during the quarter. Average annualized base rents in the company’s portfolio (excluding Brazil) reached $12.50 per square foot at the end of the quarter, up from $12.38 in the year-ago quarter. Same-store net operating income (NOI) decreased 4.1% year over year, largely due to bankruptcies and related store-closings of Circuit City, Linens 'N Things, Goody's and Steve & Barry's.

Developers Diversified is selling assets to raise cash. During the quarter, the company sold 11 wholly-owned assets totaling 1.5 million square feet generating gross proceeds of $156.6 million and realized a profit of $4.4 million. The company also sold eight JV properties totaling 1.7 million square feet generating gross proceeds of $107.6 million, realizing a loss of $13.8 million. At quarter end, Developers Diversified had four wholly-owned and consolidated JV development projects under construction and only one unconsolidated JV project under construction. The company also had a single redevelopment and expansion project each in its wholly-owned and consolidated JV segment, and unconsolidated JV segment.

During the quarter, Developers Diversified issued $300 million 9.625% senior unsecured notes due Mar 2016, utilizing the proceeds to repay debt with short-term maturities. In addition, the company purchased $250.1 million and $47.4 million face amount of senior unsecured notes at a gain of $22.1 million and $6.7 million respectively. Furthermore, Developers Diversified sold 18.4 million common shares during the quarter, generating gross proceeds of $156.6 million, all of which were utilized to repay debt. Although both debt and equity financing will provide the much-needed cash, they could potentially leverage the balance sheet and dilute earnings.

The company also obtained a $17 million mortgage loan from a life insurance company, secured by two shopping centers. Subsequent to the end of the quarter, the company obtained a $400 million five-year loan collateralized by 28 shopping centers.