DDR Corp has been putting in strategic efforts to revamp its portfolio through an aggressive capital-recycling program. Further, the company has made progress with the spin-off of Retail Value Inc. (RVI), as it recently announced the distribution dates for the same. This spin-off is expected to streamline the company’s portfolio. Moreover, DDR is now shifting its focus from deleveraging to redevelopment strategy aimed at retenanting and densification of the company’s properties.
Nevertheless, this involves large scale dispositions which are anticipated to impact the company’s bottom-line performance in the near term. In addition, the choppy retail real estate environment with store closures and bankruptcies, and shift in customers’ shopping preferences toward online purchases remains a concern for this retail real estate investment trust (REIT). Rate hike adds to its woes.
Notably, DDR has been trying to streamline its organizational structure, which is likely to drive the company’s long-term growth. The restructuring is aimed at raising efficiencies, achieving appropriate staffing level, centralizing key operational decision making and bringing down operating costs. This will enable the company to reduce general and administration expenses by $6 million, annually.
Additionally, DDR has been following an aggressive capital-recycling program through strategic asset management, which is aimed at reducing currency and development risks, as well as aiding expansion in premium U.S. markets. Consequently, the company is divesting its non-prime and non-income producing assets, and using the proceeds for reinvestment in premium U.S. shopping centers. It has nearly completed the existing $900-million disposition program. Such initiatives are likely to pave way for top-line growth, as well as demographic improvement in the long term.
Also, the deleveraging process has helped the company improve its liquidity profile and expand DDR’s unencumbered asset pool. It also helped extend the weighted average maturities of the company’s debt. In fact, its pro forma average debt maturity is 6.3 years, at present. Further, with less than 10% of total debt outstanding maturing prior to 2022, DDR remains well poised to maximize on growth scopes.
In first-quarter 2018, DDR sold assets worth $365.9 million, with the company’s share being $208.7 million. Dispositions for 2017 totaled approximately $1.3 billion. While dispositions are a strategic fit for long-term growth, the near-term dilution effect of such moves is unavoidable. In fact, the company witnessed a year-over-year decline of funds from operations (FFO), primarily due to the dilutive impact of asset sales. Nonetheless, management anticipates this dilution to end in 2018.
Furthermore, with e-retail taking precedence, retail REITs continue to suffer as mall traffic has taken a beating. In fact, with e-commerce gaining market share from the brick-and-mortar stores, retailers are compelled to reconsider their footprint and eventually opt for store closures, while others unable to cope with competition have been filing bankruptcies.
This dreary environment has also resulted in tenants demanding substantial lease concessions, which, however, mall landlords find unjustified. As such, retail REITs like DDR, GGP Inc. , Kimco Realty Corp. (KIM - Free Report) , Macerich Company (MAC - Free Report) and others have been affected, and the companies’ share prices have been suffering for the past 12 months.
Rise in interest rate remains another concern as this might restrict the company’s ability to refinance existing debt and increase the interest cost on new debt. This, in turn, is feared to negatively impact the company’s financial results and dividend payout.
Shares of this Zacks Rank #3 (Hold) company have outperformed the industry it belongs to in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
DDR has gained 28.4%, while the industry has rallied 7.1%. Also, the stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised upward 2.1% in a month’s time.
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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