SITE Centers - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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(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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer 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 5, 2007, the registrant had 122,859,891 outstanding common shares, without par value.

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

Supplemental disclosure of non-cash investing and financing activities:

     For the nine-month period ended September 30, 2007, in conjunction with the merger of 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 and 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 Company’s Class F Cumulative Redeemable Preferred Shares, the Company recorded a non-cash dividend to net income available to common shareholders of $5.4 million relating to the write-off of original issuance costs. Other liabilities included approximately $6.6 million, which represents the fair value of the Company’s interest rate swap. 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 shares of which 70,000 vested as of the date of issuance. The remaining 396,666 shares will vest in 2008 through 2011. The foregoing transactions did not provide for or require the use of cash for the nine-month period ended September 30, 2007.

     For the nine-month period ended September 30, 2006, in connection with the adoption of EITF 04-05 (“Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights”), as of January 1, 2006 the Company consolidated real estate assets of $41.4 million and a mortgage payable of $17.1 million. In conjunction with the acquisition of its partners’ interests in four shopping centers during the nine-month period ended September 30, 2006, the Company acquired real estate assets of $212.6 million and assumed debt of $104.1 million. For the nine-month period ended September 30, 2006, in conjunction with the acquisition of its partners’ interests in 52 assets, the Company acquired real estate assets of $156.3 million, other assets of $25.9 million and assumed debt of $28.8 million. For the nine-month period ended September 30, 2006, minority interests with a book value of approximately $14.2 million were converted into approximately 0.4 million common shares of the Company, resulting in an increase of approximately $8.2 million in real estate assets. Other liabilities included approximately $1.4 million, which represents the fair value of the Company’s interest rate swap. At September 30, 2006, dividends payable were $71.2 million. The foregoing transactions did not provide for or require the use of cash for the nine-month period ended September 30, 2006.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

     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 and managing shopping centers.

     On February 22, 2007, Inland Retail Real Estate Trust, Inc. (“IRRETI”) shareholders approved a merger with a subsidiary of the Company pursuant to a merger agreement among IRRETI, the Company and the subsidiary. In 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 (Note 5).

     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, 2007 and 2006 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 Company’s audited financial statements and notes thereto included in the Company’s Form 8-K dated June 30, 2007 and filed on November 9, 2007 (which financial statements reflect the impact of property sales as discontinued operations pursuant to the provisions of SFAS 144 - “Accounting for the Impairment or Disposal of Long Lived Assets”) for the year ended December 31, 2006.

     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 described in FIN 46(R) in which it has effective control. The Company consolidated one entity as a result of the adoption of the Emerging Issues Task Force (“EITF”) 04-05, “Investor’s 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 influence over the entity with respect to its operations and major decisions.

     Comprehensive Income

     Comprehensive income is as follows (in thousands):

     New Accounting Standards Implemented

     In January 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of Statement of Financial Accounting Standard (“SFAS”) No. 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). This statement is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.

     The Company’s policy for classifying estimated interest and penalties is to include such amounts as “Income Tax of Taxable REIT Subsidiaries and Franchise Taxes” in the Condensed Consolidated Statements of Operations. The amount of interest and penalties at September 30, 2007 and for the three and nine-month periods ended September 30, 2007 and 2006 was not material. The Company does not have any unrecognized tax benefits related to uncertain tax provisions that, if recognized, would impact the effective tax rate and does not expect this position to change within the next twelve months. The Company is no longer subject to income tax audits by taxing authorities for years through 2003. The effect of FIN 48 did not have a material impact on the Company’s financial position, results of operations or cash flows.

     New Accounting Standards to be Implemented

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value and establishes a framework for measuring fair value under generally accepted accounting principles. The key changes to current practice are (1) the definition of fair value, which focuses on an exit price rather than an entry price; (2) the methods used to measure fair value, such as emphasis that fair value is a market-based measurement, not an entity-specific measurement, as well as the inclusion of an adjustment for risk, restrictions and credit standing and (3) the expanded disclosures about fair value measurements. This statement applies only to those items under other accounting pronouncements for which the FASB previously concluded that fair value is the relevant measurement attribute and does not require or permit any new fair value measurements.

     This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to adopt SFAS 157 in the first quarter of 2008. The Company is currently evaluating the impact that this Statement will have on its financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This Statement allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item are to be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes a company elects for similar types of assets and liabilities.

     This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is required to adopt SFAS 159 in the first quarter of 2008. The Company is currently evaluating the impact that this statement will have on its financial statements.

     At September 30, 2007 and December 31, 2006, the Company had ownership interests in various unconsolidated joint ventures which, as of the respective dates, owned 273 and 117 shopping center properties and 44 and 50 shopping center sites formerly owned by Service Merchandise Company, Inc. Included in these amounts are the shopping center properties owned by Dividend Capital Total Realty Trust Joint Venture, which acquired three assets in the second quarter of 2007, and DDR MDT PS LLC, which acquired six assets in June 2006. These assets have been segregated and discussed separately in Notes 3 and 4. Dividend Capital Total Realty Trust Joint Venture was considered a significant subsidiary at September 30, 2007 and is excluded from the 2007 combined amounts presented below. DDR MDT PS LLC was considered a significant subsidiary at September 30, 2006 and is excluded from the 2006 and 2007 combined amounts presented below.

     During the nine-month period ended September 30, 2007, the Company formed a joint venture with TIAA-CREF (“TIAA-CREF Joint Venture”), as described below, which owns 66 shopping centers and, as a result of the merger with IRRETI, the Company acquired an investment in an additional unconsolidated joint venture, which owns 29 shopping centers. DDR, on behalf of itself and the TIAA-CREF Joint Venture, has engaged an appraiser to perform valuations of the real estate, assumed liabilities and certain other assets in connection with the acquisition of the shopping centers by the joint venture in February 2007. As a result, the purchase price allocation is preliminary and subject to change.

     Combined condensed financial information of the Company’s unconsolidated joint venture investments, excluding those amounts for Dividend Capital Total Realty Trust Joint Venture and DDR MDT PS LLC reported in Notes 3 and 4 is as follows (in thousands):

     Investments in and advances to joint ventures include the following items, which represent the difference between the Company’s investment and its proportionate share of all of the unconsolidated joint ventures’ underlying net assets (in millions):

     The Company’s share of service fees earned and recognized in income through the management, acquisition, financing, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures are as follows (in millions):

     In the second quarter of 2007, the Company formed DDR Domestic Retail Fund I (the “Fund”), a sponsored, fully-seeded commingled fund. The Fund acquired 63 shopping center assets aggregating 8.3 million square feet (“Portfolio”) from the Company and a joint venture for approximately $1.5 billion. The Portfolio is comprised of 54 assets acquired by the Company through its acquisition of IRRETI, seven assets formerly held in a joint venture with Kuwait Financial Centre (“DDR Markaz LLC Joint Venture”), in which the Company had a 20% ownership interest, and two assets from the Company’s wholly-owned portfolio. The Company recognized a gain of approximately $9.6 million, net of its 20% retained interest, from the sale of the two wholly-owned assets, which is included in gain on disposition of real estate in the Company’s statements of operations. In conjunction with the formation of the Fund and identification of the equity partners, the Company paid a $7.7 million fee to a third party consulting firm and recognized this amount as a reduction to gain on disposition of real estate. The DDR Markaz LLC Joint Venture recorded a gain of approximately $90.1 million. The Company’s proportionate share of approximately $18.0 million of the joint venture gain was deferred as the Company retained an effective 20% ownership interest in these assets. As the Company does not have economic or effective control, the Fund is accounted for using the equity method of accounting. The Company remains responsible for all day-to-day operations of the properties and receives fees for asset management and property management, leasing, construction management and ancillary income in addition to a promoted interest. In addition, upon the sale of the assets from the DDR Markaz LLC Joint Venture to the Fund, the Company recognized promoted income of approximately $13.6 million, which is included in the equity in net income of joint ventures. DDR, on behalf of itself and the DDR Domestic Retail Fund I Joint Venture, has engaged an appraiser to perform valuations of the real estate, assumed liabilities and certain other assets in connection with the acquisition by the joint venture. As a result, the purchase price allocation is preliminary and subject to change.

     In February 2007, TIAA-CREF and the Company formed the TIAA-CREF Joint Venture which acquired 66 shopping center assets from IRRETI comprising approximately 23.1 million square feet of total GLA. The TIAA-CREF Joint Venture is owned 85% by TIAA-CREF and 15% by the Company. As the Company does not have economic or effective control, the TIAA-CREF Joint Venture is accounted for using the equity method of accounting. Real estate and related assets of approximately $3.0 billion were acquired by the TIAA-CREF Joint Venture. The TIAA-CREF Joint Venture has debt of approximately $1.8 billion, of which $285.6 million was assumed in connection with the acquisition of the properties. Pursuant to the terms of the joint venture agreement, the Company earned an acquisition fee of $6.3 million and receives ongoing asset management, property management and construction management fees, plus fees on leasing and ancillary income.

     During August and September 2007, the Company contributed three shopping center properties, aggregating 0.5 million square feet, to the Company’s joint venture with Macquarie DDR Trust (ASX: MDT) (“MDT”), an Australian Listed Property Trust sponsored by Macquarie Bank Limited (ASX:MBL), an international investment bank and leading advisor and manager of specialized real estate funds in Australia. The aggregate purchase price for the properties was $49.8 million. The assets were recently acquired by the Company as part of its acquisition of IRRETI, and as a result, the Company did not record a gain on the transaction. As the Company does not have economic or effective control, the joint venture is accounted for using the equity method of accounting. The Company retained a 14.5% ownership interest in the properties, remains responsible for day-to-day operations and receives ongoing fees for property management, leasing and construction management, and base asset management fees in addition to a promoted interest.

     In June 2007, the Company’s RVIP VI Joint Venture, in which the Company has an effective 25.75% ownership interest, sold its one remaining property in Overland Park, Kansas for approximately $8.2 million. The joint venture recognized a gain of approximately $1.3 million, of which the Company’s proportionate share was approximately $0.3 million.

     During the first quarter of 2007, the Company’s joint venture in Brazil acquired an additional 73% interest in Shopping Metropole Center and, as such, the joint venture now owns 83% of this shopping center. The Company contributed approximately $24.6 million for its proportionate share of the acquisition of the additional interest.

     Effective January 2007, the Company acquired the remaining 25% minority interest in Coventry I and, as such, the Company now owns 100% of this entity. The aggregate purchase price was approximately $13.8 million. This entity generally serves as the general partner of the Company’s RVIP joint ventures.

     In the second quarter of 2007, Dividend Capital Total Realty Trust and the Company formed a $161.5 million joint venture (“Dividend Capital Total Realty Trust Joint Venture”). 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 does not have economic or effective control, the Dividend Capital Total Realty Trust Joint Venture 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 Company’s investment in Dividend Capital Total Realty Trust Joint Venture is considered a significant subsidiary pursuant to the applicable Regulation S-X rules, due to

the recognition of a gain in the second quarter of 2007 of approximately $54.8 million relating to the contribution of the assets to the joint venture.

     Condensed financial information of Dividend Capital Total Realty Trust Joint Venture is as follows (in thousands):

     In the second quarter of 2006, the Company contributed six properties, aggregating 0.8 million owned square feet, to a then newly formed joint venture with MDT (“DDR MDT PS LLC”). At September 30, 2006, the Company’s investment in DDR MDT PS LLC was considered a significant subsidiary pursuant to the applicable Regulation S-X rules, due to the recognition of a gain in the second quarter of 2006 of approximately $38.5 million relating to the contribution of the assets to the joint venture.

     Under the terms of the joint venture agreement for DDR MDT PS LLC, MDT receives a 9% preferred return on its preferred equity investment of approximately $12.2 million and then receives a 10% return on its common equity investment of approximately $20.8 million before the Company receives a 10% return on an agreed upon common equity investment of $3.5 million that has not been recognized in the consolidated balance sheet due to the terms of its subordination. The Company is then entitled to a 20% promoted interest in any cash flow achieved above a 10% leveraged internal rate of return on all common equity. The Company recognizes its proportionate share of equity in earnings of DDR MDT PS LLC at an amount equal to increases in its common equity investment, based upon an assumed liquidation, including consideration of cash received, of the joint venture at its depreciated book value as of the end of each reporting period. The Company has not recorded any equity in earnings from DDR MDT PS LLC for the nine-month periods ended September 30, 2007 or 2006.

Condensed financial information of DDR MDT PS LLC is as follows (in thousands):

     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. In 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 Company’s common shares for the 10 trading days immediately preceding the two trading days prior to the IRRETI shareholders’ meeting. The merger was accounted for utilizing the purchase method of accounting. The Company entered into the merger to acquire a large portfolio of assets, among other reasons.

     The IRRETI merger was initially recorded at a total cost of approximately $6.2 billion. Real estate and related assets of approximately $3.0 billion were recorded by both the Company and the TIAA-CREF Joint Venture (Note 2). The Company assumed debt at a fair market value of approximately $443.0 million. The IRRETI real estate portfolio consists of 316 community shopping centers, neighborhood shopping centers and single tenant/net leased retail properties, comprising approximately 44.2 million square feet of total GLA, and five development properties. The TIAA-CREF Joint Venture consists of 66 shopping centers comprising approximately 23.1 million square feet of total GLA.

     DDR, on behalf of itself and the TIAA-CREF Joint Venture, engaged an appraiser to assist with the valuations of the real estate and certain other assets. As a result, the purchase price allocation recorded as of September 30, 2007 is preliminary and subject to change. As final information regarding the fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation. The allocations are expected to be finalized no later than twelve months from the acquisition date. The revenues and expenses relating to the IRRETI properties are included in DDR’s historical results of operations from

the date of the merger, February 27, 2007. At September 30, 2007, the total aggregate purchase price, which has been reduced by the sale of IRRETI assets in 2007, was allocated as follows (in thousands):

     Pro Forma Financial Information

     The following supplemental pro forma operating data is presented for the three and nine-month periods ended September 30, 2007 and 2006, as if the IRRETI merger and the formation of the TIAA-CREF Joint Venture were completed as of the beginning of each period presented. 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.

     These acquisitions were accounted for using the purchase method of accounting. The revenues and expenses related to assets and interests acquired are included in the Company’s historical results of operations from the date of purchase. In addition, the following supplemental pro forma operating data does not present sales of assets for the three and nine-month periods ended September 30, 2007 and 2006 or the formation of the DDR Domestic Retail Fund I and the Dividend Capital Total Realty Trust Joint Venture or the contribution of three asset to Macquarie DDR Trust (Notes 2 and 3). The Company sold 78 of the assets acquired in the merger with IRRETI to an independent buyer and through the contribution of assets to joint ventures.

     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):

Other assets consist of the following (in thousands):

     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 $1.2 billion, an accordion feature for a future expansion to $1.4 billion and a maturity date of June 2010, with a one-year extension option. The Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to 50% of

the facility. The Company’s borrowings under the Unsecured Credit Facility bear interest at variable rates at the Company’s election, based on either (i) the prime rate, as defined in the facility or (ii) LIBOR, plus a specified spread (0.60% at September 30, 2007). The specified spread over LIBOR varies depending on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s 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, 2007. The facility also provides for a facility fee of 0.15% on the entire facility. At September 30, 2007, total borrowings under this facility aggregated $625.0 million with a weighted average interest rate of 5.8%.

     The Company also maintains a $60 million unsecured revolving credit facility with National City Bank which has a maturity date of June 2010. The terms are consistent with those contained in the Unsecured Credit Facility. Borrowings under the facility bear interest at variable rates, at the Company’s election, based on the (i) prime rate, as defined in the facility or (ii) LIBOR plus a specified spread (0.60% at September 30, 2007). The specified spread over LIBOR is dependent on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s 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, 2007. At September 30, 2007, there were no borrowings under this facility.

     The Company also maintains a collateralized term loan agreement with a syndicate of financial institutions, for which KeyBank Capital Markets serves as the administrative agent. This term loan was amended in February 2007 to increase the loan to $550 million, add an accordion feature for a future expansion to $800 million, extend the maturity date to February 2011 and reduce the interest rate to LIBOR plus 0.70% based on the Company’s current credit rating. The collateral for this loan are assets, or investment interests in certain assets, that are already collateralized by first mortgage loans. At September 30, 2007, total borrowings under this facility aggregated $550.0 million with a weighted average interest rate of 5.7%.

     In February 2007, the Company entered into a $750 million unsecured bridge facility (“Bridge Facility”) with Bank of America, N.A. in connection with the financing of the IRRETI merger. The Bridge Facility had a maturity date of August 2007 and bore interest at LIBOR plus 0.75%. This Bridge Facility was repaid in June 2007. Following the repayment, the Company did not have the right to draw on this facility.

     In March 2007, the Company issued $600 million of Senior Convertible Notes due 2012 (the “Senior Convertible Notes”). The Senior Convertible Notes were issued at par and pay interest in cash semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2007. The Senior Convertible Notes are senior unsecured obligations and rank equally with all other senior unsecured indebtedness. The Senior Convertible Notes are subject to net settlement and have an initial conversion price of approximately $74.75 per common share. If certain conditions are met, the incremental value can be settled in cash or the Company’s common shares, at the Company’s option. The Senior Convertible Notes may only be converted prior to maturity based on certain provisions in

the governing note documents. A total of $117.0 million of the net proceeds from the Senior Convertible Notes was used to repurchase the Company’s common stock.

     Concurrent with the issuance of the Senior Convertible Notes, the Company purchased an option on its common stock in a private transaction, in order to effectively increase the conversion premium from 20% to 40% or a conversion price of $87.21 per share at September 30, 2007. This purchase option allows the Company to receive a number of the Company’s common shares, up to a maximum of approximately 1.1 million shares, from counterparties equal to the amounts of common shares and/or cash related to the excess conversion value that it would pay to the holders of the Senior Convertible Notes upon conversion. The option, which cost $32.6 million, was recorded as a reduction of shareholders’ equity.

     In August 2007, the Company entered into an interest rate swap with a notional amount of $100 million for a 4.5 year term. This swap was executed to hedge a portion of interest rate risk associated with variable-rate borrowings. The swap was effective at August 2007, and converts LIBOR into a fixed rate of approximately 4.8% for $100 million of term loan debt.

     In February 2007, a consolidated affiliate of the Company entered into an aggregate notional amount of $600 million of forward starting interest rate swaps. The swaps were executed to hedge the benchmark interest rate and swap spread associated with forecasted interest payments related to the anticipated issuance of fixed-rate borrowings. The swaps were terminated in connection with the issuance of the forecasted fixed-rate borrowing formation and financing of the DDR Domestic Retail Fund I Joint Venture (Note 2) in the second quarter of 2007.

     As of September 30, 2007, the aggregate fair value of the Company’s interest rate swaps was a liability of $6.6 million, which is included in other liabilities in the condensed consolidated balance sheets. For the nine-month period ended September 30, 2007, the amount of hedge ineffectiveness was not material.

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

     The following table summarizes the changes in shareholders’ equity since December 31, 2006 (in thousands):

     Common share dividends declared, per share, were $0.66 and $0.59 for the three-month periods ended September 30, 2007 and 2006, respectively, and were $1.98 and $1.77 for the nine-month periods ended September 30, 2007 and 2006, respectively.

     In June 2007, the Company’s 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, 2007, the Company had repurchased under this program 2.2 million of its common shares at a weighted average cost of $48.42 per share.

     In April 2007, the Company redeemed all outstanding shares of its 8.6% Class F Cumulative Redeemable Preferred Shares, aggregating $150 million, at a redemption price of $25.10750 per Class F Preferred Share (the sum of $25.00 per share and a dividend per share of $0.10750 prorated to the redemption date). The Company recorded a non-cash dividend to net income available to common shareholders of $5.4 million relating to the write-off of original issuance costs.

     In March 2007, the Company’s Board of Directors authorized the Company to repurchase 1,878,311 common shares at a cost of $62.29 per share in connection with the issuance of the Company’s Senior Convertible Notes (Note 8).

     Stock-based compensation for the nine-month period ended September 30, 2007 included $0.9 million of stock-based compensation expense that was recorded in accordance with the provisions of SFAS 123(R), “Share-Based Payment,” related to the departure of the Company’s former President, effective May 2007.

     In 2007, the vesting of restricted stock grants to certain officers and directors of the Company, approximating 0.1 million common shares of the Company, was deferred through the Company’s non-qualified deferred compensation plans and, accordingly, the Company recorded $6.7 million in deferred obligations.

     For the nine-month period ended September 30, 2007, the Company purchased 10,480 operating partnership units for cash of $0.7 million. This transaction was treated as a purchase of a minority interest.

     In February 2007, a consolidated subsidiary of the Company issued to a designee of Wachovia Bank, N.A. (“Wachovia”), 20,000,000 preferred units (the “Preferred Units”), with a liquidation preference of $25 per unit, aggregating $500 million of the net assets of the Company’s consolidated subsidiary. In accordance with terms of the agreement, the Preferred Units were redeemed at 97.0% of par in the second quarter of 2007.

     Other income for the three and nine-month periods ended September 30, 2007 and 2006 was comprised of the following (in millions):

     Included in discontinued operations for the three and nine-month periods ended September 30, 2007 and 2006, are 66 properties sold in 2007 (including one property held for sale at December 31, 2006 and 21 properties acquired in 2007), aggregating 6.3 million square feet, and six shopping centers sold in 2006, aggregating 0.8 million square feet. This reporting has resulted in certain reclassification of 2006 financial statement amounts. The operating results relating to assets sold are as follows (in thousands):

     Earnings Per Share (EPS) have been computed pursuant to the provisions of SFAS No. 128, “Earnings Per Share.” The following table provides a reconciliation of net income 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):