DDR Corp.’s profitability is likely to be hurt by choppy retail real estate environment. In fact, demand for space is anticipated to be affected in the near term, thanks to the shift in customers’ shopping preferences toward online purchases. Also, aggressive asset disposition is expected to have a dilutive effect on earnings. Competition from other players in the industry and rate hike pose other challenges to this retail REIT.
Notably, DDR is trying to streamline its portfolio and focus on core markets. In fact, in December 2017, its board of directors revealed the decision of spinning-off a portfolio of 50 assets into a separate public-traded REIT to be named Retail Value Inc. (RVI). Further, the company sold $590.1 million of assets in the fourth quarter. While dispositions are a strategic fit for long-term growth, the near-term dilution effect of such moves cannot be bypassed.
For fourth-quarter 2017, DDR reported funds from operations (FFO) per share of 28 cents that surpassed the Zacks Consensus Estimate of 26 cents. However, the figure declined a couple of cents from the prior-year quarter , reflecting the dilutive impact of deleveraging asset dispositions. The company generated revenues of $209.4 million for the fourth quarter, surpassing the Zacks Consensus Estimate of $208 million. However, the top line fell short of $232.2 million recorded in the year-ago quarter. The results highlighted higher-than-expected business in its Continental U.S. portfolio as well as balance-sheet improvement efforts.
Admittedly, mall traffic continues to suffer amid a rapid shift in customers’ shopping preferences and patterns with online purchases growing by leaps and bounds. These have made retailers reconsider their footprint and eventually made them opt for store closures in recent times. Further, retailers unable to cope with competition have been filing for bankruptcies. This comes as a pressing concern for retail REITs like DDR as this trend has been considerably curtailing demand for the retail real estate space.
Also, hike in interest rate can pose a challenge for DDR as its ability to refinance existing debt would be restricted while the interest cost on new debt would also increase. This could adversely affect the company’s financial results.
Shares of DDR have underperformed the industry it belongs to in the past six months. During this time frame, shares of the company have declined 25.6% compared with the industry’s descend of 11.1%.
DDR currently holds a Zacks Rank #4 (Sell).
Stocks Worth a Look
A few better-ranked stocks from the real estate industry include Arbor Realty Trust (ABR - Free Report) , Extra Space Storage Inc (EXR - Free Report) and Sotherly Hotels Inc. . All three carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share has been revised 2.3% upward to 90 cents over the past month. Its share price rose 10.2% in six months’ time.
Extra Space Storage’s FFO per share estimates for the current year have moved up 0.9% to $4.52 in a month’s time. Its shares have gained 11.7% over the past six months.
Sotherly Hotels’ FFO per share estimates for 2018 were revised upward approximately 1% to $1.04 over the past month. The stock gained 5.9% during the past six months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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