e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 1-11690
DEVELOPERS DIVERSIFIED REALTY CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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34-1723097 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
3300 Enterprise Parkway, Beachwood, Ohio 44122
(Address of principal executive offices - zip code)
(216) 755-5500
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
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 o No o
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 small reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes o No þ
As
of October 30, 2009, the registrant had 196,570,089 outstanding common shares, $0.10 par
value.
PART I
FINANCIAL INFORMATION
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Item 1. |
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FINANCIAL STATEMENTS Unaudited |
- 2 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
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September 30, |
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December 31, 2008 |
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2009 |
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(As Adjusted) |
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Assets |
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Real estate rental property: |
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Land |
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$ |
1,968,142 |
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$ |
2,073,947 |
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Buildings |
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5,574,306 |
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5,890,332 |
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Fixtures and tenant improvements |
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277,153 |
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262,809 |
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7,819,601 |
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8,227,088 |
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Less: Accumulated depreciation |
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(1,317,117 |
) |
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(1,208,903 |
) |
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6,502,484 |
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7,018,185 |
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Construction in progress and land under development |
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957,298 |
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882,478 |
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7,459,782 |
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7,900,663 |
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Investments in and advances to joint ventures |
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521,161 |
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583,767 |
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Cash and cash equivalents |
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26,415 |
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29,494 |
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Restricted cash |
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102,716 |
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111,792 |
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Notes receivable |
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75,547 |
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75,781 |
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Deferred charges, net |
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22,547 |
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25,579 |
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Other assets, net |
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270,801 |
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293,146 |
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$ |
8,478,969 |
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$ |
9,020,222 |
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Liabilities and Equity |
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Unsecured indebtedness: |
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Senior notes |
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$ |
1,825,834 |
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$ |
2,402,032 |
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Revolving credit facilities |
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826,262 |
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1,027,183 |
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2,652,096 |
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3,429,215 |
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Secured indebtedness: |
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Term debt |
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800,000 |
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800,000 |
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Mortgage and other secured indebtedness |
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1,712,991 |
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1,637,440 |
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2,512,991 |
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2,437,440 |
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Total indebtedness |
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5,165,087 |
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5,866,655 |
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Accounts payable and accrued expenses |
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158,677 |
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169,014 |
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Dividends payable |
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10,899 |
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6,967 |
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Other liabilities |
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150,510 |
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112,165 |
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5,485,173 |
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6,154,801 |
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Redeemable operating partnership units |
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627 |
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|
627 |
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Commitments and contingencies |
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Developers Diversified Realty Corporation equity: |
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Class G 8.0% cumulative redeemable preferred
shares, without par value, $250 liquidation value;
750,000 shares authorized; 720,000 shares issued
and outstanding at September 30, 2009 and December
31, 2008, respectively |
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180,000 |
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180,000 |
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Class H 7.375% cumulative redeemable preferred
shares, without par value, $500 liquidation value;
750,000 shares authorized; 410,000 shares issued
and outstanding at September 30, 2009 and December
31, 2008, respectively |
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205,000 |
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205,000 |
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Class I 7.5% cumulative redeemable preferred
shares, without par value, $500 liquidation value;
750,000 shares authorized; 340,000 shares issued
and outstanding at September 30, 2009 and December
31, 2008, respectively |
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170,000 |
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170,000 |
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Common shares, $0.10 par value; 500,000,000 and
300,000,000 shares authorized; 196,654,601 and
128,642,765 shares issued at September 30, 2009
and December 31, 2008, respectively |
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19,665 |
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12,864 |
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Paid-in-capital |
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3,318,798 |
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2,849,364 |
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Accumulated distributions in excess of net income |
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(1,004,512 |
) |
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(635,239 |
) |
Deferred compensation obligation |
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16,977 |
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13,882 |
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Accumulated other comprehensive income (loss) |
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2,288 |
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(49,849 |
) |
Less: Common shares in treasury at cost: 515,641
and 224,063 shares at September 30, 2009 and
December 31, 2008, respectively |
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(10,022 |
) |
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(8,731 |
) |
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2,898,194 |
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2,737,291 |
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Non-controlling interests |
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94,975 |
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127,503 |
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Total equity |
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2,993,169 |
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2,864,794 |
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$ |
8,478,969 |
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$ |
9,020,222 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
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2008 |
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2009 |
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(As Adjusted) |
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Revenues from operations: |
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Minimum rents |
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$ |
135,481 |
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$ |
149,335 |
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Percentage and overage rents |
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1,441 |
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|
1,054 |
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Recoveries from tenants |
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43,758 |
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49,548 |
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Ancillary and other property income |
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5,698 |
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4,889 |
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Management fees, development fees and other fee income |
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14,693 |
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15,378 |
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Other |
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1,193 |
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2,656 |
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202,264 |
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222,860 |
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Rental operation expenses: |
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Operating and maintenance |
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36,952 |
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34,572 |
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Real estate taxes |
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27,965 |
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|
26,872 |
|
Impairment charges |
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|
2,653 |
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|
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General and administrative |
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|
25,886 |
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|
19,560 |
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Depreciation and amortization |
|
|
53,621 |
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|
60,031 |
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|
|
|
|
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147,077 |
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141,035 |
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Other income (expense): |
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Interest income |
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3,289 |
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|
1,660 |
|
Interest expense |
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|
(57,268 |
) |
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|
(61,713 |
) |
Gain on repurchases of senior notes |
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|
23,881 |
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|
|
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|
Loss on equity derivative instruments |
|
|
(118,174 |
) |
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Other income (expense), net |
|
|
2,203 |
|
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|
(6,859 |
) |
|
|
|
|
|
|
|
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(146,069 |
) |
|
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(66,912 |
) |
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(Loss) income before equity in net (loss) income of joint ventures, impairment of
joint venture investments, tax (expense) benefit of taxable REIT subsidiaries and
state franchise and income taxes, discontinued operations and gain on disposition of
real estate, net of tax |
|
|
(90,882 |
) |
|
|
14,913 |
|
Equity in net (loss) income of joint ventures |
|
|
(183 |
) |
|
|
1,981 |
|
Impairment of joint venture investments |
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(61,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax (expense) benefit of taxable REIT subsidiaries and state
franchise and income taxes, discontinued operations and gain on disposition of real
estate, net of tax |
|
|
(152,265 |
) |
|
|
16,894 |
|
Tax (expense) benefit of taxable REIT subsidiaries and state franchise and income taxes |
|
|
(639 |
) |
|
|
16,426 |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(152,904 |
) |
|
|
33,320 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
678 |
|
|
|
3,133 |
|
Gain (loss) on disposition of real estate, net of tax |
|
|
4,448 |
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|
(2,717 |
) |
|
|
|
|
|
|
|
|
|
|
5,126 |
|
|
|
416 |
|
|
|
|
|
|
|
|
(Loss) income before gain on disposition of real estate, net of tax |
|
|
(147,778 |
) |
|
|
33,736 |
|
Gain on disposition of real estate, net of tax |
|
|
7,128 |
|
|
|
3,093 |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(140,650 |
) |
|
$ |
36,829 |
|
|
|
|
|
|
|
|
Non-controlling interests: |
|
|
|
|
|
|
|
|
Loss (income) attributable to non-controlling interests |
|
|
2,804 |
|
|
|
(1,558 |
) |
Income attributable to redeemable operating partnership units |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
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|
|
2,804 |
|
|
|
(1,579 |
) |
|
|
|
|
|
|
|
Net (loss) income attributable to DDR |
|
$ |
(137,846 |
) |
|
$ |
35,250 |
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
10,567 |
|
|
|
10,567 |
|
|
|
|
|
|
|
|
Net (loss) income applicable to DDR common shareholders |
|
$ |
(148,413 |
) |
|
$ |
24,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Per share data: |
|
|
|
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|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to DDR common shareholders |
|
$ |
(0.93 |
) |
|
$ |
0.20 |
|
Income from discontinued operations attributable to DDR common shareholders |
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to DDR common shareholders |
|
$ |
(0.90 |
) |
|
$ |
0.20 |
|
|
|
|
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|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to DDR common shareholders |
|
$ |
(0.93 |
) |
|
$ |
0.20 |
|
Income from discontinued operations attributable to DDR common shareholders |
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to DDR common shareholders |
|
$ |
(0.90 |
) |
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.02 |
|
|
$ |
0.69 |
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|
|
|
|
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|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
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|
|
2008 |
|
|
|
2009 |
|
|
(As Adjusted) |
|
Revenues from operations: |
|
|
|
|
|
|
|
|
Minimum rents |
|
$ |
408,623 |
|
|
$ |
448,511 |
|
Percentage and overage rents |
|
|
5,075 |
|
|
|
4,947 |
|
Recoveries from tenants |
|
|
135,181 |
|
|
|
145,801 |
|
Ancillary and other property income |
|
|
15,696 |
|
|
|
15,748 |
|
Management fees, development fees and other fee income |
|
|
43,194 |
|
|
|
47,302 |
|
Other |
|
|
6,173 |
|
|
|
7,383 |
|
|
|
|
|
|
|
|
|
|
|
613,942 |
|
|
|
669,692 |
|
|
|
|
|
|
|
|
Rental operation expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance |
|
|
107,155 |
|
|
|
102,206 |
|
Real estate taxes |
|
|
83,076 |
|
|
|
79,128 |
|
Impairment charges |
|
|
80,167 |
|
|
|
|
|
General and administrative |
|
|
73,469 |
|
|
|
61,607 |
|
Depreciation and amortization |
|
|
171,552 |
|
|
|
167,769 |
|
|
|
|
|
|
|
|
|
|
|
515,419 |
|
|
|
410,710 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
9,546 |
|
|
|
2,775 |
|
Interest expense |
|
|
(175,165 |
) |
|
|
(185,977 |
) |
Gain on repurchases of senior notes |
|
|
142,360 |
|
|
|
200 |
|
Loss on equity derivative instruments |
|
|
(198,199 |
) |
|
|
|
|
Other expense, net |
|
|
(9,123 |
) |
|
|
(7,459 |
) |
|
|
|
|
|
|
|
|
|
|
(230,581 |
) |
|
|
(190,461 |
) |
|
|
|
|
|
|
|
(Loss) income before equity in net (loss) income of joint ventures, impairment of
joint venture investments, tax (expense) benefit of taxable REIT subsidiaries and
state franchise and income taxes, discontinued operations and gain on disposition of
real estate, net of tax |
|
|
(132,058 |
) |
|
|
68,521 |
|
Equity in net (loss) income of joint ventures |
|
|
(8,984 |
) |
|
|
21,924 |
|
Impairment of joint venture investments |
|
|
(101,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax (expense) benefit of taxable REIT subsidiaries and state
franchise and income taxes, discontinued operations and gain on disposition of real
estate, net of tax |
|
|
(242,613 |
) |
|
|
90,445 |
|
Tax (expense) benefit of taxable REIT subsidiaries and state franchise and income taxes |
|
|
(527 |
) |
|
|
15,111 |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(243,140 |
) |
|
|
105,556 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(61,994 |
) |
|
|
7,955 |
|
Loss on disposition of real estate, net of tax |
|
|
(19,965 |
) |
|
|
(1,830 |
) |
|
|
|
|
|
|
|
|
|
|
(81,959 |
) |
|
|
6,125 |
|
|
|
|
|
|
|
|
(Loss) income before gain on disposition of real estate, net of tax |
|
|
(325,099 |
) |
|
|
111,681 |
|
Gain on disposition of real estate, net of tax |
|
|
8,222 |
|
|
|
6,368 |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(316,877 |
) |
|
$ |
118,049 |
|
|
|
|
|
|
|
|
Non-controlling interests: |
|
|
|
|
|
|
|
|
Loss (income) attributable to non-controlling interests |
|
|
39,860 |
|
|
|
(5,914 |
) |
Income attributable to redeemable operating partnership units |
|
|
(12 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
39,848 |
|
|
|
(5,975 |
) |
|
|
|
|
|
|
|
Net (loss) income attributable to DDR |
|
$ |
(277,029 |
) |
|
$ |
112,074 |
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
31,702 |
|
|
|
31,702 |
|
|
|
|
|
|
|
|
Net (loss) income applicable to DDR common shareholders |
|
$ |
(308,731 |
) |
|
$ |
80,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to DDR common shareholders |
|
$ |
(1.55 |
) |
|
$ |
0.61 |
|
(Loss) income from discontinued operations attributable to DDR common shareholders |
|
|
(0.56 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
Net (loss) income attributable to DDR common shareholders |
|
$ |
(2.11 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to DDR common shareholders |
|
$ |
(1.55 |
) |
|
$ |
0.61 |
|
(Loss) income from discontinued operations attributable to DDR common shareholders |
|
|
(0.56 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
Net (loss) income attributable to DDR common shareholders |
|
$ |
(2.11 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.42 |
|
|
$ |
2.07 |
|
|
|
|
|
|
|
|
- 5 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
2009 |
|
|
(As Adjusted) |
|
Net cash flow provided by operating activities: |
|
$ |
216,651 |
|
|
$ |
304,155 |
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Real estate developed or acquired, net of liabilities assumed |
|
|
(168,669 |
) |
|
|
(315,637 |
) |
Equity contributions to joint ventures |
|
|
(18,817 |
) |
|
|
(80,471 |
) |
Issuance of joint venture advances, net |
|
|
(7,335 |
) |
|
|
(24,376 |
) |
Distributions of proceeds from sale and refinancing of joint venture interests |
|
|
7,442 |
|
|
|
2,416 |
|
Return of investments in joint ventures |
|
|
15,314 |
|
|
|
24,653 |
|
Issuance of notes receivable, net |
|
|
(5,173 |
) |
|
|
(38,274 |
) |
Decrease (increase) in restricted cash |
|
|
9,076 |
|
|
|
(47,433 |
) |
Proceeds from disposition of real estate |
|
|
304,490 |
|
|
|
95,459 |
|
|
|
|
|
|
|
|
Net cash flow provided by (used for) investing activities |
|
|
136,328 |
|
|
|
(383,663 |
) |
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
(Repayments of) proceeds from revolving credit facilities, net |
|
|
(217,448 |
) |
|
|
252,850 |
|
Repayment of senior notes |
|
|
(725,131 |
) |
|
|
(103,425 |
) |
Proceeds from issuance of senior notes, net of underwriting commissions and
offering expenses of $200 |
|
|
294,685 |
|
|
|
|
|
Proceeds from mortgage and other secured debt |
|
|
343,369 |
|
|
|
449,423 |
|
Principal payments on mortgage debt |
|
|
(278,818 |
) |
|
|
(274,231 |
) |
Payment of deferred finance costs |
|
|
(3,590 |
) |
|
|
(5,353 |
) |
Proceeds from issuance of common shares, net of issuance costs of $524 |
|
|
267,457 |
|
|
|
|
|
(Payment) proceeds from issuance of common shares in conjunction with the
exercise of stock options and dividend reinvestment plan |
|
|
(1,576 |
) |
|
|
1,260 |
|
Redemption of non-controlling interest |
|
|
|
|
|
|
(46 |
) |
Contributions from non-controlling interests |
|
|
5,640 |
|
|
|
25,552 |
|
Distributions to
non-controlling interest and redeemable operating partnership units |
|
|
(1,454 |
) |
|
|
(10,006 |
) |
Dividends paid |
|
|
(37,838 |
) |
|
|
(276,209 |
) |
|
|
|
|
|
|
|
Net cash flow (used for) provided by financing activities |
|
|
(354,704 |
) |
|
|
59,815 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(1,725 |
) |
|
|
(19,693 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1,354 |
) |
|
|
317 |
|
Cash and cash equivalents, beginning of period |
|
|
29,494 |
|
|
|
49,547 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
26,415 |
|
|
$ |
30,171 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
At September 30, 2009, other liabilities included approximately $19.9 million, which
represents the fair value of the Companys interest rate swaps. At September 30, 2009, dividends
payable were $10.9 million. In connection with the acquisition of a joint venture interest, the
Company acquired real estate of approximately $22.0 million and assumed mortgage debt of $17.0
million. The foregoing transactions did not provide for or require the use of cash for the
nine-month period ended September 30, 2009.
For the nine-month period ended September 30, 2008, non-controlling interests with a book
value of approximately $14.3 million were converted into approximately 0.5 million common shares of
the Company. In addition in June 2008, the Company received a note receivable of $9.1 million in
connection with the sale of one asset. Other liabilities included approximately $17.1 million,
which represented the fair value of the Companys interest rate swaps. At September 30, 2008,
dividends payable were $90.0 million. In 2008, in accordance with the terms of the outperformance
unit plans, the Company issued 107,879 of its common shares. The foregoing transactions did not
provide for or require the use of cash for the nine-month period ended September 30, 2008.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
1. |
|
NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION |
Developers Diversified Realty Corporation and its related consolidated real estate joint
ventures and subsidiaries (collectively, the Company or DDR) and its unconsolidated real estate
joint ventures own, manage and develop an international portfolio of shopping centers.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Unaudited Interim Financial Statements
These financial statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and the applicable rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the interim financial statements
include all adjustments, consisting of only normal recurring adjustments, necessary for a fair
statement of the results of the periods presented. The results of operations for the three- and
nine-month periods ended September 30, 2009 and 2008, are not necessarily indicative of the results
that may be expected for the full year. These condensed consolidated financial statements should
be read in conjunction with the Companys audited financial statements and notes thereto included
in the Companys Form 8-K dated and filed on August 10, 2009 (which financial statements reflect
the impact of property sales as discontinued operations) for the year ended December 31, 2008.
The Company consolidates certain entities in which it owns less than a 100% equity interest if
the entity is a variable interest entity (VIE), and the Company is deemed to be the primary
beneficiary in the VIE. The Company also consolidates certain entities that are not VIEs in which
it has effective control. The equity method of accounting is applied to entities in which the
Company is not the primary beneficiary or does not have effective control, but can exercise
significant influence over the entity with respect to its operations and major decisions.
- 7 -
Comprehensive (Loss) / Income
Comprehensive (loss) / income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
2008 |
|
|
|
2009 |
|
|
(As Adjusted) |
|
|
2009 |
|
|
(As Adjusted) |
|
Net (loss) income |
|
$ |
(140,650 |
) |
|
$ |
36,829 |
|
|
$ |
(316,877 |
) |
|
$ |
118,049 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest-rate
contracts |
|
|
4,093 |
|
|
|
(122 |
) |
|
|
7,315 |
|
|
|
(4,626 |
) |
Amortization of interest-rate contracts |
|
|
(93 |
) |
|
|
(93 |
) |
|
|
(279 |
) |
|
|
(550 |
) |
Foreign currency translation |
|
|
24,806 |
|
|
|
(29,703 |
) |
|
|
48,243 |
|
|
|
(9,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
28,806 |
|
|
|
(29,918 |
) |
|
|
55,279 |
|
|
|
(14,774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(111,844 |
) |
|
$ |
6,911 |
|
|
$ |
(261,598 |
) |
|
$ |
103,275 |
|
Comprehensive income (loss) attributable
to non-controlling interests |
|
|
930 |
|
|
|
305 |
|
|
|
36,706 |
|
|
|
(5,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss)
income attributable to DDR |
|
$ |
(110,914 |
) |
|
$ |
7,216 |
|
|
$ |
(224,892 |
) |
|
$ |
97,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of
Financial Accounting Standards The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles. This Statement made the FASB Accounting Standards
Codification (the Codification) the single source of U.S. GAAP used by nongovernmental entities
in the preparation of financial statements, except for rules and interpretive releases of the SEC
under authority of federal securities laws, which are sources of authoritative accounting guidance
for SEC registrants. The Codification is meant to simplify user access to all authoritative
accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics
within a consistent structure. Its purpose is not to create new accounting and reporting guidance.
The Codification supersedes all existing non-SEC accounting and reporting standards and was
effective for the Company beginning July 1, 2009. FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue
Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right; these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for conclusions on the change(s)
in the Codification. In the description of Accounting Standards Updates that follows, references in
italics relate to Codification Topics and Subtopics, and their descriptive titles, as
appropriate.
New Accounting Standards Implemented with Retrospective Application
The following accounting standards were implemented on January 1, 2009 with retrospective
application as appropriate. As a result, the financial statements as of and for the three- and
nine-month periods ended September 30, 2008 have been adjusted as required by the provisions of
these standards.
- 8 -
Non-Controlling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Non-Controlling Interests in Consolidated Financial
Statements. A non-controlling interest, sometimes referred to as a minority equity interest, is
the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The
objective of this guidance is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards that require: (i) the ownership interest in
subsidiaries held by other parties other than the parent be clearly identified, labeled, and
presented in the consolidated statement of financial position within equity, but separate from the
parents equity; (ii) the amount of consolidated net income attributable to the parent and to the
non-controlling interest be clearly identified and presented on the face of the consolidated
statement of operations; (iii) changes in a parents ownership interest while the parent retains
its controlling financial interest in a subsidiary be accounted for consistently and requires that
they be accounted for similarly, as equity transactions; (iv) when a subsidiary is deconsolidated,
any retained non-controlling equity investment in the former subsidiary be initially measured at
fair value (the gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any non-controlling equity investments rather than the carrying amount of that retained
investment) and (v) entities provide sufficient disclosures that clearly identify and distinguish
between the interest of the parent and the interest of the non-controlling owners. This guidance
was effective for fiscal years, and interim reporting periods within those fiscal years, beginning
on or after December 15, 2008, and applied on a prospective basis, except for the presentation and
disclosure requirements, which have been applied on a retrospective basis. Early adoption was not
permitted. The Company adopted this standard on January 1, 2009. As required by the standard, the
Company adjusted the presentation of non-controlling interests, as appropriate, in both the
condensed consolidated balance sheet as of December 31, 2008 and the condensed consolidated
statement of operations for the three- and nine-month periods ended September 30, 2008. The
Companys condensed consolidated balance sheets no longer have a line item referred to as Minority
Interests. Equity at December 31, 2008 was adjusted to include $127.5 million attributable to
non-controlling interests, and the Company reflected approximately $0.6 million as redeemable
operating partnership units. In connection with the Companys adoption of this standard, the
Company also adopted the recent revisions to Classification and Measurement of Redeemable
Securities. As a result of the Companys adoption of these standards, amounts previously reported
as minority equity interests and operating partnership minority interests on the Companys
condensed consolidated balance sheets are now presented as non-controlling interests within equity.
There has been no change in the measurement of these line items from amounts previously reported
except that due to certain redemption features, certain operating partnership minority interests in
the amount of approximately $0.6 million are reflected as redeemable operating partnership units in
the temporary equity section (between liabilities and equity). These units are exchangeable, at
the election of the operating partnership unit holder, and under certain circumstances at the
option of the Company, into an equivalent number of the Companys common shares or for the
equivalent amount of cash. Based on the requirements, the measurement of the redeemable operating
partnership units are now presented at the greater of their carrying amount or redemption value at
the end of each reporting period.
- 9 -
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)
In May 2008, the FASB issued Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement). The standard prohibits the
classification of convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement, as debt instruments within the scope of this standard and
requires issuers of such instruments to separately account for the liability and equity components
by allocating the proceeds from the issuance of the instrument between the liability component and
the embedded conversion option (i.e., the equity component). The liability component of the debt
instrument is accreted to par using the effective yield method; accretion is reported as a
component of interest expense. The equity component is not subsequently re-valued as long as it
continues to qualify for equity treatment. This standard must be applied retrospectively to issued
cash-settleable convertible instruments as well as prospectively to newly issued instruments. This
standard is effective for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years.
This standard was adopted by the Company as of January 1, 2009 with retrospective application
to prior periods. As a result of the adoption, the initial debt proceeds from the $250 million
aggregate principal amount of 3.5% convertible notes, due in 2011, and $600 million aggregate
principal amount of 3.0% convertible notes, due in 2012, were required to be allocated between a
liability component and an equity component. This allocation was based upon what the assumed
interest rate would have been if the Company had issued similar nonconvertible debt. Accordingly,
the Companys condensed consolidated balance sheet at December 31, 2008 was adjusted to reflect a
decrease in unsecured debt of approximately $50.7 million, reflecting the unamortized discount. In
addition, at December 31, 2008, real estate assets increased by $2.9 million relating to the impact
of capitalized interest and deferred charges decreased by $1.0 million relating to the reallocation
of original issuance costs to reflect such amounts as a reduction of proceeds from the
reclassification of the equity component. In connection with this standard, the guidance under
Classification and Measurement of Redeemable Securities was also amended, whereas the equity
component related to the convertible debt would need to be evaluated if the convertible debt were
currently redeemable at the balance sheet date. Because the Companys convertible debt is not
currently redeemable, no evaluation is required as of September 30, 2009.
For the three- and nine-month periods ended September 30, 2008, the Company adjusted the
condensed consolidated statements of operations to reflect additional non-cash interest expense of
$3.3 million and $9.8 million, respectively, net of the impact of capitalized interest, pursuant
to the provisions of this standard. The condensed consolidated statements of operations for the
three- and nine-month periods ended September 30, 2009, reflects additional non-cash interest
expense of $2.7 million and $9.8 million, respectively. In addition, the Companys gains on the
repurchase of unsecured debt during the three- and nine-month periods ending September 30, 2009 was
reduced by $2.4 million and $17.0 million, respectively, due to the reduction in the amount
allocated to the senior unsecured notes as required by the provisions of this standard.
- 10 -
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June 2008, the FASB issued Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities, which addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing earnings per share under the two-class
method as described in Earnings per Share. Under the guidance in this standard, unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The standard is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. All prior-period earnings per share data presented was adjusted
retrospectively. Early adoption was not permitted. The adoption of this standard did not have a
material impact on the Companys financial position, results of operations or earnings per share
calculations.
New Accounting Standards Implemented
Business Combinations
In December 2007, the FASB issued Business Combinations. The objective of this standard is
to improve the relevance, representative faithfulness and comparability of the information that a
reporting entity provides in its financial reports about a business combination and its effects. To
accomplish that, this standard establishes principles and requirements for how the acquirer:
(i) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest of the acquiree, (ii) recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain purchase and
(iii) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. This standard applies
prospectively to business combinations for which the acquisition date is on or after the first
annual reporting period beginning on or after December 15, 2008. Early adoption was not permitted.
The Company adopted this standard on January 1, 2009. To the extent that the Company enters into
acquisitions that qualify as businesses, this standard will require that acquisition costs and
certain fees, which were previously capitalized and allocated to the basis of the acquired assets,
be expensed as these costs are incurred. Because of this change in accounting for costs, the
Company expects that the adoption of this standard could have a negative impact on the Companys
results of operations depending on the size of a transaction and the amount of costs incurred. The
Company will assess the impact of significant transactions, if any, as they are contemplated.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Disclosures about Derivative Instruments and Hedging
Activities, which is intended to help investors better understand how derivative instruments and
hedging activities affect an entitys financial position, financial performance and cash flows
through enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing
the objectives and strategies for using derivative instruments by their underlying risk as well as
a tabular format of the fair values of the derivative instruments and their gains and losses. This
standard is
- 11 -
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company adopted the financial statement
disclosures required by this standard in the Companys Quarterly Report on Form on 10-Q for the
quarterly period ended March 31, 2009.
Subsequent Events
In May 2009, the FASB issued Subsequent Events, which provides guidance to establish general
standards of accounting for and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. This standard also requires
entities to disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. This standard is effective for interim and annual periods
ending after June 15, 2009. The adoption of this standard did not have a material impact on the
Companys financial position, results of operations or cash flows. The Company has evaluated
subsequent events through November 6, 2009, the date that the Companys condensed consolidated
financial statements were available to be issued, for this Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2009.
Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued Interim Disclosures about Fair Value of Financial Instruments,
which requires fair value disclosures for financial instruments that are not reflected in the
Condensed Consolidated Balance Sheets at fair value. Prior to the issuance of this standard, the
fair values of those assets and liabilities were only disclosed annually. With the issuance of this
standard, the Company will be required to disclose this information on a quarterly basis, providing
quantitative and qualitative information about fair value estimates for all financial instruments
not measured in the Condensed Consolidated Balance Sheets at fair value. This standard will be
effective for interim reporting periods that end after June 15, 2009. Early adoption is permitted
for periods ending after March 15, 2009. The Company adopted this standard in the second quarter of
2009.
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued Determination of the Useful Life of Intangible Assets, which
amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under the standard, Goodwill and Other
Intangible Assets. This standard is intended to improve the consistency between the useful life of
an intangible asset determined under Goodwill and Other Intangible Assets and the period of
expected cash flows used to measure the fair value of the asset under Business Combinations and
other U.S. Generally Accepted Accounting Principles. The guidance for determining the useful life
of a recognized intangible asset in this standard shall be applied prospectively to intangible
assets acquired after the effective date. The disclosure requirements in this standard shall be
applied prospectively to all intangible assets recognized as of, and subsequent to, the effective
date. This standard is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption was not permitted.
The adoption of this standard did not have a material impact on the Companys financial position
and results of operations.
- 12 -
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
In April 2009, the FASB issued Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly, which clarifies the methodology used to determine fair value when there is no active
market or where the price inputs being used represent distressed sales. This standard also
reaffirms the objective of fair value measurement, as stated in Fair Value Measurements, which is
to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the
need to use judgment to determine if a formerly active market has become inactive, as well as to
determine fair values when markets have become inactive. This standard should be applied
prospectively and will be effective for interim and annual reporting periods ending after June 15,
2009. The adoption of this standard did not have a material impact on the Companys financial
position and results of operations.
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
In June 2008, the FASB issued Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock. This standard provides guidance on determining whether an
equitylinked financial instrument (or embedded feature) can be considered indexed to an entitys
own stock, which is a key criterion for determining if the instrument may be classified as equity.
There is a provision in this standard that provides new guidance regarding how to account for
certain anti-dilution provisions that provide downside price protection to an investor. This
standard is effective for fiscal years beginning after December 15, 2008. Early adoption was not
permitted. Due to certain downward price protection provisions within the Otto Transaction (Note
10), the impact of this standard resulted in a charge to earnings of $118.2 million and $198.2
million for the three- and nine-month periods ended September 2009, respectively, but did not have
a material impact on the Companys financial position or cash flow. Refer to the discussion of the
Otto Transaction described further in Note 10.
Equity Method Investment Accounting Considerations
In November 2008, the FASB issued Equity Method Investment Accounting Considerations. This
standard clarifies the accounting for certain transactions and impairment considerations involving
equity method investments. This standard applies to all investments accounted for under the equity
method. This standard is effective for fiscal years and interim periods beginning on or after
December 15, 2008. The adoption of this standard did not have a material impact on the Companys
financial position and results of operations.
New Accounting Standards To Be Implemented
Amendments to Consolidation of Variable Interest Entities
In June 2009, the FASB issued Amendments to Consolidation of Variable Interest Entities, which
is effective for fiscal years beginning after November 15, 2009 and introduces a more qualitative
approach to evaluating VIEs for consolidation. This standard requires a company to perform an
analysis to determine whether its variable interests give it a controlling financial interest in a
VIE. This analysis identifies the primary beneficiary of a VIE as the entity that has (a) the power
to
- 13 -
direct the activities of the VIE that most significantly impact the VIEs 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 VIEs performance, this standard requires
a company to assess whether it has an implicit financial responsibility to ensure that a VIE
operates as designed. This standard requires continuous reassessment of primary beneficiary status
rather than periodic, event-driven assessments as previously required, and incorporates expanded
disclosure requirements. The Company is currently assessing the impact, if any, the adoption of
this standard will have on its consolidated financial statements.
2. EQUITY INVESTMENTS IN JOINT VENTURES
At September 30, 2009 and December 31, 2008, the Company had ownership interests in various
unconsolidated joint ventures which, as of the respective dates, owned 318 and 329 shopping center
properties, respectively.
Condensed combined financial information of the Companys unconsolidated joint venture
investments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Combined Balance Sheets: |
|
|
|
|
|
|
|
|
Land |
|
$ |
2,316,638 |
|
|
$ |
2,378,033 |
|
Buildings |
|
|
6,418,500 |
|
|
|
6,353,985 |
|
Fixtures and tenant improvements |
|
|
159,375 |
|
|
|
131,622 |
|
|
|
|
|
|
|
|
|
|
|
8,894,513 |
|
|
|
8,863,640 |
|
Less: Accumulated depreciation |
|
|
(748,754 |
) |
|
|
(606,530 |
) |
|
|
|
|
|
|
|
|
|
|
8,145,759 |
|
|
|
8,257,110 |
|
Construction in progress |
|
|
295,222 |
|
|
|
412,357 |
|
|
|
|
|
|
|
|
|
|
|
8,440,981 |
|
|
|
8,669,467 |
|
Receivables, net |
|
|
156,567 |
|
|
|
136,410 |
|
Leasehold interests |
|
|
11,746 |
|
|
|
12,615 |
|
Other assets |
|
|
408,901 |
|
|
|
315,591 |
|
|
|
|
|
|
|
|
|
|
$ |
9,018,195 |
|
|
$ |
9,134,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt |
|
$ |
5,619,195 |
|
|
$ |
5,776,897 |
|
Amounts payable to DDR |
|
|
73,746 |
|
|
|
64,967 |
|
Other liabilities |
|
|
258,518 |
|
|
|
237,363 |
|
|
|
|
|
|
|
|
|
|
|
5,951,459 |
|
|
|
6,079,227 |
|
Accumulated equity |
|
|
3,066,736 |
|
|
|
3,054,856 |
|
|
|
|
|
|
|
|
|
|
$ |
9,018,195 |
|
|
$ |
9,134,083 |
|
|
|
|
|
|
|
|
Companys share of accumulated equity (1) |
|
$ |
619,715 |
|
|
$ |
622,569 |
|
|
|
|
|
|
|
|
- 14 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Combined Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations (a) |
|
$ |
221,437 |
|
|
$ |
234,804 |
|
|
$ |
662,265 |
|
|
$ |
698,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation |
|
|
87,084 |
|
|
|
85,416 |
|
|
|
253,670 |
|
|
|
241,245 |
|
Depreciation and amortization |
|
|
62,103 |
|
|
|
58,058 |
|
|
|
186,856 |
|
|
|
172,081 |
|
Interest (b) |
|
|
84,896 |
|
|
|
74,718 |
|
|
|
237,959 |
|
|
|
221,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,083 |
|
|
|
218,192 |
|
|
|
678,485 |
|
|
|
635,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax expense, other
(expense) income, net and discontinued
operations |
|
|
(12,646 |
) |
|
|
16,612 |
|
|
|
(16,220 |
) |
|
|
63,641 |
|
Income tax expense |
|
|
(2,513 |
) |
|
|
(4,011 |
) |
|
|
(7,065 |
) |
|
|
(11,994 |
) |
Other (expense) income, net (c) |
|
|
(3,602 |
) |
|
|
(36,728 |
) |
|
|
5,833 |
|
|
|
19,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(18,761 |
) |
|
|
(24,127 |
) |
|
|
(17,452 |
) |
|
|
71,458 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
(d) |
|
|
358 |
|
|
|
1,334 |
|
|
|
(31,060 |
) |
|
|
4,138 |
|
Loss on disposition of real estate, net of
tax (e) |
|
|
(13,767 |
) |
|
|
|
|
|
|
(19,852 |
) |
|
|
|
|
Loss on disposition of real estate (2) |
|
|
(74 |
) |
|
|
|
|
|
|
(26,815 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(32,244 |
) |
|
$ |
(22,793 |
) |
|
$ |
(95,179 |
) |
|
$ |
75,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of equity in net (loss) income
of joint ventures (3) |
|
$ |
(1,302 |
) |
|
$ |
2,603 |
|
|
$ |
(12,375 |
) |
|
$ |
22,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenues from operations for the nine-month period ended September 30, 2009, as
compared to the prior-year comparable period, decreased primarily due to store closings
related to four major tenant bankruptcies. |
|
(b) |
|
Interest expense includes charges related to ineffective derivative instruments
at the DDR Macquarie Fund of $3.6 million and $5.1 million for the three- and
nine-month periods ended September 30, 2009, respectively, and $0.2 million and $0.7
million for the three- and nine-month periods ended September 30, 2008, respectively. |
|
(c) |
|
Includes the effects of certain derivative instruments that are
marked-to-market through earnings from the Companys equity investment in Macquarie DDR
Trust aggregating approximately $2.3 million of loss and $7.2 million of income through
the Companys ownership period in the units for the three- and nine-month periods ended
September 30, 2009, respectively, and $37.7 million of loss and $16.5 million of income
for the three- and nine-month periods ended September 30, 2008, respectively. |
|
(d) |
|
The DDR Macquarie Fund reported impairment losses of $33.9 million on three
assets under contract to be sold as of June 30, 2009 that were subsequently sold in the
third quarter of 2009. The Companys share of these impairment losses was reduced by
the impact of the impairment recorded on this investment in the fourth quarter of 2008. |
|
(e) |
|
The results for the nine-month period ended September 30, 2009 also include the
sale of 12 properties by three separate unconsolidated joint ventures resulting in a
loss of $13.8 million and $19.9 million for the three- and nine-month periods ended
September 30, 2009, respectively. |
- 15 -
Investments in and advances to joint ventures include the following items, which
represent the difference between the Companys investment and its share of all of the
unconsolidated joint ventures underlying net assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Companys share of accumulated equity |
|
$ |
619.7 |
|
|
$ |
622.6 |
|
Basis differentials (4) |
|
|
(75.7 |
) |
|
|
(4.6 |
) |
Deferred development fees, net of portion relating to the
Companys interest |
|
|
(5.2 |
) |
|
|
(5.2 |
) |
Basis differential upon transfer of assets (4) |
|
|
(92.5 |
) |
|
|
(95.4 |
) |
Notes receivable from investments |
|
|
1.2 |
|
|
|
1.4 |
|
Amounts payable to DDR |
|
|
73.7 |
|
|
|
65.0 |
|
|
|
|
|
|
|
|
Investments in and advances to joint ventures (1) |
|
$ |
521.2 |
|
|
$ |
583.8 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The difference between the Companys share of accumulated equity and the investments in
and advances to joint ventures recorded on the Companys condensed consolidated balance
sheets primarily results from basis differentials, as described below, including deferred
development fees, net of the portion relating to the Companys interest, notes and amounts
receivable from the unconsolidated joint venture investments and amounts payable to DDR. |
|
(2) |
|
For the Kansas City, Missouri (Ward Parkway) project owned by the Coventry II Fund in
which the Company had a 20% interest, a $35.0 million loan matured on January 2, 2009, and
on January 6, 2009, the lender sent to the borrower a formal notice of default the Company
did not provide a payment guaranty with respect to such loan. On March 26, 2009, the
Coventry II Fund transferred its ownership of this property to the lender. The joint
venture recorded a loss of $26.7 million on the transfer. The Company recorded a $5.8
million loss in March 2009 related to the write-off of the book value of its equity
investment, which is included within equity in net (loss) income of joint ventures in the
condensed consolidated statements of operations. Pursuant to the agreement with the
lender, the Company initially managed the shopping center while DDRs partner, the Coventry
II Fund, marketed the property for sale. Although the Coventry II Fund continues to market
the property, the Company terminated the property management agreement effective June 30,
2009. The joint venture has the ability to receive excess sale proceeds, if any, depending
upon the timing and terms of a future sale arrangement. |
|
(3) |
|
The difference between the Companys share of net (loss) income, as reported above, and
the amounts included in the condensed consolidated statements of operations is attributable
to the amortization of such basis differentials, deferred gains and differences in gain
(loss) on sale of certain assets due to the basis differentials. For the three-month
periods ended September 30, 2009 and 2008, the difference between the $1.3 million loss and
$2.6 million income, respectively, of the Companys share of equity in net (loss) income of
joint ventures reflected above and the $0.2 million loss and $2.0 million income,
respectively, of equity in net (loss) income of joint ventures reflected in the Companys
condensed consolidated statements of operations is primarily attributable to amortization
associated with the basis differentials and differences in the recognition of gains
(losses) on asset sales and impairments. The Companys share of joint venture net loss was
decreased by approximately $1.2 million and the equity in net income was decreased by
approximately $0.6 million for the three-month periods ended September 30, 2009 and 2008,
respectively, to reflect additional basis depreciation and basis differences in assets
sold. For the nine-month periods ended September 30, 2009 and 2008, the difference between
the $12.4 million loss and $22.8 million income, respectively, of the Companys share of
equity in net (loss) income of joint ventures reflected above and the $9.0 million loss and
$21.9 million income, respectively, of equity in net (loss) income of joint ventures
reflected in the Companys condensed consolidated statements of operations is primarily
attributable to amortization associated with the basis differentials and differences in the
recognition of gains (losses) on asset sales and impairments. The Companys share of joint
venture net loss was decreased by approximately $3.4 million and the equity in net income
was decreased by approximately $0.9 million for the nine-month periods ended September 30,
2009 and 2008, respectively, to reflect additional basis depreciation and basis differences
in assets sold. Basis differentials upon transfer of assets are primarily associated with
assets previously owned by the Company that have been transferred into a joint venture at
fair value. |
|
(4) |
|
Basis differentials occur primarily when the Company has purchased interests in
existing unconsolidated joint ventures at fair market values, which differ from their
proportionate share of the historical net assets of the unconsolidated joint ventures. In
addition, certain acquisition, transaction and other costs, including capitalized interest,
and impairments of the Companys investments that were other than temporary may not be
reflected in the net assets at the joint venture level. Basis differentials recorded upon
transfer of assets are primarily associated with assets previously owned by the Company
that have been transferred into an unconsolidated joint venture at fair value. This amount
represents the aggregate difference between the Companys historical cost basis and the
basis reflected at the joint venture level. Certain basis differentials indicated above are
amortized over the life of the related assets. |
- 16 -
Service fees earned by the Company through management, acquisition, financing, leasing
and development activities performed related to all of the Companys unconsolidated joint ventures
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
Nine-Month Periods Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Management and other fees |
|
$ |
12.2 |
|
|
$ |
12.4 |
|
|
$ |
36.6 |
|
|
$ |
37.9 |
|
Acquisition, financing, guarantee and other fees |
|
|
0.4 |
|
|
|
1.2 |
|
|
|
1.0 |
|
|
|
1.3 |
|
Development fees and leasing commissions |
|
|
2.1 |
|
|
|
2.9 |
|
|
|
5.8 |
|
|
|
9.0 |
|
Interest income |
|
|
2.1 |
|
|
|
0.1 |
|
|
|
5.9 |
|
|
|
0.3 |
|
Macquarie DDR Trust
In the third quarter of 2009, the Company liquidated its investment in Macquarie DDR Trust
(ASX: MDT) for aggregate proceeds of $6.4 million. The Company recorded a gain on sale of these
units of approximately $3.5 million for the three months ended September 30, 2009, which is
included in other income on the consolidated statements of operations. For the nine months ended
September 30, 2009, the gain on sale was reduced to $2.7 million, which is net of the $0.8 million
loss incurred on the sale units in Macquarie DDR Trust in the second quarter of 2009. During 2008,
the Company recognized an other than temporary impairment charge of approximately $31.7 million on
this investment.
Coventry II DDR Merriam Village LLC
In the third quarter of 2009, the Company acquired its partners 80% interest in Merriam
Village through the assumption and guarantee of $17.0 million face value of debt, of which the
Company had previously guaranteed 20%. The Company did not expend any
funds for this interest, which was consolidated at the acquisition date. In connection with the Companys assumption of
the remaining 80% guarantee, the lender agreed to modify and extend this secured mortgage.
Impairment of Joint Venture Investments
During the three- and nine- month periods ended September 30, 2009, the Company recorded
impairment charges of $61.2 million and $101.6 million, respectively, associated with
several unconsolidated joint venture investments as management believes these investments realized
a loss in value that was an other than temporary decline. The impairments recognized during the
nine-month period ended September 30, 2009 related to the DDRTC Core Retail Fund LLC ($55.0
million), DDR-SAU Retail Fund LLC ($6.2 million) and the Companys joint ventures with the Coventry
Real Estate Fund II (Coventry II Fund) ($40.4 million). In December 2008, the Company recorded
$107.0 million of other than temporary impairment charges associated with seven unconsolidated
joint venture investments. When the underlying assets of the entities are not required to be
impaired, these impairment charges create a basis difference between the Companys share of
accumulated equity as compared to the investment balance of the respective unconsolidated joint
venture. The Company
- 17 -
allocates the aggregate impairment charge to each of the respective properties owned by a joint
venture on a relative fair value basis and, where appropriate, amortizes this basis differential as
an adjustment to the equity in net income (loss) recorded by the Company over the estimated remaining
useful lives of the underlying assets. If the unconsolidated joint venture reflects an impairment
charge on the underlying real estate, where appropriate, the Company reduces the charge in equity
in net income (loss) of joint ventures to the extent that any basis difference was allocated to the
real estate.
3. RESTRICTED CASH
Restricted cash is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
DDR MDT MV LLC (1) |
|
$ |
24,236 |
|
|
$ |
31,806 |
|
DDR MDT MV LLC (2) |
|
|
33,060 |
|
|
|
33,000 |
|
Bond fund (3) |
|
|
45,420 |
|
|
|
46,986 |
|
|
|
|
|
|
|
|
Total restricted cash |
|
$ |
102,716 |
|
|
$ |
111,792 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
DDR MDT MV LLC (MV LLC), which is consolidated by the Company, owns 32 and 37
locations formerly occupied by Mervyns at September 30, 2009 and December 31, 2008,
respectively. The terms of the original acquisition contained a contingent refundable
purchase price adjustment secured by a letter of credit (LOC) from the seller of the real
estate portfolio, which was owned in part by an affiliate of one of the former members of
the Companys board of directors. In addition, MV LLC held a Security Deposit Letter of
Credit (SD LOC) from Mervyns. These LOCs were drawn in full in 2008 due to Mervyns filing
for protection under Chapter 11 of the United States Bankruptcy Code. Although the funds
are required to be placed in escrow with MV LLCs lender to secure MV LLCs mortgage loan,
these funds are available for re-tenanting expenses or to fund debt service. Certain of the
funds will be released as the related properties are either sold or released. |
|
(2) |
|
In connection with MV LLCs draw of the LOC, MV LLC was required under the loan
agreement to provide an additional $33.0 million as collateral security for MV LLCs
mortgage loan. DDR and its partner funded the escrow requirement with proportionate
capital contributions. |
|
(3) |
|
Under the terms of a bond issue by the Mississippi Business Finance Corporation, the
proceeds of approximately $60.0 million from the sale of bonds were placed in a trust in
connection with a development project in Mississippi. As construction is completed on the
Companys project in Mississippi, the Company receives disbursement of these funds. |
4. OTHER ASSETS, NET
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
In-place leases (including lease
origination costs and fair market value
of leases), net |
|
$ |
14,861 |
|
|
$ |
21,721 |
|
Tenant relations, net |
|
|
11,086 |
|
|
|
15,299 |
|
|
|
|
|
|
|
|
Total intangible assets (1) |
|
|
25,947 |
|
|
|
37,020 |
|
Other assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net (2) |
|
|
148,184 |
|
|
|
164,356 |
|
Prepaids, deposits and other assets |
|
|
96,670 |
|
|
|
91,770 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
270,801 |
|
|
$ |
293,146 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company recorded amortization expense of $1.7 million and $2.3 million for the
three-month periods ended September 30, 2009 and 2008, respectively, and $5.3 million and
$7.1 million for the nine-month periods ended September 30, 2009 and 2008, respectively,
related to these intangible assets. The amortization period of the in-place leases and
tenant relations is approximately two to 31 years and ten years, respectively. |
|
(2) |
|
Includes straight-line rent receivables, net, of $53.8 million both at September 30,
2009 and December 31, 2008. |
- 18 -
5. REVOLVING CREDIT FACILITIES
The Company maintains an unsecured revolving credit facility with a syndicate of financial
institutions, for which JP Morgan serves as the administrative agent (the Unsecured Credit
Facility). The Unsecured Credit Facility provides for borrowings of $1.25 billion, if certain
financial covenants are maintained, and an accordion feature for a future expansion to $1.4 billion
upon the Companys request, provided that new or existing lenders agree to the existing terms of
the facility and increase their commitment level, and a maturity date of June 2010, with a one-year
extension option at the option of the Company subject to certain customary closing conditions. The
Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to
50% of the facility. The Companys borrowings under the Unsecured Credit Facility bear interest at
variable rates at the Companys election, based on either (i) the prime rate plus a specified
spread (0.125% at September 30, 2009), as defined in the facility or (ii) LIBOR, plus a specified
spread (0.75% at September 30, 2009). The specified spreads vary depending on the Companys
long-term senior unsecured debt rating from Standard and Poors and Moodys Investors Service. The
Company is required to comply with certain covenants relating to total outstanding indebtedness,
secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The
Unsecured Credit Facility is used to finance the acquisition, development and expansion of shopping
center properties, to provide working capital and for general corporate purposes. The Company was
in compliance with these covenants at September 30, 2009. The Unsecured Credit Facility also
provides for an annual facility fee of 0.25% on the entire facility. At September 30, 2009, total
borrowings under the Unsecured Credit Facility aggregated $822.5 million with a weighted average
interest rate of 1.6%.
The Company also maintains a $75 million unsecured revolving credit facility with National
City Bank (together with the Unsecured Credit Facility, the Revolving Credit Facilities). This
facility has a maturity date of June 2010, with a one-year extension option at the option of the
Company subject to certain customary closing conditions, and reflects terms consistent with those
contained in the Unsecured Credit Facility. Borrowings under this facility bear interest at
variable rates based on (i) the prime rate plus a specified spread (0.125% at September 30, 2009),
as defined in the facility or (ii) LIBOR, plus a specified
spread (0.75% at September 30, 2009).
The specified spreads are dependent on the Companys long-term senior unsecured debt rating from
Standard and Poors and Moodys Investors Service. The Company is required to comply with certain
covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of
unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these
covenants at September 30, 2009. At September 30, 2009, total borrowings under the National City
Bank facility aggregated $3.8 million with a weighted average interest rate of 1.2%.
6. FIXED-RATE NOTES
In September 2009, the Company issued $300 million aggregate principal amount of 9.625% senior
unsecured notes due March 2016. The notes were offered to investors at 99.42% of par with a yield
to maturity of 9.75%.
- 19 -
In March 2007, the Company issued $600 million aggregate principal amount of 3.0% senior
convertible notes due in 2012 (the 2007 Senior Convertible Notes). In August 2006, the Company
issued $250 million aggregate principal amount of 3.5% senior convertible notes due in 2011 (the
2006 Senior Convertible Notes and, together with the 2007 Senior Convertible Notes, the Senior
Convertible Notes). The Senior Convertible Notes are senior unsecured obligations and rank equally
with all other senior unsecured indebtedness. For further description of the Companys Senior
Convertible Notes see Note 8, Fixed-Rate Debt, in the Companys Current Report on Form 8-K filed
August 10, 2009. Effective January 1, 2009, the Company retrospectively adopted the provisions of
the standard, Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Note 1). Concurrent with the issuance of the Senior Convertible Notes, the Company
purchased an option on its common shares in a private transaction in order to effectively increase
the conversion price of the notes to a specified option price (Option Price). This purchase
option, which has the same term as the underlying debt, allows the Company to receive a number of
the Companys common shares (Maximum Common Shares) from counterparties equal to the amounts of
common shares and/or cash related to the excess conversion value that it would pay to the holders
of the Senior Convertible Notes upon conversion. The option cost was recorded as a reduction of
shareholders equity at issuance.
The following table summarizes the information related to the Senior Convertible Notes (shares
and dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
Conversion Price (1) |
|
Option Price |
|
Common Shares |
|
Option Cost |
2007 Senior Convertible Notes |
|
$ |
74.56 |
|
|
$ |
82.71 |
|
|
|
1.1 |
|
|
$ |
32.6 |
|
2006 Senior Convertible Notes |
|
$ |
64.23 |
|
|
$ |
65.17 |
|
|
|
0.5 |
|
|
$ |
10.3 |
|
|
|
|
(1) |
|
At September 30, 2009 and December 31, 2008. |
The following tables reflect the Companys previously reported amounts, along with the
adjusted amounts as required by the standard, Accounting For Convertible Debt Instruments That May
Be Settled in Cash Upon Conversion, and as adjusted to reflect the impact of discontinued
operations (Note 13) (in thousands, except per share).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2008 |
|
Nine-Month Period Ended September 30, 2008 |
|
|
As |
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
As |
|
Effect of |
|
Previously |
|
As |
|
Effect of |
|
|
Reported |
|
Adjusted |
|
Change |
|
Reported |
|
Adjusted |
|
Change |
Condensed
Consolidated
Statements of
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing
operations |
|
$ |
37,681 |
(1) |
|
$ |
33,320 |
|
|
$ |
(4,361 |
) |
|
$ |
117,789 |
(1) |
|
$ |
105,556 |
|
|
$ |
(12,233 |
) |
Net income
attributable to DDR |
|
|
38,515 |
|
|
|
35,250 |
|
|
|
(3,265 |
) |
|
|
121,866 |
|
|
|
112,074 |
|
|
|
(9,792 |
) |
Net income
attributable to DDR
per share, basic
and diluted |
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
$ |
(0.03 |
) |
|
$ |
0.75 |
|
|
$ |
0.66 |
|
|
$ |
(0.09 |
) |
|
|
|
(1) |
|
Adjusted to reflect the impact of discontinued operations (Note 13). |
- 20 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
As Previously |
|
As |
|
Effect of |
|
|
Reported |
|
Adjusted |
|
Change |
Condensed Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress and land under development |
|
$ |
879,547 |
|
|
$ |
882,478 |
|
|
$ |
2,931 |
|
Deferred charges, net |
|
|
26,613 |
|
|
|
25,579 |
|
|
|
(1,034 |
) |
Senior unsecured notes |
|
|
(2,452,741 |
) |
|
|
(2,402,032 |
) |
|
|
50,709 |
|
Paid-in-capital |
|
|
(2,770,194 |
) |
|
|
(2,849,364 |
) |
|
|
(79,170 |
) |
Accumulated distributions in excess of net income |
|
|
608,675 |
|
|
|
635,239 |
|
|
|
26,564 |
|
The effects of this accounting change on the carrying amounts of the Companys debt and
equity balances are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Carrying value of equity component |
|
$ |
(48,684 |
) |
|
$ |
(77,587 |
) |
|
|
|
|
|
|
|
Stated principal amount of convertible debt |
|
$ |
522,683 |
|
|
$ |
833,000 |
|
Remaining unamortized debt discount |
|
|
(23,875 |
) |
|
|
(50,709 |
) |
|
|
|
|
|
|
|
Net carrying value of convertible debt |
|
$ |
498,808 |
|
|
$ |
782,291 |
|
|
|
|
|
|
|
|
As of September 30, 2009, the remaining amortization period for the debt discount was
approximately 23 and 30 months for the 2006 Senior Convertible Notes and the 2007 Senior
Convertible Notes, respectively.
The adjusted effective interest rates for the liability components of the 2006 Senior
Convertible Notes and the 2007 Senior Convertible Notes were 5.7% and 5.2%, respectively. The
impact of this accounting change required the Company to adjust its interest expense and record a
non-cash interest-related charge of $2.7 million and $9.8 million, net of capitalized interest, for
the three- and nine-month periods ended September 30, 2009, respectively. The Company recorded
non-cash interest expense of approximately $3.3 million and $9.8 million for the three- and
nine-month periods ended September 30, 2008, respectively. The Company recorded contractual
interest expense associated with the Senior Convertible Notes of approximately $4.3
million and $15.9 million for the three- and nine-month periods ended September 30,
2009, respectively, and $6.7 million and $20.1 million for the three- and
nine-month periods September 30, 2008, respectively.
During the nine months ended September 30, 2009, the Company purchased approximately $673.6
million aggregate principal amount of its outstanding senior unsecured notes (of which $310.3
million related to the Senior Convertible Notes) at a discount to par resulting in a net GAAP gain
of approximately $142.4 million. The Company allocated the consideration paid for the convertible
notes between the liability component and equity component based on the fair value of those
components immediately prior to the purchases and reflected a gain based on the difference on the
amount of consideration paid as compared to the carrying amount of the debt, net of the unamortized
discount.
- 21 -
7. FINANCIAL INSTRUMENTS
Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accruals and
other liabilities
The carrying amounts reported in the balance sheet for these financial instruments
approximated fair value because of their short-term maturities. The carrying amount of
straight-line rents receivable does not materially differ from its fair market value.
Notes receivable and advances to affiliates
The fair value is estimated by discounting the current rates at which management believes
similar loans would be made. The fair value of these notes was approximately $141.4 million and
$134.0 million at September 30, 2009 and December 31, 2008, respectively, as compared to the
carrying amounts of $136.6 million and $134.0 million, respectively. The carrying value of the tax
increment financing bonds approximated its fair value at September 30, 2009 and December 31, 2008.
The fair value of loans to affiliates is not readily determinable and has been estimated by
management based upon its assessment of the interest rate, credit risk and performance risk.
Debt
The fair market value of debt is determined using the trading price of public debt, or a
discounted cash flow technique that incorporates a market interest yield curve with adjustments for
duration, optionality, and risk profile including the Companys non-performance risk.
Considerable judgment is necessary to develop estimated fair values of financial instruments.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Company could realize on disposition of the financial instruments.
Financial instruments at September 30, 2009 and December 31, 2008, with carrying values that
are different than estimated fair values, based on the valuation methods outlined in the standard,
Fair Value Measurements, at September 30, 2009 and December 31, 2008 are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying Amount |
|
|
Fair Value |
|
|
Carrying Amount |
|
|
Fair Value |
|
Senior notes |
|
$ |
1,825,834 |
|
|
$ |
1,780,821 |
|
|
$ |
2,402,032 |
|
|
$ |
1,442,264 |
|
Revolving Credit Facilities and Term Debt |
|
|
1,626,262 |
|
|
|
1,584,412 |
|
|
|
1,827,183 |
|
|
|
1,752,260 |
|
Mortgages payable and other indebtedness |
|
|
1,712,991 |
|
|
|
1,651,132 |
|
|
|
1,637,440 |
|
|
|
1,570,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,165,087 |
|
|
$ |
5,016,365 |
|
|
$ |
5,866,655 |
|
|
$ |
4,765,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement of Fair Value
At September 30, 2009, the Company used pay-fixed interest rate swaps to manage its exposure
to changes in benchmark interest rates. The valuation of these instruments is determined using
widely accepted valuation techniques including discounted cash flow analysis on the expected cash
flows of each derivative.
- 22 -
Although the Company has determined that the significant inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with the Companys counterparties and its own credit risk utilize Level 3 inputs, such
as estimates of current credit spreads, to evaluate the likelihood of default by itself and its
counterparties. As of September 30, 2009, the Company has assessed the significance of the impact
of the credit valuation adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are significant to the overall valuation of all of
its derivatives. As a result, the Company has determined that its derivative valuations in their
entirety are classified in Level 3 of the fair value hierarchy.
Items Measured at Fair Value on a Recurring Basis
The following table presents information about the Companys financial assets and liabilities
which consist of interest rate swap agreements that are included in other liabilities at
September 30, 2009, measured at fair value on a recurring basis as of September 30, 2009, and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine
such fair value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at |
|
|
September 30, 2009 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Derivative financial instruments |
|
$ |
|
|
|
$ |
|
|
|
$ |
19.9 |
|
|
$ |
19.9 |
|
The table presented below presents a reconciliation of the beginning and ending balances of
interest rate swap agreements that are included in other liabilities having fair value measurements
based on significant unobservable inputs (Level 3) (in millions):
|
|
|
|
|
|
|
Derivative |
|
|
|
Financial |
|
|
|
Instruments |
|
Balance of Level 3 at December 31, 2008 |
|
$ |
(21.7 |
) |
Total unrealized gain included in other comprehensive
(loss) income |
|
|
1.8 |
|
|
|
|
|
Balance of Level 3 at September 30, 2009 |
|
$ |
(19.9 |
) |
|
|
|
|
The unrealized gain of $1.8 million above included in other comprehensive (loss) income is
attributable to the change in unrealized gains or losses relating to derivative liabilities that
are still held at September 30, 2009, none of which were reported in the Companys condensed
consolidated statements of operations as they are documented and qualify as hedging instruments.
Accounting Policy for Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value. The accounting for
changes in the fair value of derivatives depends on the intended use of the derivative, whether the
- 23 -
Company has elected to designate a derivative in a hedging relationship and apply hedge accounting
and whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair
value of an asset, liability, or firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a
hedge of the exposure to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the
foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally
provides for the matching of the timing of gain or loss recognition on the hedging instrument with
the recognition of the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged
forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that
are intended to economically hedge certain of its risk, even though hedge accounting does not apply
or the Company elects not to apply hedge accounting.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk primarily by managing the amount,
sources, and duration of its debt funding and, from time to time, the use of derivative financial
instruments. Specifically, the Company enters into derivative financial instruments to manage
exposures that arise from business activities that result in the receipt or payment of future known
and uncertain cash amounts, the value of which are determined by interest rates. The Companys
derivative financial instruments are used to manage differences in the amount, timing, and duration
of the Companys known or expected cash receipts and its known or expected cash payments
principally related to the Companys investments and borrowings.
The Company entered into consolidated joint ventures that own real estate assets in Canada and
Russia. The net assets of these subsidiaries are exposed to volatility in currency exchange rates.
As such, the Company uses non-derivative financial instruments to economically hedge a portion of
this exposure. The Company manages currency exposure related to the net assets of its Canadian and
European subsidiaries primarily through foreign currency-denominated debt agreements.
Cash Flow Hedges of Interest Rate Risk
The Companys objectives in using interest rate derivatives are to manage its exposure to
interest rate movements. To accomplish this objective, the Company generally uses interest rate
swaps (Swaps) as part of its interest rate risk management strategy. Swaps designated as cash
flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the
Company making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount. The Company has six Swaps with notional amounts aggregating $600
million ($200 million of which expires in 2009, $300 million of which expires in 2010 and $100
million of which expires in 2012) which effectively converts
variable-rate debt to a fixed-rate of 6.2% at September 30, 2009.
- 24 -
The effective portion of changes in the fair value of derivatives designated and that qualify
as cash flow hedges is recorded in Accumulated Other Comprehensive Income (Loss) and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. During 2009, such derivatives were used to hedge the variable cash flows
associated with existing obligations. The ineffective portion of the change in fair value of
derivatives is recognized directly in earnings. All components of the interest rate swaps were
included in the assessment of hedge effectiveness. During the nine months ended September 30, 2009
and September 30, 2008, the amount of hedge ineffectiveness recorded was not material.
Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
The Company expects that within the next 12 months, it will reflect as an increase to interest
expense (and a corresponding decrease to earnings) approximately $16.0 million. As of September
30, 2009, the Company had the following outstanding interest rate derivatives that were designated
as cash flow hedges of interest rate risk:
|
|
|
|
|
|
|
|
|
Number of |
|
Notional |
Interest Rate Derivative |
|
Instruments |
|
(in Millions) |
Interest rate swaps
|
|
Six
|
|
$ |
600.0 |
|
The table below presents the fair value of the Companys derivative financial instruments as
well as their classification on the condensed consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
September 30, 2009 |
|
December 31, 2008 |
Derivatives designated as |
|
Balance Sheet |
|
Fair |
|
Balance Sheet |
|
|
hedging instruments |
|
Location |
|
Value |
|
Location |
|
Fair Value |
Interest rate products |
|
Other liabilities |
|
$ |
19.9 |
|
|
Other liabilities |
|
$ |
21.7 |
|
The effect of the Companys derivative instruments on net (loss) and income is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) |
|
Amount of Loss Reclassified from |
|
|
Amount of Loss Recognized in OCI |
|
Reclassified |
|
Accumulated OCI into Earnings |
|
|
on Derivative (Effective Portion) |
|
from |
|
(Effective Portion) |
Derivatives |
|
Three-Month |
|
Nine-Month |
|
Accumulated |
|
Three-Month |
|
Nine-Month |
in Cash |
|
Periods Ended |
|
Periods Ended |
|
OCI into Income |
|
Periods Ended |
|
Periods Ended |
Flow |
|
September 30 |
|
September 30 |
|
(Effective |
|
September 30 |
|
September 30 |
Hedging |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Portion) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Interest rate
products |
|
$1.6 |
|
$1.2 |
|
$1.8 |
|
$0.7 |
|
Interest expense |
|
$0.1 |
|
$0.1 |
|
$0.3 |
|
$0.5 |
The Company is exposed to credit risk in the event of non-performance by the
counterparties to the Swaps. The Company believes it mitigates its credit risk by entering into
Swaps with major financial institutions. The Company continually monitors and actively manages
interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap
positions or other derivative interest rate instruments based on market conditions. In addition,
the Company continually assesses its ability to obtain funds through additional equity and/or debt
offerings, including the
- 25 -
issuance of medium term notes and joint venture capital. Accordingly, the cost of obtaining
interest rate protection agreements in relation to the Companys access to capital markets will
continue to be evaluated. The Company has not, and does not plan to, enter into any derivative
financial instruments for trading or speculative purposes.
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision
whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could
also be declared in default on its derivative obligations which could result in an acceleration of
payment.
Net Investment Hedges
The Company is exposed to foreign exchange risk from its consolidated and unconsolidated
international investments. The Company has foreign currency-denominated debt agreements, which
exposes the Company to fluctuations in foreign exchange rates. The Company has designated these
foreign currency borrowings as a hedge to the net investment in its Canadian and European
subsidiaries. Changes in the spot rate value are recorded as adjustments to the debt balance with
offsetting unrealized gains and losses recorded in other comprehensive income (OCI). As the
notional amount of the non-derivative instrument substantially matches the portion of the net
investment designated as being hedged and the non-derivative instrument is denominated in the
functional currency of the hedged net investment, the hedge ineffectiveness recognized in earnings
was not material.
The effect of the Companys net investment hedge derivative instruments on OCI is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI on |
|
|
|
Derivatives (Effective Portion) |
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30 |
|
|
Ended September 30 |
|
Derivatives in Net Investment Hedging Relationships |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Euro denominated
revolving credit
facilities
designated as hedge
of the Companys
net investment in
its subsidiary |
|
$ |
(3.4 |
) |
|
$ |
(5.7 |
) |
|
$ |
(4.1 |
) |
|
$ |
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
denominated
revolving credit
facilities
designated as hedge
of the Companys
net investment in
its subsidiaries |
|
$ |
(6.7 |
) |
|
$ |
(3.2 |
) |
|
$ |
(12.4 |
) |
|
$ |
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See discussion of equity derivative instruments in Note 10.
- 26 -
8. COMMITMENTS AND CONTINGENCIES
Business Risks and Uncertainties
The retail and real estate markets have been significantly impacted by the continued
deterioration of the global credit markets and other macro economic factors including, among
others, rising unemployment and a decline in consumer confidence leading to a decline in consumer
spending. Although a majority of the Companys tenants (in particular the anchor tenants) remain in
relatively strong financial standing, the current economic environment has resulted in tenant
bankruptcies affecting the Companys real estate portfolio, including Mervyns, Linens N Things,
Steve and Barrys, Goodys and Circuit City, which occurred primarily in the second half of 2008.
In addition, certain other tenants may be experiencing financial difficulties. The decrease in
occupancy and the projected timing associated with re-leasing these vacated spaces has resulted in
downward pressure on the Companys 2009 operating results. The reduced occupancy will likely have a
negative impact on the Companys consolidated cash flows, results of operations, financial position
and financial ratios that are integral to the continued compliance with the covenants on the
Companys Revolving Credit Facilities as further described below. Offsetting some of the current
challenges within the retail environment, the Company has a low occupancy cost relative to other
retail formats and historical averages, as well as a diversified tenant base with only one tenant
exceeding 2.0% of total consolidated revenues, which is Walmart at 5.3%. Other significant tenants
include Target, Lowes Home Improvement, Home Depot, Kohls, T.J. Maxx/Marshalls, Publix
Supermarkets, PetSmart and Bed Bath & Beyond, all of which have relatively strong credit ratings.
Management believes these tenants should continue providing the Company with a stable revenue base
for the foreseeable future given the long-term nature of their leases. Moreover, the majority of
the tenants in the Companys shopping centers provide day-to-day consumer necessities with a focus
toward value and convenience versus high-priced discretionary luxury items, which should enable
many tenants to continue operating within this challenging economic environment.
The Companys Revolving Credit Facilities and the indentures under which the Companys senior
and subordinated unsecured indebtedness is, or may be, issued contain certain financial and
operating covenants, including, among other things, leverage ratios, debt service coverage and
fixed charge coverage ratios, as well as limitations on the Companys ability to incur secured and
unsecured indebtedness, sell all or substantially all of the Companys assets and engage in mergers
and certain acquisitions. These Revolving Credit Facilities and indentures also contain customary
default provisions, including the failure to timely pay principal and interest issued thereunder,
the failure to comply with the Companys financial and operating covenants, the occurrence of a
material adverse effect on the Company, and the failure to pay when due any other Company
consolidated indebtedness (including non-recourse obligations) in excess of certain specified
levels. In the event the Companys lenders declare a default, as defined in the applicable loan
documentation, this could result in the inability to obtain further funding and/or an acceleration
of all outstanding borrowings.
As
of September 30, 2009, the Company was in compliance with all of
its financial covenants under its Revolving Credit Facilities term debt and senior notes.
However, due to the economic environment, the Company has less financial flexibility than desired
given the current market dislocation. The Companys current business plans indicate that it will be
able to operate in compliance with these covenants for the remainder of 2009 and beyond. However,
the current economic downturn, along with the dislocation in the global credit markets, has
- 27 -
significantly impacted the projected cash flows, financial position and effective leverage of
the Company. If there is a continued decline in the retail and real estate industries and/or the
Company is unable to successfully execute its plans as further described below, the Company could
violate these financial covenants, and as a result may be subject to higher finance costs and fees
and/or accelerated maturities. In addition, certain of the Companys credit facilities and
indentures permit the acceleration of the maturity of debt issued thereunder in the event certain
other debt of the Company has been accelerated. Furthermore, a default under a loan to 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, would have a negative impact on the Companys
financial condition, cash flows and results of operations. These facts and an inability to predict
future economic conditions have encouraged the Company to adopt a strict focus on lowering leverage
and increasing its financial flexibility and improve its liquidity.
The Company is committed to prudently managing and minimizing discretionary operating and
capital expenditures and raising the necessary equity and debt capital to maximize its liquidity,
repay its outstanding borrowings as they mature and comply with its financial covenants for the
remainder of 2009 and beyond. As discussed below, the Company has already implemented several steps
integral to the successful execution of its plans to raise additional equity and debt capital
through a combination of retained capital, the issuance of common shares, debt financing and
refinancing and asset sales. In addition, the Company will continue to strategically utilize
proceeds from the above sources to repay outstanding borrowings on its credit facilities and
strategically repurchase its publicly traded debt at a discount to par to further improve its
leverage ratios.
|
|
|
Retained Equity With regard to retained capital, the Company has adjusted its
dividend policy to the minimum required to maintain its REIT status. The Company did not
pay a dividend in January 2009 because it had already distributed sufficient funds to
comply with its 2008 tax requirements. Moreover, the Company funded its first and second
quarter 2009 dividends in a combination of 90% common shares and 10% cash. After it was
determined that the Company would be able to meet the minimum payout required to maintain
its REIT status for 2009, the Companys Board of Directors approved the continuation of
the cash portion of the prior two quarters dividend in order to retain additional
capital and enhance financial flexibility, while remaining committed to distributing cash
flow to the Companys investors. As a result, the Company declared an all cash dividend
of $0.02 per common share in the third quarter of 2009. The changes to the Companys
2009 dividend policy to date have resulted in additional free cash flow, which has been
applied primarily to reduce leverage. This change in the Companys quarterly dividend
payments, including the elimination of a quarterly payment of a dividend in January 2009,
is expected to result in approximately $300 million of retained capital in 2009 relative to the Companys 2008 dividend policy. |
|
|
|
|
Issuance of Common Shares The Company has several alternatives to raise equity
through the sale of its common shares. In May and September 2009, the Company issued
common shares as part of the transaction with Mr. Alexander Otto (the Investor) and
certain members of the Otto family (collectively with the Investor, the Otto Family),
resulting in aggregate gross equity proceeds of approximately $112.5 million (Note 10).
The Company used the total gross proceeds to reduce leverage. The Company also raised
$157.6 million through the issuance of 18.6 million common shares at a weighted average
price of $8.46 per |
- 28 -
\
|
|
|
share in the nine months ended September 30, 2009, under the continuous equity program.
The Company expects to commence a new common equity program pursuant to which the Company
can sell equity into the open market from time to time at its discretion at other than
fixed prices. |
|
|
|
|
Debt Financing and Refinancing The Company does not have any remaining 2009
maturities for wholly-owned debt. As a result, the Company is currently focused on
extending or refinancing 2010 maturities, all but six of the Companys wholly-owned 2010
mortgage maturities aggregating approximately $59 million have been addressed. |
|
|
|
|
In September 2009, the Company issued $300 million aggregate principal amount of 9.625%
senior unsecured notes due March 2016. The notes were offered to investors at 99.42% of
par with a yield to maturity of 9.75%. In July 2009, the Company obtained $17 million of
mortgage debt from a life insurance company on two shopping centers at a 6% interest rate
and maturing in 2017. |
|
|
|
|
In October 2009, the Company obtained a $400 million, five-year loan secured by a
portfolio of 28 stabilized shopping centers from Goldman Sachs Commercial Mortgage
Capital, L.P., an affiliate of Goldman, Sachs & Co. |
|
|
|
|
Asset Sales For the nine months ended September 2009, the Company and both its
consolidated and unconsolidated joint ventures sold numerous assets generating nearly
$450 million in estimated total proceeds (of which approximately $309 million related to
consolidated assets and $141 million related to unconsolidated joint venture assets).
The Company and its joint ventures are also in various stages of discussions with third
parties for the sale of additional non-prime assets. |
|
|
|
|
Debt Repurchases Because of the current economic environment, the Companys
publicly traded debt securities have been trading at discounts to par. During the first
nine months of 2009, the Company repurchased approximately $673.6 million aggregate
principal amount of its outstanding senior unsecured notes at a cash discount to par
aggregating $164.3 million. Although the Company will evaluate all of its alternatives to
optimize its use of cash generated from the sources above to achieve the strategic goal
of de-leveraging, the Company expects that it will continue to opportunistically
repurchase its debt securities at a discount to par to further improve its leverage
ratios. |
As described above, although the Company believes it has made considerable progress in
implementing the steps to address its objectives of reducing leverage, improving liquidity and
continuing to comply with its covenants and repay obligations as they become due, certain
transactions may not close as anticipated, or at all and, therefore, there can be no assurances
that the Company will be able to execute these plans, which could adversely impact the Companys
operations, including its ability to remain compliant with its covenants and repay the Companys
obligations as they become due.
- 29 -
Legal Matters
The Company is a party to litigation filed in November 2006 by a tenant in a Company property
located in Long Beach, California. The tenant filed suit against the Company and certain
affiliates, claiming the Company and its affiliates failed to provide adequate valet parking at the
property pursuant to the terms of the lease with the tenant. After a six-week trial, the jury
returned a verdict in October 2008, finding the Company liable for compensatory damages in the
amount of approximately $7.8 million. In addition, the trial court awarded the tenant attorneys
fees and expenses in the amount of approximately $1.5 million. The Company filed motions for a new
trial and for judgment notwithstanding the verdict, both of which were denied. The Company strongly
disagrees with the verdict, as well as the denial of the post-trial motions. As a result, the
Company is pursuing an appeal of the verdict. Included in other liabilities on the condensed
consolidated balance sheet is a provision which represents managements best estimate of loss based
upon a range of liability. The Company will continue to monitor the status of the litigation and
revise the estimate of loss as appropriate. Although the Company believes it has a meritorious
basis for reversing the jury verdict, there can be no assurance that the Company will be successful
in its appeal.
In addition to the litigation discussed above, 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 Companys liquidity, financial position or results of operations.
9. REDEEMABLE OPERATING PARTNERSHIP UNITS
At September 30, 2009 and December 31, 2008, the Company had 29,524 operating partnership
units (OP Units) outstanding, which are classified as redeemable operating partnership units on
the condensed consolidated balance sheets. These OP Units, issued to different partnerships, are
exchangeable, at the election of the OP Unit holder, and under certain circumstances at the option
of the Company, into an equivalent number of the Companys common shares or for the equivalent
amount of cash. The OP Unit holders are entitled to receive distributions, per OP Unit, generally
equal to the per share distributions on the Companys common shares. Redeemable OP Units are
presented at the greater of their carrying amount (September 30, 2009) or redemption value
(September 30, 2008) at the end of each reporting period. Changes in the value from period to
period are charged to paid in capital in the Companys condensed consolidated balance sheets.
Below is a table reflecting the activity of the redeemable OP units (in thousands):
|
|
|
|
|
|
|
September 30, 2008 |
|
Balance at December 31, 2007 |
|
$ |
1,163 |
|
Net income |
|
|
61 |
|
Distributions |
|
|
(61 |
) |
Adjustment to redeemable operating partnership units |
|
|
(215 |
) |
|
|
|
|
Balance at September 30, 2008 |
|
$ |
948 |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
Balance at December 31, 2008 |
|
$ |
627 |
|
Net income |
|
|
12 |
|
Distributions |
|
|
(12 |
) |
|
|
|
|
Balance at September 30, 2009 |
|
$ |
627 |
|
|
|
|
|
- 30 -
10. EQUITY
The following table summarizes the changes in equity since December 31, 2007 as adjusted (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developers Diversified Realty Corporation Equity |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
($0.10 |
|
|
|
|
|
Distributions |
|
|
|
|
|
Other |
|
Treasury |
|
Non- |
|
|
|
|
Preferred |
|
Par |
|
Paid-in |
|
in Excess of |
|
Deferred |
|
Comprehensive |
|
Stock at |
|
Controlling |
|
|
|
|
Shares |
|
Value) |
|
Capital |
|
Net Income |
|
Obligation |
|
(Loss) Income |
|
Cost |
|
Interests |
|
Total |
|
|
|
Balance, December
31, 2007 |
|
$ |
555,000 |
|
|
$ |
12,679 |
|
|
$ |
3,107,809 |
|
|
$ |
(272,428 |
) |
|
$ |
22,862 |
|
|
$ |
8,965 |
|
|
$ |
(369,839 |
) |
|
$ |
128,254 |
|
|
$ |
3,193,302 |
|
Issuance of common
shares related to
exercise of stock
options, dividend
reinvestment plan,
performance plan and
director
compensation |
|
|
|
|
|
|
1 |
|
|
|
(2,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,759 |
|
|
|
|
|
|
|
6,570 |
|
Contributions from
non-controlling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,714 |
|
|
|
51,714 |
|
Issuance of
restricted stock |
|
|
|
|
|
|
|
|
|
|
(5,177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,074 |
|
|
|
|
|
|
|
897 |
|
Vesting of
restricted stock |
|
|
|
|
|
|
|
|
|
|
7,436 |
|
|
|
|
|
|
|
194 |
|
|
|
|
|
|
|
(5,462 |
) |
|
|
|
|
|
|
2,168 |
|
Stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
6,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,386 |
|
Redemption of
463,185 operating
partnership units in
exchange for common
shares |
|
|
|
|
|
|
|
|
|
|
(14,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,327 |
|
|
|
(9,104 |
) |
|
|
(45 |
) |
Dividends declared
common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,612 |
) |
Dividends declared
preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702 |
) |
Distributions to
non-controlling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,222 |
) |
|
|
(30,222 |
) |
Adjustment to
redeemable
partnership units |
|
|
|
|
|
|
|
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,914 |
|
|
|
117,988 |
|
Other comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value
of interest rate
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,626 |
) |
|
|
|
|
|
|
|
|
|
|
(4,626 |
) |
Amortization of
interest rate
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(550 |
) |
|
|
|
|
|
|
|
|
|
|
(550 |
) |
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,991 |
) |
|
|
|
|
|
|
(607 |
) |
|
|
(9,598 |
) |
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,074 |
|
|
|
|
|
|
|
(14,167 |
) |
|
|
|
|
|
|
5,307 |
|
|
|
103,214 |
|
|
|
|
Balance, September
30, 2008 |
|
$ |
555,000 |
|
|
$ |
12,680 |
|
|
$ |
3,100,211 |
|
|
$ |
(440,668 |
) |
|
$ |
23,056 |
|
|
$ |
(5,202 |
) |
|
$ |
(337,141 |
) |
|
$ |
145,949 |
|
|
$ |
3,053,885 |
|
|
|
|
- 31 -
The following table summarizes the changes in equity since December 31, 2008 as adjusted
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developers Diversified Realty Corporation Equity |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
($0.10 |
|
|
|
|
|
Distributions |
|
|
|
|
|
Other |
|
Treasury |
|
Non- |
|
|
|
|
Preferred |
|
Par |
|
Paid-in |
|
in Excess of |
|
Deferred |
|
Comprehensive |
|
Stock at |
|
Controlling |
|
|
|
|
Shares |
|
Value) |
|
Capital |
|
Net Income |
|
Obligation |
|
(Loss) Income |
|
Cost |
|
Interests |
|
Total |
|
|
|
Balance, December
31, 2008 |
|
$ |
555,000 |
|
|
$ |
12,864 |
|
|
$ |
2,849,364 |
|
|
$ |
(635,239 |
) |
|
$ |
13,882 |
|
|
$ |
(49,849 |
) |
|
$ |
(8,731 |
) |
|
$ |
127,503 |
|
|
$ |
2,864,794 |
|
Issuance of common
shares related to
dividend
reinvestment plan
and director
compensation |
|
|
|
|
|
|
13 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222 |
|
|
|
|
|
|
|
836 |
|
Issuance of common
shares for cash
offering |
|
|
|
|
|
|
1,864 |
|
|
|
154,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,043 |
|
Otto Transaction |
|
|
|
|
|
|
3,286 |
|
|
|
108,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,414 |
|
Equity derivative
instruments |
|
|
|
|
|
|
|
|
|
|
143,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,716 |
|
Contributions from
non-controlling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,641 |
|
|
|
5,641 |
|
Issuance of
restricted stock |
|
|
|
|
|
|
194 |
|
|
|
1,069 |
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
(629 |
) |
|
|
|
|
|
|
732 |
|
Vesting of
restricted stock |
|
|
|
|
|
|
|
|
|
|
396 |
|
|
|
|
|
|
|
2,997 |
|
|
|
|
|
|
|
(884 |
) |
|
|
|
|
|
|
2,509 |
|
Stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
12,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,315 |
|
Dividends
declaredcommon
shares |
|
|
|
|
|
|
1,444 |
|
|
|
49,030 |
|
|
|
(60,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,068 |
) |
Dividends
declaredpreferred
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702 |
) |
Distributions to
non-controlling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,451 |
) |
|
|
(1,451 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(277,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,860 |
) |
|
|
(316,889 |
) |
Other comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value
of interest rate
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,315 |
|
|
|
|
|
|
|
|
|
|
|
7,315 |
|
Amortization of
interest rate
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279 |
) |
|
|
|
|
|
|
|
|
|
|
(279 |
) |
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,101 |
|
|
|
|
|
|
|
3,142 |
|
|
|
48,243 |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(277,029 |
) |
|
|
|
|
|
|
52,137 |
|
|
|
|
|
|
|
(36,718 |
) |
|
|
(261,610 |
) |
|
|
|
Balance, September
30, 2009 |
|
$ |
555,000 |
|
|
$ |
19,665 |
|
|
$ |
3,318,798 |
|
|
$ |
(1,004,512 |
) |
|
$ |
16,977 |
|
|
$ |
2,288 |
|
|
$ |
(10,022 |
) |
|
$ |
94,975 |
|
|
$ |
2,993,169 |
|
|
|
|
Common Shares Issued
During the nine months ended September 30, 2009, the Company issued 18.6 million common shares
at a weighted-average price of $8.46 per share through its continuous equity program and received
aggregate net proceeds of approximately $156.1 million. The net cash proceeds received from these
issuances were used to repurchase senior notes and to repay amounts outstanding under the Companys
Revolving Credit Facilities.
- 32 -
The Otto Transaction
On February 23, 2009, the Company entered into a stock purchase agreement (the Stock Purchase
Agreement) with the Investor to issue and sell 30.0 million common shares for aggregate gross
proceeds of approximately $112.5 million to the members of the Otto Family. The agreement also
provides for the issuance of warrants to purchase up to 10.0 million common shares with an exercise
price of $6.00 per share to the Otto Family. No separate consideration was paid for the warrants.
The share issuances, together with the warrant issuances are collectively referred to as the Otto
Transaction. Under the terms of the Stock Purchase Agreement, the Company also issued additional
common shares to the Otto Family in an amount equal to any dividend payable in shares declared by
the Company after February 23, 2009 and prior to the applicable closing. The exercise price of the
warrants is also subject to downward adjustment if the weighted average purchase price of all
additional common shares sold, as defined, from the date of issuance of the applicable warrant is
less than $6.00 per share (herein, along with the share issuances, referred to as Downward Price
Protection Provisions). Each warrant may be exercised at any time on or after the issuance
thereof for a five-year term.
On April 9, 2009, the Companys shareholders approved the sale of the common shares and
warrants to the Otto Family in connection with the Otto Transaction. The transaction was completed
in two closings, May 2009 and one in September 2009. In May 2009, the Company issued and sold 15.0
million shares and warrants to purchase 5.0 million common shares to the Otto Family for a purchase
price of $52.5 million. The Company also issued an additional 1,071,428, shares as a result of the
first quarter 2009 dividend to the Otto Family associated with the initial 15.0 million, shares.
In September 2009, the Company issued and sold 15.0 million common shares and warrants to purchase
5.0 million common shares to the Otto Family for a purchase price of $60.0 million. The Company
also issued an additional 1,787,304 common shares as a result of the first and second quarter 2009
dividends to the Otto Family associated with the second 15.0 million shares. In total, the Company
issued 32,858,732 million common shares to the Otto Family.
Equity Derivative Instruments Otto Transaction
The Downward Price Protection Provisions described above resulted in the equity forward
commitments and warrants required to be recorded at fair value as of the shareholder approval date
of April 9, 2009, and marked-to-market through earnings as of each balance sheet date thereafter
until exercise or expiration.
These equity instruments were issued as part of the Companys overall deleveraging strategy
and were not issued in connection with any speculative trading activity or to mitigate any market
risks.
- 33 -
The table below presents the fair value of the Companys equity derivative instruments as
well as their classification on the condensed consolidated balance sheet as follows (in millions):
|
|
|
|
|
|
|
September 30, 2009 |
Derivatives not designated as |
|
|
|
|
hedging instruments |
|
Balance Sheet Location |
|
Fair Value |
Warrants
|
|
Other liabilities
|
|
$54.5 |
The effect of the Companys equity derivative instruments on net loss is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Nine-Month |
|
|
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
2009 |
|
|
2009 |
|
Derivatives not designated |
|
Income Statement |
|
|
|
|
|
|
as hedging instruments |
|
Location |
|
Gain (Loss) |
|
|
Gain (Loss) |
|
Equity forward issued shares |
|
Loss on equity derivative instruments |
|
$ |
(83.2 |
) |
|
$ |
(152.8 |
) |
Warrants |
|
Loss on equity derivative instruments |
|
|
(35.0 |
) |
|
|
(45.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(118.2 |
) |
|
$ |
(198.2 |
) |
|
|
|
|
|
|
|
|
|
The loss above for these contracts was derived principally from the increase of the
Companys stock price from April 9, 2009, the shareholder approval date, to the market price on the
date of the second closing, September 18, 2009, related to the equity issued, or September 30,
2009, related to the warrants.
Measurement of Fair Value Equity Derivative Instruments Valued on a Recurring Basis
The valuation of these instruments is determined using a Bloomberg pricing model. The Company
has determined that the significant inputs used to value its equity forwards fall within Level 2 of
the fair value hierarchy. However, the Company has determined that the warrants fall within Level
3 of the fair value hierarchy due to the significance of the volatility and dividend yield
assumptions in the overall valuation. The Company utilized historical volatility assumptions as it
believes this better reflects the true valuation of the instruments. Although the Company
considered using an implied volatility based upon certain short-term publicly traded options on its
common shares, it instead utilized its historical share price volatility when determining an
estimate of fair value of its five year warrants. The Company believes that the long-term historic
volatility better represents long- term future volatility and is more consistent with how an
investor would view the value of these securities. The Company will continually evaluate its
significant assumptions to determine what it believes provides the most relevant measurements of
fair value at each reporting date.
- 34 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at |
|
|
September 30, 2009 (in millions) |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Warrants |
|
$ |
|
|
|
$ |
|
|
|
$ |
54.5 |
|
|
$ |
54.5 |
|
The table presented below presents a reconciliation of the beginning and ending balances of
the equity derivative instruments that are included in other liabilities as noted above having fair
value measurements based on significant unobservable inputs (Level 3).
|
|
|
|
|
|
|
Equity Derivative |
|
|
|
Instruments |
|
|
|
Liability |
|
Balance of Level 3 at March 31, 2009 (1) |
|
$ |
|
|
Initial Valuation |
|
|
(9.2 |
) |
Unrealized loss |
|
|
(45.3 |
) |
|
|
|
|
Balance of Level 3 at September 30, 2009 |
|
$ |
(54.5 |
) |
|
|
|
|
|
|
|
(1) |
|
As described above, the instruments were not valued until the shareholder
approval, which occurred on April 9, 2009. |
Stock-Based Compensation
In April 2009, the Otto Transaction was approved by the Companys shareholders resulting in a
potential change in control under the Companys equity-based award plans. In addition, in
September 2009 as a result of the second closing in which the Otto Family acquired beneficial
ownership of more than 20% of the Companys outstanding common shares, a change in control was
deemed to have occurred under the Companys equity deferred compensation plans. In accordance with
the equity-based award plans, all unvested stock options which were not subject to deferral
elections became fully exercisable and all restrictions on unvested restricted shares lapsed and,
in accordance with the equity deferred compensation plans, all unvested deferred stock units vested
and were no longer subject to forfeiture. As such, the Company recorded an accelerated non-cash
charge of approximately $4.7 million and $15.2 million for the three- and nine-month periods ended
September 30, 2009, respectively, related to these equity awards.
Value Sharing Equity Program
In July 2009, the Companys Board of Directors approved and adopted the Value Sharing Equity
Program (the VSEP) and the grant of awards to certain of the Companys officers. The VSEP is
designed to allow the Company to reward participants with a portion of Value Created (as
described below).
On six specified measurement dates, the Company will measure the Value Created during the
period between the start of the VSEP and the applicable measurement date. Value Created is measured
as the increase in the Companys market capitalization (i.e., the product of the Companys share
price and the number of shares outstanding as of the measurement date), as adjusted for any
equity issuances or equity repurchases, between the start of the VSEP and the applicable
measurement date.
- 35 -
Each participant will be assigned a percentage share of the Value Created. After the
first measurement date, each participant will receive a number of Company shares with an aggregate
value equal to two-sevenths of the participants percentage share of the Value Created. After each
of the next four measurement dates, each participant will receive a number of Company shares with
an aggregate value equal to three-sevenths, then four-sevenths, then five-sevenths, and then
six-sevenths, respectively, of the participants percentage share of the Value Created. After the
final measurement date, each participant will receive a number of Company shares with an aggregate
value equal to the participants full percentage share of the Value Created. For each measurement
date, however, the number of Company shares awarded to a participant will be reduced by the number
of Company shares previously earned by the participant as of prior measurement dates. This will
keep the participants from benefiting more than once for increases in the Companys share price
that occurred during earlier measurement periods.
The Company shares granted to a participant will then be subject to an additional
time-based vesting period. During this period, Company shares will generally vest in 20% annual
increments beginning on the date of grant and on each of the first four anniversaries of the date
of grant.
The fair value of each outperformance unit grant for the share price metrics was estimated on
the date of grant using a Monte Carlo approach model based on the following assumptions:
|
|
|
|
|
|
|
Range |
Risk-free interest rate |
|
|
1.9 |
% |
Average dividend yield |
|
|
6.2 |
% |
Expected life |
|
3.4 years |
|
Expected volatility |
|
|
88 |
% |
As of September 30, 2009, $11.9 million of total unrecognized compensation costs were related
to the two market metric components associated with the awards granted under the VSEP and expected
to be recognized over the seven year term, which includes, the vesting
period.
Adoption of Non-Controlling Interests and Accounting for Convertible Debt Instruments That May Be
Settled for Cash upon Conversion (including Partial Cash Settlement)
The Companys balance sheet was adjusted as of December 31, 2008 to include $127.5 million in
non-controlling interests as a component of equity. In addition, paid-in capital as of December
31, 2008 was increased by $52.6 million relating to the allocated value of the equity component of
certain of the Companys senior convertible unsecured notes (Note 1).
Dividends
The Company declared a dividend in the first and second quarters on March 2, 2009 and May 28,
2009, respectively, on its common shares of $0.20 per share that was paid in a combination of cash
and the Companys common shares. The aggregate amount of cash paid to shareholders was limited to
10% of the total dividend paid. In connection with the first and second quarter dividends, the
Company issued approximately 8.3 million and 6.1 million common shares, respectively, based on the
volume weighted average trading price of $2.80 and $4.49 per share, respectively, and paid $2.6
million and $3.1 million, respectively, in cash.
The Company declared an all-cash dividend of $0.02 per common share in the third quarter of
2009.
Common share dividends declared, per share, were $0.02 and $0.42 for the three- and nine-month
periods ended September 30, 2009. Common share dividends declared, per share, were $0.69 and $2.07
for the three- and nine-month periods ended September 30, 2008.
- 36 -
Deferred Obligations
During the nine-month period ended September 30, 2009, the vesting of restricted stock grants
to certain officers and directors of the Company, approximating 0.1 million common shares of the
Company, was deferred through the Companys non-qualified deferred compensation plans and,
accordingly, the Company recorded approximately $5.9 million in deferred obligations. Also, in
accordance with the transition rules under Section 409A of the Internal Revenue Code and the change
in control that occurred in September 2009, certain officers and directors elected to have their
deferrals distributed, which resulted in a reduction of the deferred obligation and a corresponding
increase in paid in capital of approximately $2.8 million.
11. OTHER REVENUE
Other revenue for the three- and nine-month periods ended September 30, 2009 and 2008, was
comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Lease termination fees |
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
$ |
3.4 |
|
|
$ |
5.0 |
|
Financing fees |
|
|
0.2 |
|
|
|
1.9 |
|
|
|
0.9 |
|
|
|
1.9 |
|
Other |
|
|
0.2 |
|
|
|
|
|
|
|
1.9 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.2 |
|
|
$ |
2.7 |
|
|
$ |
6.2 |
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. IMPAIRMENT CHARGES
During the three- and nine-month periods ended September 30, 2009, the Company recorded
impairment charges of $2.7 million and $145.7 million, respectively, on its consolidated real
estate investments. For the nine months ended September 30, 2009, impairment charges of $65.5
million are reflected in discontinued operations (Note 13). Of the aggregate amount,
approximately $84.7 million in asset impairments were triggered primarily due to the Companys
marketing of these assets for sale during the nine months ended September 30, 2009. The remaining
$61.0 million of impairment charges for the nine months ended September 30, 2009, related to 13
assets formerly occupied by Mervyns, of which the Companys proportionate share was $29.7 million
for the nine months ended September 30, 2009 after adjusting for the allocation of the loss to the
non-controlling interest in this consolidated joint venture.
During the three- and nine-month periods ended September 30, 2009, the Company recorded
impairment charges of $61.2 million and $101.6 million, respectively, on several of its
unconsolidated joint venture investments. The impairments recognized related to the DDRTC Core
Retail Fund LLC ($55.0 million), DDR-SAU Retail Fund LLC ($6.2 million) and the Companys joint
ventures with the Coventry II Fund ($40.4 million), as these investments incurred an other than
temporary impairment. The major factors contributing to the timing of the second quarter
impairment charges were the communication by the Coventry II Fund investors indicating they would
not contribute any additional capital for any of the projects and the Coventry II Funds
inability, to date, to reach an agreement with the first mortgage lender as to the Bloomfield
project,
- 37 -
combined with the overall economic downturn in the retail real estate environment. The
Company continues to maintain the position that it does not intend to fund any of its joint
venture partners capital contributions or their share of debt maturities. The Company believed
the value of these investments in the current environment was other than temporarily impaired.
Measurement of Fair Value
The Company is required to assess the value of both impaired consolidated assets and
unconsolidated joint venture investments. The valuation of impaired real estate assets and
investments is determined using widely accepted valuation techniques including discounted cash
flow analysis on the expected cash flows, the income capitalization approach considering
prevailing market capitalization rates, analysis of recent comparable sales transactions, actual
sales negotiations and 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.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the Companys impairment charges that were
measured on a fair value basis for the nine months ended September 30, 2009. The table indicates
the fair value hierarchy of the valuation techniques utilized by the Company to determine such
fair value (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Losses |
Long-lived assets held and used |
|
$ |
|
|
|
$ |
|
|
|
$ |
238.5 |
|
|
$ |
238.5 |
|
|
$ |
145.7 |
|
Unconsolidated joint venture investments |
|
|
|
|
|
|
|
|
|
|
104.4 |
|
|
|
104.4 |
|
|
|
101.6 |
|
13. DISCONTINUED OPERATIONS
All earnings of discontinued operations sold have been reclassified in the condensed
consolidated statements of operations for the three- and nine-month periods ended September 30,
2009 and 2008. The Company did not have any assets considered held for sale at September 30, 2009
or December 31, 2008. The Company considers assets held for sale when the transaction has been
approved by the appropriate levels 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.
Included in discontinued operations for the three- and nine-month periods ended September 30, 2009
and 2008, are 27 properties sold in 2009 aggregating 3.2 million square feet, and 22 shopping
centers sold in 2008 (including one business center and one property held for sale at December 31,
2007) aggregating 1.3 million square feet. The operating results relating to assets sold as of
September 30, 2009, are as follows (in thousands):
- 38 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
2,202 |
|
|
$ |
13,232 |
|
|
$ |
19,086 |
|
|
$ |
41,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
652 |
|
|
|
3,617 |
|
|
|
5,005 |
|
|
|
11,899 |
|
Impairment charges |
|
|
|
|
|
|
|
|
|
|
65,496 |
|
|
|
|
|
Interest, net |
|
|
328 |
|
|
|
2,571 |
|
|
|
4,747 |
|
|
|
8,312 |
|
Depreciation and amortization |
|
|
544 |
|
|
|
3,911 |
|
|
|
5,832 |
|
|
|
13,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
1,524 |
|
|
|
10,099 |
|
|
|
81,080 |
|
|
|
33,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before gain (loss)
on disposition of real estate |
|
|
678 |
|
|
|
3,133 |
|
|
|
(61,994 |
) |
|
|
7,955 |
|
Gain (loss) on disposition of real
estate |
|
|
4,448 |
|
|
|
(2,717 |
) |
|
|
(19,965 |
) |
|
|
(1,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,126 |
|
|
$ |
416 |
|
|
$ |
(81,959 |
) |
|
$ |
6,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. EARNINGS PER SHARE
Effective January 1, 2009, the Company adopted Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. The Companys unvested restricted
share units contain rights to receive nonforfeitable dividends, and thus are participating
securities requiring the two-class method of computing earnings per share (EPS). Under the
two-class method, EPS is computed by dividing the sum of distributed earnings to common
shareholders and undistributed earnings allocated to common shareholders by the weighted average
number of common shares outstanding for the period. In applying the two-class method, undistributed
earnings are allocated to both common shares and participating securities based on the weighted
average shares outstanding during the period. The following table provides a reconciliation of net
(loss) income from continuing operations and the number of common shares used in the computations
of basic EPS, which utilizes the weighted average number of common shares outstanding without
regard to dilutive potential common shares, and diluted EPS, which includes all such shares (in
thousands, except per share amounts):
- 39 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
|
|
| |
2008 |
|
|
| | | |
2008 |
|
|
|
2009 |
|
|
(As Adjusted) |
|
|
2009 |
|
|
(As Adjusted) |
|
Basic and Diluted Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(152,904 |
) |
|
$ |
33,320 |
|
|
$ |
(243,140 |
) |
|
$ |
105,556 |
|
Add: Gain on disposition of real estate |
|
|
7,128 |
|
|
|
3,093 |
|
|
|
8,222 |
|
|
|
6,368 |
|
Less: Loss (income) attributable to
non-controlling interests |
|
|
2,804 |
|
|
|
(1,579 |
) |
|
|
39,848 |
|
|
|
(5,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
attributable to DDR common shareholders |
|
|
(142,972 |
) |
|
|
34,834 |
|
|
|
(195,070 |
) |
|
|
105,949 |
|
Less: Preferred share dividends |
|
|
(10,567 |
) |
|
|
(10,567 |
) |
|
|
(31,702 |
) |
|
|
(31,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
attributable to DDR common shareholders |
|
|
(153,539 |
) |
|
|
24,267 |
|
|
|
(226,772 |
) |
|
|
74,247 |
|
Less: Earnings attributable to unvested shares
and operating partnership units |
|
|
(30 |
) |
|
|
(401 |
) |
|
|
(236 |
) |
|
|
(1,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations Basic |
|
|
(153,569 |
) |
|
|
23,866 |
|
|
|
(227,008 |
) |
|
|
73,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average shares outstanding |
|
|
165,073 |
|
|
|
119,795 |
|
|
|
146,151 |
|
|
|
119,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
attributable to DDR common shareholders |
|
$ |
(0.93 |
) |
|
$ |
0.20 |
|
|
$ |
(1.55 |
) |
|
$ |
0.61 |
|
Income (loss) from discontinued operations
attributable to DDR common shareholders |
|
|
0.03 |
|
|
|
|
|
|
|
(0.56 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to DDR common
shareholders |
|
$ |
(0.90 |
) |
|
$ |
0.20 |
|
|
$ |
(2.11 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average shares outstanding |
|
|
165,073 |
|
|
|
119,795 |
|
|
|
146,151 |
|
|
|
119,447 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Average shares outstanding |
|
|
165,073 |
|
|
|
119,882 |
|
|
|
146,151 |
|
|
|
119,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
attributable to DDR common shareholders |
|
$ |
(0.93 |
) |
|
$ |
0.20 |
|
|
$ |
(1.55 |
) |
|
$ |
0.61 |
|
Income (loss) from discontinued operations
attributable to DDR common shareholders |
|
|
0.03 |
|
|
|
|
|
|
|
(0.56 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to DDR common
shareholders |
|
$ |
(0.90 |
) |
|
$ |
0.20 |
|
|
$ |
(2.11 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 3.4 million and 2.2 million common shares were outstanding at
September 30, 2009 and 2008, respectively, a portion of which has been reflected above in the
diluted per share amounts. Options aggregating 3.4 million and 2.0 million common shares,
respectively, were anti-dilutive at September 30, 2009 and 2008. Accordingly, the anti-dilutive
options were excluded from the computations.
Shares subject to issuance under the Companys VSEP plan are not considered in the three- and
nine-month periods ended September 30, 2009, as the shares were considered anti-dilutive.
The Companys two issuances of Senior Convertible Notes, which are convertible into common
shares of the Company with conversion prices of approximately $74.56 and $64.23 at September 30,
2009 and 2008, were not included in the computation of diluted EPS for the three- and nine-month
periods ended September 30, 2009 and 2008 as the Companys stock price did not exceed
the conversion price of the conversion feature of the Senior Convertible Notes in these periods and
- 40 -
would
therefore be anti-dilutive. In addition, the purchased option related to the Senior
Convertible Notes will not be included in the computation of diluted EPS as the purchase option is
anti-dilutive.
The Company has excluded from its basic and diluted EPS warrants to purchase 5.0 million
common shares, issued in May 2009 and warrants to purchase 5.0 million common shares issued in
September 2009, because the average market price of the Companys common stock did not exceed the
exercise price of the warrants and accordingly are anti-dilutive. The 15.0 million common shares
issued in May 2009 and the 15.0 million common shares issued in September 2009 relating to the Otto
Transaction were included in basic and diluted EPS from the date of issuance.
15. SEGMENT INFORMATION
The Company has two reportable segments, shopping centers and other investments. Each
shopping center is considered a separate operating segment; however, each shopping center on a
stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined
reported operating segment and meets the majority of the aggregation criteria under the applicable
standard.
At September 30, 2009, the shopping center segment consisted of 664 shopping centers
(including 318 properties owned through unconsolidated joint ventures and 35 that are otherwise
consolidated by the Company) in 44 states, Puerto Rico and Brazil. At September 30, 2008, the
shopping center segment consisted of 713 shopping centers (including 329 properties owned through
unconsolidated joint ventures and 40 that are otherwise consolidated by the Company) in 45 states,
Puerto Rico and Brazil. At September 30, 2009 and 2008, the Company also owned six business
centers in four states, which are included in other investments.
The table below presents information about the Companys reportable segments for the three-
and nine-month periods ended September 30, 2009 and 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2009 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
1,327 |
|
|
$ |
200,937 |
|
|
|
|
|
|
$ |
202,264 |
|
Operating expenses |
|
|
(457 |
) |
|
|
(67,113 |
) (1) |
|
|
|
|
|
|
(67,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
870 |
|
|
|
133,824 |
|
|
|
|
|
|
|
134,694 |
|
Unallocated expenses (2) |
|
|
|
|
|
|
|
|
|
$ |
(226,215 |
) |
|
|
(226,215 |
) |
Equity in net loss of joint ventures
and impairment of joint venture
interests |
|
|
|
|
|
|
(61,383 |
) |
|
|
|
|
|
|
(61,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(152,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 41 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2008 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
2,028 |
|
|
$ |
220,832 |
|
|
|
|
|
|
$ |
222,860 |
|
Operating expenses |
|
|
(692 |
) |
|
|
(60,752 |
) |
|
|
|
|
|
|
(61,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
1,336 |
|
|
|
160,080 |
|
|
|
|
|
|
|
161,416 |
|
Unallocated expenses (2) |
|
|
|
|
|
|
|
|
|
$ |
(130,077 |
) |
|
|
(130,077 |
) |
Equity in net loss of joint ventures
and impairment of joint venture
interests |
|
|
|
|
|
|
1,981 |
|
|
|
|
|
|
|
1,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2009 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
4,134 |
|
|
$ |
609,808 |
|
|
|
|
|
|
$ |
613,942 |
|
Operating expenses |
|
|
(1,898 |
) |
|
|
(268,500 |
) (1) |
|
|
|
|
|
|
(270,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
2,236 |
|
|
|
341,308 |
|
|
|
|
|
|
|
343,544 |
|
Unallocated expenses (2) |
|
|
|
|
|
|
|
|
|
$ |
(476,129 |
) |
|
|
(476,129 |
) |
Equity in net loss of joint ventures
and impairment of joint venture
interests |
|
|
|
|
|
|
(110,555 |
) |
|
|
|
|
|
|
(110,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(243,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets |
|
$ |
49,469 |
|
|
$ |
8,727,430 |
|
|
|
|
|
|
$ |
8,776,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2008 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
4,786 |
|
|
$ |
664,906 |
|
|
|
|
|
|
$ |
669,692 |
|
Operating expenses |
|
|
(1,519 |
) |
|
|
(179,815 |
) |
|
|
|
|
|
|
(181,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
3,267 |
|
|
|
485,091 |
|
|
|
|
|
|
|
488,358 |
|
Unallocated expenses (2) |
|
|
|
|
|
|
|
|
|
$ |
(404,726 |
) |
|
|
(404,726 |
) |
Equity in net loss of joint ventures
and impairment of joint venture
interests |
|
|
|
|
|
|
21,924 |
|
|
|
|
|
|
|
21,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
105,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets |
|
$ |
49,825 |
|
|
$ |
9,136,355 |
|
|
|
|
|
|
$ |
9,186,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes impairment charges of $2.7 million and $80.2 million for the three- and
nine- month periods ended September 30, 2009. |
|
(2) |
|
Unallocated expenses consist of general and administrative, interest income,
interest expense, tax benefit/expense, other income/expense and depreciation and
amortization as listed in the condensed consolidated statements of operations. |
- 42 -
16. SUBSEQUENT EVENTS
In October 2009, the Company obtained a $400 million, five-year loan secured by a portfolio of
28 stabilized shopping centers from Goldman Sachs Commercial Mortgage Capital, L.P., an affiliate
of Goldman, Sachs & Co.
In October 2009, the Macquarie DDR Trust unitholders approved the redemption of the Companys
interest in the MDT US LLC joint venture. A 100% interest in three shopping center assets was
transferred to the Company in October 2009 in exchange for its approximate 14.5% ownership stake,
mortgages assumed of $65.3 million and a cash payment of $1.6 million made to the DDR Macquarie
Fund. The Company remains the joint manager for the Macquarie DDR Trust and continues to lease and
manage the remaining assets in the DDR Macquarie Fund and to earn fees for those services.
- 43 -
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the consolidated financial
statements, the notes thereto and the comparative summary of selected financial data appearing
elsewhere in this report. Historical results and percentage relationships set forth in the
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 Companys
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 those 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 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 they
involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond
the Companys control and that could cause actual results to differ materially from those expressed
or implied in the forward-looking statements and could materially affect the Companys actual
results, performance or achievements.
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:
|
|
|
The Company is subject to general risks affecting the real estate industry,
including the need to enter into new leases or renew leases on favorable terms to
generate rental revenues, and the current economic downturn may adversely affect the
ability of the Companys tenants, or new tenants, to enter into new leases or the ability
of the Companys existing tenants to renew their leases at rates at least as favorable as
their current rates; |
|
|
|
|
The Company could be adversely affected by changes in the local markets where its
properties are located, as well as by adverse changes in national economic and market
conditions; |
|
|
|
|
The Company may fail to anticipate the effects on its properties of changes in
consumer buying practices, including catalog sales and sales over the Internet and the
resulting retailing practices and space needs of its tenants or a general downturn in its
tenants businesses, which may cause tenants to close stores; |
|
|
|
|
The Company is subject to competition for tenants from other owners of retail
properties, and its tenants are subject to competition from other retailers and methods
of distribution. The Company is dependent upon the successful operations and financial
condition of its tenants,
in particular of its major tenants, and could be adversely affected by the bankruptcy of
those tenants; |
- 44 -
|
|
|
The Company relies on major tenants, which makes it vulnerable to changes in the
business and financial condition of, or demand for its space, by such tenants; |
|
|
|
|
The Company may not realize the intended benefits of acquisition or merger
transactions. The acquired assets may not perform as well as the Company anticipated, or
the Company may not successfully integrate the assets and realize the improvements in
occupancy and operating results that the Company anticipates. The acquisition of certain
assets may subject the Company to liabilities, including environmental liabilities; |
|
|
|
|
The Company may fail to identify, acquire, construct or develop additional
properties that produce a desired yield on invested capital, or may fail to effectively
integrate acquisitions of properties or portfolios of properties. In addition, the
Company may be limited in its acquisition opportunities due to competition, the inability
to obtain financing on reasonable terms or any financing at all and other factors; |
|
|
|
|
The Company may fail to dispose of properties on favorable terms. In addition, real
estate investments can be illiquid, particularly as prospective buyers may experience
increased costs of financing or difficulties obtaining financing, and could limit the
Companys ability to promptly make changes to its portfolio to respond to economic and
other conditions; |
|
|
|
|
The Company may abandon a development opportunity after expending resources if it
determines that the development opportunity is not feasible due to a variety of factors,
including a lack of availability of construction financing on reasonable terms, the
impact of the current economic environment on prospective tenants ability to enter into
new leases or pay contractual rent, or the inability by the Company to obtain all
necessary zoning and other required governmental permits and authorizations; |
|
|
|
|
The Company may not complete development projects on schedule as a result of
various factors, many of which are beyond the Companys control, such as weather, labor
conditions, governmental approvals, material shortages or general economic downturn
resulting in limited availability of capital, increased debt service expense and
construction costs and decreases in revenue; |
|
|
|
|
The Companys financial condition may be affected by required debt service
payments, the risk of default and restrictions on its ability to incur additional debt or
enter into certain transactions under its credit facilities and other documents governing
its debt obligations. In addition, the Company may encounter difficulties in obtaining
permanent financing or refinancing existing debt. Borrowings under the Companys
revolving credit facilities are subject to certain representations and warranties and
customary events of default, including any event that has had or could reasonably be
expected to have a material adverse effect on the Companys business or financial
condition; |
- 45 -
|
|
|
Changes in interest rates could adversely affect the market price of the Companys
common shares, as well as its performance and cash flow; |
|
|
|
|
Debt and/or equity financing necessary for the Company to continue to grow and
operate its business may not be available or may not be available on favorable terms or
at all; |
|
|
|
|
Recent disruptions in the financial markets could affect the Companys ability to
obtain financing on reasonable terms and have other adverse effects on us and the market
price of the Companys common shares; |
|
|
|
|
The Company is subject to complex regulations related to its status as a real
estate investment trust (REIT), and would be adversely affected if it failed to qualify
as a REIT; |
|
|
|
|
The Company must make distributions to shareholders to continue to qualify as a
REIT, and if the Company must borrow funds to make distributions, those borrowings may
not be available on favorable terms or at all; |
|
|
|
|
Joint venture investments may involve risks not otherwise present for investments
made solely by the Company, including the possibility that a partner or co-venturer may
become bankrupt, may at any time have different interests or goals than those of the
Company and may take action contrary to the Companys instructions, requests, policies or
objectives, including the Companys policy with respect to maintaining its qualification
as a REIT. In addition, a partner or co-venturer may not have access to sufficient
capital to satisfy its funding obligations to the joint venture. The partner could
default on the loans outside of the Companys control. Furthermore, if the current
constrained credit conditions in the capital markets persist or deteriorate further, 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 an other than temporary; |
|
|
|
|
The outcome of pending or future litigation, including
litigation with tenants or joint venture partners, may adversely effect
the Companys results of operations and financial condition.
|
|
|
|
|
The Company may not realize anticipated returns from its real estate assets outside
the United States. The Company expects to continue to pursue international opportunities
that may subject the Company to different or greater risks than those associated with its
domestic operations. The Company owns assets in Puerto Rico, an interest in an
unconsolidated joint venture that owns properties in Brazil and an interest in
consolidated joint ventures that were formed for the purpose to develop and own
properties in Canada, Russia and Ukraine; |
|
|
|
|
International development and ownership activities carry risks that are different
from those the Company faces with the Companys domestic properties and operations. These
risks include: |
|
o |
|
Adverse effects of changes in exchange rates for foreign currencies; |
|
|
o |
|
Changes in foreign political or economic environments; |
|
|
o |
|
Challenges of complying with a wide variety of foreign laws including tax
laws and addressing different practices and customs relating to corporate governance,
operations and litigation; |
|
|
o |
|
Different lending practices; |
- 46 -
|
o |
|
Cultural and consumer differences; |
|
|
o |
|
Changes in applicable laws and regulations in the United States that affect
foreign operations; |
|
|
o |
|
Difficulties in managing international operations and |
|
|
o |
|
Obstacles to the repatriation of earnings and cash; |
|
|
|
Although the Companys international activities are currently a relatively small
portion of its business, to the extent the Company expands its international activities,
these risks could significantly increase and adversely affect its results of operations
and financial condition; |
|
|
|
|
The Company is subject to potential environmental liabilities; |
|
|
|
|
The Company may incur losses that are uninsured or exceed policy coverage due to
its liability for certain injuries to persons, property or the environment occurring on
its properties and |
|
|
|
|
The Company could incur additional expenses in order to comply with or respond to
claims under the Americans with Disabilities Act or otherwise be adversely affected by
changes in government regulations, including changes in environmental, zoning, tax and
other regulations. |
Executive Summary
The Company is a self-administered and self-managed REIT, in the business of owning, managing
and developing a portfolio of shopping centers. As of September 30, 2009, the Companys portfolio
consisted of 664 shopping centers and six business centers (including 318 owned through
unconsolidated joint ventures and 35 that are otherwise consolidated by the Company). These
properties consist of shopping centers, lifestyle centers and enclosed malls owned in the United
States, Puerto Rico and Brazil. At September 30, 2009, the Company owned and/or managed
approximately 143.5 million total square feet of Gross Leasable Area (GLA), which includes all of
the aforementioned properties and one property owned by a third
party. The Company owns land in
Canada and Russia at which the development was deferred. At September 30, 2009, the aggregate
occupancy of the Companys shopping center portfolio was 87.1%, as compared to 94.5% at September
30, 2008. Excluding the impact of the Mervyns vacancy, the aggregate occupancy of the Companys
shopping center portfolio was 89.1% at September 30, 2009. The Company owned 713 shopping centers
and six business centers at September 30, 2008. The average annualized base rent per occupied
square foot was $12.59 at September 30, 2009, as compared to $12.47 at September 30, 2008.
Net loss applicable to DDR common shareholders for the three-month period ended September 30,
2009 was $148.4 million, or $0.90 per share (diluted and basic), compared to revised net income
applicable to DDR common shareholders of $24.7 million, or $0.20 per share (diluted and basic), for
the prior-year comparable period. Net loss applicable to DDR common shareholders for the
nine-month period ended September 30, 2009 was $308.7 million, or $2.11 per share (diluted and
basic), as compared to revised net income applicable to DDR commons shareholders of $80.4 million,
or $0.66 per share (diluted and basic), for the prior-year period. Funds from operations (FFO)
applicable to
- 47 -
DDR common shareholders for the three-month period ended September 30, 2009 was a loss of
$90.1 million compared to revised FFO income of $96.7 million for the three-month period ended
September 30, 2008. FFO applicable to DDR common shareholders for the nine-month period ended
September 30, 2009 was a loss of $116.6 million as compared to revised FFO income of $288.9 million
for the nine-month period ended September 30, 2008. The decrease in net income and reported loss
as well as FFO applicable to common shareholders for the three- and nine-month periods ended
September 30, 2009 is primarily related to non-operating activity consisting of impairment charges,
loss on sale of assets and equity derivative related charges in
addition to several major tenant bankruptcies in late 2008 and early
2009, offset by gains on debt repurchases as well
as lower interest rates on variable rate debt. Also contributing to
the decrease was a release of an
approximately $16 million deferred tax allowance in 2008 as well
as the impact of asset sales associated with
the Companys deleveraging efforts.
Third quarter 2009 operating results
The Companys 2009 goals included improving liquidity and lowering leverage. In the third
quarter of 2009, the Company made great strides towards achievement of these goals as evidenced by
the capital raised, which was applied to lower leverage, enhance liquidity and extend debt
maturities.
|
|
|
The Company reduced its consolidated debt by more than $700 million in the nine months
ended September 30, 2009. On December 31, 2008, the Company had $5.9 billion of
consolidated debt as compared to $5.2 billion at September 30, 2009. Additionally, the
Company reduced its share of unconsolidated joint venture debt by approximately $140
million in the same period. In October 2009, the Company further reduced its proportionate
share of unconsolidated joint venture debt by approximately $80 million with the redemption of its
interest in the MDT US LLC joint venture, as discussed below. |
|
|
|
|
The Company took advantage of the opportunity that arose in the unsecured debt market by
raising $300 million in new senior unsecured notes maturing in 2016. This offering of
long-term debt to repay short-term debt extended the duration of the Companys overall debt
maturities. The interest rate was higher than historic rates and, as such, the Company
remains focused on executing upon the balance sheet improvements that should lower this
cost over time. |
|
|
|
|
The Company has improved its debt maturity schedule by decreasing debt and by extending
debt maturities. The Company does not have any remaining 2009 wholly-owned debt maturities,
and all but six of the Companys wholly-owned 2010 mortgage maturities, aggregating
approximately $59 million, have been addressed. |
|
|
|
|
The Company closed approximately $600 million in new mortgage loans. |
|
|
|
|
Through September 30, 2009, the Company purchased $250.1 million aggregate principal
amount of unsecured senior notes through a tender offer, and an additional $423.5 million
aggregate principal amount of unsecured senior notes through open market purchases, for a
total cash discount to par of approximately $164.3 million. The tender offer achieved the
Companys goal of retiring unsecured notes, especially those with near-dated maturities. |
|
|
|
|
The Company sold assets aggregating approximately $450 million in gross proceeds, of
which the Companys share was more than $300 million. Almost all of these sales were
non-prime assets (prime assets are considered those assets that the Company intends to hold
for a long term and not offer for sale to a third party), and the sales contributed to the
de-leveraging and liquidity enhancing efforts by reducing secured mortgage debt and unsecured note and revolver
balances. |
- 48 -
|
|
|
The Company raised $157.6 million through the issuance of 18.6 million common shares at
a weighted average price of nearly $8.50 per share in the nine months ended September 30,
2009 and, in addition, raised $112.5 million of cash as part of the transaction with Mr.
Alexander Otto (the Investor) and certain members of the Otto family (collectively with
the Investor, the Otto Family). |
As a result of the transactions listed above and the Companys operating performance during
the nine months of the year, the Company has significantly enhanced
its liquidity position and remains in compliance with its debt
covenants under its Revolving Credit Facilities, term debt and senior notes. The
Companys continued execution on various de-leveraging initiatives, including asset sales, equity
issuances and retained capital, is expected to continue to improve these ratios over time. In
addition, as the Company continues to increase the portfolio occupancy, these ratios are expected
to improve further.
In addition to the liquidity initiatives described above, the Company has had success in the
execution of the following initiatives:
|
|
|
The Company simplified its structure by redeeming its interest in the MDT US LLC joint
venture in October 2009. This redemption eliminated approximately $1.0 billion of
unconsolidated debt and the Company assumed debt of approximately $65.3 million. This
simplified structure reduced the Companys proportionate share of unconsolidated joint
venture debt by approximately $146 million offset by the
assumption of debt by the Company of approximately $65.3 million
resulting in an overall reduced leverage
by approximately $80 million. In exchange for its interest, the Company owns three
wholly-owned prime assets. |
|
|
|
|
The Company focused on the re-tenanting of space formerly occupied by bankrupt
retailers. Activity was generated on a majority of the space in the form of signed leases,
sales, leases pending signature or letters of intent, and, importantly, the Company remains
focused on pursuing the retailers that are anticipating 2010 and 2011 openings. The
Company continues to be prudent in evaluating deal terms and, while rents have moderated,
the Company is pursuing economically efficient deals with lower than average capital
expenditures. |
|
|
|
|
Maximizing rent spreads remains challenging, yet the Company achieved marginal
improvement in blended rental rate spreads over the second quarter of 2009. |
|
|
|
|
The Company remains focused on tenant relationships and has strategically invested in
human capital by reassigning responsibilities communicating with its tenants, conducting
portfolio reviews, and discussing new store opportunities. |
|
|
|
|
The Company continues to focus on its current strategy and various other initiatives,
including the following: |
|
|
|
The Company intends to sell non-prime assets to third parties. However, due to the
amount of the Companys capital raising initiatives completed thus far this year, the
Company is not intending to sell its assets at significant discounts in order to raise
capital. The Company continues to have non-prime assets under contract for sale or subject
to letters of intent. The Company will continue to look at asset sales as an available
source of capital only when pricing is acceptable and those assets do not fit the Companys
focus on prime properties. |
|
|
|
|
The Company intends to continue to repurchase its unsecured notes if discounts continue
to be available. |
- 49 -
|
|
|
The Company expects to commence a new common equity program pursuant to which the
Company can sell equity into the open market from time to time at its discretion at other
than fixed prices. |
|
|
|
|
The Company may complete several other secured financings at its discretion by year end.
The Company does not believe that these transactions are required to be completed in order
to meet its near-term maturities, but remain part of the Companys long-term strategy to
provide for more liquidity. |
|
|
|
|
The Company is focused on improving its debt to EBITDA ratio (Earnings before interest,
taxes, depreciation and amortization). |
Despite the high level of transactional activity this year, the Company has not lost sight of
the operational side of the business. Although the Company is pleased with its ability to execute
on its strategic plan thus far, it acknowledges it has more to complete. The Company continues to
prepare for a prudent strategy for 2010 and beyond.
Results of Operations
Revenues from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Base and
percentage rental
revenues |
|
$ |
136,922 |
|
|
$ |
150,389 |
|
|
$ |
(13,467 |
) |
|
|
(9.0 |
)% |
Recoveries from tenants |
|
|
43,758 |
|
|
|
49,548 |
|
|
|
(5,790 |
) |
|
|
(11.7 |
) |
Ancillary and other
property income |
|
|
5,698 |
|
|
|
4,889 |
|
|
|
809 |
|
|
|
16.6 |
|
Management fees,
development fees and
other fee income |
|
|
14,693 |
|
|
|
15,378 |
|
|
|
(685 |
) |
|
|
(4.5 |
) |
Other |
|
|
1,193 |
|
|
|
2,656 |
|
|
|
(1,463 |
) |
|
|
(55.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
202,264 |
|
|
$ |
222,860 |
|
|
$ |
(20,596 |
) |
|
|
(9.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Base and
percentage rental
revenues |
|
$ |
413,698 |
|
|
$ |
453,458 |
|
|
$ |
(39,760 |
) |
|
|
(8.8 |
)% |
Recoveries from tenants |
|
|
135,181 |
|
|
|
145,801 |
|
|
|
(10,620 |
) |
|
|
(7.3 |
) |
Ancillary and other
property income |
|
|
15,696 |
|
|
|
15,748 |
|
|
|
(52 |
) |
|
|
(0.3 |
) |
Management fees,
development fees and
other fee income |
|
|
43,194 |
|
|
|
47,302 |
|
|
|
(4,108 |
) |
|
|
(8.7 |
) |
Other |
|
|
6,173 |
|
|
|
7,383 |
|
|
|
(1,210 |
) |
|
|
(16.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
613,942 |
|
|
$ |
669,692 |
|
|
$ |
(55,750 |
) |
|
|
(8.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 50 -
Base and percentage rental revenues of the core portfolio properties (shopping center
properties owned as of January 1, 2008, but excluding properties under development/redevelopment
and those classified in discontinued operations) (Core Portfolio) decreased approximately $34.1
million, or 8.2%, for the nine-month period ended September 30, 2009, as compared to the same
period in 2008. The decrease in overall base and percentage rental revenues was due to the
following (in millions):
|
|
|
|
|
|
|
Decrease |
|
Core Portfolio Properties |
|
$ |
(34.1 |
) |
Development/redevelopment of shopping center properties |
|
|
(1.6 |
) |
Business center properties |
|
|
(0.3 |
) |
Straight-line rents |
|
|
(3.8 |
) |
|
|
|
|
|
|
$ |
(39.8 |
) |
|
|
|
|
At September 30, 2009, the aggregate occupancy rate of the Companys shopping center portfolio
was 87.1%, as compared to 94.5% at September 30, 2008. The Company owned 664 shopping centers at
September 30, 2009, as compared to 713 shopping centers at September 30, 2008. The average
annualized base rent per occupied square foot was $12.59 at September 30, 2009, as compared to
$12.47 at September 30, 2008. The base and percentage rental revenue decrease within the Core
Portfolio is due almost exclusively to the impact of the major tenant bankruptcies including
Mervyns, Goodys, Linens N Things, Circuit City and Steve and Barrys. These bankruptcies have
also driven the Companys current lower occupancy level as compared to the Companys historical
levels.
At September 30, 2009, the aggregate occupancy rate of the Companys wholly-owned shopping
centers was 89.8%, as compared to 93.3% at September 30, 2008. The Company had 311 wholly-owned
shopping centers at September 30, 2009, as compared to 344 shopping centers at September 30, 2008.
The average annualized base rent per occupied square foot for wholly-owned shopping centers was
$11.73 at September 30, 2009, as compared to $11.68 at September 30, 2008. The decrease in
occupancy rate is primarily a result of the bankruptcies discussed above, excluding Mervyns.
At September 30, 2009, the aggregate occupancy rate of the Companys joint venture shopping
centers was 84.8%, as compared to 94.0% at September 30, 2008. The Companys joint ventures owned
353 shopping centers including 35 consolidated centers primarily owned through a joint venture
which owns sites previously occupied by Mervyns at September 30, 2009, as compared to 369 shopping
centers including 40 consolidated centers primarily owned through a joint venture which owns sites
previously occupied by Mervyns at September 30, 2008. The average annualized base rent per
occupied square foot was $13.36 at September 30, 2009, as compared to $13.15 at September 30, 2008.
The decrease in the occupancy rate and annualized base rent is primarily a result of the
bankruptcies discussed above as well as the impact of the vacancy of the Mervyns sites in 2009.
At September 30, 2009, the aggregate occupancy rate of the Companys business centers was
71.4%, as compared to 80.9% at September 30, 2008. The business center portfolio includes six
assets in four states at September 30, 2009 and 2008.
Recoveries from tenants decreased $10.6 million, or 7.3%, for the nine-month period ended
September 30, 2009, as compared to the same period in 2008. Recoveries were approximately 71.1%
- 51 -
and 80.4% of operating expenses and real estate taxes including bad debt expense for the
nine-months ended September 30, 2009 and 2008, respectively. The decrease in recoveries from
tenants was primarily a result of the decrease in occupancy of the Companys portfolio as discussed
above due to major tenant bankruptcies.
Ancillary revenue opportunities have historically included short-term and seasonal leasing
programs, outdoor advertising programs, wireless tower development programs, energy management
programs, sponsorship programs and various other programs.
The decrease in management, development and other fee income for the nine-month period ended
September 30, 2009, is primarily due to the following (in millions):
|
|
|
|
|
|
|
Decrease |
|
Development fee income |
|
$ |
(2.9 |
) |
Leasing commissions |
|
|
(0.1 |
) |
Decrease in property and asset management fee income at
various unconsolidated joint ventures |
|
|
(1.1 |
) |
|
|
|
|
|
|
$ |
(4.1 |
) |
|
|
|
|
The decrease in development fee income was primarily the result of the reduced construction
activity and the redevelopment of joint venture assets that are owned through the Companys
investments with the Coventry Real Estate Fund II (Coventry II Fund) discussed below. In light of
current market conditions, development fees may continue to decline if development or redevelopment
projects are delayed and/or cancelled. The reduction in management fees was primarily attributed
to tenant bankruptcies previously discussed and joint venture asset dispositions.
Other revenue was comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Lease termination fees |
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
$ |
3.4 |
|
|
$ |
5.0 |
|
Financing fees |
|
|
0.2 |
|
|
|
1.9 |
|
|
|
0.9 |
|
|
|
1.9 |
|
Other |
|
|
0.2 |
|
|
|
|
|
|
|
1.9 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.2 |
|
|
$ |
2.7 |
|
|
$ |
6.2 |
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Operating and maintenance |
|
$ |
36,952 |
|
|
$ |
34,572 |
|
|
$ |
2,380 |
|
|
|
6.9 |
% |
Real estate taxes |
|
|
27,965 |
|
|
|
26,872 |
|
|
|
1,093 |
|
|
|
4.1 |
|
Impairment charges |
|
|
2,653 |
|
|
|
|
|
|
|
2,653 |
|
|
|
100.0 |
|
General and administrative |
|
|
25,886 |
|
|
|
19,560 |
|
|
|
6,326 |
|
|
|
32.3 |
|
Depreciation and amortization |
|
|
53,621 |
|
|
|
60,031 |
|
|
|
(6,410 |
) |
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,077 |
|
|
$ |
141,035 |
|
|
$ |
6,042 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 52 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Operating and maintenance |
|
$ |
107,155 |
|
|
$ |
102,206 |
|
|
$ |
4,949 |
|
|
|
4.8 |
% |
Real estate taxes |
|
|
83,076 |
|
|
|
79,128 |
|
|
|
3,948 |
|
|
|
5.0 |
|
Impairment charges |
|
|
80,167 |
|
|
|
|
|
|
|
80,167 |
|
|
|
100.0 |
|
General and administrative |
|
|
73,469 |
|
|
|
61,607 |
|
|
|
11,862 |
|
|
|
19.3 |
|
Depreciation and amortization |
|
|
171,552 |
|
|
|
167,769 |
|
|
|
3,783 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
515,419 |
|
|
$ |
410,710 |
|
|
$ |
104,709 |
|
|
|
25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses include the Companys provision for bad debt expense,
disclosed below, which approximated 1.7% and 1.4% of total revenues for the nine-month periods
ended September 30, 2009 and 2008, respectively (see Economic Conditions). Also included in
operating and maintenance are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period |
|
Nine-Month Period |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Bad debt expense (a)
|
|
$ |
4.8 |
|
|
$ |
3.5 |
|
|
$ |
10.8 |
|
|
$ |
10.2 |
|
Ground Rent Expense (a) (b) |
|
|
1.3 |
|
|
|
1.0 |
|
|
|
3.5 |
|
|
|
3.1 |
|
|
|
|
(a) |
|
Includes discontinued operations. |
|
(b) |
|
Includes expense for the three-month periods ended September 30, 2009 and 2008
of approximately $0.6 million and $0.4 million, respectively, and for the nine-month
periods ended September 30, 2009 and 2008 of approximately $1.4 million and $1.3
million, respectively, related to the straight-line of ground leases. |
The increase in rental operation expenses, excluding general and administrative and
impairment charges, for the nine-month period ended September 30, 2009 compared to 2008, is due to
the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and |
|
|
Real Estate |
|
|
Depreciation and |
|
|
|
Maintenance |
|
|
Taxes |
|
|
Amortization |
|
Core Portfolio Properties |
|
$ |
3.0 |
|
|
$ |
2.0 |
|
|
$ |
1.4 |
(a) |
Development/redevelopment of
shopping center properties |
|
|
0.9 |
|
|
|
2.0 |
|
|
|
1.6 |
|
Provision for bad debt expense |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
Business center properties |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Personal property |
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.9 |
|
|
$ |
3.9 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily relates to accelerated depreciation due to changes in estimate
regarding asset useful lives and additional assets placed in service. |
The majority of the increase in operating and maintenance expenses is related to
increased landlord expenses primarily relating to the tenant vacancies, in particular the sites formerly occupied by Mervyns, which were generally triple net leased space. The Company is in the
process of appealing numerous real estate tax charges given the current economic environment and increased vacancy resulting from these tenant bankruptcies.
- 53 -
The Company recorded impairment charges of $145.7 million for the nine-month period ended
September 30, 2009 on various of its consolidated real estate investments of which $65.5 million is
reflected in discontinued operations. Of the aggregate amount, approximately $84.7 million in
asset impairments were triggered primarily due to the Companys marketing of assets for sale
combined with the overall economic downturn in the retail real estate environment during the
nine-months ended September 30, 2009. The remaining $61.0 million of impairment charges related to
13 assets formerly occupied by Mervyns, of which the Companys proportionate share of the charge
was $29.7 million after adjusting for the allocation of the loss to the non-controlling interest in
this consolidated joint venture.
The increase in general and administrative expenses is primarily attributable to the change
in control charge discussed below and payments required under newly executed compensation
agreements, partially offset by a reduction in 2009 expense as a result of the termination of a
supplemental equity award program in December 2008, lower headcount in 2009 as compared to 2008 and
a reduction in general corporate expenses. Total general and administrative expenses were
approximately 5.6% and 4.3% of total revenues, including total revenues of unconsolidated joint
ventures and discontinued operations, for the nine-month periods ended September 30, 2009 and 2008,
respectively.
In May 2009 and September 2009, the Company issued common shares as part of the transaction
with the Otto Family. The Otto Transaction was approved by the Companys shareholders in April
2009 resulting in a potential change in control under the Companys equity-based award plans. In
September 2009, as a result of the second closing in which the Otto Family acquired beneficial
ownership of more than 20% of the Companys outstanding common shares, a change in control
occurred under the Companys equity deferred compensation plans. All unvested stock options became
fully exercisable and all restrictions on unvested restricted shares lapsed, and in accordance with
the equity deferred compensation plans, all unvested deferred stock units vested and were no longer
subject to forfeiture. As such, in April 2009 and September 2009, the Company recorded an
accelerated non-cash charge of approximately $10.5 million and $4.9 million, respectively, related
to these equity awards. The total non-cash change in control charge recorded for the nine-month
period ended September 30, 2009 was $15.4 million.
The Company continues to expense internal leasing salaries, legal salaries and related
expenses associated with certain leasing and re-leasing of existing space. In addition, the Company
capitalized certain direct and incremental internal construction and software development and
implementation costs consisting of direct wages and benefits, travel expenses and office overhead
costs of $8.6 million and $11.8 million for the nine months ended September 30, 2009 and 2008,
respectively. The Company will cease the capitalization of these items as assets are placed in
service or upon the temporary suspension of construction. Because the Company has suspended certain
construction activities, the amount of capitalized costs has been reduced in 2009. In connection
with the anticipated reduced level of development spending, the Company has taken steps to reduce
overhead costs, such as reducing head count, in this area.
- 54 -
Other Income and Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
3,289 |
|
|
$ |
1,660 |
|
|
$ |
1,629 |
|
|
|
98.1 |
% |
Interest expense |
|
|
(57,268 |
) |
|
|
(61,713 |
) |
|
|
4,445 |
|
|
|
(7.2 |
) |
Gain on repurchases of senior notes |
|
|
23,881 |
|
|
|
|
|
|
|
23,881 |
|
|
|
100.0 |
|
Loss on equity derivative instruments |
|
|
(118,174 |
) |
|
|
|
|
|
|
(118,174 |
) |
|
|
100.0 |
|
Other income (expense), net |
|
|
2,203 |
|
|
|
(6,859 |
) |
|
|
9,062 |
|
|
|
(132.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(146,069 |
) |
|
$ |
(66,912 |
) |
|
$ |
(79,157 |
) |
|
|
118.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
9,546 |
|
|
$ |
2,775 |
|
|
$ |
6,771 |
|
|
|
244.0 |
% |
Interest expense |
|
|
(175,165 |
) |
|
|
(185,977 |
) |
|
|
10,812 |
|
|
|
(5.8 |
) |
Gain on repurchases of senior notes |
|
|
142,360 |
|
|
|
200 |
|
|
|
142,160 |
|
|
|
71,080.0 |
|
Loss on equity derivative
instruments |
|
|
(198,199 |
) |
|
|
|
|
|
|
(198,199 |
) |
|
|
100.0 |
|
Other expense, net |
|
|
(9,123 |
) |
|
|
(7,459 |
) |
|
|
(1,664 |
) |
|
|
22.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(230,581 |
) |
|
$ |
(190,461 |
) |
|
$ |
(40,120 |
) |
|
|
21.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income increased primarily due to interest earned from financing receivables which
aggregated $123.7 million at September 30, 2009 as compared to $38.3 million at September 30, 2008.
Interest
expense decreased primarily due to a reduction in outstanding debt
and a decrease in short-term interest rates,
partially offset by a decline in capitalized interest. The weighted-average debt outstanding and
related weighted-average interest rates are as follows (as adjusted):
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods |
|
|
Ended September 30, |
|
|
2009 |
|
2008 |
Weighted average debt outstanding (billions)
|
|
$ |
5.6 |
|
|
$ |
5.8 |
|
Weighted average interest rate
|
|
|
4.5 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
2009 |
|
2008 |
Weighted average interest rate
|
|
|
4.7 |
% |
|
|
4.9 |
% |
The reduction in weighted-average interest rates in 2009 is primarily related to the decline
in short-term interest rates. Interest costs capitalized in conjunction with development and
expansion projects and unconsolidated development joint venture interests were $5.7 million and
$17.3 million for the three- and nine-month periods ended September 30, 2009, respectively, as
compared to $10.4 million and $29.8 million for the same periods in 2008. The Company will cease
the capitalization of interest as assets are placed in service or upon the temporary suspension of
construction. Because the Company has suspended certain construction activities, the amount of
capitalized interest has decreased in 2009.
- 55 -
Gains on the repurchase of senior notes relates to the Companys purchase of
approximately $673.6 million aggregate principal amount of its outstanding senior unsecured notes
at a discount to par during the nine months ended September 30, 2009, resulting in a net GAAP gain
of $142.4 million. A portion of the $673.6 million occurred in September 2009 where the Company
purchased approximately $250.1 million face amount of its outstanding senior unsecured notes
through a cash tender offer.
Other income (expenses) for the third quarter of 2009 primarily related to a $3.5 million gain
on the sale of Macquarie DDR Trust units offset by litigation-related expenditures, the write off
of costs related to abandoned development projects, costs incurred for transactions that are not
expected to close and debt extinguishment costs. Other expenses for the nine months ended
September 30, 2009 also included a reserve associated with a mezzanine note receivable of $5.4
million and an $0.8 million loss on Macquarie DDR Trust units sold in the second quarter of 2009.
Other items (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
Equity in net (loss) income of joint ventures |
|
$ |
(183 |
) |
|
$ |
1,981 |
|
|
$ |
(2,164 |
) |
|
|
(109.2 |
)% |
Impairment of joint venture investments |
|
|
(61,200 |
) |
|
|
|
|
|
|
(61,200 |
) |
|
|
100.0 |
|
Tax (expense) benefit of taxable REIT subsidiaries
and state franchise and income taxes |
|
|
(639 |
) |
|
|
16,426 |
|
|
|
(17,065 |
) |
|
|
(103.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
Equity in net
(loss) income of
joint ventures |
|
$ |
(8,984 |
) |
|
$ |
21,924 |
|
|
$ |
(30,908 |
) |
|
|
(141.0 |
)% |
Impairment of joint
venture investments |
|
|
(101,571 |
) |
|
|
|
|
|
|
(101,571 |
) |
|
|
100.0 |
|
Tax (expense)
benefit of taxable
REIT subsidiaries
and state franchise
and income taxes |
|
|
(527 |
) |
|
|
15,111 |
|
|
|
(15,638 |
) |
|
|
(103.5 |
) |
A summary of the change in equity in net (loss) income of joint ventures for the nine-month
period ended September 30, 2009, is composed of the following (in millions):
|
|
|
|
|
|
|
Decrease |
|
Decrease in income from existing joint ventures, primarily due to
lower occupancy levels and ceasing of capitalizing interest and real
estate taxes on joint ventures previously under development due to a
reduction and/or cessation in construction activity |
|
$ |
(12.5 |
) |
Decrease in income at certain joint ventures primarily attributable to
loss on sale or impairment charges on unconsolidated assets |
|
|
(9.8 |
) |
Disposition of joint venture assets (see Off-Balance Sheet Arrangements) |
|
|
(8.6 |
) |
|
|
|
|
|
|
$ |
(30.9 |
) |
|
|
|
|
- 56 -
Impairment of joint venture investments is a result of the Companys determination that
several of the Companys unconsolidated joint venture investments suffered an other than temporary
impairment. For the three and nine months ended September 30, 2009, the Company recorded
impairment charges of approximately $61.2 million and $101.6 million, respectively, primarily
related to the Companys investments in the DDRTC Core Retail Fund LLC ($55.0 million) and DDR-SAU
Retail Fund LLC ($6.2 million) as well as investments with the Coventry II Fund ($40.4 million). A
loss in value of an investment under the equity method of accounting that is an other than
temporary decline must be recognized. The major factor contributing to the timing of the charges
recorded in the second quarter of 2009 on the Coventry II Fund investments was the communication by
Coventry II Fund investors indicating they would not contribute any additional capital for any of
the projects.
In the third quarter of 2008, the Company recognized a $16.7 million income tax benefit.
Approximately $15.6 million of this amount related to the release of valuation allowances
associated with deferred tax assets that were established in prior years. These valuation
allowances were previously established due to the uncertainty that the deferred tax assets would be
able to be utilized.
In order to maintain its REIT status, the Company must meet certain income tests to ensure
that its gross income consists of passive income and not income from the active conduct of a trade
or business. The Company utilizes its Taxable REIT Subsidiary (TRS) to the extent certain fee and
other miscellaneous non-real estate related income cannot be earned by the REIT. During the third
quarter of 2008, the Company began recognizing certain fee and miscellaneous other non-real estate
related income within its TRS.
Therefore, based on the Companys evaluation of the current facts and circumstances, the
Company determined during the third quarter of 2008 that the valuation allowance should be released
as it was more likely than not that the deferred tax assets would be utilized in future years. This
determination was based upon the increase in fee and miscellaneous other non-real estate related
income which is projected to be recognized within the Companys TRS.
Discontinued Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
|
|
|
|
Ended September 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
Income from discontinued operations |
|
$ |
678 |
|
|
$ |
3,133 |
|
|
$ |
(2,455 |
) |
|
|
(78.4 |
)% |
Gain (loss) on disposition of real estate, net of tax |
|
|
4,448 |
|
|
|
(2,717 |
) |
|
|
7,165 |
|
|
|
(263.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods |
|
|
|
|
|
|
Ended September 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
(Loss) income from discontinued operations |
|
$ |
(61,994 |
) |
|
$ |
7,955 |
|
|
$ |
(69,949 |
) |
|
|
(879.3 |
)% |
Loss on disposition of real estate, net of tax |
|
|
(19,965 |
) |
|
|
(1,830 |
) |
|
|
(18,135 |
) |
|
|
991.0 |
|
Included in discontinued operations for the three- and nine-month periods ended September
30, 2009 and 2008, are 27 properties sold in 2009 aggregating 3.2 million square feet, and 22
properties sold in 2008 (including one business center and one property classified as held for sale
at December 31, 2007) aggregating 1.3 million square feet. In addition, included in the reported
loss for the nine- month period ended September 30, 2009 is $65.5 million of impairment charges on assets sold in
2009.
- 57 -
Gain on Disposition of Real Estate (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
% |
|
|
2009 |
|
2008 |
|
$ Change |
|
Change |
Gain on disposition of real estate, net of tax |
|
$7,128 |
|
$3,093 |
|
$4,035 |
|
130.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
% |
|
|
2009 |
|
2008 |
|
$ Change |
|
Change |
Gain on disposition of real estate, net of tax |
|
$8,222 |
|
$6,368 |
|
$1,854 |
|
29.1% |
The Company recorded net gains on disposition of real estate and real estate investments
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Land sales (a) |
|
$ |
7.3 |
|
|
$ |
3.0 |
|
|
$ |
7.3 |
|
|
$ |
5.7 |
|
Previously deferred
gains and other gains
and losses on
dispositions
(b) |
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
0.9 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7.1 |
|
|
$ |
3.1 |
|
|
$ |
8.2 |
|
|
$ |
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These dispositions did not meet the criteria for discontinued operations as the
land did not have any significant operations prior to disposition. |
|
(b) |
|
These gains and losses are primarily attributable to the subsequent leasing of
units subject to master leases and other obligations originally established on disposed
properties, which are no longer required. |
Non-controlling interests (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
Non-controlling
interests loss
(income) |
|
$ |
2,804 |
|
|
$ |
(1,579 |
) |
|
$ |
4,383 |
|
|
|
(277.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
Non-controlling interests loss (income) |
|
$ |
39,848 |
|
|
$ |
(5,975 |
) |
|
$ |
45,823 |
|
|
|
(766.9 |
)% |
- 58 -
Non-controlling interests decreased for the nine-month period ended September 30, 2009,
primarily due to the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
DDR MDT MV LLC (owned approximately 50% by the Company) (a) |
|
$ |
(44.3 |
) |
Net loss from consolidated joint venture investments |
|
|
(0.5 |
) |
Conversion of 0.5 million operating partnership units to common shares |
|
|
(0.3 |
) |
Decrease in the quarterly distribution to operating partnership units investments |
|
|
(0.7 |
) |
|
|
|
|
|
|
$ |
(45.8 |
) |
|
|
|
|
|
|
|
(a) |
|
The joint venture owns 32 locations formerly occupied by Mervyns, which
declared bankruptcy in 2008 and vacated all sites as of December 31, 2008. This amount is
primarily the result of the $61.0 million in impairment charges recorded on 13 of the assets
during the nine-month period ended September 30, 2009. |
Net Income (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Net (loss) income attributable to DDR |
|
$ |
(137,846 |
) |
|
$ |
35,250 |
|
|
$ |
(173,096 |
) |
|
|
(491.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Net (loss) income attributable to DDR |
|
$ |
(277,029 |
) |
|
$ |
112,074 |
|
|
$ |
(389,103 |
) |
|
|
(347.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in net (loss) income attributable to DDR for the three- and nine-month
periods ended September 30, 2009 is primarily related to non-operating activity consisting of
impairment charges, loss on sale of assets and equity derivative related charges in addition to several major tenant bankruptcies in late 2008 and early 2009,
offset by gains on
debt repurchases, as well as lower interest rates on variable
rate debt. Also contributing to the decrease was a
release of an approximately $16 million deferred tax allowance
in 2008 as well as the impact of asset sales
associated with the Companys deleveraging efforts. A summary of changes in 2009 as compared to 2008 is as follows (in millions):
- 59 -
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period |
|
|
Nine-Month Period |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
Decrease in net operating revenues (total revenues
in excess of operating and maintenance expenses and
real estate taxes) |
|
$ |
(24.0 |
) |
|
$ |
(64.7 |
) |
Increase in impairment charges |
|
|
(2.7 |
) |
|
|
(80.2 |
) |
Increase in general and administrative expenses |
|
|
(6.3 |
) |
|
|
(11.9 |
) |
Decrease (increase) in depreciation expense |
|
|
6.4 |
|
|
|
(3.8 |
) |
Increase in interest income |
|
|
1.6 |
|
|
|
6.8 |
|
Decrease in interest expense |
|
|
4.4 |
|
|
|
10.8 |
|
Increase in gain on repurchases of senior notes |
|
|
23.9 |
|
|
|
142.2 |
|
Change in equity derivative instruments |
|
|
(118.2 |
) |
|
|
(198.2 |
) |
Change in other expense |
|
|
9.1 |
|
|
|
(1.7 |
) |
Decrease in equity in net income of joint ventures |
|
|
(2.2 |
) |
|
|
(30.9 |
) |
Increase in impairment of joint ventures investments |
|
|
(61.2 |
) |
|
|
(101.6 |
) |
Change in income tax benefit/expense |
|
|
(17.1 |
) |
|
|
(15.6 |
) |
Decrease in income from discontinued operations |
|
|
(2.4 |
) |
|
|
(69.9 |
) |
Increase (decrease) in gain on disposition of real
estate of discontinued operations properties |
|
|
7.2 |
|
|
|
(18.1 |
) |
Increase in gain on disposition of real estate |
|
|
4.0 |
|
|
|
1.9 |
|
Decrease in non-controlling interest expense |
|
|
4.4 |
|
|
|
45.8 |
|
|
|
|
|
|
|
|
Increase in net loss attributable to DDR |
|
$ |
(173.1 |
) |
|
$ |
(389.1 |
) |
|
|
|
|
|
|
|
Funds From Operations
The Company believes that FFO, which is a non-GAAP financial measure, provides an additional
and useful means to assess the financial performance of REITs. FFO is frequently used by securities
analysts, investors and other interested parties to evaluate the performance of REITs, most of
which present FFO along with net income attributable to DDR as calculated in accordance with GAAP.
FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate
and real estate investments, which assumes 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 utilize different depreciable lives and methods. Because FFO excludes
depreciation and amortization unique to real estate, gains and certain losses from depreciable
property dispositions and extraordinary items, it provides a performance measure that, when
compared year over year, reflects the impact on operations from trends in occupancy rates, rental
rates, operating costs, acquisition and development activities and interest costs. This provides a
perspective of the Companys 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 from disposition of depreciable real estate
property, except for those sold through the Companys merchant building program, which are
presented net of taxes, (iii) extraordinary items and (iv) certain non-cash items. These non-cash
items principally include real property depreciation, equity income (loss) from joint ventures and
equity income (loss) from non-controlling interests and adding the Companys proportionate share of FFO from its
unconsolidated joint ventures and non-controlling interests, determined on a consistent basis.
- 60 -
For the reasons described above, management believes that FFO provides the Company and
investors with an important indicator of the Companys operating performance. It provides a
recognized measure of performance other than GAAP net income, which may include non-cash items
(often significant). Other real estate companies may calculate FFO in a different manner.
This measure of performance is used by the Company for several business purposes and by other
REITs. The Company uses FFO in part (i) as a measure of a real estate assets performance, (ii) to
shape acquisition, disposition and capital investment strategies and (iii) to compare the Companys
performance to that of other publicly traded shopping center REITs.
Management recognizes FFOs limitations when compared to GAAPs income from continuing
operations. FFO does not represent amounts available for needed capital replacement or expansion,
debt service obligations, or other commitments and uncertainties. Management does not use FFO as an
indicator of the Companys cash obligations and funding requirements for future commitments,
acquisitions or development activities. FFO does not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash
needs, including the payment of dividends. FFO should not 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 is simply used as an additional indicator of the Companys operating performance.
For the three-month period ended September 30, 2009, FFO applicable to DDR common shareholders
was a loss of $90.1 million, as compared to adjusted FFO income of $96.7 million for the same
period in 2008. For the nine-month period ended September 30, 2009, FFO applicable to DDR common
shareholders was a loss of $116.6 million, as compared to adjusted FFO income of $288.9 million for
the same period in 2008. The decrease in FFO applicable to common shareholders for the three- and
nine-month periods ended September 30, 2009 is primarily related to non-operating activity
including impairment charges, loss on sale of assets and equity derivative related charges, in addition to several major tenant bankruptcies in late 2008 and
early 2009, offset
by gains on debt repurchases as well as lower interest rates
on variable rate debt. Also contributing to the decrease was a
release of an approximately $16 million deferred tax allowance
in 2008 as well as the impact
of asset sales associated with the Companys deleveraging efforts.
- 61 -
The Companys calculation of FFO is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net (loss) income applicable to DDR common
shareholders (1) |
|
$ |
(148,413 |
) |
|
$ |
24,683 |
|
|
$ |
(308,731 |
) |
|
$ |
80,372 |
|
Depreciation and amortization of real estate
investments |
|
|
51,635 |
|
|
|
61,099 |
|
|
|
170,236 |
|
|
|
172,740 |
|
Equity in net loss (income) of joint ventures |
|
|
183 |
|
|
|
(1,981 |
) |
|
|
8,557 |
|
|
|
(21,924 |
) |
Joint ventures FFO (2) |
|
|
13,584 |
|
|
|
15,833 |
|
|
|
32,553 |
|
|
|
60,922 |
|
Non-controlling interests (OP Units) |
|
|
8 |
|
|
|
261 |
|
|
|
167 |
|
|
|
1,145 |
|
Gain on disposition of depreciable real
estate (3) |
|
|
(7,130 |
) |
|
|
(3,170 |
) |
|
|
(19,405 |
) |
|
|
(4,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO applicable to DDR common shareholders |
|
|
(90,133 |
) |
|
|
96,725 |
|
|
|
(116,623 |
) |
|
|
288,934 |
|
Preferred dividends |
|
|
10,567 |
|
|
|
10,567 |
|
|
|
31,702 |
|
|
|
31,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFO |
|
$ |
(79,566 |
) |
|
$ |
107,292 |
|
|
$ |
(84,921 |
) |
|
$ |
320,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes straight-line rental revenues of approximately $1.1 million and $2.3
million for the three-month periods ended September 30, 2009 and 2008,
respectively, and $2.5 million and $7.2 million for the nine-month periods ended
September 30, 2009 and 2008, respectively. |
|
(2) |
|
Joint ventures FFO is summarized as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net (loss) income (a) |
|
$ |
(32,244 |
) |
|
$ |
(22,793 |
) |
|
$ |
(95,179 |
) |
|
$ |
75,583 |
|
Gain on disposition of real estate, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Depreciation and amortization of real
estate investments |
|
|
62,434 |
|
|
|
59,274 |
|
|
|
189,472 |
|
|
|
175,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,190 |
|
|
$ |
36,481 |
|
|
$ |
94,293 |
|
|
$ |
251,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDR ownership interest (b) |
|
$ |
13,584 |
|
|
$ |
15,883 |
|
|
$ |
32,553 |
|
|
$ |
60,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes straight-line rental revenue of approximately $1.4 million and
$1.5 million for the three-month periods ended September 30, 2009 and 2008,
respectively, of which the Companys proportionate share was $0.2 million
for both periods. For the nine-month periods ended September 30, 3009 and
2008, includes straight-line rental revenue of approximately $3.0 million
and $5.7 million, respectively, of which the Companys proportionate share
was $0.3 million and $0.7 million, respectively. |
|
(b) |
|
The Companys share of joint venture net loss was
decreased by $1.2 million and the equity in net income was decreased by $0.6
million for the three-month periods ended September 30, 2009 and 2008,
respectively. The Companys share of joint venture net loss was decreased by
$3.4 million and the equity in net income was decreased by $0.9 million for
the nine-month periods ended September 30, 2009 and 2008, respectively,
related to basis differences in depreciation and adjustments to gain on
sales. |
|
|
|
At September 30, 2009 and 2008, the Company owned unconsolidated joint venture
interests relating to 318 and 329 operating shopping center properties,
respectively. |
- 62 -
|
|
|
(3) |
|
The amount reflected as gain on disposition of real estate and real
estate investments from continuing operations in the condensed consolidated
statements of operations includes residual land sales, which management considers
to be the disposition of non-depreciable real property and the sale of newly
developed shopping centers. These dispositions are included in the Companys FFO
and therefore are not reflected as an adjustment to FFO. For the three-month
periods ended September 30, 2009 and 2008, net gains resulting from residual land
sales aggregated $7.3 million and $3.0 million, respectively. For the nine-month
periods ended September 30, 2009 and 2008, net gains resulting from residual land
sales aggregated $7.3 million and $5.7 million, respectively. |
Liquidity and Capital Resources
The Company relies on capital to buy, develop and improve its shopping center properties, as
well as repay its obligations as they become due. Events in 2008 and continuing into 2009,
including recent failures and near failures of a number of large financial services companies, have
made the capital markets volatile. The Company periodically evaluates opportunities to issue and
sell additional debt or equity securities, obtain credit facilities from lenders, or repurchase,
refinance or otherwise restructure long-term debt for strategic reasons, or to further strengthen
the financial position of the Company and anticipates utilizing a combination of these capital
sources to achieve its goal of deleveraging.
The Company maintains an unsecured revolving credit facility with a syndicate of financial
institutions, for which JP Morgan serves as the administrative agent (the Unsecured Credit
Facility). The Unsecured Credit Facility provides for borrowings of $1.25 billion if certain
financial covenants are maintained and an accordion feature for a future expansion to $1.4 billion
upon the Companys request, provided that new or existing lenders agree to the existing terms of
the facility and increase their commitment level, and a maturity date of June 2010, with a one-year
extension option at the option of the Company. The Company also maintains a $75 million unsecured
revolving credit facility with National City Bank (together with the Unsecured Credit Facility, the
Revolving Credit Facilities). This facility has a maturity date of June 2010, with a one-year
extension option at the option of the Company subject to certain customary closing conditions.
The Companys Revolving Credit Facilities and the indentures under which the Companys senior
and subordinated unsecured indebtedness is, or may be, issued, contain certain financial and
operating covenants, including, among other things, leverage ratios, debt service coverage and
fixed charge coverage ratios, as well as limitations on the Companys ability to incur secured and
unsecured indebtedness, sell all or substantially all of the Companys assets and engage in mergers
and certain acquisitions. The Revolving Credit Facilities and indentures also contain customary
default provisions including the failure to timely pay principal and interest issued thereunder,
the failure to comply with the Companys financial and operating covenants, the occurrence of a
material adverse effect on the Company, and the failure to pay when due any other Company
consolidated indebtedness (including non-recourse obligations) in excess of certain specified
levels. In the event the Companys lenders declare a default, as defined in the applicable loan
documentation, this could result in the inability to obtain further funding and/or an acceleration
of any outstanding borrowings.
As
of September 30, 2009, the Company was in compliance with all of
its financial covenants under its Unsecured Credit Facilities, term debt and senior notes.
However, due to the economic environment, the Company has less financial flexibility than desired
given the current market dislocation. The Companys current business plans indicate that it will be
able to operate in compliance with these covenants for the remainder of 2009 and beyond. However,
- 63 -
the current economic downturn, along with the dislocation in the global credit markets, has
significantly impacted the projected cash flows, financial position and effective leverage of the
Company. If there is a continued decline in the retail and real estate industries and/or the
Company is unable to successfully execute its plans as further described below, the Company could
violate these financial covenants, and as a result may be subject to higher finance costs and fees
and/or accelerated maturities. In addition, certain of the Companys credit facilities and
indentures permit the acceleration of the maturity of debt issued thereunder in the event certain
other debt of the Company has been accelerated. Furthermore, a default under a loan to 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, would have a negative impact on the Companys
financial condition, cash flows and results of operations. These facts and an inability to predict
future economic conditions have encouraged the Company to adopt a strict focus on lowering
leverage, increasing its financial flexibility and improving its liquidity.
At September 30, 2009, the following information summarizes the availability of the Revolving
Credit Facilities (in billions):
|
|
|
|
|
Revolving Credit Facilities |
|
$ |
1.325 |
|
Less: |
|
|
|
|
Amount outstanding |
|
|
(0.826 |
) |
Unfunded Lehman Brothers Holdings Commitment |
|
|
(0.008 |
) |
Letters of credit |
|
|
(0.005 |
) |
|
|
|
|
Amount Available |
|
$ |
0.486 |
|
|
|
|
|
As of September 30, 2009, the Company had cash and line of credit availability aggregating
$0.5 billion. As of September 30, 2009, the Company also had 257 unencumbered consolidated
operating properties generating $302.4 million, or 47.9%, of the total revenue of the Company for
the nine months ended September 30, 2009, thereby providing a potential collateral base for future
borrowings or to sell to generate cash proceeds, subject to consideration of the financial
covenants on unsecured borrowings.
In 2008, Lehman Brothers Holdings Inc. (Lehman Holdings) filed for protection under Chapter
11 of the United States Bankruptcy Code. Subsequently, Lehman Commercial Paper Inc. (Lehman CPI),
a subsidiary of Lehman Holdings, also filed for protection under Chapter 11 of the United States
Bankruptcy Code. Lehman CPI had a $20.0 million credit commitment under the Unsecured Credit
Facility and, at the time of the filing of this quarterly report, approximately $7.6 million of
Lehman CPIs commitment was undrawn. The Company was notified that Lehman CPIs commitment would
not be assumed. As a result, the Companys availability under the Unsecured Credit Facility was
effectively reduced by approximately $7.6 million. The Company does not believe that this reduction
of credit has a material effect on the Companys liquidity and capital resources.
The Company anticipates that cash flow from operating activities will continue to provide
adequate capital for all scheduled interest and monthly principal payments on outstanding
indebtedness, recurring tenant improvements and dividend payments in accordance with REIT
requirements.
- 64 -
The retail and real estate markets have been significantly impacted by the continued
deterioration of the global credit markets and other macro economic factors including, among
others, rising unemployment and a decline in consumer confidence leading to a decline in consumer
spending. Although a majority of the Companys tenants (in particular the anchor tenants) remain in
relatively strong financial standing, the current economic environment has resulted in tenant
bankruptcies affecting the Companys real estate portfolio, including Mervyns, Linens N Things,
Steve and Barrys, Goodys and Circuit City, which occurred primarily in the second half of 2008.
In addition, certain other tenants may be experiencing financial difficulties. The decrease in
occupancy and the projected timing associated with re-leasing these vacated spaces has resulted in
downward pressure on the Companys 2009 operating results. The reduced occupancy will likely have
a negative impact on the Companys consolidated cash flows, results of operations, financial
position and financial ratios that are integral to the continued compliance with the covenants on
the Companys revolving credit facilities as further described above. Offsetting some of the
current challenges within the retail environment, the Company has a low occupancy cost relative to
other retail formats and historical averages, as well as a diversified tenant base with only one
tenant exceeding 2.0% of total consolidated revenues, Walmart at 5.3%. Other significant tenants
include Target, Lowes Home Improvement, Home Depot, Kohls, T.J. Maxx/Marshalls, Publix
Supermarkets, PetSmart and Bed Bath & Beyond, all of which have relatively strong credit ratings.
Management believes these tenants should continue providing the Company 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 Companys shopping centers provide day-to-day consumer necessities with a focus
toward value and convenience versus high-priced discretionary luxury items, which should enable
many tenants to continue operating within this challenging economic environment.
The Company is committed to prudently managing and minimizing discretionary operating and
capital expenditures and raising the necessary equity and debt capital to maximize its liquidity,
repay its outstanding borrowings as they mature and comply with its financial covenants for the
remainder of 2009 and beyond. As discussed below, the Company has already implemented several steps
integral to the successful execution of its plans to raise additional equity and debt capital
through a combination of retained capital, the issuance of common shares, debt financing and
refinancing and asset sales. In addition, the Company will continue to strategically utilize
proceeds from the above sources to repay outstanding borrowings on its credit facilities and
strategically repurchase its publicly traded debt at a discount to par to further improve its
leverage ratios.
|
|
|
Retained Equity With regard to retained capital, the Company has adjusted its
dividend policy to the minimum required to maintain its REIT status. The Company did not
pay a dividend in January 2009 as it had already distributed sufficient funds to comply
with its 2008 tax requirements. Moreover, the Company funded its first and second
quarter 2009 dividends in a combination of 90% DDR common shares and 10% cash. After it
was determined that the Company would be able to meet the minimum payout required to
maintain its REIT status for 2009, the Companys Board of Directors approved the
continuation of the cash portion of the prior two quarters dividend in order to retain
additional capital and enhance financial flexibility, while remaining committed to
distributing cash flow to the Companys investors. As a result, the Company declared an
all cash dividend of $0.02 per common share in the third quarter of 2009. The changes to
the Companys 2009 dividend policy to date have resulted in additional free cash flow,
which has been applied primarily to reduce leverage. This change in the Companys
quarterly
|
- 65 -
|
|
|
dividend payments, including the elimination of a quarterly payment of a dividend in
January 2009, is expected to result in approximately $300 million of retained capital in
2009 relative to the Companys 2008 dividend policy. |
|
|
|
|
Issuance of Common Shares The Company has several alternatives to raise equity
through the sale of its common shares. In May and September 2009, the Company issued
common shares as part of the transaction with the Otto Family, resulting in aggregate
gross equity proceeds of approximately $112.5 million (See Strategic Transactions). The
Company used the total gross proceeds to reduce leverage. The Company also raised $157.6
million through the issuance of 18.6 million common shares at a weighted average price of
$8.46 per share during the nine months ended September 30, 2009, under the continuous
equity program. The Company expects to commence a new common equity program pursuant to
which the Company can sell equity into the open market from time to time at its
discretion at other than fixed prices. |
|
|
|
|
Debt Financing and Refinancing The Company does not have any remaining 2009
maturities for wholly-owned debt. As a result, the Company is currently focused on
extending or refinancing 2010 maturities, all but six of the Companys wholly-owned 2010
mortgage maturities aggregating approximately $59 million have been addressed. |
|
|
|
|
In September 2009, the Company issued $300 million aggregate principal amount of 9.625%
senior unsecured notes due March 2016. The notes were offered to investors at 99.42% of
par with a yield to maturity of 9.75%. The net proceeds were utilized to repay debt with
shorter term maturities and to reduce balances on the Companys revolving credit
facilities. In July 2009, the Company obtained $17 million of mortgage debt from a life
insurance company on two shopping centers at a 6% interest rate and maturing in 2017. |
|
|
|
|
In October 2009, the Company obtained a $400 million, five-year loan secured by a
portfolio of 28 stabilized shopping centers from Goldman Sachs Commercial Mortgage
Capital, L.P., an affiliate of Goldman, Sachs & Co. |
|
|
|
|
Asset Sales For the nine months ended September 2009, the Company and both its
consolidated and unconsolidated joint ventures sold numerous assets generating nearly
$450 million in estimated total proceeds. The Company and its joint ventures are also in
various stages of discussions with third parties for the sale of additional non-prime
assets. |
|
|
|
|
Debt Repurchases Because of the current economic environment, the Companys
publicly traded debt securities have been trading at discounts to par. During the first
nine months of 2009, the Company repurchased approximately $673.6 million aggregate
principal amount of its outstanding senior unsecured notes at a cash discount to par
aggregating $164.3 million. Although the Company will evaluate all of its alternatives to
optimize its use of cash generated from the sources above to achieve the strategic goal
of de-leveraging, the Company expects that it will continue to opportunistically
repurchase its debt securities at a discount to par to further improve its leverage
ratios. |
As described above, although the Company believes it has made considerable progress in
implementing the steps to address its objectives of reducing leverage and continuing to comply with
its covenants and repay obligations as they become due, certain transactions may not close as
- 66 -
anticipated, or at all and, therefore, there can be no assurances that the Company will be
able to execute these plans, which could adversely impact the Companys operations, including its
ability to remain compliant with its covenants and repay the Companys obligations as they become
due.
As discussed above, part of the Companys overall strategy includes actively addressing debt
maturing after 2009, and considering alternative courses of action in the event that the capital
markets continue to be volatile. The Company has been very careful to balance the amount and
timing of its debt maturities. For the nine months ended September 30, 2009, the Company purchased
$673.6 million of aggregate principal amount of its outstanding senior unsecured notes at a
discount to par. The Company has no major maturities until May 2010, providing time to address the
larger maturities (including the Companys credit facilities) which occur in 2010 through 2012. The
Company continually evaluates its debt maturities, and based on managements current assessment,
believes it has viable financing and refinancing alternatives that may materially impact its
expected financial results as interest rates in the future will likely be at levels higher than the
amounts it is presently incurring. Although the credit environment has become much more difficult
since the third quarter of 2008, the Company continues to pursue opportunities with the largest
U.S. banks, select life insurance companies, certain local banks, some international lenders and
the United States Term Asset Backed Securities Loan Facility (TALF) program. The approval
process from the lenders has slowed, but lenders are continuing to execute financing agreements.
While pricing and loan-to-value ratios remain dependent on specific deal terms pricing spreads, in
general, are higher and loan-to-values ratios are lower. Moreover, the Company continues to look
beyond 2009 to ensure that the Company is prepared if the current credit market dislocation
continues (See Contractual Obligations and Other Commitments).
At September 30, 2009, the Companys 2010 debt maturities consist of: $375.2 million of
unsecured notes, of which $151.2 million mature in May 2010 and $224.0 million mature in August
2010; $384.1 million of consolidated mortgage debt; $63.8 million of construction loans; $826.3
million of Unsecured Revolving Credit Facilities (subject to extension as described above) and $1.7
billion of unconsolidated joint venture mortgage debt (of which the Companys proportionate share
is $0.4 billion). The Companys Unsecured Revolving Credit Facilities allow for a one-year
extension option at the option of the Company to June 2011. The Company repaid approximately $112.8
million of the 2010 mortgage debt maturities in October 2009. At September 30, 2009,
unconsolidated joint venture mortgage debt of $220.7 million
maturing in 2009 (of which the Companys proportionate share is
$70.8 million) consists of $111.1
million of debt attributable to the DDR Macquarie Fund (see Off Balance Sheet Arrangements) and
$105.5 million of debt attributable to the Coventry II Fund assets (see Coventry II Fund discussion
above). The Companys proportionate share consists off $55.6 million of debt attributable to the
DDR Macquarie Fund and $13.2 million of debt attributable to Coventry II assets. At September 30,
2009, the Companys unconsolidated joint venture mortgage debt of maturing in 2010 aggregated $1.7
billion, of which the Companys proportionate share is $372.5 million. Of the 2010 unconsolidated
joint venture mortgage debt, the Company or the joint venture has the option to extend
approximately $584.7 million at existing terms. The Companys share of unconsolidated joint venture
mortgage debt maturing in 2010 was reduced by $67.9 million in October 2009 in connection with the
redemption of its interest in the MDT US LLC joint venture (See Off-Balance Sheet Arrangements).
In the first nine months of 2009, the Company repurchased approximately $122.8 million
aggregate principal amount of the senior unsecured notes maturing in 2010, approximately $166.2
million aggregate principal amount of senior unsecured notes maturing in 2011 and approximately
- 67 -
$336.5 million aggregate principal amount of the senior unsecured notes maturing in 2012 with
proceeds from its Unsecured Credit Facilities. The Company may repurchase additional unsecured
notes in the public market as operating cash and/or cash from equity and debt financings becomes
available.
These obligations generally require monthly payments of principal and/or interest over the
term of the obligation. In light of the current economic conditions, no assurance can be provided
that the aforementioned obligations will be refinanced or repaid as currently anticipated. Also,
additional financing may not be available at all or on terms favorable to the Company (See
Contractual Obligations and Other Commitments).
The Companys core business of leasing space to well-capitalized retailers continues to
perform well, as the Companys primarily discount-oriented tenants gain market share from retailers
offering higher price points and offering more discretionary goods. These long-term leases generate
consistent and predictable cash flow after expenses, interest payments and preferred share
dividends. This capital is available for use at the Companys discretion for investment, debt
repayment, share repurchases and the payment of dividends on the common shares.
The Companys cash flow activities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Cash flow provided by operating activities |
|
$ |
216,651 |
|
|
$ |
304,155 |
|
Cash flow provided by (used for) investing activities |
|
|
136,328 |
|
|
|
(383,663 |
) |
Cash flow (used for) provided by financing activities |
|
|
(354,704 |
) |
|
|
59,815 |
|
Operating Activities: The decrease in cash flow from operating activities in the nine
months ended September 30, 2009 as compared to the same period in 2008, was primarily due to a
decrease in the level of distributions from the Companys unconsolidated joint ventures and the
impact from the previously discussed bankruptcies and asset dispositions.
Investing Activities: The change in cash flow from investing activities for the nine months
ended September 30, 2009 as compared to the same period in 2008, was primarily due to a reduction
in capital expenditure spending for redevelopment and ground-up development projects as well as an
increase in the level of proceeds generated from asset dispositions.
Financing Activities: The change in cash used for financing activities for the nine months
ended September 30, 2009 as compared to the same period in 2008, is primarily due to debt
repurchases partially offset by a reduction in the cash dividends paid in 2009 and increased
proceeds from the issuance of common shares and senior notes.
The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable
income with declared common and preferred share dividends of $92.2 million for the first three
quarters of 2009, as compared to prior year $280.3 million of cash dividends for the same period in
2008. Accordingly, federal income taxes have not been incurred within the REIT for 2009.
- 68 -
The Company declared a quarterly dividend of $0.20 per common share for the first and second
quarters of 2009, payable in either cash or common shares at the election of shareholders, provided
that the dividends payable in cash could not exceed 10% of the aggregate dividend. The Company
declared a third quarter dividend of $0.02 per common share in September 2009, payable entirely in
cash. Based upon the Companys current results of operations and debt maturities, the Companys
Board of Directors approved a 2009 dividend policy that will maximize the Companys free cash flow,
while still adhering to REIT payout requirements. This payout policy will result in a 2009 annual
dividend at or near the minimum distribution required to maintain REIT status. The Company will
continue to monitor the 2009 dividend policy and provide for adjustments as determined in the best
interest of the Company and its shareholders. The 2009 payout policy should result in additional
free cash flow, which is expected to be applied primarily to reduce leverage (see Off-Balance Sheet
Arrangements and Contractual Obligations and Other Commitments for further discussion of capital
resources).
Current Strategies
Strategic Transactions
Otto Transaction
On February 23, 2009, the Company entered into a stock purchase agreement (the Stock Purchase
Agreement) with the Investor to issue and sell 30.0 million common shares to the members of the Otto
Family for aggregate gross proceeds of approximately $112.5 million. In addition, the Company
issued warrants to purchase up to 10.0 million common shares with an exercise price of $6.00 per
share to the Otto Family. Under the terms of the Stock Purchase Agreement, the Company issued
additional common shares to the Otto Family in an amount equal to any dividends payable in shares
declared by the Company after February 23, 2009 and prior to the applicable closing of the stock
purchase to the extent payable in common shares which the dividend is payable to all shareholders
all or in part with Company stock.
On April 9, 2009, the Companys shareholders approved the sale of the common shares and
warrants to the Otto Family pursuant to the Otto Transaction. The transaction occurred in two
closings. In May 2009, the Company issued and sold 15.0 million common shares and warrants to
purchase 5.0 million common shares to the Otto Family for a purchase price of $52.5 million. In
September 2009, the Company issued and sold 15.0 million common shares and warrants to purchase 5.0
million common shares to the Otto Family for a purchase price of $60.0 million. The Company also
issued an additional 1,071,428 common shares as a result of the first quarter 2009 dividend to the
Otto Family associated with the initial 15.0 million common shares and 1,787,304 common shares as a
result of the first and second quarter 2009 dividends to the Otto Family associated with the second
15.0 million common shares. As a result, the Company issued 32.8 million common shares and warrants
to purchase 10.0 million common shares to the Otto Family in 2009.
The shareholders approval of the Otto Transaction in April 2009 resulted in a potential
change in control under the Companys equity-based award plans. In addition, in September 2009 as
a result of the second closing in which the Otto Family acquired beneficial ownership of more than
20% of the Companys outstanding common shares, a change in control was deemed to have
- 69 -
occurred under the Companys equity deferred compensation plans. In accordance with the
equity-based award plans, all unvested stock options became fully exercisable and all restrictions
on unvested shares lapsed, and, in accordance with the equity deferred compensation plans, all
unvested deferred stock units vested and were no longer subject to forfeiture. As such, in
September 2009, the Company recorded an additional accelerated non-cash charge of approximately
$4.9 million related to these equity awards. The total non-cash change in control charge recorded
for the nine-month period ended September 30, 2009 was $15.4 million.
The equity forward commitments and warrants are considered derivatives. However, the equity
forward commitments and warrants did not qualify for equity treatment due to the existence of
downward price protection provisions. As a result, both instruments were required to be recorded
at fair value as of the shareholder approval date of April 9, 2009, and marked-to-market through
earnings as of each balance sheet date thereafter until exercise or expiration. Accordingly, the
Company reported an aggregate non-cash loss of $118.2 million and $198.2 million relating to the
valuation adjustments associated with these instruments for the three- and nine-month periods
ending September 30, 2009, respectively.
Dispositions
The Company sold 27 properties, aggregating 3.2 million square feet, in the nine months ended
September 30, 2009, generating an aggregate loss on disposition of approximately $20.0 million
related to these consolidated assets. The Companys unconsolidated joint ventures sold 12
properties, aggregating 2.1 million square feet in the nine months ended September 2009, generating
gross proceeds of $141.0 million and an aggregate loss on disposition of approximately $19.9
million.
As part of the Companys deleveraging strategy, the Company is actively marketing non-prime
assets for sale. Opportunities for large portfolio asset sales are not occurring as frequently;
therefore, the Company is also focusing on selling single tenant assets and smaller shopping
centers. For certain real estate assets in which the Company has entered into agreements and are
subject to contingencies subsequent to September 30, 2009, a loss of approximately $27 million
could be recorded if all such sales were consummated on the terms currently being negotiated. The
Company evaluates all potential sale opportunities taking into account the long-term growth
prospects of assets being sold, the use of proceeds and the impact to the Companys balance sheet
including financial covenants, in addition to the impact on operating results. As a result, it is
possible that additional assets could be sold for a loss after taking into account the above
considerations.
Developments, Redevelopments and Expansions
During the nine-month period ended September 30, 2009, the Company and its unconsolidated
joint ventures expended an aggregate of approximately $423.9 million ($190.1 million by the Company
and $233.8 million by its unconsolidated joint ventures), before deducting sales proceeds, to
acquire, develop, expand, improve and re-tenant various properties. The Companys acquisition,
development, redevelopment and expansion activity is summarized below.
- 70 -
The Company expects to continue to reduce its anticipated spending in 2009 for its
developments and redevelopments, both for consolidated and unconsolidated projects, as the Company
considers this funding to be discretionary spending. One of the important benefits of the
Companys asset class is the ability to phase development projects over time until appropriate
leasing levels can be achieved. To maximize the return on capital spending and balance the
Companys de-leveraging strategy, the Company has revised its investment criteria thresholds. The
revised underwriting criteria includes a higher cash-on-cost project return threshold, a longer
lease-up period and a higher stabilized vacancy rate. The Company applies this revised strategy to
both its consolidated and certain unconsolidated joint ventures which own assets under development
as the Company has significant influence and, in some cases, approval rights over decisions
relating to capital expenditures.
Development (Wholly-Owned and Consolidated Joint Ventures)
The Company currently has the following wholly-owned and consolidated joint venture shopping
center projects under construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
|
|
Location |
|
Owned GLA |
|
|
($ Millions) |
|
|
Description |
|
Boise (Nampa), Idaho |
|
|
431,689 |
|
|
$ |
29.3 |
|
|
Community Center |
Boston (Norwood), Massachusetts |
|
|
56,343 |
|
|
|
7.8 |
|
|
Community Center |
Elmira (Horseheads), New York |
|
|
350,987 |
|
|
|
10.0 |
|
|
Community Center |
Austin (Kyle), Texas (1) |
|
|
443,092 |
|
|
|
20.5 |
|
|
Community Center |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,282,111 |
|
|
$ |
67.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consolidated 50% Joint Venture |
In addition to these current developments, several of which will be developed in phases,
the Company and its joint venture partners intend to commence construction on various other
developments only after substantial tenant leasing has occurred and acceptable construction
financing is available, including several international projects.
The wholly-owned and consolidated joint venture development estimated funding schedule, net of
reimbursements, as of September 30, 2009, is as follows (in millions):
|
|
|
|
|
Funded as of September 30, 2009 |
|
$ |
315.0 |
|
Projected net funding 4Q 2009 |
|
|
6.1 |
|
Projected net funding thereafter |
|
|
62.7 |
|
|
|
|
|
Total |
|
$ |
383.8 |
|
|
|
|
|
- 71 -
Development (Unconsolidated Joint Ventures)
One of the Companys unconsolidated joint ventures has the following shopping center project
under construction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
|
|
|
|
|
DDRs |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Ownership |
|
|
Owned |
|
|
Cost |
|
|
|
|
Location |
|
Percentage |
|
|
GLA |
|
|
($ Millions) |
|
|
Description |
|
Dallas (Allen), Texas (1) |
|
10.0% |
|
|
797,665 |
|
|
|
(4.6 |
) |
|
Lifestyle Center |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
797,665 |
|
|
$ |
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a reduction in costs from future land sales |
The unconsolidated joint venture development estimated funding schedule, net of
reimbursements, as of September 30, 2009, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipated |
|
|
|
|
|
|
DDRs |
|
|
JV Partners |
|
|
Proceeds from |
|
|
|
|
|
|
Proportionate |
|
|
Proportionate |
|
|
Construction |
|
|
|
|
|
|
Share |
|
|
Share |
|
|
Loans |
|
|
Total |
|
Funded as of September 30, 2009 |
|
$ |
61.2 |
|
|
$ |
91.7 |
|
|
$ |
192.9 |
|
|
$ |
345.8 |
|
Projected net funding 4Q 2009 |
|
|
1.6 |
|
|
|
1.8 |
|
|
|
5.3 |
|
|
|
8.7 |
|
Projected net funding
(reimbursements) thereafter |
|
|
1.2 |
|
|
|
5.0 |
|
|
|
(16.2 |
) |
|
|
(10.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64.0 |
|
|
$ |
98.5 |
|
|
$ |
182.0 |
|
|
$ |
344.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopments and Expansions (Wholly-Owned and Consolidated Joint Ventures)
The Company is currently expanding/redeveloping the following wholly-owned shopping center at
a projected aggregate net cost of approximately $89.1 million. At September 30, 2009,
approximately $73.5 million of costs had been incurred in relation to this projects.
|
|
|
Property |
|
Description |
Miami (Plantation), Florida
|
|
Redevelop shopping center to include Kohls and additional junior anchor tenants |
Redevelopments and Expansions (Unconsolidated Joint Ventures)
One of the Companys unconsolidated joint ventures is currently expanding/redeveloping the
following shopping center at a projected net cost of $90.3 million, which includes original
acquisition costs related to this asset which was acquired for redevelopment. At September 30,
2009, approximately $76.5 million of costs had been incurred in relation to this project.
|
|
|
|
|
|
|
|
|
DDRs |
|
|
|
|
Effective |
|
|
|
|
Ownership |
|
|
Property |
|
Percentage |
|
Description |
Buena Park, California
|
|
|
20% |
|
|
Large-scale redevelopment of enclosed mall to open-air format |
- 72 -
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, development properties and two management and development companies. Such arrangements
are generally with institutional investors and various developers located throughout the United
States.
The unconsolidated joint ventures that have total assets greater than $250 million (based on
the historical cost of acquisition by the unconsolidated joint venture) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company- |
|
|
|
|
Effective |
|
|
|
Owned |
|
|
Unconsolidated Real Estate |
|
Ownership |
|
|
|
Square Feet |
|
Total Debt |
Ventures |
|
Percentage (1) |
|
Assets Owned |
|
(Thousands) |
|
(Millions) |
Sonae Sierra Brazil BV Sarl
|
|
|
50.0 |
% |
|
Ten shopping centers and a management
company in Brazil
|
|
|
3,770 |
|
|
$ |
104.9 |
|
Domestic Retail Fund
|
|
|
20.0 |
|
|
63 shopping center assets in several states
|
|
|
8,275 |
|
|
|
967.2 |
|
DDR SAU Retail Fund
|
|
|
20.0 |
|
|
29 shopping center assets in several states
|
|
|
2,376 |
|
|
|
226.2 |
|
DDRTC Core Retail Fund LLC
|
|
|
15.0 |
|
|
66 assets in several states
|
|
|
15,746 |
|
|
|
1,768.8 |
|
DDR Macquarie Fund (2)
|
|
|
14.5 |
|
|
44 shopping centers in several states
|
|
|
10,327 |
|
|
|
1,092.7 |
|
|
|
|
(1) |
|
Ownership may be held through different investment structures. Percentage ownerships are
subject to change, as certain investments contain promoted structures. |
|
(2) |
|
See discussion below regarding redemption in October 2009. |
DDR Macquarie Fund and Macquarie DDR Trust
In December 2008, MDT, DDRs partner in the DDR Macquarie Fund joint venture, announced that
it was undergoing a strategic review. This strategic review could result in asset sales, bringing
in a new capital partner or other strategic initiative. During December 2008, the Company and MDT
modified certain terms of its investment that provide for the redemption of the Companys interest
with properties in the MDT US LLC in lieu of cash or MDT shares. In October 2009, the Macquarie
DDR Trust unitholders approved the redemption of the Companys interest in the MDT US LLC joint
venture. A 100% interest in three shopping center assets was transferred to the Company in October
2009 in exchange for its approximate 14.5% ownership stake, assumption of $65.3 million of
non-recourse debt and a cash payment of $1.6 million was made to the DDR Macquarie Fund. The
Company remains the joint manager for the Macquarie DDR Trust and continues to lease and manage the
remaining assets in the DDR Macquarie Fund and to earn fees for those services.
The Company believes this transaction will simplify the ownership structure of the joint
venture and enhance flexibility for both DDR and MDT and lower the Companys leverage. The Company
expects that it will continue to receive fees for leasing and managing all the remaining assets
owned by MDT and the DDR Macquarie Fund joint venture. As a result of this transaction, the
Companys proportionate share of unconsolidated joint venture
debt was reduced by approximately $146 million offset by the
assumption of debt by the Company of approximately $65.3 million
resulting in an overall reduced leverage by approximately $80
million.
- 73 -
In the third quarter of 2009, the Company liquidated its investment in Macquarie DDR Trust
(ASX: MDT) for aggregate proceeds of $6.4 million. The Company recorded a gain on sale of these
units of approximately $3.5 million for the three months ended September 30, 2009. The
Company also incurred an $0.8 million loss on Macquarie DDR Trust units sold in the second quarter
of 2009. During 2008, the Company recognized an other than temporary impairment charge on this
investment of approximately $31.7 million.
Coventry II DDR Merriam Village LLC
In the third quarter of 2009, the Company acquired its partners 80% interest in Merriam
Village through the assumption and guarantee of $17.0 million face value of debt, of which the
Company had previously guaranteed 20%. DDR did not expend any funds for this interest. In
connection with DDRs assumption of the remaining 80% guarantee, the lender agreed to modify and
extend this secured mortgage (See Coventry II Fund discussion below).
Funding for Joint Ventures
In connection with the development of shopping centers owned by certain affiliates, the
Company and/or its equity affiliates have agreed to fund its pro rate share of the required capital
associated with approved development projects aggregating approximately $52.2 million at September
30, 2009. These obligations, comprised principally of construction contracts, are generally due in
12 to 18 months as the related construction costs are incurred and are expected to be financed
through new or existing construction loans, revolving credit facilities and retained capital.
The Company has provided loans and advances to certain unconsolidated entities and/or related
partners in the amount of $4.1 million at September 30, 2009, for which the Companys joint venture
partners have not funded their proportionate share. These entities are current on all debt service
owed to DDR. In addition to these loans, the Company has advanced $65.5 million of financing to
one of its unconsolidated joint ventures with Coventry II (the Bloomfield Loan), which accrued
interest at the greater of LIBOR plus 700 basis points or 12% through February 28, 2009. As of
March 1, 2009, the interest in the Bloomfield Loan began accruing at the default rate of 16%, due
to the joint ventures default under a third party secured land loan on the project as discussed
below. The loan has an initial maturity date of July 2011.
Coventry II Fund
The Coventry II Fund and the Company, through a series of joint ventures, acquired 11
value-added retail properties and own 42 sites formerly occupied by Service Merchandise in the
United States. The Company co-invested approximately 20% in each joint venture and is generally
responsible for day-to-day management of the properties. Pursuant to the terms of the joint
venture, the Company earns fees for property management, leasing and construction management. The
Company also could earn a promoted interest, along with the Coventry II Fund, above a preferred
return after return of capital to fund investors.
As of September 30, 2009, the aggregate amount of the Companys net investment in the Coventry
II joint ventures is $29.1 million. As discussed above, the Company has also advanced $65.5 million
of financing to one of the Coventry II joint ventures. In addition to its existing equity and note
receivable, the Company has provided partial payment guaranties to third-party lenders in
connection
- 74 -
with the
financing for five of the projects. The amount of each such guaranty is not greater
than the proportion to the Companys investment percentage in the underlying project, and the
aggregate amount of the Companys guaranties is approximately $25.3 million.
Although the Company will not acquire additional assets through the Coventry II Fund joint
ventures, additional funds maybe required to address ongoing operational needs and costs associated
with the one joint ventures undergoing development or redevelopment. The Coventry II Fund is
exploring a variety of strategies to obtain such funds, including potential dispositions and
financings. The Company continues to maintain the position that it does not intend to fund any of
its joint venture partners capital contributions or their share of debt maturities. This position
led to the Ward Parkway Center in Kansas City, Missouri being transferred to the lender in March
2009 as indicated below.
Six of the Coventry II Fund joint ventures third-party credit facilities have matured. For
the Bloomfield Hills, Michigan project, a $48.0 million land loan matured on December 31, 2008 and
on February 24, 2009, the lender sent to the borrower a formal notice of default (the Company
provided a payment guaranty in the amount of $9.6 million with respect to such loan and on July 8,
2009, paid such guaranty in full in exchange for a complete release from the lender). The above
referenced $65.5 million Bloomfield Loan from the Company relating to the Bloomfield Hills,
Michigan project is cross defaulted with this third-party loan. As a result, on March 3, 2009, the
Company sent the borrower a formal notice of default relating to its loan.
For the Kansas City, Missouri project, a $35.0 million loan matured on January 2, 2009, and on
January 6, 2009, the lender sent to the borrower a formal notice of default (the Company did not
provide a payment guaranty with respect to such loan). On March 26, 2009, the Coventry II Fund
joint venture transferred its ownership of this property to the lender. The Company recorded a
$5.8 million loss related to the write off of the book value of its equity investment. Pursuant to
the agreement with the lender, the Company initially managed the shopping center while the Coventry
II Fund marketed the property for sale. Although the Coventry II Fund continues to market the
property, the Company elected to terminate its management agreement for the shopping center,
effective on June 30, 2009. The joint venture has the ability to receive excess sale proceeds
depending upon the timing and terms of a future sale arrangement.
For the Merriam, Kansas project, a $17.0 million land loan matured on January 20, 2009, and on
February 17, 2009, the lender sent to the borrower a formal notice of default (the Company provided
a payment guaranty in the amount of $2.2 million with respect to such loan). On July 21, 2009, the
Company closed on a three-party transaction with the lender and the Coventry II Fund, pursuant to
which the Coventry II Fund transferred to the Company its entire interest in the project, the
lender released the Coventry II Fund from its payment guaranty and the lender extended the loan. As
a result, the Merriam, Kansas project now is wholly owned by DDR, and the debt matures on May 31,
2011.
For the San Antonio, Texas project, a $20.9 million loan matured on July 7, 2009. The Company
and the Coventry II Fund have received from the lender (and are reviewing) a proposed term sheet
outlining the terms required by the lender in order to extend the loan through July 7, 2011. The
Company did not provide a payment guaranty with respect to such loan.
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For the Kirkland, Washington project and Benton Harbor, Michigan projects the loans in the
amounts of $29.5 million and $16.0 million, respectively, matured on September 30, 2009. The
Company provided payment guarantees in the amount of $5.9 million and $3.2 million, respectively,
with respect to such loans. The Coventry II Fund and the Company are in negotiations with the
lender, to extend such loans.
On April 8, 2009, the lender of the Service Merchandise portfolio sent to the borrower a
formal notice of default based upon the Coventry II Funds failure to satisfy certain net worth
covenants. The Company provided a payment guaranty in the amount of $1.8 million with respect to
such loan. The Coventry II Fund is exploring a variety of strategies to pay down the outstanding
obligation and the current violation and negotiating forbearance terms with the lender. On
September 22, 2009, the lender on the Orlando Park, Illinois project sent to the borrower a formal
notice of default based upon the Coventry II Funds failure to satisfy certain net worth covenants.
The Company did not provide a payment guaranty with respect to such loan.
On August 13, 2009, the senior and mezzanine lenders in the Cincinnati, Ohio project
sent to the borrowers a formal notice of default, based upon the borrowers inability
to fund mezzanine loan payments and protective advances. The Company did not provide a payment
guaranty with respect to such loan. The Coventry II Fund is exploring restructuring strategies
with the lenders.
Other Joint Ventures
The Company is involved with overseeing the development activities for several of its
unconsolidated joint ventures that are constructing, redeveloping or expanding shopping centers.
The Company earns a fee for its services commensurate with the level of oversight provided. The
Company generally provides a completion guarantee to the third-party lending institution(s)
providing construction financing.
The Companys unconsolidated joint ventures have aggregate outstanding indebtedness to third
parties of approximately $5.6 billion and $5.8 billion at September 30, 2009 and 2008, respectively
(see Item 3. Quantitative and Qualitative Disclosures About Market Risk). Such mortgages and
construction loans 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. In connection with certain of the Companys
unconsolidated joint ventures, the Company and its joint venture partners have agreed to fund any
amounts due the joint ventures lender if such amounts are not paid by the joint venture based on
the Companys pro rata share of such amount aggregating $31.8 million at September 30, 2009.
The Company entered into an unconsolidated joint venture that owns real estate assets in
Brazil. The Company has generally chosen not to hedge any of the residual foreign currency risk
through the use of hedging instruments for this entity. The Company will continue to monitor and
evaluate this risk and may enter into hedging agreements at a later date.
The Company entered into consolidated joint ventures that own real estate assets in Canada and
Russia. The net assets of these subsidiaries are exposed to volatility in currency exchange rates.
As such, the Company uses non-derivative financial instruments to hedge this exposure. The Company
manages currency exposure related to the net assets of the Companys Canadian and European
subsidiaries primarily through foreign currency-denominated debt agreements that the Company enters
into. Gains and losses in the parent companys net investments in its subsidiaries are economically
offset by losses and gains in the parent companys foreign currency-denominated debt obligations.
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For the nine months ended September 30, 2009, $16.5 million of net losses related to the
foreign currency-denominated debt agreements was included in the Companys cumulative translation
adjustment. As the notional amount of the non-derivative instrument substantially matches the
portion of the net investment designated as being hedged and the non-derivative instrument is
denominated in the functional currency of the hedged net investment, the hedge ineffectiveness
recognized in earnings was not material.
Financing Activities
The Company has historically accessed capital sources through both the public and private
markets. The Companys acquisitions, developments, redevelopments and expansions are generally
financed through cash provided from operating activities, revolving credit facilities, mortgages
assumed, construction loans, secured debt, unsecured debt, common and preferred equity offerings,
joint venture capital, preferred OP Units and asset sales. Total consolidated debt outstanding at
September 30, 2009, was approximately $5.2 billion, as compared to approximately $5.9 billion at
September 30, 2008 and $5.9 billion at December 31, 2008.
In the first nine months of 2009, the Company purchased approximately $673.6 million aggregate
principal amount of its outstanding senior unsecured notes (of which $310.3 million related to
convertible notes) at a discount to par resulting in GAAP gains of approximately $142.4 million.
These gains were reduced by approximately $17.0 million due to the adoption of the standard
Accounting for Convertible Debt That May Be Settled in Cash Upon Conversion, in the first quarter
of 2009. This standard requires that debt issuers separately recognize the liability and equity
components of convertible instruments that may be settled in cash upon conversion. As a result of
the adoption, the initial debt proceeds from the offering of the Companys $250 million aggregate
principal amount of 3.5% convertible notes, due in 2011, and $600 million aggregate principal
amount of 3.0% convertible notes, due in 2012, were required to be allocated between a liability
and equity component. This allocation was based upon what the assumed interest rate would have
been if the Company had issued traditional senior unsecured notes. Accordingly, the debt balances
on the Companys balance sheet relating to the convertible debt were reduced such that non-cash
interest expense would be recognized with a corresponding increase to the convertible debt balance.
In September 2009, the Company issued $300 million aggregate principal amount of 9.625% senior
unsecured notes due March 2016. The notes were offered to the investors at 99.42% of par with a
yield to maturity of 9.75%. Proceeds from the offering were used to repay debt with shorter term
maturities and to reduce amounts outstanding on the Companys Unsecured Revolving Credit
Facilities.
In October 2009, the Company obtained a $400 million, five-year loan secured by a portfolio of
28 stabilized shopping centers.
In July 2009, the Company obtained $17 million of mortgage debt from a life insurance company
on two shopping centers at a 6% interest rate and maturing in 2017.
The Company
entered into a $60 million secured bridge loan with an affiliate of the Otto
Family. This was repaid on May 6, 2009 with the proceeds of a $60 million secured loan also
obtained from an affiliate of the Otto Family. In May 2009, the Company closed on $125 million of
new secured financings comprised of two loans.
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The first is an $85 million, 10-year loan secured by four assets in Puerto Rico with an
interest rate of 7.59%. The second financing is a $40 million, two-year loan with a one-year
extension option secured by a shopping center in New Jersey, which
was repaid in October 2009 with proceeds obtained from the $400
million financing discussed above.
Capitalization
At September 30, 2009, the Companys capitalization consisted of $5.2 billion of debt, $555
million of preferred shares, and $1.8 billion of market equity (market equity is defined as common
shares and OP Units outstanding multiplied by the closing price of the common shares on the New
York Stock Exchange at September 30, 2009, of $9.24), resulting in a debt to total market
capitalization ratio of 0.7 to 1.0. At September 30, 2009, the Companys total debt consisted of
$3.8 billion of fixed-rate debt and $1.4 billion of variable-rate debt, including $600 million of
variable-rate debt that was effectively swapped to a fixed rate. At September 30, 2008, the
Companys total debt consisted of $4.5 billion of fixed-rate debt and $1.4 billion of variable-rate
debt, including $600 million of variable-rate debt that was effectively swapped to a fixed rate.
It is managements current strategy to have access to the capital resources necessary to
manage its balance sheet, to repay upcoming maturities and to consider making prudent investments
should such opportunities arise. 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. In 2009, the Companys rating
agencies, Moodys Investors Service and Standard and Poors, reduced the Companys debt ratings.
The security rating is not a recommendation to buy, sell or hold securities, as it may be subject
to revision or withdrawal at any time by the rating organization. Each rating should be evaluated
independently of any other rating. In light of the current economic conditions, the Company may not
be able to obtain financing on favorable terms, or at all, which may negatively impact future
ratings. The interest spread over LIBOR on the Companys Revolving Credit Facilities, term loans,
letters of credit and certain construction debt are determined based upon the Companys credit
ratings. The Companys interest rate on its Revolving Credit Facilities was increased from 60
basis points over LIBOR at December 31, 2008 to 75 basis points over LIBOR at September 30, 2009 and the facility fee increased from 15 basis
points to 17.5 basis points, for the same periods. The Companys interest rate on its term loans was increased from 70
basis points at December 31, 2008 to 120 basis points at September
30, 2009.
The Companys credit facilities and the indentures under which the Companys 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 Companys ability to incur secured and unsecured indebtedness, sell
all or substantially all of the Companys 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 Companys 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 Companys financial condition and results of operations.
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Contractual Obligations and Other Commitments
The Company does not have any remaining 2009 wholly-owned debt maturities. At September 30,
2009, the Company had letters of credit outstanding of approximately $88.1 million on its
consolidated assets. The Company has not recorded any obligation associated with these letters of
credit. The majority of letters of credit are collateral for existing indebtedness and other
obligations of the Company.
In conjunction with the development of shopping centers, the Company has entered into
commitments aggregating approximately $59.9 million with general contractors for its wholly-owned
and consolidated joint venture properties at September 30, 2009. These obligations, comprised
principally of construction contracts, are generally due in 12 to 18 months as the related
construction costs are incurred and are expected to be financed through operating cash flow and/or
new or existing construction loans, assets sales or revolving credit facilities.
The Company routinely enters into contracts for the maintenance of its properties which
typically can be cancelled upon 30 to 60 days notice without penalty. At September 30, 2009, the
Company had purchase order obligations, typically payable within one year, aggregating
approximately $7.1 million related to the maintenance of its properties and general and
administrative expenses.
The Company continually monitors its obligations and commitments. There have been
no other material items entered into by the Company since December 31, 2003, through September 30,
2009, other than as described above. See discussion of commitments relating to the Companys joint
ventures and other unconsolidated arrangements in Off-Balance Sheet Arrangements.
Inflation
Substantially all of the Companys 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 negotiation, increases in the consumer price index or similar inflation indices. In
addition, many of the Companys leases are for terms of less than 10 years, permitting the Company
to seek increased rents at market rates upon renewal. Most of the Companys leases require the
tenants to pay their share of operating expenses, including common area maintenance, real estate
taxes, insurance and utilities, thereby reducing the Companys exposure to increases in costs and
operating expenses resulting from inflation.
Economic Conditions
The retail market in the United States significantly weakened in 2008 and continues to be
challenged in 2009. Consumer spending has declined in response to erosion in housing values and
stock market investments, more stringent lending practices and job losses. Retail sales have
declined
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and tenants have become more selective in new store openings. Some retailers have closed
existing locations and as a result, the Company has experienced a loss in occupancy. The reduced
occupancy will likely continue to have a negative impact on the Companys consolidated cash flows,
results of operations and financial position in 2009. Offsetting some of the current challenges
within the retail environment, the Company has a low occupancy cost relative to other retail
formats and historic averages as well as a diversified tenant base with only one tenant exceeding
2.0% of total third quarter 2009 consolidated revenues (which is Walmart at 5.3%). Other
significant tenants include Target, Lowes Home Improvement, Home Depot, Kohls, T.J.
Maxx/Marshalls, Publix Supermarkets, PetSmart and Bed Bath & Beyond, all which have relatively
strong credit ratings, remain well-capitalized, and have outperformed other retail categories on a
relative basis. The Company believes these tenants should continue providing us 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 Companys shopping centers provide day-to-day consumer necessities
with a focus towards value and convenience versus high priced discretionary luxury items, which the
Company believes will enable many of the tenants to continue operating within this challenging
economic environment.
The Company monitors potential credit issues of its tenants, and analyzes the possible effects
to the financial statements of the Company and its unconsolidated joint ventures. In addition to
the collectibility assessment of outstanding accounts receivable, the Company evaluates the related
real estate for recoverability, as well as any tenant related deferred charges for recoverability,
which may include straight-line rents, deferred lease costs, tenant improvements, tenant
inducements and intangible assets (Tenant Related Deferred Charges). The Company routinely
evaluates its exposure relating to tenants in financial distress. Where appropriate, the Company
has either written off the unamortized balance or accelerated depreciation and amortization expense
associated with the Tenant Related Deferred Charges for such tenants.
The retail shopping sector has been 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 have forced some market
share away from weaker retailers and required them, in some cases, to declare bankruptcy and/or
close stores. Certain retailers have announced store closings even though they have not filed for
bankruptcy protection. However, these store closings often represent a relatively small percentage
of the Companys overall gross leasable area and therefore, the Company does not expect these
closings to have a material adverse effect on the Companys overall long-term performance. Overall,
the Companys portfolio remains stable. However, there can be no assurance that these events will
not adversely affect the Company (see Item 1A. Risk Factors in the Companys Annual Report of Form
10-K for the year ended December 31, 2008).
Historically, the Companys portfolio has performed consistently throughout many economic
cycles, including downward cycles. Broadly speaking, national retail sales have grown consistently
since World War II, including during several recessions and housing slowdowns. In the past the
Company has not experienced significant volatility in its long-term portfolio occupancy rate. The
Company has experienced downward cycles before and has made the necessary adjustments to leasing
and development strategies to accommodate the changes in the operating environment and mitigate
risk. In many cases, the loss of a weaker tenant creates an opportunity to re-lease space at higher
rents to a stronger retailer. More importantly, the quality of the property revenue stream is high
and
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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 believes that the quality of its shopping center portfolio is strong, as evidenced by
the high historical occupancy rates, which have previously ranged from 92% to 96% since the
Companys initial public offering in 1993. Although the Company experienced a decline in 2009 occupancy, the shopping center portfolio occupancy, excluding the impact of the
Mervyns vacancy, is at 89.1% at September 30, 2009. Notwithstanding the decline in
occupancy, the Company continues to sign a large number of new leases, with overall leasing spreads
that continue to stabilize, as new leases and renewals have historically. Moreover, the
Company has been able to achieve these results without significant capital investment in tenant
improvements or leasing commissions. In 2008, the Company assembled an Anchor Store Redevelopment
Department staffed with seasoned leasing professionals dedicated to releasing vacant anchor space
created by recent bankruptcies and store closings. While tenants may come and go over time,
shopping centers that are well-located and actively managed are expected to perform well. The
Company is very conscious of, and sensitive to, the risks posed to the economy, but is currently
comfortable that the position of its portfolio and the general diversity and credit quality of its
tenant base should enable it to successfully navigate through these challenging economic times.
Legal Matters
The Company is a party to litigation filed in November 2006 by a tenant in a Company property
located in Long Beach, California. The tenant filed suit against the Company and certain
affiliates, claiming the Company and its affiliates failed to provide adequate valet parking at the
property pursuant to the terms of the lease with the tenant. After a six-week trial, the jury
returned a verdict in October 2008, finding the Company liable for compensatory damages in the
amount of approximately $7.8 million. In addition, the trial court awarded the tenant attorneys
fees and expenses in the amount of approximately $1.5 million. The Company filed motions for a new
trial and for judgment notwithstanding the verdict, both of which were denied. The Company strongly
disagrees with the verdict, as well as the denial of the post-trial motions. As a result, the
Company is pursuing an appeal of the verdict. Included in other liabilities on the condensed
consolidated balance sheet is a provision which represents managements best estimate of loss based
upon a range of liability. The Company will continue to monitor the status of the litigation and
revise the estimate of loss as appropriate. Although the Company believes it has a meritorious
basis for reversing the jury verdict, there can be no assurance that the Company will be successful
its appeal.
The Company is a party to various joint ventures
with Coventry Real Estate Fund II L.L.C. through which 11 existing or proposed retail properties, along with a portfolio of former Service Merchandise locations,
were acquired at various times from 2003 through 2006. All properties were acquired by the joint ventures as value-add investments, with major renovation and/or ground-up
development contemplated for many of these properties. The Company is generally responsible for day-to-day management of the retail properties. On November 4, 2009,
Coventry Real Estate Advisors L.L.C., Coventry Real Estate Fund II L.L.C. and Coventry Fund II Parallel Fund, L.L.C. (collectively, Coventry) filed suit against the
Company and certain of its affiliates and officers in the Supreme Court of the State of New York, County of New York. The complaint alleges that the Company
(i) breached contractual obligations under a co-investment agreement and various joint venture limited liability company agreements, project development agreements
and management and leasing agreements, (ii) breached its fiduciary duties as a member of various limited liability companies, (iii) fraudulently induced the plaintiffs
to enter into certain agreements and (iv) made certain material misrepresentations. The complaint also requests that a general release made by Coventry in favor of the
Company in connection with one of the joint venture properties should be voided on the grounds of economic duress. The complaint seeks compensatory and consequential
damages in an amount not less than $500 million as well as punitive damages.
The Company believes that the allegations in the lawsuit
are without merit and that it has strong defenses against this lawsuit. The Company will vigorously defend itself against the allegations contained in the complaint. Although
this lawsuit is subject to the uncertainties inherent in the
litigation process and the Company cannot provide assurances as to its ultimate outcome, based on the information presently
available to the Company, the Company does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Companys financial condition,
results of operations or cash flows.
In addition to the litigation discussed above, 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 Companys liquidity, financial position or results of operations.
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of
Financial Accounting Standards The FASB Accounting Standards Codification and the Hierarchy
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of Generally Accepted Accounting Principles. This Statement made the FASB Accounting Standards
Codification (the Codification) the single source of U.S. GAAP used by nongovernmental entities
in the preparation of financial statements, except for rules and interpretive releases of the SEC
under authority of federal securities laws, which are sources of authoritative accounting guidance
for SEC registrants. The Codification is meant to simplify user access to all authoritative
accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics
within a consistent structure. Its purpose is not to create new accounting and reporting guidance.
The Codification supersedes all existing non-SEC accounting and reporting standards and was
effective for the Company beginning July 1, 2009. FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue
Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right; these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for conclusions on the change(s)
in the Codification. In the description of Accounting Standards Updates that follows, references in
italics relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate
New Accounting Standards Implemented with Retrospective Application
The following accounting standards were implemented on January 1, 2009 with retrospective
application as appropriate. As a result, the financial statements as of and for the three- and
nine-month periods ended September 30, 2008 have been adjusted as required by the provisions of
these standards.
Non-Controlling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Non-Controlling Interests in Consolidated Financial
Statements. A non-controlling interest, sometimes referred to as a minority equity interest, is
the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The
objective of this guidance is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards that require: (i) the ownership interest in
subsidiaries held by other parties other than the parent be clearly identified, labeled, and
presented in the consolidated statement of financial position within equity, but separate from the
parents equity; (ii) the amount of consolidated net income attributable to the parent and to the
non-controlling interest be clearly identified and presented on the face of the consolidated
statement of operations; (iii) changes in a parents ownership interest while the parent retains
its controlling financial interest in a subsidiary be accounted for consistently and requires that
they be accounted for similarly, as equity transactions; (iv) when a subsidiary is deconsolidated,
any retained non-controlling equity investment in the former subsidiary be initially measured at
fair value (the gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any non-controlling equity investments rather than the carrying amount of that retained
investment) and (v) entities provide sufficient disclosures that clearly identify and distinguish
between the interest of the parent and the interest of the non-controlling owners. This guidance
was effective for fiscal years, and interim reporting periods within those fiscal years, beginning
on or after December 15, 2008, and applied on a prospective basis, except for the presentation and
disclosure requirements, which have been applied on a retrospective basis. Early adoption was not
permitted. The Company adopted this standard on January 1, 2009. As required by the standard, the
Company adjusted the presentation of non-controlling interests, as appropriate, in both the
condensed
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consolidated balance sheet as of December 31, 2008 and the condensed consolidated statement of
operations for the three- and nine-month periods ended September 30, 2008. The Companys condensed
consolidated balance sheets no longer have a line item referred to as Minority Interests. Equity
at December 31, 2008 was adjusted to include $127.5 million attributable to non-controlling
interests, and the Company reflected approximately $0.6 million as redeemable operating partnership
units. In connection with the Companys adoption of this standard, the Company also adopted the
recent revisions to Classification and Measurement of Redeemable Securities. As a result of the
Companys adoption of these standards, amounts previously reported as minority equity interests and
operating partnership minority interests on the Companys condensed consolidated balance sheets are
now presented as non-controlling interests within equity. There has been no change in the
measurement of these line items from amounts previously reported except that due to certain
redemption features, certain operating partnership minority interests in the amount of
approximately $0.6 million are reflected as redeemable operating partnership units in the temporary
equity section (between liabilities and equity). These units are exchangeable, at the election of
the operating partnership unit holder, and under certain circumstances at the option of the
Company, into an equivalent number of the Companys common shares or for the equivalent amount of
cash. Based on the requirements, the measurement of the redeemable operating partnership units are
now presented at the greater of their carrying amount or redemption value at the end of each
reporting period.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)
In May 2008, the FASB issued Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement). The standard prohibits the
classification of convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement, as debt instruments within the scope of this standard and
requires issuers of such instruments to separately account for the liability and equity components
by allocating the proceeds from the issuance of the instrument between the liability component and
the embedded conversion option (i.e., the equity component). The liability component of the debt
instrument is accreted to par using the effective yield method; accretion is reported as a
component of interest expense. The equity component is not subsequently re-valued as long as it
continues to qualify for equity treatment. This standard must be applied retrospectively to issued
cash-settleable convertible instruments as well as prospectively to newly issued instruments. This
standard is effective for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years.
This standard was adopted by the Company as of January 1, 2009 with retrospective application
to prior periods. As a result of the adoption, the initial debt proceeds from the $250 million
aggregate principal amount of 3.5% convertible notes, due in 2011, and $600 million aggregate
principal amount of 3.0% convertible notes, due in 2012, were required to be allocated between a
liability component and an equity component. This allocation was based upon what the assumed
interest rate would have been if the Company had issued similar nonconvertible debt. Accordingly,
the Companys condensed consolidated balance sheet at December 31, 2008 was adjusted to reflect a
decrease in unsecured debt of approximately $50.7 million, reflecting the unamortized discount. In
addition, at December 31, 2008, real estate assets increased by $2.9 million relating to the impact
of capitalized interest and deferred charges decreased by $1.0 million relating to the reallocation
of original issuance costs to reflect such amounts as a reduction of proceeds from the
reclassification of the equity component. In connection with this standard, the guidance under
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Classification and Measurement of Redeemable Securities was also amended, whereas the equity
component related to the convertible debt would need to be evaluated if the convertible debt were
currently redeemable at the balance sheet date. Because the Companys convertible debt is not
currently redeemable, no evaluation is required as of September 30, 2009.
For the three- and nine-month periods ended September 30, 2008, the Company adjusted the
condensed consolidated statements of operations to reflect additional non-cash interest expense of
$3.3 million and $9.8 million, respectively, net of the impact of capitalized interest, pursuant
to the provisions of this standard. The condensed consolidated statements of operations for the
three- and nine-month periods ended September 30, 2009, reflects additional non-cash interest
expense of $2.7 million and $9.8 million, respectively. In addition, the Companys gains on the
repurchase of unsecured debt during the three- and nine-month periods ending September 30, 2009 was
reduced by $2.4 million and $17.0 million, respectively, due to the reduction in the amount
allocated to the senior unsecured notes as required by the provisions of this standard.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June 2008, the FASB issued Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities, which addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing earnings per share under the two-class
method as described in Earnings per Share. Under the guidance in this standard, unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The standard is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. All prior-period earnings per share data presented was adjusted
retrospectively. Early adoption was not permitted. The adoption of this standard did not have a
material impact on the Companys financial position, results of operations or earnings per share
calculations.
New Accounting Standards Implemented
Business Combinations
In December 2007, the FASB issued Business Combinations. The objective of this standard is
to improve the relevance, representative faithfulness and comparability of the information that a
reporting entity provides in its financial reports about a business combination and its effects. To
accomplish that, this standard establishes principles and requirements for how the acquirer: (i)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest of the acquiree, (ii) recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain purchase and (iii)
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. This standard applies prospectively to
business combinations for which the acquisition date is on or after the first annual reporting
period beginning on or after December 15, 2008. Early adoption was not permitted. The Company
adopted this standard on
- 84 -
January 1, 2009. To the extent that the Company enters into acquisitions that qualify as
businesses, this standard will require that acquisition costs and certain fees, which were
previously capitalized and allocated to the basis of the acquired assets, be expensed as these
costs are incurred. Because of this change in accounting for costs, the Company expects that the
adoption of this standard could have a negative impact on the Companys results of operations
depending on the size of a transaction and the amount of costs incurred. The Company will assess
the impact of significant transactions, if any, as they are contemplated.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Disclosures about Derivative Instruments and Hedging
Activities, which is intended to help investors better understand how derivative instruments and
hedging activities affect an entitys financial position, financial performance and cash flows
through enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing
the objectives and strategies for using derivative instruments by their underlying risk as well as
a tabular format of the fair values of the derivative instruments and their gains and losses. This
standard is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The Company adopted the
financial statement disclosures required by this standard in the Companys Quarterly Report on Form
on 10-Q for the quarterly period ended March 31, 2009.
Subsequent Events
In May 2009, the FASB issued Subsequent Events, which provides guidance to establish general
standards of accounting for and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. This standard also requires
entities to disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. This standard is effective for interim and annual periods
ending after June 15, 2009. The adoption of this standard did not have a material impact on the
Companys financial position, results of operations or cash flows. The Company has evaluated
subsequent events through November 6, 2009, the date that the Companys condensed consolidated
financial statements were available to be issued, for this Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2009.
Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued Interim Disclosures about Fair Value of Financial Instruments,
which requires fair value disclosures for financial instruments that are not reflected in the
Condensed Consolidated Balance Sheets at fair value. Prior to the issuance of this standard, the
fair values of those assets and liabilities were only disclosed annually. With the issuance of this
standard, the Company will be required to disclose this information on a quarterly basis, providing
quantitative and qualitative information about fair value estimates for all financial instruments
not measured in the Condensed Consolidated Balance Sheets at fair value. This standard will be
effective for interim reporting periods that end after June 15, 2009. Early adoption is permitted
for periods ending after March 15, 2009. The Company adopted this standard in the second quarter of
2009.
- 85 -
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued Determination of the Useful Life of Intangible Assets, which
amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under the standard, Goodwill and Other
Intangible Assets. This standard is intended to improve the consistency between the useful life of
an intangible asset determined under Goodwill and Other Intangible Assets and the period of
expected cash flows used to measure the fair value of the asset under Business Combinations and
other U.S. Generally Accepted Accounting Principles. The guidance for determining the useful life
of a recognized intangible asset in this standard shall be applied prospectively to intangible
assets acquired after the effective date. The disclosure requirements in this standard shall be
applied prospectively to all intangible assets recognized as of, and subsequent to, the effective
date. This standard is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption was not permitted.
The adoption of this standard did not have a material impact on the Companys financial position
and results of operations.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
In April 2009, the FASB issued Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly, which clarifies the methodology used to determine fair value when there is no active
market or where the price inputs being used represent distressed sales. This standard also
reaffirms the objective of fair value measurement, as stated in Fair Value Measurements, which is
to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the
need to use judgment to determine if a formerly active market has become inactive, as well as to
determine fair values when markets have become inactive. This standard should be applied
prospectively and will be effective for interim and annual reporting periods ending after June 15,
2009. The adoption of this standard did not have a material impact on the Companys financial
position and results of operations.
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
In June 2008, the FASB issued Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock. This standard provides guidance on determining whether an
equitylinked financial instrument (or embedded feature) can be considered indexed to an entitys
own stock, which is a key criterion for determining if the instrument may be classified as equity.
There is a provision in this standard that provides new guidance regarding how to account for
certain anti-dilution provisions that provide downside price protection to an investor. This
standard is effective for fiscal years beginning after December 15, 2008. Early adoption was not
permitted. Due to certain downward price protection provisions within the Otto Transaction, the
impact of this standard resulted in a charge to earnings of $118.2 million and $198.2 million for
the three- and nine-month periods ended September 2009, respectively, but did not have a material
impact on the Companys financial position or cash flow. Refer to the discussion of the Otto
Transaction described further in Strategic Transactions.
- 86 -
Equity Method Investment Accounting Considerations
In November 2008, the FASB issued Equity Method Investment Accounting Considerations. This
standard clarifies the accounting for certain transactions and impairment considerations involving
equity method investments. This standard applies to all investments accounted for under the equity
method. This standard is effective for fiscal years and interim periods beginning on or after
December 15, 2008. The adoption of this standard did not have a material impact on the Companys
financial position and results of operations.
New Accounting Standards To Be Implemented
Amendments to Consolidation of Variable Interest Entities
In June 2009, the FASB issued Amendments to Consolidation of Variable Interest Entities, which
is effective for fiscal years beginning after November 15, 2009 and introduces a more qualitative
approach to evaluating VIEs for consolidation. This standard requires a company to perform an
analysis to determine whether its variable interests give it a controlling financial interest in a
VIE. This analysis identifies the primary beneficiary of a VIE as the entity that has (a) the power
to direct the activities of the VIE that most significantly impact the VIEs 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 VIEs performance, this standard requires a company to assess
whether it has an implicit financial responsibility to ensure that a VIE operates as designed. This
standard requires continuous reassessment of primary beneficiary status rather than periodic,
event-driven assessments as previously required, and incorporates expanded disclosure requirements.
The Company is currently assessing the impact, if any, the adoption of this standard will have on
its consolidated financial statements.
- 87 -
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Companys primary market risk exposure is interest rate risk. The Companys debt,
excluding unconsolidated joint venture debt, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
Amount |
|
Maturity |
|
Interest |
|
Percentage of |
|
Amount |
|
Maturity |
|
Interest |
|
Percentage of |
|
|
(Millions) |
|
(Years) |
|
Rate |
|
Total |
|
(Millions) |
|
(Years) |
|
Rate |
|
Total |
Fixed- Rate Debt
(1) |
|
$ |
3,827.2 |
|
|
|
3.1 |
|
|
|
5.8 |
% |
|
|
74.1 |
% |
|
$ |
4,375.5 |
|
|
|
3.0 |
|
|
|
5.1 |
% |
|
|
74.6 |
% |
Variable- Rate
Debt (1) |
|
$ |
1,337.9 |
|
|
|
2.2 |
|
|
|
1.6 |
% |
|
|
25.9 |
% |
|
$ |
1,491.2 |
|
|
|
2.7 |
|
|
|
1.7 |
% |
|
|
25.4 |
% |
|
|
|
(1) |
|
Adjusted to reflect the $600 million of variable-rate debt that LIBOR was swapped to a
fixed-rate of 6.2% and 5.0% at September 30, 2009 and December 31, 2008, respectively. At September 30, 2009 and
December 31, 2008, 30-Day LIBOR was 0.25% and 0.43%, respectively. |
The Companys unconsolidated joint ventures indebtedness is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
|
Joint |
|
Companys |
|
Weighted |
|
Weighted |
|
Joint |
|
Companys |
|
Weighted |
|
Weighted |
|
|
Venture |
|
Proportionate |
|
Average |
|
Average |
|
Venture |
|
Proportionate |
|
Average |
|
Average |
|
|
Debt |
|
Share |
|
Maturity |
|
Interest |
|
Debt |
|
Share |
|
Maturity |
|
Interest |
|
|
(Millions) |
|
(Millions) |
|
(Years) |
|
Rate |
|
(Millions) |
|
(Millions) |
|
(Years) |
|
Rate |
Fixed- Rate Debt |
|
$ |
4,476.8 |
|
|
$ |
881.9 |
|
|
|
4.7 |
|
|
|
5.5 |
% |
|
$ |
4,581.6 |
|
|
$ |
982.3 |
|
|
|
5.3 |
|
|
|
5.5 |
% |
Variable- Rate
Debt |
|
$ |
1,142.4 |
|
|
$ |
194.8 |
|
|
|
0.5 |
|
|
|
2.3 |
% |
|
$ |
1,195.3 |
|
|
$ |
233.8 |
|
|
|
1.2 |
|
|
|
2.2 |
% |
The Company intends to utilize retained cash flow, proceeds from asset sales, financing
and variable-rate indebtedness available under its Revolving Credit Facilities to repay
indebtedness and fund capital expenditures of the Companys shopping centers. Thus, to the extent
the Company incurs additional variable-rate indebtedness, its exposure to increases in interest
rates in an inflationary period would increase. The Company does not believe, however, that
increases in interest expense as a result of inflation will significantly impact the Companys
distributable cash flow.
The interest rate risk on a portion of the Companys variable-rate debt described above has
been mitigated through the use of interest rate swap agreements (the Swaps) with major financial
institutions. At September 30, 2009 and December 31, 2008, the interest rate on $600 million of the
Companys consolidated variable rate debt was swapped to fixed rates. The Company is exposed to
credit risk in the event of non-performance by the counterparties to the Swaps. The Company
believes it mitigates its credit risk by entering into Swaps with a diversified group of major
financial institutions.
- 88 -
The fair value of the Companys fixed-rate debt adjusted to: (i) include the $600 million that
was swapped to a fixed-rate at September 30, 2009 and December 31, 2008; and (ii) include the
Companys proportionate share of the joint venture fixed-rate debt and an estimate of the effect of
a 100 basis point increase in market interest rates, is summarized as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
100 Basis |
|
|
|
|
|
|
|
|
|
100 Basis |
|
|
Carrying |
|
|
|
|
|
Point Increase |
|
Carrying |
|
|
|
|
|
Point Increase |
|
|
Value |
|
Fair Value |
|
in Market |
|
Value |
|
Fair Value |
|
in Market |
|
|
(Millions) |
|
(Millions) |
|
Interest Rates |
|
(Millions) |
|
(Millions) |
|
Interest Rates |
Companys fixed-rate debt |
|
$ |
3,827.2 |
|
|
$ |
3,756.5 |
(1) |
|
$ |
3,678.2 |
(2) |
|
$ |
4,375.5 |
|
|
$ |
3,439.0 |
(1) |
|
$ |
3,381.3 |
(2) |
Companys proportionate
share of joint venture
fixed-rate debt |
|
$ |
881.9 |
|
|
$ |
798.8 |
|
|
$ |
772.8 |
|
|
$ |
982.3 |
|
|
$ |
911.0 |
|
|
$ |
878.8 |
|
|
|
|
(1) |
|
Includes the fair value of interest rate swaps, which was a liability of $19.9
million and $21.7 million at September 30, 2009 and December 31, 2008, respectively. |
|
(2) |
|
Includes the fair value of interest rate swaps, which was a liability of $16.5
million and $12.4 million at September 30, 2009 and December 31, 2008, respectively. |
The sensitivity to changes in interest rates of the Companys fixed-rate debt was
determined utilizing 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 at September 30, 2009
and 2008, would result in an increase in interest expense of approximately $10.0 million and $10.5
million, respectively, for the Company and $1.5 million and $1.9 million, respectively,
representing the Companys proportionate share of the joint ventures interest expense relating to
variable-rate debt outstanding for the nine-month and year end periods. The estimated increase in
interest expense for the year does not give effect to possible changes in the daily balance for the
Companys 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 that 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 Companys access to capital markets will
continue to be evaluated. The Company has not, and does not plan to, enter into any derivative
financial instruments for trading or speculative purposes. As of September 30, 2009, the Company
had no other material exposure to market risk.
- 89 -
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Based on their evaluation as required by Securities Exchange Act Rules 13a-15(b) and
15d-15(b), the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have
concluded that the Companys disclosure controls and procedures (as defined in Securities Exchange
Act Rule 13a-15(e)) are effective as of the end of the period covered by this quarterly report on
Form 10-Q 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 the end of such period to ensure that information required to be disclosed by the
Company issuer in reports that it files or submits under the Securities Exchange Act is accumulated
and communicated to the Companys management, including its CEO and CFO, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
During the three-month period ended September 30, 2009, there were no changes in the Companys
internal control over financial reporting that materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting.
- 90 -
PART II
OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
Other than routine litigation and administrative proceedings arising in the ordinary course of
business, the Company is not presently involved in any litigation nor, to its knowledge, is any
litigation threatened against the Company or its properties, which is reasonably likely to have a
material adverse effect on the liquidity or results of operations of the Company.
None.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number |
|
|
(d) Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
|
of Publicly |
|
|
Shares that May Yet |
|
|
|
(a) Total number of |
|
|
(b) Average Price |
|
|
Announced Plans |
|
|
Be Purchased Under |
|
|
|
shares purchased (1) |
|
|
Paid per Share |
|
|
or Programs |
|
|
the Plans or Programs |
|
July 1 31, 2009 |
|
|
952 |
|
|
$ |
4.49 |
|
|
|
|
|
|
|
|
|
August 1 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 30, 2009 |
|
|
124,271 |
|
|
|
9.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
125,223 |
|
|
$ |
9.78 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of common shares surrendered or deemed surrendered to the Company to
satisfy minimum tax withholding obligations in connection with the vesting and/or exercise of
awards under the Companys equity-based compensation plans with respect to outstanding shares of
restricted stock in September 2009 and the payment of the second quarter dividend in common shares
by the Company in July 2009. |
|
|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
None.
|
|
|
ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
None
- 91 -
3.1 |
|
Second Amended and Restated Articles of Incorporation, as amended effective July 10, 2009
(incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August
10, 2009, Commission File No. 1-11690) |
|
10.1 |
|
Separation Agreement and Release, dated July 28, 2009, by and between Developers Diversified
Realty Corporation and Timothy J. Bruce |
|
10.2 |
|
Amended and Restated Employment Agreement, dated July 29, 2009, by and between Developers
Diversified Realty Corporation and Scott A. Wolstein |
|
10.3 |
|
Amended and Restated Employment Agreement, dated July 29, 2009, by and between Developers
Diversified Realty Corporation and Daniel B. Hurwitz |
|
10.4 |
|
Form 2009 Retention Award Agreement |
|
10.5 |
|
Developers Diversified Realty Corporation Value Sharing Equity Program |
|
10.6 |
|
Ninth Supplemental Indenture, dated as of September 30, 2009, by and between Developers
Diversified Realty Corporation and U.S. Bank National, Association (as successor to U.S. Bank
Trust National Association (successor to National City Bank)), as Trustee (incorporated by
reference to Exhibit 4.12 to the Registration Statement on Form S-3 filed on October 13, 2009
(File No. 333-162451)) |
|
31.1 |
|
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Exchange Act
pf 1934 |
|
31.2 |
|
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Exchange Act
of 1934 |
|
32.1 |
|
Certification of CEO pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of
20021 |
|
32.2 |
|
Certification of CFO pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of
20021 |
|
|
|
1 |
|
Pursuant to SEC Release No. 34-4751, these exhibits are deemed to
accompany this report and are not filed as part of this report. |
- 92 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
|
|
|
November 6, 2009 |
|
/s/ William H. Schafer |
|
|
|
(Date) |
|
William H. Schafer, Executive Vice President and
Chief Financial Officer (Duly Authorized Officer) |
|
|
|
November 6, 2009 |
|
/s/ Christa A. Vesy |
|
|
|
(Date) |
|
Christa A. Vesy, Senior Vice President and Chief
Accounting Officer (Chief Accounting Officer) |
- 93 -
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or |
Exhibit No. |
|
|
|
|
|
|
|
Incorporated |
Under Reg. |
|
Form 10-Q |
|
|
|
Herein by |
S-K Item 601 |
|
Exhibit No. |
|
Description |
|
Reference |
3.1 |
|
|
3.1 |
|
|
Second Amended and Restated
Articles of Incorporation, as
amended effective July 10, 2009 |
|
Current Report on
Form 8-K (Filed
with the SEC on
August 10, 2009;
Commission File
No. 1-11690) |
|
|
|
|
|
|
|
|
|
10.1 |
|
|
10.1 |
|
|
Separation Agreement and Release,
dated July 28, 2009, by and
between Developers Diversified
Realty Corporation and Timothy J.
Bruce |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
10.2 |
|
|
10.2 |
|
|
Amended and Restated Employment
Agreement, dated July 29, 2009, by
and between Developers Diversified
Realty Corporation and Scott A.
Wolstein |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
10.3 |
|
|
10.3 |
|
|
Amended and Restated Employment
Agreement, dated July 29, 2009, by
and between Developers Diversified
Realty Corporation and Daniel B.
Hurwitz |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
10.4 |
|
|
10.4 |
|
|
Form 2009 Retention Award Agreement |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
10.5 |
|
|
10.5 |
|
|
Developers Diversified Realty Corporation Value Sharing Equity Program |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
10.6 |
|
|
10.6 |
|
|
Ninth Supplemental Indenture,
dated as of September 30, 2009, by
and between Developers Diversified
Realty Corporation and U.S. Bank
National Association (as successor
to U.S. Bank Trust National
Association (successor to National
City Bank)), as Trustee |
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Form S-3
Registration No. 333-162451 (Filed
with the SEC on
October 13, 2009) |
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31 |
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31.1 |
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Certification of principal
executive officer pursuant to Rule
13a-14(a) of the Exchange Act of
1934 |
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Filed herewith |
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31 |
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31.2 |
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Certification of principal
financial officer pursuant to Rule
13a-14(a) of the Exchange Act of
1934 |
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Filed herewith |
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32 |
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32.1 |
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Certification of CEO pursuant to
Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of
this report pursuant to the
Sarbanes-Oxley Act of 2002 1 |
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Filed herewith |
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32 |
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32.2 |
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Certification of CFO pursuant to
Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of
this report pursuant to the
Sarbanes-Oxley Act of 2002 1 |
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Filed herewith |
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