UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

OR

For the transition period from                to               

Commission file number 1-11690

 

DDR Corp.  

(Exact Name of Registrant as Specified in Its Charter)

 

 

3300 Enterprise Parkway, Beachwood, Ohio 44122

(Address of Principal Executive Offices — Zip Code)

(216) 755-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes R     No £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £     No R

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R     No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R     No £

 

---

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £     No R

The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2015, was $4.7 billion.  

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  

365,311,573 common shares outstanding as of February 12, 2016

 

DOCUMENTS INCORPORATED BY REFERENCE

The registrant incorporates by reference in Part III hereof portions of its definitive Proxy Statement for its 2016 Annual Meeting of Shareholders.  

 

 

 

 

 

---

 

TABLE OF CONTENTS

 

 

 

 

3

---

 

PART I

 

General Development of Business

DDR Corp., an Ohio corporation (the “Company” or “DDR”), a self-administered and self-managed real estate investment trust (“REIT”), is in the business of acquiring, owning, developing, redeveloping, expanding, leasing and managing shopping centers.  In addition, the Company engages in the origination and acquisition of loans and debt securities, which are generally collateralized directly or indirectly by shopping centers.  Unless otherwise provided, references herein to the Company or DDR include DDR Corp., its wholly-owned and majority-owned subsidiaries and its consolidated and unconsolidated joint ventures.  

The Company is self-administered and self-managed and, therefore, has not engaged, nor does it expect to retain, any REIT advisor.  The Company manages substantially all of the Portfolio Properties as defined herein.  At December 31, 2015, the Company owned and managed more than 115 million total square feet of gross leasable area (“GLA”).  

Financial Information About Industry Segments

See the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for certain information regarding the Company’s reportable segments, which is incorporated herein by reference to such information.  

Narrative Description of Business

The Company’s portfolio as of February 12, 2016, consisted of 352 shopping centers (including 158 centers owned through joint ventures) and more than 1,000 acres of undeveloped land (of which approximately 100 acres are owned through unconsolidated joint ventures).  The shopping centers are located in 37 states as well as Puerto Rico (14 assets).  The shopping centers and land are collectively referred to as the “Portfolio Properties.”  From January 1, 2013, to February 12, 2016, the Company acquired 133 shopping centers (including 76 that were acquired by two unconsolidated joint ventures and 44 that were acquired from unconsolidated joint ventures) aggregating 27.4 million square feet of Company-owned GLA for an aggregate purchase price of $5.2 billion.  From January 1, 2013, to February 12, 2016, the Company sold 199 shopping centers (including 91 properties owned through unconsolidated joint ventures) aggregating 24.4 million square feet of Company-owned GLA for an aggregate sales price of $2.6 billion.  In 2014, the Company sold its entire investment in 10 assets in Brazil for an aggregate sales price of $343.6 million.  

The following tables present the operating statistics affecting base and percentage rental revenues summarized by the following portfolios: combined shopping center portfolio, wholly-owned shopping center portfolio and joint venture shopping center portfolio.  

 

 

Strategy and Philosophy

The Company’s mission is to create shareholder value by inspiring an extraordinary team to thoughtfully allocate time and capital to the highest quality portfolio of power centers.  The Company strives to own premier locations for our retail partners to win market share and provide value and convenience for their customers.  The organization is focused on optimizing portfolio performance within a constantly evolving retail landscape.  

The strategy, philosophy, investment and financing policies of the Company, and its policies with respect to certain other activities including its growth, debt capitalization, dividends, status as a REIT and operating policies, are determined by management and the Board of Directors.  Although the Board of Directors has no present intention to amend or revise its policies, the Board of Directors may do so from time to time without a vote of the Company’s shareholders.  

4

---

 

The Company’s key strategies are summarized as follows:

Recent Developments

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2015, for information on certain recent developments of the Company, which is incorporated herein by reference to such information.  

Tenants and Competition

As one of the nation’s largest owners and operators of shopping centers (measured by total GLA), the Company has established close relationships with a large number of major national and regional retailers.  The Company’s management is associated with and actively participates in many shopping center and REIT industry organizations.  

Notwithstanding these relationships, numerous developers and real estate companies, private and public, compete with the Company in leasing space in shopping centers to tenants.  The Company competes with other real estate companies and developers in terms of rental rate, property location, availability of other space, management services and maintenance.  

The Company’s five largest tenants based on the Company’s aggregate annualized base rental revenues, including its proportionate share of joint venture aggregate annualized base rental revenues, are TJX Companies, Bed Bath & Beyond, Walmart, PetSmart and Kohl's, representing 3.5%, 3.2%, 3.0%, 2.8% and 2.2%, respectively, of the Company’s aggregate annualized base rental revenues at December 31, 2015.  For more information on the Company’s tenants, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption Company Fundamentals.  

Qualification as a Real Estate Investment Trust

As of December 31, 2015, the Company met the qualification requirements of a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”).  As a result, the Company, with the exception of its taxable REIT subsidiary (“TRS”), will not be subject to federal income tax to the extent it meets certain requirements of the Code.  

Employees

As of February 12, 2016, the Company employed 576 full-time individuals including executive, administrative and field personnel.  The Company considers its relations with its personnel to be good.  

Corporate Headquarters

The Company is an Ohio corporation and was incorporated in 1992.  The Company’s executive offices are located at 3300 Enterprise Parkway, Beachwood, Ohio 44122, and its telephone number is (216) 755-5500.  The Company’s website is http://www.ddr.com.  The Company uses the Investors section of its website as a channel for routine distribution of important

5

---

 

information, including news releases, analyst presentations and financial information.  The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including the Company’s annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K, the Company’s proxy statements and any amendments to those reports or statements.  All such postings and filings are available on the Company’s website free of charge.  In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on its website.  The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.  The content on, or accessible through, any website referred to in this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, is not incorporated by reference into, and shall not be deemed part of, this Form 10-K unless expressly noted.  

 

 

The risks described below could materially and adversely affect the Company’s results of operations, financial condition, liquidity and cash flows.  These risks are not the only risks the Company faces.  The Company’s business operations could also be affected by additional factors that are not presently known to it or that the Company currently considers to be immaterial to its operations.  

The Economic Performance and Value of the Company’s Shopping Centers Depend on Many Factors, Each of Which Could Have an Adverse Impact on the Company’s Cash Flows and Operating Results

The economic performance and value of the Company’s real estate holdings can be affected by many factors, including the following:

Because the Company’s properties consist primarily of shopping centers, the Company’s performance is linked to general economic conditions in the market for retail space.  The market for retail space has been and may continue to be adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, increases in consumer Internet purchases and the excess amount of retail space in a number of markets.  To the extent that any of these conditions occur, they are likely to affect market rents for retail space.  In addition, the Company may face challenges in the management and maintenance of its properties or incur increased operating costs, such as real estate taxes, insurance and utilities, that may make its properties unattractive to tenants.  The loss of rental revenues from a number of the Company’s tenants and its inability to replace such tenants may adversely affect the Company’s profitability and ability to meet its debt and other financial obligations and make distributions to shareholders.  

6

---

 

The Company Relies on Major Tenants, Making It Vulnerable to Changes in the Business and Financial Condition of, or Demand for Its Space by, Such Tenants

As of December 31, 2015, the annualized base rental revenues of the Company’s tenants that are equal to or exceed 1.5% of the Company’s aggregate annualized shopping center base rental revenues, including its proportionate share of joint venture aggregate annualized shopping center base rental revenues, are as follows:

 

 

The retail shopping sector has been affected by economic conditions as well as the competitive nature of the retail business and the competition for market share where stronger retailers have out-positioned some of the weaker retailers.  These shifts have forced some market share away from weaker retailers and required them, in some cases, to declare bankruptcy and/or close stores.  

As information becomes available regarding the status of the Company’s leases with tenants in financial distress or as the future plans for their spaces change, the Company may be required to write off and/or accelerate depreciation and amortization expense associated with a significant portion of the tenant-related deferred charges in future periods.  The Company’s income and ability to meet its financial obligations could also be adversely affected in the event of the bankruptcy, insolvency or significant downturn in the business of one of these tenants or any of the Company’s other major tenants.  In addition, the Company’s results could be adversely affected if any of these tenants do not renew their leases as they expire on terms favorable to the Company or at all.  

The Company’s Dependence on Rental Income May Adversely Affect Its Ability to Meet Its Debt Obligations and Make Distributions to Shareholders

Substantially all of the Company’s income is derived from rental income from real property.  As a result, the Company’s performance depends on its ability to collect rent from tenants.  The Company’s income and funds for distribution would be negatively affected if a significant number of its tenants, or any of its major tenants, were to do the following:

Any of these actions could result in the termination of tenants’ leases and the loss of rental income attributable to the terminated leases.  Lease terminations by an anchor tenant or a failure by that anchor tenant to occupy the premises could also result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases.  In addition, the Company cannot be certain that any tenant whose lease expires will renew that lease or that it will be able to re-lease space on economically advantageous terms.  The loss of rental revenues from a number of the Company’s major tenants and its inability to replace such tenants may adversely affect the Company’s profitability and its ability to meet debt and other financial obligations and make distributions to shareholders.  

7

---

 

The Company’s Ability to Increase Its Debt Could Adversely Affect Its Cash Flow

At December 31, 2015, the Company had outstanding debt of $5.1 billion (excluding its proportionate share of unconsolidated joint venture mortgage debt aggregating $441.9 million as of December 31, 2015). The Company intends to maintain a conservative ratio of debt to total market capitalization (the sum of the aggregate market value of the Company’s common shares and operating partnership units, the liquidation preference on any preferred shares outstanding and its total consolidated indebtedness).  The Company is subject to limitations under its credit facilities and indentures relating to its ability to incur additional debt; however, the Company’s organizational documents do not contain any limitation on the amount or percentage of indebtedness it may incur.  If the Company were to become more highly leveraged, its cash needs to fund debt service would increase accordingly.  Under such circumstances, the Company’s risk of decreases in cash flow due to fluctuations in the real estate market, reliance on its major tenants, acquisition and development costs and the other factors discussed in these risk factors, could subject the Company to an even greater adverse impact on its financial condition and results of operations.  In addition, increased leverage could increase the risk of default on the Company’s debt obligations, which could further reduce its cash available for distribution and adversely affect its ability to dispose of its portfolio on favorable terms, which could cause the Company to incur losses and reduce its cash flows.  

Disruptions in the Financial Markets Could Affect the Company’s Ability to Obtain Financing on Reasonable Terms and Have Other Adverse Effects on the Company and the Market Price of the Company’s Common Shares

The U.S. and global equity and credit markets have experienced significant price volatility, dislocations and liquidity disruptions in the past, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably.  These circumstances materially affected liquidity in the financial markets, making terms for certain financings less attractive and, in certain cases, resulting in the unavailability of certain types of financing.  Uncertainty in the equity and credit markets may negatively affect the Company’s ability to access additional financing at reasonable terms or at all, which may negatively affect the Company’s ability to refinance its debt, obtain new financing or make acquisitions.  These circumstances may also adversely affect the Company’s tenants, including their ability to enter into new leases, pay their rents when due and renew their leases at rates at least as favorable as their current rates.  

A prolonged downturn in the equity or credit markets may cause the Company to seek alternative sources of potentially less attractive financing and may require it to adjust its business plan accordingly.  In addition, these factors may make it more difficult for the Company to sell properties or may adversely affect the price it receives for properties that it does sell, as prospective buyers may experience increased costs of financing or difficulties in obtaining financing.  These events in the equity and credit markets may make it more difficult or costly for the Company to raise capital through the issuance of its equity or debt securities.  These disruptions in the financial markets also may have a material adverse effect on the market value of the Company’s common shares and other adverse effects on the Company or the economy in general.  There can be no assurances that government responses to the disruptions in the financial markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of equity or credit financing.  

Changes in the Company’s Credit Ratings or the Debt Markets, as well as Market Conditions in the Credit Markets, Could Adversely Affect the Company’s Publicly Traded Debt and Revolving Credit Facilities

The market value for the Company’s publicly traded debt depends on many factors, including the following:

The condition of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future.  The U.S. credit markets and the sub-prime residential mortgage market have experienced severe dislocations and liquidity disruptions in the past.  Furthermore, uncertain market conditions can be exacerbated by leverage.  The occurrence of these circumstances in the credit markets and/or additional fluctuations in the financial markets and prevailing interest rates could have an adverse effect on the Company’s ability to access capital and its cost of capital.  

In addition, credit rating agencies continually review their ratings for the companies they follow, including the Company.  The credit rating agencies also evaluate the real estate industry as a whole and may change their credit rating for the Company based on

8

---

 

their overall view of the industry.  Any rating organization that rates the Company’s publicly traded debt may lower the rating or decide, at its sole discretion, not to rate the publicly traded debt.  The ratings of the Company’s publicly traded debt are based primarily on the rating organization’s assessment of the likelihood of timely payment of interest when due and the payment of principal on the maturity date.  A negative change in the Company’s rating could have an adverse effect on the Company’s revolving credit facilities and market price of the Company’s publicly traded debt as well as the Company’s ability to access capital and its cost of capital.  

The Company’s Cash Flows and Operating Results Could Be Adversely Affected by Required Payments of Debt or Related Interest and Other Risks of Its Debt Financing

The Company is generally subject to the risks associated with debt financing.  These risks include the following:

If a property is mortgaged to secure payment of indebtedness and the Company cannot or does not make the mortgage payments, it may have to surrender the property to the lender with a consequent loss of any prospective income and equity value from such property, which may also adversely affect the Company’s credit ratings.  Any of these risks can place strains on the Company’s cash flows, reduce its ability to grow and adversely affect its results of operations.  

The Company’s Financial Condition Could Be Adversely Affected by Financial Covenants

The Company’s credit facilities and the indentures under which its senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants, including, among other things, leverage ratios and certain coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of its assets and engage in mergers and certain acquisitions.  These credit facilities and indentures also contain customary default provisions including the failure to pay principal and interest issued thereunder in a timely manner, the failure to comply with the Company’s financial and operating covenants, the occurrence of a material adverse effect on the Company and the failure of the Company or its majority-owned subsidiaries (i.e., entities in which the Company has a greater than 50% interest) to pay when due certain indebtedness in excess of certain thresholds beyond applicable grace and cure periods.  These covenants could limit the Company’s ability to obtain additional funds needed to address cash shortfalls or pursue growth opportunities or transactions that would provide substantial return to its shareholders.  In addition, a breach of these covenants could cause a default or accelerate some or all of the Company’s indebtedness, which could have a material adverse effect on its financial condition.  

The Company Has Variable-Rate Debt and Is Subject to Interest Rate Risk

The Company has indebtedness with interest rates that vary depending upon the market index.  In addition, the Company has revolving credit facilities that bear interest at a variable rate on any amounts drawn on the facilities.  The Company may incur additional variable-rate debt in the future.  Increases in interest rates on variable-rate debt would increase the Company’s interest expense, which would negatively affect net earnings and cash available for payment of its debt obligations and distributions to its shareholders.  

9

---

 

Property Ownership Through Partnerships and Joint Ventures Could Limit the Company’s Control of Those Investments and Reduce Its Expected Return

Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that the Company’s partner or co-venturer might become bankrupt, that its partner or co-venturer might at any time have different interests or goals than the Company and that its partner or co-venturer may take action contrary to the Company’s instructions, requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT.  In addition, the Company’s partner or co-venturer could have different investment criteria that would impact the assets held by the joint venture or its interest in the joint venture.  These situations could have an impact on the Company’s revenues from its joint ventures.  Other risks of joint venture investments include impasse on decisions, such as a sale, because neither the Company’s partner or co-venturer nor the Company would have full control over the partnership or joint venture.  These factors could limit the return that the Company receives from such investments, cause its cash flows to be lower than its estimates or lead to business conflicts or litigation.  There is no limitation under the Company’s Articles of Incorporation, or its Code of Regulations, as to the amount of funds that the Company may invest in partnerships or joint ventures.  In addition, a partner or co-venturer may not have access to sufficient capital to satisfy its funding obligations to the joint venture.  Furthermore, if credit conditions in the capital markets deteriorate, the Company could be required to reduce the carrying value of its equity method investments if a loss in the carrying value of the investment is considered an other than temporary decline.  As of December 31, 2015, the Company had $467.7 million of investments in and advances to unconsolidated joint ventures holding 168 operating shopping centers.  

The Company’s Real Estate Assets May Be Subject to Impairment Charges

On a periodic basis, the Company assesses whether there are any indicators that the value of its real estate assets and other investments may be impaired.  A property’s value is impaired only if the estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property.  In the Company’s estimate of cash flows, it considers factors such as expected future operating income, trends and prospects, the effects of demand, competition and other factors.  If the Company is evaluating the potential sale of an asset or development alternatives, the undiscounted future cash flow considerations include the most likely course of action at the balance sheet date based on current plans, intended holding periods and available market information.  The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate assets and other investments.  These assessments have a direct impact on the Company’s earnings because recording an impairment charge results in an immediate negative adjustment to earnings.  For example, in the first quarter of 2015, the Company recorded impairment charges on 25 operating shopping centers and several land parcels aggregating $279.0 million.  There can be no assurance that the Company will not take additional charges in the future related to the impairment of its assets.  Any future impairment could have a material adverse effect on the Company’s results of operations in the period in which the charge is taken.  

The Company’s Acquisition Activities May Not Produce the Cash Flows That It Expects and May Be Limited by Competitive Pressures or Other Factors

The Company intends to acquire retail properties only to the extent that suitable acquisitions can be made on advantageous terms.  Acquisitions of commercial properties entail risks such as the following:

10

---

 

In addition, the Company may not be in a position or have the opportunity in the future to make suitable property acquisitions on advantageous terms due to competition for such properties with others engaged in real estate investment, some of which may have greater financial resources than the Company.  The Company’s inability to successfully acquire new properties may affect the Company’s ability to achieve its anticipated return on investment, which could have an adverse effect on its results of operations.  

Real Estate Property Investments Are Illiquid; Therefore, the Company May Not Be Able to Dispose of Properties When Desired or on Favorable Terms

Real estate investments generally cannot be disposed of quickly.  In addition, the federal income tax code imposes restrictions, which are not applicable to other types of real estate companies, on the ability of a REIT to dispose of properties.  Therefore, the Company may not be able to diversify its portfolio in response to economic or other conditions promptly or on favorable terms, which could cause the Company to incur losses and reduce its cash flows and adversely affect distributions to shareholders.  

The Company’s Development, Redevelopment and Construction Activities Could Affect Its Operating Results

The Company intends to continue the selective development, redevelopment and construction of retail properties in accordance with its development underwriting policies as opportunities arise.  The Company’s development, redevelopment and construction activities include the following risks:

Additionally, the time frame required for development, construction and lease-up of these properties means that the Company may wait several years for a significant cash return.  If any of the above events occur, the development of properties may hinder the Company’s growth and have an adverse effect on its results of operations and cash flows.  In addition, new development activities, regardless of whether they are ultimately successful, typically require substantial time and attention from management.  

If the Company Fails to Qualify as a REIT in Any Taxable Year, It Will Be Subject to U.S. Federal Income Tax as a Regular Corporation and Could Have Significant Tax Liability

The Company intends to operate in a manner that allows it to qualify as a REIT for U.S. federal income tax purposes.  However, REIT qualification requires that the Company satisfy numerous requirements (some on an annual or quarterly basis) established under highly technical and complex provisions of the Code, for which there are a limited number of judicial or administrative interpretations.  The Company’s status as a REIT requires an analysis of various factual matters and circumstances that are not entirely within its control.  Accordingly, the Company’s ability to qualify and remain qualified as a REIT for U.S. federal income tax purposes is not certain.  Even a technical or inadvertent violation of the REIT requirements could jeopardize the Company’s REIT qualification.  Furthermore, Congress or the Internal Revenue Service (“IRS”) might change the tax laws or regulations and the courts could issue new rulings, in each case potentially having a retroactive effect that could make it more difficult or impossible for the Company to continue to qualify as a REIT.  If the Company fails to qualify as a REIT in any tax year, the following would result:

11

---

 

Even if the Company remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow.  The Company’s TRS is subject to taxation, and any changes in the laws affecting the Company’s TRS may increase the Company’s tax expenses.  The Company may also be subject to certain federal, state and local taxes on its income and property either directly or at the level of its subsidiaries.  Any of these taxes would decrease cash available for debt service obligations and distribution to the Company’s shareholders.  

Compliance with REIT Requirements May Negatively Affect the Company’s Operating Decisions

To maintain its status as a REIT for U.S. federal income tax purposes, the Company must meet certain requirements on an ongoing basis, including requirements regarding its sources of income, the nature and diversification of its assets, the amounts the Company distributes to its shareholders and the ownership of its shares.  The Company may also be required to make distributions to its shareholders when it does not have funds readily available for distribution or at times when the Company’s funds are otherwise needed to fund capital expenditures or debt service obligations.  

As a REIT, the Company must distribute at least 90% of its annual net taxable income (excluding net capital gains) to its shareholders.  To the extent that the Company satisfies this distribution requirement, but distributes less than 100% of its net taxable income, the Company will be subject to U.S. federal corporate income tax on its undistributed taxable income.  In addition, the Company will be subject to a 4% non-deductible excise tax if the actual amount paid to its shareholders in a calendar year is less than the minimum amount specified under U.S. federal tax laws.  From time to time, the Company may generate taxable income greater than its income for financial reporting purposes, or its net taxable income may be greater than its cash flow available for distribution to its shareholders.  If the Company does not have other funds available in these situations, it could be required to borrow funds, sell its securities or a portion of its properties at unfavorable prices or find other sources of funds in order to meet the REIT distribution requirements and avoid corporate income tax and the 4% excise tax.  

In addition, the REIT provisions of the Code impose a 100% tax on income from “prohibited transactions.”  Prohibited transactions generally include sales of assets, other than foreclosure property, that constitute inventory or other property held for sale to customers in the ordinary course of business.  This 100% tax could affect the Company’s decisions to sell property if it believes such sales could be treated as a prohibited transaction.  However, the Company would not be subject to this tax if it were to sell assets through its TRS.  The Company will also be subject to a 100% tax on certain amounts if the economic arrangements between the Company and its TRS are not comparable to similar arrangements among unrelated parties.  

Dividends Paid by REITs Generally Do Not Qualify for Reduced Tax Rates

In general, the maximum U.S. federal income tax rate for dividends paid to individual U.S. shareholders is 20%.  Due to its REIT status, the Company’s distributions to individual shareholders generally are not eligible for the reduced rates.  

The Company Is Subject to Litigation That Could Adversely Affect Its Results of Operations

The Company is a defendant from time to time in lawsuits and regulatory proceedings relating to its business.  Due to the inherent uncertainties of litigation and regulatory proceedings, the Company cannot accurately predict the ultimate outcome of any such litigation or proceedings.  An unfavorable outcome could adversely affect the Company’s business, financial condition or results of operations.  Any such litigation could also lead to increased volatility of the trading price of the Company’s common shares.  For a further discussion of litigation risks, see “Legal Matters” in Note 9—Commitments and Contingencies to the Consolidated Financial Statements.  

The Company’s Real Estate Investments May Contain Environmental Risks That Could Adversely Affect Its Results of Operations

The acquisition of properties may subject the Company to liabilities, including environmental liabilities.  The Company’s operating expenses could be higher than anticipated due to the cost of complying with existing or future environmental laws and

12

---

 

regulations.  In addition, under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or to have arranged for the disposal or treatment of hazardous or toxic substances.  As a result, the Company may become liable for the costs of removal or remediation of certain hazardous substances released on or in its properties.  The Company may also be liable for other potential costs that could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property).  The Company may incur such liability whether or not it knew of, or was responsible for, the presence of such hazardous or toxic substances.  Such liability could be of substantial magnitude and divert management’s attention from other aspects of the Company’s business and, as a result, could have a material adverse effect on the Company’s operating results and financial condition, as well as its ability to make distributions to shareholders.  

An Uninsured Loss on the Company’s Properties or a Loss That Exceeds the Limits of the Company’s Insurance Policies Could Subject the Company to Lost Capital or Revenue on Those Properties

Under the terms and conditions of the leases currently in effect on the Company’s properties, tenants generally are required to indemnify and hold the Company harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of the Company or its agents.  Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease liability and full replacement value property damage insurance policies.  The Company has obtained comprehensive liability, casualty, flood, terrorism and rental loss insurance policies on its properties.  All of these policies may involve substantial deductibles and certain exclusions.  Furthermore, there is no assurance that the Company may be able to renew or secure additional insurance policies on commercially reasonable terms or at all.  In addition, tenants could fail to properly maintain their insurance policies or be unable to pay the deductibles.  Should a loss occur that is uninsured or is in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, the Company could lose all or part of its capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on the Company’s operating results and financial condition, as well as its ability to make distributions to shareholders.  

The Company’s Properties Could Be Subject to Damage from Weather-Related Factors

A number of the Company’s properties are located in areas that are subject to natural disasters.  Certain of the Company’s properties are located in California and in other areas with higher risk of earthquakes.  In addition, many of the Company’s properties are located in coastal regions, including 14 properties located on the island of Puerto Rico as of February 12, 2016, and would therefore be affected by any future increases in sea levels or in the frequency or severity of hurricanes and tropical storms, whether such increases are caused by global climate changes or other factors.  

The Company’s Investments in Real Estate Assets Outside the Continental United States May Be Subject to Additional Risks

Investments and operations outside the continental United States generally are subject to various political and other risks that are different from and in addition to risks inherent in the investment in real estate generally discussed in these risk factors and elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2015.  The Company currently has investments in consolidated and unconsolidated joint ventures with real estate assets outside the continental United States, including Puerto Rico, and may increase its investment in real estate in jurisdictions outside the continental United States in the future.  The Company may not realize the intended benefits of these investments due to the uncertainty of foreign or novel laws and markets including, but not limited to, unexpected changes in the regulatory requirements such as the enactment of laws prohibiting or restricting the Company’s ability to own property, political and economic instability in certain geographic locations, labor disruptions, difficulties in managing international operations, potentially adverse tax consequences, including unexpected or unfavorable changes in tax structure, laws restricting the Company’s ability to transfer profits between jurisdictions or to repatriate profits to the United States, additional accounting and control expenses and the administrative burden associated with complying with laws from a variety of jurisdictions.  

In addition, financing may not be available at acceptable rates outside, and equity requirements may be different from the Company’s strategy in, the continental United States.  Each of these factors may adversely affect the Company’s ability to achieve anticipated return on investment, which could have an adverse effect on its results of operations.  

The Company Could Be Subject to Risks Relating to the Puerto Rican Economy and Government

 

In recent years, the economy in Puerto Rico has experienced a sustained downturn and the territorial government of Puerto Rico has operated at substantial spending deficits.  In light of these economic conditions, the territorial government’s current and expected cash flows, and recent credit downgrades that triggered acceleration clauses in certain outstanding municipal bonds and other bonds, the territorial government of Puerto Rico and certain utilities have announced that they expect to be unable to meet their existing debt obligations. If the territorial government and certain utilities are not able to restructure their debt obligations or obtain forbearance on debt service payments, they may be unable to provide various services (including utilities) relied upon in the operation of businesses

13

---

 

in Puerto Rico.  Furthermore, inaccessibility of utilities and other government services, along with a continued economic downturn and increases in taxes in Puerto Rico, may result in continued or increased migration of residents of Puerto Rico to the mainland United States and elsewhere, which could decrease the territory’s tax base, exacerbating the territorial government’s cash flow issues, and decrease the number of consumers in Puerto Rico. In turn, consumers who remain in Puerto Rico could have less disposable income for the purchase of goods, which may result in declining merchant sales and merchant inability to expand or lease new space or pay rent or pay other expenses for new or existing operations, or result in a general decline in prevailing rental rates.  As of December 31, 2015, the Company owned 14 assets in Puerto Rico, aggregating 4.8 million square feet of Company-owned GLA and representing 7.6% of the Company’s annualized consolidated revenues for its portfolio at 100% and 5.7% of Company-owned GLA.  The persistence or further deterioration of economic conditions in Puerto Rico could have a negative impact on the Company’s results of operations, cash flows and financial condition.

Compliance with Certain Laws and Governmental Rules and Regulations May Require the Company to Make Unplanned Expenditures That Adversely Affect the Company’s Cash Flows

The Company is required to operate its properties in compliance with certain laws and governmental rules and regulations, including the Americans with Disabilities Act, fire and safety regulations, building codes and other land use regulations, as currently in effect or as they may be enacted or adopted and become applicable to the properties, from time to time.  The Company may be required to make substantial capital expenditures to make upgrades at its properties or otherwise comply with those requirements, and these expenditures could have a material adverse effect on its ability to meet its financial obligations and make distributions to shareholders.  

The Company May Be Unable to Retain and Attract Key Management Personnel

The Company may be unable to retain and attract talented executives.  In the event of the loss of key management personnel to competitors, or upon unexpected death, disability or retirement, the Company may not be able to find replacements with comparable skill, ability and industry expertise.  The Company’s operating results and financial condition could be materially and adversely affected until suitable replacements are identified and retained, if at all.  

The Company’s Articles of Incorporation Contain Limitations on Acquisitions and Changes in Control

In order to maintain the Company’s status as a REIT, its Articles of Incorporation prohibit any person, except for certain shareholders as set forth in the Company’s Articles of Incorporation, from owning more than 5% of the Company’s outstanding common shares.  This restriction is likely to discourage third parties from acquiring control of the Company without consent of its Board of Directors even if a change in control were in the best interests of shareholders.  

The Company Has Significant Shareholders Who May Exert Influence on the Company as a Result of Their Considerable Beneficial Ownership of the Company’s Common Shares, and Their Interests May Differ from the Interests of Other Shareholders

The Company has shareholders, including Mr. Alexander Otto who is a member of the Board of Directors, who, because of their considerable beneficial ownership of the Company’s common shares, are in a position to exert significant influence over the Company.  These shareholders may exert influence with respect to matters that are brought to a vote of the Company’s Board of Directors and/or the holders of the Company’s common shares.  Among others, these matters include the election of the Company’s Board of Directors, corporate finance transactions and joint venture activity, merger, acquisition and disposition activity, and amendments to the Company’s Articles of Incorporation and Code of Regulations.  In the context of major corporate events, the interests of the Company’s significant shareholders may differ from the interests of other shareholders.  For example, if a significant shareholder does not support a merger, tender offer, sale of assets or other business combination because the shareholder judges it to be inconsistent with the shareholder’s investment strategy, the Company may be unable to enter into or consummate a transaction that would enable other shareholders to realize a premium over the then-prevailing market prices for common shares.  Furthermore, if the Company’s significant shareholders sell substantial amounts of the Company’s common shares in the public market to enhance the shareholders’ liquidity positions, fund alternative investments or for other reasons, the trading price of the Company’s common shares could decline significantly and other shareholders may be unable to sell their common shares at favorable prices.  The Company cannot predict or control how the Company’s significant shareholders may use the influence they have as a result of their common share holdings.

14

---

 

Changes in Market Conditions Could Adversely Affect the Market Price of the Company’s Publicly Traded Securities

As with other publicly traded securities, the market price of the Company’s publicly traded securities depends on various market conditions, which may change from time to time.  Among the market conditions that may affect the market price of the Company’s publicly traded securities are the following:

The Company May Issue Additional Securities Without Shareholder Approval

The Company can issue preferred shares and common shares without shareholder approval subject to certain limitations in the Company’s Articles of Incorporation.  Holders of preferred shares have priority over holders of common shares, and the issuance of additional shares reduces the interest of existing holders in the Company.  

The Company Faces Risks Relating to Cybersecurity Attacks and Other Data Breaches

The Company’s business is at risk from and may be impacted by cybersecurity intrusions and other data security breaches. Such attacks could range from individual attempts to gain unauthorized access to information technology systems, to more sophisticated and coordinated security threats such as social engineering.  While the Company maintains some of its own critical information technology systems, it also depends on third parties to provide important information technology services relating to several key business functions, such as payroll, human resources, electronic communications and certain finance functions. Although the Company and such third parties employ a number of measures to prevent, detect and mitigate these threats, including password protection, firewalls, backup servers, threat monitoring and periodic penetration testing, there is no guarantee such efforts will be successful in preventing a data breach. Furthermore, the security measures employed by third-party service providers may prove to be ineffective at preventing breaches of their systems. Data breach incidents could compromise the confidential information of the Company’s tenants, employees and third-party vendors and disrupt the Company’s business operations.

 

None.

 

 

At December 31, 2015, the Portfolio Properties included 367 shopping centers (including 169 centers owned through joint ventures).  At December 31, 2015, the Portfolio Properties also included more than 1,000 acres of undeveloped land including parcels located adjacent to certain of the shopping centers.  At December 31, 2015, the Portfolio Properties aggregated 83.6 million square feet of Company-owned GLA (115.5 million square feet of total GLA) located in 38 states, plus Puerto Rico.  These centers are principally in the Southeast and Midwest, with significant concentrations in Florida, Georgia, Ohio and North Carolina, as well as Puerto Rico.  The 14 assets owned in Puerto Rico aggregate 4.8 million square feet of Company-owned GLA (5.1 million square feet of total GLA).  At December 31, 2015, the Company also owned an interest in two land parcels in Canada.  

At December 31, 2015, the average annualized base rent per square foot of Company-owned GLA of the Company’s 198 wholly-owned shopping centers was $14.80.  For the 169 shopping centers owned through joint ventures, average annualized base rent per square foot was $13.95 at December 31, 2015.  The Company’s average annualized base rent per square foot does not

15

---

 

consider tenant expense reimbursements.  The Company generally does not enter into significant tenant concessions on a lease-by-lease basis.  

The Company’s shopping centers are designed to attract local area customers and are typically anchored by two or more national tenant anchors (such as Walmart, Kohl’s or Target).  The properties often include discounters, warehouse clubs, dollar stores and specialty grocers as additional anchors or tenants.  The tenants of the shopping centers typically cater to the consumer’s desire for value and convenience and offer day-to-day necessities rather than high-priced luxury items.  As one of the nation’s largest owners and operators of shopping centers (measured by total GLA), the Company has established close relationships with a large number of major national and regional retailers, many of which occupy space in its shopping centers.  

Information as to the Company’s 10 largest tenants based on total annualized rental revenues and Company-owned GLA at December 31, 2015, is set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption Company Fundamentals of this Annual Report on Form 10-K.  For additional details related to property encumbrances for the Company’s wholly-owned assets, see “Real Estate and Accumulated Depreciation” (Schedule III) herein.  At December 31, 2015, the Company owned an investment in 168 properties owned through unconsolidated joint ventures, which served as collateral for joint venture mortgage debt aggregating approximately $3.2 billion (of which the Company’s proportionate share is $441.9 million) and which is not reflected in the consolidated indebtedness.  In addition, as of December 31, 2015, unless otherwise indicated, with respect to the 367 shopping centers:

Tenant Lease Expirations and Renewals

The following table shows the impact of tenant lease expirations through 2025 at the Company’s 198 wholly-owned shopping centers, assuming that none of the tenants exercise any of their renewal options:

 

 

16

---

 

The following table shows the impact of tenant lease expirations at the joint venture level through 2025 at the Company’s 169 shopping centers owned through joint ventures, assuming that none of the tenants exercise any of their renewal options:

 

 

The rental payments under certain of these leases will remain constant until the expiration of their base terms, regardless of inflationary increases.  There can be no assurance that any of these leases will be renewed or that any replacement tenants will be obtained if not renewed.  

 

 

 

17

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

18

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

19

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

20

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

21

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

22

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

23

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

24

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

25

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

26

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

27

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

28

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

29

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

30

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

31

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

32

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

33

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

34

---

 

DDR Corp.

Shopping Center Property List at December 31, 2015

 

 

 

 

 

35

---

 

 

The Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company.  The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance.  While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

 

 

Not Applicable.

 

EXECUTIVE OFFICERS

 

The executive officers of the Company are as follows:

 

 

David J. Oakes was appointed Chief Executive Officer and a Director of the Company on February 10, 2015, and continues to serve as President, a position in which he has served since January 2013. Mr. Oakes had served as Chief Financial Officer from January 2013 to March 2015, Senior Executive Vice President and Chief Financial Officer from February 2010 to December 2012, Senior Executive Vice President of Finance and Chief Investment Officer from December 2008 to February 2010 and Executive Vice President of Finance and Chief Investment Officer from May 2007 to December 2008.  Prior to joining the Company, Mr. Oakes served as Senior Vice President and Portfolio Manager at Cohen & Steers Capital Management, an investment firm, from April 2002 through March 2007.  In his role, Mr. Oakes oversaw the firm's global and international real estate securities portfolios for the oldest and largest dedicated real estate securities fund manager.  Previously, Mr. Oakes worked as a Research Analyst in global investment research at Goldman Sachs, where he covered U.S. REITs.

 

Luke J. Petherbridge was appointed Chief Financial Officer on March 1, 2015, and continues to serve as Treasurer, a position in which he has served since January 2013.  Mr. Petherbridge had served as Executive Vice President of Capital Markets and Treasurer from January 2013 to February 2015 and Senior Vice President of Capital Markets from December 2011 to January 2013.  Prior to joining the Company, Mr. Petherbridge served as the Chief Executive Officer and Director of shopping center owner EDT Retail Trust (formerly Macquarie DDR Trust), a company which had been publicly traded on the Australian Stock Exchange and previously managed in a joint venture between DDR and Macquarie Group. Before that, Mr. Petherbridge served as director of transactions with boutique real estate investment company Rubicon Asset Management. While in this role, Mr. Petherbridge worked on transactions focusing on United States, European and Japanese real estate and real estate structured finance.

 

Paul W. Freddo was appointed Senior Executive Vice President of Leasing and Development in December 2008.  Mr. Freddo joined the Company in August 2008 and served as Senior Vice President of Development-Western Region from August 2008 to December 2008.  Prior to joining the Company, Mr. Freddo served as Vice President and Director of Real Estate for J.C. Penney Company, Inc., a retail department store, from January 2004 through August 2008 and in other various roles at J.C. Penney since 1978.  

 

Christa A. Vesy was appointed Executive Vice President and Chief Accounting Officer in March 2012.  Ms. Vesy joined the Company in November 2006 and served as Senior Vice President and Chief Accounting Officer from November 2006 to March 2012.  Prior to joining the Company, Ms. Vesy worked for The Lubrizol Corporation, a specialty chemicals company, where she served as manager of external financial reporting and then as controller for the lubricant additives business segment, from September 2004 to November 2006.  Prior to joining Lubrizol, Ms. Vesy held various positions with the Assurance and Business Advisory Services Group of PricewaterhouseCoopers, LLP, a registered public accounting firm, including Senior Manager from 1999 to 2004.

 

36

---

 

Part II

 

 

The high and low sale prices per share of the Company’s common shares, as reported on the New York Stock Exchange (the “NYSE”) composite tape, and declared dividends per share for the quarterly periods indicated were as follows:

 

 

As of February 12, 2016, there were 6,720 record holders and approximately 30,000 beneficial owners of the Company’s common shares.

 

The Company’s Board of Directors approved a 2016 dividend policy that it believes will continue to result in significant free cash flow, while still adhering to REIT payout requirements.  In January 2016, the Company declared its first-quarter 2016 dividend of $0.19 per common share, which represents an increase of 10.1% from the first quarter of 2015, payable on April 5, 2016, to shareholders of record at the close of business on March 10, 2016.

 

The decision to declare and pay dividends on the common shares in 2016, as well as the timing, amount and composition of any such future dividends, will be at the discretion of the Company’s Board of Directors and will be subject to the Company’s cash flow from operations, earnings, financial condition, capital and debt service requirements and such other factors as the Board of Directors considers relevant.  The Company is required by the Code to distribute at least 90% of its REIT taxable income.  The Company intends to continue to declare quarterly dividends on its common shares; however, there can be no assurances as to the timing and amounts of future dividends.

 

Distributions to the extent of the Company’s current and accumulated earnings and profits for federal income tax purposes will be taxable to shareholders as with ordinary dividend income or capital gain income.  Distributions in excess of taxable earnings and profits generally will be treated as non-taxable return of capital.  These distributions, to the extent that they do not exceed the shareholder’s adjusted tax basis in its common shares, have the effect of deferring taxation until the sale of the shareholder’s common shares.  To the extent that distributions are both in excess of taxable earnings and profits and in excess of the shareholder’s adjusted tax basis in its common shares, the distribution will be treated as capital gain from the sale of common shares.  For the taxable year ended December 31, 2015, approximately 57% of the Company’s distributions to shareholders constituted a return of capital and approximately 43% constituted taxable ordinary income dividends.

 

Certain of the Company’s credit facilities and indentures contain financial and operating covenants including the requirement that the Company cannot exceed a total dividend payout ratio of 95% of the Company’s pro rata share of FFO (as defined in the agreement) for the prior 12-month period unless required to maintain REIT status.

 

The Company has a dividend reinvestment plan under which shareholders may elect to reinvest their dividends automatically in common shares.  Under the plan, the Company may, from time to time, elect to purchase common shares in the open market on behalf of participating shareholders or may issue new common shares to such shareholders.

 

37

---

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

38

---

 

 

The consolidated financial data included in the following table has been derived from the financial statements for the last five years and includes the information required by Item 301 of Regulation S-K.  The following selected consolidated financial data should be read in conjunction with the Company’s consolidated financial statements and related notes and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  

 

COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA

(In thousands, except per share data)

 

 

39

---

 

(In thousands, except per share data)

 

 

 

 

 

 

40

---

 

 

EXECUTIVE SUMMARY

 

The Company is a self-administered and self-managed Real Estate Investment Trust (“REIT”) in the business of acquiring, owning, developing, redeveloping, leasing and managing shopping centers.  In addition, the Company engages in the origination and acquisition of loans and debt securities collateralized directly or indirectly by shopping centers.  As of December 31, 2015, the Company’s portfolio consisted of 367 shopping centers (including 169 shopping centers owned through joint ventures).  These properties consist of 353 shopping centers owned in the United States and 14 in Puerto Rico.  At December 31, 2015, the Company owned and managed more than 115 million total square feet of gross leasable area (“GLA”), which includes all of the aforementioned properties.  The Company also owns more than 1,000 acres of undeveloped land, including interests in land.  At December 31, 2015, the aggregate occupancy of the Company’s operating shopping center portfolio was 93.3%, and the average annualized base rent per occupied square foot was $14.48.

 

Current Strategy

 

The Company has positioned itself for growth by enhancing the quality of its portfolio, lowering its risk profile and simplifying its structure and investments.  The Company is focused on creating shareholder value through capital allocation that should translate into net asset value growth over time.  A key to achieving this objective is the continued recycling of proceeds from the sale of bottom tier assets, as the Company believes the current pricing environment for its property type remains favorable.  The Company has accelerated the sale of assets not considered to have long-term growth potential and re-evaluated the targeted risk-return criteria for investing in development/redevelopments and new acquisitions of prime assets (i.e., market-dominant prime power centers located in large and supply-constrained markets, occupied by high-quality retailers with strong demographic profiles, which are referred to as “Prime”, “Prime Portfolio” or “Prime Assets”).  The Company seeks to invest in Prime Assets that will continue to improve portfolio quality, credit quality of cash flows and property-level operating results.  Overall, the Company seeks to hold market-dominant, quality assets in the top MSAs where retailers want to locate their stores.  The Company leases space to retailers that it believes are winning market share and that are most successful in adapting to an omni-channel retailing world. DDR is an organization that strives to be focused, fast and frugal in a constantly evolving retail landscape.

 

In addition to transactional activity, growth opportunities include continued lease-up of the portfolio, as well as selective redevelopment projects.  Further lease-up opportunities include recapturing prime units occupied by weaker retailers, consolidating small shops to accommodate high credit quality tenants, and downsizing junior anchors to enhance the merchandising mix of the assets, providing retailers with the preferred footprint and generating higher blended rents.  The Company strives to be the preeminent landlord and the choice for tenants to lease space.

 

The Company is focused on the following core competencies:

 

 

 

 

 

 

 

41

---

 

 

 

 

Transaction and Capital Markets Highlights

 

During 2015, the Company completed approximately $1.6 billion of real estate transactions and financing activities, including the following:

 

 

 

 

 

 

Operational Accomplishments

 

The Company continued to improve cash flow and the quality of its portfolio in 2015 as evidenced by the achievement of the following:

 

 

 

 

 

Retail Environment

 

Many retailers have aggressive store opening plans for 2016 and 2017.  With demand exceeding supply, retailers are becoming more flexible with their design and prototype requirements.  Further, the Company continues to see strong demand from a broad range of retailers for its space.

 

Value-oriented retailers are taking market share from conventional and national chain department stores.  The Company’s largest tenants, including TJX Companies, Bed Bath & Beyond, Walmart/Sam’s Club, PetSmart, Kohl’s, Dick’s Sporting Goods and Ross Stores have increased sales and remained well-capitalized while outperforming other retail categories on a relative basis.  The Company is also focused on increasing its exposure to specialty grocers, which are expanding. (Over 60% of the Company’s properties have a grocery component.)

 

42

---

 

Company Fundamentals

 

The following table lists the Company’s 10 largest tenants based on total annualized rental revenues of the wholly-owned properties and the Company’s proportionate share of unconsolidated joint venture properties combined as of December 31, 2015 (footnotes apply to all further references to noted tenants):

 

 

 

 

 

 

 

 

The following table lists the Company’s 10 largest tenants based on total annualized rental revenues of the wholly-owned properties and of the unconsolidated joint venture properties as of December 31, 2015:

 

 

 

 

43

---

 

The Company leased approximately 11 million square feet, including 515 new leases and 815 renewals, for a total of 1,330 leases executed in 2015.  The Company continued to execute both new leases and renewals at positive rental spreads.  Leasing spreads are a key metric in real estate, representing the percentage increase over rental rates on existing leases versus rental rates on new and renewal leases.  At December 31, 2015, the Company had 841 leases expiring in 2016 with an average base rent per square foot of $15.64.  For the comparable leases executed in 2015, the Company generated positive leasing spreads on a pro rata basis of 22.0% for new leases and 7.0% for renewals and 9.4% on a blended basis.  The Company’s leasing spread calculation includes only those deals that were executed within one year of the date the prior tenant vacated and, as a result, is a good benchmark to compare the average annualized base rent of expiring leases with the comparable executed market rental rates.

Five-Year Blended Lease Spreads

 

 

For new leases executed during 2015, the Company expended a weighted-average cost of tenant improvements and lease commissions estimated at $4.89 per rentable square foot over the lease term.  The Company generally does not expend a significant amount of capital on lease renewals.

 

Year in Review—2015 Financial Results

 

For the year ended December 31, 2015, net income attributable to common shareholders decreased compared to 2014 primarily due to a greater amount of impairment charges recorded in 2015, partially offset by the impact of transaction activity as well as organic growth and continued lease up within the portfolio.  The following provides an overview of the key financial metrics (see Non-GAAP Financial Measures, FFO described later in this section) (in thousands except per share amounts):

 

 

In 2015, the Company continued to pursue opportunities to position itself for long-term growth while lowering the Company’s risk profile and cost of capital.  The Company initiatives are focused on positioning its balance sheet to perform in all market cycles.  In the first quarter of 2015, a new senior leadership team was put in place as the Company named a new Chief Executive Officer as well as a new Chief Financial Officer.  Although the general Company strategy has not changed, as a result of a combination of continual recycling of assets and the overall favorable asset disposition environment, the new senior management team determined to accelerate the portfolio quality improvement initiative and potentially achieve lower leverage more quickly.  Management expects to achieve these goals through the acceleration of asset sales not considered to have long-term growth potential that the Company’s seeks, as well as the re-evaluation of the targeted risk/return criteria for investing in development/redevelopments and new acquisitions of Prime Assets.  As a result, the Company recorded $279.0 million in impairment charges in the first quarter related to 25 operating

44

---

 

shopping centers and five parcels of land previously held for development.  The impairments were triggered by the acceleration of the disposition plans for the operating assets as well as the decision to no longer pursue any potential development related to the land parcels.  

 

The following discussion of the Company’s financial condition and results of operations provides information that will assist in the understanding of the Company’s financial statements, the changes in certain key items and the factors that accounted for changes in the financial statements, as well as critical accounting policies that affected these financial statements.

 

CRITICAL ACCOUNTING POLICIES

 

The consolidated financial statements of the Company include the accounts of the Company and all subsidiaries where the Company has financial or operating control.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes.  In preparing these financial statements, management has used available information, including the Company’s history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the Company’s consolidated financial statements, giving due consideration to materiality.  It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize.  Application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties.  Accordingly, actual results could differ from these estimates.  In addition, other companies may use different estimates that may affect the comparability of the Company’s results of operations to those of companies in similar businesses.

 

Revenue Recognition and Accounts Receivable

 

Rental revenue is recognized on a straight-line basis that averages minimum rents over the current term of the leases.  Certain of these leases provide for percentage and overage rents based upon the level of sales achieved by the tenant.  Percentage and overage rents are recognized after a tenant’s reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease.  The leases also typically provide for tenant reimbursements of common area maintenance and other operating expenses and real estate taxes.  Accordingly, revenues associated with tenant reimbursements are recognized in the period in which the expenses are incurred based upon the tenant lease provision.  Ancillary and other property-related income, which includes the leasing of vacant space to temporary tenants, is recognized in the period earned.  Lease termination fees are included in other revenue and recognized and earned upon termination of a tenant’s lease and relinquishment of space in which the Company has no further obligation to the tenant. Management fees are recorded in the period earned.  Fee income derived from the Company’s unconsolidated joint venture investments is recognized to the extent attributable to the unaffiliated ownership interest.  In 2014, the Financial Accounting Standards Board (the “FASB”) issued Revenue from Contracts with Customers, which will be effective for the Company in 2018.  Most significantly for the real estate industry, leasing transactions are not within the scope of the new standard.  A majority of the Company’s tenant-related revenue is recognized pursuant to lease agreements.

 

The Company makes estimates of the collectability of its accounts receivable related to base rents, including straight-line rentals, expense reimbursements and other revenue or income.  The Company analyzes accounts receivable, tenant credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.  In addition, with respect to tenants in bankruptcy, the Company makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable.  The time to resolve these claims may exceed one year.  These estimates have a direct impact on the Company’s earnings because a higher bad debt reserve and/or a subsequent write-off in excess of an estimated reserve results in reduced earnings.

 

Consolidation

 

All significant inter-company balances and transactions have been eliminated in consolidation.  Investments in real estate joint ventures in which the Company has the ability to exercise significant influence, but does not have financial or operating control, are accounted for using the equity method of accounting.  Accordingly, the Company’s share of the earnings (or loss) of these joint ventures is included in consolidated net income.

 

The Company has a number of joint venture arrangements with varying structures.  The Company consolidates entities in which it owns less than a 100% equity interest if it is determined that it is a variable interest entity (“VIE”), and the Company has a controlling interest in that VIE or is the controlling general partner.  The analysis to identify whether the Company is the primary beneficiary of a VIE is based upon which party has (a) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.  In determining whether it has the power to direct the activities of the VIE that most significantly affect the VIE’s performance,

45

---

 

the Company is required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed.  This qualitative assessment has a direct impact on the Company’s financial statements, as the detailed activity of off-balance sheet joint ventures is not presented within the Company’s consolidated financial statements.

 

Real Estate and Long-Lived Assets

 

Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The Company is required to make subjective assessments as to the useful lives of its properties to determine the amount of depreciation to reflect on an annual basis with respect to those properties.  These assessments have a direct impact on the Company’s net income.  If the Company were to extend the expected useful life of a particular asset, it would be depreciated over more years and result in less depreciation expense and higher annual net income.

 

On a periodic basis, management assesses whether there are any indicators that the value of real estate assets, including undeveloped land and construction in progress, and intangibles may be impaired.  A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property.  The determination of undiscounted cash flows requires significant estimates by management.  In management’s estimate of cash flows, it considers factors such as expected future operating income (loss), trends and prospects, the effects of demand, competition and other factors.  If the Company is evaluating the potential sale of an asset or development alternatives, the undiscounted future cash flows analysis is probability-weighted based upon management’s best estimate of the likelihood of the alternative courses of action.  Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could affect the determination of whether an impairment exists and whether the effects could have a material impact on the Company’s net income.  To the extent an impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property.

 

The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties and other investments.  These assessments have a direct impact on the Company’s net income because recording an impairment charge results in an immediate negative adjustment to net income.  If the Company’s estimates of the projected future cash flows, anticipated holding periods or market conditions change, its evaluation of the impairment charges may be different, and such differences could be material to the Company’s consolidated financial statements.  Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.  

 

The Company allocates the purchase price to assets acquired and liabilities assumed at the date of acquisition.  In estimating the fair value of the tangible and intangible assets and liabilities acquired, the Company considers information obtained about each property as a result of its due diligence, marketing and leasing activities.  It applies various valuation methods, such as estimated cash flow projections using appropriate discount and capitalization rates, estimates of replacement costs net of depreciation and available market information.  If the Company determines that an event has occurred after the initial allocation of the asset or liability that would change the estimated useful life of the asset, the Company will reassess the depreciation and amortization of the asset.  The Company is required to make subjective estimates in connection with these valuations and allocations.  

 

The Company generally considers assets to be held for sale when the transaction has been approved by the appropriate level of management and there are no known significant contingencies relating to the sale such that the sale of the property within one year is considered probable.  This generally occurs when a sales contract is executed with no contingencies and the prospective buyer has significant funds at risk to ensure performance.  

 

Notes Receivable

 

Notes receivable include certain loans that are held for investment and are generally collateralized by real estate-related investments and that may be subordinate to other senior loans.  Loan receivables are recorded at stated principal amounts or at initial investment plus accretable yield for loans purchased at a discount.  The related discounts on mortgages and other loans purchased are accreted over the life of the related loan receivable.  The Company defers loan origination and commitment fees, net of origination costs, and amortizes them over the term of the related loan.  The Company evaluates the collectability of both principal and interest on each loan based on an assessment of the underlying collateral value to determine whether it is impaired, and not by the use of internal risk ratings.  A loan loss reserve is recorded when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms, and the amount of loss can be reasonably estimated.  When a loan is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value of the underlying collateral.  As the underlying collateral for a majority of the notes receivable is real estate-related investments, the same valuation techniques are used to value the collateral as those used to determine the fair value of real estate investments for impairment purposes.  Given the small number of loans outstanding, the Company does not provide for an additional allowance for loan losses based on the grouping of loans, as the Company believes the characteristics of the loans are not sufficiently similar to allow an

46

---

 

evaluation of these loans as a group.  As such, all of the Company’s loans are evaluated individually for this purpose.  Interest income on performing loans is accrued as earned.  A loan is placed on non-accrual status when, based upon current information and events, it is probable that the Company will not be able to collect all amounts due according to the existing contractual terms.  Interest income on non-performing loans is generally recognized on a cash basis.  Recognition of interest income on an accrual basis on non-performing loans is resumed when it is probable that the Company will be able to collect amounts due according to the contractual terms.  

 

Off-Balance Sheet Arrangements—Impairment Assessment

 

The Company has a number of off-balance sheet joint ventures and other unconsolidated arrangements with varying structures.  On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired.  An investment’s value is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment and such loss is deemed to be other than temporary.  To the extent an impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

 

Measurement of Fair Value—Real Estate and Unconsolidated Joint Venture Investments

 

The Company is required to assess the value of certain impaired consolidated and unconsolidated joint venture investments as well as the underlying collateral for certain financing notes receivable.  The fair value of real estate investments used in the Company’s impairment calculations is estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date.  Investments without a public market are valued based on assumptions made and valuation techniques used by the Company.  The availability of observable transaction data and inputs can make it more difficult and/or subjective to determine the fair value of such investments.  As a result, amounts ultimately realized by the Company from investments sold may differ from the fair values presented, and the differences could be material.

 

The valuation of impaired real estate assets, investments and real estate collateral is determined using widely accepted valuation techniques including the income capitalization approach or discounted cash flow analysis on the expected cash flows of each asset considering prevailing market capitalization rates, analysis of recent comparable sales transactions, actual sales negotiations, bona fide purchase offers received from third parties and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence.  In general, the Company considers multiple valuation techniques when measuring fair value of an investment.  However, in certain circumstances, a single valuation technique may be appropriate.

 

For operational real estate assets, the significant assumptions include the capitalization rate used in the income capitalization valuation as well as the projected property net operating income and expected hold period.  For projects under development or not at stabilization, the significant assumptions include the discount rate, the timing for the construction completion and project stabilization and the exit capitalization rate.  For investments in unconsolidated joint ventures, the Company also considers the valuation of any underlying joint venture debt.  Valuation of real estate assets is calculated based on market conditions and assumptions made by management at the measurement date, which may differ materially from actual results if market conditions or the underlying assumptions change.

 

Deferred Tax Assets and Tax Liabilities

 

The Company accounts for income taxes related to its taxable REIT subsidiary (“TRS”) under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  The Company records net deferred tax assets to the extent it believes it is more likely than not that these assets will be realized.  In making such determinations, the Company considers all available positive and negative evidence, including forecasts of future taxable income, the reversal of other existing temporary differences, available net operating loss carryforwards, tax planning strategies and recent results of operations.  Several of these considerations require assumptions and significant judgment about the forecasts of future taxable income that are consistent with the plans and estimates that the Company is utilizing to manage its business.  Based on this assessment, management must evaluate the need for, and amount of, valuation allowances against the Company’s deferred tax assets.  The Company would record a valuation allowance to reduce deferred tax assets when it has determined that an uncertainty exists regarding their realization, which would increase the provision for income taxes.  To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.  In the event the Company were to determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, the Company would adjust the valuation allowance, which would reduce the provision for income taxes.  The Company makes certain estimates in the determination of the use of valuation reserves recorded for deferred tax assets.  These estimates could have a direct impact on the Company’s earnings, as a difference in the tax provision would impact the Company’s earnings.

47

---

 

 

The Company has made estimates in assessing the impact of the uncertainty of income taxes.  Accounting standards prescribe a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  These estimates have a direct impact on the Company’s net income because higher tax expense will result in reduced earnings.

 

Stock-Based Employee Compensation

 

Stock-based compensation requires all stock-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair value.  The fair value is estimated at the date of grant using a Black-Scholes option pricing model with weighted-average assumptions for the activity under stock plans.  Option pricing model input assumptions, such as expected volatility, expected term and risk-free interest rate, all affect the fair value estimate.  Further, the forfeiture rate has an impact on the amount of aggregate compensation.  These assumptions are subjective and generally require significant analysis and judgment to develop.

 

When estimating fair value, some of the assumptions will be based on or determined from external data, and other assumptions may be derived from experience with stock-based payment arrangements.  The appropriate weight to place on experience is a matter of judgment, based on relevant facts and circumstances.

 

 

COMPARISON OF 2015, 2014 AND 2013 RESULTS OF OPERATIONS

 

As disclosed in Note 1, “Summary of Significant Accounting Policies,” of the Company’s consolidated financial statements included herein, the Company adopted FASB Standard, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, as of January 1, 2015.  The Company did not have any asset sales that qualified for discontinued operations presentation in 2015.  However, the Company’s 2014 and 2013 consolidated financial statements continue to be presented in accordance with the accounting standards effective through December 31, 2014.  For the comparison of 2015 to 2014, shopping center properties owned as of January 1, 2014, and for the comparison of 2014 to 2013, shopping center properties owned as of January 1, 2013, are referred to herein as the “Comparable Portfolio Properties.”  These exclude properties under development or redevelopment and those sold by the Company.

 

Revenues from Operations (in thousands)

 

 

 

 

48

---

 

The following tables present the statistics for the Company’s operating shopping center portfolio affecting base and percentage rental revenues summarized by the following portfolios: combined shopping center portfolio, wholly-owned shopping center portfolio and joint venture shopping center portfolio.

 

 

 

 

The Comparable Portfolio Properties’ aggregate occupancy rate was 94.3% at December 31, 2015, as compared to 93.6% at both December 31, 2014 and 2013.  The Comparable Portfolio Properties average annualized base rent per occupied square foot was $14.70, $14.01 and $13.40, as of December 31, 2015, 2014 and 2013, respectively.

 

Including the Sonae Sierra Brazil BV SARL (“SSB”) joint venture assets that were sold in 2014, the combined shopping center portfolio and joint venture shopping center portfolio occupancy rate was 92.2% and 90.5%, respectively, and the average annualized base rent per occupied square foot was $14.18 and $15.23, respectively, as of December 31, 2013.  

 

Comparison of 2015 to 2014

 

The increase in the average annualized base rent per occupied square foot primarily was due to the Company’s strategic portfolio realignment achieved through the recycling of capital from asset sales into the acquisition of Prime power centers (see Strategic Transaction Activity), as well as continued leasing of the existing portfolio at positive rental spreads.

 

 

 

 

49

---

 

Comparison of 2015 to 2014

 

The revenues classified as management, development and other fee income are generated from the Company’s unconsolidated joint ventures.  Changes in the number of assets under management or the joint venture fee structure could impact the amount of revenue recorded in future periods.  The decrease in Ancillary and other property income primarily was due to the termination of the Company’s operating agreement with certain entertainment operations at a property under redevelopment in the third quarter of 2014.  After considering the related operating expenses associated with the operating agreement, the impact of the termination on the Company’s results was immaterial.  

 

Comparison of 2014 to 2013

 

The decrease in management, development and other fee income in 2014, compared to 2013, was largely the result of a decrease in the number of properties owned by the Company’s unconsolidated joint ventures, partially offset by BRE DDR Retail Holdings III, a joint venture with The Blackstone Group L.P. (“Blackstone”) formed in 2014, which owned 70 properties at December 31, 2014.  During 2014, the Company dissolved two joint ventures and acquired eight assets from two other joint ventures.  The Company had 188 joint venture shopping centers at December 31, 2014, as compared to 170 at December 31, 2013.  

 

Expenses from Operations (in thousands)

 

 

 

Comparison of 2015 to 2014

 

 

The decrease in depreciation expense for the Comparable Portfolio Properties was attributable to assets becoming fully amortized in 2014.  The decrease in development or redevelopment properties was attributable to accelerated depreciation charges related to changes in the estimated useful lives of certain assets in 2014.

 

50

---

 

Comparison of 2014 to 2013

 

 

The increase in depreciation expense for the Comparable Portfolio Properties was attributable to a combination of accelerated depreciation charges related to changes in the estimated useful lives of certain assets that are expected to be redeveloped in future periods and assets placed in service in 2013.

 

 

 

Included in general and administrative expenses in 2014 is a $5.4 million charge related to the separation of the Company’s former Chief Executive Officer, the terms of which were pursuant to a separation agreement executed on December 31, 2014.

 

Other Income and Expenses (in thousands)

 

 

 

 

51

---

 

 

 

The weighted-average interest rate (based on contractual rates and excluding senior convertible debt accretion, fair market value of adjustments and debt issuance costs) at December 31, 2015, 2014 and 2013, was 4.6%, 4.8% and 4.7%, respectively.  The change in the weighted-average debt outstanding for the year ended December 31, 2014, compared to 2013, was a result of the acquisition of Prime power centers.

 

Interest costs capitalized in conjunction with development and redevelopment projects and unconsolidated development and redevelopment joint venture interests were $6.7 million for the year ended December 31, 2015, compared to $8.7 million and $8.8 million for the comparable periods in 2014 and 2013, respectively.  The decrease in the amount of interest costs capitalized is a result of a change in the mix of active development projects year-over-year.

 

For the years ended December 31, 2014 and 2013, $9.9 million and $19.5 million, respectively, of interest expense was classified as discontinued operations.  As a result, when this amount is appropriately considered in the year-over-year comparison, the change in interest expense was immaterial.

 

 

 

Transaction and other income (expense), net

 

In 2015, 2014 and 2013, the Company incurred $1.0 million, $3.0 million and $3.3 million, respectively, in transaction costs related to the acquisition of shopping centers.  In 2014, the Company recorded a charge of $7.3 million, as a result of net termination fees paid to major tenants in connection with two redevelopments.  The 2014 expenses were partially offset by a gain recorded on the sale of securities of $1.4 million.

 

Litigation-related expenses

 

Litigation-related expenses include costs incurred by the Company to defend the litigation arising from joint venture assets that were owned through the Company’s investments with the Coventry II Fund.  This litigation was settled in 2015.

 

Notes receivable reserve

 

In 2014, the Company recorded a loan loss reserve based upon the estimated collateral value of a non-performing note receivable.  In the fourth quarter of 2015, the Company sold the note receivable associated with this loan loss reserve.  As a result, the related aggregate loan loss reserve of $4.8 million was reversed and income of $2.9 million was recognized and classified as Gain on Disposition of Real Estate in the consolidated statement of operations.  

 

52

---

 

Other Items (in thousands)

 

 

 

Comparison of 2015 to 2014

 

The decrease in equity in net income of joint ventures for the year ended December 31, 2015, compared to the prior year, primarily was a result of higher impairment charges in 2015 as well as the sale of joint venture investments in 2014 and 2015 and the related transactional impact.  This decrease was partially offset by the impact of the Company’s investments in joint ventures formed with Blackstone in the fourth quarter of 2014 and the fourth quarter of 2015.  In addition, in 2014, the Company recorded a gain of $83.7 million from its sale of its 50% interest in SSB.  

 

Comparison of 2014 to 2013

 

The increase in equity in net income of joint ventures for the year ended December 31, 2014, compared to the prior year, primarily was a result of gains recognized in 2014 from the sale of assets held in joint ventures and lower impairment charges, partially offset by lower net income from the Company’s investment in SSB in 2014 related to the sale of its interest in the joint venture (see 2014 Strategic Transaction Activity).

 

 

 

 

Discontinued Operations (in thousands)

 

 

53

---

 

 

Disposition of Real Estate, Non-Controlling Interests and Net (Loss) Income (in thousands)

 

 

 

 

 

 

NON-GAAP FINANCIAL MEASURES

 

Definition and Basis of Presentation

 

The Company believes that Funds from Operations (“FFO”) and Operating FFO, both non-GAAP financial measures, provide additional and useful means to assess the financial performance of REITs.  FFO and Operating FFO are frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs.

 

FFO excludes GAAP historical cost depreciation and amortization of real estate and real estate investments, which assume that the value of real estate assets diminishes ratably over time.  Historically, however, real estate values have risen or fallen with market conditions, and many companies use different depreciable lives and methods.  Because FFO excludes depreciation and amortization unique to real estate and gains and losses from depreciable property dispositions, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, interest costs and acquisition, disposition and development activities.  This provides a perspective of the Company’s financial performance not immediately apparent from net income determined in accordance with GAAP.

 

FFO is generally defined and calculated by the Company as net income (loss), adjusted to exclude (i) preferred share dividends, (ii) gains and losses from disposition of depreciable real estate property and related investments, which are presented net of taxes, (iii) impairment charges on depreciable real estate property and related investments and (iv) certain non-cash items.  These non-cash items principally include real property depreciation and amortization of intangibles, equity income (loss) from joint ventures and equity income (loss) from non-controlling interests and the Company’s proportionate share of FFO from its unconsolidated joint ventures and non-controlling interests, determined on a consistent basis.  The Company’s calculation of FFO is consistent with the definition of FFO provided by the National Association of Real Estate Investment Trusts (“NAREIT”).  Other real estate companies may calculate FFO in a different manner.

 

The Company believes that certain gains and charges recorded in its operating results are not reflective of its core operating performance.  As a result, the Company also computes Operating FFO and discusses it with the users of its financial statements, in addition to other measures such as net income/loss determined in accordance with GAAP as well as FFO.  Operating FFO is generally

54

---

 

defined and calculated by the Company as FFO excluding certain charges and gains that management believes are not indicative of the results of the Company’s operating real estate portfolio.  The disclosure of these charges and gains is regularly requested by users of the Company’s financial statements.  The adjustment for these charges and gains may not be comparable to how other REITs or real estate companies calculate their results of operations, and the Company’s calculation of Operating FFO differs from NAREIT’s definition of FFO.  Additionally, the Company provides no assurances that these charges and gains are non-recurring.  These charges and gains could be reasonably expected to recur in future results of operations.

 

These measures of performance are used by the Company for several business purposes and by other REITs.  The Company uses FFO and/or Operating FFO in part (i) as a disclosure to improve the understanding of the Company’s operating results among the investing public, (ii) as a measure of a real estate asset’s performance, (iii) to influence acquisition, disposition and capital investment strategies and (iv) to compare the Company’s performance to that of other publicly traded shopping center REITs.

 

For the reasons described above, management believes that FFO and Operating FFO provide the Company and investors with an important indicator of the Company’s operating performance.  They provide recognized measures of performance other than GAAP net income, which may include non-cash items (often significant).  Other real estate companies may calculate FFO and Operating FFO in a different manner.

 

Management recognizes the limitations of FFO and Operating FFO when compared to GAAP’s income from continuing operations.  FFO and Operating FFO do not represent amounts available for dividends, capital replacement or expansion, debt service obligations or other commitments and uncertainties.  Management does not use FFO or Operating FFO as an indicator of the Company’s cash obligations and funding requirements for future commitments, acquisitions or development activities.  Neither FFO nor Operating FFO represents cash generated from operating activities in accordance with GAAP, and neither is necessarily indicative of cash available to fund cash needs.  Neither FFO nor Operating FFO should be considered an alternative to net income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of liquidity.  FFO and Operating FFO are simply used as additional indicators of the Company’s operating performance.  The Company believes that to further understand its performance, FFO and Operating FFO should be compared with the Company’s reported net income (loss) and considered in addition to cash flows determined in accordance with GAAP, as presented in its consolidated financial statements.

 

Reconciliation Presentation

 

FFO and Operating FFO attributable to common shareholders were as follows (in millions):

 

 

Comparison of 2015 to 2014

 

The decrease in FFO for the year ended December 31, 2015, compared to 2014, primarily was due to an increase in impairment charges of non-depreciable assets, offset by the 2015 growth described below.

 

The increase in Operating FFO for the year ended December 31, 2015, compared to 2014, primarily was due to the impact of Prime power center acquisitions as well as organic growth and continued lease up within the portfolio.

 

Comparison of 2014 to 2013

 

The decrease in FFO for the year ended December 31, 2014, compared to 2013, primarily was due to the impact of asset dispositions, including the sale of the Company’s interest in SSB, an increase in impairment charges of non-depreciable assets and an executive separation charge.  These factors were partially offset by the impact of Prime power center acquisitions, organic growth and the reduction of the write-off of the original issuance costs from the redemption of the 7.375% Class H Cumulative Redeemable Preferred Shares compared to 2013.  

 

The increase in Operating FFO for the year ended December 31, 2014, compared to 2013, primarily was due to the same factors impacting FFO.

 

55

---

 

The Company’s reconciliation of net (loss) income attributable to common shareholders to FFO attributable to common shareholders and Operating FFO attributable to common shareholders is as follows (in millions):

 

 

 

FFO at DDR ownership interests considers the impact of basis differentials.  Joint ventures’ FFO and Operating FFO is summarized as follows (in millions):

 

 

 

56

---

 

Operating FFO Adjustments

 

The Company’s adjustments to arrive at Operating FFO are composed of the following for the years ended December 31, 2015, 2014 and 2013 (in millions).  The Company provides no assurances that these charges and gains are non-recurring.  These charges and gains could reasonably be expected to recur in future results of operations.

 

 

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company periodically evaluates opportunities to issue and sell additional debt or equity securities, obtain credit facilities from lenders, or repurchase or refinance long-term debt for strategic reasons or to further strengthen the financial position of the Company.  In 2015, the Company continued to strategically allocate cash flow from operating and financing activities.  The Company also completed public debt offerings and amended the Revolving Credit Facilities (as defined below) in order to strengthen its balance sheet and reduce risk, finance strategic investments and improve its financial flexibility.

 

The Company’s consolidated and unconsolidated debt obligations generally require monthly or semi-annual payments of principal and/or interest over the term of the obligation.  While the Company currently believes it has several viable sources to obtain capital and fund its business, including capacity under its facilities described below, no assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.  

 

In 2015, the Company amended its unsecured revolving credit facility with a syndicate of financial institutions, arranged by J.P. Morgan Securities, LLC and Wells Fargo Securities, LLC (the “Unsecured Credit Facility”).  The Unsecured Credit Facility provides for borrowings of up to $750 million and includes an accordion feature for expansion of availability up to $1.25 billion upon the Company’s request, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level.  The Company also amended its unsecured revolving credit facility with PNC Bank, National Association (together with the Unsecured Credit Facility, the “Revolving Credit Facilities”) to reduce the borrowing capacity from $65 million to $50 million and to match the terms of the primary facility.  The Company’s borrowings under these facilities bear interest at variable rates based on LIBOR plus 100 basis points at December 31, 2015, a decrease of 15 basis points from the previous rate, subject to adjustment based on the Company’s current corporate credit ratings from Moody’s Investors Service (“Moody’s”) and Standard and Poor’s (“S&P”).

 

57

---

 

The Revolving Credit Facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants including, among other things, leverage ratios and debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions.  These credit facilities and indentures also contain customary default provisions including the failure to make timely payments of principal and interest payable thereunder, the failure to comply with the Company’s financial and operating covenants, the occurrence of a material adverse effect on the Company and the failure of the Company or its majority-owned subsidiaries (i.e., entities in which the Company has a greater than 50% interest) to pay, when due, certain indebtedness in excess of certain thresholds beyond applicable grace and cure periods.  In the event the Company’s lenders or note holders declare a default, as defined in the applicable agreements governing the debt, the Company may be unable to obtain further funding, and/or an acceleration of any outstanding borrowings may occur.  As of December 31, 2015, the Company was in compliance with all of its financial covenants in the agreements governing its debt.  Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities.  The Company believes it will continue to be able to operate in compliance with these covenants in 2016 and beyond.

 

Certain of the Company’s credit facilities and indentures permit the acceleration of the maturity of the underlying debt in the event certain other debt of the Company has been accelerated.  Furthermore, a default under a loan by the Company or its affiliates, a foreclosure on a mortgaged property owned by the Company or its affiliates or the inability to refinance existing indebtedness may have a negative impact on the Company’s financial condition, cash flows and results of operations.  These facts, and an inability to predict future economic conditions, have led the Company to continue to strengthen its focus on its balance sheet risk and increasing financial flexibility.

 

The Company expects to fund its obligations from available cash, current operations and utilization of its Revolving Credit Facilities; however, the Company may issue long-term debt and/or equity securities in lieu of, or in addition to, borrowing under its Revolving Credit Facilities.  The following information summarizes the availability of the Revolving Credit Facilities at December 31, 2015 (in millions):

 

 

The Company has a $250 million continuous equity program.  At February 12, 2016, the Company had $234.6 million available for the future issuance of common shares under that program.

 

The Company intends to continue to maintain a long-term financing strategy with limited reliance on short-term debt.  The Company believes its Revolving Credit Facilities are sufficient for its liquidity strategy and longer-term capital structure needs.  Part of the Company’s overall strategy includes scheduling future debt maturities in a balanced manner, including incorporating a healthy level of conservatism regarding possible future market conditions.  For additional discussion, see Financing Activities described later in this section.

 

At December 31, 2015, the Company’s 2016 debt maturities consisted of $240.0 million of unsecured notes and $140.7 million of consolidated mortgage debt.  In January 2016, $27.5 million of the consolidated mortgage debt maturing in 2016, was extended for a one-year term.  The Company expects to fund these obligations from possible refinancing opportunities, including extension options, utilization of its Revolving Credit Facilities, proceeds from asset sales or cash flow from operations.  No assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.

 

Management believes the scheduled debt maturities in 2016 and in future years are manageable.  The Company continually evaluates its debt maturities and, based on management’s assessment, believes it has viable financing and refinancing alternatives.  The Company continues to evaluate its debt maturities with the goal of executing a strategy to extend debt duration, lower leverage, increase liquidity and improve the Company’s credit ratings with the goal of lowering the Company's balance sheet risk and cost of capital.

 

58

---

 

Unconsolidated Joint Ventures

 

The Company’s unconsolidated joint ventures have $665.2 million of debt maturing in 2016, of which the Company’s proportionate share is $33.3 million.  The Company expects to fund these obligations from possible refinancing opportunities.

 

Cash Flow Activity

 

The Company’s core business of leasing space to well-capitalized retailers continues to generate consistent and predictable cash flow after expenses, interest payments and preferred share dividends.  This capital is available for use at the Company’s discretion for investment, debt repayment and the payment of dividends on common shares.

 

The Company’s cash flow activities are summarized as follows (in thousands):

 

 

Operating Activities:  The change in cash flow from operating activities for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily was due to a full year of cash flow from assets acquired in 2014 and an increase in cash flow from those assets acquired in 2015 from the date of acquisition, partially offset by assets sold and changes in accounts payable and accrued expenses.

 

Investing Activities:  The change in cash flow from investing activities for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily was due to a decrease in joint venture advances and contributions offset by a reduction in proceeds received from the disposition of real estate investments in 2015 and a lower amount of real estate acquired in 2015.  The 2014 disposition proceeds included the Company’s sale of its joint venture investment in Brazil.

 

Financing Activities:  The change in cash flow from financing activities for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily was due to a higher amount of net debt repayments and the redemption of preferred shares in 2014.  

 

The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable income with declared common and preferred share cash dividends of $272.4 million in 2015, as compared to $246.9 million of cash dividends paid in 2014 and $205.4 million of cash dividends paid in 2013.  Because actual distributions were greater than 100% of taxable income, federal income taxes were not incurred by the Company in 2015.

 

The Company declared cash dividends of $0.69 per common share in 2015.  In January 2016, the Company declared its first quarter 2016 dividend of $0.19 per common share payable on April 5, 2016, to shareholders of record at the close of business on March 10, 2016.  The Board of Directors of the Company expects to continue to monitor the 2016 dividend policy and provide for adjustments as determined to be in the best interests of the Company and its shareholders to maximize the Company’s free cash flow while still adhering to REIT payout requirements.  

 

 

 

SOURCES AND USES OF CAPITAL

 

2016 Strategic Transaction Activity

 

From January 1, 2016 to February 24, 2016, the Company sold 16 operating assets, including 11 owned by one joint venture, and two non-operating assets for an aggregate sales price of $218.7 million at the Company’s share.

 

2015 Strategic Transaction Activity

 

The Company has a portfolio management strategy to opportunistically recycle capital from lower quality, lower growth potential assets into Prime Assets located in large and supply-constrained markets occupied by high credit quality retailers.  

59

---

 

Transactions are completed both on balance sheet and through off-balance sheet joint venture arrangements with top tier, well capitalized partners.

 

Acquisitions

 

In 2015, the Company acquired four Prime Assets (Orange County, California; Orlando, Florida (two assets) and Houston, Texas).  These assets aggregated 1.2 million square feet of Company-owned GLA and were acquired for an aggregate purchase price of $219.1 million.  The Company assumed $33.0 million of mortgage debt at a fair value of $33.7 million at closing with these acquisitions.  The Company acquired its partner’s 80% interest in the asset in Orange County, California, included above, valued at $49.2 million in connection with the final dissolution of the Company’s joint venture with the Coventry II Fund in exchange for the Company’s transfer of its interest in the remaining 21 joint venture assets.  The Company recorded a Gain on Change in Control of Interests of $14.3 million related to the acquisition of the interest in this asset from the joint venture.  

 

Dispositions

 

In 2015, the Company sold 29 shopping center properties, aggregating 3.9 million square feet, plus non-income producing assets, for an aggregate sales price of $495.5 million.  The Company recorded a net gain of $167.6 million.  

 

In 2015, the Company’s unconsolidated joint ventures had the following sales transactions, of which the Company’s proportionate share of the gain was $4.0 million:

 

 

As discussed above, a part of the Company’s portfolio management strategy is to opportunistically recycle capital from lower quality, lower growth assets into the acquisition of higher quality assets with long-term growth potential.  In March 2015, the Company’s new senior management team completed an extensive review of the entire portfolio and evaluated potential sale opportunities, taking into account the long-term growth prospects of assets being considered for sale, the current overall favorable disposition environment, the use of sale proceeds and the impact to the Company’s balance sheet, in addition to the impact on operating results.  As a result of that review, in the first quarter of 2015, the Company recorded an aggregate impairment charge of $179.7 million related to 25 operating shopping centers.  The Company sold five of these assets in 2015 and has started marketing certain of the remainder of the assets for sale.  As a result, these shopping centers are no longer considered as long-term holds.  

 

Transactions with Blackstone

 

The Company has invested in several joint venture arrangements with Blackstone.  Each of the joint ventures is structured with Blackstone-affiliated entities owning 95% of the common equity and a consolidated affiliate of DDR owning the remaining 5%.  DDR also invested preferred equity in each joint venture.  The transactions completed are as follows:

 

Investments at December 31, 2015

 

60

---

 

 

Prior Investments

 

 

Development and Redevelopment Opportunities

 

One of the important benefits of the Company’s asset class is the ability to phase development and redevelopment projects over time until appropriate leasing levels can be achieved.  To maximize the return on capital spending, the Company generally adheres to strict investment criteria thresholds.  The Company also evaluates the credit quality of the tenants and, in the case of redevelopments, generally seeks to upgrade the retailer merchandise mix. The Company applies this strategy to both its consolidated and certain unconsolidated joint ventures that own assets under development and redevelopment because the Company has significant influence and, in most cases, approval rights over decisions relating to significant capital expenditures.

 

The Company will generally commence construction on various developments only after substantial tenant leasing has occurred and acceptable construction financing is available.  The Company will continue to closely monitor its expected spending in 2016 for developments and redevelopments, as the Company considers this funding to be discretionary spending.  The Company does not anticipate expending significant funds on joint venture development projects in 2016.

 

The Company’s consolidated land holdings are classified in two separate line items on the Company’s consolidated balance sheets included herein, (i) Land and (ii) Construction in Progress and Land.  At December 31, 2015, the $2.2 billion of Land primarily consisted of land that is part of the Company’s operating shopping center portfolio.  However, this amount also includes a small portion of vacant land composed primarily of outlots or expansion pads adjacent to the shopping center properties.  Approximately 150 acres of this land, which has a recorded cost basis of approximately $24 million, is available for future development.

 

61

---

 

Included in Construction in Progress and Land at December 31, 2015, were $84 million of recorded costs related to undeveloped land for which active construction has not yet commenced or was previously ceased.  The Company evaluates its intentions with respect to these assets each reporting period and records an impairment charge equal to the difference between the current carrying value and fair value when the expected undiscounted cash flows are less than the asset’s carrying value.  In 2015, the Company determined it would no longer pursue the development of certain of these assets.  Rather, the Company sold two of these assets in 2015 and is marketing the remainder of these parcels for sale in the near term.  As a result, the Company recorded an aggregate impairment charge of $99.3 million on five parcels of land in 2015.

 

Development and Redevelopment Projects

 

As part of its portfolio management strategy to develop, expand, improve and re-tenant various properties, the Company has invested approximately $369 million in various consolidated active development and redevelopment projects and expects to bring at least $190 million of investments in service in 2016 on a net basis, after deducting sales proceeds from outlot sales.  

 

At December 31, 2015, the Company’s current significant consolidated development projects were as follows (dollars in millions and GLA in thousands):

 

 

The Company’s redevelopment projects are typically substantially complete within a year of the construction commencement date.  The Company sold its major redevelopment asset in Pasadena, California, in January 2016 for a net gain that had net costs incurred of $20.7 million at the time of sale.  At December 31, 2015, the Company’s significant consolidated redevelopment projects were as follows (in millions):

 

 

For redevelopment assets completed in 2015, the assets placed in service were completed at approximately $148 cost per square foot, excluding The Pike Outlets, which is a larger scale project (at a cost of approximately $309 per square foot).

 

2014 and 2013 Strategic Transaction Activity

 

Acquisitions and Investments

 

In 2014, the Company acquired five Prime Assets (Roseville, California; Colorado Springs, Colorado; Chicago, Illinois; Cincinnati, Ohio and Philadelphia, Pennsylvania).  In addition, the Company acquired its partner’s share of eight assets held through joint ventures with Blackstone.  These assets aggregate 2.8 million square feet of Company-owned GLA and were acquired for an aggregate purchase price of $688.8 million.  The Company assumed $281.7 million of mortgage debt at a fair value of $293.3 million and issued 1.0 million Operating Partnership Units (“OP Units”) valued at $17.9 million at closing in connection with these acquisitions.  These OP Units were converted into DDR common shares in 2015.

 

In 2013, in addition to the assets acquired from Blackstone discussed above, the Company acquired nine shopping centers, five of which were acquired from its unconsolidated joint venture partners, and parcels adjacent to existing shopping centers.  These assets aggregated 2.0 million square feet of Company-owned GLA and were acquired for an aggregate purchase price of $462.1 million.  The Company assumed $139.4 million of mortgage debt at a fair value of $148.5 million in connection with these acquisitions.  The

62

---

 

Company recorded a Gain on Change in Control of Interests of $1.1 million related to the five assets acquired from unconsolidated joint venture partners.

 

In 2013, the Company originated two mezzanine loans aggregating $28.5 million that were collateralized by a development project and a Prime Asset, both in Chicago, Illinois, and earned interest ranging between 9.0% and 9.5% per annum.  In 2014, the Company applied one of these loans toward the purchase price of the development project acquired in Chicago, Illinois.

 

Dispositions

 

In 2014, the Company sold its entire investment in SSB for $343.6 million to Mr. Alexander Otto, a director of the Company in 2015, and certain of his affiliates.  Through this investment, the Company owned an approximate 33% interest in Sonae Sierra Brasil, as well as an indirect ownership in the Parque Dom Pedro shopping center.  Dr. Finne, a director of DDR, is a Managing Director of certain entities affiliated with Mr. Otto, which entities purchased a portion of the Company’s ownership in SSB.  The Company believed that the sales price and other terms of the transaction were negotiated on terms equivalent to those prevailing in an arms’ length transaction.  Prior to the authorization of the transaction, an independent committee of the Company’s Board of Directors reviewed the relationship of the parties and the terms of the proposed transaction, among other things.  Upon concluding its review, the independent committee recommended the approval of the proposed transaction. After assessing the terms of the transaction and its favorability and fairness to the Company, the transaction was approved by the Company’s Board of Directors, with the two board members recommended for nomination by Mr. Otto, including Dr. Finne, recusing themselves.

 

In 2014, the Company sold 35 shopping center properties, aggregating 5.7 million square feet, and other consolidated

non-income producing assets for an aggregate sales price of $654.0 million.  The Company recorded a net gain of $99.1 million, which excludes the impact of an aggregate $102.7 million in related impairment charges that were recorded in prior periods related to the assets sold in 2014.  One of the land parcels sold was the entire acreage of undeveloped land in Russia.  The Company’s unconsolidated joint ventures sold 37 shopping center properties, excluding those properties acquired by the Company as described above, aggregating 4.7 million square feet for an aggregate sales price of $480.4 million, of which the Company’s proportionate share of the gain was approximately $11.9 million.

 

In 2013, the Company sold 39 shopping center properties, aggregating 2.9 million square feet, and other consolidated

non-income producing assets at an aggregate sales price of $239.6 million.  The Company recorded a net gain of $11.7 million, which excludes the impact of an aggregate $86.8 million in related impairment charges that were recorded in prior periods related to the assets sold in 2013. The Company’s unconsolidated joint ventures sold 26 shopping center properties, excluding those properties acquired by the Company as described above, aggregating 2.4 million square feet for an aggregate sales price of $163.4 million, of which the Company’s proportionate share of the gain was approximately $4.0 million.

 

Development and Redevelopments

 

As part of its portfolio management strategy to develop, expand, improve and re-tenant various consolidated properties, the Company invested an aggregate of $190.9 million and $166.0 million in various development and redevelopment projects on a net basis, after deducting sales proceeds from outlot sales, during 2014 and 2013, respectively.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has a number of off-balance sheet joint ventures and other unconsolidated entities with varying economic structures.  Through these interests, the Company has investments in operating properties and one development project.  Such arrangements are generally with institutional investors located throughout the United States.  The Company also had a preferred equity investment of $388.4 million plus $6.8 million of accrued interest at December 31, 2015, with an annual interest rate of 8.5% due from its joint ventures with Blackstone.

 

The Company’s unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $3.2 billion and $3.5 billion at December 31, 2015 and 2014, respectively (see Item 7A. Quantitative and Qualitative Disclosures About Market Risk).  Such mortgages are generally non-recourse to the Company and its partners; however, certain mortgages may have recourse to the Company and its partners in certain limited situations, such as misuse of funds and material misrepresentations.

 

 

FINANCING ACTIVITIES

 

The Company has historically accessed capital sources through both the public and private markets.  The Company’s acquisitions, developments and redevelopments are generally financed through cash provided from operating activities, Revolving

63

---

 

Credit Facilities, mortgages assumed, construction loans, secured debt, unsecured debt, common and preferred equity offerings, joint venture capital and asset sales.  Total consolidated debt outstanding was $5.1 billion at December 31, 2015, compared to $5.2 billion and $5.3 billion at December 31, 2014 and 2013, respectively.

In 2015, the Company amended and restated its Revolving Credit Facilities.  The Unsecured Credit Facility maturity date was extended to June 2019, with two six-month borrower options to extend upon the Company’s request, provided certain conditions are satisfied.  The PNC unsecured revolving credit facility was amended to reduce the commitment to $50 million, extend the maturity date to June 2019, with two six-month borrower options, and modify certain other terms to conform to the Unsecured Credit Facility.  Also, pricing on the Revolving Credit Facilities was reduced and set at LIBOR plus 100 basis points at December 31, 2015, a decrease of 15 basis points from the previous rate, and is determined based upon the Company’s credit ratings from Moody's and S&P.  

 

Debt and equity financings are summarized as follows (in millions):

 

 

 

 

CAPITALIZATION

 

At December 31, 2015, the Company’s capitalization consisted of $5.1 billion of debt, $350.0 million of preferred shares and $6.2 billion of market equity (market equity is defined as common shares and OP Units outstanding multiplied by $16.84, the closing price of the Company’s common shares on the New York Stock Exchange at December 31, 2015), resulting in a debt to total market capitalization ratio of 0.44 to 1.0, as compared to the ratios of 0.43 to 1.0 and 0.47 to 1.0 at December 31, 2014 and 2013, respectively.  The closing prices of the common shares on the New York Stock Exchange were $18.36 and $15.37 at December 31, 2014 and 2013, respectively.  The Company’s total debt consisted of the following (in billions):  

 

 

 

It is management’s strategy to have access to the capital resources necessary to manage the Company’s balance sheet, to repay upcoming maturities and to consider making prudent opportunistic investments.  Accordingly, the Company may seek to obtain funds through additional debt or equity financings and/or joint venture capital in a manner consistent with its intention to operate with a conservative debt capitalization policy and to reduce the Company’s cost of capital by maintaining an investment grade rating with Moody’s, S&P and Fitch Ratings, Inc.  The security rating is not a recommendation to buy, sell or hold securities, as it may be subject

64

---

 

to revision or withdrawal at any time by the rating organization.  Each rating should be evaluated independently of any other rating.  The Company may not be able to obtain financing on favorable terms, or at all, which may negatively affect future ratings.

 

The Company’s credit facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants, including, among other things, debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions.  Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities.  In addition, certain of the Company’s credit facilities and indentures may permit the acceleration of maturity in the event certain other debt of the Company has been accelerated.  Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would have a negative impact on the Company’s financial condition and results of operations.

 

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

 

The Company has debt obligations relating to its revolving credit facilities, term loan, fixed-rate senior notes and mortgages payable with maturities ranging from one to 10 years.  In addition, the Company has non-cancelable operating leases, principally for office space and ground leases.

 

These obligations are summarized as follows for the subsequent five years ending December 31 (in millions):

 

 

 

In conjunction with the development and redevelopment of shopping centers, the Company had entered into commitments with general contractors aggregating approximately $24.8 million for its consolidated properties at December 31, 2015.  These obligations, composed principally of construction contracts, are generally due in 12 to 24 months, as the related construction costs are incurred, and are expected to be financed through operating cash flow, new or existing construction loans, asset sales or Revolving Credit Facilities.

 

At December 31, 2015, the Company had letters of credit outstanding of $30.2 million.  The Company has not recorded any obligations associated with these letters of credit, the majority of which are collateral for existing indebtedness and other obligations of the Company.

 

The Company routinely enters into contracts for the maintenance of its properties.  These contracts typically can be canceled upon 30 to 60 days’ notice without penalty.  At December 31, 2015, the Company had purchase order obligations, typically payable within one year, aggregating approximately $2.8 million related to the maintenance of its properties and general and administrative expenses.

 

During 2015, the Company was a party to employment contracts with certain executive officers.  These contracts generally provided for base salary, bonuses based on factors including the financial performance of the Company and personal performance, participation in the Company’s equity plans and retirement plans, health and welfare benefits and reimbursement of various qualified business expenses.  These employment agreements also provided for certain perquisites (e.g., disability insurance coverage, reimbursement of country or social club expenses related to the conduct of the Company’s business, etc.) and severance payments and benefits for various departure scenarios.  These contracts expired pursuant to their terms on December 31, 2015.

 

INFLATION

 

Most of the Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation.  Such provisions include clauses enabling the Company to receive additional rental income from escalation clauses that generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales.  Such escalations are determined by

65

---

 

negotiation, increases in the consumer price index or similar inflation indices.  In addition, many of the Company’s leases are for terms of less than 10 years, permitting the Company to seek increased rents at market rates upon renewal.  Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.

 

ECONOMIC CONDITIONS

 

The Company continues to believe there is a favorable landlord dynamic in the supply-and-demand curve for quality locations within well-positioned shopping centers.  Many retailers have aggressive store opening plans for 2016 and 2017.  Further, the Company continues to see strong demand from a broad range of retailers for its space, particularly in the off-price sector, which is a reflection of the general outlook of consumers who are demanding more value for their dollars.  This is evidenced by the continued high volume of leasing activity, which was approximately 11 million square feet of space for new leases and renewals for the year ended December 31, 2015.  The Company also benefits from its real estate asset class (shopping centers), which typically has a higher return on capital expenditures, as well as a diversified tenant base, with only three tenants whose annualized rental revenue equals or exceeds 3% of annualized consolidated revenues and the Company’s proportionate share of unconsolidated joint venture revenues (TJX Companies at 3.5%, Bed Bath & Beyond at 3.2% and Walmart at 3.0%).  Other significant tenants include Target, Kohl’s, PetSmart, Dick’s Sporting Goods, Ross Stores, Lowe’s and Publix, all of which have relatively strong credit ratings, remain well-capitalized and have outperformed other retail categories on a relative basis over time.  In addition, several of the Company’s big box tenants (Dick’s Sporting Goods, Walmart, TJX Companies, Target and Bed Bath & Beyond) have been rapidly growing their omni-channel platform, creating positive sales growth.  The Company believes these tenants will continue providing it with a stable revenue base for the foreseeable future, given the long-term nature of these leases.  Moreover, the majority of the tenants in the Company’s shopping centers provide day-to-day consumer necessities with a focus toward value and convenience, versus high-priced discretionary luxury items, which the Company believes will enable many of its tenants to outperform even in a challenging economic environment.

 

The retail shopping sector continues to be affected by the competitive nature of the retail business and the competition for market share, as well as general economic conditions, where stronger retailers have out-positioned some of the weaker retailers.  These shifts can force some market share away from weaker retailers, which could require them to downsize and close stores and/or declare bankruptcy.  In many cases, the loss of a weaker tenant or downsizing of space creates a value-add opportunity to re-lease space at higher rents to a stronger retailer.  Overall, the Company believes its portfolio remained stable at December 31, 2015, as evidenced by the consistency in the occupancy rate as further described below.  However, there can be no assurance that the loss of a tenant or down-sizing of space will not adversely affect the Company (see Item 1A. Risk Factors).

 

The Company believes that the quality of its shopping center portfolio is strong, as evidenced by the high historical occupancy rates and consistent growth in the average annualized base rent per occupied square foot.  Historical occupancy has generally ranged from 92% to 96% since the Company’s initial public offering in 1993.  The shopping center portfolio occupancy was 93.3% at December 31, 2015, as compared to 93.5% at December 31, 2014.  The total portfolio average annualized base rent per occupied square foot was $14.48 at December 31, 2015, as compared to $13.91 at December 31, 2014.  The increase primarily was due to the Company’s strategic portfolio realignment achieved through the recycling of capital from the sale of lower quality assets into the acquisition of Prime Assets with higher growth potential, as well as continued lease up and renewal of the existing portfolio at positive rental spreads.  Moreover, the Company has been able to achieve these results without significant capital investment in tenant improvements or leasing commissions.  The weighted-average cost of tenant improvements and lease commissions estimated to be incurred over the expected lease term for new leases executed during 2015 was only $4.89 per rentable square foot.  The Company generally does not expend a significant amount of capital on lease renewals.  The quality of the property revenue stream is high and consistent, as it is generally derived from retailers with good credit profiles under long-term leases, with very little reliance on overage rents generated by tenant sales performance.  The Company is very conscious of and sensitive to the risks posed by the economy, but believes that the position of its portfolio and the general diversity and credit quality of its tenant base should enable it to successfully navigate through potentially challenging economic times.

The Company owns 14 assets on the island of Puerto Rico aggregating 4.8 million square feet of Company-owned GLA.  These assets represent 7.6% of the Company’s annualized consolidated revenues for its portfolio at 100% and 5.7% of Company-owned GLA at December 31, 2015.  There is concern about the status of the Puerto Rican economy, the ability of the government of Puerto Rico to meet its financial obligations and the impact of any government default on the economy of Puerto Rico.  The Company, however, believes that its assets are well positioned to withstand continuing recessionary pressures and represent a source of stable, high quality cash flow because the tenants in these assets (many of which are U.S. retailers such as Walmart, TJX Companies and Bed Bath & Beyond) typically cater to the local consumer’s desire for value and convenience and often provide consumers with day-to-day necessities.  However, there can be no assurance that the economic conditions in Puerto Rico will not deteriorate further, which could materially and negatively impact consumer spending and ultimately adversely affect the Company (see Item 1A. Risk Factors).

 

66

---

 

NEW ACCOUNTING STANDARDS

 

New Accounting Standards are more fully described in Note 1, “Summary of Significant Accounting Policies,” of the Company’s consolidated financial statements included herein.

 

FORWARD-LOOKING STATEMENTS

 

Management’s discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this report.  Historical results and percentage relationships set forth in the Company’s consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations.  The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods.  Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations.  Although the Company believes that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved.  For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements.  Without limiting the foregoing, the words “will,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements.  Readers should exercise caution in interpreting and relying on forward-looking statements because such statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements and that could materially affect the Company’s actual results, performance or achievements.  For additional factors that could cause the results of the Company to differ materially from those indicated in the forward-looking statements, please refer to Item 1A. Risk Factors, included elsewhere in this report.

 

Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

 

 

 

 

 

 

 

67

---

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68

---

 

 

 

 

 

 

The Company’s primary market risk exposure is interest rate risk.  The Company’s debt, excluding unconsolidated joint venture debt, (adjusted to reflect the $78.5 million and $530.0 million of variable-rate debt that LIBOR was swapped to at a fixed rate of 2.8% and 1.3%, at December 31, 2015 and 2014, respectively), is summarized as follows:

 

 

The Company’s unconsolidated joint ventures’ indebtedness at its carrying value, adjusted to reflect the $42.0 million of variable-rate debt ($2.1 million at the Company’s proportionate share) that LIBOR was swapped to at a fixed rate of 1.9% at December 31, 2015 and 2014 is summarized as follows:

 

 

The Company intends to use retained cash flow, proceeds from asset sales, equity and debt financing and variable-rate indebtedness available under its Revolving Credit Facilities to repay indebtedness and fund capital expenditures of the Company’s shopping centers.  Thus, to the extent the Company incurs additional variable-rate indebtedness, its exposure to increases in interest rates in an inflationary period could increase.  The Company does not believe, however, that increases in interest expense as a result of inflation will significantly impact the Company’s distributable cash flow.

 

The interest rate risk on a portion of the Company’s and its unconsolidated joint ventures’ variable-rate debt described above has been mitigated through the use of interest rate swap agreements (the “Swaps”) with major financial institutions.  At December 31, 2015 and 2014, the interest rate on the Company’s $78.5 million and $530.0 million consolidated floating rate debt, respectively, was swapped to fixed rates.  At December 31, 2015 and 2014, the interest rate on $42.0 million of unconsolidated joint venture floating rate debt (of which $2.1 million is the Company’s proportionate share) was swapped to fixed rates.  The Company is exposed to credit risk in the event of nonperformance by the counterparties to the Swaps.  The Company believes it mitigates its credit risk by entering into Swaps with major financial institutions.

 

69

---

 

The carrying value of the Company’s fixed-rate debt is adjusted to include the $78.5 million and $530.0 million of variable-rate debt that was swapped to a fixed rate at December 31, 2015 and 2014, respectively.  The fair value of the Company’s fixed-rate debt is adjusted to (i) include the Swaps reflected in the carrying value and (ii) include the Company’s proportionate share of the joint venture fixed-rate debt.  An estimate of the effect of a 100 basis-point increase at December 31, 2015 and 2014, is summarized as follows (in millions):

 

 

 

 

The sensitivity to changes in interest rates of the Company’s fixed-rate debt was determined using a valuation model based upon factors that measure the net present value of such obligations that arise from the hypothetical estimate as discussed above.

 

Further, a 100 basis-point increase in short-term market interest rates on variable-rate debt at December 31, 2015, would result in an increase in interest expense of approximately $8.9 million for the Company and $0.9 million representing the Company’s proportionate share of the joint ventures’ interest expense relating to variable-rate debt outstanding for the 12-month period ended December 31, 2015.  The estimated increase in interest expense for the year does not give effect to possible changes in the daily balance of the Company’s or joint ventures’ outstanding variable-rate debt.

 

The Company and its joint ventures intend to continually monitor and actively manage interest costs on their variable-rate debt portfolio and may enter into swap positions based on market fluctuations.  In addition, the Company believes it has the ability to obtain funds through additional equity and/or debt offerings and joint venture capital.  Accordingly, the cost of obtaining such protection agreements in relation to the Company’s access to capital markets will continue to be evaluated.  The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.  As of December 31, 2015, the Company had no other material exposure to market risk.

 

 

The response to this item is included in a separate section at the end of this Annual Report on Form 10-K beginning on page F-1 and is incorporated herein by reference thereto.

 

 

None.

 

 

Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation, pursuant to Securities Exchange Act Rules 13a-15(b) and 15d-15(b), of the effectiveness of our disclosure controls and procedures.  Based on their evaluation as required, the CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of December 31, 2015, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of December 31, 2015, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

70

---

 

 

Management’s Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Securities Exchange Act Rule 13a-15(f) or 15d-15(f).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).  Based on those criteria, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm as stated in their report which appears herein and is incorporated in this Item 9A. by reference thereto.

 

Changes in Internal Control over Financial Reporting

 

During the three months ended December 31, 2015, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 

None.

PART III

 

 

The Company’s Board of Directors has adopted the following corporate governance documents:

 

 

 

 

 

Copies of the Company’s corporate governance documents are available on the Company’s website, www.ddr.com, under “Investors—Governance.”

 

Certain other information required by this Item 10 is incorporated herein by reference to the information under the headings “Proposal One: Election of Directors—Nominees for Election at the Annual Meeting,” “Board Governance” and “Corporate Governance and Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance,” contained in the Company’s Proxy Statement for the Company’s 2016 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (“2016 Proxy Statement”), and the information under the heading “Executive Officers” in Part I of this Annual Report on Form 10-K.

 

71

---

 

 

Information required by this Item 11 is incorporated herein by reference to the information under the headings “Board Governance—Compensation of Directors,” “Executive Compensation Tables and Related Disclosure,” “Compensation Discussion and Analysis” and “Proposal Two: Shareholders Advisory Vote to Approve the Compensation of the Company’s Named Executive Officers—Compensation Committee Report” and “—Compensation Committee Interlocks and Insider Participation” contained in the Company’s 2016 Proxy Statement.

 

 

Certain information required by this Item 12 is incorporated herein by reference to the “Board Governance—Security Ownership of Directors and Management” and “Corporate Governance and Other Matters—Security Ownership of Certain Beneficial Owners” sections of the Company’s 2016 Proxy Statement.  The following table sets forth the number of securities issued and outstanding under the existing plans, as of December 31, 2015, as well as the weighted-average exercise price of outstanding options.

 

EQUITY COMPENSATION PLAN INFORMATION

 

 

 

 

 

Information required by this Item 13 is incorporated herein by reference to the “Proposal One: Election of Directors—Independent Directors” and “Corporate Governance and Other Matters—Policy Regarding Related Party Transactions” and “Proposal One: Election of Directors—Transactions with the Otto Family” sections of the Company’s 2016 Proxy Statement.

 

 

Incorporated herein by reference to the “Proposal Three: Ratification of PricewaterhouseCoopers LLP as Our Independent Registered Public Accounting Firm—Fees Paid to PricewaterhouseCoopers LLP” section of the Company’s 2016 Proxy Statement.

72

---

 

 

 PART IV

 

 

 

The following documents are filed as part of this report:

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

 

The following financial statement schedules are filed herewith as part of this Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements of the registrant:

 

Schedule

 

II — Valuation and Qualifying Accounts and Reserves

 

III — Real Estate and Accumulated Depreciation

 

IV — Mortgage Loans on Real Estate

 

Schedules not listed above have been omitted because they are not applicable or because the information required to be set forth therein is included in the Company’s consolidated financial statements or notes thereto.

 

Financial statements of the Company’s unconsolidated joint venture companies have been omitted because they do not meet the significant subsidiary definition of S-X 210.1-02(w).

 

Exhibits — The following exhibits are filed as part of, or incorporated by reference into, this report:

 

73

---

 

74

---