UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
For the quarterly period ended September 30, 2013
OR
For the transition period from to
Commission file number 1-11690
DDR Corp.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3300 Enterprise Parkway, Beachwood, Ohio 44122
(Address of principal executive offices—zip code)
(216) 755-5500
(Registrant’s 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 1, 2013, the registrant had 359,243,879 outstanding common shares, $0.10 par value per share.
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS—Unaudited
Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012
Condensed Consolidated Statements of Operations for the Three-Month Periods Ended September 30, 2013 and 2012
Condensed Consolidated Statements of Operations for the Nine-Month Periods Ended September 30, 2013 and 2012
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three- and Nine-Month Periods Ended September 30, 2013 and 2012
Consolidated Statement of Equity for the Nine-Month Period Ended September 30, 2013
Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2013 and 2012
Notes to Condensed Consolidated Financial Statements
1
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
Assets
Land
Buildings
Fixtures and tenant improvements
Less: Accumulated depreciation
Land held for development and construction in progress
Real estate held for sale, net
Total real estate assets, net
Investments in and advances to joint ventures
Cash and cash equivalents
Restricted cash
Notes receivable, net
Other assets, net
Liabilities and Equity
Unsecured indebtedness:
Senior notes
Unsecured term loan
Revolving credit facilities
Secured indebtedness:
Secured term loan
Mortgage indebtedness
Total indebtedness
Accounts payable and other liabilities
Dividends payable
Total liabilities
Commitments and contingencies (Note 9)
DDR Equity:
Class H—7.375% cumulative redeemable preferred shares, without par value, $500 liquidation value; 750,000 shares authorized; 110,000 and 410,000 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
Class J—6.5% cumulative redeemable preferred shares, without par value, $500 liquidation value; 750,000 shares authorized; 400,000 shares issued and outstanding at September 30, 2013 and December 31, 2012
Class K—6.25% cumulative redeemable preferred shares, without par value, $500 liquidation value; 750,000 shares authorized; 300,000 shares issued and outstanding at September 30, 2013
Common shares, with par value, $0.10 stated value; 600,000,000 and 500,000,000 shares authorized; 324,215,984 and 315,239,299 shares issued at September 30, 2013 and December 31, 2012, respectively
Paid-in capital
Accumulated distributions in excess of net income
Deferred compensation obligation
Accumulated other comprehensive loss
Less: Common shares in treasury at cost: 980,825 and 977,673 shares at September 30, 2013 and December 31, 2012, respectively
Total DDR shareholders’ equity
Non-controlling interests
Total equity
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
Revenues from operations:
Minimum rents
Percentage and overage rents
Recoveries from tenants
Fee and other income
Rental operation expenses:
Operating and maintenance
Real estate taxes
Impairment charges
General and administrative
Depreciation and amortization
Other income (expense):
Interest income
Interest expense
Other income (expense), net
(Loss) income before earnings from equity method investments and other items
Equity in net income of joint ventures
Impairment of joint venture investments
Gain on change in control of interests
(Loss) income before tax expense of taxable REIT subsidiaries and state franchise and income taxes
Tax expense of taxable REIT subsidiaries and state franchise and income taxes
(Loss) income from continuing operations
Income (loss) from discontinued operations
(Loss) income before gain on disposition of real estate
Gain on disposition of real estate, net of tax
Net (loss) income
Net (loss) income attributable to DDR
Write-off of preferred share original issuance costs
Preferred dividends
Net (loss) income attributable to DDR common shareholders
Per share data:
Basic earnings per share data:
(Loss) income from continuing operations attributable to DDR common shareholders
Income (loss) from discontinued operations attributable to DDR common shareholders
Diluted earnings per share data:
3
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
Loss on debt retirement, net
Loss before earnings from equity method investments and other items
Loss from discontinued operations
Loss before gain on disposition of real estate
Net loss
Net loss attributable to DDR
Net loss attributable to DDR common shareholders
Loss from continuing operations attributable to DDR common shareholders
Loss from discontinued operations attributable to DDR common shareholders
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands)
Three-Month Periods
Ended September 30,
Nine-Month Periods
Other comprehensive (loss) income:
Foreign currency translation
Change in fair value of interest-rate contracts
Amortization of interest-rate contracts
Unrealized gains on available-for-sale securities
Total other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (loss) income attributable to non-controlling interests:
Allocation of net income
Total comprehensive loss attributable to non-controlling interests
Total comprehensive income (loss) attributable to DDR
5
CONSOLIDATED STATEMENT OF EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013
Balance, December 31, 2012
Issuance of common shares related to stock plans
Issuance of common shares for cash offering
Issuance of preferred shares
Issuance of restricted stock
Vesting of restricted stock
Stock-based compensation
Contributions from non-controlling interests
Distributions to non-controlling interests
Redemption of preferred shares
Dividends declared-common shares
Dividends declared-preferred shares
Comprehensive (loss) income
Balance, September 30, 2013
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Net cash flow provided by operating activities:
Cash flow from investing activities:
Real estate acquired, net of liabilities assumed
Real estate developed and improvements to operating real estate
Proceeds from disposition of real estate
Equity contributions to joint ventures
Issuance of joint venture advances, net
Distributions of proceeds from sale and refinancing of joint venture interests
Return of investments in joint ventures
Purchase of securities available for sale
Issuance of notes receivable
Repayment of notes receivable
Change in restricted cash – capital improvements
Net cash flow used for investing activities:
Cash flow from financing activities:
(Repayments) proceeds of revolving credit facilities, net
Proceeds from issuance of senior notes, net of underwriting commissions and offering expenses of $650 and $709 in 2013 and 2012, respectively
Repayment of senior notes
Proceeds from mortgages and other secured debt
Repayment of term loans and mortgage debt
Payment of debt issuance costs
Proceeds from issuance of preferred shares, net of underwriting commissions and offering expenses of $412 and $845 in 2013 and 2012, respectively
Proceeds from issuance of common shares, net of underwriting commissions and offering expenses of $473 and $805 in 2013 and 2012, respectively
Repurchase of common shares in conjunction with equity award plans
Distributions to non-controlling interests and redeemable operating partnership units
Dividends paid
Net cash flow provided by financing activities:
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of non-cash investing and financing activities:
At September 30, 2013, dividends payable were $49.8 million. During the nine months ended September 30, 2013, as part of the consideration used to acquire real estate assets, the Company assumed debt of $148.5 million. In addition, in conjunction with the acquisition of its partner’s interest in five shopping centers, the Company reversed its previously held equity interest by decreasing Investments in and Advances to Joint Ventures by $15.4 million and increased net assets by $1.0 million for its previously held proportionate share of the assets. In conjunction with the redemption of $150.0 million of the Company’s $205.0 million, 7.375% Class H Cumulative Redeemable Preferred Shares (“Class H Preferred Shares”), the Company recorded a charge to net income attributable to common shareholders of $5.2 million related to the prorated write-off of the Class H Preferred Shares’ original issuance costs. At September 30, 2013, accounts payable included $25.1 million for accrued but unpaid real estate asset expenditures. The foregoing transactions did not provide for or require the use of cash for the nine-month period ended September 30, 2013.
At September 30, 2012, dividends payable were $43.2 million. During the nine months ended September 30, 2012, as part of the consideration used to acquire real estate assets, the Company assumed debt of $25.4 million. In addition, in conjunction with the acquisition of its partners’ interests in five shopping centers, the Company reversed its previously held equity interest by increasing Investments in and Advances to Joint Ventures by $36.8 million, as the investment basis was negative, increasing net assets by $80.0 million for its previously held proportionate share of the assets and assumed debt of $246.2 million. In conjunction with the redemption of the Company’s 7.50% Class I Cumulative Redeemable Preferred Shares, the Company recorded a charge to net income attributable to common shareholders of $5.8 million related to the write-off of original issuance costs. The foregoing transactions did not provide for or require the use of cash for the nine-month period ended September 30, 2012.
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1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
DDR Corp. and its related real estate joint ventures and subsidiaries (collectively, the “Company” or “DDR”) are primarily engaged in the business of acquiring, owning, developing, redeveloping, expanding, leasing and managing shopping centers. In addition, the Company engages in the origination and acquisition of loans and debt securities, which are generally collateralized directly or indirectly by shopping centers. Unless otherwise provided, references herein to the Company or DDR include DDR Corp., its wholly-owned and majority-owned subsidiaries and its consolidated and unconsolidated joint ventures. The Company’s tenant base primarily includes national and regional retail chains and local retailers. Consequently, the Company’s credit risk is concentrated in the retail industry.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year. Actual results could differ from those 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, 2013 and 2012, 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 Annual Report on Form 10-K for the year ended December 31, 2012, as amended.
Principles of Consolidation
The condensed consolidated financial statements include the results of the Company and all entities in which the Company has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). Investments in joint ventures that the Company does not control are accounted for under the equity method of accounting.
At September 30, 2013 and December 31, 2012, the Company’s investments in consolidated real estate joint ventures in which the Company was deemed to be the primary beneficiary had total real estate assets of $186.3 million and $184.6 million, respectively, mortgages of $19.4 million and $21.5 million, respectively, and other liabilities of $1.8 million and $1.9 million, respectively.
8
New Accounting Standards Implemented
Presentation of Other Comprehensive Income
In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the presentation of comprehensive income. This guidance requires presentation of reclassification adjustments from other comprehensive income to net income in a single note or on the face of the financial statements. This guidance was effective for the Company on January 1, 2013. This guidance did not materially impact the Company’s consolidated financial statements.
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
At September 30, 2013 and December 31, 2012, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 203 and 206 shopping center properties, respectively. Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):
Condensed Combined Balance Sheets
Real estate, net
Cash and restricted cash(A)
Receivables, net
Other assets
Mortgage debt
Notes and accrued interest payable to DDR(B)
Other liabilities
Redeemable preferred equity
Accumulated equity
Company’s share of Accumulated Equity
9
Condensed Combined Statements of Operations
Revenues from operations
Operating expenses(A)
(Loss) income before tax expense and discontinued operations
Income tax expense (primarily Sonae Sierra Brasil), net
Loss from continuing operations
Discontinued operations:
(Loss) gain on disposition of real estate, net of tax(B)
Loss before gain on disposition of real estate, net
Gain on disposition of real estate, net
Net loss attributable to unconsolidated joint ventures
Company’s share of equity in net income (loss) of joint ventures(C)
Amortization of basis differentials(D)
10
Investments in and Advances to Joint Ventures include the following items, which represent the difference between the Company’s investment basis and its share of all of the unconsolidated joint ventures’ underlying net assets (in millions):
Company’s share of accumulated equity
Redeemable preferred equity and other(A)
Basis differentials
Deferred development fees, net of portion related to the Company’s interest
Notes and accrued interest payable to DDR
Investments in and Advances to Joint Ventures
Service fees and income earned by the Company through management, financing, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures are as follows (in millions):
Management and other fees
Development fees and leasing commissions
BRE DDR Retail Holdings II Joint Venture
In August 2013, a newly formed joint venture between consolidated affiliates of the Company and an affiliate of Blackstone acquired a portfolio of seven prime shopping centers, (“BRE DDR Retail Holdings II”). The purchase price was $332.0 million, including assumed debt of $206.6 million and $28.0 million of new mortgage debt. An affiliate of Blackstone owns 95% of the common equity of the joint venture and an affiliate of DDR owns the remaining 5%. DDR also invested $30.0 million in preferred equity in the joint venture with a fixed dividend rate of 9%. DDR’s investment was funded primarily through proceeds from asset sales. DDR will provide leasing and management services and has certain rights allowing it to potentially acquire four assets in the portfolio.
DDRTC Core Retail Fund LLC
In April 2013, the Company purchased its unconsolidated joint venture partner’s 85% ownership interest in five assets. The aggregate purchase price of these assets was $110.5 million. The Company recorded an aggregate Gain on Change in Control of Interests related to the difference between the Company’s carrying value and fair value of the previously held equity interest. At closing, $92.4 million of aggregate mortgage debt was repaid. Upon acquisition, these shopping centers were unencumbered and consolidated into the Company’s results from operations.
11
3. ACQUISITIONS
In the nine-month period ended September 30, 2013, the Company acquired the following operating shopping centers:
Location
Orlando, FL and Atlanta, GA
Parcels adjacent to existing shopping centers
Tampa, FL, Atlanta, GA, Newport News, VA and Richmond, VA (2 assets) (A)
Dallas, TX
Oakland, CA
The Company accounted for these acquisitions utilizing the purchase method of accounting. The acquisition cost of the operating shopping centers was allocated as follows (in thousands):
Tenant improvements
In-place leases (including lease origination costs and fair market value of leases)(A)
Tenant relations
Less: Mortgage debt assumed
Less: Below-market leases
Net assets acquired
Consideration:
Cash (including debt repaid at closing)
Fair value of previously held equity interests
Total consideration
The costs related to the acquisition of these assets, which were not material, were expensed as incurred and included in other income (expense), net.
12
The following unaudited supplemental pro forma operating data is presented for the three- and nine-month periods ended September 30, 2013 and 2012, as if the acquisition of the interests in the properties acquired in 2013 and 2012 was completed on January 1, 2012 (in thousands, except per share amounts). The Gain on Change in Control related to the acquisitions from unconsolidated joint ventures was adjusted to the assumed acquisition date. The unaudited supplemental pro forma operating data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transactions had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods.
Pro forma revenues
Pro forma loss from continuing operations
Pro forma income (loss) from discontinued operations
Pro forma net loss attributable to DDR common shareholders
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4. NOTES RECEIVABLE
The Company has notes receivable, including accrued interest, that are collateralized by certain rights in development projects, partnership interests, sponsor guaranties and/or real estate assets, some of which are subordinate to other financings.
Notes receivable consist of the following (in thousands):
Loans receivable
Other notes
Tax Increment Financing Bonds (“TIF Bonds”)(A)
As of September 30, 2013 and December 31, 2012, the Company had seven and six loans receivable outstanding, respectively. The following table reconciles the loans receivable on real estate for the nine-month periods ended September 30, 2013 and 2012 (in thousands):
Balance at January 1
Additions:
New mortgage loans
Interest
Accretion of discount
Deductions:
Payments of principal and interest
Other(A)
Balance at September 30
In addition, at September 30, 2013, the Company had one loan outstanding aggregating $9.8 million that matured in September 2011 and was more than 90 days past due. The Company is no longer accruing interest income on this note as no payments have been received. A loan loss reserve of $4.3 million was established in 2012 based on the estimated value of the underlying real estate collateral.
14
5. OTHER ASSETS, NET
Other assets consist of the following (in thousands):
Intangible assets:
In-place leases (including lease origination costs and fair market value of leases), net
Tenant relations, net
Total intangible assets, net(A)
Other assets:
Accounts receivable, net(B)
Deferred charges, net
Prepaid expenses
Deposits
Total other assets, net
6. REVOLVING CREDIT FACILITIES AND TERM LOANS
The following table discloses certain information regarding the Company’s Revolving Credit Facilities (as defined below) and term loans (in millions):
Unsecured Credit Facility
PNC Facility
Unsecured Term Loan — Tranche 1
Unsecured Term Loan — Tranche 2
Secured Term Loan
15
Revolving Credit Facilities
The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, arranged by JP Morgan Securities, LLC and Wells Fargo Securities, LLC (the “Unsecured Credit Facility”), which was last amended in January 2013. The Unsecured Credit Facility provides for borrowings of up to $750 million, if certain financial covenants are maintained, and an accordion feature for expansion of availability to $1.25 billion upon the Company’s request, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level and the ability to extend the maturity for one year to April 2018 at the Company’s option. The Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to 50% of the facility. The Unsecured Credit Facility also provides for an annual facility fee, which was 30 basis points on the entire facility at September 30, 2013. The Unsecured Credit Facility also allows for foreign currency-denominated borrowings. At September 30, 2013, the Company had US$5.0 million of Euro borrowings and US$25.4 million of Canadian dollar borrowings outstanding (Note 8).
The Company also maintains a $65 million unsecured revolving credit facility with PNC Bank, National Association, (the “PNC Facility” and, together with the Unsecured Credit Facility, the “Revolving Credit Facilities”). The PNC Facility was also amended in January 2013 to reflect terms consistent with those contained in the Unsecured Credit Facility.
The Company’s borrowings under the Revolving Credit Facilities bear interest at variable rates at the Company’s election, based on either (i) the prime rate plus a specified spread (0.40% at September 30, 2013), as defined in the respective facility, or (ii) LIBOR, plus a specified spread (1.40% at September 30, 2013). The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Moody’s Investors Service and Standard and Poor’s. 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, 2013.
The Company maintains a collateralized term loan (the “Secured Term Loan”) with a syndicate of financial institutions, for which KeyBank National Association serves as the administrative agent, which was amended in January 2013. The Secured Term Loan includes an option to extend the maturity for one year to April 2018, at the Company’s option. Borrowings under the Secured Term Loan bear interest at variable rates based on LIBOR, as defined in the loan agreement, plus a specified spread based on the Company’s long-term senior unsecured debt rating (1.55% at September 30, 2013). The collateral for the Secured Term Loan is real estate assets, or investment interests in certain assets, that are already encumbered by first mortgage loans. The Company is required to comply with covenants similar to those contained in the Revolving Credit Facilities. The Company was in compliance with these covenants at September 30, 2013.
16
7. SENIOR NOTES
In May 2013, the Company issued $300 million aggregate principal amount of 3.375% senior unsecured notes due May 2023. The Company used the net proceeds to partially fund the Blackstone Acquisition (Note 17).
8. FINANCIAL INSTRUMENTS
Measurement of Fair Value
At September 30, 2013, the Company used pay-fixed interest rate swaps to manage its exposure to changes in benchmark interest rates (the “Swaps”). The estimated fair values were determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk, including the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk. The Company determined that the significant inputs used to value its derivatives fell within Level 2 of the fair value hierarchy.
Items Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities, which consist of interest rate swap agreements (included in Other Liabilities) and marketable securities (included in Other Assets), which include investments in the Company’s elective deferred compensation plan and investments in securities at September 30, 2013 and December 31, 2012, measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions):
Assets (liabilities):
September 30, 2013
Derivative financial instruments
Marketable securities
December 31, 2012
The unrealized gain of $11.1 million included in other comprehensive income (loss) (“OCI”) is attributable to the net change in fair value during the nine-month period ended September 30, 2013, related to derivative financial instruments, none of which were reported in the Company’s condensed consolidated statements of operations because the swaps are documented and qualify as hedging instruments.
17
Other Fair Value Instruments
Investments in unconsolidated joint ventures are considered financial assets. See discussion of related fair value considerations in Note 13.
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Marketable Securities, Accounts Payable, Accrued Expenses and Other Liabilities
The carrying amounts reported in the condensed consolidated balance sheets for these financial instruments approximated fair value because of their short-term maturities. The Company’s marketable equity securities have been classified as available-for-sale and are recorded at fair value, with any realized gains and losses recorded using the specific identification method and any unrealized gains or losses recorded in OCI. The fair value of cash and cash equivalents, restricted cash and available-for-sale securities are classified as Level 1 in the fair value hierarchy.
Notes Receivable and Advances to Affiliates
The fair value is estimated using a discounted cash flow analysis, in which the Company used unobservable inputs such as market interest rates determined by the loan to value and market capitalization rates related to the underlying collateral at which management believes similar loans would be made and classified as Level 3 in the fair value hierarchy. The fair value of these notes was approximately $305.9 million and $250.7 million at September 30, 2013 and December 31, 2012, respectively, as compared to the carrying amounts of $303.6 million and $250.4 million, respectively. The carrying value of the TIF bonds, which was $5.2 million at both September 30, 2013 and December 31, 2012, approximated their fair value.
Debt
The fair market value of senior notes, except senior convertible notes, is determined using the trading price of the Company’s public debt. The fair market value for all other debt is estimated using a discounted cash flow technique that incorporates future contractual interest and principal payments and a market interest yield curve with adjustments for duration, optionality and risk profile including the Company’s nonperformance risk and loan to value. The Company’s senior notes, except senior convertible notes, and all other debt including senior convertible notes are classified as Level 2 and Level 3, respectively, in the fair value hierarchy.
Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.
18
Debt instruments at September 30, 2013 and December 31, 2012, with carrying values that are different than estimated fair values, are summarized as follows (in thousands):
Revolving Credit Facilities and term loans
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and, from time to time, through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
The Company has interests in 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. The Company uses non-derivative financial instruments to economically hedge a portion of this exposure. The Company manages its currency exposure related to the net assets of its Canadian and European subsidiaries through foreign currency-denominated debt agreements.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements. To accomplish this objective, the Company generally uses interest rate swaps as part of its interest rate risk management strategy. Swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
As of September 30, 2013 and December 31, 2012, the notional amount of the Company’s Swaps was $631.8 million and $632.8 million, respectively. The following table discloses certain information regarding the Company’s 10 outstanding interest rate swaps (not including the specified spreads), as well as their classification on the condensed consolidated balance sheets, as of September 30, 2013 and December 31, 2012 (in millions):
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Maturity Date
Counterparty PaysVariable Rate
June 2014
June 2015
July 2015
September 2017
January 2018
February 2019
Other Assets
Accounts Payable
All components of the Swaps were included in the assessment of hedge effectiveness. The Company expects that within the next 12 months it will reflect an increase to interest expense (and a corresponding decrease to earnings) of approximately $6.7 million, which includes amortization of previously settled interest rate contracts.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2013, such derivatives were used to hedge the forecasted variable cash flows associated with existing or probable future obligations. The ineffective portion of the change in the fair value of derivatives is recognized directly in earnings. During the nine-month periods ended September 30, 2013 and 2012, the amount of hedge ineffectiveness recorded was not material.
The Company is exposed to credit risk in the event of non-performance by the counterparties to the Swaps if the derivative position has a positive balance. The Company believes it mitigates its credit risk by entering into swaps with major financial institutions. The Company continually monitors and actively manages interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap positions or other derivative interest rate instruments based on market conditions. The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.
Credit Risk-Related Contingent Features
The Company has agreements with each of its Swap counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its Swaps, resulting in an acceleration of payment under the Swaps.
Net Investment Hedges
The Company is exposed to foreign exchange risk from its consolidated and unconsolidated international investments. The Company has foreign currency-denominated debt agreements that expose the Company to fluctuations in foreign exchange rates. The Company has designated these foreign currency borrowings as a hedge of its net investment in its Canadian and European subsidiaries. Changes in the spot rate value are recorded as adjustments to the debt balance with offsetting unrealized gains and losses recorded in OCI. Because the notional amount of the non-derivative instrument substantially matches the portion of the net investment designated as being hedged, and the non-derivative instrument is denominated in the functional currency of the hedged net investment, the hedge ineffectiveness recognized in earnings is not material.
20
Effect on Net Income (Loss) and OCI
The effect of the Company’s cash flow hedges and net investment hedge instruments on net income (loss) and OCI is as follows (in millions):
Cash flow hedges:
Interest rate contracts
Net investment hedges:
Euro-denominated
Canadian dollar-denominated
Total:
9. COMMITMENTS AND CONTINGENCIES
Legal Matters
Coventry II
The Company is a party to various joint ventures with the Coventry II Fund, through which 10 existing or proposed retail properties, along with a portfolio of former Service Merchandise locations, were acquired at various times from 2003 through 2006. The properties were acquired by the joint ventures as value-add investments, with major renovation and/or ground-up development contemplated for many of the properties. The Company was generally responsible for day-to-day management of the properties through December 2011. On November 4, 2009, Coventry Real Estate Advisors L.L.C., Coventry Real Estate Fund II, L.L.C. and Coventry Fund II Parallel Fund, L.L.C. (collectively, “Coventry”) filed suit against the Company and certain of its affiliates and officers in the Supreme Court of the State of New York, County of New York. The complaint alleges that the Company: (i) breached contractual obligations under a co-investment agreement and various joint venture limited liability company agreements, project development agreements and management and leasing agreements; (ii) breached its fiduciary duties as a member of various limited liability companies; (iii) fraudulently induced the plaintiffs to enter into certain agreements; and (iv) made certain material misrepresentations. The complaint also requests that a general release made by Coventry in favor of the Company in connection with one of the joint venture properties be voided on the grounds of economic duress. The complaint seeks compensatory and consequential damages in an amount not less than $500 million, as well as punitive damages.
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In response to this action, the Company filed a motion to dismiss the complaint or, in the alternative, to sever the plaintiffs’ claims. In June 2010, the court granted the motion in part (which was affirmed on appeal), dismissing Coventry’s claim that the Company breached a fiduciary duty owed to Coventry. The Company also filed an answer to the complaint, and asserted various counterclaims against Coventry. On October 10, 2011, the Company filed a motion for summary judgment, seeking dismissal of all of Coventry’s remaining claims. On April 18, 2013, the court issued an order granting the majority of the Company’s motion. Among other findings, the order dismissed all claims of fraud and misrepresentation against the Company and its officers, dismissed all claims for breach of the joint venture agreements and development agreements, and dismissed Coventry’s claim of economic duress. The court’s decision denied the Company’s motion solely with respect to several claims for breach of contract under the Company’s prior management agreements in connection with certain assets. Coventry appealed the court’s ruling. The Company cross-appealed the ruling with respect to those limited aspects of the motion that were not granted.
The Company believes that the allegations in the lawsuit are without merit and that it has strong defenses against this lawsuit. The Company will continue to vigorously defend itself against the allegations contained in the complaint. This lawsuit is subject to the uncertainties inherent in the litigation process and, therefore, no assurance can be given as to its ultimate outcome and no loss provision has been recorded in the accompanying financial statements because a loss contingency is not deemed probable or estimable. However, based on the information presently available to the Company, the Company does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Contract Termination
In January 2008, the Company entered into a Services Agreement (the “Agreement”) with Oxford Building Services, Inc. (“Oxford”). Oxford’s obligations under the Agreement were guaranteed by Control Building Services, Inc. (“Control”), an affiliate of Oxford. The Agreement required that Oxford identify and contract directly with various service providers (“Vendors”) to provide maintenance, repairs, supplies and a variety of on-site services to certain properties in the Company’s portfolio, in exchange for which Oxford would pay such Vendors for the services. Under the Agreement, the Company remitted funds to Oxford to pay the Vendors under the Vendors’ contracts with Oxford.
On or about January 23, 2013, Oxford advised the Company that approximately $11 million paid by the Company to Oxford for the sole purpose of paying various Vendors had instead been used to repay commercial financing obligations incurred by Oxford and its affiliates to a third-party lender. As a result, Oxford had insufficient funds to pay the Vendors in accordance with the Agreement. On January 28, 2013, the Company terminated the Agreement based upon Oxford’s violations of the Agreement principally due to its insolvency. On February 26, 2013, Oxford and several affiliates filed petitions for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of New Jersey (Case No. 13-13821).
In its initial filings in the bankruptcy case, Oxford has claimed that the Company refused to pay Oxford approximately $5 million allegedly due and owing to Vendors for work performed at the Company’s properties prior to the termination of the Agreement. Further, Oxford threatened to
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commence litigation against the Company to recover the alleged amounts owed should a consensual resolution not be reached. The Company denies that any sums are due to Oxford, and if any such claim is asserted, the Company will vigorously defend against it. Furthermore, as a result of the funds previously paid by the Company to Oxford, the Company also denies that any sums are due from the Company to any Vendors and will vigorously defend against any such claims. On March 18, 2013, the Company filed suit in the Court of Common Pleas, Cuyahoga County, Ohio, against Control, Control Equity Group, Inc. (the non-bankrupt parent company of Oxford) and the individual principals of Oxford. The suit asserts claims for, among other things, breach of the Control guaranty, fraud, conversion and civil conspiracy.
Other
In addition to the litigation discussed above, the Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.
10. EQUITY
Common Shares
In May 2013, the Company entered into forward sale agreements with respect to 39.1 million of its common shares. In September 2013 and October 2013, the Company settled forward equity agreements totaling 3.96 million and 35.14 million common shares, respectively, for an aggregate net proceeds of $701.3 million, at a price to the Company of $17.94 per share. The Company used the net proceeds received upon settlement of the forward sale agreements to partially fund the Blackstone Acquisition (Note 17).
From January 1, 2013 through September 30, 2013, the Company issued 5.0 million common shares at a weighted-average price of $17.70 per share, generating gross proceeds of $88.4 million. The net proceeds primarily were used to acquire shopping center assets (Note 3).
Common share dividends declared were as follows:
Common share dividends declared
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Preferred Shares
In April 2013, the Company issued $150.0 million of its newly designated 6.250% Class K cumulative redeemable preferred shares (“Class K Preferred Shares”) at a price of $500.00 per share (or $25.00 per depositary share). In May 2013, the Company redeemed $150.0 million of its Class H Preferred Shares at a redemption price of $25.1127 per depositary share (the sum of $25.00 per depositary share and dividends per depositary share of $0.1127 prorated to the redemption date). The Company recorded a charge of $5.2 million to net loss attributable to common shareholders related to the write-off of the Class H Preferred Shares’ original issuance costs.
2013 Value Sharing Equity Program
On December 31, 2012, the Company adopted the 2013 Value Sharing Equity Program (“2013 VSEP”), which granted awards to certain officers of the Company on January 1, 2013. The 2013 VSEP awards, if earned, may result in the granting of common shares of the Company to participants on future measurement dates over three years, subject to an additional service-based vesting schedule. As a result, in general, the total compensation available to participants under the 2013 VSEP, if any, will be fully earned only after seven years (the three-year performance period and the final four-year service-based vesting period).
The 2013 VSEP is designed to allow DDR to reward participants for superior financial performance and allow them to share in “value created” (as defined below), based upon (1) increases in DDR’s adjusted market capitalization over pre-established periods of time and (2) increases in relative total shareholder return of DDR as compared to the performance of the FTSE NAREIT Equity REITs Total Return Index for the FTSE International Limited NAREIT U.S. Real Estate Index Series (the “NAREIT Index”). Under the 2013 VSEP, participants are granted two types of performance-based awards – a “relative performance award” and an “absolute performance award” – that, if earned, are settled with DDR common shares that are generally subject to additional service-based vesting requirements for a period of four years.
Absolute Performance Awards. Under the absolute performance awards, on five specified measurement dates (occurring on December 31, 2013 and every six months thereafter through December 31, 2015), DDR will measure the “Value Created” during the period between the start of the 2013 VSEP and the applicable measurement date. Value Created is measured for each period for the absolute performance awards as the increase in DDR’s market capitalization (i.e. the product of DDR’s five-day trailing average share price as of each measurement date (price-only appreciation, not total shareholder return) and the number of shares outstanding as of the measurement date), as adjusted for equity issuances and/or equity repurchases, between the start of the 2013 VSEP and the applicable measurement date. The share price used for purposes of determining Value Created for the absolute performance awards during any measurement period is capped based on an 8.0% per year compound annual growth rate for DDR shares from the start of the 2013 VSEP through the end of 2015 (the “Maximum Ending Share Price”).
Each participant has been assigned a “percentage share” of the Value Created for the absolute performance awards, but the total share of Value Created for all participants for the absolute performance awards is capped at $18.0 million (the aggregate percentage share for all participants for
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the absolute performance awards is 1.4133%). As a result, each participant’s total share of Value Created for the absolute performance awards is capped at an individual maximum limit. After the first measurement date, each participant will earn DDR common shares with an aggregate value equal to two-sixths of the participant’s percentage share of the Value Created for this award. After each of the next three measurement dates, each participant will earn DDR common shares with an aggregate value equal to three-sixths, then four-sixths, and then five-sixths, respectively, of the participant’s percentage share of the Value Created for this award. After the final measurement date (or, if earlier, upon a change in control, as defined in the 2013 VSEP), each participant will earn DDR common shares with an aggregate value equal to the participant’s full percentage share of the Value Created. In addition, for each measurement date, the number of DDR common shares earned by a participant will be reduced by the number of DDR common shares previously earned by the participant for prior measurement periods.
Relative Performance Awards. Under the relative performance awards, on December 31, 2015 (or, if earlier, upon a change in control), DDR will compare its dividend-adjusted share price performance during the period between the start of the 2013 VSEP and December 31, 2015, to the performance of a comparable hypothetical investment in the NAREIT Index (in each case as adjusted for equity issuances and/or equity repurchases during the same period). No relative performance awards will be earned by participants unless and until the absolute performance awards have already been earned by DDR achieving its Maximum Ending Share Price, and thus achieving maximum performance for the absolute performance awards.
If DDR’s relative performance exceeds the NAREIT Index, then the relative performance awards may be earned provided certain conditions are met. First, DDR’s five-day trailing average share price as of December 31, 2015, must be equal to or exceed the Maximum Ending Share Price. Second, the participant must be employed with DDR on the measurement date for the relative performance awards. If, after satisfaction of those conditions, DDR’s relative performance exceeds the NAREIT Index performance (subject to a not-less-than-minimum level of NAREIT Index performance), then each participant will earn DDR common shares based on the participant’s full “percentage share” of the Value Created for the relative performance awards, which percentage shares have been assigned by DDR. The total share of Value Created for all participants for the relative performance awards is capped at $36.0 million (the aggregate percentage share for all participants for the relative performance awards is 1.9337%), and, as a result, each participant’s total share of Value Created for the relative performance awards is capped at an individual maximum limit.
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Unless otherwise determined by DDR, the DDR shares earned under the absolute performance awards and relative performance awards will generally be subject to additional service-based restrictions that are expected to vest in 20% annual increments beginning on the date of grant and on each of the first four anniversaries of the date of grant. The fair value of the 2013 VSEP grants was estimated on the date of grant using a Monte Carlo approach model based on the following assumptions:
Risk-free interest rate
Weighted-average dividend yield
Expected life
Expected volatility
As of September 30, 2013, $7.7 million of total unrecognized compensation costs are related to the two market metric components associated with the awards granted under the 2013 VSEP and are expected to be recognized over the 6.25-year term, which includes the vesting period.
11. OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component are as follows (in thousands):
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss(B)
Net current-period other comprehensive income (loss)
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12. FEE AND OTHER INCOME
Fee and other income from continuing operations was composed of the following (in millions):
Management, development and other fee income
Ancillary and other property income
Lease termination fees
Other miscellaneous
Total fee and other income
13. IMPAIRMENT CHARGES AND IMPAIRMENT OF JOINT VENTURE INVESTMENTS
The Company recorded impairment charges during the three- and nine-month periods ended September 30, 2013 and 2012, based on the difference between the carrying value of the assets or investments and the estimated fair market value as follows (in millions):
Land held for development
Undeveloped land
Assets marketed for sale (A)
Total continuing operations
Sold assets or assets held for sale
Total discontinued operations
Joint venture investments
Total impairment charges
Items Measured at Fair Value on a Non-Recurring Basis
For a description of the Company’s methodology on determining fair value, refer to Note 11 of the Company’s Financial Statements filed on its Annual Report on Form 10-K for the year ended December 31, 2012, as amended.
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The following table presents information about the Company’s impairment charges on both financial and nonfinancial assets that were measured on a fair value basis for the nine-month period ended September 30, 2013 and the year ended December 31, 2012. The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions):
Long-lived assets held and used
Long-lived assets held and used and held for sale
Unconsolidated joint venture investment
Deconsolidated joint venture investment
The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in millions):
Quantitative Information about Level 3 Fair Value Measurements
Range
Description
Valuation Technique
Unobservable Inputs
2013
2012
Impairment of consolidated assets
Impairment of joint venture investments(C)
Deconsolidated joint venture investment(D)
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14. DISCONTINUED OPERATIONS
The Company sold 28 properties during the nine-month period ended September 30, 2013, and had one property held for sale at September 30, 2013. In addition, the Company sold 29 properties in 2012. These asset sales are included in discontinued operations for the three- and nine-month periods ended September 30, 2013 and 2012. The balance sheet related to the asset held for sale and the operating results related to assets sold or designated as held for sale as of September 30, 2013, are as follows (in thousands):
Total asset held for sale
Revenues
Operating expenses
Interest, net
Gain (loss) on disposition of real estate, net of tax
15. EARNINGS PER SHARE
The following table calculates the Company’s earnings per share (“EPS”) and provides a reconciliation of net loss 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):
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Basic Earnings:
Continuing Operations:
Plus: Gain on disposition of real estate
Plus: Loss attributable to non-controlling interests
Less: Earnings attributable to unvested shares and operating partnership units
Basic—(Loss) income from continuing operations
Discontinued Operations:
Basic—Income (loss) from discontinued operations
Basic—Net (loss) income attributable to DDR common shareholders after allocation to participating securities
Diluted Earnings:
Diluted—(Loss) income from continuing operations
Diluted—Net (loss) income attributable to DDR common shareholders after allocation to participating securities
Number of Shares:
Basic—Average shares outstanding
Effect of dilutive securities:
Stock options
Value sharing equity program
Forward equity agreement
Diluted—Average shares outstanding
Basic Earnings Per Share:
Dilutive Earnings Per Share:
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The following potentially dilutive securities are considered in the calculation of EPS as described below:
Potentially Dilutive Securities:
16. SEGMENT INFORMATION
The Company has three reportable operating segments: shopping centers, loan investments and Brazil equity investment. Each consolidated shopping center is considered a separate operating segment; however, each shopping center on a stand-alone basis represents less than 10% of the revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under the applicable standard.
The tables below present information about the Company’s reportable operating segments and reflect the impact of discontinued operations (Note 14) (in thousands):
Total revenues
Operating expenses(B)
Net operating income (loss)
Unallocated expenses(C)
Equity in net (loss) income of joint ventures
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Income from continuing operations
Gain on change in control on interests
As of September 30, 2013:
Total gross real estate assets
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As of September 30, 2012:
17. SUBSEQUENT EVENTS
In October 2013, the Company acquired sole ownership of a portfolio of 30 prime power centers that were previously owned by BRE DDR Retail Holdings I, the Company’s joint venture with an affiliate of Blackstone. The transaction was valued at approximately $1.46 billion ($1.54 billion at 100%). The transaction included a cash payment of $566.4 million to an affiliate of Blackstone, of which $25.0 million was funded in the second quarter of 2013 and is recorded in Other Assets on the condensed consolidated balance sheet as of September 30, 2013. Furthermore, in connection with the closing of the Blackstone Acquisition, the Company assumed an affiliate of Blackstone’s 95% share of $792.9 million of mortgage debt, of which $139.0 million was repaid upon closing. In addition, $148.8 million of the preferred equity interest and mezzanine loan previously funded by the Company was repaid upon the closing of the Blackstone Acquisition. The Company will account for this transaction as a step acquisition. Due to the change in control that occurred, the Company expects to record a Gain on Change in Control of Interest related to the difference between the Company’s carrying value and fair value of the previously held equity interest. The Company funded the cash portion of the consideration received by an affiliate of Blackstone, and the repayment of certain of the BRE DDR Retail Holdings I’s debt, with a portion of the net proceeds of its issuance and sale of 3.375% Notes due 2023 and its issuance and sale of 39.1 million of its common shares in a forward equity offering (Note 10).
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides readers with a perspective from management on the Company’s financial condition, results of operations, liquidity and other factors that may affect the Company’s future results. The Company believes it is important to read the MD&A in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2012, as amended, as well as other publicly available information.
Executive Summary
The Company is a self-administered and self-managed Real Estate Investment Trust (“REIT”) in the business of acquiring, owning, developing, redeveloping, expanding, leasing and managing shopping centers. In addition, the Company engages in the origination and acquisition of loans and debt securities collateralized directly or indirectly by shopping centers. As of September 30, 2013, the Company’s portfolio consisted of 431 shopping centers (including 203 shopping centers owned through unconsolidated joint ventures and three shopping centers that are otherwise consolidated by the Company) in which the Company had an economic interest. These properties consist of shopping centers, lifestyle centers and enclosed malls owned in the United States, Puerto Rico and Brazil. At September 30, 2013, the Company owned almost 117 million total square feet of gross leasable area (“GLA”), which includes all of the aforementioned properties. These amounts do not include 26 assets that the Company has a nominal interest in and has not managed since January 1, 2012. At September 30, 2013, the aggregate occupancy of the Company’s operating shopping center portfolio in which the Company has an economic interest was 92.1%, as compared to 91.3% at September 30, 2012. The Company owned 458 shopping centers (including 210 shopping centers owned through unconsolidated joint ventures and three that were otherwise consolidated by the Company) and one office property at September 30, 2012. The average annualized base rent per occupied square foot was $14.00 at September 30, 2013, as compared to $13.66 at December 31, 2012 and $13.79 at September 30, 2012.
Net loss attributable to DDR common shareholders for the three-month period ended September 30, 2013, was $7.0 million, or $0.02 per share (basic and diluted), compared to net income attributable to DDR common shareholders of $13.3 million, or $0.04 per share (basic and diluted), for the prior-year comparable period. Net loss attributable to DDR common shareholders for the nine-month period ended September 30, 2013, was $43.7 million, or $0.14 per share (basic and diluted), compared to net loss attributable to DDR common shareholders of $53.2 million, or $0.19 per share (basic and diluted), for the prior-year comparable period. Funds from operations attributable to DDR common shareholders (“FFO”) for the three-month period ended September 30, 2013, was $89.9 million, compared to $112.7 million for the prior-year comparable period. FFO for the nine-month period ended September 30, 2013, was $252.4 million, compared to $250.5 million for the prior-year comparable period. The increase in FFO for the nine-month period ended September 30, 2013, primarily was due to organic growth and net shopping center acquisition activity as well as a reduction in impairment charges of non-depreciable assets and the loss on debt retirement related to the Company’s repurchase of senior unsecured notes recorded in 2012, partially offset by the gain on change in control of interests recorded in 2012.
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Third Quarter 2013 Operating Results
During the third quarter of 2013, the Company continued to pursue opportunities to position itself for long-term growth while also lowering the Company’s risk profile and cost of capital. The Company continued making progress on its balance sheet initiatives; strengthening the operations of its prime portfolio and recycling capital from non-prime asset sales into the acquisition of prime assets (i.e., market-dominant shopping centers with high-quality tenants located in attractive markets with strong demographic profiles, which are referred to as “Prime,” “Prime Portfolio” or “Prime Assets”) to improve portfolio quality. The Company continues to carefully consider opportunities that fit its selective acquisition requirements and remains prudent in its underwriting and bidding practices.
Significant third quarter 2013 and other recent transactional activity included the following:
The Company continued its trend of consistent internal growth and strong operating performance in the first nine months of 2013 as evidenced by the number of leases executed during the third quarter, the increase in the occupancy rate and the upward trend in the average annualized base rental rates.
The Company continued to execute both new leases and renewals at positive rental spreads. At December 31, 2012, the Company had 1,466 leases expiring in 2013 with an average base rent per square foot of $16.94. For the comparable leases executed in the third quarter of 2013, the Company generated positive leasing spreads on a pro rata basis of 14.5% for
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new leases and 7.0% for renewals. The Company’s leasing spread calculation only includes deals that were executed within one year of the date the prior tenant vacated and, as a result, is a good benchmark to compare the average annualized base rent of expiring leases with the comparable executed market rental rates.
Results of Operations
Continuing Operations
Shopping center properties owned as of January 1, 2012, but excluding properties under development or redevelopment and those classified in discontinued operations, are referred to herein as the “Comparable Portfolio Properties.”
Revenues from Operations (in thousands)
Base and percentage rental revenues
Base and percentage rental revenues(A)
Recoveries from tenants(B)
Fee and other income(C)
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Acquisition of shopping centers
Comparable Portfolio Properties
Straight-line rents
Development or redevelopment properties
The following tables present the statistics for the Company’s operating shopping center portfolio affecting base and percentage rental revenues summarized by the following portfolios: combined shopping center portfolio, wholly-owned shopping center portfolio and joint venture shopping center portfolio:
Centers owned
Aggregate occupancy rate
Average annualized base rent per occupied square foot
Wholly-Owned
Shopping Centers
September 30,
Joint Venture
Shopping Centers(1)
Centers owned through consolidated joint ventures
Comparable Portfolio Properties:
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The decrease in management, development and other fee income for the nine-month period ended September 30, 2013, compared to the comparable period in 2012, largely is the result of a decrease in the number of properties owned by the Company’s unconsolidated joint ventures. This fee income is expected to decrease as a result of the Blackstone Acquisition that closed in October 2013 (see Sources and Uses of Capital).
Expenses from Operations (in thousands)
Operating and maintenance(A)
Real estate taxes(A)
Impairment charges(B)
General and administrative(C)
Depreciation and amortization(A)
38
Acquisitions of shopping centers
The increase in depreciation expense for the Comparable Portfolio Properties and the development or redevelopment properties is attributable to a combination of accelerated depreciation charges related to changes in the estimated useful life of certain assets that are expected to be redeveloped in future periods and assets placed in service in 2012.
Other Income and Expenses (in thousands)
Interest income(A)
Interest expense(B)
Loss on debt retirement(C)
Other income (expense), net(D)
The weighted-average interest rate of loan receivables, including loans to affiliates, was 9.0% and 8.5% at September 30, 2013 and 2012, respectively. The increase in the amount of interest income recognized in the first nine months of 2013 primarily is due to the preferred equity investment in the
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Nine-Month
Periods Ended
Weighted-average debt outstanding (in billions)
Weighted-average interest rate
The weighted-average interest rate (based on contractual rates and excluding convertible debt accretion and deferred financing costs) at September 30, 2013 and 2012 was 4.8%.
Interest costs capitalized in conjunction with development and redevelopment projects and unconsolidated development and redevelopment joint venture interests were $2.0 million and $6.8 million for the three- and nine-month periods ended September 30, 2013, respectively, as compared to $3.5 million and $9.9 million for the comparable periods in 2012. The Company ceases the capitalization of interest as assets are placed in service or upon the suspension of construction activities.
Periods EndedSeptember 30,
Transaction and other expenses, net
Litigation-related expenses
Debt extinguishment gain (costs), net
Other Items (in thousands)
40
Equity in net income of joint ventures(A)
Impairment of joint venture investments(B)
Gain on change in control of interests(C)
At September 30, 2013 and 2012, the Company had an approximate 33% interest in an unconsolidated joint venture, Sonae Sierra Brasil, which owns real estate in Brazil and is headquartered in Sao Paulo, Brazil. This entity uses the functional currency of Brazilian Real. The Company has generally chosen not to mitigate any of the foreign currency risk through the use of hedging instruments for this entity. The operating cash flow generated by this investment has been generally retained by the joint venture and reinvested in the operation of the joint venture including ground-up developments and expansions in Brazil. The weighted-average exchange rate of the Brazilian Real to U.S. Dollar used for recording the equity in net income was 2.10 and 1.90 for the nine-month periods ended September 30, 2013 and 2012, respectively, which represents a 10.5% increase. The overall decrease in equity in net income from the Sonae Sierra Brasil joint venture, net of the impact of foreign currency translation, for the nine-month period ended September 30, 2013, as compared to the comparable period in 2012, primarily is due to the sale of three shopping centers in the fourth quarter of 2012 and a gain recognized on the strategic asset swap and partial sale of two assets in the portfolio in the first quarter of 2012, partially offset by expansion activity coming on line as well as increases in parking revenue and ancillary income.
Discontinued Operations (in thousands)
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The Company sold 28 shopping center properties during the nine-month period ended September 30, 2013, and had one shopping center classified as held for sale at September 30, 2013, aggregating 2.1 million square feet. In addition, the Company sold 29 properties in 2012, aggregating 3.1 million square feet. Included in the reported loss from discontinued operations for the nine-month periods ended September 30, 2013 and 2012, is $12.7 million and $61.2 million, respectively, of impairment charges.
Gain on Disposition of Real Estate (in thousands)
Gain on disposition of real estate, net(A)
Non-Controlling Interests (in thousands)
Net (Loss) Income (in thousands)
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A summary of changes in net loss attributable to DDR in 2013 as compared to 2012 for the periods ended September 30 is as follows (in millions):
Increase in net operating revenues (total revenues in excess of operating and maintenance expenses and real estate taxes)
Increase in consolidated impairment charges
Increase in general and administrative expenses
Increase in depreciation expense
Increase in interest income
Increase in interest expense
Decrease in loss on retirement of debt
Change in other income (expense), net
Decrease in equity in net income of joint ventures
Decrease in impairment of joint venture investments
Decrease in gain on change in control of interests
Increase in income tax expense
Decrease in loss from discontinued operations
Increase (decrease) in gain on disposition of real estate
Change in non-controlling interests
(Increase) decrease in net loss attributable to DDR
Funds From Operations
Definition and Basis of Presentation
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 excludes GAAP historical cost depreciation and amortization of real estate and real estate investments, which assume that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions, and many companies use different depreciable lives and methods. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from depreciable property dispositions and extraordinary items, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, acquisition, disposition and development activities and interest costs. This provides a perspective of the Company’s financial performance not immediately apparent from net income determined in accordance with GAAP.
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FFO is generally defined and calculated by the Company as net income (loss), adjusted to exclude: (i) preferred share dividends, (ii) gains and losses from disposition of depreciable real estate property, which are presented net of taxes, (iii) impairment charges on depreciable real estate property and related investments, (iv) extraordinary items and (v) certain non-cash items. These non-cash items principally include real property depreciation and amortization of intangibles, equity income (loss) from joint ventures and equity income (loss) from non-controlling interests, and the Company’s proportionate share of FFO from its unconsolidated joint ventures and non-controlling interests, determined on a consistent basis. For the periods presented below, the Company’s calculation of FFO is consistent with the definition of FFO provided by the National Association of Real Estate Investment Trusts (“NAREIT”). Other real estate companies may calculate FFO in a different manner.
The Company believes that certain gains and charges recorded in its operating results are not reflective of its core operating performance. As a result, the Company also computes Operating FFO and discusses it with the users of its financial statements, in addition to other measures such as net income/loss determined in accordance with GAAP as well as FFO. Operating FFO is generally calculated by the Company as FFO excluding certain charges and gains that management believes are not indicative of the results of the Company’s operating real estate portfolio. The disclosure of these charges and gains is regularly requested by users of the Company’s financial statements.
Operating FFO is a non-GAAP financial measure, and, as described above, its use combined with the required primary GAAP presentations has been beneficial to management in improving the understanding of the Company’s operating results among the investing public and making comparisons of other REITs’ operating results to the Company’s more meaningful. The adjustments may not be comparable to how other REITs or real estate companies calculate their results of operations, and the Company’s calculation of Operating FFO differs from NAREIT’s definition of FFO. The Company will continue to evaluate the usefulness and relevance of the reported non-GAAP measures, and such reported measures could change. Additionally, the Company provides no assurances that these charges and gains are non-recurring. These charges and gains could be reasonably expected to recur in future results of operations.
These measures of performance are used by the Company for several business purposes and by other REITs. The Company uses FFO and/or Operating FFO in part: (i) as a measure of a real estate asset’s performance, (ii) to influence acquisition, disposition and capital investment strategies and (iii) to compare the Company’s performance to that of other publicly traded shopping center REITs.
For the reasons described above, management believes that FFO and Operating FFO provide the Company and investors with an important indicator of the Company’s operating performance. They provide recognized measures of performance other than GAAP net income, which may include non-cash items (often significant). Other real estate companies may calculate FFO and Operating FFO in a different manner.
Management recognizes the limitations of FFO and Operating FFO when compared to GAAP’s income from continuing operations. FFO and Operating FFO do not represent amounts available for dividends, capital replacement or expansion, debt service obligations or other commitments and uncertainties. Management does not use FFO or Operating FFO as an indicator of
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the Company’s cash obligations and funding requirements for future commitments, acquisitions or development activities. Neither FFO nor Operating FFO represents cash generated from operating activities in accordance with GAAP, and neither is necessarily indicative of cash available to fund cash needs, including the payment of dividends. Neither FFO nor Operating FFO should be considered an alternative to net income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of liquidity. FFO and Operating FFO are simply used as additional indicators of the Company’s operating performance. The Company believes that to further understand its performance, FFO and Operating FFO should be compared with the Company’s reported net income (loss) and considered in addition to cash flows in accordance with GAAP, as presented in its condensed consolidated financial statements.
Reconciliation Presentation
FFO and Operating FFO attributable to DDR common shareholders were as follows (in millions):
FFO attributable to DDR common shareholders
Operating FFO attributable to DDR common shareholders
FFO attributable to DDR common shareholders(A)
Operating FFO attributable to DDR common shareholders(B)
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The Company’s reconciliation of net (loss) income attributable to DDR common shareholders to FFO attributable to DDR common shareholders and Operating FFO attributable to DDR common shareholders is as follows (in millions):
Net (loss) income attributable to DDR common shareholders(A), (B)
Depreciation and amortization of real estate investments
Impairment of depreciable joint venture investments
Joint ventures’ FFO(C)
Non-controlling interests (OP Units)
Impairment of depreciable real estate assets, net of non-controlling interests
(Gain) loss on disposition of depreciable real estate
Non-operating items(D)
Straight-line ground rent expense
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Joint ventures’ FFO and Operating FFO is summarized as follows (in millions):
Net loss attributable to unconsolidated joint ventures (1)
Impairment of depreciable real estate assets
Loss (gain) on disposition of depreciable real estate, net
FFO
FFO at DDR’s ownership interests (2)
Operating FFO at DDR’s ownership interests (D)
DDR’s proportionate share
Operating FFO Adjustments
The Company’s adjustments to arrive at Operating FFO are composed of the following for the three- and nine-month periods ended September 30, 2013 and 2012 (in millions). The Company provides no assurances that these charges and gains are non-recurring. These charges and gains could be reasonably expected to recur in future results of operations.
Impairment charges – non-depreciable consolidated assets
Loss on debt retirement, net (A)
Other (income) expense, net (B)
Equity in net (income) loss of joint ventures – currency adjustments, debt extinguishment costs, transaction costs and other expenses
Gain on disposition of non-depreciable real estate, net
Gain on change in control of interests(A)
Discontinued operations, loss on debt extinguishment, net
Total non–operating items
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Transaction and other expenses (income), net
Debt extinguishment (gain) costs, net
Liquidity and Capital Resources
The Company periodically evaluates opportunities to issue and sell additional debt or equity securities, obtain credit facilities from lenders or repurchase, refinance or otherwise restructure long-term debt for strategic reasons or to further strengthen the financial position of the Company. In the first nine months of 2013, the Company continued to strategically manage cash flow from operating and financing activities. The Company also completed public equity and debt offerings in order to strengthen its balance sheet, finance strategic investments and improve its financial flexibility.
The Company’s consolidated and unconsolidated debt obligations generally require monthly or semi-annual payments of principal and/or interest over the term of the obligation. While the Company currently believes that it has several viable sources to obtain capital and fund its business, including capacity under its facilities described below, no assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.
The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, arranged by JP Morgan Securities, LLC and Wells Fargo Securities, LLC (the “Unsecured Credit Facility”), which was last amended in January 2013. The Unsecured Credit Facility provides for borrowings of $750 million, and includes an accordion feature for expansion of availability to $1.25 billion upon the Company’s request, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level. The Company also maintains a $65 million unsecured revolving credit facility with PNC Bank, National Association (together with the Unsecured Credit Facility, the “Revolving Credit Facilities”), which was also amended in January 2013. The Company’s borrowings under these facilities bear interest at variable rates based on LIBOR plus 140 basis points at September 30, 2013, subject to adjustment based on the Company’s current corporate credit ratings from Moody’s Investors Service (“Moody’s”) and Standard and Poor’s (“S&P”).
The Revolving Credit Facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants including, among other things, leverage ratios and debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions. These credit facilities and indentures also contain customary default provisions including the failure to make timely payments of principal and interest payable thereunder, the failure to comply with the Company’s financial and operating covenants, the occurrence of a material adverse effect on the Company and the failure of the Company or its majority-owned subsidiaries (i.e., entities in which
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the Company has a greater than 50% interest) to pay, when due, certain indebtedness in excess of certain thresholds beyond applicable grace and cure periods. In the event the Company’s lenders or note holders declare a default, as defined in the applicable agreements governing the debt, the Company may be unable to obtain further funding, and/or an acceleration of any outstanding borrowings may occur. As of September 30, 2013, the Company was in compliance with all of its financial covenants in the agreements governing its debt. Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities. The Company believes it will continue to be able to operate in compliance with these covenants for the remainder of 2013 and beyond.
Certain of the Company’s credit facilities and indentures permit the acceleration of the maturity of the underlying debt in the event certain other debt of the Company has been accelerated. Furthermore, a default under a loan by the Company or its affiliates, a foreclosure on a mortgaged property owned by the Company or its affiliates or the inability to refinance existing indebtedness may have a negative impact on the Company’s financial condition, cash flows and results of operations. These facts, and an inability to predict future economic conditions, have led the Company to adopt a strict focus on lowering leverage and increasing financial flexibility.
The Company expects to fund its obligations from available cash, current operations and utilization of its Revolving Credit Facilities; however, the Company may issue long-term debt and/or equity securities in lieu of, or in addition to, borrowing under its Revolving Credit Facilities. The following information summarizes the availability under the Revolving Credit Facilities at September 30, 2013 (in millions):
Less:
Amount outstanding
Letters of credit
Borrowing capacity available
In June 2013, the Company entered into agreements for the future issuance of up to $250.0 million of common shares under a continuous equity program. This program replaced any previous continuous equity program maintained by the Company. As of November 1, 2013, the Company had $246.6 million of its common shares available for future issuance under its continuous equity program.
The Company intends to continue to maintain a longer-term financing strategy and rely less on the use of short-term debt. The Company believes its Revolving Credit Facilities are sufficient for its liquidity strategy and longer-term capital structure needs. Part of the Company’s overall strategy includes scheduling future debt maturities in a balanced manner, including incorporating a healthy level of conservatism regarding possible future market conditions.
The Company has no debt maturing through the remainder of 2013. The Company has $352.6 million of mortgage debt maturing in 2014 and no unsecured maturities until May 2015.
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Management believes that the scheduled debt maturities in future years are manageable. The Company continually evaluates its debt maturities and, based on management’s assessment, believes it has viable financing and refinancing alternatives. The Company continues to look beyond 2014 to ensure that it executes its strategy to lower leverage, increase liquidity, improve the Company’s credit ratings and extend debt duration, with the goal of lowering the Company’s balance sheet risk and cost of capital.
Unconsolidated Joint Ventures
After reflecting the debt repaid in October 2013 in connection with the Blackstone Acquisition, the Company’s unconsolidated joint venture mortgage debt outstanding at September 30, 2013, that matures in 2013 or had matured and is now past due, is all attributable to the Coventry II Fund (see Off-Balance Sheet Arrangements) and aggregates $100.1 million (of which the Company’s proportionate share was $11.0 million).
Cash Flow Activity
The Company’s core business of leasing space to well-capitalized retailers continues to generate consistent and predictable cash flow after expenses, interest payments and preferred share dividends. This capital is available for use at the Company’s discretion for investment, debt repayment and the payment of dividends on common shares.
The Company’s cash flow activities are summarized as follows (in thousands):
Cash flow provided by operating activities
Cash flow used for investing activities
Cash flow provided by financing activities
Operating Activities: The change in cash flow provided by operating activities for the nine-month period ended September 30, 2013, as compared to the comparable period in 2012, primarily was due to additional cash flow from acquired properties and the decrease in settlement of accreted debt discount on the repayment of senior convertible notes and cash paid for interest rate hedging contracts, partially offset by changes in accounts receivable, accounts payable and accrued expenses.
Investing Activities: The change in cash flow used for investing activities for the nine-month period ended September 30, 2013, as compared to the comparable period in 2012, primarily was due to an increase in proceeds from the disposition of real estate, a decrease in equity contributions and advances to joint ventures, partially offset by an increase in asset acquisitions.
Financing Activities: The change in cash flow provided by financing activities for the nine-month period ended September 30, 2013, as compared to the comparable period in 2012, primarily was due to a decrease in proceeds from the issuance of common and preferred shares, partially offset by a decrease in the repayment of debt.
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The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable income with declared common and preferred share cash dividends of $150.3 million for the nine-month period ended September 30, 2013, as compared to $125.6 million for the same period in 2012. Because actual distributions were greater than 100% of taxable income, federal income taxes have not been incurred by the Company thus far during 2013.
The Company declared a quarterly dividend of $0.135 per common share for each of the first three quarters of 2013. In November 2013, the Company declared its fourth quarter 2013 dividend of $0.135 per common share, payable on January 7, 2014, to shareholders of record at the close of business on December 17, 2013. The Board of Directors of the Company will continue to monitor the 2014 dividend policy and provide for adjustments as determined to be in the best interests of the Company and its shareholders to maximize the Company’s free cash flow, while still adhering to REIT payout requirements.
Sources and Uses of Capital
The Company has a portfolio management strategy to recycle capital from lower quality, lower growth potential assets into Prime Assets with long-term growth potential.
Acquisition of Assets
BRE DDR Retail Holdings I – Acquired Assets
In October 2013, the Company acquired sole ownership of a portfolio of 30 Prime power centers that were previously owned by BRE DDR Retail Holdings I, the Company’s joint venture with an affiliate of Blackstone. The transaction was valued at approximately $1.46 billion ($1.54 billion at 100%). The transaction included a cash payment of $566.4 million to an affiliate of Blackstone. Furthermore, in connection with the closing of the Blackstone Acquisition, the Company assumed an affiliate of Blackstone’s 95% share of $792.9 million of mortgage debt, of which $139.0 million was repaid upon closing. In addition, $148.8 million of the preferred equity interest and mezzanine loan previously funded by the Company was repaid upon the closing of the Blackstone Acquisition. The Company will account for this transaction as a step acquisition. Due to the change in control that occurred, the Company expects to record a Gain on Change in Control of Interest related to the difference between the Company’s carrying value and fair value of the previously held equity interest. The Company funded the cash portion of the consideration received by an affiliate of Blackstone, and the repayment of certain of the BRE DDR Retail Holdings I’s debt, with a portion of the net proceeds of its issuance and sale of 3.375% Notes due 2023 and its issuance and sale of 39.1 million of its common shares in a forward equity offering. The portfolio of properties has been owned, developed, leased and managed through various ventures affiliated with the Company since 1995. The portfolio is comprised of 11.8 million total square feet.
BRE DDR Retail Holdings II
In August 2013, a newly formed joint venture (“BRE DDR Retail Holdings II”) between consolidated affiliates of the Company and an affiliate of Blackstone acquired a portfolio of seven Prime shopping centers aggregating approximately 2.4 million square feet of GLA. The purchase price was $332.0 million, including assumed debt of $206.6 million and $28.0 million of new
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mortgage debt. An affiliate of Blackstone owns 95% of the common equity of the joint venture and an affiliate of DDR owns the remaining 5%. DDR also invested $30.0 million in preferred equity in the joint venture with a fixed dividend rate of 9%. DDR’s investment was funded primarily through proceeds from asset sales. DDR will provide leasing and management services and has certain rights allowing it to potentially acquire four assets in the portfolio. The seven assets are located in Los Angeles, California; San Diego, California; Washington, D.C.; Portland, Oregon; Cincinnati, Ohio and Harrisburg, Pennsylvania.
Additional Acquisitions
In July 2013, the Company acquired two Prime power centers in Orlando, Florida and Atlanta, Georgia, with a combined GLA of 1.4 million square feet for a gross purchase price of $258.5 million. The Company assumed a $139.4 million mortgage with the acquisition.
In April 2013, the Company acquired its joint venture partner’s 85% interest for $93.9 million in five Prime power centers, aggregating 1.3 million of total square feet. The Company funded its investment primarily with proceeds from the issuance of common shares, proceeds from asset sales and corporate debt. These Prime power centers are unencumbered. The Company acquired its joint venture partner’s interest in The Walk at Highwoods Preserve (Tampa, Florida), Douglasville Pavilion (Atlanta, Georgia), Commonwealth Center and Chesterfield Crossing (Richmond, Virginia) and Jefferson Plaza (Newport News, Virginia).
In the second quarter of 2013, the Company originated $28.5 million in mezzanine loans (of which $22.2 million was funded as of September 30, 2013). These loans are collateralized by a development project and a Prime shopping center, both in Chicago, Illinois, and earn interest ranging between 9.0% and 9.5%.
In the first quarter of 2013, the Company acquired the property leased by Whole Foods at Bay Place in Oakland, California, and The Marketplace at Highland Village in Dallas, Texas, for an aggregate purchase price of $81.4 million. No debt was assumed in these transaction and these properties are unencumbered.
Dispositions
During the nine-month period ended September 30, 2013, the Company sold 28 shopping center properties aggregating 2.0 million square feet and other consolidated non-income producing assets at an aggregate sales price of $157.8 million. The Company recorded a net gain of $7.6 million, which excludes the impact of an aggregate $69.8 million in related impairment charges that were recorded in prior periods related to the assets sold in 2013.
During the nine-month period ended September 30, 2013, the Company’s unconsolidated joint ventures sold assets generating gross proceeds of $91.0 million, of which the Company’s proportionate share was $40.7 million. The aggregate net loss of $27.1 million is comprised of the following: (1) a $38.3 million loss on sale of which the Company did not record any of the loss because this investment was previously written down to zero offset by (2) a gain on sale of four assets aggregating $11.2 million, of which the Company’s proportionate share was $2.3 million.
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As discussed above, a part of the Company’s portfolio management strategy is to recycle capital from lower quality, lower growth potential assets into Prime Assets with long-term growth potential. The Company has been marketing certain non-Prime Assets for sale and is focused on selling single-tenant assets and/or smaller shopping centers that do not meet the Company’s current business strategy. The Company has entered into agreements, including contracts executed through November 1, 2013, to sell real estate assets that are subject to contingencies. An aggregate loss of approximately $6 million could be recorded if all such sales were consummated on the terms as negotiated through November 1, 2013. Given the Company’s experience over the past few years, it is difficult for many buyers to complete these transactions in the timing contemplated or at all. The Company has not recorded an impairment charge on the assets that would result in a loss at September 30, 2013, as the undiscounted cash flows, when considering and evaluating the various alternative courses of action that may occur, exceeded the assets’ current carrying values at September 30, 2013. The Company evaluates all potential sale opportunities taking into account the long-term growth prospects of assets being sold, the use of proceeds and the impact to the Company’s balance sheet, in addition to the impact on operating results. As a result, if actual results differ from expectations, it is possible that additional assets could be sold in subsequent periods for a gain or loss after taking into account the above considerations.
Development Opportunities
The Company’s current policy is that the Company and its joint venture partners may commence construction on various developments only after substantial tenant leasing has occurred and acceptable construction financing is available.
As disclosed below, in May 2013, the Company opened Belgate Shopping Center, the Company’s first ground-up domestic development in over four years. Belgate is a 100% leased, 900,000-square-foot Prime power center located in Charlotte, North Carolina, anchored by IKEA, Walmart and a complementary lineup of premier junior anchors.
The Company will continue to closely monitor its expected spending in 2013 for developments and redevelopments, both for consolidated and unconsolidated projects, as the Company considers this funding to be discretionary spending. The Company does not anticipate expending a significant amount of funds on joint venture development projects for the remainder of 2013, excluding projects through Sonae Sierra Brasil. The projects in Brazil are expected to be funded with operating cash flow generated by Sonae Sierra Brasil or proceeds from local debt financing.
One of the important benefits of the Company’s asset class is the ability to phase development and redevelopment projects over time until appropriate leasing levels can be achieved. To maximize the return on capital spending and balance the Company’s de-leveraging strategy, the Company generally adheres to strict investment criteria thresholds. The revised underwriting criteria, generally followed for the past three years, includes a higher cash-on-cost project return threshold and incorporates more conservative underwriting assumptions such as a longer period before the leases commence and a higher stabilized vacancy rate. The Company applies this revised strategy to both its consolidated and certain unconsolidated joint ventures that own assets under development and redevelopment because the Company has significant influence and, in most cases, approval rights over decisions relating to significant capital expenditures.
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The Company’s consolidated land holdings are classified in two separate line items on the condensed consolidated balance sheets included herein, Land and Land Held for Development and Construction in Progress. At September 30, 2013, the $1.9 billion of Land classified on the Company’s balance sheet primarily consists of land that is part of its operating shopping center portfolio. However, this amount also includes a small portion of vacant land comprised primarily of outlots or expansion pads adjacent to the shopping center properties. The Company believes that approximately 203 acres of this land, which has a recorded cost basis of approximately $21 million, is available for future development.
Included in Land Held for Development and Construction in Progress at September 30, 2013, are $251.9 million of recorded costs related to land and projects under development, for which active construction had temporarily ceased or had not yet commenced. The Company estimates that if it proceeded with the development of these sites, approximately 2.5 to 4.0 million square feet of GLA could be developed. Based on the Company’s intentions and business plans, the Company believes that the expected undiscounted cash flows exceed its current carrying value on each of these projects. However, if the Company were to dispose of certain of these assets in the market, the Company would likely incur a loss, which may be material. The Company evaluates its intentions with respect to these assets each reporting period and records an impairment charge equal to the difference between the current carrying value and fair value when the expected undiscounted cash flows are less than the asset’s carrying value.
Developments and Redevelopments (Wholly-Owned and Consolidated Joint Ventures)
As part of its portfolio management strategy to develop, expand, improve and re-tenant various consolidated properties, the Company has invested $244.5 million in various development and redevelopment projects and expects to expend an aggregate project cost of approximately $56.0 million on a net basis, after deducting sales proceeds from outlot sales, for the remainder of 2013. The current significant development projects are as follows:
Merriam, KS (Merriam Village)
Seabrook, NH (Seabrook Town Center)
Charlotte, NC (Belgate)
Total
The Company’s redevelopment projects are typically substantially complete within a year of the construction commencement date. At September 30, 2013, the Company’s significant redevelopment projects are as follows:
Phoenix, AZ (Ahwatukee Foothills Town Centre)
Roswell, GA (Sandy Plains Village)
Tinley Park, IL (Brookside Marketplace)
Lansing, MI (Marketplace at Delta Township)
Charlotte, NC (Cotswold Village)
Columbus, OH (Easton Market)
Bayamon, PR (Plaza Del Sol)
Fajardo, PR (Plaza Fajardo)
Midvale, UT (Family Center at Ft. Union)
Chester, VA (Bermuda Square)
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For redevelopment assets completed in 2012 and in the first nine months of 2013, the assets placed in service were completed at $157 cost per square foot.
Development and Redevelopments (Unconsolidated Joint Ventures)
In addition, the Company’s unconsolidated joint ventures have projects being developed that have incurred $171.1 million in project costs in the first nine months of 2013, with projected expenditures of $45.8 million on a net basis for the remainder of 2013. A significant amount of the projected expenditures is related to projects under development at the Company’s joint venture in Brazil as follows:
Goiania, Brazil
Londrina, Brazil
At September 30, 2013, the Company’s significant unconsolidated joint venture redevelopment projects were as follows:
Plant City, FL (Lake Walden Square)
Newnan, GA (Newnan Pavilion)
Greensboro, NC (Wendover Village)
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, two management companies and one development company. Such arrangements are generally with institutional investors located throughout the United States and Brazil.
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The unconsolidated joint ventures that have total assets greater than $250 million (based on the historical cost of acquisition by the unconsolidated joint venture) at September 30, 2013, are as follows (in order of gross asset book value):
Unconsolidated Real Estate Ventures
Assets Owned
BRE DDR Retail Holdings I
DDR Domestic Retail Fund I
Sonae Sierra Brazil BV Sarl
DDR – SAU Retail Fund LLC
Funding for Unconsolidated Joint Ventures
The Company has provided loans and advances to certain unconsolidated entities and/or related partners in the amount of $297.3 million at September 30, 2013. Included in this amount is the $198.5 million in preferred equity, including accrued interest, with rates ranging from 9-10%, due from its joint ventures with affiliates of Blackstone. The Company used the repayment of approximately $148.8 million of the preferred equity as consideration to fund the Blackstone Acquisition (see Sources and Uses of Capital). Also included in this amount is $66.9 million of financing that the Company advanced to one of its unconsolidated joint ventures, which accrued interest at the greater of LIBOR plus 700 basis points, or 12%, and a default rate of 16%, and had an initial maturity of July 2011 (the “Bloomfield Loan”). This advance was reserved in full in prior periods (see Coventry II Fund discussion below).
Coventry II Fund
At September 30, 2013, the Company maintained several investments with the Coventry II Fund. The Company co-invested approximately 20% in each joint venture. The Company’s management and leasing agreements with the joint ventures expired by their own terms on December 31, 2011, and the Company decided not to renew these agreements (see Part II, Item 1. Legal Proceedings).
As of September 30, 2013, the aggregate carrying amount of the Company’s net investment in the Coventry II Fund joint ventures was $2.4 million. The Service Holdings LLC joint venture sold 17 assets in the first nine months of 2013. In addition, the asset owned by Coventry II DDR Tri-County LLC was foreclosed by the lender in September 2013. The Company had previously written down its investment to zero in these assets. In addition to its existing equity and notes receivable, including the
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Bloomfield Loan, at September 30, 2013, the Company had provided for one partial payment guaranty to a third-party lender in connection with the financing of one of the Coventry II Fund projects that aggregates $0.1 million.
Although the Company will not acquire additional investments through the Coventry II Fund joint ventures, additional funds may be required to address ongoing operational needs and costs associated with the joint ventures undergoing development or redevelopment. The Coventry II Fund is exploring a variety of strategies to obtain such funds, including potential dispositions and financings. The Company continues to maintain the position that it does not intend to fund any of its joint venture partners’ capital contributions or their share of debt maturities.
A summary of the Coventry II Fund investments as of September 30, 2013, is as follows (in millions):
Shopping Center or
Development Owned
Coventry II DDR Bloomfield LLC
Coventry II DDR Buena Park LLC
Coventry II DDR Fairplain LLC
Coventry II DDR Marley Creek Square LLC
Coventry II DDR Phoenix Spectrum LLC
Coventry II DDR Totem Lakes LLC
Coventry II DDR Westover LLC
Service Holdings LLC
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Other Joint Ventures
The Company is involved with overseeing the development activities for several of its unconsolidated joint ventures that are constructing or redeveloping shopping centers. The Company earns a fee for its services commensurate with the level of oversight and services provided. The Company generally provides a completion guaranty to the third-party lending institution(s) providing construction financing.
The Company’s unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $4.2 billion and $4.4 billion at September 30, 2013 and 2012, respectively (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). Such mortgages are generally non-recourse to the Company and its partners; however, certain mortgages may have recourse to the Company and its partners in certain limited situations, such as misuse of funds and material misrepresentations. In connection with certain of the Company’s unconsolidated joint ventures, the Company agreed to fund any amounts due to the joint venture’s lender if such amounts are not paid by the joint venture based on the Company’s pro rata share of such amount, which aggregated $5.2 million at September 30, 2013, including guaranties associated with the Coventry II Fund joint ventures.
The Company has generally chosen not to mitigate any of the foreign currency risk through the use of hedging instruments for Sonae Sierra Brasil. The Company will continue to monitor and evaluate this risk and may enter into hedging agreements at a later date.
The Company has interests in consolidated and unconsolidated joint ventures that own real estate assets in Canada and Russia. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. As such, the Company uses non-derivative financial instruments to hedge this exposure. The Company manages currency exposure related to the net assets of the Company’s Canadian and European subsidiaries primarily through foreign currency-denominated debt agreements into which the Company enters. Gains and losses in the parent company’s net investments in its subsidiaries are economically offset by losses and gains in the parent company’s foreign currency-denominated debt obligations.
For the nine months ended September 30, 2013, $0.7 million of net gains related to the foreign currency-denominated debt agreements were included in the Company’s cumulative translation adjustment. As the notional amount of the non-derivative instrument substantially matches the portion of the net investment designated as being hedged and the non-derivative instrument is denominated in the functional currency of the hedged net investment, the hedge ineffectiveness recognized in earnings was not material.
Financing Activities
In May 2013, the Company issued $300 million aggregate principal amount of 3.375% senior unsecured notes due May 2023. The forward sale agreements entered into in May 2013 were settled in September 2013 and October 2013, totaling 3.96 million and 35.14 million common shares, respectively, for aggregate net proceeds of $701.3 million, at a price to the Company of $17.94 per share. The net proceeds from the issuance of unsecured debt and the forward sale of common shares were used to fund the Blackstone Acquisition.
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In the first nine months of 2013, the Company issued 5.0 million common shares at a weighted-average price of $17.70 per share, primarily through the use of the Company’s continuous equity program, generating gross proceeds of $88.4 million, to partially fund the acquisition of Prime Assets (see Liquidity and Capital Resources and Sources and Uses of Capital).
Also, in April 2013, the Company issued $150.0 million of newly designated 6.250% Class K Preferred Shares at a price of $500.00 per preferred share (or $25.00 per depositary share). In addition, in May 2013, the Company redeemed $150.0 million of its 7.375% Class H Cumulative Redeemable Preferred shares (“Class H Preferred Shares”) at a redemption price of $25.1127 per depositary share (the sum of $25.00 per depositary share and dividends per depositary share of $0.1127 prorated to the redemption date). The Company recorded a non-cash charge of $5.2 million to net income attributable to common shareholders in the second quarter of 2013 related to the prorated write-off of Class H Preferred Shares’ original issuance costs.
Capitalization
At September 30, 2013, the Company’s capitalization consisted of $4.6 billion of debt, $405.0 million of preferred shares and $5.1 billion of market equity (market equity is defined as common shares and OP Units outstanding multiplied by $15.71, the closing price of the Company’s common shares on the New York Stock Exchange at September 30, 2013), resulting in a debt to total market capitalization ratio of 0.46 to 1.0 at September 30, 2013 and 2012. The closing price of the common shares on the New York Stock Exchange was $15.36 at September 30, 2012. At September 30, 2013 and 2012, the Company’s total debt consisted of the following (in billions):
Fixed-rate debt (A)
Variable-rate debt
It is management’s strategy to have access to the capital resources necessary to manage the Company’s balance sheet, to repay upcoming maturities and to consider making prudent opportunistic investments. Accordingly, the Company may seek to obtain funds through additional debt or equity financings and/or joint venture capital in a manner consistent with its intention to operate with a conservative debt capitalization policy and to reduce the Company’s cost of capital by maintaining an investment grade rating with Moody’s, S&P and Fitch Ratings, Inc. The security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating. The Company may not be able to obtain financing on favorable terms, or at all, which may negatively affect future ratings.
The Company’s credit facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants, including, among other things, debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions. Although
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the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities. In addition, certain of the Company’s credit facilities and indentures may permit the acceleration of maturity in the event certain other debt of the Company has been accelerated. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would have a negative impact on the Company’s financial condition and results of operations.
Contractual Obligations and Other Commitments
The Company has no remaining debt maturities in 2013, and, as such, has turned its focus to the timing and opportunities for the consolidated secured debt maturing in 2014 and beyond. As of September 30, 2013, there are no unsecured maturities until May 2015.
At September 30, 2013, the Company had letters of credit outstanding of $27.1 million. The Company has not recorded any obligations associated with these letters of credit, the majority of which are collateral for existing indebtedness and other obligations of the Company.
In conjunction with the development of shopping centers, the Company had entered into commitments with general contractors aggregating approximately $18.5 million for its wholly-owned and consolidated joint venture properties at September 30, 2013. These obligations, composed principally of construction contracts, are generally due in 12 to 36 months, as the related construction costs are incurred, and are expected to be financed through operating cash flow, new or existing construction loans, asset sales or revolving credit facilities.
The Company routinely enters into contracts for the maintenance of its properties. These contracts typically can be cancelled upon 30 to 60 days’ notice without penalty. At September 30, 2013, the Company had purchase order obligations, typically payable within one year, aggregating approximately $7.3 million related to the maintenance of its properties and general and administrative expenses.
Inflation
Most of the Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive additional rental income from escalation clauses that generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales. Such escalations are determined by negotiation, increases in the consumer price index or similar inflation indices. In addition, many of the Company’s leases are for terms of less than 10 years, permitting the Company to seek increased rents at market rates upon renewal. Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.
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Economic Conditions
The Company believes there has been a favorable shift in the supply-and-demand dynamic for quality locations in well-positioned shopping centers. Many retailers have strong store opening plans for the remainder of 2013 and 2014. The Company continues to see strong demand from a broad range of retailers for its space, particularly in the off-price sector, which is a reflection of the general outlook of consumers who are demanding more value for their dollars. This is evidenced by the continued high volume of leasing activity, which was 7.8 million square feet of space for both new leases and renewals for the first nine months of 2013. The Company also benefits from its real estate asset class (shopping centers) typically having a higher return on capital expenditures, as well as a diversified tenant base with only one tenant exceeding 3.0% of annualized consolidated revenues and the Company’s proportionate share of unconsolidated joint venture revenues (Walmart at 3.7%). Other significant tenants include Target, Lowe’s, Home Depot, Kohl’s, TJX Companies, PetSmart, Publix and Bed Bath & Beyond, all of which have relatively strong credit ratings, remain well-capitalized and have outperformed other retail categories on a relative basis over time. The Company believes these tenants should continue providing it with a stable revenue base for the foreseeable future, given the long-term nature of these leases. Moreover, the majority of the tenants in the Company’s shopping centers provide day-to-day consumer necessities with a focus toward value and convenience versus high-priced discretionary luxury items, which the Company believes will enable many of the tenants to continue operating even in a challenging economic environment.
The retail shopping sector continues to be affected by the competitive nature of the retail business and the competition for market share as well as general economic conditions where stronger retailers have out-positioned some of the weaker retailers. These shifts can force some market share away from weaker retailers which could require them to downsize and close stores and/or declare bankruptcy. In many cases, the loss of a weaker tenant or downsizing of space creates a value-add opportunity to re-lease space at higher rents to a stronger retailer. Overall, the Company believes its portfolio remained stable at September 30, 2013, as evidenced by the increase in the occupancy rate as further described below. However, there can be no assurance that these events will not adversely affect the Company (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as amended).
Historically, the Company’s portfolio has performed consistently throughout many economic cycles, including downward cycles. Broadly speaking, national retail sales have grown since World War II, including during several recessions and housing slowdowns. In the past, the Company has not experienced significant volatility in its long-term portfolio occupancy rate. The Company has experienced downward cycles before and has made the necessary adjustments to leasing and development strategies to accommodate the changes in the operating environment and mitigate risk. 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 generally ranged from 92% to 96% since the Company’s initial public offering in 1993. The shopping center portfolio occupancy was at 92.1% at September 30, 2013 as compared to 91.3% at September 30, 2012. Notwithstanding the lower occupancy rate at the lower end of the historical range, the Company continues to sign new leases at rental rates that have reflected consistent growth on an annual basis.
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The total portfolio average annualized base rent per occupied square foot, including the results of Sonae Sierra Brasil, was $14.00 at September 30, 2013, as compared to $13.66 at December 31, 2012, and $13.79 at September 30, 2012. The increase primarily was due to the Company’s strategic portfolio realignment achieved through the recycling of capital from non-prime asset sales into the acquisition of Prime Assets as well as continued lease up of the existing portfolio at positive rental spreads. Moreover, the Company has been able to achieve these results without significant capital investment in tenant improvements or leasing commissions. The weighted-average cost of tenant improvements and lease commissions estimated to be incurred over the expected lease term for new leases executed during the third quarter of 2013 for the U.S. portfolio was only $3.80 per rentable square foot. The Company generally does not expend a significant amount of capital on lease renewals. The Company is very conscious of and sensitive to the risks posed by the economy, but believes that the position of its portfolio and the general diversity and credit quality of its tenant base should enable it to successfully navigate through these challenging economic times.
New Accounting Standards
New Accounting Standards are more fully described in Note 1, “Nature of Business and Financial Statement Presentation,” of the Company’s condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Management’s discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations. The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements. Without limiting the foregoing, the words “will,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Readers should exercise caution in interpreting and relying on forward-looking statements because such statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements and that could materially affect the Company’s actual results, performance or achievements. For additional factors that could cause the results of the Company to differ materially from those indicated in the forward looking statements, please refer to Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as amended.
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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:
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The Company’s primary market risk exposure is interest rate risk. The Company’s debt, excluding unconsolidated joint venture debt, is summarized as follows:
Fixed-Rate Debt(A)
Variable-Rate Debt(A)
The Company’s unconsolidated joint ventures’ indebtedness is summarized as follows:
Fixed-Rate Debt
Variable-Rate Debt
The Company intends to use retained cash flow, proceeds from asset sales, equity and debt financing and variable-rate indebtedness available under its Revolving Credit Facilities to repay indebtedness and fund capital expenditures of the Company’s shopping centers. Thus, to the extent the Company incurs additional variable-rate indebtedness, its exposure to increases in interest rates in an inflationary period could increase. The Company does not believe, however, that increases in interest expense as a result of inflation will significantly impact the Company’s distributable cash flow.
The interest rate risk on a portion of the Company’s 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, 2013 and December 31, 2012, the interest rate on the Company’s $631.8 million and $632.8 million, respectively, consolidated floating rate debt was swapped to fixed rates. The Company is exposed to credit risk in the event of nonperformance by the counterparties to the Swaps. The Company believes it mitigates its credit risk by entering into Swaps with major financial institutions.
The carrying value of the Company’s fixed-rate debt is adjusted to include the $631.8 million and $632.8 million of variable-rate debt that was swapped to a fixed rate at September 30, 2013 and December 31, 2012, respectively. The fair value of the Company’s fixed-rate debt is adjusted to (i)
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include the swaps reflected in the carrying value and (ii) include the Company’s proportionate share of the joint venture fixed-rate debt. An estimate of the effect of a 100 basis-point increase at September 30, 2013 and December 31, 2012, is summarized as follows (in millions):
Company’s fixed-rate debt
Company’s proportionate share of joint venture fixed-rate debt
The sensitivity to changes in interest rates of the Company’s fixed-rate debt was determined using a valuation model based upon factors that measure the net present value of such obligations that arise from the hypothetical estimate as discussed above.
Further, a 100 basis point increase in short-term market interest rates on variable-rate debt at September 30, 2013, would result in an increase in interest expense of approximately $2.5 million for the Company and $1.5 million representing the Company’s proportionate share of the joint ventures’ interest expense relating to variable-rate debt outstanding for the nine-month period ended September 30, 2013. The estimated increase in interest expense for the period does not give effect to possible changes in the daily balance of the Company’s or joint ventures’ outstanding variable-rate debt.
The Company and its joint ventures intend to continually monitor and actively manage interest costs on their variable-rate debt portfolio and may enter into swap positions based on market fluctuations. In addition, the Company believes that it has the ability to obtain funds through additional equity and/or debt offerings and joint venture capital. Accordingly, the cost of obtaining such protection agreements in relation to the Company’s access to capital markets will continue to be evaluated. The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes. As of September 30, 2013, the Company had no other material exposure to market risk.
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Based on their evaluation as required by Securities Exchange Act Rules 13a-15(b) and 15d-15(b), the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of 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 in reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
During the three-month period ended September 30, 2013, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
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None.
ISSUER PURCHASES OF EQUITY SECURITIES
July 1 – 31, 2013
August 1 – 31, 2013
September 1 – 30, 2013
Not applicable.
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Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the Three- and Nine-Month Periods Ended September 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three- and Nine-Month Periods Ended September 30, 2013 and 2012, (iv) Consolidated Statement of Equity for the Nine-Month Period Ended September 30, 2013, (v) Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2013 and 2012 and (vi) Notes to Condensed Consolidated Financial Statements.
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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.
November 8, 2013
/s/ Christa A. Vesy
Christa A. Vesy
Executive Vice President and Chief Accounting Officer (Authorized Officer)
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EXHIBIT INDEX
Exhibit No.
Under
Reg. S-K
Item 601
Filed Herewith or
Incorporated Herein
by Reference
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