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We maintain our Neutral rating on DDR Corp. (DDR - Analyst Report), a real estate investment trust (REIT) that primarily focuses on open-air value-oriented shopping centers.

Headquartered in Beachwood, Ohio, DDR acquires, owns, develops, leases and manages shopping centers and business centers across 39 states in the U.S., along with Puerto Rico and Brazil. By the end of the second quarter of 2012, DDR owned and managed 459 retail operating and development properties spanning approximately 117 million square feet.

DDR reported second quarter 2012 FFO (fund from operations) of $78.1 million or $0.27 per share compared to $52.6 million or $0.19 per share in the year-earlier quarter. The increase in year over year FFO was primarily due to the accretive effect of acquisition of two assets from an unconsolidated joint venture and partially offset by the loss on debt extinguishment charges.
 
Excluding non-recurring items, FFO in the second quarter of 2012 was $71.6 million or $0.25 per share compared to $64.4 million or $ 0.23 per share in the year-ago quarter. The increase in operating FFO was primarily due to the acquisition of nine shopping center assets in 2011 and year to date, partially offset by asset disposals. The recurring FFO beat the Zacks Consensus Estimate by $0.01.

DDR is currently repositioning its portfolio to upgrade the overall quality and improve the balance sheet by reducing leverage. In tune with this long-term strategic objective, DDR completed approximately $1.6 billion of acquisitions and asset sale transactions in the second quarter. These include the acquisition of the EDT Retail Portfolio for $1.4 billion; acquisition of a 50% ownership interest in two prime shopping centers in Portland and Phoenix for $140 million; and non-core asset sale of $81 million.

The EDT Retail Portfolio comprised of 46 open-air value-oriented shopping centers (90% leased) spanning 10.6 million square feet of gross leasable area. The property was acquired through a joint venture formed by DDR and the flagship real estate fund of The Blackstone Group LP (BX - Analyst Report).

DDR also acquired its joint venture partner’s 50% ownership interests in Tanasbourne Town Center – a 566,000 square foot prime power center in Portland, Oregon, and Arrowhead Crossing – a 412,000 square foot prime power center in Phoenix, Arizona. The properties were 95% leased to a host of leading retailers in the country.

The company sold 24 non-core assets during the quarter for total proceeds of $81 million to bring the tally for the first half of 2012 to $126 million. DDR presently has an additional $18 million worth of wholly owned assets under contract for sale.

However, the possibility of store closings at many DDR Corp. centers due to lease terminations adds uncertainty to the earnings, and it might have to re-let large big box spaces at significantly lower rents in a tough leasing environment. This in turn would affect the top-line growth of the company and put considerable pressure on its sustainability.

Note: FFO, 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.

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