Neutral Stance on DDR

On Apr 19, 2013, we reiterated our long-term recommendation on DDR Corp. ( DDR - Analyst Report ) – a retail real estate investment trust (REIT) – ­­at Neutral. Our decision is based on DDR’s strong portfolio restructuring activity in the first quarter of 2013.

Going forward, we expect DDR’s diversified retail portfolio, along with a strong tenant base to provide a significant upside potential to the stock. However, the continuous acquisition spree of the company involves significant upfront operating expenses, which will limit its near-term profitability.

Why the Reiteration?

DDR mainly focuses on best-in-class retailers at strategic locations and thereby its portfolio drives value and mitigates operating risks by generating a relatively steady revenue stream. Moreover, the company boasts a cluster of industry leading tenants such as Wal-Mart Stores Inc. ( WMT - Analyst Report ) , Home Depot, Lowe’s and Target Corp. ( TGT - Analyst Report ) . This will boost its top-line growth going forward.

DDR’s fourth-quarter 2012 operating FFO came in at 27 cents per share, in line with the Zacks Consensus Estimate. This also compared favorably with 26 cents reported in the year-ago quarter. The results were attributable to organic growth and investments related to property acquisitions, partially offset by asset divesture.

Moreover, DDR’s successful execution of its long-term strategy of restructuring the portfolio and improving the balance sheet by reducing leverage are noteworthy. These provide a significant upside potential for the company going forward.

However, DDR’s properties consist primarily of community shopping centers, thereupon making its performance dependent on general economic conditions of the market for retail space. Excess retail space in a number of markets and the increase in consumer purchases through catalogs and the Internet could hurt the demand for DDR properties. Consequently, this could adversely affect the top-line growth of the company.

Over the last 60 days, the Zacks Consensus Estimate for 2013 remained unchanged at $1.10 per share. On the other hand, the Zacks Consensus Estimate for 2014 has slightly moved up to $1.18 per share. Consequently, DDR carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

REITs that are currently performing better include Acadia Realty Trust ( AKR - Snapshot Report ) , which carries a Zacks Rank #2 (Buy).

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.