FORM 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 September 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
incorporation or organization)
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(I.R.S. Employer
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 November 3, 2008, the registrant had 120,278,988 outstanding common shares, $0.10 par
value.
PART I
FINANCIAL INFORMATION
- 2 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
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September 30, |
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December 31, |
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2008 |
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2007 |
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Assets |
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|
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Real estate rental property: |
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|
|
|
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Land |
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$ |
2,084,898 |
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$ |
2,142,942 |
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Buildings |
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5,898,491 |
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5,933,890 |
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Fixtures and tenant improvements |
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260,902 |
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237,117 |
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|
|
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8,244,291 |
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8,313,949 |
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Less: Accumulated depreciation |
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(1,167,243 |
) |
|
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(1,024,048 |
) |
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|
|
|
|
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|
7,077,048 |
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|
7,289,901 |
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Construction in progress and land under development |
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939,421 |
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664,926 |
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Real estate held for sale |
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|
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5,796 |
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8,016,469 |
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7,960,623 |
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Investments in and advances to joint ventures |
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709,974 |
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638,111 |
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Cash and cash equivalents |
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30,171 |
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|
49,547 |
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Restricted cash |
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106,391 |
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58,958 |
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Notes receivable |
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65,930 |
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18,557 |
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Deferred charges, net |
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29,409 |
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31,172 |
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Other assets, net |
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335,912 |
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|
332,848 |
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$ |
9,294,256 |
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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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$ |
2,519,435 |
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$ |
2,622,219 |
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Revolving credit facilities |
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955,912 |
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709,459 |
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3,475,347 |
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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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1,634,528 |
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1,459,336 |
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2,434,528 |
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2,259,336 |
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Total indebtedness |
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5,909,875 |
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5,591,014 |
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Accounts payable and accrued expenses |
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168,670 |
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141,629 |
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Dividends payable |
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89,956 |
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85,851 |
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Other liabilities |
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127,890 |
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143,616 |
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6,296,391 |
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5,962,110 |
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Minority equity interest |
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138,565 |
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|
111,767 |
|
Operating partnership minority interests |
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8,010 |
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|
17,114 |
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6,442,966 |
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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 September 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 September 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 September 30, 2008 and December
31, 2007 |
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170,000 |
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170,000 |
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Common shares, $0.10 par value; 300,000,000 shares
authorized; 126,798,119 and 126,793,684 shares
issued at September 30, 2008 and December 31,
2007, respectively |
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12,680 |
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12,679 |
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Paid-in-capital |
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3,021,363 |
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3,029,176 |
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Accumulated distributions in excess of net income |
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(418,466 |
) |
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(260,018 |
) |
Deferred compensation obligation |
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23,056 |
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22,862 |
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Accumulated other comprehensive (loss) income |
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(5,202 |
) |
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8,965 |
|
Less: Common
shares in treasury at cost: 6,523,838 and 7,345,304 shares at September 30,
2008 and December 31, 2007, respectively |
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(337,141 |
) |
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(369,839 |
) |
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2,851,290 |
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2,998,825 |
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$ |
9,294,256 |
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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 SEPTEMBER 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 |
|
$ |
158,223 |
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$ |
156,911 |
|
Percentage and overage rents |
|
|
1,062 |
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|
|
1,980 |
|
Recoveries from tenants |
|
|
51,644 |
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|
51,609 |
|
Ancillary and other property income |
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|
4,950 |
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|
5,110 |
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Management fees, development fees and other fee income |
|
|
15,378 |
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|
13,827 |
|
Other |
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|
2,656 |
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|
2,110 |
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|
|
|
|
|
|
|
|
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|
233,913 |
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|
231,547 |
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|
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Rental operation expenses: |
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Operating and maintenance |
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|
35,992 |
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|
32,596 |
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Real estate taxes |
|
|
28,407 |
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|
26,516 |
|
General and administrative |
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|
19,560 |
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|
19,626 |
|
Depreciation and amortization |
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|
63,297 |
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|
55,803 |
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|
|
|
|
|
|
|
|
|
|
147,256 |
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|
134,541 |
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|
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|
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|
|
|
|
|
|
|
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Other income (expense): |
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Interest income |
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|
1,663 |
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|
|
1,564 |
|
Interest expense |
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|
(60,651 |
) |
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|
(61,666 |
) |
Other expense, net |
|
|
(6,859 |
) |
|
|
(225 |
) |
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|
|
|
|
|
|
|
|
|
(65,847 |
) |
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|
(60,327 |
) |
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Income before equity in net income of joint ventures, minority
interests, tax benefit (expense) of taxable REIT subsidiaries and
franchise taxes, discontinued operations and gain on disposition of
real estate, net of tax |
|
|
20,810 |
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|
|
36,679 |
|
Equity in net income of joint ventures |
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|
1,981 |
|
|
|
6,003 |
|
|
|
|
|
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|
Income before minority interests, tax benefit (expense) of taxable
REIT subsidiaries and franchise taxes, discontinued operations and
gain on disposition of real estate, net of tax |
|
|
22,791 |
|
|
|
42,682 |
|
Minority interests: |
|
|
|
|
|
|
|
|
Minority equity interests |
|
|
(1,263 |
) |
|
|
(1,635 |
) |
Operating partnership minority interests |
|
|
(261 |
) |
|
|
(569 |
) |
|
|
|
|
|
|
|
|
|
|
(1,524 |
) |
|
|
(2,204 |
) |
Tax benefit (expense) of taxable REIT subsidiaries and franchise taxes |
|
|
16,414 |
|
|
|
(483 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
37,681 |
|
|
|
39,995 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
458 |
|
|
|
(93 |
) |
Loss on disposition of real estate, net of tax |
|
|
(2,717 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
(2,259 |
) |
|
|
(403 |
) |
|
|
|
|
|
|
|
Income before gain on disposition of real estate, net of tax |
|
|
35,422 |
|
|
|
39,592 |
|
Gain on disposition of real estate, net of tax |
|
|
3,093 |
|
|
|
3,691 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,515 |
|
|
$ |
43,283 |
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
10,567 |
|
|
|
10,567 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
27,948 |
|
|
$ |
32,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
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|
|
|
|
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Basic earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.25 |
|
|
$ |
0.27 |
|
Loss from discontinued operations |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.23 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.25 |
|
|
$ |
0.26 |
|
Loss from discontinued operations |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.23 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.69 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
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|
2008 |
|
|
2007 |
|
Revenues from operations: |
|
|
|
|
|
|
|
|
Minimum rents |
|
$ |
474,885 |
|
|
$ |
479,576 |
|
Percentage and overage rents |
|
|
5,145 |
|
|
|
5,511 |
|
Recoveries from tenants |
|
|
152,194 |
|
|
|
152,640 |
|
Ancillary and other property income |
|
|
15,932 |
|
|
|
14,048 |
|
Management fees, development fees and other fee income |
|
|
47,302 |
|
|
|
34,906 |
|
Other |
|
|
7,834 |
|
|
|
13,536 |
|
|
|
|
|
|
|
|
|
|
|
703,292 |
|
|
|
700,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance |
|
|
106,512 |
|
|
|
93,990 |
|
Real estate taxes |
|
|
83,719 |
|
|
|
82,284 |
|
General and administrative |
|
|
61,607 |
|
|
|
60,304 |
|
Depreciation and amortization |
|
|
177,544 |
|
|
|
161,274 |
|
|
|
|
|
|
|
|
|
|
|
429,382 |
|
|
|
397,852 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
2,791 |
|
|
|
7,726 |
|
Interest expense |
|
|
(182,782 |
) |
|
|
(194,581 |
) |
Other expense, net |
|
|
(7,259 |
) |
|
|
(675 |
) |
|
|
|
|
|
|
|
|
|
|
(187,250 |
) |
|
|
(187,530 |
) |
|
|
|
|
|
|
|
Income before equity in net income of joint ventures,
minority interests, tax benefit of taxable REIT subsidiaries
and franchise taxes, discontinued operations and gain on
disposition of real estate, net of tax |
|
|
86,660 |
|
|
|
114,835 |
|
Equity in net income of joint ventures |
|
|
21,924 |
|
|
|
33,887 |
|
|
|
|
|
|
|
|
Income before minority interests, tax benefit of taxable
REIT subsidiaries and franchise taxes, discontinued
operations and gain on disposition of real estate, net of
tax |
|
|
108,584 |
|
|
|
148,722 |
|
Minority interests: |
|
|
|
|
|
|
|
|
Minority equity interests |
|
|
(4,720 |
) |
|
|
(4,808 |
) |
Preferred operating partnership minority interests |
|
|
|
|
|
|
(9,690 |
) |
Operating partnership minority interests |
|
|
(1,145 |
) |
|
|
(1,706 |
) |
|
|
|
|
|
|
|
|
|
|
(5,865 |
) |
|
|
(16,204 |
) |
Tax benefit of taxable REIT subsidiaries and franchise taxes |
|
|
15,070 |
|
|
|
15,294 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
117,789 |
|
|
|
147,812 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(461 |
) |
|
|
8,408 |
|
(Loss) gain on disposition of real estate, net of tax |
|
|
(1,830 |
) |
|
|
13,323 |
|
|
|
|
|
|
|
|
|
|
|
(2,291 |
) |
|
|
21,731 |
|
|
|
|
|
|
|
|
Income before gain on disposition of real estate, net of tax |
|
|
115,498 |
|
|
|
169,543 |
|
Gain on disposition of real estate, net of tax |
|
|
6,368 |
|
|
|
63,713 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
121,866 |
|
|
$ |
233,256 |
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
31,702 |
|
|
|
40,367 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
90,164 |
|
|
$ |
192,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.77 |
|
|
$ |
1.42 |
|
(Loss) income from discontinued operations |
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.75 |
|
|
$ |
1.60 |
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.77 |
|
|
$ |
1.41 |
|
(Loss) income from discontinued operations |
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.75 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
2.07 |
|
|
$ |
1.98 |
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Net cash flow provided by operating activities: |
|
$ |
319,452 |
|
|
$ |
334,570 |
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Real estate developed or acquired, net of liabilities assumed |
|
|
(334,264 |
) |
|
|
(2,726,074 |
) |
Equity contributions to joint ventures |
|
|
(80,471 |
) |
|
|
(232,643 |
) |
(Issuance) repayment of joint venture advances, net |
|
|
(24,376 |
) |
|
|
1,839 |
|
Proceeds from sale and refinancing of joint venture interests |
|
|
2,416 |
|
|
|
38,650 |
|
Return on investments in joint ventures |
|
|
24,653 |
|
|
|
12,152 |
|
(Issuance) repayment of notes receivable, net |
|
|
(38,273 |
) |
|
|
937 |
|
Increase in restricted cash |
|
|
(47,433 |
) |
|
|
|
|
Proceeds from disposition of real estate |
|
|
95,459 |
|
|
|
1,978,464 |
|
|
|
|
|
|
|
|
Net cash flow used for investing activities |
|
|
(402,289 |
) |
|
|
(926,675 |
) |
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facilities, net |
|
|
252,850 |
|
|
|
327,500 |
|
Repayment of senior notes |
|
|
|
|
|
|
(85,000 |
) |
Repayment of medium term notes |
|
|
(103,425 |
) |
|
|
(110,000 |
) |
Proceeds from term loans |
|
|
|
|
|
|
900,000 |
|
Repayment of term loans |
|
|
|
|
|
|
(750,000 |
) |
Proceeds from mortgage and other secured debt |
|
|
449,423 |
|
|
|
61,526 |
|
Principal payments on mortgage debt |
|
|
(274,231 |
) |
|
|
(383,116 |
) |
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 |
|
|
(5,353 |
) |
|
|
(3,011 |
) |
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 |
|
|
1,260 |
|
|
|
7,634 |
|
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 equity interest shareholder |
|
|
(3,657 |
) |
|
|
(4,261 |
) |
Contributions
from minority interest shareholders |
|
|
25,239 |
|
|
|
|
|
Purchase of operating partnership minority interests |
|
|
(46 |
) |
|
|
(683 |
) |
Distributions to operating partnership minority interests |
|
|
(1,431 |
) |
|
|
(11,330 |
) |
Repurchase of common shares |
|
|
|
|
|
|
(222,819 |
) |
Dividends paid |
|
|
(276,209 |
) |
|
|
(264,811 |
) |
|
|
|
|
|
|
|
Net cash flow provided by financing activities |
|
|
64,420 |
|
|
|
613,427 |
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(18,417 |
) |
|
|
21,322 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(959 |
) |
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
49,547 |
|
|
|
28,378 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
30,171 |
|
|
$ |
49,700 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
For the nine-month period ended September 30, 2008, minority 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 $17.1 million, which
represents the fair value of the Companys interest rate swaps. At September 30, 2008, dividends
payable were $90.0 million. In 2008, in accordance with the terms of the outperformance unit plans
and performance unit plans, the Company issued 107,879 and vested
- 6 -
79,332,
respectively, of its common shares. The foregoing transactions did not provide for or require the use of
cash for the nine-month period ended September 30, 2008.
For the nine-month period ended September 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 $31.7 million and accounts receivable, intangible
assets and other assets aggregating approximately $92.3 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 $27.1 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 charge to net
income available to common shareholders of $5.4 million relating to the write-off of original
issuance costs. Other liabilities included approximately $6.6 million, which represents the fair
value of the Companys interest rate swaps. At September 30, 2007, dividends payable were $88.1
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 317,334 shares will vest in 2009 through 2011. The foregoing transactions did not provide
for or require the use of cash for the nine-month period ended September 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
nine-month periods ended September 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 |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
38,515 |
|
|
$ |
43,283 |
|
|
$ |
121,866 |
|
|
$ |
233,256 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts |
|
|
(122 |
) |
|
|
(11,155 |
) |
|
|
(4,626 |
) |
|
|
(4,239 |
) |
Amortization of interest rate contracts |
|
|
(93 |
) |
|
|
(364 |
) |
|
|
(550 |
) |
|
|
(1,091 |
) |
Foreign currency translation |
|
|
(27,819 |
) |
|
|
6,913 |
|
|
|
(8,991 |
) |
|
|
18,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
|
|
(28,034 |
) |
|
|
(4,606 |
) |
|
|
(14,167 |
) |
|
|
13,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
10,481 |
|
|
$ |
38,677 |
|
|
$ |
107,699 |
|
|
$ |
246,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and related disclosure
requirements 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 position and results of operations.
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active
FSP FAS 157-3
In October 2008, the FASB issued FSP FAS No. 157-3, Fair Value Measurements (FSP FAS No.
157-3), which clarifies the application of SFAS No. 157 in an inactive market and provides an
example to demonstrate how the fair value of a financial asset is determined when the market for
that financial asset is inactive. FSP FAS No. 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued. The adoption of this standard as of
September 30, 2008 did not have a material impact on the Companys financial position and results
of operations.
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
that qualify as businesses, this standard will require that acquisition costs and certain fees,
which are currently capitalized and allocated to the basis of the acquisition, be expensed as these
costs are incurred. Because of this change in accounting for costs, the Company expects that the
adoption of this standard could have a negative impact on the Companys results of operations
depending on the size of a transaction and the amount of costs incurred. The Company is currently
assessing the 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:
- 10 -
(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 14-1
In May 2008, the FASB issued a Staff Position (FSP), Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB 14-1). FSP APB 14-1 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 14-1 and requires issuers of such instruments to separately account for the
liability and equity components by allocating the proceeds from the issuance of the instrument
between the liability component and the embedded conversion option (i.e., the equity component).
FSP No. APB 14-1 will require that the debt proceeds from the sale of $600 million 3.0%
convertible notes, due in 2012, and $250 million of 3.5% convertible notes, due in 2011, be
allocated between a liability component and an equity component in a manner that reflects interest
expense at the interest rate of similar nonconvertible debt. 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 using the interest method. As a
- 11 -
result, the
Company will report a lower net income as interest
expense would be increased to include both the
current periods amortization of the debt discount and the instruments coupon interest. Based on
the Companys understanding of the application of FSP APB 14-1, this will result in an estimated
impact of approximately $0.11 per share (net of capitalized interest
on the Companys qualifying expenditures) of estimated additional
non-cash interest expense for 2008. FSP No. APB 14-1 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.
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 No. 140-3). FSP FAS No. 140-3 addresses the issue of
whether or not these transactions should be viewed as two separate transactions or as one linked
transaction. FSP FAS No. 140-3 includes a rebuttable presumption linking the two transactions
unless the presumption can be overcome by meeting certain criteria. FSP FAS No. 140-3 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 No. 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 an FSP Determination of the Useful Life of Intangible Assets
(FSP No. 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 SFAS
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is intended to improve the
consistency between the useful life of an intangible asset determined under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS No. 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.
FSP No. 142-3 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 No. 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 an FSP Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP EITF No. 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
- 12 -
in FSP EITF No. 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 No. 03-6-1 will have on its
financial position and results of operations.
2. EQUITY INVESTMENTS IN JOINT VENTURES
At September 30, 2008 and December 31, 2007, the Company had ownership interests in various
unconsolidated joint ventures which, as of the respective dates, owned 329 shopping center
properties and 317 shopping center properties. Included in the number
of properties above 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 September 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):
- 13 -
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Combined Balance Sheets: |
|
|
|
|
|
|
|
|
Land |
|
$ |
2,356,289 |
|
|
$ |
2,352,034 |
|
Buildings |
|
|
6,213,613 |
|
|
|
6,126,564 |
|
Fixtures and tenant improvements |
|
|
125,349 |
|
|
|
99,917 |
|
|
|
|
|
|
|
|
|
|
|
8,695,251 |
|
|
|
8,578,515 |
|
Less: Accumulated depreciation |
|
|
(562,857 |
) |
|
|
(409,993 |
) |
|
|
|
|
|
|
|
|
|
|
8,132,394 |
|
|
|
8,168,522 |
|
Construction in progress |
|
|
409,509 |
|
|
|
207,367 |
|
|
|
|
|
|
|
|
|
|
|
8,541,903 |
|
|
|
8,375,889 |
|
Receivables, net |
|
|
153,043 |
|
|
|
122,729 |
|
Leasehold interests |
|
|
12,905 |
|
|
|
13,927 |
|
Other assets |
|
|
358,642 |
|
|
|
361,277 |
|
|
|
|
|
|
|
|
|
|
$ |
9,066,493 |
|
|
$ |
8,873,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt |
|
$ |
5,642,459 |
|
|
$ |
5,441,839 |
|
Amounts payable to DDR |
|
|
34,731 |
|
|
|
8,492 |
|
Other liabilities |
|
|
229,221 |
|
|
|
200,641 |
|
|
|
|
|
|
|
|
|
|
|
5,906,411 |
|
|
|
5,650,972 |
|
Accumulated equity |
|
|
3,160,082 |
|
|
|
3,222,850 |
|
|
|
|
|
|
|
|
|
|
$ |
9,066,493 |
|
|
$ |
8,873,822 |
|
|
|
|
|
|
|
|
Companys share of accumulated equity (1) |
|
$ |
669,117 |
|
|
$ |
609,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Combined Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations |
|
$ |
236,212 |
|
|
$ |
227,444 |
|
|
$ |
703,096 |
|
|
$ |
572,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation |
|
|
85,471 |
|
|
|
73,109 |
|
|
|
242,021 |
|
|
|
186,367 |
|
Depreciation and amortization |
|
|
58,173 |
|
|
|
54,312 |
|
|
|
172,420 |
|
|
|
133,271 |
|
Interest |
|
|
74,156 |
|
|
|
79,359 |
|
|
|
220,320 |
|
|
|
190,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,800 |
|
|
|
206,780 |
|
|
|
634,761 |
|
|
|
510,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense and
discontinued operations |
|
|
18,412 |
|
|
|
20,664 |
|
|
|
68,335 |
|
|
|
62,111 |
|
Income tax expense |
|
|
(4,010 |
) |
|
|
(2,958 |
) |
|
|
(11,994 |
) |
|
|
(7,503 |
) |
(Loss) gain on sale of real estate |
|
|
|
|
|
|
(103 |
) |
|
|
(13 |
) |
|
|
92,987 |
|
Other (expense) income, net |
|
|
(36,728 |
) |
|
|
|
|
|
|
19,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations |
|
|
(22,326 |
) |
|
|
17,603 |
|
|
|
76,139 |
|
|
|
147,595 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued
operations |
|
|
(1 |
) |
|
|
(323 |
) |
|
|
115 |
|
|
|
(413 |
) |
Gain on disposition of real estate |
|
|
|
|
|
|
1,790 |
|
|
|
|
|
|
|
2,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(22,327 |
) |
|
$ |
19,070 |
|
|
$ |
76,254 |
|
|
$ |
149,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of equity in net
income of joint ventures (2) |
|
$ |
2,649 |
|
|
$ |
6,290 |
|
|
$ |
22,883 |
|
|
$ |
34,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 14 -
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):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Companys share of accumulated equity |
|
$ |
674.1 |
|
|
$ |
614.5 |
|
Basis differentials (2) |
|
|
99.8 |
|
|
|
114.1 |
|
Deferred
development fees, net of portion relating to the Companys interest |
|
|
(4.9 |
) |
|
|
(3.8 |
) |
Basis differential upon transfer of assets (2) |
|
|
(95.2 |
) |
|
|
(97.2 |
) |
Notes receivable from investments |
|
|
1.4 |
|
|
|
2.0 |
|
Amounts payable to DDR |
|
|
34.8 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
Investments in and advances to joint ventures
(1) |
|
$ |
710.0 |
|
|
$ |
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 September 30, 2008 and 2007, the difference between
the $2.6 million and $6.3 million, respectively, of the Companys share of equity in net
income of joint ventures and the $2.0 million and $6.0 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 $0.6 million and $0.2 million for the
three-month periods ended September 30, 2008 and 2007, respectively, to reflect additional
basis depreciation and basis differences in assets sold. For the nine-month periods ended
September 30, 2008 and 2007, the difference between the $22.8 million and $34.5
million, respectively, of the Companys share of equity in net income of joint ventures and
the $21.9 million and $33.9 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
differences in the recognition of gains on sales. The Companys share of joint venture net
income has been decreased by approximately $0.9 million and $0.6 million for the nine-month
periods ended September 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 |
|
Nine-Month Periods |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Management and other fees |
|
$ |
12.4 |
|
|
$ |
10.5 |
|
|
$ |
37.9 |
|
|
$ |
27.4 |
|
Acquisition, financing,
guarantee and other fees
(1) |
|
|
1.2 |
|
|
|
0.6 |
|
|
|
1.3 |
|
|
|
8.5 |
|
Development fees and
leasing commissions |
|
|
2.9 |
|
|
|
3.0 |
|
|
|
9.0 |
|
|
|
6.9 |
|
Interest income |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
|
(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 IRRETI real estate assets. |
- 15 -
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 September 30, 2008, the Company purchased an aggregate 112.5
million units of MDT at an aggregate purchase price of $42.9 million. Through the combination of
its purchase of the units in MDT (9.3% and 6.7% interest in MDT on a
weighted-average basis for the three- and nine-month periods ended September 30, 2008,
respectively) and its direct and indirect ownership of the Fund, DDR is entitled
to an approximate 24.7% economic interest in the Fund as of
September 30, 2008. As the Companys direct and indirect investments in MDT and the Fund gives it 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 $50.3 million, which is included in gain on disposition of
real estate. As the Company has the ability to exercise significant influence, but does not have
financial or operating 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.
At September 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 $54.8 million gain in 2007 from the contribution of assets to the
joint venture.
Condensed financial information of TRT DDR Venture I is as follows (in thousands):
- 16 -
|
|
|
|
|
|
|
|
|
|
|
September 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 |
|
|
(5,957 |
) |
|
|
(2,813 |
) |
|
|
|
|
|
|
|
|
|
|
154,006 |
|
|
|
157,023 |
|
Construction in progress |
|
|
5 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
154,011 |
|
|
|
157,043 |
|
Receivables, net |
|
|
1,912 |
|
|
|
1,811 |
|
Other assets |
|
|
4,727 |
|
|
|
4,648 |
|
|
|
|
|
|
|
|
|
|
$ |
160,650 |
|
|
$ |
163,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt |
|
$ |
110,000 |
|
|
$ |
110,000 |
|
Other liabilities |
|
|
596 |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
110,596 |
|
|
|
110,442 |
|
Accumulated equity |
|
|
50,054 |
|
|
|
53,060 |
|
|
|
|
|
|
|
|
|
|
$ |
160,650 |
|
|
$ |
163,502 |
|
|
|
|
|
|
|
|
Companys share of accumulated equity |
|
$ |
5,005 |
|
|
$ |
5,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations |
|
$ |
3,709 |
|
|
$ |
3,491 |
|
|
$ |
11,528 |
|
|
$ |
5,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation |
|
|
1,505 |
|
|
|
982 |
|
|
|
4,208 |
|
|
|
1,362 |
|
Depreciation and amortization |
|
|
1,101 |
|
|
|
1,256 |
|
|
|
3,303 |
|
|
|
1,936 |
|
Interest |
|
|
1,569 |
|
|
|
1,525 |
|
|
|
4,688 |
|
|
|
2,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,175 |
|
|
|
3,763 |
|
|
|
12,199 |
|
|
|
5,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(466 |
) |
|
$ |
(272 |
) |
|
$ |
(671 |
) |
|
$ |
(380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of equity in
net loss of joint venture |
|
$ |
(46 |
) |
|
$ |
(27 |
) |
|
$ |
(67 |
) |
|
$ |
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 17 -
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 or transferred 78 of
the assets, valued at approximately $1.2 billion, acquired in the merger with IRRETI, 21 of which
were sold to independent buyers 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 nine-month
periods ended September 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 independent buyers 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 nine-month period ended September 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):
- 18 -
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Pro forma revenues |
|
$ |
230,510 |
|
|
$ |
693,111 |
|
|
|
|
|
|
|
|
Pro forma income from continuing operations |
|
$ |
40,121 |
|
|
$ |
107,475 |
|
|
|
|
|
|
|
|
Pro forma (loss) income from discontinued
operations |
|
$ |
(403 |
) |
|
$ |
21,731 |
|
|
|
|
|
|
|
|
Pro forma net income applicable to common
shareholders |
|
$ |
32,842 |
|
|
$ |
152,685 |
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.27 |
|
|
$ |
1.05 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.17 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.27 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.27 |
|
|
$ |
1.05 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.17 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.27 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
5. RESTRICTED CASH
Restricted Cash is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
DDR MDT MV
LLC (1) |
|
$ |
25,000 |
|
|
$ |
|
|
DDR MDT MV LLC (2) |
|
|
33,000 |
|
|
|
|
|
Bond fund (3) |
|
|
48,391 |
|
|
|
58,958 |
|
|
|
|
|
|
|
|
Total restricted cash |
|
$ |
106,391 |
|
|
$ |
58,958 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The DDR MDT MV LLC joint venture (MV LLC), which is consolidated by the Company, owns
37 Mervyns locations. The terms of the original acquisition
contained a contingently refundable
purchase price adjustment secured by a $25.0 million letter of credit (LOC) from the
seller of the real estate portfolio, which was owned in part by an affiliate of one of the
members of the Companys board of directors. The LOC was drawn in full during the third
quarter of 2008 due to Mervyns filing for protection under Chapter 11 of the United States
Bankruptcy Code. Although the funds are required to be placed in escrow with MV LLCs
lender to secure MV LLCs mortgage loan, these funds are available for re-tenanting
expenses. The funds will be released as the related leases are either assumed or released,
or the debt is repaid. |
|
(2) |
|
In connection with MV LLCs draw of the $25.0 million LOC, MV LLC was required under
the loan agreement to provide an additional $33.0 million as collateral security for MV
LLCs mortgage loan. DDR and MDT funded the escrow requirement with proportionate capital
contributions. The funds will be released in the same manner as the
$25.0 million LOC. |
|
(3) |
|
Under the terms of a bond issue by the Mississippi Business Finance Corporation, the
proceeds of approximately $60.0 million from the sale of bonds were placed in a trust in
connection with a Company development project in Mississippi. As construction is completed
on the Companys project in Mississippi, the Company will request disbursement of these
funds. |
- 19 -
6. OTHER ASSETS, NET
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
In-place leases (including lease origination costs and fair
market value of leases), net |
|
$ |
25,161 |
|
|
$ |
31,201 |
|
Tenant relations, net |
|
|
18,696 |
|
|
|
22,102 |
|
|
|
|
|
|
|
|
Total intangible assets (1) |
|
|
43,857 |
|
|
|
53,303 |
|
Other assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net (2) |
|
|
201,657 |
|
|
|
199,354 |
|
Prepaids, deposits and other assets |
|
|
90,398 |
|
|
|
80,191 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
335,912 |
|
|
$ |
332,848 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company recorded amortization expense of $2.3 million and $1.9 million for the
three-month periods ended September 30, 2008 and 2007, respectively, and $7.1 million and
$5.5 million for the nine-month periods ended September 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 $67.5 million and $61.7 million at
September 30, 2008 and December 31, 2007, respectively.
|
7. 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 if certain financial covenants are maintained, and an accordion feature for a future expansion to $1.4 billion upon the
Companys request, provided that new or existing lenders agree to the existing terms of the
facility and increase their commitment level, and a maturity date of June 2010, with a one-year
extension option at the option of the Company subject to certain customary closing conditions. The
Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to
50% of the facility. The Companys borrowings under the Unsecured Credit Facility bear interest at
variable rates at the Companys election, based on either (i) the prime rate less a specified
spread (-0.125% at September 30, 2008), as defined in the facility or (ii) LIBOR, plus a specified
spread (0.60% at September 30, 2008). The specified spreads vary depending on the Companys
long-term senior unsecured debt rating from Standard and Poors and Moodys Investors Service. The
Company is required to comply with certain covenants relating to total outstanding indebtedness,
secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The
Unsecured Credit Facility is used to finance the acquisition, development and expansion of shopping
center properties, to provide working capital and for general corporate purposes. The Company was
in compliance with these covenants at September 30, 2008. The facility also provides for an annual
facility fee of 0.15% on the entire facility. At September 30, 2008, total borrowings under the
Unsecured Credit Facility aggregated $888.2 million with a weighted average interest rate of 3.8%.
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 at
- 20 -
the option of the Company subject to certain customary closing conditions, and reflects terms
consistent with those contained in the Unsecured Credit Facility. Borrowings under this facility
bear interest at variable rates based on (i) the prime rate less a specified spread (-0.125% at
September 30, 2008), as defined in the facility or (ii) LIBOR, plus a specified spread (0.60% at
September 30, 2008). The specified spreads are dependent on the Companys long-term senior
unsecured debt rating from Standard and Poors and Moodys Investors Service. The Company is
required to comply with certain covenants relating to total outstanding indebtedness, secured
indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Company
was in compliance with these covenants at September 30, 2008. At September 30, 2008, total
borrowings under the National City Bank facility aggregated $67.8 million with a weighted average
interest rate of 3.8%.
8. FAIR VALUE MEASUREMENTS
As of September 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 $17.1 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 nine-month periods ended September
30, 2008, the amount of hedge ineffectiveness was not material.
The Company adopted the provisions of SFAS No. 157, as amended by FSP FAS No. 157-1, FSP FAS
No. 157-2 and FSP FAS No. 157-3, 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; |
|
|
|
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.
- 21 -
Measurement of Fair Value
At September 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 September 30, 2008, the Company had assessed the significance of the impact of the
credit valuation adjustments on the overall valuation of its derivative positions and had
determined that the credit valuation adjustments were 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 consist of interest rate swap agreements that are included in other
liabilities at September 30, 2008, measured at fair value on a recurring basis as of September 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 September 30, 2008 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Derivative Financial Instruments |
|
$ |
|
|
|
$ |
17.1 |
|
|
$ |
|
|
|
$ |
17.1 |
|
9. CONTINGENCIES
The Company is a party to litigation filed in January 2007 by a tenant in a Company property
located in Long Beach, California. The tenant located at this property filed suit against the
Company and certain affiliates, claiming the Company and its affiliates failed to provide adequate
valet parking pursuant to the terms of the lease with the tenant. After a six-week trial, the jury
returned a verdict in October 2008, finding the Company liable for compensatory damages in the
amount of approximately $7.8 million. The Company strongly disagrees with the verdict and is
presently evaluating all of its options, which include filing a motion for a new trial, as well as
filing an appeal of the verdict. However, the Company recorded a charge during the three months
ended September 30, 2008 which represents managements best estimate of loss based upon a range of
liability pursuant to SFAS No. 5, Accounting for Contingencies. The accrual, as well as the
related litigation costs incurred to date, were recorded in the Other Income (Expense) line of the
condensed consolidated statements of operations. The Company will continue to monitor the status
of the litigation and revise the estimate of loss as appropriate.
There can be no assurance that a new trial will be granted or that an appeal will be successful.
- 22 -
In addition to the litigation discussed above, the Company and its subsidiaries are subject to
various other 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.
10. 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 |
|
|
|
(2,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,759 |
|
|
|
6,570 |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
(5,177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,074 |
|
|
|
897 |
|
Vesting of restricted stock |
|
|
|
|
|
|
|
|
|
|
7,436 |
|
|
|
|
|
|
|
194 |
|
|
|
|
|
|
|
(5,462 |
) |
|
|
2,168 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
6,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,386 |
|
Redemption of 463,185
operating partnership units in
exchange for common shares |
|
|
|
|
|
|
|
|
|
|
(14,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,327 |
|
|
|
9,059 |
|
Dividends declaredcommon
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,612 |
) |
Dividends declaredpreferred
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,866 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
fair value of interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,626 |
) |
|
|
|
|
|
|
(4,626 |
) |
Amortization of interest
rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(550 |
) |
|
|
|
|
|
|
(550 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,991 |
) |
|
|
|
|
|
|
(8,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,866 |
|
|
|
|
|
|
|
(14,167 |
) |
|
|
|
|
|
|
107,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
$ |
555,000 |
|
|
$ |
12,680 |
|
|
$ |
3,021,363 |
|
|
$ |
(418,466 |
) |
|
$ |
23,056 |
|
|
$ |
(5,202 |
) |
|
$ |
(337,141 |
) |
|
$ |
2,851,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share dividends declared, per share, were $0.69 and $0.66 for the three-month periods
ended September 30, 2008 and 2007, respectively, and $2.07 and $1.98 for the nine-month periods
ended September 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 September 30, 2008, the Company had repurchased
under this program 5.6 million of its common shares for an aggregate cost of $261.9 million 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.
- 23 -
During the nine-month period ended September 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.
11. OTHER INCOME
Other income for the three- and nine-month periods ended September 30, 2008 and 2007, was
composed of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month |
|
|
|
Ended |
|
|
Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Acquisition and financing fees (1) |
|
$ |
1.9 |
|
|
$ |
0.2 |
|
|
$ |
1.9 |
|
|
$ |
7.9 |
|
Lease termination fees |
|
|
0.8 |
|
|
|
1.4 |
|
|
|
5.5 |
|
|
|
4.9 |
|
Other |
|
|
|
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.7 |
|
|
$ |
2.1 |
|
|
$ |
7.8 |
|
|
$ |
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
12. 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 nine-month
periods ended September 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
nine-month periods ended September 30, 2008 and 2007, are 11 properties sold in 2008 (including one
business center and one property held for sale at December 31, 2007) aggregating 0.9 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. The operating results relating to assets sold are as follows (in thousands):
- 24 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
2,179 |
|
|
$ |
3,860 |
|
|
$ |
7,875 |
|
|
$ |
34,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
650 |
|
|
|
2,033 |
|
|
|
2,962 |
|
|
|
10,075 |
|
Interest, net |
|
|
371 |
|
|
|
1,178 |
|
|
|
1,730 |
|
|
|
9,170 |
|
Depreciation and amortization |
|
|
646 |
|
|
|
972 |
|
|
|
3,534 |
|
|
|
7,025 |
|
Minority interest |
|
|
54 |
|
|
|
(230 |
) |
|
|
110 |
|
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
1,721 |
|
|
|
3,953 |
|
|
|
8,336 |
|
|
|
25,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (loss) gain
on disposition of real estate |
|
|
458 |
|
|
|
(93 |
) |
|
|
(461 |
) |
|
|
8,408 |
|
(Loss) gain on disposition of real
estate |
|
|
(2,717 |
) |
|
|
(310 |
) |
|
|
(1,830 |
) |
|
|
13,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(2,259 |
) |
|
$ |
(403 |
) |
|
$ |
(2,291 |
) |
|
$ |
21,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2008, the Company sold its approximate 56% interest in one of its business
centers to its partner for $20.7 million and recorded an aggregate loss of $5.8 million. The
Companys partner exercised its buy-sell rights provided under the joint venture agreement in July
2008 and the Company elected to sell its interest pursuant to the terms of the buy-sell right in
mid-August 2008.
13. TRANSACTIONS WITH RELATED PARTIES
In July 2008, the Company purchased a 25.2525% membership interest (the Membership Interest)
in RO & SW Realty LLC, a Delaware limited liability company (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. ROSW is a real estate company that owns 11 properties (the Properties). The Company
accounts for its interest in ROSW under the equity method of accounting and has recorded the $10.0
million acquisition of the Membership Interest as Investments in and Advances to Joint Ventures in
the Companys condensed consolidated balance sheet at September 30, 2008. The Company had
identified a number of Company development projects located near the Properties as well as several
value-add opportunities relating to the Properties, including a project in Solon, Ohio being
pre-developed by Mr. Wolstein and a 50% partner (the Project). In addition to the purchase of
the Membership Interest, on October 3, 2008, the Company also acquired Mr. Wolsteins 50% interest
in the Project in exchange for the assumption of Mr. Wolsteins obligation under a promissory note
that funded the pre-development expenses of the Project. Mr. Wolstein and his 50% partner, who
also holds the remaining membership interest, in ROSW were jointly and severally liable for the
obligations under the promissory note, and they each agreed to indemnify the other for 50% of such
obligations. As of October 3, 2008, there was approximately $3.6 million outstanding under the
promissory note, of which the Company is responsible for 50%.
The purchase of the Membership Interest
by the Company and the acquisition of the 50% interest in the Project in exchange for the
- 25 -
assumption of the promissory note obligations were 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 and assumption.
14. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income from continuing operations |
|
$ |
37,681 |
|
|
$ |
39,995 |
|
|
$ |
117,789 |
|
|
$ |
147,812 |
|
Add: Gain on disposition of real estate |
|
|
3,093 |
|
|
|
3,691 |
|
|
|
6,368 |
|
|
|
63,713 |
|
Less: Preferred stock dividends |
|
|
(10,567 |
) |
|
|
(10,567 |
) |
|
|
(31,702 |
) |
|
|
(40,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income from continuing
operations applicable to common shareholders |
|
$ |
30,207 |
|
|
$ |
33,119 |
|
|
$ |
92,455 |
|
|
$ |
171,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average shares outstanding |
|
|
119,795 |
|
|
|
123,329 |
|
|
|
119,447 |
|
|
|
120,910 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
87 |
|
|
|
371 |
|
|
|
136 |
|
|
|
507 |
|
Restricted stock |
|
|
|
|
|
|
27 |
|
|
|
48 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Average shares outstanding |
|
|
119,882 |
|
|
|
123,727 |
|
|
|
119,631 |
|
|
|
121,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.25 |
|
|
$ |
0.27 |
|
|
$ |
0.77 |
|
|
$ |
1.42 |
|
(Loss) income from discontinued operations |
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.23 |
|
|
$ |
0.27 |
|
|
$ |
0.75 |
|
|
$ |
1.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
0.77 |
|
|
$ |
1.41 |
|
(Loss) income from discontinued operations |
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.23 |
|
|
$ |
0.26 |
|
|
$ |
0.75 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exchange of the minority interest associated with operating partnership units into common
shares was not included in the computation of diluted EPS for the three- and nine-month periods
ended September 30, 2008 and 2007, 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 nine-month
periods ended September 30, 2008 and 2007 as the Companys stock price did not exceed the strike
price of the conversion feature of the senior convertible notes in these periods. At September 30,
2008, the conversion price on the Companys 3.5% senior convertible notes due 2011 was adjusted in
accordance with the terms of the notes as a result of the increase in the Companys quarterly
dividend through
- 26 -
September 30, 2008 to a conversion price of $64.23 per share into the Companys common shares or
cash, at the Companys option.
15. FEDERAL INCOME TAXES
In the third quarter of 2008, the Company recognized a $16.7 million income tax benefit.
Approximately $15.6 million of this amount related to the release of valuation allowances
associated with deferred tax assets that were established in prior years. These valuation
allowances were previously established due to the uncertainty that the deferred tax assets would be
utilizable.
In order to maintain its REIT status, the Company must meet certain income tests to ensure
that its gross income consists of passive income and not income from the active conduct of a trade
or business. The Company utilizes its Taxable REIT Subsidiary (TRS) to the extent certain fee and
other miscellaneous non-real estate related income cannot be earned by the REIT. During the third
quarter of 2008, the Company began recognizing certain fee and miscellaneous other non-real estate
related income within its TRS.
Therefore, based on the Companys evaluation of the current facts and circumstances the Company
determined during the third quarter of 2008 that the valuation allowance should be released as it was more-likely-than-not that the
deferred tax assets would be utilized in future years. This determination was based upon the
increase in fee and miscellaneous other non-real estate related income which is projected to be
recognized within the Companys TRS.
16. 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 September 30, 2008, the shopping center segment consisted of 713 shopping centers
(including 329 owned through unconsolidated joint ventures and 40 that are otherwise consolidated
by the Company) in 45 states, Puerto Rico and Brazil. At September 30, 2007, the shopping center
segment consisted of 708 shopping centers (including 317 owned through unconsolidated joint
ventures and 39 that are otherwise consolidated by the Company) in 45 states, Puerto Rico and
Brazil. At September 30, 2008 the Company also owned six business centers in four states and at
September 30, 2007, the Company owned seven business centers in five states.
- 27 -
The table below presents information about the Companys reportable segments for the three-
and nine-month periods ended September 30, 2008 and 2007 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2008 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
2,028 |
|
|
$ |
231,885 |
|
|
|
|
|
|
$ |
233,913 |
|
Operating expenses |
|
|
(692 |
) |
|
|
(63,707 |
) |
|
|
|
|
|
|
(64,399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
1,336 |
|
|
|
168,178 |
|
|
|
|
|
|
|
169,514 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(132,290 |
) |
|
|
(132,290 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
1,981 |
|
|
|
|
|
|
|
1,981 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
(1,524 |
) |
|
|
(1,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2007 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
1,412 |
|
|
$ |
230,135 |
|
|
|
|
|
|
$ |
231,547 |
|
Operating expenses |
|
|
(534 |
) |
|
|
(58,578 |
) |
|
|
|
|
|
|
(59,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
878 |
|
|
|
171,557 |
|
|
|
|
|
|
|
172,435 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(136,239 |
) |
|
|
(136,239 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
6,003 |
|
|
|
|
|
|
|
6,003 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
(2,204 |
) |
|
|
(2,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2008 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
4,786 |
|
|
$ |
698,506 |
|
|
|
|
|
|
$ |
703,292 |
|
Operating expenses |
|
|
(1,519 |
) |
|
|
(188,712 |
) |
|
|
|
|
|
|
(190,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
3,267 |
|
|
|
509,794 |
|
|
|
|
|
|
|
513,061 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(411,331 |
) |
|
|
(411,331 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
21,924 |
|
|
|
|
|
|
|
21,924 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
(5,865 |
) |
|
|
(5,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
117,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets as of
September 30, 2008 |
|
$ |
49,825 |
|
|
$ |
9,133,887 |
|
|
|
|
|
|
$ |
9,183,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 28 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2007 |
|
|
|
Other |
|
|
Shopping |
|
|
|
|
|
|
|
|
|
Investments |
|
|
Centers |
|
|
Other |
|
|
Total |
|
Total revenues |
|
$ |
3,777 |
|
|
$ |
696,440 |
|
|
|
|
|
|
$ |
700,217 |
|
Operating expenses |
|
|
(1,556 |
) |
|
|
(174,718 |
) |
|
|
|
|
|
|
(176,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
2,221 |
|
|
|
521,722 |
|
|
|
|
|
|
|
523,943 |
|
Unallocated expenses (1) |
|
|
|
|
|
|
|
|
|
$ |
(393,814 |
) |
|
|
(393,814 |
) |
Equity in net income of joint ventures |
|
|
|
|
|
|
33,887 |
|
|
|
|
|
|
|
33,887 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
(16,204 |
) |
|
|
(16,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets as of
September 30, 2007 |
|
$ |
99,985 |
|
|
$ |
8,702,230 |
|
|
|
|
|
|
$ |
8,802,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
17. SUBSEQUENT EVENT
As described in Note 13, on October 3, 2008, the Company acquired Mr. Wolsteins 50% interest
in the Project in exchange for the assumption of Mr. Wolsteins obligations under a promissory note
that funded the pre-development expenses of the Project.
- 29 -
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. In addition, these forward-looking statements speak
only as of the date on which they were made. The Company expressly states that it has no current
intention to update any forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by law.
Factors that could cause actual results, performance or achievements to differ materially from
those expressed or implied by forward-looking statements include, but are not limited to, the
following:
|
|
|
The Company is subject to general risks affecting the real estate industry, including
the need to enter into new leases or renew leases on favorable terms to generate rental
revenues, and the current economic downturn may adversely affect the ability of the
Companys tenants, or new tenants, to enter into new leases or the ability of the
Companys existing tenants to renew their leases at rates at least as favorable as their
current rates; |
|
|
|
|
The Company could be adversely affected by changes in the local markets where its
properties are located, as well as by adverse changes in national economic and market
conditions; |
|
|
|
|
The Company may fail to anticipate the effects on its properties of changes in
consumer buying practices, including sales over the Internet and the resulting retailing
practices and space needs of its tenants or a general downturn in its tenants businesses,
which may cause tenants to close stores; |
|
|
|
|
The Company is subject to competition for tenants from other owners of retail
properties, and its tenants are subject to competition from other retailers and methods of
distribution. The Company is dependent upon the successful operations and financial
condition of its tenants, in |
- 30 -
|
|
|
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 results that the Company anticipates. The acquisition of certain
assets may subject the Company to liabilities, including environmental liabilities; |
|
|
|
|
The Company may fail to identify, acquire, construct or develop additional properties
that produce a desired yield on invested capital, or may fail to effectively integrate
acquisitions of properties or portfolios of properties. In addition, the Company may be
limited in its acquisition opportunities due to competition, the inability to obtain
financing on reasonable terms or any financing at all and other factors; |
|
|
|
|
The Company may fail to dispose of properties on favorable terms. In addition, real
estate investments can be illiquid, particularly as prospective buyers may experience
increased costs of financing or difficulties obtaining financing, and could limit the
Companys ability to promptly make changes to its portfolio to respond to economic and
other conditions; |
|
|
|
|
The Company may abandon a development opportunity after expending resources if it
determines that the development opportunity is not feasible due to a variety of factors,
including a lack of availability of construction financing on reasonable terms, the
impact of the current economic environment on prospective tenants ability to enter into
new leases or pay contractual rent, or the inability by the Company to obtain all
necessary zoning and other required governmental permits and authorizations; |
|
|
|
|
The Company may not complete development projects on schedule as a result of various
factors, many of which are beyond the Companys control, such as weather, labor
conditions, governmental approvals, material shortages, or general economic downturn
resulting in limited availability of capital, increased debt service expense and
construction costs and decreases in revenue; |
|
|
|
|
The Companys financial condition may be affected by required debt service payments,
the risk of default and restrictions on its ability to incur additional debt or enter into
certain transactions under its credit facilities and other documents governing its debt
obligations. In addition, the Company may encounter difficulties in obtaining permanent
financing or refinancing existing debt. Borrowings under the Companys revolving credit
facilities are subject to certain representations and warranties, including any event
which has had or could reasonably be expected to have a material adverse effect on the
Companys business or financial condition; |
|
|
|
|
Changes in interest rates could adversely affect the market price of the Companys
common shares, as well as its performance and cash flow; |
|
|
|
|
Debt and/or equity financing necessary for the Company to continue to grow and
operate its business may not be available or may not be available on favorable terms; |
|
|
|
|
The Company is subject to complex regulations related to its status as a real estate
investment trust, or REIT, and would be adversely affected if it failed to qualify as a
REIT; |
- 31 -
|
|
|
The Company must make distributions to shareholders to continue to qualify as a REIT,
and if the Company must borrow funds to make distributions, those borrowings may not be
available on favorable terms or at all; |
|
|
|
|
Joint venture investments may involve risks not otherwise present for investments
made solely by the Company, including the possibility that a partner or co-venturer may
become bankrupt, may at any time have different interests or goals than those of the
Company and may take action contrary to the Companys instructions, requests, policies or
objectives, including the Companys policy with respect to maintaining its qualification
as a REIT. In addition, a partner or co-venturer may not have access to sufficient
capital to satisfy its funding obligations to the joint venture. Furthermore, if the
current constrained credit conditions in the capital markets persist or deteriorate
further, the Company could be required to reduce the carrying value of its equity method
investments if a loss in the carrying value of the investment is other than a temporary
decline pursuant to APB 18, The Equity Method of Accounting for Investments in Common
Stock; |
|
|
|
|
The Company may not realize anticipated returns from its real estate assets outside
the United States. The Company expects to continue to pursue international opportunities
that may subject the Company to different or greater risks than those associated with its
domestic operations. The Company owns assets in Puerto Rico, an interest in an
unconsolidated joint venture that owns properties in Brazil and an interest in
consolidated joint ventures that 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 tax laws,
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 and |
|
|
|
|
The Company could incur additional expenses in order to comply with or respond to
claims under the Americans with Disabilities Act or otherwise be adversely affected by
changes in |
- 32 -
|
|
|
government regulations, including changes in environmental, zoning, tax and other
regulations. |
Executive Summary
The Company is a self-administered and self-managed REIT, in the business of acquiring,
developing, redeveloping, owning, leasing and managing shopping centers. As of September 30, 2008,
the Companys portfolio consisted of 713 shopping centers and six business centers (including 329
owned through unconsolidated joint ventures and 40 that are otherwise consolidated by the Company).
These properties consist of shopping centers, lifestyle centers and enclosed malls owned in the
United States, Puerto Rico and Brazil. At September 30, 2008, the Company owned and/or managed
approximately 146.3 million total square feet of Gross Leasable Area (GLA), which includes all of
the aforementioned properties and one property owned by a third party. The Company 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-traded REIT. At September 30, 2008, the aggregate occupancy of the Companys shopping
center portfolio was 94.5%, as compared to 94.9% at September 30, 2007. The Company owned 708
shopping centers at September 30, 2007. The average annualized base rent per occupied square foot
was $12.47 at September 30, 2008, as compared to $12.15 at September 30, 2007. The Company also
owns six office and industrial properties.
Net income applicable to common shareholders for the three-month period ended September 30,
2008, was $27.9 million, or $0.23 per share (diluted and basic), compared to $32.7 million, or
$0.26 per share (diluted) and $0.27 per share (basic), for the prior-year period. Net income
applicable to common shareholders for the nine-month period ended September 30, 2008, was $90.2
million, or $0.75 per share (diluted and basic), compared to $192.9 million, or $1.59 per share
(diluted) and $1.60 per share (basic), for the prior-year period. Funds from operations (FFO)
applicable to common shareholders for the three-month period ended September 30, 2008, was
$100.0 million compared to $99.5 million for the three-month period ended September 30, 2007, an
increase of 0.5%. FFO applicable to common shareholders for the nine-month period ended September
30, 2008, was $298.7 million compared to $365.0 million for the nine-month period ended September
30, 2007, a decrease of 18.2%. The decrease in net income and FFO applicable to common
shareholders for the nine-month period ended September 30, 2008, of approximately $102.7 million
and $66.3 million, respectively, is primarily related to a reduction in the amount of
transactional income earned compared to the same period in 2007 (gains on disposition of real
estate of approximately $72.5 million and promoted income from joint venture interests of
approximately $14.3 million), the transfer of 62 assets to unconsolidated joint ventures in 2007
and the sale of 67 assets to third parties in 2007.
Third quarter 2008 operating results
The results for the three-month period ended September 30, 2008, reflect only a small amount
of transactional income as compared to the comparable period of 2007. Notwithstanding this
decrease in transactional activity, the third quarter results demonstrate the stability and the
consistency of the core portfolio. Net income applicable to common shareholders of $27.9 million
is primarily derived
- 33 -
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 and in the third quarter of 2007
and, as such, a year-over-year comparison is difficult. The Company sold approximately $1.4
billion of assets into joint venture investments during this time period. The revenues and
expenses in 2007 associated with these assets, as depreciation expense was not recorded for the
newly acquired 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.
In response to the unprecedented events that have recently taken place in the capital markets,
the Company has refined its strategies in order to mitigate risk and focus on core operating
results. The Companys top priority is to ensure that it is positioned to navigate this current
challenging environment and emerge as a stronger company. The Company is taking proactive steps,
as described below, to reduce leverage by utilizing strategic financial measures to protect the
Companys long-term financial strength. The Company expects to continue to enhance liquidity,
protect the quality of the balance sheet and maximize access to a variety of capital sources.
The Company intends to address its capital requirements through generating capital from
anticipated asset sales, including sales to joint ventures, retaining capital, the elimination of
the fourth quarter 2008 dividend, as well as the previously announced
intention to reduce its
2009 quarterly dividend, and pursuing existing and prospective financings, in order to fund
the Companys debt repayments and repurchases and, to the extent deemed appropriate, minimizing
further capital expenditures.
With respect to capital expenditures, the Company generally considers this type of spending to
be discretionary. Within the Companys development and redevelopment portfolios, the Company has
dramatically reduced expected spending and is able to do so by phasing construction until
sufficient pre-leasing is reached and financing is in place. One of the historical benefits of the
Companys asset class is the relatively low level of capital necessary to lease and maintain the
portfolio. The Company can operate the portfolio in a highly cash-efficient manner and still
generate consistent cash flows.
The Company will selectively pursue new investment opportunities only after significant equity
and debt financings are identified and when underwritten expected returns sufficiently exceed the
Companys current cost of capital. The Company is focusing on conserving capital, ensuring that
capital allocation decisions are prudent. The Company continues to scrutinize all capital
expenditures for its development pipeline as well. The Company does not expect to pursue any
further projects that do not meet the Companys pre-leasing thresholds or other thresholds
necessary to secure third-party construction financing and/or the Companys return thresholds. In
situations where the Companys joint ventures are unable to obtain adequate third-party financing,
construction may be delayed on development projects until such financing is obtained.
With
respect to international development, the Company has recently
suspended funding relating to proposed
developments in Russia until there is greater clarity on the economic and business environment in
that country and debt financing is available on commercially reasonable terms. In Brazil, the
project in Manaus is almost fully leased and expected to become operational in April 2009.
- 34 -
The Company does not expect to commence any other prospective development projects in Brazil
in the near future. While the Company continues to believe in the
long term value of these prospective development
projects and their returns in the future, capital is being carefully rationed at this time. As a
result only projects that meet the Companys underwriting thresholds are expected to receive funding.
The Company has adjusted its leasing strategy to meet the changing environment. The Companys
top leasing priority is to maintain occupancy with high-quality tenants. The Company has conducted
full portfolio reviews and is meeting with its major tenants. The Company is proactively renewing
tenants extension options before the contractual expiration dates. The Company is also executing
leases more quickly, in particular leases which require no or nominal capital investment by the
Company. The Company is also revisiting and renegotiating deals that had previously been declined
to determine if they may be feasible and in best interest of the
Company on revised terms given the current market
conditions.
In response to recent tenant bankruptcies and potential space recapture, the Company has
dedicated personnel in the leasing department to monitor the day-to-day events of the bankruptcy
process and to focus on marketing and re-tenanting those properties. This approach increases the
Companys ability to more quickly release units whose leases have been rejected and to pursue
package deals or portfolio transactions to mitigate potential vacancies or rent loss caused by
such bankruptcy proceeding.
Operationally, the third quarter of 2008 was rewarding from a leasing perspective, considering
the challenging environment in which the Company operated. The Company expects that 2009 will be
equally challenging. The Company intends to respond in a conservative manner by concentrating on
the Companys core operations and limiting development spending.
The
Company has experienced many difficult economic cycles before. The Company knows that the best
strategy is to focus on and commit to the basics of maintaining and enhancing a high-quality retail
real estate portfolio, which generates the vast majority of the Companys revenues and drives value
creation, in addition to making more capital available for distribution and investment.
Results of Operations
Revenues from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Base and percentage rental revenues |
|
$ |
159,285 |
|
|
$ |
158,891 |
|
|
$ |
394 |
|
|
|
0.2 |
% |
Recoveries from tenants |
|
|
51,644 |
|
|
|
51,609 |
|
|
|
35 |
|
|
|
0.1 |
|
Ancillary and other property income |
|
|
4,950 |
|
|
|
5,110 |
|
|
|
(160 |
) |
|
|
(3.1 |
) |
Management fees, development fees
and other fee income |
|
|
15,378 |
|
|
|
13,827 |
|
|
|
1,551 |
|
|
|
11.2 |
|
Other |
|
|
2,656 |
|
|
|
2,110 |
|
|
|
546 |
|
|
|
25.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
233,913 |
|
|
$ |
231,547 |
|
|
$ |
2,366 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 35 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Base and percentage rental revenues |
|
$ |
480,030 |
|
|
$ |
485,087 |
|
|
$ |
(5,057 |
) |
|
|
(1.0 |
)% |
Recoveries from tenants |
|
|
152,194 |
|
|
|
152,640 |
|
|
|
(446 |
) |
|
|
(0.3 |
) |
Ancillary and other property income |
|
|
15,932 |
|
|
|
14,048 |
|
|
|
1,884 |
|
|
|
13.4 |
|
Management fees, development fees
and other fee income |
|
|
47,302 |
|
|
|
34,906 |
|
|
|
12,396 |
|
|
|
35.5 |
|
Other |
|
|
7,834 |
|
|
|
13,536 |
|
|
|
(5,702 |
) |
|
|
(42.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
703,292 |
|
|
$ |
700,217 |
|
|
$ |
3,075 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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, but excluding properties under development/redevelopment and
those classified as discontinued operations) (Core Portfolio Properties) increased approximately
$4.1 million, or 1.0%, for the nine-month period ended September 30, 2008, as compared to the
same period in 2007. There was a decrease in overall base and percentage rental revenues due to
the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Core Portfolio Properties |
|
$ |
4.1 |
|
IRRETI
merger and acquisition of real estate assets |
|
|
18.3 |
|
Development/redevelopment of shopping center properties |
|
|
3.3 |
|
Disposition of shopping center properties in 2007 |
|
|
(28.9 |
) |
Business center properties |
|
|
0.4 |
|
Straight-line rents |
|
|
(2.3 |
) |
|
|
|
|
|
|
$ |
(5.1 |
) |
|
|
|
|
At September 30, 2008, the aggregate occupancy rate of the Companys shopping center portfolio
was 94.5%, as compared to 94.9% at September 30, 2007. The Company owned 713 shopping centers at
September 30, 2008, as compared to 708 shopping centers at September 30, 2007. The average
annualized base rent per occupied square foot was $12.47 at September 30, 2008, as compared to
$12.15 at September 30, 2007.
At September 30, 2008, the aggregate occupancy rate of the Companys wholly-owned shopping
centers was 93.3%, as compared to 93.6% at September 30, 2007. The Company had 344
wholly-owned shopping centers at September 30, 2008, as compared to 352 shopping centers at
September 30, 2007. The average annualized base rent per occupied square foot for wholly-owned
shopping centers was $11.68 at September 30, 2008, as compared to $11.50 at September 30, 2007.
At September 30, 2008, the aggregate occupancy rate of the Companys joint venture shopping
centers was 94.0%, as compared to 97.2% at September 30, 2007. The Companys joint ventures owned
369 shopping centers including 40 consolidated centers primarily owned through the Mervyns Joint
Venture at September 30, 2008, as compared to 317 shopping centers including 39 consolidated
centers primarily owned through the Mervyns Joint Venture at September 30, 2007. The average
annualized base rent per occupied square foot was $13.15 at September 30, 2008, as compared to
- 36 -
$12.72 at September 30, 2007. The increase in annualized base rent is primarily a result of the
tenant mix of shopping center assets in the joint ventures at September 30, 2008, as compared to
September 30, 2007.
At September 30, 2008, the aggregate occupancy rate of the Companys business centers was
80.9%, as compared to 64.1% at September 30, 2007. The increase in occupancy is primarily a result
of the sale of the business center in Boston, Massachusetts. The business centers consist of six
assets in four states at September 30, 2008. The business centers consisted of seven assets in five
states at September 30, 2007.
Recoveries from tenants decreased $0.4 million for the nine-month period ended September 30,
2008, as compared to the same period in 2007. This decrease is primarily due to the transfer of
assets to joint ventures in 2007. Operating expenses and real estate taxes increased approximately
$14.0 million primarily due to the merger with IRRETI in February 2007 and the Companys Core
Portfolio Properties. Recoveries were approximately 80.0% and 86.6% of operating expenses and real
estate taxes for the nine-month periods ended September 30, 2008 and 2007, respectively.
The decrease in recoveries from tenants was primarily related to the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
IRRETI merger and acquisition of real estate assets |
|
$ |
5.8 |
|
Development/redevelopment of shopping center properties in 2008 and 2007 |
|
|
3.2 |
|
Transfer of assets to unconsolidated joint ventures in 2007 |
|
|
(10.7 |
) |
Increase in operating expenses at the remaining shopping center and
business center properties |
|
|
1.3 |
|
|
|
|
|
|
|
$ |
(0.4 |
) |
|
|
|
|
Ancillary and other property income is a result of pursuing additional revenue opportunities
in the Core Portfolio Properties. 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 $3.8 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.
- 37 -
The increase in management, development and other fee income for the nine-month period ended
September 30, 2008, is primarily due to the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Newly formed unconsolidated joint venture interests |
|
$ |
7.2 |
|
Development fee income |
|
|
(0.8 |
) |
Other income |
|
|
3.7 |
|
Sale of several of the Companys unconsolidated joint venture properties |
|
|
(0.5 |
) |
Leasing commissions |
|
|
2.9 |
|
Decrease in
management fee income at various unconsolidated joint ventures |
|
|
(0.1 |
) |
|
|
|
|
|
|
$ |
12.4 |
|
|
|
|
|
Management
fee income is expected to continue to increase as joint venture
assets under development become operational or as assets are transferred into joint
ventures. Management fee income may also increase if
unconsolidated joint ventures acquire additional properties. 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. In light of current market conditions, development fees may
decline if development projects are delayed. The Company may pursue additional developments
through new and unconsolidated joint ventures as opportunities present themselves and to the extent
consistent with the Companys current development strategies and
underwriting thresholds.
Other income for the three- and nine-month periods ended September 30, 2008 and 2007, was
composed of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Nine-Month |
|
|
|
Periods Ended |
|
|
Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Acquisition and financing fees (1) |
|
$ |
1.9 |
|
|
$ |
0.2 |
|
|
$ |
1.9 |
|
|
$ |
7.9 |
|
Lease termination fees |
|
|
0.8 |
|
|
|
1.4 |
|
|
|
5.5 |
|
|
|
4.9 |
|
Other |
|
|
|
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.7 |
|
|
$ |
2.1 |
|
|
$ |
7.8 |
|
|
$ |
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Operating and maintenance |
|
$ |
35,992 |
|
|
$ |
32,596 |
|
|
$ |
3,396 |
|
|
|
10.4 |
% |
Real estate taxes |
|
|
28,407 |
|
|
|
26,516 |
|
|
|
1,891 |
|
|
|
7.1 |
|
General and administrative |
|
|
19,560 |
|
|
|
19,626 |
|
|
|
(66 |
) |
|
|
(0.3 |
) |
Depreciation and amortization |
|
|
63,297 |
|
|
|
55,803 |
|
|
|
7,494 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,256 |
|
|
$ |
134,541 |
|
|
$ |
12,715 |
|
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 38 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Operating and maintenance |
|
$ |
106,512 |
|
|
$ |
93,990 |
|
|
$ |
12,522 |
|
|
|
13.3 |
% |
Real estate taxes |
|
|
83,719 |
|
|
|
82,284 |
|
|
|
1,435 |
|
|
|
1.7 |
|
General and administrative |
|
|
61,607 |
|
|
|
60,304 |
|
|
|
1,303 |
|
|
|
2.2 |
|
Depreciation and amortization |
|
|
177,544 |
|
|
|
161,274 |
|
|
|
16,270 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
429,382 |
|
|
$ |
397,852 |
|
|
$ |
31,530 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses include the Companys provision for bad debt expense, which
approximated 1.4% and 0.9% of total revenues for the nine-month periods ended September 30, 2008
and 2007, respectively (see Economic Conditions).
The increase in rental operation expenses, excluding general and administrative, for the
nine-month period ended September 30, 2008, compared to 2007, is due to the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Real |
|
|
Depreciation |
|
|
|
and |
|
|
Estate |
|
|
and |
|
|
|
Maintenance |
|
|
Taxes |
|
|
Amortization |
|
Core Portfolio Properties |
|
$ |
9.1 |
|
|
$ |
0.8 |
|
|
$ |
6.7 |
|
IRRETI merger and acquisition of real estate assets |
|
|
2.9 |
|
|
|
3.8 |
|
|
|
9.3 |
|
Development/redevelopment of shopping center properties |
|
|
2.9 |
|
|
|
1.8 |
|
|
|
3.0 |
|
Transfer of assets to unconsolidated joint ventures in 2007 |
|
|
(6.3 |
) |
|
|
(5.0 |
) |
|
|
(3.8 |
) |
Business center properties |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Provision for bad debt expense |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
Personal property |
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12.5 |
|
|
$ |
1.4 |
|
|
$ |
16.3 |
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses for the nine-month period ended September 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 4.3% and 4.6%,
respectively, of total revenues, including total revenues of unconsolidated joint ventures, for the
nine-month periods ended September 30, 2008 and 2007, respectively. General and administrative
expenses for the nine-month period ended September 30, 2007 include additional compensation expense of $4.1 million that was
recorded by the Company 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 $11.8 million and $9.6 million for the nine-month periods ending September 30, 2008 and
2007, respectively.
- 39 -
Other Income and Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
1,663 |
|
|
$ |
1,564 |
|
|
$ |
99 |
|
|
|
6.3 |
% |
Interest expense |
|
|
(60,651 |
) |
|
|
(61,666 |
) |
|
|
1,015 |
|
|
|
(1.6 |
) |
Other expense, net |
|
|
(6,859 |
) |
|
|
(225 |
) |
|
|
(6,634 |
) |
|
|
2,948.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(65,847 |
) |
|
$ |
(60,327 |
) |
|
$ |
(5,520 |
) |
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
2,791 |
|
|
$ |
7,726 |
|
|
$ |
(4,935 |
) |
|
|
(63.9 |
)% |
Interest expense |
|
|
(182,782 |
) |
|
|
(194,581 |
) |
|
|
11,799 |
|
|
|
(6.1 |
) |
Other expense, net |
|
|
(7,259 |
) |
|
|
(675 |
) |
|
|
(6,584 |
) |
|
|
975.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(187,250 |
) |
|
$ |
(187,530 |
) |
|
$ |
280 |
|
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the nine-month period ended September 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 $1.4 billion of assets
in the second and third quarter of 2007. In addition, interest
expense was lower due to a decrease in short-term interest rates. Offsetting
the above decreases was an increase in interest expense
due to the IRRETI merger, which closed in February 2007, and associated
borrowings combined with other development assets becoming
operational. The weighted average debt outstanding and related
weighted average interest rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine-Month |
|
|
Periods |
|
|
Ended September 30, |
|
|
2008 |
|
2007 |
Weighted average debt outstanding (billions) |
|
$ |
5.8 |
|
|
$ |
5.5 |
|
Weighted average interest
rate |
|
|
4.7 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
2008 |
|
2007 |
Weighted average interest rate |
|
|
4.9 |
% |
|
|
5.2 |
% |
The reduction in weighted average interest rates is primarily related to a decline in
short-term interest rates for the nine-month period ended September 30, 2008 as compared to the
prior year period. Interest costs capitalized, in conjunction with development and expansion
projects and development joint venture interests, were $9.9 million and $28.4 million for the
three- and nine-month periods ended September 30, 2008, respectively, as compared to $7.2 million
and $18.7 million for the same periods in the prior year.
Other expense primarily relates to abandoned acquisition and development project costs and
litigation costs offset by a gain of $0.2 million from the repurchase of $3.425 million of the
Companys senior notes. The increase in other expense for the third quarter of 2008 is due in part
to an accrual for
- 40 -
the
potential liability associated with a litigation judgment as well as the related litigation
expenses (See Legal Matters).
Other (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Equity in net income of joint ventures |
|
$ |
1,981 |
|
|
$ |
6,003 |
|
|
$ |
(4,022 |
) |
|
|
(67.0 |
)% |
Minority interests |
|
|
(1,524 |
) |
|
|
(2,204 |
) |
|
|
680 |
|
|
|
(30.9 |
) |
Tax benefit (expense) of taxable REIT
subsidiaries and franchise taxes |
|
|
16,414 |
|
|
|
(483 |
) |
|
|
16,897 |
|
|
|
(3498.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Equity in net income of joint ventures |
|
$ |
21,924 |
|
|
$ |
33,887 |
|
|
$ |
(11,963 |
) |
|
|
(35.3 |
)% |
Minority interests |
|
|
(5,865 |
) |
|
|
(16,204 |
) |
|
|
10,339 |
|
|
|
(63.8 |
) |
Tax benefit of taxable REIT
subsidiaries and franchise taxes |
|
|
15,070 |
|
|
|
15,294 |
|
|
|
(224 |
) |
|
|
(1.5 |
) |
The decrease in equity in net income of joint ventures is primarily due to the promoted income
of $14.3 million earned during the nine-month period ended September 30, 2007, related to the sale
of certain joint venture assets, partially offset by increased income at the joint ventures. A summary of
the decrease in equity in net income of joint ventures for the nine-month period ended September
30, 2008, is composed of the following (in millions):
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Acquisition of assets by unconsolidated joint ventures |
|
$ |
(1.4 |
) |
Decrease in gains from sale transactions as compared to
2007 |
|
|
(14.5 |
) |
Acquisitions and increased operating results of a joint
venture in Brazil |
|
|
4.8 |
|
Various other decreases |
|
|
(0.9 |
) |
|
|
|
|
|
|
$ |
(12.0 |
) |
|
|
|
|
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
- 41 -
Minority interest expense decreased for the nine-month period ended September 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) |
|
|
0.4 |
|
Conversion of 0.5 million of operating partnership minority interests
(OP Units) to common shares |
|
|
0.6 |
|
Increase in net income from consolidated joint venture investments |
|
|
(0.4 |
) |
|
|
|
|
|
|
$ |
10.3 |
|
|
|
|
|
|
|
|
(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. |
In the third quarter of 2008, the Company recognized a $16.7 million income tax benefit.
Approximately $15.6 million of this amount related to the release of valuation allowances
associated with deferred tax assets that were established in prior years. These valuation
allowances were previously established due to the uncertainty that the deferred tax assets would be
utilizable.
In order to maintain its REIT status, the Company must meet certain income tests to ensure
that its gross income consists of passive income and not income from the active conduct of a trade
or business. The Company utilizes its Taxable REIT Subsidiary (TRS) to the extent certain fee and
other miscellaneous non-real estate related income cannot be earned by the REIT. During the third
quarter of 2008, the Company began recognizing certain fee and miscellaneous other non-real estate
related income within its TRS.
Therefore, based on the Companys evaluation of the current facts and circumstances the Company
determined during the third quarter of 2008 that the valuation allowance should be released as it was more-likely-than-not that the
deferred tax assets would be utilized in future years. This determination was based upon the
increase in fee and miscellaneous other non-real estate related income which is projected to be
recognized within the Companys TRS.
The aggregate income tax benefit of $15.3 million for the nine-month period ended September
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.
- 42 -
Discontinued Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
|
|
|
|
Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Income (loss) from discontinued operations |
|
$ |
458 |
|
|
$ |
(93 |
) |
|
$ |
551 |
|
|
|
(592.5 |
)% |
Loss on disposition of real estate, net of tax |
|
|
(2,717 |
) |
|
|
(310 |
) |
|
|
(2,407 |
) |
|
|
(776.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month |
|
|
|
|
|
|
Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
(Loss) income from discontinued operations |
|
$ |
(461 |
) |
|
$ |
8,408 |
|
|
$ |
(8,869 |
) |
|
|
(105.5 |
)% |
(Loss) gain on disposition of real
estate, net of tax |
|
|
(1,830 |
) |
|
|
13,323 |
|
|
|
(15,153 |
) |
|
|
(113.7 |
) |
Included in discontinued operations for the three- and nine-month periods ended September 30,
2008 and 2007, are 11 properties sold in 2008 (including one business center and one property
classified as held for sale at December 31, 2007), aggregating 0.9 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.
In September 2008, the Company sold its approximate 56% interest in one of its business
centers to its partner for $20.7 million and recorded an aggregate loss of $5.8 million. The
Companys partner exercised its buy-sell rights provided under the joint venture agreement in July
2008 and the Company elected to sell its interest pursuant to the terms of the buy-sell right in
mid-August 2008.
Gain on Disposition of Real Estate (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Gain on disposition of real estate, net of tax |
|
$ |
3,093 |
|
|
$ |
3,691 |
|
|
$ |
(598 |
) |
|
|
(16.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Gain on disposition of real estate, net of tax |
|
$ |
6,368 |
|
|
$ |
63,713 |
|
|
$ |
(57,345 |
) |
|
|
(90.0 |
)% |
The Company recorded net gains on disposition of real estate and real estate investments for
the three- and nine-month periods ended September 30, 2008 and 2007, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Nine-Month |
|
|
|
Periods Ended |
|
|
Periods Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Transfer of assets to DDR Domestic Retail Fund I (1) (2) |
|
$ |
|
|
|
$ |
(0.1 |
) |
|
$ |
|
|
|
$ |
1.9 |
|
Transfer of assets to TRT DDR Venture I (1) (3) |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
50.3 |
|
Land sales (4) |
|
|
3.0 |
|
|
|
2.0 |
|
|
|
5.7 |
|
|
|
10.0 |
|
Previously deferred gains and other gains and loss on
dispositions (5) |
|
|
0.1 |
|
|
|
1.7 |
|
|
|
0.7 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.1 |
|
|
$ |
3.7 |
|
|
$ |
6.4 |
|
|
$ |
63.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This disposition is not classified as discontinued operations due to the
Companys continuing involvement through its retained ownership interest and management
agreements. |
- 43 -
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Net income |
|
$ |
38,515 |
|
|
$ |
43,283 |
|
|
$ |
(4,768 |
) |
|
|
(11.0) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Net income |
|
$ |
121,866 |
|
|
$ |
233,256 |
|
|
$ |
(111,390 |
) |
|
|
(47.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income decreased for the nine-month period ended September 30, 2008 primarily due to the
reduction in the amount of transactional income earned compared to the same period in 2007 (gains
on disposition of real estate of approximately $72.5 million and promoted income from joint venture
interests of approximately $14.3 million) and the transfer of 62 assets to unconsolidated joint
venture interests in 2007 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):
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period |
|
|
Nine-Month Period |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
Decrease in net operating revenues
(total revenues in excess of operating
and maintenance expenses and real estate
taxes) (1) |
|
$ |
(3.0 |
) |
|
$ |
(10.8 |
) |
Decrease (increase) in general and
administrative
expenses |
|
|
0.1 |
|
|
|
(1.3 |
) |
Increase in depreciation expense (2) |
|
|
(7.5 |
) |
|
|
(16.3 |
) |
Increase (decrease) in interest
income |
|
|
0.1 |
|
|
|
(4.9 |
) |
Decrease in interest expense |
|
|
1.0 |
|
|
|
11.8 |
|
Change in other expense |
|
|
(6.6 |
) |
|
|
(6.6 |
) |
Decrease in equity in net income of
joint ventures (3) |
|
|
(4.0 |
) |
|
|
(12.0 |
) |
Decrease in minority interest
expense |
|
|
0.7 |
|
|
|
10.3 |
|
Change in income tax
benefit/expense |
|
|
16.9 |
|
|
|
(0.2 |
) |
Increase (decrease) in income from
discontinued
operations |
|
|
0.5 |
|
|
|
(8.9 |
) |
Decrease in gain on disposition of real
estate of discontinued operations
properties |
|
|
(2.4 |
) |
|
|
(15.2 |
) |
Decrease in gain on disposition of real
estate |
|
|
(0.6 |
) |
|
|
(57.3 |
) |
|
|
|
|
|
|
|
Decrease in net income |
|
$ |
(4.8 |
) |
|
$ |
(111.4 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease primarily related to assets sold to joint ventures in 2007. |
|
(2) |
|
Increase primarily related to the IRRETI merger. |
- 44 -
|
|
|
(3) |
|
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.
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 compensation 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.
- 45 -
For the three-month period ended September 30, 2008, FFO applicable to common shareholders was
$100.0 million, as compared to $99.5 million for the same period in 2007. For the nine-month
period ended September 30, 2008, FFO applicable to common shareholders was $298.7 million, as
compared to $365.0 million for the same period in 2007. The decrease in FFO, for the nine-month
period ended September 30, 2008, is primarily related to a reduction in the amount of transactional
income earned during the same period in 2007 and the transfer of 62 assets to unconsolidated joint
venture interests in 2007 and the sale of 67 assets to third parties in 2007. The Companys
calculation of FFO is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income applicable to common
shareholders (1) |
|
$ |
27,948 |
|
|
$ |
32,716 |
|
|
$ |
90,164 |
|
|
$ |
192,889 |
|
Depreciation and amortization of real
estate investments |
|
|
61,099 |
|
|
|
54,235 |
|
|
|
172,740 |
|
|
|
160,819 |
|
Equity in net income of joint ventures |
|
|
(1,981 |
) |
|
|
(6,003 |
) |
|
|
(21,924 |
) |
|
|
(33,887 |
) |
Joint ventures FFO (2) |
|
|
15,833 |
|
|
|
17,602 |
|
|
|
60,922 |
|
|
|
62,475 |
|
Minority interests (OP Units) |
|
|
261 |
|
|
|
569 |
|
|
|
1,145 |
|
|
|
1,706 |
|
(Gain) loss on disposition of
depreciable real estate (3) |
|
|
(3,170 |
) |
|
|
430 |
|
|
|
(4,321 |
) |
|
|
(19,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO applicable to common shareholders |
|
|
99,990 |
|
|
|
99,549 |
|
|
|
298,726 |
|
|
|
364,989 |
|
Preferred dividends |
|
|
10,567 |
|
|
|
10,567 |
|
|
|
31,702 |
|
|
|
40,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFO |
|
$ |
110,557 |
|
|
$ |
110,116 |
|
|
$ |
330,428 |
|
|
$ |
405,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes straight-line rental revenues of approximately $2.3 million and $2.8
million for the three-month periods ended September 30, 2008 and 2007, respectively,
and $7.2 million and $9.4 million for the nine-month periods ended September 30, 2008
and 2007, respectively. |
|
(2) |
|
Joint ventures FFO is summarized as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net (loss) income (a) |
|
$ |
(22,793 |
) |
|
$ |
18,798 |
|
|
$ |
75,583 |
|
|
$ |
149,331 |
|
Loss (gain) on disposition of real estate, net |
|
|
|
|
|
|
103 |
|
|
|
13 |
|
|
|
(91,339 |
) |
Depreciation and amortization of real estate
investments |
|
|
59,274 |
|
|
|
55,702 |
|
|
|
175,723 |
|
|
|
135,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,481 |
|
|
$ |
74,603 |
|
|
$ |
251,319 |
|
|
$ |
193,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDR ownership interest (b) |
|
$ |
15,833 |
|
|
$ |
17,602 |
|
|
$ |
60,922 |
|
|
$ |
62,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes straight-line rental revenue of approximately $1.5
million and $2.3 million for the three-month periods ended September 30, 2008
and 2007, respectively, of which the Companys proportionate share was $0.2
million and $0.3 million , respectively. For the nine-month periods ended
September 30, 2008 and 2007, includes straight-line rental revenue of
approximately $5.7 million and $6.6 million, respectively, of which the
Companys proportionate share was $0.7 million and $1.0 million, respectively. |
|
(b) |
|
The Companys share of joint venture net income has been reduced
by $0.6 million and $0.2 million for the three-month periods ended September 30,
2008 and 2007, respectively, related to basis differences in depreciation and
adjustments to gain on sales. The Companys share of joint venture |
- 46 -
|
|
|
|
|
net income has been reduced by $0.9 million and $0.6 million for the nine-month
periods ended September 30, 2008 and 2007, respectively, related to basis
differences in depreciation and adjustments to gain on sales. |
|
|
|
At September 30, 2008 and 2007, the Company owned unconsolidated joint venture
interests relating to 329 and 317 operating shopping center properties,
respectively. |
|
(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 September 30, 2008 and 2007, net
gains resulting from residual land sales aggregated $3.0 million and $2.0 million,
respectively. For the nine-month periods ended September 30, 2008 and 2007, net gains
resulting from residual land sales aggregated $5.7 million and $10.0 million,
respectively. For the three-month periods ended September 30, 2008 and 2007, merchant
building gains, net of tax, aggregated $0.1 million and $1.8 million, respectively.
For the nine-month periods ended September 30, 2008 and 2007, merchant building gains,
net of tax, aggregated $0.4 million and $48.0 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 if certain financial covenants are
maintained, and an accordion
feature for a future expansion to $1.4 billion upon the Companys request, provided that new or
existing lenders agree to the existing terms of the facility and increase their commitment level,
and a maturity date of June 2010, with a one-year extension option. 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 at the option of the Company subject
to certain customary closing conditions. 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 Company was in compliance with these covenants at September
30, 2008. Should the Company be in default under the Revolving
Credit Facilities, the default could result in an acceleration of the
maturity of the Revolving Credit Facilities unless a waiver or
modification is agreed upon by a requisite percentage of the lenders under
the Revolving Credit Facilities. 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 continues to maintain a
substantial unencumbered asset pool that it believes can be used for additional secured and
unsecured borrowings.
At September 30, 2008, the following information summarizes the availability of the Revolving
Credit Facilities (in billions):
|
|
|
|
|
Revolving Credit Facilities |
|
$ |
1.317 |
|
Less: |
|
|
|
|
Amount outstanding |
|
|
(0.956 |
) |
Letters of credit |
|
|
(0.005 |
) |
|
|
|
|
Amount Available |
|
$ |
0.356 |
|
|
|
|
|
As of September 30, 2008, the Company had cash of $30.2 million. As of September 30, 2008, the
Company also had 300 unencumbered consolidated operating properties generating $350.9 million,
- 47 -
or 49.9% of the total revenue of the Company for the nine-month period ended September 30, 2008,
thereby providing a potential collateral base for future borrowings, subject to consideration of
the financial covenants on unsecured borrowings.
On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman Holdings) filed for protection
under Chapter 11 of the United States Bankruptcy Code. Subsequently, Lehman Commercial Paper Inc.
(Lehman CPI), a subsidiary of Lehman Holdings, also filed for protection under Chapter 11 of the
United States Bankruptcy Code. Lehman CPI had a $20.0 million credit commitment under the
Companys Unsecured Credit Facilities and, at the time of the
filing of this Form on 10-Q, approximately $7.6 million of
Lehman CPIs commitment was undrawn. In October 2008, the Company was notified that Lehman CPIs
commitment would not be assumed. As a result, the Companys availability under the Unsecured
Credit Facility was effectively reduced by approximately $7.6 million. The Company does not believe
that this reduction of credit has a material effect on the Companys liquidity and capital
resources.
The Company anticipates that cash flow from operating activities will continue to provide
adequate capital for all scheduled interest and monthly principal payments on outstanding
indebtedness, recurring tenant improvements and dividend payments in accordance with REIT
requirements. The Company intends to utilize a combination of equity raised from expected asset
sales that are accounted for as discontinued operations, sales to joint ventures,
retained capital, the elimination of the fourth quarter 2008 dividend, as well as the previously
announced intention to reduced its 2009 quarterly dividend. In
addition, the Company is pursuing prospective financings, and
refinancings in order to fund its debt repayments and repurchases and, to the extent
deemed appropriate, minimizing further capital expenditures. The Company may also, from time to
time, repurchase its existing debt securities using cash, common shares, or other securities or any
combination thereof prior to maturity. While the Company reviews numerous investment
opportunities, it does not expect to invest significant capital in these projects until debt
maturities are appropriately addressed. Moreover, in the unlikely event that the capital markets
remain indefinitely closed, the Company believes that it can rely on its free cash flow, asset
sales, and unencumbered asset pool as sources of funding.
The Company has addressed all of the significant debt maturities occurring in the fourth
quarter of 2008. Part of the Companys overall strategy includes not just addressing the 2009
debt maturities, but also the debt maturing in the following years. Over the years, the Company
has been very careful to balance the amount and timing of its debt maturities. Notably, the
Company has no major maturities between February 2009 through
April 2010, providing time to ensure that the larger maturities, including the Companys credit facilities, which occur in
2010 through 2012, are addressed. The Company continually evaluates its debt
maturities, and based on managements current assessment, believes it has viable financing and
refinancing alternatives that will not materially adversely impact its expected financial results.
Although the credit environment has become much more difficult since the third quarter of 2008,
the Company continues to pursue opportunities with the largest U.S. banks, select life insurance
companies, certain local banks and some international lenders. The Company has noticed a trend
that the approval process from the lenders has slowed, while pricing and loan-to-value ratios
remain dependent on specific deal terms and in general, spreads are higher and loan-to-values are
lower, but the lenders are continuing to execute financing agreements. Moreover, the Company
continues to look beyond 2008 to ensure the Company is
- 48 -
prepared if the current credit market dislocation continues (see Contractual Obligations and
Other Commitments).
During the first nine 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.
Construction loan closings for the Companys wholly-owned assets included a three-year $44.5
million loan on a development property in Horseheads, New York in September 2008, a three-year, $40
million loan relating to the expansion of the Companys corporate headquarters in Beachwood, Ohio
in April 2008 and a $71 million construction loan on a development property in Homestead, Florida
in March 2008.
The Companys joint venture with Macquarie DDR Trust (ASX: MDT) (MDT), an Australian Real
Estate Investment Trust, refinanced $340.0 million of mortgage debt with new mortgage debt proceeds
aggregating $370 million. In the second and third quarters of 2008, refinancings at six of the
Companys unconsolidated joint ventures aggregated $166.5 million with terms ranging from LIBOR
plus 1.50% to LIBOR plus 3.50%. In March 2008, 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 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.
As of September 30, 2008, the Company had $56.6 million of consolidated debt and the Companys
joint ventures had $66.5 million of unconsolidated joint venture debt maturing during the balance
of 2008. The 2008 debt maturities are anticipated to be repaid through several sources as
described below.
The
Companys remaining 2008 consolidated debt maturities are
comprised of four mortgages
aggregating $56.6 million, of which two loans aggregating
$25.2 million will be repaid using the Companys Revolving Credit Facilities
during the fourth quarter of 2008, one mortgage aggregating
$12.8 million is expected to be extended, and one loan on a consolidated 50% owned joint venture
development aggregating $18.6 million, which was due November 2008 was extended to February
2009.
The remaining
2008 maturities related to unconsolidated joint venture mortgages aggregate
$66.5 million of which $48.0 million is expected to be extended through an existing extension
option. The other mortgage, in the amount of $18.5 million,
matured in October 2008, has not been repaid or refinanced, and the joint
venture has been in discussions with the lender. The lender is willing to extend the loan for an
additional 12 months but in exchange is requiring a paydown of approximately $7.5 million. The
Companys partner, which provided an 80% payment guarantee, has not yet provided its 80% share of
such paydown. The Company has provided a 20% payment guarantee in connection with this mortgage.
The Companys 2009 debt maturities consist of: $275.0 million of consolidated unsecured notes
maturing in January 2009; $162.0 million of consolidated mortgage debt and $559.9 million of
unconsolidated joint venture mortgage debt. The $275.0 million of consolidated unsecured notes is
expected to be repaid from a combination of operating cash flow and amounts available on the
Companys Revolving Credit Facilities. In addition, the Company expects to generate additional
cash flow from the sale of non-core assets and the elimination of the
dividend for the fourth quarter of 2008.
Of the 2009 maturing consolidated mortgage debt, $45.9 million has extension options at existing
terms. Of
- 49 -
the 2009 maturing unconsolidated joint venture mortgage debt, the joint venture has the option
to extend approximately $253.1 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 the most competitive terms possible.
These obligations generally require monthly payments of principal and/or interest over the
term of the obligation. In light of the current economic conditions, no assurance can be provided
that the aforementioned obligations will be refinanced or repaid as currently anticipated.
The Companys core business of leasing space to well-capitalized retailers continues to
perform well, as the Companys primarily discount-oriented tenants gain market share from retailers
offering higher price points and offering more discretionary goods. These long-term leases
generate consistent and predictable cash flow after expenses, interest payments, and preferred
stock dividends. This capital is available for use at the Companys discretion for investment, debt
repayment, share repurchases and the payment of dividends on our common stock.
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 nine-month period ended
September 30, 2007, the Company completed a $3.1 billion merger with IRRETI, which closed in
February 2007, and sold 62 assets to joint ventures and 66 assets to third parties in 2007.
The Companys cash flow activities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods |
|
|
Ended September 30, |
|
|
2008 |
|
2007 |
Cash flow provided by operating activities |
|
$ |
319,452 |
|
|
$ |
334,570 |
|
Cash flow used for investing activities |
|
|
(402,289 |
) |
|
|
(926,675 |
) |
Cash flow provided by financing activities |
|
|
64,420 |
|
|
|
613,427 |
|
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 November 3, 2008, the Company
has not repurchased any of its common shares.
For each of the first three quarters of 2008, the Company paid a quarterly dividend of $0.69
per common share. The payout ratio was determined based on common and preferred dividends declared
as compared to the Companys FFO. The Companys common share dividend payout ratio for the first
nine months of 2008 was approximately 83.6% of reported FFO, as compared to 67.9% for the same
period in 2007.
Based upon the Companys current results of operations and debt maturities, the Companys
Board of Directors approved a 2009 dividend policy that will maximize the Companys free cash flow,
- 50 -
while still adhering to REIT payout requirements. This policy results in an annual 2009 dividend
per common share of approximately $1.50, to be paid quarterly. To further enhance the Companys current
liquidity position and to apply this updated approach to the Companys payout policy, the Company
will not declare a dividend in the fourth quarter of 2008. This change in the dividend policy will
result in more than $80 million of additional capital in January 2009 to further increase the
Companys liquidity. As a result, the Companys 2008 common share dividends will aggregate $2.07
per share. In total, the changes to the Companys 2008 and 2009 dividend policy should result in
additional free cash flow of approximately $230 million, which is expected to be applied primarily
to reduce leverage.
See Off-Balance Sheet Arrangements and Contractual Obligations and Other Commitments sections
for discussion of additional disclosure of capital resources.
Acquisitions and Dispositions
During the nine-month period ended September 30, 2008, the Company and its unconsolidated
joint ventures expended an aggregate of approximately $517.9 million ($198.9 million by the Company
and $319 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.
Current Strategies
The Company continues
to proceed with negotiations with numerous parties involving asset
sales. In October 2008, the Company had a combination of asset sales under contract and certain
assets subject to letters of intent. Prospective buyers range from local individuals to larger,
more regional private investors to large REITs. Additionally, the Company is pursuing the sale of
additional assets to close in 2009.
The Company
announced that it has reached an agreement for the sale of 13 assets to a new
joint venture with an institutional investor, subject to entry into a
definitive agreement. Two of the 13 assets are owned by one of the Companys
unconsolidated joint ventures which has a mortgage loan outstanding
secured by a pool of properties, including these two assets. The
new joint venture anticipated assuming the portion of the loan
relating to these two assets and the assumed loan would remain
secured by these two assets but would be released as security for the
mortgage made to the unconsolidated joint venture. Subsequent to the announcement, the
lender of such two assets notified the Company that
it would not approve the assumption of such mortgage loan by the
unconsolidated joint venture and the release of these two assets as security for the
mortgage loan to the unconsolidated joint venture because the release
of those two assets would diminish the value of the security for the
loan made to the unconsolidated joint venture. Consequently, these two assets are currently
excluded from the sale.
However, in the event the lender would subsequently approves such
assumption and release prior to closing,
then these two assets may be again included in the sale.
The current terms for the sale of the remaining 11 stabilized
assets is at an expected purchase price
of approximately $781 million.
The joint venture is expected to close in December 2008, subject to the satisfaction or waiver
of customary closing conditions. Upon closing, the joint venture is expected to be owned 80% by the
partner and a 20% subordinated position by the Company. Pursuant to the terms of the joint venture, the Company is expected
to receive property management and development/redevelopment fees, as well as leasing and ancillary
income fees upon closing. In addition, the Company is expected to receive a promoted interest.
- 51 -
The transaction is expected to generate approximately $260 million of total net proceeds to the
Company, of which approximately $170 million is expected to be available at closing. The remainder is expected to be available when
seller first mortgage financing is refinanced. The Company expects to provide further information
regarding the transaction once it has closed.
The Company expects to use the proceeds from these transactions to de-leverage its balance
sheet. Given the current market conditions, there can be no assurance that the final purchase
agreement or the joint venture agreement will not be materially different from the terms described
above or be consummated.
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 MDT. 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 (9.3% and 6.7% interest in MDT on a
weighted-average basis for the three- and nine-month periods ended September 30, 2008,
respectively) and its direct and indirect ownership of the Fund, DDR is entitled to
an approximate 24.7% economic interest in the Fund at
September 30, 2008. Through September 30, 2008, as described in filings with the Australian Securities
Exchange (ASX Limited), the Company has purchased an aggregate 112.5 million units of MDT in open
market transactions at an aggregate cost of approximately $42.9 million. Through October 9, 2008,
as filed with the ASX Limited, the Company has purchased an aggregate 114.4 million MDT units in
open market transactions at an aggregate cost of approximately $43.2 million. As the Companys
direct and indirect investments in MDT and the Fund gives it 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.
Dispositions
For the nine-months ended September 30, 2008, the Company sold 11 shopping center properties,
including one business center and one shopping center that was classified as held for sale at
December 31, 2007, aggregating 0.9 million square feet for approximately $100 million and
recognized an aggregate loss of $1.5 million. The Company recorded an aggregate loss of $5.8
million relating to the sale of one of its business centers in Massachusetts as the Companys
partner exercised its buy-sell rights provided under the joint venture agreement in July 2008 and
the Company elected to sell its interest pursuant to the terms of the buy-sell rights in mid-August
2008. This loss was recorded as a charge to FFO for the three- and nine-month periods ended
September 30, 2008.
- 52 -
Developments, Redevelopments and Expansions
The
Company expects to significantly reduced its anticipated spending for the remainder of 2008 and
through 2009 for its developments and redevelopments, both for consolidated and unconsolidated
projects, as the Company considers this funding to be discretionary spending. One of the
important benefits of the Companys asset class is the ability to phase development projects over
time until appropriate leasing levels can be achieved. To maximize the return on capital spending
and balance the Companys de-leveraging strategy, the Company has revised its investment criteria
thresholds. The revised underwriting criteria includes a higher cash-on-cost project return
threshold, a longer lease-up period and a higher stabilized vacancy rate. The Company will apply
this revised strategy to both its consolidated and certain unconsolidated joint ventures which own
assets under development as the Company has significant influence and, in some cases, approval
rights over decisions relating to capital expenditures.
Development (Wholly-Owned and Consolidated Joint Ventures)
The Company currently has the following wholly-owned and consolidated joint venture shopping
center projects under construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
|
|
|
|
|
Owned |
|
|
Net Cost |
|
|
|
|
Location |
|
GLA |
|
|
($ 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 |
|
|
|
53.7 |
|
|
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 |
|
|
$ |
686.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated 50% Joint Venture |
The wholly-owned and consolidated joint venture development estimated funding schedule, net of
reimbursements, as of September 30, 2008, is as follows (in millions):
|
|
|
|
|
Funded as of September 30, 2008 |
|
$ |
447.4 |
|
Projected net funding during 2008 |
|
|
22.4 |
|
Projected net funding during 2009 |
|
|
55.8 |
|
Projected net funding thereafter |
|
|
160.6 |
|
|
|
|
|
Total |
|
$ |
686.2 |
|
|
|
|
|
In addition to the current developments described above with a projected net funding at
September 30, 2008, of approximately $686.2 million to complete these projects, the Company and its
joint ventures intend to commence construction on various other developments only after substantial
- 53 -
tenant leasing has occurred and construction financing is available, including several
international projects. At September 30, 2008, the Company owned 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
potential development projects will be undertaken, they provide a source of potential development
projects over the next several years.
Development (Unconsolidated Joint Ventures)
The Companys unconsolidated joint ventures have the following shopping center projects under
construction. At September 30, 2008, $433 million of costs had been incurred in relation to these
development projects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDRs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Expected |
|
|
|
|
|
|
Joint Venture |
|
|
Ownership |
|
|
Owned |
|
|
Net Cost |
|
|
|
|
Location |
|
Partner |
|
|
Percentage |
|
|
GLA |
|
|
($ Millions) |
|
|
Description |
|
Kansas City
(Merriam), Kansas |
|
Coventry II |
|
|
20.0 |
% |
|
|
158,632 |
|
|
$ |
43.7 |
|
|
Community Center |
Detroit (Bloomfield
Hills), Michigan (a) |
|
Coventry II |
|
|
10.0 |
% |
|
|
623,782 |
|
|
|
189.8 |
|
|
Lifestyle Center |
Dallas (Allen), Texas |
|
Coventry II |
|
|
10.0 |
% |
|
|
797,665 |
|
|
|
171.2 |
|
|
Lifestyle Center |
Manaus, Brazil |
|
Sonae Sierra |
|
|
47.4 |
% |
|
|
477,630 |
|
|
|
124.6 |
|
|
Enclosed Mall |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
2,057,709 |
|
|
$ |
529.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Because Coventry II currently has not committed to fund its 80% of the additional
required equity, the Company has announced that construction on this
asset will be suspended until appropriate
leasing levels and financing commitments are available. |
The unconsolidated joint venture development estimated funding schedule, net of
reimbursements, as of September 30, 2008, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
|
|
|
|
|
DDRs |
|
|
JV Partners |
|
|
from |
|
|
|
|
|
|
Proportionate |
|
|
Proportionate |
|
|
Construction |
|
|
|
|
|
|
Share |
|
|
Share |
|
|
Loans |
|
|
Total |
|
Funded as of September 30, 2008 |
|
$ |
69.9 |
|
|
$ |
172.2 |
|
|
$ |
190.9 |
|
|
$ |
433.0 |
|
Projected net funding during 2008 |
|
|
12.2 |
|
|
|
23.0 |
|
|
|
47.1 |
|
|
|
82.3 |
|
Projected net funding during 2009 |
|
|
22.2 |
|
|
|
47.1 |
|
|
|
100.4 |
|
|
|
169.7 |
|
Projected net funding
(reimbursements) thereafter |
|
|
(39.5 |
) |
|
|
(158.1 |
) |
|
|
41.9 |
|
|
|
(155.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64.8 |
|
|
$ |
84.2 |
|
|
$ |
380.3 |
|
|
$ |
529.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $121.5 million.
At September 30, 2008, approximately $85 million of costs had been incurred in relation to these
projects resulting in a balance of approximately $36.5 million to be funded.
- 54 -
|
|
|
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 |
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 $449.2 million, which includes original acquisition
costs related to assets acquired for redevelopment. At September 30, 2008, approximately $401.8
million of costs had been incurred in relation to these projects resulting in a balance of
approximately $47.4 million to be funded. The following is a summary of these unconsolidated joint
venture redevelopment and expansion projects:
|
|
|
|
|
|
|
|
|
|
|
|
|
DDR's |
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Ownership |
|
|
Property |
|
Joint Venture Partner |
|
Percentage |
|
Description |
Buena Park, California
|
|
Coventry II
|
|
|
20.0 |
% |
|
Large-scale re-development 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 |
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.
- 55 -
The
individual unconsolidated joint ventures that have total assets
greater than $250 million (based on the historical cost of
acquisition by the unconsolidated joint venture)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
3,617 |
|
|
$ |
26.6 |
|
DDR Domestic Retail Fund I
|
|
|
20.0 |
|
|
63 shopping center assets in
several states
|
|
|
8,250 |
|
|
|
968.0 |
|
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
|
|
|
15,743 |
|
|
|
1,761.0 |
|
DDR Macquarie Fund LLC (1)
|
|
|
24.7 |
|
|
51 shopping center assets in
several states
|
|
|
12,084 |
|
|
|
1,300.4 |
|
|
|
|
(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 $98.2 million at September 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, asset sales and retained capital.
The Company has provided loans and advances to certain unconsolidated entities and/or related
partners in the amount of $4.0 million at September 30, 2008, for which the Companys joint venture
partners have not funded their proportionate share. In addition to these loans, the Company has
advanced $25.8 million of financing to one of its unconsolidated joint ventures which accrues
interest at the greater of LIBOR plus 700 basis points or 12% and has an initial maturity of July
2011. 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. As
development manager, 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 $5.8 billion and $5.5 billion at September 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 debt aggregating $71.6 million at September 30, 2008.
- 56 -
The Company maintains an interest in unconsolidated joint ventures that own real estate assets
in Brazil, Canada and Russia and has generally chosen not to mitigate any of the residual foreign
currency risk through the use of hedging instruments for these entities. 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 September 30, 2008, $9.0 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 would allow DDR to be opportunistic in its
investment strategy and in accessing the most efficient and lowest cost financing available.
Construction loan closings for the Companys wholly-owned assets included a three-year $44.5
million loan on a development property in Horseheads, New York in September 2008, a three-year, $40
million loan relating to the expansion of the Companys corporate headquarters in Beachwood, Ohio
in April 2008 and a $71 million construction loan on a development property in Homestead, Florida
in March 2008.
In March 2008, the Company entered into mortgage loans 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 the Companys Revolving Credit Facilities.
The Companys joint venture with MDT refinanced $340.0 million of mortgage debt with new
mortgage debt proceeds aggregating $370.0 million. In the second and third quarters of 2008,
refinancings at six of the Companys unconsolidated joint ventures aggregated $166.5 million with
- 57 -
terms ranging from LIBOR plus 1.50% to LIBOR plus 3.50%. In March 2008, 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 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.
In January 2008, the Company repaid unsecured senior notes of $100.0 million through
borrowings under the Companys Revolving Credit Facilities.
Capitalization
At September 30, 2008, the Companys capitalization consisted of $5.9 billion of debt, $555
million of preferred shares, and $3.8 billion of market equity (market equity is defined as common
shares and OP Units outstanding multiplied by the closing price of the common shares on the New
York Stock Exchange at September 30, 2008, of $31.69), resulting in a debt to total market
capitalization ratio of 0.6 to 1.0. At September 30, 2008, the Companys total debt consisted of
$4.5 billion of fixed-rate debt and $1.4 billion of variable-rate debt, including $600 million of
variable-rate debt that was effectively swapped to a fixed rate. At September 30, 2007, the
Companys total debt consisted of $4.6 billion of fixed-rate debt and $0.6 billion of variable-rate
debt, including $600 million of variable-rate debt which was effectively swapped to a fixed rate.
It is managements current strategy to have access to the capital resources necessary to
manage its balance sheet, to repay upcoming maturities and to consider making prudent investments
should such opportunities arise. Accordingly, the Company may seek to obtain funds through
additional debt or equity financings and/or joint venture capital in a manner consistent with its
intention to operate with a conservative debt capitalization policy and maintain 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. In light of the current economic conditions, the Company may not be able to obtain
financing on favorable terms, or at all, which may negatively impact future ratings. In October
2008, one of the Companys rating agencies reduced the Companys debt ratings.
The Companys credit facilities and the indentures under which the Companys senior and
subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating
covenants, including, among other things, debt service coverage and fixed charge coverage ratios,
as well as limitations on the Companys ability to incur secured and unsecured indebtedness, sell
all or substantially all of the Companys assets and engage in mergers and certain acquisitions.
Although the Company intends to operate in compliance with these covenants, if the Company were to
violate these covenants, the Company may be subject to higher finance costs and fees or accelerated
maturities. In addition, certain of the Companys credit
facilities and indentures may permit the acceleration of maturity in
the event certain other debt of the Company has been accelerated. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness
would have a negative impact on the Companys financial condition and results of operations.
Contractual Obligations and Other Commitments
As of November 3, 2008, the Companys maturities for the remainder of 2008 consist of $43.8
million in consolidated mortgage loans that are expected to be refinanced or repaid from operating
cash
- 58 -
flow, the Companys 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 September 30, 2008, the Company had letters of credit outstanding of approximately $81.0
million on its consolidated assets. The Company has not recorded any obligation associated with
these letters of credit. The majority of letters of credit are collateral for existing
indebtedness and other obligations of the Company.
In conjunction with the development of shopping centers, the Company has entered into
commitments aggregating approximately $116.1 million with general contractors for its wholly-owned
and consolidated joint venture properties at September 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, assets sales 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 generally for a three-year period. At September
30, 2008, the Companys material master lease obligations, included in accounts payable and accrued
expenses, incurred with the properties transferred to the following unconsolidated joint ventures
were as follows (in millions):
|
|
|
|
|
DDR Markaz II |
|
$ |
0.2 |
|
DDR MDT PS LLC |
|
|
0.8 |
|
TRT DDR Venture I |
|
|
0.5 |
|
|
|
|
|
|
|
$ |
1.5 |
|
|
|
|
|
The Company routinely enters into contracts for the maintenance of its properties which
typically can be cancelled upon 30 to 60 days notice without penalty. At September 30, 2008, the
Company had purchase order obligations, typically payable within one year, aggregating
approximately $7.6 million related to the maintenance of its properties and general and
administrative expenses.
The Company continually monitors its obligations and commitments. There have been no other
material items entered into by the Company since December 31, 2003, through September 30, 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
- 59 -
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 and may continue to experience varying
degrees of economic growth or distress. Adverse changes in general or local economic conditions
could result in the inability 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 presence 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).
The Company has evaluated its exposure relating to tenants in financial distress (e.g., the
bankruptcy cases filed by Linens N Things, Goodys, Mervyns and Steve & Barrys). Where
appropriate, the Company has accelerated depreciation and amortization expense associated with the
Tenant Related Deferred Charges. The Company does not believe its exposure associated with past
due accounts receivable for these tenants, net of related reserves, is significant to the financial
statements as most of these tenants were current with their rental payments at the date the
respective 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 as well as general economic conditions where stronger
retailers have out-positioned some of the weaker retailers. These shifts have forced some market
share away from weaker retailers and required them, in some cases, to declare bankruptcy and/or
close stores. Certain retailers have announced store closings even though they have not filed for
bankruptcy protection. However, these store closings often represent a small percentage of the
Companys overall gross leasable area and therefore, the Company does not expect these closings to
have a material adverse effect on the Companys overall performance. 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. There can be no assurances that these events will not adversely affect the Company (see Risk
Factors).
- 60 -
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 these tenants relatively constant same store tenant sales growth in the current economic
environment. However, recent headlines continue to 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 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 are expected to 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 and is
already addressing those renewals scheduled in 2009. During the second and the third quarters of
2008, 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 will
enable it to successfully navigate through these challenging economic times.
Legal Matters
The Company is a party to litigation filed in January 2007 by a tenant in a Company property
located in Long Beach, California. The tenant located at this property filed suit against the
Company and certain affiliates, claiming the Company and its affiliates failed to provide adequate
valet parking pursuant to the terms of the lease with the tenant. After a six-week trial, the jury
returned a verdict in October 2008, finding the Company liable for compensatory damages in the
amount of approximately $7.8 million. The Company strongly disagrees with the verdict and is
presently evaluating all of its
- 61 -
options, which include filing a motion for a new trial, as well as filing an appeal of the
verdict. However, the Company recorded a charge during the three months ended September 30, 2008
which represents managements best estimate of loss based upon a range of liability pursuant to
SFAS No. 5, Accounting for Contingencies. The accrual, as well as the related litigation costs
incurred to date, were recorded in the Other Income (Expense) line of the condensed consolidated
statements of operations. The Company will continue to monitor the status of the litigation and
revise the estimate of loss as appropriate. There can be no assurance
that a new trial will
be granted or that an appeal will be successful.
In addition to the litigation discussed above, the Company and its subsidiaries are subject to
various other 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 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 and related disclosure
requirements on January 1, 2008.
- 62 -
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 position and results of operations.
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active
FSP FAS 157-3
In October 2008, the FASB issued FSP FAS No. 157-3, Fair Value Measurements (FSP FAS No.
157-3), which clarifies the application of SFAS No. 157 in an inactive market and provides an
example to demonstrate how the fair value of a financial asset is determined when the market for
that financial asset is inactive. FSP FAS No. 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued. The adoption of this standard as of
September 30, 2008 did not have a material impact on the Companys financial position and results
of operations.
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
that qualify as businesses, this standard will require that acquisition costs and certain fees,
which are currently capitalized and allocated to the basis of the acquisition, be expensed as these
costs are incurred. Because of this change in accounting for costs, the Company expects that the
adoption of this standard could have a negative impact on the Companys results of operations
depending on the size of a transaction and the amount of costs incurred. The Company is currently
assessing the 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 equity 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
- 63 -
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 14-1
In May 2008, the FASB issued a Staff Position (FSP), Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB 14-1). FSP APB 14-1 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 14-1 and requires issuers of such instruments to separately account for the
liability and equity components by allocating the proceeds from the issuance of the instrument
between the liability component and the embedded conversion option (i.e., the equity component).
FSP No. APB 14-1 will require that the debt proceeds from the sale of $600 million 3.0%
convertible notes, due in 2012, and $250 million of 3.5% convertible notes, due in 2011, be
allocated between a liability component and an equity component in a manner that reflects interest
expense at the interest rate of similar nonconvertible debt. 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
- 64 -
subsequently amortized to earnings over the instruments expected life using the interest
method. As a result, the Company will report a lower net income as
interest expense would be increased to include
both the current periods amortization of the debt discount and the instruments coupon interest.
Based on the Companys understanding of the application of FSP APB 14-1, this will result in an
estimated impact of approximately $0.11 per share (net of the
estimated incremental capitalized interest on the Companys
qualifying expenditures) of estimated
additional non-cash interest expense for 2008. FSP No. APB 14-1
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.
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 No. 140-3). FSP FAS No. 140-3 addresses the issue of
whether or not these transactions should be viewed as two separate transactions or as one linked
transaction. FSP FAS No. 140-3 includes a rebuttable presumption linking the two transactions
unless the presumption can be overcome by meeting certain criteria. FSP FAS No. 140-3 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 No. 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 an FSP Determination of the Useful Life of Intangible Assets
(FSP No. 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 SFAS
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is intended to improve the
consistency between the useful life of an intangible asset determined under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS No. 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.
FSP No. 142-3 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 No. 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 an FSP Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP EITF No. 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
- 65 -
under the two-class method as described in SFAS No. 128, Earnings per Share. Under the
guidance in FSP EITF No. 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 No. 03-6-1 will have on its
financial position and results of operations.
- 66 -
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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)
|
|
$ |
4,507.4 |
|
|
|
3.2 |
|
|
|
5.1 |
% |
|
|
76.3 |
% |
|
$ |
4,533.1 |
|
|
|
3.9 |
|
|
|
5.1 |
% |
|
|
81.1 |
% |
Variable- Rate Debt (1)
|
|
$ |
1,402.5 |
|
|
|
3.0 |
|
|
|
4.2 |
% |
|
|
23.7 |
% |
|
$ |
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 September 30, 2008 and December 31, 2007. |
The Companys unconsolidated joint ventures fixed-rate indebtedness, including $307.3 million
and $557.3 million of variable-rate debt that was swapped to a weighted average fixed rate of
approximately 5.2% and 5.3% at September 30, 2008 and December 31, 2007, respectively, is
summarized as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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 |
|
$ |
4,511.8 |
|
|
$ |
952.8 |
|
|
|
5.5 |
|
|
|
5.5 |
% |
|
$ |
4,516.4 |
|
|
$ |
860.5 |
|
|
|
5.9 |
|
|
|
5.3 |
% |
Variable- Rate
Debt |
|
$ |
1,240.7 |
|
|
$ |
246.8 |
|
|
|
1.3 |
|
|
|
5.3 |
% |
|
$ |
1,035.4 |
|
|
$ |
173.6 |
|
|
|
1.5 |
|
|
|
5.5 |
% |
The
Company intends to utilize retained cash flow, including proceeds
from asset sales, construction financing and variable-rate
indebtedness available under its Revolving Credit Facilities 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 September 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 September 30, 2008 and December 31, 2007, the interest rate on $307.3
million and $557.3 million of joint venture floating rate debt,
respectively (of which $75.9
million and
- 67 -
$80.8 million is the Companys proportionate share at September 30, 2008 and December 31,
2007, respectively), was swapped to fixed rates. The Company is exposed to credit 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 September 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 $75.9 million and $80.8 million that was swapped to a fixed rate at
September 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
100 Basis Point |
|
|
|
|
|
|
|
|
|
100 Basis Point |
|
|
Carrying |
|
Fair |
|
Decrease in |
|
Carrying |
|
Fair |
|
Decrease in |
|
|
Value |
|
Value |
|
Market Interest |
|
Value |
|
Value |
|
Market Interest |
|
|
(Millions) |
|
(Millions) |
|
Rates |
|
(Millions) |
|
(Millions) |
|
Rates |
Companys fixed-rate debt |
|
$ |
4,507.4 |
|
|
$ |
4,249.1 |
(1) |
|
$ |
4,360.2 |
(2) |
|
$ |
4,533.1 |
|
|
$ |
4,421.0 |
(1) |
|
$ |
4,525.0 |
(2) |
Companys proportionate
share of joint venture
fixed-rate debt |
|
$ |
952.8 |
|
|
$ |
890.8 |
(3) |
|
$ |
929.7 |
(4) |
|
$ |
860.5 |
|
|
$ |
880.1 |
(3) |
|
$ |
927.0 |
(4) |
|
|
|
(1) |
|
Includes the fair value of interest rate swaps, which was a liability of $17.1
million and $17.8 million at September 30, 2008 and December 31, 2007, respectively. |
|
(2) |
|
Includes the fair value of interest rate swaps, which was a liability of $27.1
million and $32.0 million at September 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 $2.2 million and $3.0 million at September 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 $4.9 million and $7.5 million at September 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 September 30, 2008
and December 31, 2007, would result in an increase in interest expense of approximately
$10.5 million and $10.6 million, respectively, for the Company and $1.9 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 nine-month and twelve-month 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.
- 68 -
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 September 30, 2008, the Company had no other material exposure to market risk.
- 69 -
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 September 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.
- 70 -
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 following risk factors supplement the risk factors set forth in the Companys Form on 10-K
for the fiscal year ended December 31, 2007.
Recent Disruptions in the Financial Markets Could Affect the Companys Ability To Obtain Financing
on Reasonable Terms and Have Other Adverse Effects on the Company and the Market Price of the
Companys Common Shares
The United States and global equity and credit markets have recently experienced significant price
volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks
to fluctuate substantially and the spreads on prospective debt financings to widen considerably.
These circumstances have materially impacted liquidity in the financial markets, making terms for
certain financings less attractive, and in certain cases have resulted in the unavailability of
certain types of financing. Continued uncertainty in the equity and credit markets may negatively
impact the Companys ability to access additional financing at reasonable terms or at all, which
may negatively affect the Companys ability to make acquisitions, obtain construction financing or
refinance its debt. These circumstances may also adversely affect the Companys tenants, including
their ability to enter into new leases, pay their rents when due and renew their leases at rates at
least as favorable as their current rates. A prolonged downturn in the equity or credit markets
may cause the Company to seek alternative sources of potentially less attractive financing, and may
require it to adjust its business plan accordingly. In addition, these factors may make it more
difficult for the Company to sell properties or may adversely affect the price it receives for
properties that it does sell, as prospective buyers may experience increased costs of financing or
difficulties in obtaining financing. These events in the equity and credit markets may make it
more difficult or costly for the Company to raise capital through the issuance of its common
shares. These disruptions in the financial markets also may have a material adverse effect on the
market value of the Companys common shares and other adverse effects on it or the economy
generally. There can be no assurances that government responses to the disruptions in the
financial markets will restore consumer confidence, stabilize the markets or increase liquidity and
the availability of equity or credit financing.
- 71 -
The Company Relies on Major Tenants, Making It Vulnerable to Changes in the Business and Financial
Condition of, or Demand for Its Space, by Such Tenants
As of December 31, 2007, the annualized base rental revenues from Wal-Mart, Mervyns, T.J. Maxx,
PetSmart, Lowes Home Improvement, Bed Bath & Beyond and Circuit City represented 4.3%, 2.4%, 2.0%,
2.0%, 1.9%, 1.6% and 1.6%, respectively, of the Companys aggregate annualized shopping center base
rental revenues (those tenants greater than 1.5%), including its proportionate share of joint
venture aggregate annualized shopping center base rental revenues.
The retail shopping sector has been affected by economic conditions, as well as the competitive
nature of the retail business and the competition for market share where stronger retailers have
out-positioned some of the weaker retailers. These shifts have forced some market share away from
weaker retailers and required them, in some cases, to declare bankruptcy and/or close stores. For
example, in the second and third quarter of 2008, certain retailers filed for bankruptcy
protection and other retailers have announced store closings even though they have not filed for
bankruptcy protection. As information becomes available regarding the status of the Companys
leases with tenants in financial distress or the future plans for their spaces change, the Company
may be required to write off and/or accelerate depreciation and amortization expense associated
with a significant portion of the Tenant Related Deferred Charges in future periods. The Companys
income and ability to meet its financial obligations could also be adversely affected in the event
of the bankruptcy, insolvency or significant downturn in the business of one of these tenants or
any of the Companys other major tenants. In addition, the Companys results could be adversely
affected if any of these tenants do not renew multiple lease terms as they expire.
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, which
was announced on June 28, 2007. 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 September 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 September 30, 2008.
- 72 -
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total |
|
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number (or |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
Shares that May |
|
|
|
(a) Total number |
|
|
(b) Average |
|
|
Announced |
|
|
Yet Be Purchased |
|
|
|
of shares |
|
|
Price Paid per |
|
|
Plans or |
|
|
Under the Plans or |
|
|
|
purchased |
|
|
Share |
|
|
Programs |
|
|
Programs |
|
July 1 - 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
August 1 - 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 - 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In July 2008, the Company purchased a 25.2525% membership interest (the Membership Interest)
in RO & SW Realty LLC, a Delaware limited liability company (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. ROSW is a real estate company that owns 11 properties (the Properties). The Company
had identified a number of Company development projects located near the Properties as well as
several value-add opportunities relating to the Properties, including a project in Solon, Ohio
being pre-developed by Mr. Wolstein and a 50% partner (the Project). In addition to the purchase
of the Membership Interest, on October 3, 2008, the Company also acquired Mr. Wolsteins 50%
interest in the Project in exchange for the assumption of Mr. Wolsteins obligation under a
promissory note that funded the pre-development expenses of the Project. Mr. Wolstein and his 50%
partner, who also holds the remaining membership interest, in ROSW were jointly and severally
liable for the obligations under the promissory note, and they each agreed to indemnify the other
for 50% of such obligations. As of October 3, 2008, there was approximately $3.6 million
outstanding under the promissory note, of which the Company is responsible for 50%.
- 73 -
The Company determined that the acquisition of the Membership Interest would be in the best
interest of the Company because it would eliminate any potential or perceived conflict of interest
between the Company and Mr. Wolstein as a member of ROSW. The purchase of the Membership Interest
by the Company and the acquisition of the 50% interest in the Project in exchange for the
assumption of the promissory note obligations were 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 and assumption.
ITEM 6. EXHIBITS
10.1 |
|
Purchase and Sale Agreement, dated as of July 9, 2008, between Developers Diversified Realty
Corporation and Wolstein Business Enterprises, L.P. (incorporated by reference to Exhibit 10.1
of Form 8-K filed with the Commission on July 15, 2008 (Commission File No. 1-11690)) |
|
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. |
- 74 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
November 7, 2008 |
/s/ William H. Schafer
|
|
|
(Date) |
William H. Schafer, Executive Vice President and |
|
|
|
Chief Financial Officer (Duly Authorized Officer) |
|
|
|
|
|
|
|
|
November 7, 2008 |
/s/ Christa A. Vesy
|
|
(Date) |
|
Christa A. Vesy, Senior Vice President and Chief Accounting Officer (Chief Accounting Officer) |
|
- 75 -
EXHIBIT INDEX
10.1 |
|
Purchase and Sale Agreement, dated as of July 9, 2008, between Developers Diversified Realty
Corporation and Wolstein Business Enterprises, L.P. (incorporated by reference to Exhibit 10.1
of Form 8-K filed with the Commission on July 15, 2008 (Commission File No. 1-11690)) |
|
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. |
- 76 -