Developers Diversified Realty Corp. 10-Q
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 June 30, 2008
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 |
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 is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company
o |
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 August 6, 2008, the registrant had 120,271,886 outstanding common shares, $0.10 par
value.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
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June 30, |
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December 31, |
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2008 |
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2007 |
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Assets |
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Real estate rental property: |
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Land |
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$ |
2,099,882 |
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$ |
2,142,942 |
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Buildings |
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5,958,173 |
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5,933,890 |
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Fixtures and tenant improvements |
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259,515 |
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237,117 |
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8,317,570 |
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8,313,949 |
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Less: Accumulated depreciation |
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(1,125,477 |
) |
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(1,024,048 |
) |
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7,192,093 |
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7,289,901 |
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Construction in progress and land under development |
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898,161 |
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664,926 |
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Real estate held for sale |
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5,796 |
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8,090,254 |
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7,960,623 |
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Investments in and advances to joint ventures |
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689,313 |
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638,111 |
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Cash and cash equivalents |
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47,847 |
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49,547 |
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Restricted cash |
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49,179 |
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58,958 |
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Notes receivable |
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40,423 |
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18,557 |
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Deferred charges, net |
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30,740 |
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31,172 |
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Other assets, net |
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325,997 |
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332,848 |
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$ |
9,273,753 |
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$ |
9,089,816 |
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Liabilities and Shareholders Equity |
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Unsecured indebtedness: |
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Senior notes |
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$ |
2,519,225 |
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$ |
2,622,219 |
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Revolving credit facilities |
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878,006 |
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709,459 |
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3,397,231 |
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3,331,678 |
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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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1,614,051 |
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1,459,336 |
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2,414,051 |
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2,259,336 |
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Total indebtedness |
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5,811,282 |
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5,591,014 |
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Accounts payable and accrued expenses |
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158,876 |
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141,629 |
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Dividends payable |
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89,951 |
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85,851 |
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Other liabilities |
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132,960 |
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143,616 |
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6,193,069 |
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5,962,110 |
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Minority equity interest |
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140,648 |
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111,767 |
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Operating partnership minority interests |
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8,010 |
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17,114 |
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6,341,727 |
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6,090,991 |
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Commitments and contingencies |
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Shareholders 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 June 30, 2008 and December 31,
2007 |
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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 June 30, 2008 and December 31,
2007 |
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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 June 30, 2008 and December 31,
2007 |
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170,000 |
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170,000 |
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Common shares, $0.10 par value; 300,000,000 shares
authorized; 126,797,819 and 126,793,684 shares
issued at June 30, 2008 and December 31, 2007,
respectively |
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12,680 |
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12,679 |
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Paid-in-capital |
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3,019,404 |
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3,029,176 |
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Accumulated distributions in excess of net income |
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(363,424 |
) |
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(260,018 |
) |
Deferred compensation obligation |
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22,864 |
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22,862 |
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Accumulated other comprehensive income |
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22,832 |
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8,965 |
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Less: Common shares in treasury at
cost: 6,708,295 and 7,345,304 shares at
June 30, 2008
and December 31, 2007, respectively |
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(337,330 |
) |
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(369,839 |
) |
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2,932,026 |
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2,998,825 |
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$ |
9,273,753 |
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$ |
9,089,816 |
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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 JUNE 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
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2008 |
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2007 |
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Revenues from operations: |
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Minimum rents |
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$ |
159,452 |
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$ |
174,761 |
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Percentage and overage rents |
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1,100 |
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1,547 |
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Recoveries from tenants |
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48,498 |
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55,832 |
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Ancillary and other property income |
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6,328 |
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4,250 |
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Management fees, development fees and other fee income |
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15,637 |
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11,996 |
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Other |
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1,691 |
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3,717 |
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232,706 |
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252,103 |
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Rental operation expenses: |
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Operating and maintenance |
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34,985 |
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34,658 |
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Real estate taxes |
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28,138 |
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30,233 |
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General and administrative |
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21,333 |
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19,161 |
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Depreciation and amortization |
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59,809 |
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54,313 |
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144,265 |
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138,365 |
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Other income (expense): |
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Interest income |
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552 |
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2,500 |
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Interest expense |
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(61,174 |
) |
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(73,554 |
) |
Other income (expense), net |
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98 |
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(225 |
) |
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(60,524 |
) |
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(71,279 |
) |
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Income before equity in net income of joint ventures, minority equity
interests, tax (expense) benefit of taxable REIT subsidiaries and
franchise taxes, discontinued operations and gain on disposition of
real estate, net of tax |
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27,917 |
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42,459 |
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Equity in net income of joint ventures |
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12,555 |
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21,602 |
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Income before minority equity interests, tax (expense) benefit of
taxable REIT subsidiaries and franchise taxes, discontinued
operations and gain on disposition of real estate, net of tax |
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40,472 |
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64,061 |
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Minority equity interests: |
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Minority equity interests |
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(1,735 |
) |
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(1,399 |
) |
Preferred operating partnership minority interests |
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(5,908 |
) |
Operating partnership minority interests |
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(290 |
) |
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(569 |
) |
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(2,025 |
) |
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|
(7,876 |
) |
Tax (expense) benefit of taxable REIT subsidiaries and franchise taxes |
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|
(307 |
) |
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|
711 |
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Income from continuing operations |
|
|
38,140 |
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|
56,896 |
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|
|
|
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Discontinued operations: |
|
|
|
|
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|
(Loss) income from discontinued operations |
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|
(199 |
) |
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|
5,714 |
|
Gain on disposition of real estate, net of tax |
|
|
1,078 |
|
|
|
10,815 |
|
|
|
|
|
|
|
|
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|
879 |
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|
16,529 |
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|
|
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|
Income before gain on disposition of real estate |
|
|
39,019 |
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|
73,425 |
|
Gain on disposition of real estate, net of tax |
|
|
908 |
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|
54,012 |
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|
|
|
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Net income |
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$ |
39,927 |
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|
$ |
127,437 |
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|
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|
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Preferred dividends |
|
|
10,567 |
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|
16,008 |
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Net income applicable to common shareholders |
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$ |
29,360 |
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$ |
111,429 |
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Per share data: |
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Basic earnings per share data: |
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Income from continuing operations |
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$ |
0.24 |
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$ |
0.77 |
|
Income from discontinued operations |
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|
0.01 |
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|
|
0.13 |
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|
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Net income applicable to common shareholders |
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$ |
0.25 |
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$ |
0.90 |
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Diluted earnings per share data: |
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Income from continuing operations |
|
$ |
0.24 |
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|
$ |
0.75 |
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
0.14 |
|
|
|
|
|
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Net income applicable to common shareholders |
|
$ |
0.25 |
|
|
$ |
0.89 |
|
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|
|
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Dividends declared per common share |
|
$ |
0.69 |
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|
$ |
0.66 |
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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 SIX-MONTH PERIODS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
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2008 |
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|
2007 |
|
Revenues from operations: |
|
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|
|
|
|
|
|
Minimum rents |
|
$ |
319,870 |
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|
$ |
324,355 |
|
Percentage and overage rents |
|
|
4,083 |
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|
|
3,531 |
|
Recoveries from tenants |
|
|
102,036 |
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|
101,499 |
|
Ancillary and other property income |
|
|
10,982 |
|
|
|
8,940 |
|
Management fees, development fees and other fee income |
|
|
31,924 |
|
|
|
21,078 |
|
Other |
|
|
5,178 |
|
|
|
11,426 |
|
|
|
|
|
|
|
|
|
|
|
474,073 |
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|
470,829 |
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|
|
|
|
|
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Rental operation expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance |
|
|
71,738 |
|
|
|
61,884 |
|
Real estate taxes |
|
|
55,740 |
|
|
|
55,986 |
|
General and administrative |
|
|
42,047 |
|
|
|
40,678 |
|
Depreciation and amortization |
|
|
116,769 |
|
|
|
106,350 |
|
|
|
|
|
|
|
|
|
|
|
286,294 |
|
|
|
264,898 |
|
|
|
|
|
|
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Other income (expense): |
|
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|
|
|
|
|
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Interest income |
|
|
1,135 |
|
|
|
6,182 |
|
Interest expense |
|
|
(123,249 |
) |
|
|
(133,947 |
) |
Other expense, net |
|
|
(400 |
) |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
(122,514 |
) |
|
|
(128,215 |
) |
|
|
|
|
|
|
|
Income before equity in net income of joint ventures, minority equity
interests, tax (expense) benefit of taxable REIT subsidiaries and
franchise taxes, discontinued operations and gain on disposition of
real estate, net of tax |
|
|
65,265 |
|
|
|
77,716 |
|
Equity in net income of joint ventures |
|
|
19,943 |
|
|
|
27,883 |
|
|
|
|
|
|
|
|
Income before minority equity interests, tax (expense) benefit of
taxable REIT subsidiaries and franchise taxes, discontinued
operations and gain on disposition of real estate, net of tax |
|
|
85,208 |
|
|
|
105,599 |
|
Minority equity interests: |
|
|
|
|
|
|
|
|
Minority equity interests |
|
|
(3,512 |
) |
|
|
(2,887 |
) |
Preferred operating partnership minority interests |
|
|
|
|
|
|
(9,690 |
) |
Operating partnership minority interests |
|
|
(884 |
) |
|
|
(1,138 |
) |
|
|
|
|
|
|
|
|
|
|
(4,396 |
) |
|
|
(13,715 |
) |
Tax (expense) benefit of taxable REIT subsidiaries and franchise taxes |
|
|
(1,353 |
) |
|
|
15,771 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
79,459 |
|
|
|
107,655 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(269 |
) |
|
|
8,662 |
|
Gain on disposition of real estate, net of tax |
|
|
886 |
|
|
|
13,634 |
|
|
|
|
|
|
|
|
|
|
|
617 |
|
|
|
22,296 |
|
|
|
|
|
|
|
|
Income before gain on disposition of real estate |
|
|
80,076 |
|
|
|
129,951 |
|
Gain on disposition of real estate, net of tax |
|
|
3,275 |
|
|
|
60,022 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
83,351 |
|
|
$ |
189,973 |
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
21,134 |
|
|
|
29,800 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
62,217 |
|
|
$ |
160,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.51 |
|
|
$ |
1.15 |
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.52 |
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.51 |
|
|
$ |
1.14 |
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.52 |
|
|
$ |
1.33 |
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
1.38 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
- 5 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Net cash flow provided by operating activities: |
|
$ |
212,864 |
|
|
$ |
221,219 |
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Real estate developed or acquired, net of liabilities assumed |
|
|
(238,279 |
) |
|
|
(2,591,744 |
) |
Equity contributions to joint ventures |
|
|
(43,889 |
) |
|
|
(223,517 |
) |
Proceeds from joint venture advances, net |
|
|
1,544 |
|
|
|
1,587 |
|
Proceeds from sale and refinancing of joint venture interests |
|
|
736 |
|
|
|
5,936 |
|
Return on investments in joint ventures |
|
|
14,873 |
|
|
|
35,255 |
|
(Issuance) repayment of notes receivable, net |
|
|
(12,766 |
) |
|
|
837 |
|
Decrease in restricted cash |
|
|
9,779 |
|
|
|
|
|
Proceeds from disposition of real estate |
|
|
22,897 |
|
|
|
1,846,817 |
|
|
|
|
|
|
|
|
Net cash flow used for investing activities |
|
|
(245,105 |
) |
|
|
(924,829 |
) |
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facilities, net |
|
|
165,976 |
|
|
|
82,500 |
|
Repayment of senior notes |
|
|
(103,425 |
) |
|
|
(100,000 |
) |
Proceeds from term loans |
|
|
|
|
|
|
900,000 |
|
Repayment of term loans |
|
|
|
|
|
|
(750,000 |
) |
Proceeds from mortgage and other secured debt |
|
|
408,708 |
|
|
|
55,046 |
|
Principal payments on mortgage debt |
|
|
(253,992 |
) |
|
|
(316,633 |
) |
Proceeds from issuance of convertible senior notes, net of underwriting
commissions and offering expenses of $267 in 2007 |
|
|
|
|
|
|
587,733 |
|
Payment of deferred finance costs |
|
|
(4,307 |
) |
|
|
(2,958 |
) |
Proceeds from issuance of common shares, net of underwriting commissions and
offering expenses of $208 in 2007 |
|
|
|
|
|
|
746,645 |
|
Purchased option arrangement on common shares |
|
|
|
|
|
|
(32,580 |
) |
Proceeds from issuance of common shares in conjunction with the exercise of stock
options, dividend reinvestment plan and restricted stock plan |
|
|
994 |
|
|
|
5,991 |
|
Proceeds from issuance of preferred operating partnership interest, net of expenses |
|
|
|
|
|
|
484,204 |
|
Redemption of preferred operating partnership interest, net of expenses |
|
|
|
|
|
|
(484,204 |
) |
Redemption of preferred shares |
|
|
|
|
|
|
(150,000 |
) |
Return of investmentminority interest shareholder |
|
|
(1,681 |
) |
|
|
(4,260 |
) |
Purchase of operating partnership minority interests |
|
|
(46 |
) |
|
|
(683 |
) |
Distributions to operating partnership minority interests |
|
|
(1,175 |
) |
|
|
(10,789 |
) |
Repurchase of common shares |
|
|
|
|
|
|
(117,000 |
) |
Dividends paid |
|
|
(182,658 |
) |
|
|
(171,761 |
) |
|
|
|
|
|
|
|
Net cash flow provided by financing activities |
|
|
28,394 |
|
|
|
721,251 |
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(3,847 |
) |
|
|
17,641 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
2,147 |
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
49,547 |
|
|
|
28,378 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
47,847 |
|
|
$ |
46,019 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
For the six-month period ended June 30, 2008, minority equity interests with a book value of
approximately $14.3 million were converted into approximately 0.5 million common shares of the
Company. In addition, the Company issued a note receivable of $9.1 million in connection with the
sale of one asset in June 2008. Other liabilities included approximately $18.3 million, which
represents the fair value of the Companys interest rate swaps. At June 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 six-month period ended June 30, 2008.
- 6 -
For the six-month period ended June 30, 2007, in conjunction with the merger of Inland Retail
Real Estate Trust, Inc. (IRRETI), the Company acquired real estate assets of $3.0 billion,
investments in joint ventures of approximately $29.8 million and accounts receivable, intangible
assets and other assets aggregating approximately $83.0 million. A portion of the consideration
used to acquire the $3.0 billion of assets included assumed debt of $446.5 million, accounts
payable and other liabilities aggregating approximately $12.1 million and common shares of
approximately $394.2 million. In conjunction with the redemption of the Companys Class F
Cumulative Redeemable Preferred Shares, the Company recorded a non-cash dividend to net income
available to common shareholders of $5.4 million relating to the write-off of original issuance
costs. Other assets included approximately $2.7 million, which represents the fair value of the
Companys interest rate swaps. At June 30, 2007, dividends payable were $89.5 million. In January
2007, in accordance with the terms of the performance unit plans, the Company issued 466,666
restricted common shares of which 70,000 vested as of the date of issuance. The remaining 396,666
shares will vest in 2008 through 2011. The foregoing transactions did not provide for or require
the use of cash for the six-month period ended June 30, 2007.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 7 -
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 real estate joint ventures and
subsidiaries (collectively, the Company or DDR) are engaged in the business of acquiring,
expanding, owning, developing, redeveloping, leasing, managing and operating shopping centers and
enclosed malls.
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
six-month periods ended June 30, 2008 and 2007, 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 10-K for the year ended December 31, 2007.
The Company consolidates certain entities in which it owns less than a 100% equity interest if
the entity is a variable interest entity (VIE), as defined in Financial Accounting Standards
Board (FASB) Interpretation No. 46(R) Consolidation of Variable Interest Entities (FIN 46(R))
and the Company is deemed to be the primary beneficiary in the VIE. The Company also consolidates
certain entities that are not a VIE as defined in FIN 46(R) in which it has effective control. The
Company consolidates one entity pursuant to the provisions of Emerging Issues Task Force (EITF)
04-05, Investors Accounting for an Investment in a Limited Partnership When the Investor Is the
Sole General Partner and the Limited Partners Have Certain Rights. The equity method of
accounting is applied to entities in which the Company is not the primary beneficiary as defined by
FIN 46(R), or does not have effective control, but can exercise significant influence over the
entity with respect to its operations and major decisions.
- 8 -
Comprehensive Income
Comprehensive income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
39,927 |
|
|
$ |
127,437 |
|
|
$ |
83,351 |
|
|
$ |
189,973 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts |
|
|
16,935 |
|
|
|
5,572 |
|
|
|
(4,504 |
) |
|
|
6,916 |
|
Amortization of interest rate contracts |
|
|
(93 |
) |
|
|
(364 |
) |
|
|
(457 |
) |
|
|
(727 |
) |
Foreign currency translation |
|
|
14,724 |
|
|
|
7,962 |
|
|
|
18,828 |
|
|
|
11,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
31,566 |
|
|
|
13,170 |
|
|
|
13,867 |
|
|
|
18,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
71,493 |
|
|
$ |
140,607 |
|
|
$ |
97,218 |
|
|
$ |
208,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Standards Implemented
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 SFAS 159
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159), which gives entities the option to measure
eligible financial assets, financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded
in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon
adoption, with the transition adjustment recorded to beginning retained earnings. The Company
adopted SFAS No. 159 on January 1, 2008, and did not elect to measure any assets, liabilities or
firm commitments at fair value.
Fair Value Measurements SFAS 157
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and
liabilities. This statement clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing the asset or liability. SFAS No. 157
establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets
and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require
assets or liabilities to be measured at fair value. SFAS No. 157 also provides for certain
disclosure requirements, including, but not limited to, the valuation techniques used to measure
fair value and a discussion of changes in valuation techniques, if any, during the period. The
Company adopted this statement for its financial assets and liabilities on January 1, 2008.
For nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at
fair value on a recurring basis, the statement is effective for fiscal years beginning after
November 15,
- 9 -
2008. The Company is currently evaluating the impact that this statement, for nonfinancial
assets and liabilities, will have on its financial statements.
New Accounting Standards to Be Implemented
Business Combinations SFAS 141(R)
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(SFAS No. 141 (R)). The objective of this statement 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 statement
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 statement 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 is not permitted. The Company will adopt SFAS No. 141(R) on
January 1, 2009. To the extent that the Company enters into new acquisitions in 2009 and beyond,
acquisition costs and fees which are currently capitalized and allocated to the basis of the
acquisition, this standard will require the Company to expense these costs as incurred. Because of
this change in accounting for costs, the Company expects that the adoption of this standard will
cause a negative impact to the Companys results of operations as costs are incurred. The Company
is currently assessing the complete impact, if any, the adoption of SFAS No. 141 (R) will have on
its financial position and results of operations.
Non-Controlling Interests in Consolidated Financial Statements an Amendment of ARB No. 51
SFAS 160
In December 2007, the FASB issued Statement No. 160, Non-Controlling Interest in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS No. 160). A non-controlling interest,
sometimes called minority interest, is the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. The objective of this statement 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
- 10 -
interest of the non-controlling owners. This statement is effective for fiscal years, and
interim reporting periods within those fiscal years, beginning on or after December 15, 2008, and
is applied on a prospective basis. Early adoption is not permitted. The Company is currently
assessing the impact, if any, the adoption of SFAS No. 160 will have on the Companys financial
position and results of operations.
Disclosures about Derivative Instruments and Hedging Activities SFAS 161
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161), 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. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged.
The Company is currently assessing the impact, if any, that the adoption of SFAS No. 161 will have
on its financial statement disclosures.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) FSP APB 14-a
In May 2008, the FASB issued a FASB Staff Position (FSP), Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB 14-a). This FSP 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 FSP APB 14-a and requires issuers of such instruments to separately account for the
liability and equity components by allocating the proceeds from issuance of the instrument between
the liability component and the embedded conversion option (i.e., the equity component). The
difference between the principal amount of the debt and the amount of the proceeds allocated to the
liability component should be reported as a debt discount and subsequently amortized to earnings
over the instruments expected life. As a result, a lower net income would be reflected as
interest expense would include both the current periods amortization of the debt discount and the
instruments coupon interest. This statement is effective for fiscal years beginning after December
15, 2008, and for interim periods within those fiscal years, with retrospective application
required. Early adoption is not permitted. The Company is currently assessing the impact that the
adoption of FSP APB 14-a will have on its financial position and results of operations.
Accounting for Transfers of Financial Assets and Repurchase Financing Transactions FSP FAS 140-3
In February 2008, the FASB issued a FSP
Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions (FSP FAS 140-3). This FSP addresses the issue of whether or
not these transactions should be viewed as two separate transactions or as one linked
transaction. The FSP includes a rebuttable presumption linking the two transactions unless the
presumption can be
- 11 -
overcome by meeting certain criteria. This FSP
is effective for fiscal years beginning after
November 15, 2008, and will apply only to original transfers made after that date; early adoption
is not permitted. The Company is currently evaluating the impact, if any, the adoption of FSP FAS
140-3 will have on its financial position and results of operations.
Determination of the Useful Life of Intangible Assets FSP FAS 142-3
In April 2008, the FASB issued a FSP
Determination of the Useful Life of Intangible
Assets (FSP 142-3), 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 FAS
142, Goodwill and Other Intangible Assets. The FSP is intended to improve the consistency between
the useful life of an intangible asset determined under FAS 142 and the period of expected cash
flows used to measure the fair value of the asset under FAS 141(R), Business Combinations, and
other US GAAP. The guidance for determining the useful life of a recognized intangible asset in
this FSP shall be applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements in this FSP shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is not permitted. The Company is currently evaluating the
impact, if any, the adoption of FSP 142-3 will have on its financial position and results of
operations.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities FSP EITF 03-6-1
In June 2008, the FASB issued a FSP
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP EITF 03-6-1), 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 SFAS No. 128, Earnings per Share. Under the
guidance in FSP EITF 03-6-1, 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 FSP 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 shall be adjusted retrospectively. Early adoption is not permitted. The Company is
currently assessing the impact, if any, the adoption of FSP EITF 03-6-1 will have on its financial
position and results of operations.
- 12 -
2. EQUITY INVESTMENTS IN JOINT VENTURES
At June 30, 2008 and December 31, 2007, the Company had ownership interests in various
unconsolidated joint ventures which, as of the respective dates, owned 274 shopping center
properties and 273 shopping center properties, and 44 shopping center sites formerly owned by
Service Merchandise Company, Inc. Included in these amounts are the shopping center properties
owned by TRT DDR Venture I, which acquired three assets in the second quarter of 2007. These
assets have been segregated and discussed separately in Note 3. TRT DDR Venture I was considered a
significant subsidiary at June 30, 2007, and is excluded from the 2008 and 2007 combined amounts
presented below.
Combined condensed financial information of the Companys unconsolidated joint venture
investments excluding those amounts for TRT DDR Venture I reported in Note 3 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Combined Balance Sheets: |
|
|
|
|
|
|
|
|
Land |
|
$ |
2,362,572 |
|
|
$ |
2,352,034 |
|
Buildings |
|
|
6,192,616 |
|
|
|
6,126,564 |
|
Fixtures and tenant improvements |
|
|
124,369 |
|
|
|
99,917 |
|
|
|
|
|
|
|
|
|
|
|
8,679,557 |
|
|
|
8,578,515 |
|
Less: Accumulated depreciation |
|
|
(512,412 |
) |
|
|
(409,993 |
) |
|
|
|
|
|
|
|
|
|
|
8,167,145 |
|
|
|
8,168,522 |
|
Construction in progress |
|
|
309,287 |
|
|
|
207,367 |
|
|
|
|
|
|
|
|
|
|
|
8,476,432 |
|
|
|
8,375,889 |
|
Receivables, net |
|
|
142,532 |
|
|
|
122,729 |
|
Leasehold interests |
|
|
13,195 |
|
|
|
13,927 |
|
Other assets |
|
|
432,928 |
|
|
|
361,277 |
|
|
|
|
|
|
|
|
|
|
$ |
9,065,087 |
|
|
$ |
8,873,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt |
|
$ |
5,587,730 |
|
|
$ |
5,441,839 |
|
Amounts payable to DDR |
|
|
8,334 |
|
|
|
8,492 |
|
Other liabilities |
|
|
223,954 |
|
|
|
200,641 |
|
|
|
|
|
|
|
|
|
|
|
5,820,018 |
|
|
|
5,650,972 |
|
Accumulated equity |
|
|
3,245,069 |
|
|
|
3,222,850 |
|
|
|
|
|
|
|
|
|
|
$ |
9,065,087 |
|
|
$ |
8,873,822 |
|
|
|
|
|
|
|
|
Companys share of accumulated equity (1) |
|
$ |
666,980 |
|
|
$ |
609,171 |
|
|
|
|
|
|
|
|
- 13 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Combined Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations |
|
$ |
232,575 |
|
|
$ |
200,079 |
|
|
$ |
466,884 |
|
|
$ |
345,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation |
|
|
78,423 |
|
|
|
64,837 |
|
|
|
157,888 |
|
|
|
113,258 |
|
Depreciation and amortization |
|
|
58,744 |
|
|
|
48,524 |
|
|
|
114,247 |
|
|
|
78,960 |
|
Interest |
|
|
70,416 |
|
|
|
65,563 |
|
|
|
146,163 |
|
|
|
111,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,583 |
|
|
|
178,924 |
|
|
|
418,298 |
|
|
|
303,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense and
discontinued operations |
|
|
24,992 |
|
|
|
21,155 |
|
|
|
48,586 |
|
|
|
41,556 |
|
Income tax expense |
|
|
(2,865 |
) |
|
|
(2,297 |
) |
|
|
(6,645 |
) |
|
|
(4,545 |
) |
(Loss) gain on sale of real estate |
|
|
(11 |
) |
|
|
93,089 |
|
|
|
(13 |
) |
|
|
93,089 |
|
Other income, net |
|
|
50,100 |
|
|
|
|
|
|
|
56,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
72,216 |
|
|
|
111,947 |
|
|
|
98,467 |
|
|
|
130,100 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations |
|
|
101 |
|
|
|
(284 |
) |
|
|
115 |
|
|
|
(198 |
) |
Gain on disposition of real estate |
|
|
|
|
|
|
1,080 |
|
|
|
|
|
|
|
738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
796 |
|
|
|
115 |
|
|
|
540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,317 |
|
|
$ |
112,743 |
|
|
$ |
98,582 |
|
|
$ |
130,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of equity in net
income of joint ventures (2) |
|
$ |
12,737 |
|
|
$ |
21,758 |
|
|
$ |
20,234 |
|
|
$ |
28,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (including TRT DDR Venture I reported in Note 3) underlying net assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Companys share of accumulated equity |
|
$ |
672.1 |
|
|
$ |
614.5 |
|
Basis differentials (2) |
|
|
107.9 |
|
|
|
114.1 |
|
Deferred development fees, net of portion
relating to the Companys interest |
|
|
(4.6 |
) |
|
|
(3.8 |
) |
Basis differential upon transfer of assets (2) |
|
|
(95.9 |
) |
|
|
(97.2 |
) |
Notes receivable from investments |
|
|
1.5 |
|
|
|
2.0 |
|
Amounts payable to DDR |
|
|
8.3 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
Investments in and advances to joint ventures
(1) |
|
$ |
689.3 |
|
|
$ |
638.1 |
|
|
|
|
|
|
|
|
|
|
|
(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, deferred development
fees, net of the portion relating to the Companys interest, notes and amounts receivable
from the joint venture investments. |
|
(2) |
|
For the three-month periods ended June 30, 2008 and 2007, the difference between the
$12.7 million and $21.7 million, respectively, of the Companys share of equity in net
income of joint ventures and the $12.6 million and $21.6 million, respectively, of equity
in net income of joint ventures reflected in the Companys condensed consolidated
statements of operations is primarily attributable to amortization associated with basis
differentials and differences in the recognition of gains on sales. The Companys share of
joint venture net income has been decreased by approximately $0.2 million and $0.1 million
for the three-month periods ended June 30, 2008 and 2007, respectively, to reflect
additional basis depreciation and basis differences in assets sold. For the six-month
periods ended June 30, 2008 and 2007, the difference between the $20.2 million and $28.3
million, respectively, of the Companys share of equity in net income of joint ventures
reflected above and the $19.9 million and $27.9 million, respectively, of equity in net
income of joint ventures reflected in the Companys condensed consolidated statements of
operations is primarily attributable to amortization associated with the basis
differentials and |
- 14 -
|
|
|
|
|
differences in the recognition of gains on sales. The Companys share of joint venture net
income has been decreased by approximately $0.3 million and $0.4 million for the six-month
periods ended June 30, 2008 and 2007, respectively, to reflect additional basis depreciation
and basis differences in assets sold. Basis differentials occur primarily when the Company
has purchased interests in existing joint ventures at fair market values, which differ from
their proportionate share of the historical net assets of the joint venture. 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. |
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 |
|
Six-Month Periods |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Management and other fees |
|
$ |
12.6 |
|
|
$ |
9.8 |
|
|
$ |
25.5 |
|
|
$ |
17.0 |
|
Acquisition, financing,
guarantee and other fees
(1) |
|
|
0.1 |
|
|
|
1.5 |
|
|
|
0.1 |
|
|
|
7.8 |
|
Development fees and
leasing commissions |
|
|
2.9 |
|
|
|
1.9 |
|
|
|
6.1 |
|
|
|
3.8 |
|
Interest income |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
(1) |
|
Acquisition fees of $6.3 million were earned from the formation of the joint venture
with TIAA-CREF in 2007, excluding the Companys retained ownership of approximately 15%.
The Companys fees were earned in conjunction with services rendered by the Company in
connection with the acquisition of the Inland Retail Real Estate Trust, Inc. (IRRETI)
real estate assets. |
In February 2008, the Company began purchasing units of Macquarie DDR Trust (ASX: MDT)
(MDT), an Australian Real Estate Investment Trust which is managed by an affiliate of Macquarie
Group Limited (ASX: MQG) an international investment bank, advisor and manager of specialized real
estate funds, and the Company. MDT is DDRs joint venture partner in the DDR Macquarie Fund LLC
Joint Venture (the Fund). Through June 30, 2008, the Company purchased 62.9 million units of MDT
at an aggregate purchase price of $29.3 million. Through the combination of its purchase of the
units in MDT and its direct and indirect ownership of the Fund, DDR is entitled to an approximate
20.3% economic interest in the Fund as of June 30, 2008 (6.4% and 4.8% on a weighted-average basis
for the three- and six-month periods ended June 30, 2008). As the Company does not have the
ability to exercise significant influence over operating and financial policies, the Company
accounts for both its interest in MDT and the Fund using the equity method of accounting.
3. TRT DDR VENTURE I
In the second quarter of 2007, Dividend Capital Total Realty Trust and the Company formed a
$161.5 million joint venture (TRT DDR Venture I). The Company contributed three recently
developed assets aggregating 0.7 million of Company-owned square feet to the joint venture and
retained an effective ownership interest of 10%. The Company recorded an after-tax gain, net of
its retained interest, of approximately $50.2 million, which is included in gain on disposition of
real estate. As the Company does not have economic or effective control, TRT DDR Venture I is
accounted for using the equity method of accounting. The Company receives asset management and
property management fees, plus fees on leasing and ancillary income in addition to a promoted
interest.
- 15 -
At June 30, 2007, the Companys investment in TRT DDR Venture I was considered a significant
subsidiary pursuant to the applicable Regulation S-X rules as a result of the recognition of an
approximate $54.7 million gain in the second quarter of 2007 from the contribution of assets to
the joint venture.
Condensed financial information of TRT DDR Venture I is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Balance Sheet: |
|
|
|
|
|
|
|
|
Land |
|
$ |
32,055 |
|
|
$ |
32,035 |
|
Buildings |
|
|
126,710 |
|
|
|
126,603 |
|
Fixtures and tenant improvements |
|
|
1,198 |
|
|
|
1,198 |
|
|
|
|
|
|
|
|
|
|
|
159,963 |
|
|
|
159,836 |
|
Less: Accumulated depreciation |
|
|
(4,909 |
) |
|
|
(2,813 |
) |
|
|
|
|
|
|
|
|
|
|
155,054 |
|
|
|
157,023 |
|
Construction in progress |
|
|
4 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
155,058 |
|
|
|
157,043 |
|
Receivables, net |
|
|
1,958 |
|
|
|
1,811 |
|
Other assets |
|
|
4,484 |
|
|
|
4,648 |
|
|
|
|
|
|
|
|
|
|
$ |
161,500 |
|
|
$ |
163,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt |
|
$ |
110,000 |
|
|
$ |
110,000 |
|
Other liabilities |
|
|
629 |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
110,629 |
|
|
|
110,442 |
|
Accumulated equity |
|
|
50,871 |
|
|
|
53,060 |
|
|
|
|
|
|
|
|
|
|
$ |
161,500 |
|
|
$ |
163,502 |
|
|
|
|
|
|
|
|
Companys share of accumulated equity |
|
$ |
5,087 |
|
|
$ |
5,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations |
|
$ |
3,931 |
|
|
$ |
1,817 |
|
|
$ |
7,819 |
|
|
$ |
1,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation |
|
|
1,225 |
|
|
|
380 |
|
|
|
2,703 |
|
|
|
380 |
|
Depreciation and amortization |
|
|
1,101 |
|
|
|
680 |
|
|
|
2,202 |
|
|
|
680 |
|
Interest |
|
|
1,573 |
|
|
|
865 |
|
|
|
3,120 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,899 |
|
|
|
1,925 |
|
|
|
8,025 |
|
|
|
1,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
32 |
|
|
$ |
(108 |
) |
|
$ |
(206 |
) |
|
$ |
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of equity in
net income (loss) of joint
venture |
|
$ |
3 |
|
|
$ |
(11 |
) |
|
$ |
(20 |
) |
|
$ |
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 16 -
4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
Acquisitions
On February 22, 2007, IRRETI shareholders approved a merger with a subsidiary of the Company
pursuant to a merger agreement among IRRETI, the Company and the subsidiary. Pursuant to the
merger, the Company acquired all of the outstanding shares of IRRETI for a total merger
consideration of $14.00 per share, of which $12.50 per share was funded in cash and $1.50 per share
was paid in the form of DDR common shares. As a result, on February 27, 2007, the Company issued
5.7 million DDR common shares to the IRRETI shareholders with an aggregate value of approximately
$394.2 million valued at $69.54 per share, which was the average closing price of the Companys
common shares for the ten trading days immediately preceding the two trading days prior to the
IRRETI shareholders meeting.
The IRRETI merger was initially recorded at a total cost of approximately $6.2 billion. Real
estate and related assets of approximately $3.1 billion were recorded by the Company and
approximately $3.0 billion was recorded by the TIAA-CREF Joint Venture. The Company assumed debt at
a fair market value of approximately $443.0 million. At the time of the merger, the IRRETI real
estate portfolio consisted of 315 community shopping centers, neighborhood shopping centers and
single tenant/net leased retail properties, totaling approximately 35.2 million square feet of
Company-owned Gross Leasable Area (GLA), and five development properties. In connection with the
merger, the TIAA-CREF Joint Venture acquired 66 of these shopping centers totaling approximately
15.6 million square feet of Company-owned GLA. During 2007, the Company sold 78 of the assets,
valued at approximately $1.2 billion, acquired in the merger with IRRETI, 21 of which were sold to
an independent buyer and the remaining 57 were contributed to unconsolidated joint ventures.
Pro Forma Financial Information
The following supplemental pro forma operating data is presented for the three- and six-month
periods ended June 30, 2007, as if the IRRETI merger, the formation of the joint venture with
TIAA-CREF, the contribution of 57 assets to unconsolidated joint ventures and the sale of 21 IRRETI
assets to an independent buyer were completed as of January 1, 2007. Pro forma amounts include
general and administrative expenses that IRRETI reported in its historical results of approximately
$48.3 million for the six-month period ended June 30, 2007, including severance, a substantial
portion of which management believes to be non-recurring. The supplemental pro forma operating
data does not present the formation of TRT DDR Venture I.
The merger with IRRETI was accounted for using the purchase method of accounting. The
revenues and expenses related to assets and interests acquired are included in the Companys
historical results of operations from the date of purchase.
The pro forma financial information is presented for informational purposes only and may not
be indicative of what actual results of operations would have been had the acquisitions occurred as
indicated, nor does it purport to represent the results of the operations for future periods (in
thousands, except per share data):
- 17 -
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Six-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2007 |
|
Pro forma revenues |
|
$ |
233,712 |
|
|
$ |
464,760 |
|
|
|
|
|
|
|
|
Pro forma income from continuing operations |
|
$ |
58,750 |
|
|
$ |
67,192 |
|
|
|
|
|
|
|
|
Pro forma income from discontinued operations |
|
$ |
16,529 |
|
|
$ |
22,296 |
|
|
|
|
|
|
|
|
Pro forma net income applicable to common shareholders |
|
$ |
113,283 |
|
|
$ |
119,843 |
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.78 |
|
|
$ |
0.78 |
|
Income from discontinued operations |
|
|
0.13 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.91 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.77 |
|
|
$ |
0.78 |
|
Income from discontinued operations |
|
|
0.13 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.90 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
5. OTHER ASSETS, NET
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
In-place leases (including lease origination costs and fair
market value of leases), net |
|
$ |
27,368 |
|
|
$ |
31,201 |
|
Tenant relations, net |
|
|
20,237 |
|
|
|
22,102 |
|
|
|
|
|
|
|
|
Total intangible assets (1) |
|
|
47,605 |
|
|
|
53,303 |
|
Other assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net (2) |
|
|
206,753 |
|
|
|
199,354 |
|
Prepaids, deposits and other assets |
|
|
71,639 |
|
|
|
80,191 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
325,997 |
|
|
$ |
332,848 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company recorded amortization expense of $2.7 million and $1.8 million for the
three-month periods ended June 30, 2008 and 2007, respectively, and $4.9 million and $3.6
million for the six-month periods ended June 30, 2008 and 2007, 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 $66.6 million and $61.7 million at
June 30, 2008 and December 31, 2007, respectively. |
6. 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), which was amended in December 2007. The Unsecured Credit Facility provides for
borrowings of $1.25 billion, an accordion feature for a future expansion to $1.4 billion and a
maturity date of June 2010, with a one-year extension option. 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, as defined in the facility or (ii) LIBOR,
plus a specified spread (0.60% at June 30,
- 18 -
2008). The specified spread over LIBOR varies 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 June 30, 2008. The facility also provides for an annual
facility fee of 0.15% on the entire facility. At June 30, 2008, total borrowings under the
Unsecured Credit Facility aggregated $856.5 million with a weighted average interest rate of 3.6%.
The Company also maintains a $75 million unsecured revolving credit facility, amended in
December 2007, 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, 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, as
defined in the facility or (ii) LIBOR, plus a specified spread (0.60% at June 30, 2008). The
specified spread over LIBOR is 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 June 30, 2008. At June 30, 2008, total borrowings under the National City Bank
facility aggregated $21.5 million with a weighted average interest rate of 3.1%.
7. FAIR VALUE MEASUREMENTS
As of June 30, 2008, the aggregate fair value of the Companys interest rate swaps that have
been designated and qualify as cash flow hedges was a liability of $18.3 million, which is included
in other liabilities in the condensed consolidated balance sheet. The effective portion of the
gain or loss on the interest rate swaps is reported as a component of other comprehensive income
and will be reclassified into earnings in the same period or periods during which the hedged
interest payments are a charge to earnings. For the three- and six-month periods ended June 30,
2008, the amount of hedge ineffectiveness was not material.
The Company adopted the provisions of SFAS No. 157, as amended by FSP FAS 157-1 and FSP FAS
157-2, on January 1, 2008.
Fair Value Hierarchy
SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to
those valuation techniques reflect assumptions other market participants would use based upon
market data obtained from independent sources (observable inputs). In accordance with SFAS No.
157, the following summarizes the fair value hierarchy:
Level 1 |
|
Quoted prices in active markets that are unadjusted and accessible at the
measurement date for identical, unrestricted assets or liabilities; |
- 19 -
Level 2 |
|
Quoted prices for identical assets and liabilities in markets that are not
active, quoted prices for similar assets and liabilities in active markets or financial
instruments for which significant inputs are observable, either directly or indirectly such as
interest rates and yield curves that are observable at commonly quoted intervals and |
|
Level 3 |
|
Prices or valuations that require inputs that are both significant to the fair
value measurement and unobservable. |
In certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair
value measurement in its entirety falls has been determined based on the lowest level input that is
significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the asset or liability.
Measurement of Fair Value
At June 30, 2008, 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.
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.
However, as of June 30, 2008, 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 not significant to the overall valuation of its derivatives.
As a result, the Company has determined that its derivative valuations in their entirety are
classified in Level 2 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
(in millions), which consists of interest rate swap agreements that are included in other
liabilities at June 30, 2008, measured at fair value on a recurring basis as of June 30, 2008, and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine
such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
at June 30, 2008 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Derivative Financial Instruments |
|
$ |
|
|
|
$ |
18.3 |
|
|
$ |
|
|
|
$ |
18.3 |
|
- 20 -
8. CONTINGENCIES
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. SHAREHOLDERS EQUITY
The following table summarizes the changes in shareholders equity since December 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.10 |
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
Other |
|
|
Treasury |
|
|
|
|
|
|
Preferred |
|
|
Par |
|
|
Paid-in |
|
|
in Excess of |
|
|
Deferred |
|
|
Comprehensive |
|
|
Stock |
|
|
|
|
|
|
Shares |
|
|
Value) |
|
|
Capital |
|
|
Net Income |
|
|
Obligation |
|
|
Income |
|
|
at Cost |
|
|
Total |
|
Balance, December 31, 2007 |
|
$ |
555,000 |
|
|
$ |
12,679 |
|
|
$ |
3,029,176 |
|
|
$ |
(260,018 |
) |
|
$ |
22,862 |
|
|
$ |
8,965 |
|
|
$ |
(369,839 |
) |
|
$ |
2,998,825 |
|
Issuance of common shares
related to exercise of stock
options, dividend reinvestment
plan, performance plan and
director compensation |
|
|
|
|
|
|
1 |
|
|
|
(2,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,378 |
|
|
|
6,241 |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
(5,177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,074 |
|
|
|
897 |
|
Vesting of restricted stock |
|
|
|
|
|
|
|
|
|
|
7,436 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
(5,270 |
) |
|
|
2,168 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
4,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,375 |
|
Redemption of 463,185
operating partnership units in
exchange for common shares |
|
|
|
|
|
|
|
|
|
|
(14,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,327 |
|
|
|
9,059 |
|
Dividends declaredcommon
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165,623 |
) |
Dividends declaredpreferred
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,134 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,351 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,504 |
) |
|
|
|
|
|
|
(4,504 |
) |
Amortization of interest
rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(457 |
) |
|
|
|
|
|
|
(457 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,828 |
|
|
|
|
|
|
|
18,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,351 |
|
|
|
|
|
|
|
13,867 |
|
|
|
|
|
|
|
97,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
555,000 |
|
|
$ |
12,680 |
|
|
$ |
3,019,404 |
|
|
$ |
(363,424 |
) |
|
$ |
22,864 |
|
|
$ |
22,832 |
|
|
$ |
(337,330 |
) |
|
$ |
2,932,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share dividends declared, per share, were $0.69 and $0.66 for the three-month periods
ended June 30, 2008 and 2007, respectively, and $1.38 and $1.32 for the six-month periods ended
June 30, 2008 and 2007, respectively.
In June 2007, the Companys Board of Directors authorized a common share repurchase program.
Under the terms of the program, the Company may purchase up to a maximum value of $500 million of
its common shares over a two-year period. As of June 30, 2008, the Company had
- 21 -
repurchased under this program 5.6 million of its common shares at a weighted average cost of
$46.66 per share. The Company has not repurchased any of its shares pursuant to this program in
2008.
During the six-month period ended June 30, 2008, the vesting of restricted stock grants to
certain officers and directors of the Company, approximating 0.2 million common shares of the
Company, was deferred through the Companys non-qualified deferred compensation plans and,
accordingly, the Company recorded approximately $4.3 million in deferred obligations. Also, in the
first quarter of 2008, in accordance with the transition rules under Section 409A of the Internal
Revenue Code, an officer elected to have his deferrals distributed to him, which resulted in a
reduction of the deferred obligation and a corresponding increase in paid in capital of
approximately $4.7 million.
Operating Partnership Units
In 2008, 0.5 million of operating partnership minority interests were converted
into an equivalent number of common shares of the Company.
10. OTHER INCOME
Other income for the three- and six-month periods ended June 30, 2008 and 2007, was composed
of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Six-Month |
|
|
|
Periods Ended |
|
|
Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Acquisition and financing
fees (1) |
|
$ |
|
|
|
$ |
1.4 |
|
|
$ |
|
|
|
$ |
7.7 |
|
Lease termination
fees |
|
|
1.4 |
|
|
|
2.2 |
|
|
|
4.7 |
|
|
|
3.5 |
|
Other |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.7 |
|
|
$ |
3.7 |
|
|
$ |
5.2 |
|
|
$ |
11.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes acquisition fees of $6.3 million earned from the formation of the joint
venture with TIAA-CREF in February 2007, excluding the Companys retained ownership
interest. The Companys fees were earned in conjunction with services rendered by the
Company in connection with the acquisition of the IRRETI real estate assets. Financing
fees were earned in connection with the formation and refinancing of unconsolidated joint
ventures, excluding the Companys retained ownership interest. The Companys fees are
earned in conjunction with the closing and amount of the financing transaction by the joint
venture. |
11. DISCONTINUED OPERATIONS
Pursuant to the definition of a component of an entity in SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), all earnings of discontinued
operations sold or held for sale, assuming no significant continuing involvement, have been
reclassified in the condensed consolidated statements of earnings for the three- and six-month
periods ended June 30, 2008 and 2007. The Company considers assets held for sale when the
transaction has been approved and there are no significant contingencies related to the sale that
may prevent the transaction from closing. Included in discontinued operations for the three- and
six-month periods ended June 30, 2008 and 2007, are four properties sold in 2008 (including one
property held for sale at December 31, 2007) aggregating 0.3 million square feet, and 67 shopping
centers sold in 2007 (including one property held for sale at December 31, 2006 and 22 properties
acquired through the IRRETI merger in 2007),
- 22 -
aggregating 6.3 million square feet. The operating results relating to assets sold are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
354 |
|
|
$ |
15,909 |
|
|
$ |
1,003 |
|
|
$ |
28,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
335 |
|
|
|
3,897 |
|
|
|
658 |
|
|
|
7,328 |
|
Interest, net |
|
|
98 |
|
|
|
3,681 |
|
|
|
248 |
|
|
|
6,980 |
|
Depreciation and amortization |
|
|
120 |
|
|
|
2,617 |
|
|
|
366 |
|
|
|
5,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
553 |
|
|
|
10,195 |
|
|
|
1,272 |
|
|
|
19,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before gain on
disposition of real estate |
|
|
(199 |
) |
|
|
5,714 |
|
|
|
(269 |
) |
|
|
8,662 |
|
Gain on disposition of real estate |
|
|
1,078 |
|
|
|
10,815 |
|
|
|
886 |
|
|
|
13,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
879 |
|
|
$ |
16,529 |
|
|
$ |
617 |
|
|
$ |
22,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. EARNINGS PER SHARE
Earnings Per Share (EPS) has been computed pursuant to the provisions of SFAS No. 128,
Earnings Per Share. The following table provides a reconciliation of net 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):
- 23 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income from continuing operations |
|
$ |
38,140 |
|
|
$ |
56,896 |
|
|
$ |
79,459 |
|
|
$ |
107,655 |
|
Add: Gain on disposition of real estate |
|
|
908 |
|
|
|
54,012 |
|
|
|
3,275 |
|
|
|
60,022 |
|
Less: Preferred stock dividends |
|
|
(10,567 |
) |
|
|
(16,008 |
) |
|
|
(21,134 |
) |
|
|
(29,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income from continuing operations applicable to
common shareholders |
|
|
28,481 |
|
|
|
94,900 |
|
|
|
61,600 |
|
|
|
137,877 |
|
Add: Operating partnership minority interests |
|
|
|
|
|
|
569 |
|
|
|
|
|
|
|
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income from continuing operations applicable
to common shareholders |
|
$ |
28,481 |
|
|
$ |
95,469 |
|
|
$ |
61,600 |
|
|
$ |
139,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average shares outstanding |
|
|
119,390 |
|
|
|
124,455 |
|
|
|
119,269 |
|
|
|
119,681 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
171 |
|
|
|
545 |
|
|
|
161 |
|
|
|
575 |
|
Operating partnership minority interests |
|
|
|
|
|
|
862 |
|
|
|
|
|
|
|
863 |
|
Restricted stock |
|
|
7 |
|
|
|
64 |
|
|
|
51 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Average shares outstanding |
|
|
119,568 |
|
|
|
125,926 |
|
|
|
119,481 |
|
|
|
121,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.77 |
|
|
$ |
0.51 |
|
|
$ |
1.15 |
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
0.13 |
|
|
|
0.01 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.25 |
|
|
$ |
0.90 |
|
|
$ |
0.52 |
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.75 |
|
|
$ |
0.51 |
|
|
$ |
1.14 |
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
0.14 |
|
|
|
0.01 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.25 |
|
|
$ |
0.89 |
|
|
$ |
0.52 |
|
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exchange of the minority equity interest associated with operating partnership units into
common shares was not included in the computation of diluted EPS for
the three- and six-month periods ended June 30, 2008, because the effect of assuming conversion was anti-dilutive.
The Companys two issuances of senior convertible notes, which are convertible into common
shares of the Company with an initial conversion price of approximately $74.75 and $65.11,
respectively, were not included in the computation of diluted EPS for
the three- and six-month
periods ended June 30, 2008 and 2007. The Companys stock price did not exceed the strike price of
the conversion feature of the senior convertible notes in these periods.
13. SEGMENT INFORMATION
The Company has two reportable segments, shopping centers and other investments, determined in
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131). 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
SFAS No. 131.
At June 30, 2008, the shopping center segment consisted of 708 shopping centers (including 318
owned through unconsolidated joint ventures and 40 that are otherwise consolidated by the Company)
in 45 states, Puerto Rico and Brazil. At June 30, 2007, the shopping center segment
- 24 -
consisted of 708 shopping centers (including 315 owned through unconsolidated joint ventures and 39
that are otherwise consolidated by the Company) in 45 states, Puerto Rico and Brazil. At June 30,
2008 and 2007, the Company also owned seven business centers in five states.
The table below presents information about the Companys reportable segments for the three-
and six-month periods ended June 30, 2008 and 2007 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended June 30, 2008 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
2,622 |
|
|
$ |
230,084 |
|
|
|
|
|
|
$ |
232,706 |
|
Operating expenses |
|
|
(859 |
) |
|
|
(62,264 |
) |
|
|
|
|
|
|
(63,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
1,763 |
|
|
|
167,820 |
|
|
|
|
|
|
|
169,583 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(141,973 |
) |
|
|
(141,973 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
12,555 |
|
|
|
|
|
|
|
12,555 |
|
Minority equity interests |
|
|
|
|
|
|
|
|
|
|
(2,025 |
) |
|
|
(2,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended June 30, 2007 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
1,715 |
|
|
$ |
250,388 |
|
|
|
|
|
|
$ |
252,103 |
|
Operating expenses |
|
|
(1,027 |
) |
|
|
(63,864 |
) |
|
|
|
|
|
|
(64,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
688 |
|
|
|
186,524 |
|
|
|
|
|
|
|
187,212 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(144,042 |
) |
|
|
(144,042 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
21,602 |
|
|
|
|
|
|
|
21,602 |
|
Minority equity interests |
|
|
|
|
|
|
|
|
|
|
(7,876 |
) |
|
|
(7,876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, 2008 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
5,308 |
|
|
$ |
468,765 |
|
|
|
|
|
|
$ |
474,073 |
|
Operating expenses |
|
|
(2,039 |
) |
|
|
(125,439 |
) |
|
|
|
|
|
|
(127,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
3,269 |
|
|
|
343,326 |
|
|
|
|
|
|
|
346,595 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(282,683 |
) |
|
|
(282,683 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
19,943 |
|
|
|
|
|
|
|
19,943 |
|
Minority equity interests |
|
|
|
|
|
|
|
|
|
|
(4,396 |
) |
|
|
(4,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets as of June 30, 2008 |
|
$ |
103,657 |
|
|
$ |
9,112,074 |
|
|
|
|
|
|
$ |
9,215,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 25 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, 2007 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
3,017 |
|
|
$ |
467,812 |
|
|
|
|
|
|
$ |
470,829 |
|
Operating expenses |
|
|
(1,459 |
) |
|
|
(116,411 |
) |
|
|
|
|
|
|
(117,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
1,558 |
|
|
|
351,401 |
|
|
|
|
|
|
|
352,959 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(259,472 |
) |
|
|
(259,472 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
27,883 |
|
|
|
|
|
|
|
27,883 |
|
Minority equity interests |
|
|
|
|
|
|
|
|
|
|
(13,715 |
) |
|
|
(13,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets as of June 30, 2007 |
|
$ |
98,192 |
|
|
$ |
8,710,189 |
|
|
|
|
|
|
$ |
8,808,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets as of December 31, 2007 |
|
$ |
101,989 |
|
|
$ |
8,882,749 |
|
|
|
|
|
|
$ |
8,984,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
14. SUBSEQUENT EVENT
In July 2008, the Company purchased an approximate 25% membership interest (the Membership
Interest) in RO & SW Realty LLC (ROSW) from Wolstein Business Enterprises, L.P. (WBE), a
limited partnership established for the benefit of the children of Scott A. Wolstein, the Chairman
of the Board and Chief Executive Officer of the Company, for $10.0 million. The managing partner of
WBE is an unrelated third party. ROSW is a real estate company that effectively owns 11 properties
(the Properties). The Company manages the Properties on behalf of ROSW pursuant to written
property management agreements. Other than the Membership Interest now owned by the Company,
neither WBE nor any other entity affiliated with the Company or its officers and directors
currently owns any interest in ROSW.
The purchase of the Membership Interest by the Company was approved by a special committee of
disinterested directors, who were appointed and authorized by the Nominating and Corporate
Governance Committee of the Companys Board of Directors to review and approve the terms of the
acquisition.
- 26 -
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 Exchange Act of
1933 and Section 21E of the Securities Exchange Act of 1934 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 will, believes, anticipates, plans, expects,
seeks, estimates and similar expressions are intended to identify forward-looking statements.
Readers should exercise caution in interpreting and relying on forward-looking statements because
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; |
|
|
|
|
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 sales over the Internet and the resulting retailing
practices and space needs of its tenants; |
|
|
|
|
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; |
|
|
|
|
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 |
- 27 -
|
|
|
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 and other factors; |
|
|
|
|
The Company may fail to dispose of properties on favorable terms. In addition, real
estate investments can be illiquid and 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, or if it is unable 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 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; |
|
|
|
|
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; |
|
|
|
|
The Company is subject to complex regulations related to its status as a real estate
investment trust, which is referred to as a 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 borrows funds to make distributions, those borrowings may not be
available on favorable terms; |
|
|
|
|
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; |
|
|
|
|
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 |
- 28 -
|
|
|
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 will 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: |
|
|
|
Adverse effects of changes in exchange rates for foreign currencies; |
|
|
|
|
Changes in foreign political or economic environments; |
|
|
|
|
Challenges of complying with a wide variety of foreign laws including taxes,
addressing different practices and customs relating to corporate governance, operations
and litigation; |
|
|
|
|
Different lending practices; |
|
|
|
|
Cultural and consumer differences; |
|
|
|
|
Changes in applicable laws and regulations in the United States that affect
foreign operations; |
|
|
|
|
Difficulties in managing international operations and |
|
|
|
|
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; |
|
|
|
|
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 and |
|
|
|
|
Changes in interest rates could adversely affect the market price of the Companys
common shares, as well as its performance and cash flow. |
Executive Summary
The Company is a self-administered and self-managed REIT, in the business of acquiring,
developing, redeveloping, owning, leasing and managing shopping centers. As of June 30, 2008, the
Companys portfolio consisted of 708 shopping centers and seven business centers (including 318
properties owned through unconsolidated joint ventures and 40 properties owned through consolidated
joint ventures). These properties consist of shopping centers, lifestyle centers and enclosed malls
owned in the United States, Puerto Rico and Brazil. At June 30, 2008, the Company owned and/or
managed approximately 115 million total square feet of Gross Leasable Area (GLA), which includes
all of the aforementioned properties and 12 properties owned by third parties. The Company also has
assets under development in Canada and Russia. The Company believes that its portfolio of shopping
center properties is one of the largest (measured by the amount of total GLA) currently held by any
publicly-
- 29 -
traded REIT. At June 30, 2008, the aggregate occupancy of the Companys shopping center
portfolio was 94.2%, as compared to 94.9% at June 30, 2007. The Company owned 708 shopping centers
at June 30, 2007. The average annualized base rent per occupied square foot was $12.47 at June 30,
2008, as compared to $12.03 at June 30, 2007. The Company also owns seven office and industrial
properties.
Net income applicable to common shareholders for the three-month period ended June 30, 2008,
was $29.4 million, or $0.25 per share (diluted and basic), compared to $111.4 million, or $0.89 per
share (diluted) and $0.90 per share (basic), for the prior-year period. Net income applicable to
common shareholders for the six-month period ended June 30, 2008, was $62.2 million, or $0.52 per
share (diluted and basic), compared to $160.2 million, or $1.33 per share (diluted) and $1.34 per
share (basic), for the prior-year period. Funds From Operations (FFO) applicable to common
shareholders for the three-month period ended June 30, 2008, was $99.1 million compared to
$159.3 million for the three-month period ended June 30, 2007, a decrease of 37.8%. FFO applicable
to common shareholders for the six-month period ended June 30, 2008, was $198.7 million compared to
$265.4 million for the six-month period ended June 30, 2007, a decrease of 25.1%. The decrease in
net income and FFO applicable to common shareholders for the six-month period ended June 30, 2008,
of approximately $98.0 million and $66.7 million, respectively, is primarily related to the release
of certain tax reserves in the first quarter of 2007, a reduction in the amount of transactional
income, promoted income from joint venture interests, gains on sale of real estate earned in 2007
and the transfer of 62 assets to unconsolidated joint venture
interests and the sale of 67 assets
to third parties in 2007.
Second quarter 2008 operating results
The results for the three-month period ended June 30, 2008, reflect only a small amount of
transactional income. Net income of $39.9 million is primarily derived from recurring operating
income from the Companys core portfolio. Further, the Companys operating metrics continue to be
in line with its expectations.
Significant asset sales closed late in the second quarter of 2007 and, as such, a
year-over-year comparison is difficult. The Company sold
approximately $1.3 billion of
assets into joint venture investments during this time period. The revenues and expenses in 2007
associated with these assets, with the exception of depreciation on the Inland Retail Real Estate
Trust, Inc. (IRRETI) assets sold, are reflected in the 2007 results and are not reclassified to
discontinued operations due to the Companys continuing involvement with these assets. There was
also a significant number of asset sales that occurred in late June 2007, that are reflected in
discontinued operations.
Operating strategy in the current environment
The Companys balance sheet remains a top priority. The Company continues to proactively
pursue new financing opportunities to ensure a well-situated balance sheet position through the
remainder of 2008 and looking forward to 2009. As a result of these dedicated efforts, the Company
is comfortable with its ability to meet future debt maturities and development funding needs. By
monitoring these needs and raising capital proactively, the Companys current balance sheet and
outlook for 2009 are in a good position at the date of this filing, despite the ongoing disruption
in the credit markets.
- 30 -
Furthermore, the Company is actively marketing dark and vacant space from recent bankruptcies
and store closings. In the past, the Company has demonstrated the stability of its assets and its
ability to create value through re-leasing, and management believes the Company will continue to do
so. Additionally, the Company is committing less capital to early stage domestic developments.
While the Company is presented with many new and attractive investment opportunities, it has
adjusted its underwriting assumptions to ensure that any new capital investments will meet more
stringent return requirements that address potential risks appropriately.
The operating environment for retail faces near-term challenges, which the Company believes
are not the same for all landlords. The pressure on the consumers disposable income, particularly
from the precipitous increase in energy costs, has resulted in a pronounced trend of trading down
by the consumer from full-priced retailers to value and off-priced retailers. Recent sales reports
by retailers have demonstrated a significant shift in market share from those retailers that
typically populate the nations regional malls to those value retailers that typically populate the
Companys portfolio. The Company believes this shift in market share may not be evident in recent
earnings of the various landlords as there is often a significant time lag before retail distress
impacts landlords. However, the Company believes that current distress among many of the
full-priced specialty stores will be reflected in their earnings over the next 18 months. The
Company will not be immune from the distress in the economy, but it believes that its focus on
value retail will allow it to be less impacted than many other landlords. Further, the Companys
international development initiative is expected to enable it to achieve above-average returns on
capital in markets that the Company believes are not equally susceptible to the economic problems
in the current domestic economy.
Nevertheless, the Company, like other real estate companies, will be forced to operate in an
environment of radically reduced availability of traditional funding for real estate by commercial
banks, investment banks, and traditional investors in corporate bonds and commercial mortgage
backed securities. Similarly, the Companys business strategy assumes that it will not be an issuer
of public common equity at any time in the foreseeable future. The Company has been, and remains,
mindful of these challenges and has adopted significant changes to its investment and capital
markets strategy to navigate successfully through this period of constrained credit.
Results of Operations
Revenues from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Base and percentage rental revenues |
|
$ |
160,552 |
|
|
$ |
176,308 |
|
|
$ |
(15,756 |
) |
|
|
(8.9 |
)% |
Recoveries from tenants |
|
|
48,498 |
|
|
|
55,832 |
|
|
|
(7,334 |
) |
|
|
(13.1 |
) |
Ancillary and other property income |
|
|
6,328 |
|
|
|
4,250 |
|
|
|
2,078 |
|
|
|
48.9 |
|
Management fees, development fees
and other fee income |
|
|
15,637 |
|
|
|
11,996 |
|
|
|
3,641 |
|
|
|
30.4 |
|
Other |
|
|
1,691 |
|
|
|
3,717 |
|
|
|
(2,026 |
) |
|
|
(54.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
232,706 |
|
|
$ |
252,103 |
|
|
$ |
(19,397 |
) |
|
|
(7.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 31 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Base and percentage rental revenues |
|
$ |
323,953 |
|
|
$ |
327,886 |
|
|
$ |
(3,933 |
) |
|
|
(1.2 |
)% |
Recoveries from tenants |
|
|
102,036 |
|
|
|
101,499 |
|
|
|
537 |
|
|
|
0.5 |
|
Ancillary and other property income |
|
|
10,982 |
|
|
|
8,940 |
|
|
|
2,042 |
|
|
|
22.8 |
|
Management fees, development fees
and other fee income |
|
|
31,924 |
|
|
|
21,078 |
|
|
|
10,846 |
|
|
|
51.5 |
|
Other |
|
|
5,178 |
|
|
|
11,426 |
|
|
|
(6,248 |
) |
|
|
(54.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
474,073 |
|
|
$ |
470,829 |
|
|
$ |
3,244 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Base and percentage rental revenues relating to new leasing, re-tenanting and expansion of the
core portfolio properties (shopping center properties owned as of January 1, 2007, and since March
1, 2007, with regard to IRRETI assets, excluding properties under development/redevelopment and
those classified as discontinued operations) (Core Portfolio Properties) increased approximately
$4.1 million, or 1.5%, for the six-month period ended June 30, 2008, as compared to the same period
in 2007. The decrease in base and percentage rental revenues is due to the following (in
millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Core Portfolio Properties |
|
$ |
4.1 |
|
IRRETI merger and acquisition of real estate
assets |
|
|
18.4 |
|
Development/redevelopment of shopping center properties |
|
|
2.6 |
|
Disposition of shopping center properties in 2007 |
|
|
(28.4 |
) |
Business center properties |
|
|
0.7 |
|
Straight-line rents |
|
|
(1.3 |
) |
|
|
|
|
|
|
$ |
(3.9 |
) |
|
|
|
|
At June 30, 2008, the aggregate occupancy rate of the Companys shopping center portfolio was
94.2%, as compared to 94.9% at June 30, 2007. The Company owned 708 shopping centers at June 30,
2008 and 2007. The average annualized base rent per occupied square foot was $12.47 at June 30,
2008, as compared to $12.03 at June 30, 2007.
At June 30, 2008, the aggregate occupancy rate of the Companys wholly-owned shopping centers
was 93.2%, as compared to 93.6% at June 30, 2007. The Company had 350 wholly-owned shopping
centers at June 30, 2008, as compared to 354 shopping centers at June 30, 2007. The average
annualized base rent per occupied square foot for wholly-owned shopping centers was $11.63 at June
30, 2008, as compared to $11.33 at June 30, 2007.
At June 30, 2008, the aggregate occupancy rate of the Companys joint venture shopping centers
was 95.0%, as compared to 96.2% at June 30, 2007. The Companys joint ventures owned 358 shopping
centers including 40 consolidated centers primarily owned through the Mervyns Joint Venture at June
30, 2008, as compared to 354 shopping centers including 39 consolidated centers primarily owned
through the Mervyns Joint Venture at June 30, 2007. The average annualized base rent per occupied
square foot was $13.20 at June 30, 2008, as compared to $12.65 at June 30, 2007. The
increase is a result of the tenant mix of shopping center assets in the joint ventures at June 30, 2008,
as
- 32 -
compared to June 30, 2007.
At June 30, 2008, the aggregate occupancy rate of the Companys business centers was 71.2%, as
compared to 62.0% at June 30, 2007. The increase in occupancy is primarily due to a large vacancy
filled at a business center in Boston, Massachusetts. The business centers consist of seven assets
in five states at June 30, 2008 and 2007.
Recoveries from tenants increased $0.5 million for the six-month period ended June 30, 2008,
as compared to the same period in 2007. This increase is primarily due to an increase in operating
expenses and real estate taxes that aggregated $9.6 million due to the merger with IRRETI in
February 2007 and the Companys Core Portfolio Properties. Recoveries were approximately 80.0% and
86.1% of operating expenses and real estate taxes for the six-month periods ended June 30, 2008 and
2007, respectively.
The increase in recoveries from tenants was primarily related to the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
IRRETI merger and acquisition of real estate assets |
|
$ |
5.1 |
|
Development/redevelopment of shopping center properties in
2007 |
|
|
1.8 |
|
Transfer of assets to unconsolidated joint ventures in
2007 |
|
|
(9.2 |
) |
Increase in operating expenses at the remaining shopping center
and business center properties |
|
|
2.8 |
|
|
|
|
|
|
|
$ |
0.5 |
|
|
|
|
|
Ancillary and other property income is a result of pursuing additional revenue opportunities
in the Core Portfolio Properties. The Company believes its ancillary income program will continue
to be an industry leader among shopping center developers. Continued growth is anticipated in the
area of ancillary or non-traditional revenue as new revenue opportunities are identified and as
currently established revenue opportunities grow throughout the Companys core, acquired and
development portfolios. The increase in ancillary and other property income is offset by the
conversion of operating arrangements at one of the Companys shopping centers into a long-term
lease agreement. This conversion resulted in a decrease in ancillary and other property income of
$2.8 million and a corresponding increase in base rent. Ancillary revenue opportunities have in
the past included short-term and seasonal leasing programs, outdoor advertising programs, wireless
tower development programs, energy management programs, sponsorship programs and various other
programs.
The increase in management, development and other fee income for the six-month period ended
June 30, 2008, is primarily due to the following (in millions):
- 33 -
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Newly formed unconsolidated joint venture interests |
|
$ |
6.7 |
|
Development fee income |
|
|
(0.2 |
) |
Other income |
|
|
2.5 |
|
Sale of several of the Companys unconsolidated joint venture properties |
|
|
(0.5 |
) |
Leasing commissions |
|
|
2.4 |
|
Decrease in management fee income at various unconsolidated joint ventures |
|
|
(0.1 |
) |
|
|
|
|
|
|
$ |
10.8 |
|
|
|
|
|
Management fee income is expected to continue to increase as unconsolidated joint ventures
acquire additional properties and as assets under development become operational. Development fee
income was primarily earned through the redevelopment of joint venture assets that are owned
through the Companys investments with the Coventry II Fund. The Company expects to continue to
pursue additional development of unconsolidated joint ventures as opportunities present themselves.
Other income for the three- and six-month periods ended June 30, 2008 and 2007, was composed
of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Six-Month |
|
|
|
Periods Ended |
|
|
Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Acquisition and financing fees (1) |
|
$ |
|
|
|
$ |
1.4 |
|
|
$ |
|
|
|
$ |
7.7 |
|
Lease termination fees |
|
|
1.4 |
|
|
|
2.2 |
|
|
|
4.7 |
|
|
|
3.5 |
|
Other |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.7 |
|
|
$ |
3.7 |
|
|
$ |
5.2 |
|
|
$ |
11.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes acquisition fees of $6.3 million earned from the formation of the joint
venture with TIAA-CREF in February 2007, excluding the Companys retained ownership
interest. The Companys fees were earned in conjunction with services rendered by the
Company in connection with the acquisition of the IRRETI real estate assets. Financing
fees were earned in connection with the formation and refinancing of unconsolidated joint
ventures, excluding the Companys retained ownership interest. The Companys fees are
earned in conjunction with the closing and amount of the financing transaction by the joint
venture. |
Expenses from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Operating and maintenance |
|
$ |
34,985 |
|
|
$ |
34,658 |
|
|
$ |
327 |
|
|
|
0.9 |
% |
Real estate taxes |
|
|
28,138 |
|
|
|
30,233 |
|
|
|
(2,095 |
) |
|
|
(6.9 |
) |
General and administrative |
|
|
21,333 |
|
|
|
19,161 |
|
|
|
2,172 |
|
|
|
11.3 |
|
Depreciation and amortization |
|
|
59,809 |
|
|
|
54,313 |
|
|
|
5,496 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144,265 |
|
|
$ |
138,365 |
|
|
$ |
5,900 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 34 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Operating and maintenance |
|
$ |
71,738 |
|
|
$ |
61,884 |
|
|
$ |
9,854 |
|
|
|
15.9 |
% |
Real estate taxes |
|
|
55,740 |
|
|
|
55,986 |
|
|
|
(246 |
) |
|
|
(0.4 |
) |
General and administrative |
|
|
42,047 |
|
|
|
40,678 |
|
|
|
1,369 |
|
|
|
3.4 |
|
Depreciation and amortization |
|
|
116,769 |
|
|
|
106,350 |
|
|
|
10,419 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
286,294 |
|
|
$ |
264,898 |
|
|
$ |
21,396 |
|
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses include the Companys provision for bad debt expense, which
approximated 1.4% and 0.7% of total revenues for the six-month periods ended June 30, 2008 and
2007, respectively (see Economic Conditions).
The increase in rental operation expenses, excluding general and administrative, for the
six-month period ended June 30, 2008, compared to 2007, is due to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Real |
|
|
Depreciation |
|
|
|
and |
|
|
Estate |
|
|
and |
|
|
|
Maintenance |
|
|
Taxes |
|
|
Amortization |
|
Core Portfolio Properties |
|
$ |
6.9 |
|
|
$ |
0.3 |
|
|
$ |
3.1 |
|
IRRETI merger and acquisition of real estate assets |
|
|
2.3 |
|
|
|
3.4 |
|
|
|
8.3 |
|
Development/redevelopment of shopping center properties |
|
|
2.0 |
|
|
|
0.8 |
|
|
|
(0.1 |
) |
Transfer of assets to unconsolidated joint ventures in 2007 |
|
|
(5.3 |
) |
|
|
(4.8 |
) |
|
|
(2.5 |
) |
Business center properties |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
1.0 |
|
Provision for bad debt expense |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
Personal property |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9.9 |
|
|
$ |
(0.2 |
) |
|
$ |
10.4 |
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses for the six-month period ended June 30, 2008, includes
increased expenses primarily due to the merger with IRRETI and additional stock-based compensation
expense. Total general and administrative expenses were approximately 4.4% and 4.8%, respectively,
of total revenues, including total revenues of unconsolidated joint ventures, for the six-month
periods ended June 30, 2008 and 2007, respectively. General and administrative expenses for the
six-month period include additional compensation expense of $4.1 million that was recorded by the
Company in 2007 in connection with the Companys former presidents departure as an executive
officer.
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 construction and software development and
implementation costs consisting of direct wages and benefits, travel expenses and office overhead
costs of $7.9 million and $6.5 million for the six-month periods ending June 30, 2008 and 2007,
respectively.
- 35 -
Other Income and Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
552 |
|
|
$ |
2,500 |
|
|
$ |
(1,948 |
) |
|
|
(77.9 |
)% |
Interest expense |
|
|
(61,174 |
) |
|
|
(73,554 |
) |
|
|
12,380 |
|
|
|
(16.8 |
) |
Other income (expense), net |
|
|
98 |
|
|
|
(225 |
) |
|
|
323 |
|
|
|
(143.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(60,524 |
) |
|
$ |
(71,279 |
) |
|
$ |
10,755 |
|
|
|
(15.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
1,135 |
|
|
$ |
6,182 |
|
|
$ |
(5,047 |
) |
|
|
(81.6 |
)% |
Interest expense |
|
|
(123,249 |
) |
|
|
(133,947 |
) |
|
|
10,698 |
|
|
|
(8.0 |
) |
Other expense, net |
|
|
(400 |
) |
|
|
(450 |
) |
|
|
50 |
|
|
|
(11.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(122,514 |
) |
|
$ |
(128,215 |
) |
|
$ |
5,701 |
|
|
|
(4.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the six-month period ended June 30, 2008, decreased primarily due to
excess cash held by the Company immediately following the closing of the IRRETI merger in February
2007.
Interest
expense decreased primarily due to the sale of approximately $1.3 billion of assets
in the second quarter of 2007 offset by increased interest expense due to the IRRETI merger and
associated borrowings combined with other development assets becoming operational. This interest
expense was significantly offset by a decrease in short-term interest rates. The weighted average
debt outstanding and related weighted average interest rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six-Month |
|
|
Periods |
|
|
Ended June 30, |
|
|
2008 |
|
2007 |
Weighted average debt outstanding (billions) |
|
$ |
5.8 |
|
|
$ |
5.7 |
|
Weighted average interest rate |
|
|
4.8 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
2008 |
|
2007 |
Weighted average interest rate |
|
|
4.7 |
% |
|
|
5.2 |
% |
The reduction in weighted average interest rates is primarily related to the recent decline in
short-term interest rates. Interest costs capitalized, in conjunction with development and
expansion projects and development joint venture interests were $9.3 million and $18.4 million for
the three- and six-month periods ended June 30, 2008, respectively, as compared to $5.9 million and
$11.6 million for the same periods in the prior year.
Other income/expense primarily relates to a gain of $0.2 million from the repurchase of $3.425
million of the Companys Senior Notes offset by abandoned acquisition and development project
costs.
- 36 -
Other (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Equity in net income of joint ventures |
|
$ |
12,555 |
|
|
$ |
21,602 |
|
|
$ |
(9,047 |
) |
|
|
(41.9 |
)% |
Minority equity interests |
|
|
(2,025 |
) |
|
|
(7,876 |
) |
|
|
5,851 |
|
|
|
(74.3 |
) |
Tax (expense) benefit of taxable REIT
subsidiaries and franchise taxes |
|
|
(307 |
) |
|
|
711 |
|
|
|
(1,018 |
) |
|
|
(143.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Equity in net income of joint ventures |
|
$ |
19,943 |
|
|
$ |
27,883 |
|
|
$ |
(7,940 |
) |
|
|
(28.5 |
)% |
Minority equity interests |
|
|
(4,396 |
) |
|
|
(13,715 |
) |
|
|
9,319 |
|
|
|
(67.9 |
) |
Tax (expense) benefit of taxable REIT
subsidiaries and franchise taxes |
|
|
(1,353 |
) |
|
|
15,771 |
|
|
|
(17,124 |
) |
|
|
(108.6 |
) |
The decrease in equity in net income of joint ventures is primarily due to the promoted income
of $14.3 million earned during the six-month period ended
June 30, 2007, related to the sale of
certain joint venture assets, offset by increased income at the joint ventures. A summary of the
decrease in equity in net income of joint ventures for the six-month period ended June 30, 2008, is
composed of the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Acquisition of assets by unconsolidated joint ventures |
|
$ |
2.8 |
|
Decrease in gains from sale transactions as compared to
2007 |
|
|
(14.3 |
) |
Acquisitions and increased operating results of a joint
venture in Brazil |
|
|
4.1 |
|
Various other decreases |
|
|
(0.5 |
) |
|
|
|
|
|
|
$ |
(7.9 |
) |
|
|
|
|
In addition to the sale of the DDR Markaz LLC Joint Venture assets in June 2007, the Companys
unconsolidated joint ventures sold the following assets during 2007:
2007 Sales
One 25.5% effectively-owned shopping center
Six sites formerly occupied by Service Merchandise
- 37 -
Minority equity interest expense decreased for the six-month period ended June 30, 2008,
primarily due to the following (in millions):
|
|
|
|
|
|
|
(Increase) |
|
|
|
Decrease |
|
Preferred operating partnership units (1) |
|
$ |
9.7 |
|
Mervyns Joint Venture (owned approximately 50% by the
Company) |
|
|
(0.3 |
) |
Conversion of 0.5 million of operating partnership minority
interests (OP Units) to common
shares |
|
|
0.3 |
|
Net increase in net income from consolidated joint venture
investments |
|
|
(0.4 |
) |
|
|
|
|
|
|
$ |
9.3 |
|
|
|
|
|
|
|
|
(1) |
|
Preferred operating partnership units were issued in February 2007 as part of the financing
of the IRRETI merger. These units were repaid in June 2007. |
The aggregate income tax benefit of $15.8 million for the six-month period ended June 30,
2007, is primarily due to the Company recognizing an income tax benefit of approximately
$15.4 million in the first quarter of 2007 resulting from the reversal of a previously established
valuation allowance against certain deferred tax assets. The reserves were related to deferred tax
assets established in prior years, at which time it was determined that it was more likely than not
that the deferred tax asset would not be realized and, therefore, a valuation allowance was
required. Several factors were considered in the first quarter of 2007 that contributed to the
reversals of the valuation allowance. The most significant factor was the sale of merchant building
assets by the Companys taxable REIT subsidiary in the second quarter of 2007 and similar projected
taxable gains for future periods. Other factors include the merger of various taxable REIT
subsidiaries and the anticipated profit levels of the Companys taxable REIT subsidiaries, which
will facilitate the realization of the deferred tax assets. Management regularly assesses
established reserves and adjusts these reserves when facts and circumstances indicate that a change
in estimate is necessary. Based upon these factors, management determined that it was more likely
than not that the deferred tax assets would be realized in the future and, accordingly, the
valuation allowance recorded against those deferred tax assets was no longer required.
Discontinued Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
(Loss) income from
discontinued
operations |
|
$ |
(199 |
) |
|
$ |
5,714 |
|
|
$ |
(5,913 |
) |
|
|
(103.5 |
)% |
Gain on disposition
of real estate, net
of tax |
|
|
1,078 |
|
|
|
10,815 |
|
|
|
(9,737 |
) |
|
|
(90.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
(Loss) income from
discontinued
operations |
|
$ |
(269 |
) |
|
$ |
8,662 |
|
|
$ |
(8,931 |
) |
|
|
(103.1 |
)% |
Gain on disposition
of real estate, net
of tax |
|
|
886 |
|
|
|
13,634 |
|
|
|
(12,748 |
) |
|
|
(93.5 |
) |
Included in discontinued operations for the three- and six-month periods ended June 30, 2008
and 2007, are four properties sold in 2008 (including one property classified as held for sale at
December 31, 2007), aggregating 0.3 million square feet, and 67 shopping centers sold in 2007
(including one property held for sale at December 31, 2006 and 22 properties acquired through the
IRRETI merger in 2007), aggregating 6.3 million square feet.
- 38 -
Gain on Disposition of Real Estate (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Gain on disposition of real estate, net of tax |
|
$ |
908 |
|
|
$ |
54,012 |
|
|
$ |
(53,104 |
) |
|
|
(98.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Gain on disposition of real estate, net of tax |
|
$ |
3,275 |
|
|
$ |
60,022 |
|
|
$ |
(56,747 |
) |
|
|
(94.5 |
)% |
The Company recorded net gains on disposition of real estate and real estate investments for
the three- and six-month periods ended June 30, 2008 and 2007, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Six-Month |
|
|
|
Periods Ended |
|
|
Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Transfer of assets to DDR Domestic Retail Fund I (1) (2) |
|
$ |
|
|
|
$ |
2.0 |
|
|
$ |
|
|
|
$ |
2.0 |
|
Transfer of assets to TRT DDR Venture I (1) (3) |
|
|
|
|
|
|
50.2 |
|
|
|
|
|
|
|
50.2 |
|
Land sales (4) |
|
|
0.6 |
|
|
|
2.6 |
|
|
|
2.7 |
|
|
|
8.0 |
|
Previously deferred gains and other gains and loss on
dispositions (5) |
|
|
0.3 |
|
|
|
(0.8 |
) |
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.9 |
|
|
$ |
54.0 |
|
|
$ |
3.3 |
|
|
$ |
60.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This disposition is not classified as discontinued operations due to the
Companys continuing involvement through its retained ownership interest and management
agreements. |
|
(2) |
|
The Company transferred two wholly-owned assets. The Company did not record a
gain on the contribution of 54 assets, as these assets were recently acquired through
the merger with IRRETI. |
|
(3) |
|
The Company transferred three recently developed assets. |
|
(4) |
|
These dispositions did not meet the criteria for discontinued operations as the
land did not have any significant operations prior to disposition. |
|
(5) |
|
These gains and losses are primarily attributable to the subsequent leasing of
units related to master lease and other obligations originally established on disposed
properties, which are no longer required. |
Net Income (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Net income |
|
$ |
39,927 |
|
|
$ |
127,437 |
|
|
$ |
(87,510 |
) |
|
|
(68.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Net income |
|
$ |
83,351 |
|
|
$ |
189,973 |
|
|
$ |
(106,622 |
) |
|
|
(56.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income decreased primarily due to the release of certain tax reserves in the first quarter
of 2007, a reduction in the amount of transactional income (gains on disposition of real estate of
approximately $69.5 million and promoted income from joint venture interests of approximately $14.3
million) earned during the same period in 2007 and the transfer of 62 assets to unconsolidated
joint
venture interests and the sale of 67 assets to third parties in 2007. A summary of changes in
net income in 2008 as compared to 2007 is as follows (in millions):
- 39 -
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period |
|
|
Six-Month Period |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
Decrease in net operating revenues
(total revenues in excess of operating
and maintenance expenses and real estate
taxes) (1) |
|
$ |
(17.7 |
) |
|
$ |
(6.5 |
) |
Increase in general and administrative
expenses |
|
|
(2.2 |
) |
|
|
(1.4 |
) |
Increase in depreciation expense |
|
|
(5.5 |
) |
|
|
(10.4 |
) |
Decrease in interest
income |
|
|
(1.9 |
) |
|
|
(5.0 |
) |
Decrease in interest expense |
|
|
12.4 |
|
|
|
10.7 |
|
Change in other expense |
|
|
0.3 |
|
|
|
|
|
Decrease in equity in net income of
joint ventures (2) |
|
|
(9.0 |
) |
|
|
(7.9 |
) |
Decrease in minority equity interest
expense |
|
|
5.8 |
|
|
|
9.3 |
|
Change in income tax
benefit/expense |
|
|
(1.0 |
) |
|
|
(17.1 |
) |
Decrease in income from discontinued
operations |
|
|
(5.9 |
) |
|
|
(8.9 |
) |
Decrease in gain on disposition of real
estate of discontinued operations
properties |
|
|
(9.7 |
) |
|
|
(12.7 |
) |
Decrease in gain on disposition of real
estate |
|
|
(53.1 |
) |
|
|
(56.7 |
) |
|
|
|
|
|
|
|
Decrease in net income |
|
$ |
(87.5 |
) |
|
$ |
(106.6 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease primarily related to assets sold to joint ventures
in 2007. |
|
(2) |
|
Decrease primarily due to a reduction of promoted income associated with 2007 joint venture asset sales. |
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 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, 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 from joint ventures and equity income from
minority equity investments and adding the Companys proportionate share of FFO from its
unconsolidated joint ventures and minority equity investments, determined on a consistent basis.
- 40 -
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 (i) to determine incentives for executive based on the Companys
performance, (ii) as a measure of a real estate assets performance, (iii) to shape acquisition,
disposition and capital investment strategies and (iv) 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 June 30, 2008, FFO applicable to common shareholders was
$99.1 million, as compared to $159.3 million for the same period in 2007. For the six-month period
ended June 30, 2008, FFO applicable to common shareholders was $198.7 million, as compared to
$265.4 million for the same period in 2007. The decrease in FFO, for the six-month period ended
June 30, 2008, is primarily related to the release of certain tax reserves in the first quarter of
2007, a reduction in the amount of transactional income and the transfer of 62 assets to
unconsolidated joint venture interests and the sale of 67 assets to third parties in 2007. The
Companys calculation of FFO is as follows (in thousands):
- 41 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income applicable to common
shareholders (1) |
|
$ |
29,360 |
|
|
$ |
111,429 |
|
|
$ |
62,217 |
|
|
$ |
160,173 |
|
Depreciation and amortization of real
estate investments |
|
|
57,279 |
|
|
|
54,136 |
|
|
|
111,641 |
|
|
|
106,584 |
|
Equity in net income of joint ventures |
|
|
(12,555 |
) |
|
|
(21,602 |
) |
|
|
(19,943 |
) |
|
|
(27,883 |
) |
Joint ventures FFO (2) |
|
|
25,908 |
|
|
|
31,313 |
|
|
|
45,088 |
|
|
|
44,872 |
|
Minority equity interests (OP Units) |
|
|
290 |
|
|
|
569 |
|
|
|
884 |
|
|
|
1,138 |
|
Gain on disposition of depreciable
real estate (3) |
|
|
(1,133 |
) |
|
|
(16,587 |
) |
|
|
(1,151 |
) |
|
|
(19,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO applicable to common shareholders |
|
|
99,149 |
|
|
|
159,258 |
|
|
|
198,736 |
|
|
|
265,441 |
|
Preferred dividends |
|
|
10,567 |
|
|
|
16,008 |
|
|
|
21,134 |
|
|
|
29,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFO |
|
$ |
109,716 |
|
|
$ |
175,266 |
|
|
$ |
219,870 |
|
|
$ |
295,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes straight-line rental revenues of approximately $2.1 million and $3.4
million for the three-month periods ended June 30, 2008 and 2007, respectively, and
$4.9 million and $6.5 million for the six-month periods ended June 30, 2008 and 2007,
respectively. |
|
(2) |
|
Joint ventures FFO is summarized as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Six-Month Periods |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (a) |
|
$ |
72,349 |
|
|
$ |
112,635 |
|
|
$ |
98,376 |
|
|
$ |
130,532 |
|
Loss (gain) on disposition of real estate, net (b) |
|
|
11 |
|
|
|
(91,441 |
) |
|
|
13 |
|
|
|
(91,441 |
) |
Depreciation and amortization of real estate
investments |
|
|
59,845 |
|
|
|
49,215 |
|
|
|
116,449 |
|
|
|
79,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
132,205 |
|
|
$ |
70,409 |
|
|
$ |
214,838 |
|
|
$ |
118,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDR ownership interest (c) |
|
$ |
25,908 |
|
|
$ |
31,313 |
|
|
$ |
45,088 |
|
|
$ |
44,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes straight-line rental revenue of approximately $1.8
million and $2.1 million for the three-month periods ended June 30, 2008 and
2007, respectively, of which the Companys proportionate share was $0.3 million
in both periods. For the six-month periods ended June 30, 2008 and 2007,
includes straight-line rental revenue of approximately $4.1 million and $3.7
million, respectively, of which the Companys proportionate share was $0.5
million in both periods. |
|
(b) |
|
The gain or loss on disposition of recently developed shopping
centers, generally owned by the Companys taxable REIT subsidiaries, is included
in FFO, as the Company considers these properties part of the merchant building
program. These properties were either developed through the Retail Value
Investment Program with Prudential Real Estate Investors, or were assets sold in
conjunction with the formation of the joint venture that holds the designation
rights for the Service Merchandise properties. |
|
(c) |
|
The Companys share of joint venture net income has been reduced
by $0.2 million and $0.1 million for the three-month periods ended June 30, 2008
and 2007, respectively, related to basis differences in depreciation and
adjustments to gain on sales. The Companys share of joint venture net income
has been reduced by $0.3 million and $0.4 million for the six-month periods
ended June 30, 2008 and 2007, respectively, related to basis differences in
depreciation and adjustments to gain on sales. |
|
|
|
At June 30, 2008 and 2007, the Company owned unconsolidated joint venture
interests relating to 274 and 269 operating shopping center properties,
respectively. In addition, at June 30, 2008 and 2007, the Company owned 44 and 46 shopping center sites, respectively, formerly owned
by Service |
- 42 -
|
|
|
|
|
Merchandise through its 20% owned joint venture. The Company also
owned an approximate 25% interest in the Prudential Retail Value Fund and a 50%
joint venture equity interest in two real estate management/development
companies. |
|
(3) |
|
The amount reflected as gain on disposition of real estate and real estate
investments from continuing operations in the consolidated statement 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 June 30, 2008 and 2007, net gains
resulting from residual land sales aggregated $0.6 million and $2.6 million,
respectively. For the six-month periods ended June 30, 2008 and 2007, net gains
resulting from residual land sales aggregated $2.7 million and $8.0 million,
respectively. For the three-month periods ended June 30, 2008 and 2007, merchant
building gains, net of tax, aggregated $0.2 million and $45.7 million, respectively.
For the six-month periods ended June 30, 2008 and 2007, merchant building gains, net of
tax, aggregated $0.3 million and $46.2 million, respectively. |
Liquidity and Capital Resources
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, an accordion
feature for a future expansion to $1.4 billion and a maturity date of June 2010, with a one-year
extension option. The Company also maintains a $75 million unsecured revolving credit facility,
amended in December 2007, 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. The Revolving Credit Facilities require the Company to comply with certain
covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of
unencumbered real estate assets and fixed charge coverage. The Revolving Credit Facilities are 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 June 30, 2008. The Company continues to maintain a substantial unencumbered asset pool that it
believes can be used for additional secured and unsecured borrowings.
At June 30, 2008, the following information summarizes the availability of the Revolving
Credit Facilities (in billions):
|
|
|
|
|
Revolving Credit Facilities |
|
$ |
1.325 |
|
Less: |
|
|
|
|
Amount outstanding |
|
|
(0.878 |
) |
Letters of credit |
|
|
(0.006 |
) |
|
|
|
|
Amount Available |
|
$ |
0.441 |
|
|
|
|
|
As of June 30, 2008, the Company had cash of $47.8 million. As of June 30, 2008, the Company
also had 293 unencumbered consolidated operating properties generating $240.1 million, or 51.1% of
the total revenue of the Company for the six-month period ended June 30, 2008, thereby providing a
potential collateral base for future borrowings, subject to consideration of the financial
covenants on unsecured borrowings. In addition, one of the Companys consolidated joint ventures
is
- 43 -
the beneficiary of a five year, $25.0 million letter of credit relating to one of the joint
ventures major tenants. Subject to certain terms and conditions, the joint venture may draw on
this letter of credit upon the occurrence of certain events including the bankruptcy of this major
tenant.
The Company anticipates that cash flow from operating activities will continue to provide
adequate capital for all interest and monthly principal payments on outstanding indebtedness,
recurring tenant improvements and dividend payments in accordance with REIT requirements. The
Company anticipates that cash on hand, borrowings available under its existing revolving credit
facilities and other debt and equity alternatives, joint venture capital and asset dispositions,
will provide the necessary capital to achieve continued growth and the repayment of principal
balances of the Companys debt upon its maturity. The proceeds from the sale of assets classified
as discontinued operations and other asset dispositions will also be utilized to acquire and
develop assets. The Company anticipates being a net seller of assets in 2008 by divesting certain
recently developed assets, land parcels and non-core assets. These asset sales are expected to
provide the capital necessary to fund the growing number of investment and development
opportunities. The Company believes that its acquisitions and developments completed in 2007, new
leasing, expansion and re-tenanting of the Core Portfolio Properties will continue to add to the
Companys operating cash flow on an aggregate basis as compared to previous years.
The Company continues to evaluate its maturing debt, and based on managements current
assessment, believes it has viable financing and refinancing
alternatives that will not materially adversely
impact its expected financial results. Moreover, the Company is looking beyond 2008 to ensure the
Company is prepared if the current credit market dislocation continues (see Contractual Obligations
and Other Commitments).
During the first six months of 2008, the Company completed an aggregate collateralized
financing of $350 million, with a fixed interest coupon rate of 5% and a five-year maturity. In
February 2008, the Companys 50% joint venture with Sonae Sierra, which owns and develops retail
real estate in Brazil, closed on a R$50 million reais revolving credit facility. Other loan
closings included a $71 million construction loan on a development property in Homestead, Florida
in March 2008 and a three-year, $40 million construction loan relating to the expansion of the
Companys corporate headquarters in Beachwood, Ohio in April 2008. Also, the Company refinanced
$72.1 million of mortgage debt at one of its unconsolidated joint ventures with the existing lender
at LIBOR plus 1.25% with a two-year maturity and a one-year extension option in March 2008. In the
second quarter, refinancings aggregating $112 million occurred at four of the Companys
unconsolidated joint ventures, with terms ranging from LIBOR plus 1.50% to LIBOR plus 2.50%.
The Company and its partners continue to assess their 2008 maturities. As of June 30, 2008,
the Company had $115.9 million of consolidated debt and the Companys joint ventures have $492.2
million of unconsolidated joint venture debt maturing in 2008. In 2008, debt maturities are
anticipated to be repaid through several sources as described below.
The Company has $38.6 million in mortgage loans that are expected to be repaid with proceeds
from the Companys revolving credit facilities and $45.9 million in mortgage loans that are
expected to be extended pursuant to existing options. Also, construction loans of $31.4 million are
anticipated to be
extended. The Company will continue to seek opportunities to obtain
construction
- 44 -
financing at commercially reasonable pricing to fund development activity. The
Company anticipates all 2008 maturities related to unconsolidated joint venture mortgages will be
refinanced or extended. In August 2008, $340.5 million of joint venture debt was
refinanced. The refinancing resulted in total loan proceeds of $370.5 million with interest at
6.4% in relation to $268.0 million of debt and interest at LIBOR plus 2.4% in relation to $102.5
million of debt.
The Companys 2009 debt maturities consist of: $275 million of consolidated unsecured notes
maturing in January; $123.0 million of consolidated mortgage debt and $450.5 million of
unconsolidated joint venture mortgage debt. Of the 2009 maturing unconsolidated joint venture
mortgage debt, the joint venture has the option to extend approximately $237.6 million at existing
terms. The Company continues discussions with a variety of banks and lenders about opportunities
to refinance these maturities and intends to negotiate at the most competitive terms possible.
These obligations generally have monthly payments of principal and/or interest over the term
of the obligation. No assurance can be provided that the aforementioned obligations will be
refinanced or repaid as currently anticipated.
The decrease
in cash flow from operations primarily relates to the sale of $2.0
billion of assets in 2007. Changes in cash flow from investing and
financing activities in 2008, as compared to 2007, are primarily due to a
reduction in both the acquisition and sale of assets combined with
the related financing activities associated with the transactions.
During the six-month period ended June 30, 2007, the Company
completed a $3.1 billion merger with IRRETI, which closed in February
2007, and sold 59 assets to joint ventures and 58 assets to third parties.
The Companys cash flow activities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods |
|
|
Ended June 30, |
|
|
2008 |
|
2007 |
Cash flow provided by operating activities |
|
$ |
212,864 |
|
|
$ |
221,219 |
|
Cash flow used for investing activities |
|
|
(245,105 |
) |
|
|
(924,829 |
) |
Cash flow provided by financing activities |
|
|
28,394 |
|
|
|
721,251 |
|
During 2007, the Companys Board of Directors authorized a common share repurchase program.
Under the terms of the program, the Company may purchase up to a maximum value of $500 million of
its common shares over a two-year period. Through December 31, 2007, the Company had repurchased
under this program 5.6 million of its common shares in open market transactions at an aggregate
cost of approximately $261.9 million. From January 1, 2008 through August 6, 2008, the Company has
not repurchased any of its common shares.
- 45 -
In January 2008, the Company announced its intent to increase its 2008 quarterly dividend per
common share to $0.69 from $0.66. The payout ratio is determined based on common and preferred
dividends declared as compared to the Companys FFO. The Companys common share dividend payout
ratio for the first six months of 2008 was approximately 83.8% of reported FFO, as compared to
62.6% for the same period in 2007. See Off-Balance Sheet Arrangements and Contractual
Obligations and Other Commitments sections for discussion of additional disclosure of capital
resources.
Acquisitions, Developments, Redevelopments and Expansions
During the six-month period ended June 30, 2008, the Company and its unconsolidated joint
ventures expended an aggregate of approximately $434.0 million ($231.0 million by the Company and
$203.0 million by its unconsolidated joint ventures), net, to acquire, develop, expand, improve and
re-tenant various properties. The Companys acquisition, development, redevelopment and expansion
activity is summarized below.
Acquisitions
In January 2008, through a 50% consolidated joint venture interest with Holborn Brampton
Limited Partnership, the Company acquired 43 acres of land in Brampton, Ontario, Canada, for
approximately $32.6 million to develop a retail shopping center.
Macquarie DDR Trust
In February 2008, the Company began purchasing units of Macquarie DDR Trust (ASX: MDT)
(MDT), an Australian Real Estate Investment Trust which is managed by an affiliate of Macquarie
Group Limited (ASX: MQG) an international investment bank, advisor and manager of specialized real
estate funds, and the Company. MDT is DDRs joint venture partner in the DDR Macquarie Fund LLC
Joint Venture (the Fund). Through the combination of its purchase of the units in MDT and its
direct and indirect ownership of the Fund, DDR is entitled to an approximate 20.3% economic
interest in the Fund at June 30, 2008, (6.4% and 4.8% on a weighted-average basis for the three-
and six-month periods ended June 30, 2008). Through June 30, 2008, as described in filings with
the Australian Securities Exchange (ASX Limited), the Company has purchased 62.9 million units of
MDT in open market transactions at an aggregate cost of approximately $29.3 million. Through
August 6, 2008, as filed with the ASX Limited, the Company has
purchased 92.3 million MDT units in open market transactions at an aggregate cost of approximately
$37.5 million. As the Company does not have the ability to exercise significant influence over
operating and financial policies, the Company accounts for both its interest in MDT and the Fund
using the equity method of accounting.
- 46 -
Development (Wholly-Owned and Consolidated Joint Ventures)
The Company currently has the following wholly-owned and consolidated joint venture shopping
center projects under construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
|
|
|
|
Owned |
|
|
Net Cost |
|
|
|
Location |
|
GLA |
|
|
($ Millions) |
|
|
Description |
Ukiah (Mendocino), California * |
|
|
227,500 |
|
|
$ |
66.2 |
|
|
Mixed Use |
Guilford, Connecticut |
|
|
146,396 |
|
|
|
47.6 |
|
|
Lifestyle Center |
Miami (Homestead), Florida |
|
|
275,839 |
|
|
|
74.9 |
|
|
Community Center |
Miami, Florida |
|
|
400,685 |
|
|
|
142.6 |
|
|
Mixed Use |
Boise (Nampa), Idaho |
|
|
450,855 |
|
|
|
123.1 |
|
|
Community Center |
Boston (Norwood), Massachusetts |
|
|
72,340 |
|
|
|
25.5 |
|
|
Community Center |
Boston, Massachusetts
(Seabrook, New Hampshire) |
|
|
215,905 |
|
|
|
57.5 |
|
|
Community Center |
Elmira (Horseheads), New York |
|
|
350,987 |
|
|
|
53.0 |
|
|
Community Center |
Raleigh (Apex), North Carolina
(Promenade) |
|
|
81,780 |
|
|
|
17.9 |
|
|
Community Center |
Austin (Kyle), Texas * |
|
|
443,092 |
|
|
|
77.2 |
|
|
Community Center |
|
|
|
|
|
|
|
|
|
Total |
|
|
2,665,379 |
|
|
$ |
685.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated 50% Joint Venture |
The wholly-owned and consolidated joint venture development estimated funding schedule, net of
reimbursements, as of June 30, 2008, is as follows (in millions):
|
|
|
|
|
Funded as of June 30, 2008 |
|
$ |
423.8 |
|
Projected net funding during 2008 |
|
|
48.9 |
|
Projected net funding thereafter |
|
|
212.8 |
|
|
|
|
|
Total |
|
$ |
685.5 |
|
|
|
|
|
In addition to these current developments described above with a projected funding of
approximately $685.5 million at June 30, 2008, the Company and its unconsolidated joint ventures
intend to commence construction on various other developments, including several international
projects. At June 30, 2008, the Company had acquired undeveloped land for the future development
of operational assets in excess of $370 million which is included in construction in progress on
the Companys condensed consolidated balance sheet. The Company has also identified several
additional potential development opportunities. While there are no assurances any of these
projects will be undertaken, they provide a source of potential development projects over the next
several years.
- 47 -
Development (Unconsolidated Joint Ventures)
The Companys unconsolidated joint ventures have the following shopping center projects under
construction. At June 30, 2008, $349.2 million of costs had been incurred in relation to these
development projects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDRs |
|
|
|
|
|
|
|
|
|
|
|
|
Joint |
|
Effective |
|
|
|
|
|
|
Expected |
|
|
|
|
|
Venture |
|
Ownership |
|
|
Owned |
|
|
Net Cost |
|
|
|
Location |
|
Partner |
|
Percentage |
|
|
GLA |
|
|
($ Millions) |
|
Description |
|
Kansas City
(Merriam), Kansas |
|
Coventry II |
|
|
20.0 |
% |
|
|
202,116 |
|
|
$46.8 |
|
Community Center |
Detroit (Bloomfield
Hills), Michigan |
|
Coventry II |
|
|
10.0 |
% |
|
|
882,197 |
|
|
192.5 |
|
Lifestyle Center |
Dallas (Allen), Texas |
|
Coventry II |
|
|
10.0 |
% |
|
|
797,665 |
|
|
171.2 |
|
Lifestyle Center |
Manaus, Brazil |
|
Sonae Sierra |
|
|
47.4 |
% |
|
|
477,630 |
|
|
119.3 |
|
Enclosed Mall |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
2,359,608 |
|
|
$529.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unconsolidated joint venture development estimated funding schedule, net of
reimbursements, as of June 30, 2008, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
|
|
|
|
|
DDRs |
|
|
JV Partners |
|
|
from |
|
|
|
|
|
|
Proportionate |
|
|
Proportionate |
|
|
Construction |
|
|
|
|
|
|
Share |
|
|
Share |
|
|
Loans |
|
|
Total |
|
Funded as of June 30, 2008 |
|
$ |
61.2 |
|
|
$ |
145.3 |
|
|
$ |
142.7 |
|
|
$ |
349.2 |
|
Projected net funding during
2008 |
|
|
15.5 |
|
|
|
35.8 |
|
|
|
120.7 |
|
|
|
172.0 |
|
Projected net funding thereafter |
|
|
5.3 |
|
|
|
(15.3 |
) |
|
|
18.6 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82.0 |
|
|
$ |
165.8 |
|
|
$ |
282.0 |
|
|
$ |
529.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopments and Expansions (Wholly-Owned and Consolidated Joint Ventures)
The Company is currently expanding/redeveloping the following wholly-owned and consolidated
joint venture shopping centers at a projected aggregate net cost of approximately $122.1 million.
At June 30, 2008, approximately $79.5 million of costs had been incurred in relation to these
projects.
|
|
|
Property |
|
Description |
Miami (Plantation), Florida
|
|
Redevelop shopping center to include Kohls and additional junior tenants |
Chesterfield, Michigan
|
|
Construct 25,400 sf of small shop space and retail space |
Fayetteville, North Carolina
|
|
Redevelop 18,000 sf of small shop space and construct an outparcel
building |
Akron (Stow), Ohio
|
|
Redevelop former K-Mart space and develop new outparcels |
- 48 -
Redevelopments and Expansions (Unconsolidated Joint Ventures)
The Companys unconsolidated joint ventures are currently expanding/redeveloping the following
shopping centers at a projected net cost of $453.1 million, which includes original acquisition
costs related to assets acquired for development. At June 30, 2008, approximately $396.4 million
of costs had been incurred in relation to these projects. The following is a summary of these
unconsolidated joint venture redevelopment and expansion projects:
|
|
|
|
|
|
|
|
|
|
|
|
|
DDRs |
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Ownership |
|
|
Property |
|
Joint Venture Partner |
|
Percentage |
|
Description |
Buena Park, California
|
|
Coventry II
|
|
|
20.0 |
% |
|
Large-scale redevelopment of
enclosed mall to open-air
format |
Los Angeles
(Lancaster),
California
|
|
Prudential Real Estate
Investors
|
|
|
21.0 |
% |
|
Relocate Wal-Mart and
redevelop former Wal-Mart
space |
Chicago (Deer Park),
Illinois
|
|
Prudential Real Estate
Investors
|
|
|
25.75 |
% |
|
Re-tenant former retail shop
space with junior tenant and
construct 13,500 sf
multi-tenant outparcel
building |
Benton Harbor, Michigan
|
|
Coventry II
|
|
|
20.0 |
% |
|
Construct 89,000 sf of anchor
space and retail shops |
Kansas City, Missouri
|
|
Coventry II
|
|
|
20.0 |
% |
|
Relocate retail shops and
re-tenant former retail shop
space |
Cincinnati, Ohio
|
|
Coventry II/Thor Equities
|
|
|
18.0 |
% |
|
Redevelop former JCPenney space |
Dispositions
For the six-months ended June 30, 2008, the Company sold four shopping center properties,
including one shopping center that was classified as held for sale at December 31, 2007,
aggregating 0.3 million square feet for approximately $27.1 million and recognized an aggregate
gain of $1.1 million.
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.
- 49 -
The individual unconsolidated joint ventures that have total assets greater than $250 million
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
Company-Owned |
|
|
|
|
Ownership |
|
|
|
Square Feet |
|
Total Debt |
Unconsolidated Real Estate Venture |
|
Percentage (1) |
|
Assets Owned |
|
(Thousands) |
|
(Millions) |
Sonae Sierra Brazil BV Sarl
|
|
|
47.4 |
% |
|
Nine shopping centers,
one shopping center under
development and a management
company in Brazil
|
|
|
3,612 |
|
|
$ |
17.3 |
|
DDR Domestic Retail Fund I
|
|
|
20.0 |
|
|
63 shopping center assets in
several states
|
|
|
8,250 |
|
|
|
968.1 |
|
DDR SAU Retail Fund LLC
|
|
|
20.0 |
|
|
29 shopping center assets in
several states
|
|
|
2,372 |
|
|
|
226.2 |
|
DDRTC Core Retail Fund LLC
|
|
|
15.0 |
|
|
66 shopping center assets in
several states
|
|
|
15,744 |
|
|
|
1,772.3 |
|
DDR Macquarie Fund LLC
|
|
|
20.3 |
|
|
51 shopping center assets in
several states
|
|
|
12,058 |
|
|
|
1,279.6 |
|
|
|
|
(1) |
|
Ownership may be held through different investment structures. Percentage ownerships are
subject to change as certain investments contain promoted structures. |
In connection with the development of shopping centers owned by certain of these affiliates,
the Company and/or its equity affiliates have agreed to fund the required capital associated with
approved development projects aggregating approximately $124.0 million at June 30, 2008. 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 $3.7 million at June 30, 2008, for which the Companys joint venture
partners have not funded their proportionate share. These entities are current on all debt service
owed to DDR.
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 $5.7 billion and $5.5 billion at June 30, 2008 and 2007, 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 agreed to fund any amounts due to 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 $69.1 million at June 30, 2008.
- 50 -
The Company entered into a unconsolidated joint venture that own real estate assets in Brazil
and has generally chosen not to mitigate 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 nonderivative 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.
For the quarter ended June 30, 2007, $1.2 million of net losses related to the
foreign-currency-denominated debt agreements were included in the Companys cumulative translation
adjustment. As the notional amount of the nonderivative instrument substantially matches the
portion of the net investment designated as being hedged and the nonderivative instrument is
denominated in the functional currency of the hedged net investment, the hedge ineffectiveness
recognized in earnings was not material.
Financing Activities
The volatility in the debt markets during the past year has caused borrowing spreads over
treasury rates to reach higher levels than previously experienced. This uncertainty re-emphasizes
the need to access diverse sources of capital, maintain liquidity and stage debt maturities
carefully. Most significantly, it underscores the importance of a conservative balance sheet that
provides flexibility in accessing capital and enhances the Companys ability to manage assets with
limited restrictions. A conservative balance sheet should allow DDR to be opportunistic in its
investment strategy and in accessing the most efficient and lowest cost financing available.
In March 2008,
the Company entered into mortgage loans with a life insurance company on six of its
wholly-owned shopping center assets, four of which are located in the
continental United States, two of which are located in Puerto Rico, for an aggregate of $350.0
million with a maturity date of April 2013. The loans have a fixed interest rate of 5.0% and
provide for interest-only debt service payments with a balloon payment at maturity. The Company
used the proceeds from the loans to repay scheduled 2008 debt maturities and the remaining balance
to repay revolving credit facilities.
In January 2008, the Company repaid unsecured senior notes of $100.0 million through
borrowings on the Companys revolving credit facilities.
Others
loan closings during the first quarter included a $71 million construction loan on the
Companys Homestead, Florida development and the refinancing of $72 million of unconsolidated joint
venture debt. In addition, the Companys 50% joint venture
with Sonae Sierra, which owns and develops retail real estate in
Brazil, closed on a R$50 million reais revolving credit facility in
February 2008. In the second quarter, a three year, $40 million
construction loan relating to the expansion of the
Companys corporate headquarters in Beachwood, Ohio was completed. In addition refinancing
occurred at four of the
- 51 -
Companys unconsolidated joint ventures, aggregating $112 million with terms ranging from LIBOR
plus 1.50% to LIBOR plus 2.50%.
Capitalization
At June 30, 2008, the Companys capitalization consisted of $5.8 billion of debt, $555
million of preferred shares, and $4.2 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 June 30, 2008, of $34.71), resulting in a debt to total market
capitalization ratio of 0.55 to 1.0. At June 30, 2008, the Companys total debt consisted of $4.5
billion of fixed-rate debt and $1.3 billion of variable-rate debt, including $600 million of
variable-rate debt that was effectively swapped to a fixed rate. At June 30, 2007, the Companys
total debt consisted of $4.6 billion of fixed-rate debt and $0.5 billion of variable-rate debt,
including $500 million of variable-rate debt which was effectively swapped to a fixed rate.
It is managements strategy to have access to the capital resources necessary to expand and
develop its business. Accordingly, the Company may seek to obtain funds through additional debt
financings and/or joint venture capital in a manner consistent with its intention to operate with a
conservative debt capitalization policy and maintain its investment grade ratings with Moodys
Investors Service and Standard and Poors. 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.
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 those covenants, the Company may be subject to higher finance costs and fees or accelerated
maturities. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness
would likely have a negative impact on the Companys financial condition and results of operations.
Contractual Obligations and Other Commitments
In 2008, debt maturities are anticipated to be repaid through several sources. The Companys
maturities for the remainder of 2008 consist of $115.9 million in consolidated mortgage loans that
are expected to be refinanced or repaid from operating cash flow, revolving credit facilities,
assets sales and/or new financings. No assurance can be provided that the aforementioned
obligations will be refinanced or repaid as anticipated (see Liquidity and Capital Resources).
At June 30, 2008, the Company had letters of credit outstanding of approximately $81.4
million. 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 $134.1 million with
general contractors for its wholly-owned and consolidated joint venture
- 52 -
properties at June 30, 2008. 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
or revolving credit facilities.
The Company entered into master lease agreements during 2004 through 2007 in connection with
the transfer of properties to certain unconsolidated joint ventures, which are recorded as a
liability and reduction of the related gain on sale. The Company is responsible for the monthly
base rent, all operating and maintenance expenses and certain tenant improvements and leasing
commissions for units not yet leased at closing for a three-year period. At June 30, 2008, the
Companys material master lease obligations, included in accounts payable and accrued expenses,
were incurred with the properties transferred to the following unconsolidated joint ventures were
(in millions):
|
|
|
|
|
DDR Markaz II |
|
$ |
0.2 |
|
DDR MDT PS LLC |
|
|
0.9 |
|
TRT DDR Venture I |
|
|
0.7 |
|
|
|
|
|
|
|
$ |
1.8 |
|
|
|
|
|
The Company routinely enters into contracts for the maintenance of its properties which
typically can be cancelled upon 30-60 days notice without penalty. At June 30, 2008, the Company
had purchase order obligations, typically payable within one year, aggregating approximately $7.0
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 June 30, 2008, 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 ten 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
Historically, real estate has been subject to a wide range of cyclical economic conditions
that affect various real estate markets and geographic regions with differing intensities and at
different times. Different regions of the United States have been experiencing varying degrees of
economic growth or distress. Adverse changes in general or local economic conditions could result
in the inability
- 53 -
of some tenants of the Company to meet their lease obligations and could otherwise adversely
affect the Companys ability to attract or retain tenants. The Companys shopping centers are
typically anchored by two or more national tenants (Wal-Mart or Target), home improvement stores
(Home Depot or Lowes Home Improvement) and two or more junior tenants (Bed Bath & Beyond, Kohls,
T.J. Maxx or PetSmart), which generally offer day-to-day necessities, rather than high-priced
luxury items. In addition, the Company seeks to reduce its operating and leasing risks through
ownership of a portfolio of properties with a diverse geographic and tenant base.
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 pursuant to the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), 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).
At June 30, 2008, the Company has approximately $15.6 million of tenant improvements, net of
depreciation, recorded on the Companys condensed consolidated financial statements for tenants in
financial distress (e.g., the recent bankruptcy cases filed by Goodys, Mervyns and Steve &
Barrys). The Company is currently evaluating the impact of the recent financial difficulties of
these tenants on its recorded Tenant Related Deferred Charges and based on its current assessment
and plans for these spaces should the current tenant vacate, the Company has not recorded any
significant charges to earnings for the three- and six-month periods ended June 30, 2008. As
additional information becomes available regarding the status of the Companys leases with these
major tenants or the Companys future plans for these spaces change, the Company may be required to
write off and/or accelerate depreciation and amortization expense associated with a significant
portion of the Tenant Related Deferred Charges in future periods. The Company does not believe its
exposure associated with past due accounts receivable, net of related reserves, for these tenants
is significant to the financial statements as most of these tenants were current with their rental
payments at the date the tenant filed for bankruptcy protection.
The retail shopping sector has been affected by the competitive nature of the retail business
and the competition for market share where stronger retailers have out-positioned some of the
weaker retailers. These shifts have forced some market share away from weaker retailers and
required them, in some cases, to declare bankruptcy and/or close stores. Certain retailers have
announced store closings even though they have not filed for bankruptcy protection. Notwithstanding
any store closures, the Company does not expect to have any significant losses associated with
these tenants. Overall, the Companys portfolio remains stable. While negative news relating to
troubled retail tenants tends to attract attention, the vacancies created by unsuccessful tenants
may also create opportunities to increase rent.
Although certain individual tenants within the Companys portfolio have filed for bankruptcy
protection as discussed above, the Company believes that several of its major tenants, including
Wal-Mart, Home Depot, Kohls, Target, Lowes Home Improvement, T.J. Maxx and Bed Bath & Beyond, are
financially secure retailers based upon their credit quality. This stability is further evidenced
by the tenants relatively constant same store tenant sales growth in the current economic
environment. Headlines describe the plight of subprime borrowers, the general troubles in the
housing market and the potential for such problems to impact consumer spending. Consumers
concerns regarding the health
- 54 -
of the U.S. economy and its impact on disposable income have caused broad changes in shopping
patterns. Consumers appear to be more price sensitive and patronize those retailers that offer the
best value for non-discretionary goods. As a result, many of the Companys core retailers are
believed to be doing well and are still pursuing new store locations. Weaker retailers, some of
which have locations in the Companys portfolio, are feeling pressure and will likely continue to
experience difficulty in this environment.
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. More specifically,
in the past the Company has not experienced significant volatility in its long-term portfolio
occupancy rate. The Company has experienced these 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 a great
opportunity to re-lease space at higher rents to a stronger retailer. More importantly, the
quality of the property revenue stream is high and consistent as it is generally derived from
retailers with good credit profiles under long-term leases, with very little reliance on overage
rents generated by tenant sales performance. The Company believes that the quality of its shopping
center portfolio is strong, as evidenced by the high historical occupancy rates, which have ranged
from 92% to 96% since the Companys initial public offering in 1993. Also, average base rental
rates have increased from $5.48 to $12.47 since 1993. Expecting that there are more store closings
likely to occur this year, the Company continues to be proactive in its leasing strategy to reflect
a more conservative stance. Most of the 2008 renewals were addressed earlier in the year. During
the second quarter, the Company focused on maintaining occupancy by pursuing new lease commitments.
Moreover, the Company has been able to achieve these results without significant capital
investment in tenant improvements or leasing commissions. 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 with the position of its portfolio and the general diversity and credit quality of its
tenant base.
Legal Matters
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 Implemented
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 SFAS 159
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159), which gives entities the option to measure
eligible
- 55 -
financial assets, financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded
in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon
adoption, with the transition adjustment recorded to beginning retained earnings. The Company
adopted SFAS No. 159 on January 1, 2008, and did not elect to measure any assets, liabilities or
firm commitments at fair value.
Fair Value Measurements SFAS 157
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and
liabilities. This statement clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing the asset or liability. SFAS No. 157
establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets
and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require
assets or liabilities to be measured at fair value. SFAS No. 157 also provides for certain
disclosure requirements, including, but not limited to, the valuation techniques used to measure
fair value and a discussion of changes in valuation techniques, if any, during the period. The
Company adopted this statement for its financial assets and liabilities on January 1, 2008.
For nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at
fair value on a recurring basis, the statement is effective for fiscal years beginning after
November 15, 2008. The Company is currently evaluating the impact that this statement, for
nonfinancial assets and liabilities, will have on its financial statements.
New Accounting Standards to Be Implemented
Business Combinations SFAS 141(R)
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(SFAS No. 141 (R)). The objective of this statement 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 statement
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 statement 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 is not permitted. To the extent that the Company enters into new
acquisitions in 2009 and beyond, acquisition costs and fees which are currently capitalized and
allocated to the basis of the acquisition, this standard will require the Company to expense these
costs as incurred. Because of this change in accounting for costs, the Company expects that the
adoption of this standard will cause a negative impact to the Companys results of operations as
costs are incurred. The Company is currently assessing the
- 56 -
complete impact, if any, the adoption of SFAS No. 141 (R) will have on its financial position
and results of operations.
Non-Controlling Interests in Consolidated Financial Statements an Amendment of ARB No. 51
SFAS 160
In December 2007, the FASB issued Statement No. 160, Non-Controlling Interest in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS No. 160). A non-controlling interest,
sometimes called minority interest, is the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. The objective of this statement 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 statement is effective for fiscal years, and interim
reporting periods within those fiscal years, beginning on or after December 15, 2008, and is
applied on a prospective basis. Early adoption is not permitted. The Company is currently assessing
the impact, if any, the adoption of SFAS No. 160 will have on the Companys financial position and
results of operations.
Disclosures about Derivative Instruments and Hedging Activities SFAS 161
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161), 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. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged.
The Company is currently assessing the impact, if any, that the adoption of SFAS No. 161 will have
on its financial statement disclosures.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) FSP APB 14-a
In May 2008, the FASB issued a FASB Staff Position (FSP), Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
- 57 -
(FSP APB 14-a). This FSP 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 FSP APB 14-a and requires issuers of such instruments to separately account for
the liability and equity components by allocating the proceeds from issuance of the instrument
between the liability component and the embedded conversion option (i.e., the equity component).
The difference between the principal amount of the debt and the amount of the proceeds allocated to
the liability component should be reported as a debt discount and subsequently amortized to
earnings over the instruments expected life. As a result, a lower net income would be reflected
as interest expense would include both the current periods amortization of the debt discount and
the instruments coupon interest. This statement is effective for fiscal years beginning after
December 15, 2008, and for interim periods within those fiscal years, with retrospective
application required. Early adoption is not permitted. The Company is currently assessing the
impact that the adoption of FSP APB 14-a will have on its financial position and results of
operations.
Accounting for Transfers of Financial Assets and Repurchase Financing Transactions FSP FAS 140-3
In February 2008,
the FASB issued a FSP Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions (FSP FAS 140-3). This FSP addresses the issue of whether or
not these transactions should be viewed as two separate transactions or as one linked
transaction. The FSP includes a rebuttable presumption linking the two transactions unless the
presumption can be overcome by meeting certain criteria. This FSP is effective for fiscal years
beginning after November 15, 2008, and will apply only to original transfers made after that date;
early adoption is not permitted. The Company is currently evaluating the impact, if any, the
adoption of FSP FAS 140-3 will have on its financial position and results of operations.
Determination of the Useful Life of Intangible Assets FSP FAS 142-3
In
April 2008, the FASB issued a FSP Determination of the Useful Life of Intangible
Assets (FSP 142-3), 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 FAS
142, Goodwill and Other Intangible Assets. The FSP is intended to improve the consistency between
the useful life of an intangible asset determined under FAS 142 and the period of expected cash
flows used to measure the fair value of the asset under FAS 141(R), Business Combinations, and
other US GAAP. The guidance for determining the useful life of a recognized intangible asset in
this FSP shall be applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements in this FSP shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is not permitted. The Company is currently evaluating the
impact, if any, the adoption of FSP 142-3 will have on its financial position and results of
operations.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities FSP EITF 03-6-1
In June
2008, the FASB issued a FSP Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP EITF 03-6-1), which addresses
- 58 -
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 SFAS No. 128, Earnings per Share.
Under the guidance in FSP EITF 03-6-1, 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 FSP 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 shall be adjusted retrospectively. Early adoption is not
permitted. The Company is currently assessing the impact, if any, the adoption of FSP EITF 03-6-1
will have on its financial position and results of operations.
- 59 -
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
Percentage |
|
|
|
|
|
Average |
|
Average |
|
Percentage |
|
|
Amount |
|
Maturity |
|
Interest |
|
of |
|
Amount |
|
Maturity |
|
Interest |
|
of |
|
|
(Millions) |
|
(Years) |
|
Rate |
|
Total |
|
(Millions) |
|
(Years) |
|
Rate |
|
Total |
Fixed-Rate Debt (1) |
|
$ |
4,527.4 |
|
|
|
3.4 |
|
|
|
5.1 |
% |
|
|
77.9 |
% |
|
$ |
4,533.1 |
|
|
|
3.9 |
|
|
|
5.1 |
% |
|
|
81.1 |
% |
Variable-Rate Debt (1) |
|
$ |
1,283.9 |
|
|
|
3.3 |
|
|
|
3.2 |
% |
|
|
22.1 |
% |
|
$ |
1,057.9 |
|
|
|
4.1 |
|
|
|
5.3 |
% |
|
|
18.9 |
% |
|
|
|
(1) |
|
Adjusted to reflect the $600 million of variable-rate debt that LIBOR was swapped to a fixed
rate of 5.0% at June 30, 2008 and December 31, 2007. |
The Companys unconsolidated joint ventures fixed-rate indebtedness, including $557.3 million
of variable-rate debt that was swapped to a weighted average fixed rate of approximately 5.3% at
June 30, 2008 and December 31, 2007, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
|
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 |
|
$ |
4,512.2 |
|
|
$ |
912.5 |
|
|
|
5.4 |
|
|
|
5.3 |
% |
|
$ |
4,516.4 |
|
|
$ |
860.5 |
|
|
|
5.9 |
|
|
|
5.3 |
% |
Variable-Rate
Debt |
|
$ |
1,185.6 |
|
|
$ |
211.9 |
|
|
|
1.3 |
|
|
|
3.6 |
% |
|
$ |
1,035.4 |
|
|
$ |
173.6 |
|
|
|
1.5 |
|
|
|
5.5 |
% |
The Company intends to utilize variable-rate indebtedness available under its revolving credit
facilities and construction loans to initially fund future acquisitions, developments and
expansions of 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 and its unconsolidated joint ventures
variable-rate debt described above has been mitigated through the use of interest rate swap
agreements (the Swaps) with major financial institutions. At June 30, 2008 and December 31, 2007,
the interest rate on $600 million of the Companys consolidated floating rate debt was swapped to
fixed rates. At June 30, 2008 and December 31, 2007, the interest rate on $557.3 million of joint
venture floating rate debt (of which $113.0 million and $80.8 million is the Companys
proportionate share at June 30, 2008 and December 31, 2007, respectively) was swapped to fixed
rates. The Company is exposed to credit
- 60 -
risk in the event of non-performance by the counter-parties to the Swaps. The Company believes
it mitigates its credit risk by entering into Swaps with major financial institutions.
In November 2007, the Company entered into a treasury lock with a notional amount of
$100 million. The treasury lock was terminated in connection with the issuance of mortgage debt in
March 2008. The treasury lock was executed to hedge the benchmark interest rate associated with
forecasted interest payments associated with the anticipated issuance of fixed-rate borrowings.
The effective portion of these hedging relationships has been deferred in accumulated other
comprehensive income and will be reclassified into earnings over the term of the debt as an
adjustment to earnings, based on the effective-yield method.
The fair value of the Companys fixed-rate debt adjusted to: (i) include the $600 million that
was swapped to a fixed rate at June 30, 2008 and December 31, 2007; (ii) include the Companys
proportionate share of the joint venture fixed-rate debt and (iii) include the Companys
proportionate share of $113.0 million and $80.8 million that was swapped to a fixed rate at June
30, 2008 and December 31, 2007, respectively, and an estimate of the effect of a 100 basis point
decrease in market interest rates, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
|
Carrying |
|
Fair |
|
100 Basis Point
Decrease in |
|
Carrying |
|
Fair |
|
100 Basis Point Decrease in |
|
|
Value |
|
Value |
|
Market Interest |
|
Value |
|
Value |
|
Market Interest |
|
|
(Millions) |
|
(Millions) |
|
Rates |
|
(Millions) |
|
(Millions) |
|
Rates |
Companys fixed-rate debt |
|
$ |
4,527.4 |
|
|
$ |
4,398.2 |
(1) |
|
$ |
4,523.8 |
(2) |
|
$ |
4,533.1 |
|
|
$ |
4,421.0 |
(1) |
|
$ |
4,525.0 |
(2) |
Companys proportionate
share of joint venture
fixed-rate debt |
|
$ |
912.5 |
|
|
$ |
891.4 |
(3) |
|
$ |
934.5 |
(4) |
|
$ |
860.5 |
|
|
$ |
880.1 |
(3) |
|
$ |
927.0 |
(4) |
|
|
|
(1) |
|
Includes the fair value of interest rate swaps, which was a liability of $18.3
million and $17.8 million at June 30, 2008 and December 31, 2007, respectively. |
|
(2) |
|
Includes the fair value of interest rate swaps, which was a liability of $29.6
million and $32.0 million at June 30, 2008 and December 31, 2007, respectively. |
|
(3) |
|
Includes the Companys proportionate share of the fair value of interest rate
swaps that was a liability of $3.9 million and $3.0 million at June 30, 2008 and
December 31, 2007, respectively. |
|
(4) |
|
Includes the Companys proportionate share of the fair value of interest rate
swaps that was a liability of $10.3 million and $7.5 million at June 30, 2008 and
December 31, 2007, 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 June 30, 2008 and
December 31, 2007, would result in an increase in interest expense of approximately $6.4 million
and $10.6 million, respectively, for the Company and $1.1 million and $1.7 million, respectively,
representing the Companys proportionate share of the joint ventures interest expense relating to
variable-rate debt outstanding, for the six-month and year end periods. The estimated increase in interest
expense does not give effect to possible changes in the daily balance for
the Companys or joint ventures outstanding variable-rate debt.
- 61 -
The Company and its joint ventures continually monitor and actively manage interest costs on
their variable-rate debt portfolio and may enter into interest rate swap positions based on market
conditions. In addition, the Company continually assess its ability to obtain funds through
additional equity and/or debt offerings, including the 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. As of June 30, 2008, the Company had no other material exposure to market risk.
- 62 -
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 June 30, 2008, 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.
- 63 -
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.
ITEM 1A. RISK FACTORS
The risk factors are set forth in the Companys Form on 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 26, 2007, the Board of Directors authorized a common share repurchase program. Under
the terms of the program, the Company may purchase up to a maximum value of $500 million of its
common shares over a two-year period. At June 30, 2008, the Company had repurchased under this
program 5.6 million of its common shares at a gross cost of approximately $261.9 million at a
weighted-average price per share of $46.66. The Company made no repurchases during the quarter
ended June 30, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 2008, the Company held its annual meeting of shareholders. The matters presented to
shareholders for vote and the vote on such matters were as follows:
1. To elect nine directors, each to serve until the next annual meeting of shareholders and until a
successor has been duly elected and qualified.
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
Dean S. Adler |
|
|
106,551,331 |
|
|
|
2,508,275 |
|
Terrance R. Ahern |
|
|
80,506,611 |
|
|
|
28,552,995 |
|
Robert H. Gidel |
|
|
106,586,248 |
|
|
|
2,473,358 |
|
Victor B. MacFarlane |
|
|
80,648,016 |
|
|
|
28,411,590 |
|
Craig Macnab |
|
|
103,892,947 |
|
|
|
5,166,659 |
|
Scott D. Roulston |
|
|
106,573,907 |
|
|
|
2,485,699 |
|
Barry A. Sholem |
|
|
80,645,711 |
|
|
|
28,413,895 |
|
William B. Summers, Jr. |
|
|
80,639,860 |
|
|
|
28,419,746 |
|
Scott A. Wolstein |
|
|
106,522,669 |
|
|
|
2,536,937 |
|
- 64 -
2. To approve the 2008 Developers Diversified Realty Corporation Equity-Based Award Plan;
|
|
|
|
|
For |
|
Against |
|
Abstain |
88,029,206
|
|
5,714,209
|
|
1,166,178 |
3. To approve an amendment to the Companys Amended and Restated Articles of Incorporation, as
amended, to adopt a majority vote standard in uncontested elections of directors.
|
|
|
|
|
For |
|
Against |
|
Abstain |
104,032,534
|
|
3,849,494
|
|
1,177,575 |
4. To approve an amendment to the Companys Amended and Restated Articles of Incorporation, as
amended, to change the par value of the common shares of the Company from without par value to
$0.10 par value per share.
|
|
|
|
|
For |
|
Against |
|
Abstain |
107,410,562
|
|
423,134
|
|
1,225,904 |
5. To ratify the selection of PricewaterhouseCoopers LLP as the Companys independent accountants
for the Companys fiscal year ending December 31, 2008.
|
|
|
|
|
For |
|
Against |
|
Abstain |
107,282,774
|
|
636,423
|
|
1,140,410 |
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 |
|
Certification of principal executive officer pursuant to Rule 13a-14(a) of the Exchange Act
of 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
2002 1 |
|
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
2002 1 |
- 65 -
|
|
|
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. |
- 66 -
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
|
|
|
|
|
|
|
August 11, 2008
|
|
|
/s/ William H. Schafer |
|
|
|
|
|
|
|
|
(Date)
|
|
|
William H. Schafer, Executive Vice President and |
|
|
|
|
|
Chief Financial Officer (Duly Authorized Officer) |
|
|
|
|
|
|
|
|
August 11, 2008
|
|
|
/s/ Christa A. Vesy |
|
|
|
|
|
|
|
|
(Date)
|
|
|
Christa A. Vesy, Senior Vice President and |
|
|
|
|
|
Chief Accounting Officer (Chief Accounting Officer) |
|
- 67 -
EXHIBIT INDEX
31.1 |
|
Certification of principal executive officer pursuant to Rule 13a-14(a) of the Exchange Act
of 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
2002 1 |
|
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
2002 1 |
|
|
|
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. |
- 68 -