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DDR Corp. (DDR - Analyst Report) reported fourth quarter 2012 operating FFO (funds from operations) per share of 27 cents, in line with the Zacks Consensus Estimate. This also compared favorably with 26 cents reported in the year-ago quarter.

For full year 2012, operating FFO per share escalated 6.2% year over year to $1.03 and marginally exceeded the Zacks Consensus Estimate of $1.02. Both quarterly and yearly results were attributable to organic growth and investments related to property acquisitions, partially offset by asset divesture.

Including non-recurring items, DDR reported fourth quarter 2012 FFO of $61.8 million or 20 cents per share, compared with $47.4 million or 17 cents per share in the year-ago quarter. For full year 2012, FFO stood at $312.4 million or $1.06 per share, compared with $227.6 million or 75 cents per share in 2011.

Inside the Headlines

Total revenue for the fourth quarter increased to $210.9 million from $189.4 million reported in the year-ago quarter. Moreover, total revenue substantially beat the Zacks Consensus Estimate of $199 million.

For full year 2012, the company reported total revenues of $800.4 million, significantly higher than $749.8 million generated in the previous year. Also, total revenues outpaced the Zacks Consensus Estimate of $775 million.

Leasing and Operating Activity

DDR executed strong leasing activities during the quarter under review. The company signed 189 new leases and 282 renewal leases spanning 0.7 million square feet and 1.7 million square feet, respectively. Including this, DDR inked 1,958 new and renewal lease deals for 11.3 million square feet in the full year 2012.  

At the year-end 2012, the company’s core portfolio was 94.2% leased – a 60 bps (basis point) expansion over the prior-year end figure of 93.6%.

During the quarter under review, rental rates for new leases increased 11.7% (cash) over prior rents and renewals increased 6.8%, resulting in an overall blended spread of 7.6%. Also, same-store net operating income (NOI) increased 4.3% on a year-over-year basis.

Portfolio Restructuring Activity

In tune with its long-term strategic objectives of restructuring the overall portfolio by upgrading the quality of shopping centers, DDR completed approximately $151 million worth of acquisitions of two California-based prime power centers in the fourth quarter. Both these assets were funded through a combination of proceeds from asset dispositions, new common equity and issuance of unsecured notes.

DDR purchased the first asset – Carolina Pavilion – from Blackstone Real Estate Partners VII for $106 million. Positioned in Charlotte, Carolina Pavilion spans 852,000 square foot and is 94% leased. Poyner Place, the second asset, was acquired for $45 million. The property, spanning 434,000 square foot, is based in Raleigh and is currently 96% occupied.

The company also sold $255 million worth of non-core assets during the quarter, out of which its share on a pro-rata basis was $62 million.

Moreover, Sonae Sierra Brasil – a joint venture of DDR – closed the sale of its 10% ownership stake in Patio Brasil, 51% share in Shopping Penha and 30% share in Tivoli Shopping for a total price of $103 million. The joint venture company will continue to manage and lease Shopping Penha and Tivoli Shopping for at least three years. Including this, during fourth quarter, DDR’s joint ventures divested five assets and generated gross proceeds of roughly $219.4 million, of which DDR's share was $51.5 million.
 
Liquidity

At year-end 2012, DDR had $31.2 million of cash.

During the fourth quarter, DDR completed new long-term financings worth $365 million, which comprised of mortgage loan of $265 million and a $100 million increase in the unsecured term loan. The company used the proceeds from these financings to pay off a mortgage loan worth $350 million that was set to mature in April this year.

Also, DDR issued 4.625% senior unsecured notes worth $150 million, due July 2022, at a premium to par of 109.2% and yield-to-maturity of 3.46%.

Subsequent to quarter end, DDR acquired funds worth $1.2 billion for refinancing its debt. In particular, the company obtained a new $750 million unsecured revolving credit facility as well as a $400 million term loan, both of which will mature in 2017. The $750 million revolving credit facility may be increased to $1.25 billion. The company also refinanced its $65 million unsecured revolving credit facility that was offered by PNC Bank of PNC Financial Services Group Inc. (PNC - Analyst Report) on similar terms.

2013 Guidance

For full year 2013, DDR reiterated its operating FFO guidance of $1.07–$1.11 per share.

Our Viewpoint

We are impressed with DDR’s decent results in the reported quarter. The company’s diversified portfolio concentrated mostly in the high growth areas of the country along with a strong tenant base has enabled it to generate steady rental revenue.

Moreover, DDR’s long-term strategy of restructuring its overall portfolio, by upgrading the quality of shopping centers and improving the balance sheet by reducing leverage has further strengthened its results. We expect these activities to provide the company a considerable upside potential and boost its top-line growth going forward.

However, DDR currently holds a Zacks Rank #4 (Sell). Other REITs that are performing better and are worth a look include Ventas Inc. (VTR - Analyst Report) and Simon Property Group Inc. (SPG - Analyst Report), both carrying a Zacks Rank #2 (Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

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