Document/ExhibitDescriptionPagesSize 1: 10-Q Developers Diversified Realty Corporation 10-Q HTML 573K
2: EX-3.1 Articles of Incorporation/Organization or By-Laws 123 450K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws 1 9K
4: EX-3.3 Articles of Incorporation/Organization or By-Laws 9 47K
5: EX-3.4 Articles of Incorporation/Organization or By-Laws 3 14K
6: EX-3.5 Articles of Incorporation/Organization or By-Laws 2 13K
7: EX-3.6 Articles of Incorporation/Organization or By-Laws 3 19K
8: EX-3.7 Articles of Incorporation/Organization or By-Laws 4 23K
9: EX-3.8 Articles of Incorporation/Organization or By-Laws 4 25K
10: EX-3.9 Articles of Incorporation/Organization or By-Laws HTML 46K
11: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 14K
12: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 14K
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(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes o No þ
Construction in progress and land under development
508,341
453,493
8,808,381
7,442,135
Less: Accumulated depreciation
(925,976
)
(861,266
)
Real estate, net
7,882,405
6,580,869
Cash and cash equivalents
46,019
28,378
Notes receivable
17,328
18,161
Investments in and advances to joint ventures
636,731
291,685
Deferred charges, net
33,614
23,708
Other assets
332,447
231,628
Real estate held for sale
—
5,324
$
8,948,544
$
7,179,753
Liabilities and Shareholders’ Equity
Unsecured indebtedness:
Senior notes
$
2,718,788
$
2,218,020
Revolving credit facilities
380,000
297,500
3,098,788
2,515,520
Secured indebtedness:
Term debt
550,000
400,000
Mortgage and other secured indebtedness
1,470,248
1,333,292
2,020,248
1,733,292
Total indebtedness
5,119,036
4,248,812
Accounts payable and accrued expenses
153,325
134,781
Dividends payable
89,451
71,269
Other liabilities
106,228
106,775
5,468,040
4,561,637
Minority equity interest
98,962
104,596
Operating partnership minority interests
17,114
17,337
5,584,116
4,683,570
Commitments and contingencies
Shareholders’ equity:
Class F – 8.60% cumulative redeemable preferred shares, without par value, $250
liquidation value;
750,000 shares authorized; 600,000 shares issued and outstanding at December 31, 2006
—
150,000
Class G – 8.0% cumulative redeemable preferred shares, without par value, $250
liquidation value;
750,000 shares authorized; 720,000 shares issued and outstanding at June 30, 2007 and
December 31, 2006
180,000
180,000
Class H – 7.375% cumulative redeemable preferred shares, without par value, $500
liquidation value;
410,000 shares authorized; 410,000 shares issued and outstanding at June 30, 2007 and
December 31, 2006
205,000
205,000
Class I – 7.5% cumulative redeemable preferred shares, without par value, $500
liquidation value; 340,000 shares authorized; 340,000 shares issued and outstanding
at June 30, 2007 and December 31, 2006
170,000
170,000
Common shares, without par value, $.10 stated value; 300,000,000 shares authorized;
126,788,386 and 109,739,262 shares issued at June 30, 2007 and December 31, 2006,
respectively
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
2007
2006
Revenues from operations:
Minimum rents
$
177,342
$
132,972
Percentage and overage rents
1,593
1,600
Recoveries from tenants
56,461
42,145
Ancillary and other property income
4,290
4,464
Management, development and other fee income
11,996
6,596
Other
3,746
1,250
255,428
189,027
Rental operation expenses:
Operating and maintenance
35,092
27,259
Real estate taxes
30,771
21,694
General and administrative
19,161
15,422
Depreciation and amortization
54,772
45,217
139,796
109,592
Other income (expense):
Interest income
2,500
2,849
Interest expense
(74,462
)
(52,812
)
Other (expense) income
(225
)
1,167
(72,187
)
(48,796
)
Income before equity in net income of joint ventures, minority
interests, tax benefit of taxable REIT subsidiaries and franchise
taxes, discontinued operations and gain on disposition of real estate
43,445
30,639
Equity in net income of joint ventures
21,602
4,619
Income before minority interests, tax benefit of taxable REIT
subsidiaries and franchise taxes, discontinued operations and gain on
disposition of real estate
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
2007
2006
Revenues from operations:
Minimum rents
$
328,626
$
264,441
Percentage and overage rents
3,607
3,663
Recoveries from tenants
102,587
82,035
Ancillary and other property income
8,995
8,743
Management, development and other fee income
21,078
12,955
Other
11,455
8,208
476,348
380,045
Rental operation expenses:
Operating and maintenance
62,720
51,695
Real estate taxes
56,952
43,458
General and administrative
40,678
30,832
Depreciation and amortization
107,225
89,563
267,575
215,548
Other income (expense):
Interest income
6,182
5,955
Interest expense
(135,452
)
(103,790
)
Other (expense) income
(450
)
667
(129,720
)
(97,168
)
Income before equity in net income of joint ventures, minority interests, tax benefit
of taxable REIT subsidiaries and franchise taxes, discontinued operations and gain on
disposition of real estate
79,053
67,329
Equity in net income of joint ventures
27,883
10,088
Income before minority interests, tax benefit of taxable REIT subsidiaries and franchise
taxes, discontinued operations and gain on disposition of real estate
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
(Dollars in thousands)
(Unaudited)
2007
2006
Net cash flow provided by operating activities:
$
221,219
$
175,036
Cash flow from investing activities:
Real estate developed or acquired, net of liabilities assumed
(2,591,744
)
(210,535
)
Proceeds from sale and refinancing of joint venture interests
5,936
1,104
Equity contributions to joint ventures
(223,517
)
(2,592
)
Proceeds from notes receivable, net
837
991
Proceeds (advances) from joint venture advances, net
1,587
(2,866
)
Return of investments in joint ventures
35,255
—
Proceeds from disposition of real estate
1,846,817
139,918
Net cash flow used for investing activities
(924,829
)
(73,980
)
Cash flow from financing activities:
Proceeds from revolving credit facilities, net
82,500
10,000
Proceeds from term loans
900,000
180,000
Repayment of term loans
(750,000
)
—
Repayment of medium term notes
(100,000
)
—
Proceeds from construction loans and mortgages
55,046
1,646
Principal payments on mortgage debt
(316,633
)
(128,264
)
Payment of deferred finance costs
(2,958
)
(3,682
)
Purchased option arrangement on common shares
(32,580
)
—
Proceeds from issuance of convertible senior notes, net of underwriting
commissions and
offering expenses of $267 in 2007
587,733
—
Proceeds from issuance of common shares in conjunction with the exercise of stock
options, dividend reinvestment plan and restricted stock plan
5,991
4,097
Proceeds from issuance of preferred operating partnership interest, net of expenses
484,204
—
Redemption of preferred operating partnership interest, net of expenses
(484,204
)
—
Redemption of preferred shares
(150,000
)
—
Proceeds from issuance of common shares, net of underwriting commissions and
offering
expenses of $208 in 2007
746,645
—
Distributions to operating partnership minority interests
(10,789
)
(1,288
)
Return of investment-minority interest shareholder
(4,260
)
—
Purchase of operating partnership minority interests
(683
)
—
Repurchase of common shares
(117,000
)
—
Dividends paid
(171,761
)
(151,101
)
Net cash flow provided by (used for) financing activities
721,251
(88,592
)
Increase in cash and cash equivalents
17,641
12,464
Cash and cash equivalents, beginning of period
28,378
30,655
Cash and cash equivalents, end of period
$
46,019
$
43,119
Supplemental disclosure of non-cash investing and financing activities:
For the six-months ended June 30, 2007, in conjunction with the merger of IRRETI, the Company
acquired real estate assets of $3.0 billion, investments in joint ventures of approximately $29.8
million and accounts receivable, intangible assets and other assets aggregating approximately $83.0
million. A portion of the consideration used to acquire the $3.0 billion of assets included
assumed debt of $446.5 million and accounts payable and other liabilities aggregating approximately
$12.1 million and common shares of approximately $394.2 million. In conjunction with the
redemption of the Company’s Class F Cumulative Redeemable Preferred Shares, the Company recorded a
non-cash dividend to net income available to common shareholders of $5.4 million relating to the
write-off of original issuance costs. Other assets included approximately $2.7 million, which
represents the fair value of the Company’s interest rate swap. At June 30, 2007, dividends payable
were $89.5 million. In January 2007, in accordance with the terms of the performance unit plans,
the Company issued
466,666 restricted shares of which 70,000 vested as of the date of issuance. The remaining
396,666 shares will vest in 2008 through 2011. The foregoing transactions did not provide for or
require the use of cash for the six-month period ended June 30, 2007.
For the six-months ended June 30, 2006, in connection with the adoption of EITF 04-05
(“Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole
General Partner and the Limited Partners Have Certain Rights”), as of January 1, 2006the Company
consolidated real estate assets of $41.4 million and a mortgage payable of $17.1 million. For the
six-months ended June 30, 2006, in conjunction with the acquisition of its partners’ interest in
three shopping centers, the Company acquired real estate assets of $233.9 million and assumed debt
of $121.2 million. For the six-months ended June 30, 2006, minority interests with a book value of
approximately $14.2 million were converted into approximately 0.4 million common shares of the
Company resulting in an increase of approximately $8.2 million in real estate assets. Other assets
included approximately $2.8 million, which represents the fair value of the Company’s interest rate
swap. At June 30, 2006, dividends payable were $71.7 million. The foregoing transactions did not
provide for or require the use of cash for the six-month period ended June 30, 2006.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Notes to Condensed Consolidated Financial Statements
1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
Developers Diversified Realty Corporation and its related consolidated real estate joint
ventures and subsidiaries (collectively, the “Company” or “DDR”) are engaged in the business of
acquiring, expanding, owning, developing, redeveloping, leasing and managing shopping centers.
On February 22, 2007, Inland Retail Real Estate Trust, Inc. (“IRRETI”) shareholders approved a
merger with a subsidiary of the Company pursuant to the merger agreement. The Company acquired all of
the outstanding shares of IRRETI for a total merger consideration of $14.00 per share, of which
$12.50 per share was funded in cash and $1.50 per share was paid in the form of DDR common shares.
As a result, on February 27, 2007, the Company issued 5.7 million DDR common shares to the IRRETI
shareholders for a total consideration of approximately $394.2 million.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Unaudited Interim Financial Statements
These financial statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and the applicable rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the interim financial statements
include all adjustments, consisting of only normal recurring adjustments, necessary for a fair
statement of the results of the periods presented. The results of operations for the three and
six-months ended June 30, 2007 and 2006 are not necessarily indicative of the results that may be
expected for the full year. These condensed consolidated financial statements should be read in
conjunction with the Company’s audited financial statements and notes thereto included in the
Company’s Form 10-K for the year ended December 31, 2006.
The Company consolidates certain entities in which it owns less than a 100% equity interest if
the entity is a variable interest entity (“VIE”), as defined in Financial Accounting Standards
Board (“FASB”) Interpretation No. 46(R) “Consolidation of Variable Interest Entities” (“FIN 46(R)”)
and the Company is deemed to be the primary beneficiary in the VIE. The Company also consolidates
certain entities that are not a VIE as described in FIN 46(R) in which it has effective control.
The Company consolidated one entity as a result of the adoption of the Emerging Issues Task Force
(“EITF”) 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor
Is the Sole
General Partner and the Limited Partners Have Certain Rights.” The equity method of accounting is
applied to entities in which the Company is not the primary beneficiary as defined by FIN 46(R), or
does not have effective control, but can exercise influence over the entity with respect to its
operations and major decisions.
Comprehensive Income
Comprehensive income is as follows (in thousands):
Accounting for Uncertainty in Income Taxes — FIN 48
In January 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes — An Interpretation of Statement of Financial Accounting Standard (“SFAS”) No. 109”
(“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that the company has taken
or expects to take on a tax return (including a decision whether to file or not to file a return in
a particular jurisdiction). This statement is effective for financial statements issued for fiscal
years beginning after December 15, 2006, and interim periods within those fiscal years.
The Company’s policy for classifying estimated interest and penalties is to include such
amounts as “Income Tax of Taxable REIT Subsidiaries and Franchise Taxes” in the Condensed
Consolidated Statements of Operations. The amount of interest and penalties at June 30, 2007 and
for the three and six-month periods ended June 30, 2007 and 2006 was not material. The Company
does not have any unrecognized tax benefits related to uncertain tax
provisions that, if recognized, would impact the effective tax
rate and does not expect this position to change within the next twelve months. The Company is no
longer subject to income tax audits by taxing authorities for years through 2003. The effect of
FIN 48 did not have a material impact on the Company’s financial position, results of operations or
cash flows.
New Accounting Standards to be Implemented
Fair Value Measurements — SFAS 157
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement
defines fair value and establishes a framework for measuring fair value under generally
accepted accounting principles. The key changes to current practice are (1) the definition of
fair value, which focuses on an exit price rather than an entry price; (2) the methods used to
measure fair value, such as emphasis that fair value is a market-based measurement, not an
entity-specific measurement, as well as the inclusion of an adjustment for risk, restrictions and
credit standing and (3) the expanded disclosures about fair value measurements. This statement
applies only to those items under other accounting pronouncements for which the FASB previously
concluded that fair value is the relevant measurement attribute and does not require or permit any
new fair value measurements.
This statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is required to adopt
SFAS 157 in the first quarter of 2008. The Company is currently evaluating the impact that this
Statement will have on its financial statements.
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 — SFAS 159
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This
Statement allows measurement at fair value of eligible financial assets and liabilities that are
not otherwise measured at fair value. If the fair value option for an eligible item is elected,
unrealized gains and losses for that item are to be reported in current earnings at each subsequent
reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to
draw comparison between the different measurement attributes a company elects for similar types of
assets and liabilities.
This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is required to adopt SFAS 159 in the first quarter of 2008. The
Company is currently evaluating the impact that this statement will have on its financial
statements.
Accounting for Convertible Debt Instruments
In July 2007, the Board
directed the staff to prepare a proposed FSP that would require the liability and equity components
of convertible debt instruments that may be settled in cash upon conversion (including partial
cash settlement) to be separately accounted for in a manner that reflects the issuer’s
nonconvertible debt borrowing rate. If issued in its current form, the proposed FSP would require
that the initial debt proceeds from the sale of the Company’s convertible and exchangeable senior
unsecured notes be allocated between a liability component and an equity component. The resulting
debt discount would be amortized over the period the debt is expected to be outstanding as
additional interest expense. The proposed FSP would be effective for financial statements issued
for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years.
The guidance in the proposed FSP would be applied retrospectively to all periods presented and
could result in additional annual interest expense recognized by the Company if adopted and final,
as proposed.
2. EQUITY INVESTMENTS IN JOINT VENTURES
At June 30, 2007 and December 31, 2006, the Company had ownership interests in various
unconsolidated joint ventures which, as of the respective dates, owned 269 and 117
shopping center properties and 46 and 50 shopping center sites formerly owned by Service
Merchandise Company, Inc. Included in these amounts are the shopping center properties owned by
Dividend Capital Total Realty Trust Joint Venture and DDR MDT PS LLC, which owned nine and six
operating shopping center
properties, respectively, at June 30, 2007 and December 31, 2006, and has been segregated and
discussed separately in Notes 3 and 4. Dividend Capital Total Realty Trust Joint Venture was
considered a significant subsidiary at June 30, 2007 and is excluded from the 2007 combined amounts
presented below. DDR MDT PS LLC was considered a significant subsidiary at June 30, 2006 and is
excluded from the 2006 combined amounts presented below.
During the six-months ended June 30, 2007, the Company formed a joint venture with TIAA-CREF
(“TIAA-CREF Joint Venture”), as described below, which owns 66 shopping centers and, as a result of
the merger with IRRETI, the Company acquired an investment in an additional unconsolidated joint
venture, which owns 28 shopping centers. DDR, on behalf of itself and the TIAA-CREF Joint Venture,
has engaged an appraiser to perform valuations of the real estate, assumed liabilities and certain
other assets in connection with the acquisition by the joint venture in February 2007. As a result, the purchase price
is preliminary and subject to change.
Combined condensed financial information of the Company’s unconsolidated joint venture
investments excluding those amounts for Dividend Capital Total Realty Trust Joint Venture and DDR
MDT PS LLC reported in Notes 3 and 4 is as follows (in thousands):
Income before income tax expense, gain on
disposition of real estate and discontinued
operations
21,020
19,453
41,536
40,017
Income tax expense
(2,297
)
—
(4,545
)
—
Gain on disposition of real estate
93,089
6
93,089
42
Income from continuing operations
111,812
19,459
130,080
40,059
Discontinued operations:
(Loss) income from discontinued operations
(149
)
(164
)
(178
)
221
Gain (loss) on disposition of real estate
1,080
(1,762
)
738
(1,550
)
Net income
$
112,743
$
17,533
$
130,640
$
38,730
Company’s share of equity in net income of
joint ventures (2)
$
21,758
$
4,462
$
28,268
$
9,777
Investments in and advances to joint ventures include the following items, which represent the
difference between the Company’s investment and its proportionate share of all of the joint ventures’
underlying net assets (in millions):
Company’s proportionate share of
accumulated equity
$
602.9
$
252.9
Basis differentials (2)
111.7
92.3
Deferred development fees, net
of portion relating to the Company’s
interest
(3.4
)
(3.0
)
Basis differential upon transfer
of assets (2)
(98.8
)
(74.3
)
Notes receivable from investments
17.2
18.8
Amounts payable to DDR
7.1
5.0
Investments in and advances to
joint ventures (1)
$
636.7
$
291.7
(1)
The difference between the Company’s share of accumulated equity and the investments in
and advances to joint ventures recorded on the Company’s condensed consolidated balance
sheets primarily results from the basis differentials, as described below, deferred
development fees, net of the portion relating to the Company’s interest, notes and amounts
receivable from the joint venture investments.
(2)
For the three-month periods ended June 30, 2007 and 2006, the difference between the
$21.7 million and $4.5 million, respectively, of the Company’s share of equity in net
income of joint ventures reflected above and the $21.6 million and $4.6 million,
respectively, of equity in net income of joint ventures reflected in the Company’s
condensed consolidated statements of operations is primarily attributable to amortization
associated with basis differentials and differences in the recognition of gains on sales.
The Company’s share of joint venture net income has been decreased by
approximately $0.1 million and increased by $0.1 million for the three-month periods ended
June 30, 2007 and 2006, respectively, to reflect basis differentials associated with
amortization and adjustments to gain on sales. For the six-month periods ended June 30,2007 and 2006, the difference between the $28.3 million and $9.8 million, respectively, of
the Company’s share of equity in net income of joint ventures reflected above and the $27.9
million and $10.1 million, respectively, of equity in net income of joint ventures
reflected in the
Company’s condensed consolidated statements of operations is attributable to depreciation
associated with basis differentials and differences in the recognition of gains on sales of
certain assets due to the basis differentials. The Company’s share of joint
venture net income has been decreased by approximately $0.4 million and increased by $0.2
million, for the six-month periods ended June 30, 2007 and 2006, respectively, to reflect
basis differentials associated with amortization and adjustments to gain on sales. Basis
differentials occur primarily when the Company has purchased interests in existing joint
ventures at fair market values, which differ from their share of the historical cost of the
net assets of the joint venture. Basis differentials also occur when the Company
contributes assets to joint ventures.
The Company’s proportionate share of service fees earned through the management,
acquisition, financing, leasing and development activities performed related to all of the Company’s joint
ventures are as follows (in millions):
Acquisition fees of $6.3 million were earned from the formation of the TIAA-CREF Joint
Venture in the first quarter of 2007, excluding the Company’s retained ownership of
approximately 15%. Financing fees were earned from several joint venture interests,
excluding the Company’s retained ownership. The Company’s fees were earned in conjunction
with services rendered by the Company in connection with the acquisition of the IRRETI real
estate assets and financings and re-financings of joint ventures.
DDR Domestic Retail Fund I
In the second quarter of 2007, the Company formed DDR Domestic Retail Fund I (“Fund”), a
sponsored, fully-seeded commingled fund. The Fund acquired 63 shopping center assets
aggregating 8.3 million square feet (“Portfolio”) from the Company and a joint venture for
approximately $1.5 billion. The Portfolio is comprised of 54 assets acquired by the Company
through its acquisition of IRRETI, seven assets formerly held in a joint venture with Kuwait
Financial Centre (“DDR Markaz LLC Joint Venture”), in which the Company had a 20% ownership
interest, and two assets from the Company’s wholly-owned portfolio. The Company recognized a gain
of approximately $9.6 million, net of its 20% retained interest, from the sale of the two
wholly-owned assets, which is included in gain on disposition of real estate in our statements of
operations. In conjunction with the formation of the Fund and identification of the equity partners,
the Company paid a $7.6 million fee to a third party consulting firm and recognized this amount as
a reduction to gain on disposition of real estate. The DDR Markaz LLC Joint Venture recorded a gain
of approximately $90.2 million. The
Company’s proportionate share of approximately $18.0 million of the joint venture gain was deferred
as the Company retained an effective 20% ownership interest in these assets. As the Company does
not have economic or effective control, the Fund is accounted for using the equity method of
accounting. The Company remains responsible for all day-to-day operations of the properties and
receives fees for asset management and property management, leasing, construction
management and ancillary income in addition to a promoted interest. In addition, upon the sale of
the assets from the DDR Markaz LLC Joint Venture, the Company realized and recognized promoted
income of approximately $13.6 million, which is included in the equity in net income of joint
ventures.
In February 2007, TIAA-CREF and the Company formed a joint venture which acquired 66 shopping
center assets from IRRETI comprising approximately 23.1 million square feet of total GLA. The
TIAA-CREF Joint Venture is owned 85% by TIAA-CREF and 15% by the Company. As the Company does not
have economic or effective control, the TIAA-CREF Joint Venture is accounted for on the equity
method of accounting. Real estate related assets of approximately $3.0 billion were acquired by
the TIAA-CREF Joint Venture. The TIAA-CREF Joint Venture has debt of approximately $1.8 billion,
of which $285.6 million was assumed in connection with the acquisition of the properties. Pursuant
to the terms of the joint venture agreement, the Company earned an acquisition fee of $6.3 million
and receives ongoing asset management, property management and construction management fees, plus
fees on leasing and ancillary income.
Other Joint Ventures
In June 2007, the Company’s RVIP VI Joint Venture in which the Company has an effective 25.75%
ownership interest sold its remaining property in Overland Park, Kansas for approximately $8.2
million. The joint venture recognized a gain of approximately $1.3 million, of which the Company’s
proportionate share was approximately $0.3 million.
In May 2007, ECE Projektmanagement G.m.b.H. & Co.KG (“ECE”), a fully integrated international
developer and manager of shopping centers based in Hamburg, Germany, and the Company formed a new
joint venture, subject to certain closing conditions, to fund investments in new retail
developments located in western Russia and Ukraine. The joint venture is owned 75% by the Company
and 25% by ECE. As of June 30, 2007, the Company had not funded any amounts to this joint venture.
During the first quarter of 2007, the Company’s joint venture in Brazil acquired an additional
73% interest in Shopping Metropole Center and, as such, the joint venture now owns 83% of this
shopping center. The Company contributed approximately $24.6 million for its proportionate share of
the acquisition of the additional interest.
Effective January 2007, the Company acquired the remaining 25% minority interest in Coventry I
and, as such, the Company now owns 100% of this entity. The aggregate purchase price was
approximately $13.8 million. This entity generally serves as the general partner of the Company’s
RVIP joint ventures.
3. DIVIDEND CAPITAL TOTAL REALTY TRUST JOINT VENTURE
In the second quarter of 2007, Dividend Capital Total Realty Trust and the Company formed a
$161.5 million joint venture (“Dividend Capital Total Realty Trust Joint Venture”). The Company
contributed three recently developed assets aggregating 0.7 million of Company-owned square feet to
the joint venture and retained an effective ownership interest of 10%. The Company recorded an
after-tax gain, net of its retained interest, of approximately $50.2 million, which is included in
gain on disposition of real estate. As the Company does not have economic or effective control,
the Dividend Capital Total Realty Trust Joint Venture is accounted for using the equity method of
accounting. The
Company receives asset management and property management fees, plus fees on leasing and ancillary
income. In addition, the Company, subject to performance of the joint venture, as defined in the
agreement, is entitled to receive a promoted interest above a 9.5% leveraged threshold return.
At June 30, 2007, the Company’s investment in Dividend Capital Total Realty Trust Joint
Venture is considered a significant subsidiary pursuant to the applicable Regulation S-X rules, due
to the recognition of a gain, net of tax, in the second quarter
of 2007 of approximately $50.2 million relating to the contribution of the assets to the joint
venture.
Condensed
financial information of Dividend Capital Total Realty Trust Joint Venture for the periods that it
was considered a significant subsidiary is as
follows (in thousands):
Company’s share of equity in
net loss of joint
ventures
$
(11
)
$
(11
)
4. DDR MDT PS LLC
In the second quarter of 2006, the Company sold six properties, aggregating 0.8 million
owned square feet, to a then newly formed joint venture with MDT (“DDR MDT PS LLC”). At June 30, 2006,
the Company’s investment in DDR MDT PS LLC was considered a significant subsidiary pursuant to the
applicable Regulation S-X rules, due to the formation of this joint venture and recognition of a
gain, net of tax, in the second quarter of 2006 of approximately $38.5 million relating to the
contribution of the assets to the joint venture.
Condensed financial information of DDR MDT PS LLC for the periods that it was considered a
significant subsidiary is as follows (in thousands):
Company’s share of equity in net
loss of joint ventures
$
—
$
—
5. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
Acquisitions
On February 22, 2007,
IRRETI shareholders approved a merger with a subsidiary of the Company
pursuant to the merger agreement. The Company acquired all of the outstanding shares of IRRETI for
a total merger consideration of $14.00 per share, of which $12.50 per share was funded in cash and
$1.50 per share was paid in the form of DDR common shares. As a result, on February 27, 2007, the
Company issued 5.7 million DDR common shares to the IRRETI shareholders for a total consideration
of approximately $394.2 million valued at $69.54 per share, which was the average closing price of
the Company’s common shares for the 10 trading days immediately preceding the two trading days
prior to the IRRETI shareholders’ meeting. The merger was accounted for utilizing the purchase
method of accounting. The Company entered into the merger to acquire a large portfolio of assets,
among other reasons.
The IRRETI merger was initially recorded at a total cost of approximately $6.2 billion. Real
estate related assets of approximately $3.0 billion were recorded by both the Company and the
TIAA-CREF Joint Venture (Note 2). The Company assumed debt at a fair market value of approximately
$443.0 million. The IRRETI real estate portfolio consists of 316 community shopping centers,
neighborhood shopping centers and single tenant/net leased retail properties, comprising
approximately 44.2 million square feet of total GLA, and five development properties. The TIAA-CREF
Joint Venture consists of 66 shopping centers comprising approximately 23.1 million square feet of
total GLA.
DDR, on behalf of itself and the TIAA-CREF Joint Venture, has engaged an appraiser to assist
with the valuations of the real estate and certain other assets. As a result, the purchase price
allocation recorded as of June 30, 2007 is preliminary and subject to change. As final information
regarding the fair value of the assets acquired and liabilities assumed is received and estimates
are refined, appropriate adjustments will be made to the purchase price allocation. The allocations
are expected to be finalized no later than twelve months from the acquisition date. The revenues and expenses
relating to the IRRETI properties are included in DDR’s historical results of operations from the
date of the merger, February 27, 2007. The total aggregate purchase price was allocated as
follows (in thousands):
The following unaudited supplemental pro forma operating data is presented for the three and
six-month periods ended June 30, 2007 and 2006, as if the IRRETI merger and the formation of the
TIAA-CREF Joint Venture was completed as of the beginning of each period presented. Pro forma
amounts include general and administrative expenses that IRRETI reported in its historical results
of approximately $48.3 million for the six-months ended June 30, 2007, including severance, a
substantial portion of which management believes to be non-recurring.
These acquisitions were accounted for using the purchase method of accounting. The revenues
and expenses related to assets and interests acquired are included in the Company’s historical
results of operations from the date of purchase. In addition, the following supplemental pro forma
operating data does not present the sale of assets for the three and six-months ended June 30, 2007
and 2006 or the formation of the DDR Domestic Retail Fund I and the Dividend Capital Total Realty
Trust Joint Venture. The Company sold 62 of the assets acquired from the merger with IRRETI
to an independent buyer and through the formation of the DDR Domestic Retail Fund I.
The pro forma financial information is presented for informational purposes only and may not
be indicative of what actual results of operations would have been had the acquisitions occurred as
indicated, nor does it purport to represent the results of the operations for future periods (in
thousands, except per share data):
Three-Month Periods Ended
Six-Month Periods Ended
June 30,
June 30,
(Unaudited)
(Unaudited)
2007
2006
2007
2006
Pro forma revenues
$
255,428
$
260,014
$
518,605
$
524,169
Pro forma income from continuing operations
$
57,880
$
33,747
$
55,875
$
75,327
Pro forma income from discontinued operations
$
15,545
$
2,694
$
20,960
$
5,744
Pro forma income before cumulative effect of
adoption of a new accounting standard
$
127,437
$
76,378
$
136,991
$
128,233
Pro forma net income applicable to common
shareholders
$
111,429
$
76,378
$
107,191
$
128,233
Per share data:
Basic earnings per share data:
Income from continuing operations
applicable to common shareholders
$
0.78
$
0.58
$
0.69
$
0.97
Income from discontinued operations
0.12
0.02
0.17
0.05
Net income applicable to common shareholders
$
0.90
$
0.60
$
0.86
$
1.02
Diluted earnings per share data:
Income from continuing operations
applicable to common shareholders
In-place leases (including lease origination costs and fair market value
of leases), net
$
31,639
$
1,485
Tenant relations, net
10,803
12,969
Total intangible assets (1)
42,442
14,454
Other assets:
Accounts receivable, net (2)
186,494
152,161
Prepaids, deposits and other assets (3)
103,511
65,013
Total other assets
$
332,447
$
231,628
(1)
The Company recorded amortization expense of $1.8 million and $1.4 million for the
three-months ended June 30, 2007 and 2006, respectively, and $3.6 million and $3.0 million
for the six-months ended June 30, 2007 and 2006, respectively, related to these intangible
assets. The amortization period of the in-place leases and tenant relations is
approximately two to 31 years and ten years, respectively.
(2)
Includes straight-line rent receivables, net of $56.5 million and $54.7 million at June30, 2007 and December 31, 2006, respectively.
(3)
Includes tax valuation allowances (Note 15) of approximately $16.3 million and $36.0
million at June 30, 2007 and December 31, 2006, respectively.
7. REVOLVING CREDIT FACILITIES AND TERM LOANS
The Company maintains an unsecured revolving credit facility with a syndicate of financial
institutions, for which JP Morgan serves as the administrative agent (the “Unsecured Credit
Facility”). The Unsecured Credit Facility provides for borrowings of $1.2 billion, an accordion
feature for a future expansion to $1.4 billion and a maturity date of June 2010, with a one-year
extension option. The Unsecured Credit Facility includes a competitive bid option on periodic
interest rates for up to 50% of the facility. The Company’s borrowings under the Unsecured Credit
Facility bear interest at variable rates at the Company’s election, based on either (i) the prime
rate, as defined in the facility or (ii) LIBOR, plus a specified spread (0.60% at June 30, 2007).
The specified spread over LIBOR varies depending on the Company’s long-term senior unsecured debt
rating from Standard and Poor’s and Moody’s Investors Service. The Company is required to comply
with certain covenants relating to total outstanding indebtedness, secured indebtedness,
maintenance of unencumbered real estate assets and fixed charge coverage. The Company was in
compliance with these covenants at June 30, 2007. The facility also provides for a facility fee of
0.15% on the entire facility. At June 30, 2007, total borrowings under this facility aggregated
$365.0 million with a weighted average interest rate of 5.5%.
The Company also maintains a $60 million unsecured revolving credit facility with National
City Bank which has a maturity date of June 2010. The terms are consistent with those contained in
the Unsecured Credit Facility. Borrowings under the facility bear interest at variable rates, at
the Company’s election, based on the (i) prime rate, as defined in the facility or (ii) LIBOR plus
a specified spread (0.60% at June 30, 2007). The specified spread over LIBOR is dependent on the
Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors
Service. The Company is required to comply with certain covenants relating to total outstanding
indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge
coverage. The
Company was in compliance with these covenants at June 30, 2007. At June 30, 2007, total
borrowings under this facility aggregated $15.0 million with a weighted average interest rate of
5.9%.
The Company also maintains a secured term loan agreement with a syndicate of financial
institutions, for which KeyBank Capital Markets serves as the administrative agent. This term loan
was amended in February 2007 to increase the loan to $550 million, add an accordion feature for a
future expansion to $800 million, extend the maturity date to February 2011 and reduce the interest
rate to LIBOR plus 0.70% based on the Company’s current credit rating. The collateral for this
secured loan are assets, or investment interests in certain assets, that are already collateralized
by first mortgage loans. At June 30, 2007, total borrowings under this facility aggregated $550.0
million with a weighted average interest rate of 5.8%.
In February 2007, the Company entered into a $750 million unsecured bridge facility (“Bridge
Facility”) with Bank of America, N.A. in connection with the financing of the IRRETI merger. The
Bridge Facility had a maturity date of August 2007 and bore interest at LIBOR plus 0.75%. This
bridge facility was repaid in June 2007. Following the repayment, the Company does not have the
right to draw on this facility.
8. CONVERTIBLE NOTES
In March 2007, the Company issued $600 million of Senior Convertible Notes due 2012 (the
“Senior Convertible Notes”). The Senior Convertible Notes were issued at par and pay interest in
cash semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15,2007. The Senior Convertible Notes are senior unsecured obligations and rank equally with all other
senior unsecured indebtedness. The Senior Convertible Notes are subject to net settlement and have an initial conversion price of
approximately $74.75 per common share. If certain conditions are met,
the incremental value can be settled in cash or the Company’s common shares, at the Company’s option. The Senior Convertible
Notes may only be converted prior to maturity based on certain provisions in the governing note
documents. A total of $117.0 million of the net proceeds from Senior Convertible Notes was used to
repurchase the Company’s common stock.
Concurrent with the issuance of the Senior Convertible Notes, the Company purchased an option
on its common stock in a private transaction, in order to effectively increase the conversion
premium from 20% to 40% or a conversion price of $87.21 per share at
June 30, 2007. This purchase option
allows the Company to receive a number of the Company’s common shares, up to a maximum of
approximately 1.1 million shares, from counterparties equal to the amounts of common stock and/or
cash related to the excess conversion value that it would pay to the holders of the Senior
Convertible Notes upon conversion. The option, which cost $32.6 million, was recorded as a
reduction of shareholders’ equity.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges and Fair Value Hedges
In February 2007, a consolidated affiliate of the Company entered into an aggregate notional
amount of $600 million of forward starting interest rate swaps. The swaps were executed to hedge
the
benchmark interest rate and swap spread associated with forecasted interest payments related to the
anticipated issuance of fixed rate borrowings. The treasury locks were terminated in connection
with the formation and financing of the DDR Domestic Retail Fund I Joint Venture (Note 2) in the
second quarter of 2007.
As of June 30, 2007, the aggregate fair value of the Company’s interest rate swaps was an
asset of $2.7 million, which is included in other assets in the condensed consolidated balance
sheets. For the six-month period ended June 30, 2007, the amount of hedge ineffectiveness was not
material.
10. CONTINGENCIES
The Company and its subsidiaries are subject to various legal proceedings which, taken
together, are not expected to have a material adverse effect on the Company. The Company is also
subject to a variety of legal actions for personal injury or property damage arising in the
ordinary course of its business, most of which are covered by insurance. While the resolution of
all matters cannot be predicted with certainty, management believes that the final outcome of such
legal proceedings and claims will not have a material adverse effect on the Company’s liquidity,
financial position or results of operations.
11. SHAREHOLDERS’ EQUITY AND OPERATING PARTNERSHIP UNITS
The following table summarizes the changes in shareholders’ equity since December 31, 2006 (in
thousands):
Common share dividends declared, per share, were $0.66 and $0.59 for the three-month
periods ended June 30, 2007 and 2006, respectively, and were $1.32 and $1.18 for the six-month
periods ended June 30, 2007 and 2006, respectively.
In June 2007, the Company’s Board of Directors authorized a common share repurchase program.
Under the terms of the program, the Company may purchase up to a maximum value of $500 million of
its common shares during the following two years.
In April 2007, the Company redeemed all outstanding shares of its 8.6% Class F
Cumulative
Redeemable Preferred Shares, aggregating $150 million, at a redemption price of $25.10750 per Class
F Preferred Share (the sum of $25.00 per share and a dividend per share of $0.10750 prorated to
the
redemption date). The Company recorded a non-cash dividend to net income available to common
shareholders of $5.4 million relating to the write-off of original issuance costs.
In March 2007, the Company’s Board of Directors authorized the Company to repurchase 1,878,311
common shares at a cost of $62.29 per share in connection with the convertible debt financing (Note
8).
Stock-based compensation for the six-months ended June 30, 2007 includes $0.9 million of
stock-based compensation expense that was recorded in accordance with the provisions of SFAS
123(R), “Share-Based Payment,” related to the departure of the Company’s president, effective May
2007.
In 2007, the vesting of restricted stock grants to certain officers and directors of the
Company, approximating 0.1 million common shares of the Company, was deferred through the Company’s
non-qualified deferred compensation plans and, accordingly, the Company recorded $6.7 million in
deferred obligations.
Operating Partnership Units
For the six-months ended June 30, 2007, the Company purchased 10,480 operating
partnership units for cash of $0.7 million. This transaction was treated as a purchase of a
minority interest.
Preferred Operating Partnership Units
In February 2007, a consolidated subsidiary of the Company issued to a designee of
Wachovia Bank, N.A. (“Wachovia”), 20,000,000 preferred units (the “Preferred Units”), with a
liquidation preference of $25 per unit, aggregating $500 million of the net assets of the Company’s
consolidated subsidiary. In accordance with terms of the agreement, the Preferred Units were
redeemed at 97.0% of par in the second quarter of 2007.
12. OTHER INCOME
Other income for the three and six-month periods ended June 30, 2007 and 2006 was comprised of
the following (in millions):
Represents acquisition fees of $6.3 million earned from the formation of the TIAA-CREF
Joint Venture in the first quarter of 2007, excluding the Company’s retained ownership
interest of approximately 15%. The Company’s fees were earned in conjunction with services
rendered by the Company in connection with the acquisition of the IRRETI real estate
assets.
(2)
Represents financing fees earned in connection with the formation of joint ventures,
excluding the Company’s retained ownership interest. The Company’s fees are earned in
conjunction with the timing and amount of the transaction by the joint venture.
(3)
For the six-month period ended June 30, 2006, the Company executed lease terminations
on four vacant Wal-Mart spaces in the Company’s wholly-owned portfolio.
13. DISCONTINUED OPERATIONS
Included in discontinued operations for the three and six-month periods ended June 30, 2007
and 2006, are 58 properties sold in 2007 (including one property held for sale at December 31,2006), aggregating 5.4 million square feet, and six shopping centers sold in 2006, aggregating 0.8
million square feet. This reporting has resulted in certain reclassification of 2006 financial
statement amounts. The operating results relating to assets sold are as follows (in thousands):
Earnings Per Share (EPS) have been computed pursuant to the provisions of SFAS No. 128,
“Earnings per Share.” The following table provides a reconciliation of net income and the number
of common shares used in the computations of “basic” EPS, which utilizes the weighted average
number of common shares outstanding without regard to dilutive potential common shares, and
“diluted” EPS, which includes all such shares.
Basic – Income from continuing operations
applicable to common shareholders
95,884
62,249
139,213
95,134
Add: Operating partnership minority interests
569
534
1,138
—
Diluted – Income from continuing operations
applicable to common shareholders
$
96,453
$
62,783
$
140,351
$
95,134
Number of Shares:
Basic – average shares outstanding
124,455
109,393
119,681
109,127
Effect of dilutive securities:
Stock options
545
516
575
558
Operating partnership minority interests
862
904
863
—
Restricted stock
64
53
199
50
Diluted – average shares outstanding
125,926
110,866
121,318
109,735
Per share data:
Basic earnings per share data:
Income from continuing operations applicable to
common shareholders
$
0.78
$
0.57
$
1.16
$
0.87
Income from discontinued operations
0.12
0.02
0.18
0.05
Net income applicable to common shareholders
$
0.90
$
0.59
$
1.34
$
0.92
Diluted earnings per share data:
Income from continuing operations applicable to
common shareholders
$
0.77
$
0.57
$
1.16
$
0.87
Income from discontinued operations
0.12
0.02
0.17
0.05
Net income applicable to common shareholders
$
0.89
$
0.59
$
1.33
$
0.92
The exchange of the minority interest associated with operating partnership units into
common shares was not included in the computation of diluted EPS for the six-months ended June 30,2006 because the effect of assuming conversion was anti-dilutive.
The Senior Convertible Notes, which are convertible into common shares of the Company at a
price of $65.11 and $74.75 were not included in the computation of diluted EPS for the three and
six-months ended June 30, 2007, as the Company’s stock price did not exceed the strike price of the
conversion feature.
15. FEDERAL INCOME TAXES
In 2007, the Company recognized an income tax benefit of approximately $15.4 million resulting
from the reversal of previously established valuation allowance against certain deferred tax
assets. The reserves were related to deferred tax assets established in prior years at which time
it was determined that it was more likely than not that the deferred tax asset would not be
realized and therefore, a valuation allowance was required. Several factors were considered in the
first quarter of 2007 that contributed to the reversal of the valuation allowance. The most
significant factor was the sale of merchant build assets by the Company’s taxable REIT subsidiary
in the second quarter of 2007 and similar projected taxable gains for future periods. Other
factors include the merger of various taxable REIT subsidiaries and the anticipated profit levels
of its taxable REIT subsidiaries, which will
facilitate the realization of the deferred tax assets. Management regularly assesses established
reserves and adjusts these reserves when facts and circumstances indicate that a change in
estimates is necessary. Based upon these factors, management determined that it is more likely
than not that the deferred tax assets will be realized in the future and, accordingly, the
valuation allowance recorded against those deferred tax assets is no longer required.
16. SEGMENT INFORMATION
The Company has two reportable business segments, shopping centers and business centers,
determined in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information.” Each shopping center is considered a separate operating segment; however,
each shopping center on a stand-alone basis is less than 10% of the revenues, profit or loss, and
assets of the combined reported operating segment and meets the majority of the aggregation
criteria under SFAS 131.
At June 30, 2007, the shopping center segment consisted of 708 shopping centers (including 315
owned through joint ventures and 39 of which are otherwise consolidated by the Company), in 45
states, plus Puerto Rico and Brazil. At June 30, 2006, the shopping center segment consisted of
465 shopping centers (including 163 owned through joint ventures and 39 of which are consolidated
by the Company), in 44 states, plus Puerto Rico. At June 30, 2007 and 2006, the Company also owned
seven business centers in five states.
The table below presents information about the Company’s reportable segments for the three and
six-month periods ended June 30, 2007 and 2006.
Unallocated expenses consist of general and administrative, interest income,
interest expense, tax benefit/expense, other income/expense and depreciation and
amortization as listed in the condensed consolidated statements of operations.
17. SUBSEQUENT EVENTS
From July 30 to August 7, 2007, the Company repurchased 1.2 million of its common shares in
open market transactions at an aggregate cost of approximately $59.3 million.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated
financial statements, the notes thereto and the comparative summary of selected financial data
appearing elsewhere in this report. Historical results and percentage relationships set forth in
the consolidated financial statements, including trends that might appear, should not be taken as
indicative of future operations. The Company considers portions of this information to be
“forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of
1933 and Section 21E of the Securities Exchange Act of 1934, 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 those forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be achieved. For this purpose, any
statements contained herein that are not statements of historical fact should be deemed to be
forward-looking statements. Without limiting the foregoing, the words “believes,”“anticipates,”“plans,”“expects,”“seeks,”“estimates” and similar expressions are intended to identify
forward-looking statements. Readers should exercise caution in interpreting and relying on
forward-looking statements since they involve known and unknown risks, uncertainties and other
factors that are, in some cases, beyond the Company’s control and that could materially affect the
Company’s actual results, performance or achievements.
Factors that could cause actual results, performance or achievements to differ materially from
those expressed or implied by forward-looking statements include, but are not limited to, the
following:
•
The Company is subject to general risks affecting the real estate industry, including the
need to enter into new leases or renew leases on favorable terms to generate rental
revenues;
•
The Company could be adversely affected by changes in the local markets where its
properties are located, as well as by adverse changes in national economic and market
conditions;
•
The Company may fail to anticipate the effects on its properties of changes in consumer
buying practices, including sales over the Internet and the resulting retailing practices
and space needs of its tenants;
•
The Company is subject to competition for tenants from other owners of retail properties,
and its tenants are subject to competition from other retailers and methods of distribution.
The Company is dependent upon the successful operations and financial condition of its
tenants, in particular of its major tenants, and could be adversely affected by the
bankruptcy of those tenants;
•
The Company may not realize the intended benefits of an acquisition or merger
transaction. The assets may not perform as well as the Company anticipated or the Company
may not successfully integrate the assets and realize the improvements in occupancy and
operating results that the Company anticipates. The acquisition of certain assets may
subject the Company to liabilities, including environmental liabilities;
The Company may not realize the intended benefits of the Inland Retail Real Estate Trust,
Inc. (“IRRETI”) merger. For example, the Company may not achieve the anticipated costs
savings and operating efficiencies, or effectively integrate the operations of IRRETI, the
IRRETI portfolio or its development projects. The IRRETI assets may not perform as well as
the Company anticipates;
•
The Company may fail to identify, acquire, construct or develop additional properties
that produce a desired yield on invested capital, or may fail to effectively integrate
acquisitions of properties or portfolios of properties. In addition, the Company may be
limited in its acquisition opportunities due to competition and other factors;
•
The Company may fail to dispose of properties on favorable terms. In addition, real
estate investments can be illiquid and limit the Company’s ability to promptly make changes
to its portfolio to respond to economic and other conditions;
•
The Company may abandon a development opportunity after expending resources if it
determines that the development opportunity is not feasible or if it is unable to obtain all
necessary zoning and other required governmental permits and authorizations;
•
The Company may not complete development projects on schedule as a result of various
factors, many of which are beyond the Company’s control, such as weather, labor conditions,
governmental approvals and material shortages, resulting in increased debt service expense
and construction costs and decreases in revenue;
•
The Company’s financial condition may be affected by required payments of debt or related
interest, the risk of default and restrictions on its ability to incur additional debt or
enter into certain transactions under its credit facilities and other documents governing
its debt obligations. In addition, the Company may encounter difficulties in obtaining
permanent financing;
•
Debt and/or equity financing necessary for the Company to continue to grow and operate
its business may not be available or may not be available on favorable terms;
•
The Company is subject to complex regulations related to its status as a real estate
investment trust (“REIT”) and would be adversely affected if it failed to qualify as a REIT;
•
The Company must make distributions to shareholders to continue to qualify as a REIT, and
if the Company borrows funds to make distributions, those borrowings may not be available on
favorable terms;
•
Partnership or joint venture investments may involve risks not otherwise present for
investments made solely by the Company, including the possibility a partner or co-venturer
might become bankrupt, might at any time have different interests or goals than those of the
Company and may take action contrary to the Company’s instructions, requests, policies or
objectives, including the Company’s policy with respect to maintaining its qualification as
a REIT;
The Company may not realize anticipated returns from its real estate assets outside of
the United States. The Company expects to continue to pursue international opportunities
that may subject the Company to different or greater risk from those associated with its
domestic operations. The Company owns assets in Puerto Rico, an interest in a joint venture
which owns properties in Brazil and an interest in a recently formed joint venture that
will develop and own properties in Russia and Ukraine;
•
International development and ownership activities carry risks that are different from
those the Company faces with the Company’s domestic properties and operations. These risks
include:
•
Adverse effects of changes in exchange rates for foreign currencies;
•
Changes in foreign political environments;
•
Challenges of complying with a wide variety of foreign laws including taxes,
addressing different practices and customs relating to corporate governance, operations
and litigation;
•
Different lending practices;
•
Cultural differences;
•
Changes in applicable laws and regulations in the United States that affect foreign
operations;
•
Difficulties in managing international operations and
•
Obstacles to the repatriation of earnings and cash;
•
Although the Company’s international activities currently are a relatively small portion
of its business, to the extent the Company expands its international activities, these risks
could significantly increase and adversely affect its results of operations and financial
condition;
•
The Company is subject to potential environmental liabilities;
•
The Company may incur losses that are uninsured or exceed policy coverage due to its
liability for certain injuries to persons, property or the environment occurring on its
properties;
•
The Company could incur additional expenses in order to comply with or respond to claims
under the Americans with Disabilities Act or otherwise be adversely affected by changes in
government regulations, including changes in environmental, zoning, tax and other
regulations and
•
Changes in interest rates could adversely affect the market price of the Company’s common
shares, as well as its performance and cash flow.
Executive Summary
The Company achieved several important objectives during the second quarter of 2007 that
should have a positive long-term impact on the Company’s business. In the second quarter of 2007,
the Company executed transactions and delivered results in line with its expectations. Moreover,
the Company continues to leverage its core competencies in development and leasing to identify new
opportunities for further value creation.
With respect to strategic transactions, the Company sold a $1.5 billion portfolio of assets to
DDR Domestic Retail Fund I, a long-term, core, commingled fund that combined new institutional
clients with relationships of existing partners. This transaction expanded the Company’s funds
management platform, and allowed the Company to oversee the day-to-day operations of high quality
retail assets. The Company will pursue additional opportunities to create new funds and partner
with large institutions that share the Company’s interest in directly owning high quality shopping
centers over a long period, but desire the Company to actively manage the assets.
The Company also sold a portfolio of non-core assets for approximately $600 million, of which
approximately $151 million is expected to close in the third quarter of 2007, subject to lender
approvals and other closing conditions. This sale was consistent with the Company’s ongoing
strategy to trim its portfolio of assets which, for various reasons, no longer meet the Company’s
investment criteria. In the case of this non-core asset sale, the Company reduced its portfolio of
many smaller and older shopping centers in remote markets, thereby improving the quality and
manageability of the remaining portfolio. As a result, the Company is expected to now be in a
position to recognize increased efficiencies across its existing asset base, particularly in the
areas of leasing and property management. The Company will continue to monitor the performance of
individual properties within the portfolio and sell assets, when appropriate.
With the proceeds generated by these two transactions, the Company repaid the bridge financing
used to fund the merger with IRRETI and has improved its financial ratios to a level above those
prior to the merger.
While the Company’s acquisitions tend to create attention, the Company’s investment strategy
clearly includes, when appropriate, the sale of assets. Currently, the Company anticipates selling
more than $100 million of assets during the next year. Historically, the Company has sold assets
and placed assets into infinite or long-term joint ventures such as MDT, TIAA-CREF, Dividend
Capital Total Capital Realty Joint Venture, DDR Domestic Retail Fund I, as well as more traditional
joint venture structures with other quality institutional partners, such as Prudential Real Estate
Investors and Kuwait Financial Centre. As a result of these sales, the Company has a more
efficient operating platform.
The Company’s investment strategy also includes potential share repurchases, when appropriate.
The Company pursued share repurchases in 1999 and 2000 when the Company determined that investment
in its own shares was the best investment opportunity available. At that time, the Company
repurchased more than $170 million of stock and OP units at an average price of approximately
$17.00 per share. Recently, the Company believes its share price has appeared attractive relative
to market pricing available on acquisitions and dispositions. The Company’s Board of Directors
responded by approving a share repurchase program of up to a maximum value of $500 million in its
common shares.
As part of the Company’s capital allocation strategy, the Company evaluates all investment
opportunities, whether acquisitions, developments or share repurchases, on a comparative and
relative basis, to maximize returns on the Company’s investments and to create value for its
shareholders. The framework for the Company’s investment strategy has evolved as market conditions
have changed, and during the second quarter, the Company continued that evolution through these
strategic initiatives that will help ensure it remains a prudent steward of its shareholders’
capital.
Base and percentage rental revenues relating to new leasing, re-tenanting and expansion of the
Core Portfolio Properties (shopping center properties owned as of January 1, 2006, but excluding
properties under development and those classified as discontinued operations) (“Core Portfolio
Properties”) increased approximately $4.6 million, or 1.9%, for the six-months ended June 30, 2007,
as compared to the same period in 2006. The increase in base and percentage rental revenues is due
to the following (in millions):
Increase
(Decrease)
Core Portfolio Properties
$
4.6
IRRETI Merger
60.4
Acquisition of real estate assets
1.9
Development and redevelopment of 22 shopping center properties
occupied square foot was $12.03 at June 30, 2007, as compared to $11.64 at June 30, 2006. The
increase is primarily due to the higher rents attributable to the assets acquired from IRRETI.
At June 30, 2007, the aggregate occupancy of the Company’s wholly-owned shopping centers was
93.6%, as compared to 93.1% at June 30, 2006. The Company owned 354 wholly-owned shopping centers
at June 30, 2007, as compared to 264 shopping centers at June 30, 2006. The average annualized
base rent per occupied square foot was $11.33 at June 30, 2007, as compared to $10.64 at June 30,2006. The increase is primarily due to the higher rents attributable to the assets acquired from
IRRETI.
At June 30, 2007, the aggregate occupancy rate of the Company’s joint venture shopping centers
was 96.2%, as compared to 97.3% at June 30, 2006. The Company’s joint ventures owned 315 shopping
centers and 39 consolidated centers primarily owned through the Mervyns Joint Venture at June 30,2007, as compared to 201 shopping centers at June 30, 2006. The average annualized base rent per
occupied square foot was $12.65 at June 30, 2007, as compared to $11.98 at June 30, 2006. The
increase is a result of the mix of shopping center assets in the joint ventures at June 30, 2007,
as compared to June 30, 2006 primarily related to the 2007 formation of the TIAA-CREF Joint
Venture, Dividend Capital Total Capital Realty Joint Venture and DDR Domestic Retail Fund I.
Recoveries from tenants increased $20.6 million, or 25.1%, for the six-month period ended June30, 2007, as compared to the same period in 2006. This increase is primarily due to an increase in
operating expenses and real estate taxes that aggregated $24.5 million due to the IRRETI merger in
February 2007. Recoveries were approximately 85.7% and 86.2% of operating expenses and real estate
taxes for the six-month period ended June 30, 2007 and 2006, respectively.
The increase in recoveries from tenants was primarily related to the following (in millions):
Increase
(Decrease)
IRRETI Merger
$
14.8
Acquisition and development/redevelopment of shopping center
properties in 2006 and 2007
2.5
Transfer of assets to unconsolidated joint ventures in
2006
(1.2
)
Net increase in operating expenses at the remaining shopping
center and business center properties
4.5
$
20.6
Ancillary and other property income increased due to additional opportunities in the Core
Portfolio Properties. The Company anticipates that this ancillary income will grow with additional
opportunities in the IRRETI portfolio. The Company believes its ancillary income program continues
to be an industry leader among “open-air” shopping centers. Continued growth is anticipated in the
area of ancillary or non-traditional revenue, as additional revenue opportunities are pursued and
as currently established revenue opportunities proliferate throughout the Company’s core, acquired
and development portfolios. Ancillary revenue opportunities have in the past included short-term and
seasonal leasing programs, outdoor advertising programs, wireless tower development programs,
energy management programs, sponsorship programs and various other programs.
The increase in management, development and other fee income, which aggregated $8.1 million
during the six-months ended June 30, 2007, is primarily due to the continued growth of
unconsolidated joint venture interests aggregating $4.1 million, an increase in development fee
income of approximately $1.5 million and other income of approximately $2.3 million. The remaining
increase of $0.8 million is due to an increase in other fee income as a result of increased leasing
activity. This increase was offset by the sale of several of the Company’s unconsolidated joint
venture properties that contributed approximately $0.6 million in management fee income.
Management fee income is expected to continue to increase as unconsolidated joint ventures acquire
additional properties and as assets under development become operational. Development fee income
was primarily earned through the redevelopment of assets through the Coventry II Joint Venture. The
Company expects to continue to pursue additional development joint ventures as opportunities
present themselves.
Other income for the three and six-month periods ended June 30, 2007 and 2006 was comprised of
the following (in millions):
Acquisition fees of $6.3 million earned from the formation of the joint venture with
TIAA-CREF (“TIAA-CREF Joint Venture”), in the first quarter of 2007 excluding the Company’s
retained ownership interest of approximately 15%. The Company’s fees were earned in
conjunction with services rendered by the Company in connection with the acquisition of the
IRRETI real estate assets.
(2)
Represents financing fees earned in connection with the formation of joint ventures,
excluding the Company’s retained ownership interest. The Company’s fees are earned in
conjunction with the timing and amount of the transaction by the joint venture.
(3)
For the six-month period ended June 30, 2006, the Company executed lease terminations on
four vacant Wal-Mart spaces in the Company’s wholly-owned portfolio.
Operating and maintenance expenses include the Company’s provision for bad debt expense, which
approximated 0.7% and 0.8% of total revenues for the six-months ended June 30, 2007 and 2006,
respectively (see Economic Conditions).
The increase in rental operation expenses, excluding general and administrative, for the three
and six-month periods ended June 30, 2007 and 2006 is due to the following (in millions):
Operating
Real
Depreciation
and
Estate
and
Maintenance
Taxes
Amortization
Core Portfolio Properties
$
(0.3
)
$
2.9
$
1.3
IRRETI Merger
7.6
10.2
14.6
Acquisition and development/redevelopment of shopping center
properties
2.8
1.2
2.2
Transfer of assets to unconsolidated joint ventures in 2006....
—
(0.8
)
(1.5
)
Business center properties
0.6
—
0.5
Provision for bad debt expense
0.3
—
—
Personal property
—
—
0.6
$
11.0
$
13.5
$
17.7
The increase in general and administrative expenses is primarily attributable to compensation
expense as a result of the departure of the President of the Company effective May 2007, and
certain executive outperformance incentive compensation plans. The Company recorded a charge of
$4.1 million during the six-month period ended June 30, 2007, related to the departure of the
President as outlined in the Amended and Restated Employment Agreement which includes, among other
items, stock-based compensation charges required under the provisions of SFAS 123(R). Total
general and administrative expenses were approximately 4.8% and 5.0%, respectively, of total
revenues, including total revenues of joint ventures, for the six-months ended June 30, 2007 and
2006, respectively.
The Company continues to expense internal leasing salaries, legal salaries and related
expenses associated with certain leasing and re-leasing of existing space. In addition, the
Company capitalized certain direct and incremental construction and software development and
implementation costs consisting of direct wages and benefits, travel expenses and office overhead
costs of $6.5 million and $3.6 million for the six-month periods ending June 30, 2007 and 2006,
respectively.
Interest income for the six-months ended June 30, 2007, increased primarily due to excess cash
held by the Company as the result of IRRETI merger. This increase was offset by advances to the
Service Merchandise joint venture, which were repaid by the joint venture in August 2006.
Interest expense increased primarily due to the IRRETI merger and associated borrowings
combined with other development assets becoming operational. The weighted average debt outstanding
and related weighted average interest rate during the six-month period ended June 30, 2007, was
$5.7 billion and 5.3%, respectively, compared to $4.1 billion and 5.8%, respectively, for the same
period in 2006. At June 30, 2007, the Company’s weighted average interest rate was 5.2% compared
to 5.9% at June 30, 2006. The reduction in weighted average interest rates is primarily related
to the Company’s issuance of $850 million of senior convertible notes in August 2006 and March 2007
with a weighted average coupon rate of 3.2%. Interest costs capitalized, in conjunction with
development and expansion projects and development joint venture interests, were $5.9 million and
$11.6 million for the three and six-month periods ended June 30, 2007, respectively, as compared to
$5.0 million and $9.2 million for the same periods in 2006.
Other income/expense primarily relates to abandoned acquisition and development project costs
and litigation settlements or costs.
Income tax benefit of taxable REIT
subsidiaries and franchise taxes
15,770
2,360
13,410
568.2
A summary of the increase in equity in net income of joint ventures for the six-months ended
June 30, 2007, is comprised of the following (in millions):
Increase
(Decrease)
Increase in gains from sale transactions as compared to
2006
$
15.2
Purchase of joint venture interests by DDR
(0.6
)
Acquisition of assets by unconsolidated joint ventures
1.1
Primarily debt refinancing at a fixed rate at a joint venture
2.1
$
17.8
The
increase in equity in net income of joint ventures is primarily due
to an increase in promoted income and
gains from the disposition of unconsolidated joint venture assets in 2007. During the three-month
period ended June 30, 2007, the Company received $13.6 million of promoted income relating to the
sale of assets from the DDR Markaz LLC Joint Venture to DDR Domestic Retail Fund I, which is
included in the Company’s proportionate share of net income. In 2007, the Company’s unconsolidated
joint ventures recognized an aggregate gain from the sale of joint venture assets of $93.8 million,
of which the Company’s proportionate share was
$19.7 million of which $18.0 million was deferred due to the
Company's continuing involvement in certain assets. In 2006, the Company’s
unconsolidated joint ventures recognized an aggregate loss from the sale of joint venture assets of
$1.5 million, of which the Company’s proportionate share was $0.4 million.
The Company’s unconsolidated joint ventures sold the following assets in the six-month period
ended June 30, 2007 and 2006.
2007 Sales
One 25.5% effectively-owned shopping center
Four sites formerly occupied by Service Merchandise
2006 Sales
Four 25.5% effectively-owned shopping centers
One site formerly occupied by Service Merchandise
Minority equity interest expense increased for the six-months ended June 30, 2007, primarily
due to the following (in millions):
(Increase)
Decrease
Issuance of preferred operating partnership
units
$
(9.7
)
Mervyns Joint Venture which is owned approximately 50% by the Company
0.1
Net decrease in net income from consolidated joint venture investments
The income tax benefit of $15.8 million is primarily due to the Company recognizing an income
tax benefit of approximately $15.4 million resulting from the reversal of previously established
valuation allowance against certain deferred tax assets in 2007. The
reserves were related to deferred tax assets established in prior years at which time it was determined that it was more likely
than not that the deferred tax asset would not be realized and therefore, a valuation allowance was required. Several factors were
considered in the first quarter of 2007 that contributed to the reversals of the valuation
allowance. The most significant factor was the sale of merchant build assets by the Company’s
taxable REIT subsidiary in the second quarter of 2007 and similar projected taxable gains for
future periods. Other factors include the merger of various taxable REIT subsidiaries and the
anticipated profit levels of its taxable REIT subsidiaries, which will facilitate the realization
of the deferred tax assets. Management regularly assesses established reserves and adjusts these
reserves when facts and circumstances indicate that a change in estimates is necessary. Based upon
these factors, management determined that it is more likely than not that the deferred tax assets
will be realized in the future and, accordingly, the valuation allowance recorded against those
deferred tax assets is no longer required.
Included in discontinued operations for the three and six-month periods ended June 30, 2007
and 2006, are 58 properties sold in 2007 (including one property classified as held for sale at
December 31, 2006 and 17 properties acquired in 2007), aggregating 5.4 million square feet, and six
shopping centers sold in 2006, aggregating 0.8 million square feet.
The Company recorded gains on disposition of real estate and real estate investments for the
six-months ended June 30, 2007 and 2006, as follows (in millions):
Transfer of assets to the DDR Domestic Retail Fund
I (1), (2)
$
2.0
$
—
$
2.0
$
—
Transfer of assets to the DPG Realty Holdings Joint
Venture (1), (3)
—
0.6
—
0.6
Transfer of assets to the Dividend Capital Total Realty
Trust Joint Venture (1), (4)
50.2
—
50.2
—
Transfer of assets to the MDT Joint Venture (1), (5)
—
—
—
5.8
Transfer of assets to the MDT Preferred Joint Venture
(1), (6)
—
38.5
—
38.5
Land sales (7)
2.6
0.6
8.0
2.4
Previously deferred gains and other loss on sales (8)
(0.8
)
0.2
(0.2
)
(0.1
)
$
54.0
$
39.9
$
60.0
$
47.2
(1)
This disposition is not classified as discontinued operations due to the
Company’s continuing involvement through its retained ownership interest and
management agreements.
For the six-month period ended June 30, 2006, the Company transferred a
newly developed expansion area adjacent to a shopping center owned by the joint
venture.
For the six-month period ended June 30, 2006, the Company transferred
newly developed expansion areas adjacent to two shopping centers owned by the joint
venture.
These dispositions did not meet the discontinued operations disclosure
requirement.
(8)
Primarily attributable to the recognition of additional gains associated
with the leasing of units associated with master lease and other obligations on
disposed properties.
Increase in net operating revenues (total
revenues in excess of operating and maintenance
expenses and real estate taxes)
$
49.5
$
71.8
Increase in general and administrative
expenses
(3.7
)
(9.8
)
Increase in depreciation expense
(9.6
)
(17.7
)
(Decrease) increase in interest income
(0.3
)
0.2
Increase in interest expense
(21.7
)
(31.7
)
Change in other expense
(1.4
)
(1.1
)
Increase in equity in net income of joint
ventures
17.0
17.8
Increase in minority interest expense
(5.9
)
(9.5
)
Change in income tax benefit/expense
(2.1
)
13.4
Increase in income from discontinued
operations
2.0
1.6
Increase in gain on disposition of real estate
of discontinued operations properties
10.8
13.6
Increase in gain on disposition of real
estate
14.1
12.9
Increase in net income
$
48.7
$
61.5
Funds From Operations
The Company believes that Funds From Operations (“FFO”), which is a non-GAAP financial
measure, provides an additional and useful means to assess the financial performance of real estate
investment trusts (“REITs”). FFO is frequently used by securities analysts, investors and other
interested parties to evaluate the performance of REITs, most of which present FFO along with net
income as calculated in accordance with GAAP.
FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate
and real estate investments, which assumes that the value of real estate assets diminishes ratably
over time. Historically, however, real estate values have risen or fallen with market conditions,
and many companies utilize different depreciable lives and methods. Because FFO excludes
depreciation and amortization unique to real estate, gains from depreciable property dispositions
and extraordinary items, it provides a performance measure that, when compared year over year,
reflects the impact on operations from trends in occupancy rates, rental rates, operating costs,
acquisition and development activities and interest costs. This provides a perspective of the
Company’s financial performance not immediately apparent from net income determined in accordance
with GAAP.
FFO is generally defined and calculated by the Company as net income, adjusted to exclude: (i)
preferred dividends, (ii) gains from disposition of depreciable real estate property, except for
those sold through the Company’s merchant building program, which are presented net of taxes, (iii)
sales of securities, (iv) extraordinary items, (v) cumulative effect of adoption of new accounting
standards and (vi) certain non-cash items. These non-cash items principally include real property
depreciation, equity
income from joint ventures and equity income from minority equity investments and adding the
Company’s proportionate share of FFO from its unconsolidated joint ventures and minority equity
investments, determined on a consistent basis.
For the reasons described above, management believes that FFO provides the Company and
investors with an important indicator of the Company’s operating performance. This measure of
performance is used by the Company for several business purposes and by other REITs. It provides a
recognized measure of performance other than GAAP net income, which may include non-cash items
(often large). Other real estate companies may calculate FFO in a different manner.
The Company uses FFO (i) in executive employment agreements to determine incentives based on
the Company’s performance, (ii) as a measure of a real estate asset’s performance, (iii) to shape
acquisition, disposition and capital investment strategies and (iv) to compare the Company’s
performance to that of other publicly traded shopping center REITs.
Management recognizes FFO’s limitations when compared to GAAP’s income from continuing
operations. FFO does not represent amounts available for needed capital replacement or expansion,
debt service obligations, or other commitments and uncertainties. Management does not use FFO as an
indicator of the Company’s cash obligations and funding requirements for future commitments,
acquisitions or development activities. FFO does not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash
needs, including the payment of dividends. FFO should not be considered an alternative to net
income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of
liquidity. FFO is simply used as an additional indicator of the Company’s operating performance.
For the three-month period ended June 30, 2007, FFO available to common shareholders increased
$49.5 million to $159.3 million, as compared to $109.8 million for the same period in 2006. For
the six-month period ended June 30, 2007, FFO available to common shareholders increased $69.4
million to $265.4 million as compared to $196.0 million for the same period in 2006. The increase
in FFO for the six-months ended June 30, 2007, is primarily related to the merger with IRRETI, the
release of certain valuation reserves and an increase in the gain on sale of assets including those
recognized through the Company’s merchant build program and promoted income of approximately $13.6
million earned from one of the Company’s joint ventures in the second quarter of 2007.
Depreciation and amortization of real
estate investments
54,136
45,804
106,584
90,836
Equity in net income of joint ventures
(21,602
)
(4,619
)
(27,883
)
(10,088
)
Joint ventures’ FFO (2)
31,313
9,342
44,872
19,281
Minority equity interests (OP Units)
569
534
1,138
1,068
Gain on disposition of depreciable
real estate, net (3)
(16,587
)
(6,220
)
(19,443
)
(5,999
)
FFO applicable to common shareholders
159,258
109,784
265,441
195,976
Preferred dividends
16,008
13,792
29,800
27,584
Total FFO
$
175,266
$
123,576
$
295,241
$
223,560
(1)
Includes straight-line rental revenues of approximately $3.4 million and $4.2
million for the three-month periods ended June 30, 2007 and 2006, respectively, and
$6.5 million and $7.8 million for the six-month periods ended June 30, 3007 and 2006,
respectively.
(Gain) loss on disposition of
real estate, net (b)
(91,441
)
11
(91,441
)
(19
)
Depreciation and amortization
of real estate investments
49,215
20,586
79,837
40,612
$
70,409
$
37,822
$
118,928
$
79,015
DDR ownership interest (c)
$
31,313
$
9,342
$
44,872
$
19,281
(a)
Revenue for the three-month periods ended June 30, 2007 and 2006,
included approximately $2.1 million and $1.1 million, respectively, resulting
from the recognition of straight-line rents of which the Company’s proportionate
share is $0.3 million and $0.2 million, respectively. Revenue for the six-month
periods ended June 30, 2007 and 2006, included approximately $3.7 million and
$2.5 million, respectively, resulting from the recognition of straight-line
rents of which the Company’s proportionate share is $0.5 million for each
period.
(b)
The gain on disposition of recently developed shopping centers is
not reflected as an adjustment from net income to arrive at FFO, as the Company
considers these properties as part of the merchant building program. These
gains primarily reflect the sale of the assets previously occupied by Service
Merchandise.
The Company’s share of joint venture net income was decreased by
$0.1 million and increased by $0.1 million for the three-month periods ended
June 30, 2007 and 2006, respectively. The Company’s share of joint venture net
income was decreased by $0.4 million and increased by $0.2 million for the
six-month periods ended June 30, 2007 and 2006, respectively. The above amounts
are related to basis differences in depreciation and adjustments to gain on
sales. During the three-month period ended June 30, 2007, the Company received
$13.6 million of promoted income relating to the sale of assets from the DDR
Markaz LLC Joint Venture to DDR Domestic Retail Fund I, which is included in the
Company’s proportionate share of net income and FFO.
At June 30, 2007 and 2006, the Company owned joint venture interests in 269 and
111 operating shopping center properties, respectively. In addition, at June 30,2007, the Company owned 46 shopping center sites formerly owned by Service
Merchandise through its 20% owned joint venture with Coventry II. At June 30,2006, 52 of these Service Merchandise sites were formerly owned through an
approximate 25% owned joint venture. The Company also owned an approximate 25%
interest in the Prudential Retail Value Fund and a 50% joint venture equity
interest in a real estate management/development company.
(3)
The amount reflected as gain on disposition of real estate and real estate
investments from continuing operations in the condensed consolidated statement of
operations includes residual land sales, which management considers a sale of
non-depreciated real property, and the sale of newly developed shopping centers, as the
Company considers these properties as part of the merchant building program. These
sales are included in the Company’s FFO and therefore are not reflected as an
adjustment in FFO. For the three-month periods ended June 30, 2007 and 2006, net gains
resulting from residual land sales aggregated $2.6 million and $0.6 million,
respectively. For the six-month periods ended June 30, 2007 and 2006, net gains
resulting from residual land sales aggregated $8.0 million and $2.4 million,
respectively. For the three-month periods ended June 30, 2007 and 2006, merchant
building gains, net of tax, aggregated $45.7 million and $33.1 million, respectively.
For the six-month periods ended June 30, 2007 and 2006, merchant building gains, net of
tax, aggregated $46.2 million and $38.8 million, respectively.
Liquidity and Capital Resources
The Company’s cash flow activities are summarized as follows (in thousands):
The Company anticipates that cash flow from operating activities will continue to provide
adequate capital for all interest and monthly principal payments on outstanding indebtedness,
recurring tenant improvements and dividend payments in accordance with REIT requirements.
The Company
anticipates that cash on hand, borrowings available under its existing revolving credit facilities
and other debt and equity alternatives, including the issuance of common and preferred shares, OP
Units, joint venture capital and asset dispositions, will provide the necessary capital to achieve
continued growth. The proceeds from the sale of assets classified as discontinued operations and
other asset dispositions are utilized to acquire and develop assets. The Company believes that its
acquisition and developments completed in 2006 and 2007, new leasing, and expansion and
re-tenanting of the Core Portfolio Properties continue to add to the Company’s operating cash flow.
Additionally, the Company believes that the merger with IRRETI will contribute to the Company’s
long-term growth.
Changes in cash flow from investing activities in 2007, as compared to 2006, are primarily due
to the IRRETI merger, the sale of assets (including Domestic Retail Fund I and Dividend Capital Total
Realty Trust Joint Venture as described in Acquisitions, Developments
and Expansions), and the
additional equity contributions to joint ventures, primarily TIAA-CREF Joint Venture and Sonae
Sierra Brazil BV Sarl. Changes in cash flow from financing activities in 2007, as compared to
2006, primarily relate to an increase in acquisition activity in 2007 as compared to 2006 and the
issuance of convertible senior notes and common shares offset by the Company’s repurchase of its
common shares in 2007.
During the second quarter of 2007, the Company’s Board of Directors authorized a common share
repurchase program. Under the terms of the program, the Company may purchase up to a maximum value
of $500 million of its common shares during the next two years. From July 30 to August 7, 2007,
the Company repurchased 1.2 million of its common shares in open market transactions at an
aggregate cost of approximately $59.3 million.
In December 2006, the Company announced the Company’s intent to increase its 2007 quarterly
dividend per common share to $0.66 from $0.59. The Company anticipates that the increased dividend
level will continue to result in a conservative payout ratio. The payout ratio is determined based
on common and preferred dividends declared as compared to the Company’s FFO. The Company’s common
share dividend payout ratio for the first six-months of 2007 was approximately 62.6% of reported
FFO, as compared to 66.6% for the same period in 2006. See “Off Balance Sheet Arrangements” and
“Contractual Obligations and Other Commitments” sections for discussion of additional disclosure of
capital resources.
Acquisitions, Developments, Redevelopments and Expansions
During the six-month period ended June 30, 2007, the Company and its unconsolidated joint
ventures expended $6.2 billion, net, to acquire, develop, expand, improve and re-tenant various
properties. The Company’s expansion, acquisition and development activity is summarized below.
Inland Retail Real Estate Trust, Inc.
On February 27, 2007, the Company merged with IRRETI. The Company acquired all of the
outstanding shares of IRRETI for a total merger consideration of $14.00 per share, of which $12.50
per
share was funded in cash and $1.50 per share in the form of DDR common shares. As a result,
the Company issued 5.7 million DDR common shares to the IRRETI shareholders for a total
consideration of approximately $394.2 million.
The IRRETI merger included assets of approximately $6.2 billion, of which real estate related
assets of approximately $3.0 billion were acquired by the TIAA-CREF Joint Venture. The IRRETI real
estate portfolio consists of 316 community shopping centers, neighborhood shopping centers and
single tenant/net leased retail properties, comprising approximately 44.2 million square feet of
total GLA of which 66 shopping centers comprising approximately 23.1 million square feet of total
GLA are owned by the TIAA-CREF Joint Venture.
DDR Domestic Retail Fund I
In the second quarter of 2007, the Company formed DDR Domestic Retail Fund I (“Fund”), a
sponsored, fully-seeded commingled fund. The Fund acquired 63 shopping center assets aggregating
8.3 million square feet (“Portfolio”) from the Company and a joint venture of the Company for
approximately $1.5 billion. The Portfolio is comprised of 54 assets acquired by the Company
through its acquisition of IRRETI, seven assets formerly held in a joint venture with Kuwait
Financial Centre (“DDR Markaz LLC Joint Venture”), in which the Company had a 20% ownership
interest, and two assets from the Company’s wholly-owned portfolio. The Company recognized a gain
of approximately $9.6 million, net of its 20% retained interest, from the sale of the two
wholly-owned assets, which is included in gain on disposition of real estate in our statements of
operations. In conjunction with the formation of the Fund and identification of the equity
partners, the Company paid a $7.6 million fee to a third party consulting firm and recognized this
amount as a reduction to gain on disposition of real estate. The DDR Markaz LLC Joint Venture
recorded a gain of approximately $90.2 million. The
Company’s proportionate share of approximately $18.0 million of the joint venture gain was deferred
as the Company retained an effective 20% ownership interest in these assets. The Company remains
responsible for all day-to-day operations of the properties and receives ongoing fees for asset
management and property management, leasing, construction management and ancillary income in
addition to a promoted interest. In addition, upon the sale of the assets from the DDR Markaz LLC
Joint Venture to the Fund, the Company realized and recognized promoted income of approximately
$13.6 million, which is included in equity in net income of joint ventures and FFO.
Dividend Capital Total Realty Trust Joint Venture
In the second quarter of 2007, Dividend Capital Total Realty Trust and the Company formed a
$161.5 million joint venture (“Dividend Capital Total Realty Trust Joint Venture”). The Company
contributed three recently developed assets aggregating 0.7 million of Company-owned square feet to
the joint venture and retained an effective ownership interest of 10%. The Company recorded an
after-tax merchant build gain, net of its retained interest, of approximately $45.6 million, which
is included in gain on disposition of real estate and FFO. The Company receives ongoing asset
management and property management fees, plus fees on leasing and ancillary income. In addition,
the Company, subject to performance of the joint venture, as defined in the agreement, is entitled
to receive a promoted interest above a 9.5% leveraged threshold return.
ECE Projektmanagement Joint Venture
In May 2007, ECE Projektmanagement G.m.b.H. & Co.KG (“ECE”), a fully integrated international
developer and manager of shopping centers based in Hamburg, Germany, and the
Company formed a new joint venture,
subject to certain closing conditions which were finalized in the third quarter 2007, to fund investments
in new retail developments located in western Russia and Ukraine. The joint venture is owned 75%
by the Company and 25% by ECE. As of June 30, 2007, the Company had not funded any amounts to this
joint venture.
Acquisitions
During the first quarter of 2007, the Company’s joint venture in Brazil acquired an additional
73% interest in Shopping Metropole Center and, as such, the joint venture now owns 83% of this
shopping center. The Company’s contributed approximately $24.6 million for its proportionate share
of the acquisition of the additional interest.
Effective January 2007, the Company acquired the remaining 25% minority interest in Coventry I
and, as such, the Company now owns 100% of this entity. The aggregate purchase price was
approximately $13.8 million. This entity generally serves as the general partner of the Company’s
RVIP joint ventures.
Dispositions
In addition to the sale of assets to the two joint ventures discussed above, the Company sold
52 shopping center properties in one transaction, aggregating 4.7 million square feet, for approximately $448.7
million and recognized a non-FFO gain of approximately $10.8 million in the second quarter of 2007.
An additional 11 assets associated with this transaction are expected to close in the third
quarter of 2007, subject to lender approvals and other closing conditions, for approximately $151
million.
In the first quarter of 2007, the Company sold six shopping center properties, including one
shopping center that was classified as held for sale at December 31, 2006, aggregating 0.7 million
square feet for approximately $51.9 million and recognized a non-FFO gain of approximately $2.8
million.
Development (Wholly-Owned and Consolidated Joint Ventures)
The Company currently has the following shopping center projects under construction:
Wholly-Owned and Consolidated Joint Venture Developments
Currently in Progress
Targeted
Expected
Substantial
Total
Gross Cost
Completion
Property
GLA
($Millions)
Date
Description
Ukiah (Mendocino), California
669,406
$
113.5
2009
Community Center
Miami, Florida
644,999
155.7
2006-2009
Mixed Use
Tampa (Brandon), Florida
370,700
70.7
2008
Community Center
Douglasville, Georgia
124,200
22.4
2008
Community Center
Nampa, Idaho
829,975
147.0
2007-2008
Community Center
Chicago (McHenry), Illinois
454,378
73.3
2007
Community Center
Boston, Massachusetts
(Seabrook, New Hampshire)
461,825
74.5
2009
Community Center
Elmira (Horseheads), New York
668,619
77.1
2007-2008
Community Center
Raleigh (Apex), North
Carolina Promenade
87,780
20.2
2008
Community Center
Raleigh (Apex), North
Carolina Beaver Creek
Crossing, (Phase II)
283,217
52.3
2009
Community Center
San Antonio (Stone Oak), Texas
665,229
93.4
2007
Hybrid Center
Total
5,260,328
$
900.1
The Company anticipates commencing construction in 2007 on the following additional
shopping centers:
Wholly-Owned and Consolidated Joint Venture Developments
to Commence Construction in 2007
Targeted
Expected
Substantial
Total
Gross Cost
Completion
Property
GLA
($Millions)
Date
Description
Homestead, Florida
398,759
$
95.2
2008
Community Center
Tampa (Wesley Chapel),
Florida
95,408
17.4
2008
Community Center
Atlanta (Union City), Georgia
200,000
47.5
2008
Community Center
Gulfport, Mississippi
703,379
91.2
2008
Hybrid Center
Isabela, Puerto Rico
290,085
57.1
2009
Community Center
Austin (Kyle), Texas
778,415
97.2
2009
Community Center
Total
2,466,046
$
405.6
At June 30, 2007, $525.5 million of costs were incurred in relation to the Company’s 11
development projects under construction and the six that will commence construction in 2007.
The wholly-owned and consolidated development estimated funding schedule, net of
reimbursements, as of June 30, 2007, is as follows (in millions):
In addition to the above developments, the Company has identified several development sites in
its development pipeline reflecting an aggregate estimated cost of over $1 billion. While there
are no assurances that any of these projects will be developed, they provide a source of potential
development projects over the next several years. As of June 30, 2007, the projected unleveraged
return, on the Company’s aggregate development and redevelopment pipeline is approximately
10%.
Development (Unconsolidated Joint Ventures)
The Company’s unconsolidated joint ventures have the following shopping center projects under
construction. At June 30, 2007, $159.5 million of costs had been incurred in relation to these
development projects.
Unconsolidated Joint Venture Developments
Currently in Progress
DDR’s
Expected
Targeted
Joint
Effective
Gross
Substantial
Venture
Ownership
Total
Cost
Completion
Property
Partner
Percentage
GLA
($Millions)
Date
Description
Kansas City
(Merriam), Kansas
Coventry II
20.0%
280,516
$
71.0
2008
Community Center
Detroit (Bloomfield
Hills), Michigan
Coventry II
10.0%
882,197
335.6
2008-2009
Lifestyle Center
Dallas (Allen), Texas
Coventry II
10.0%
521,413
167.6
2008
Lifestyle Center
Manaus, Brazil
Sonae Sierra
47.2%
477,630
95.7
2009
Enclosed Mall
2,161,756
$
669.9
The Company’s unconsolidated joint venture with Sonae Sierra anticipates commencing
construction on a 350,000 square foot enclosed mall in Uberlandia, Brazil, with an estimated gross
cost of $69.9 million.
The unconsolidated joint venture development estimated funding schedule, net of
reimbursements, as of June 30, 2007, is as follows (in millions):
Redevelopments and Expansions (Wholly-Owned and Consolidated Joint Ventures)
The Company is currently expanding/redeveloping the following shopping centers at a projected
aggregate gross cost of approximately $93.9 million. At June 30, 2007, approximately $20.1 million
of costs had been incurred in relation to these projects.
Wholly-Owned and Consolidated Joint Venture Redevelopments and Expansions
Currently in Progress
Property
Description
Gadsden, Alabama
Redevelop 64,400 sf retail building
Crystal River, Florida
Construct 24,000 sf of retail shops
Miami (Plantation), Florida
Redevelop shopping center to include Kohl’s and additional junior anchors
Tallahassee, Florida
Redevelop former Lowe’s Home Improvement space
Ottumwa, Iowa
Redevelop former Wal-Mart space
Chesterfield, Michigan
Construct 25,400 sf of small shop space and retail space
Gaylord, Michigan
Redevelop former Wal-Mart space
Hamilton, New Jersey
Construct 22,500 sf of junior anchor space and retail shops
Olean, New York
Wal-Mart expansion and tenant relocation
Akron (Stow), Ohio
Redevelop former K-Mart space and develop new outparcels
Milwaukee (Brookfield),
Wisconsin
Construct 15,000 sf multi-tenant outparcel building
The Company anticipates commencing construction on the following redevelopment and
expansion projects in the next year:
Wholly-Owned and Consolidated Joint Venture Redevelopments and Expansions
to Commence Construction in 2007
Property
Description
Louisville, Kentucky
Construct 6,000 sf multi-tenant outparcel building for retail shops
Gulfport, Mississippi
Construct bank pad, retail shops and restaurants on 4.4 acre outparcel
Dayton (Huber Heights), Ohio
Construct 45,000 sf junior anchor space
Buffalo (Amherst), New York
Construct 5,300 sf multi-tenant outparcel building for retail shops
Fayetteville, North Carolina
Reconfigure 18,000 sf of in-line space; construct multi-tenant outparcel building
Allentown, Pennsylvania
Construct 20,000 sf multi-tenant outparcel building for retail shops
Hatillo, Puerto Rico
Construct 21,000 sf of junior anchor space
San Juan (Bayamon), Puerto
Rico (Plaza Del Sol)
Construct 144,000 sf of junior anchor space and retail shops
San Juan, Puerto Rico
Redemise shop space and construct a food court
Dallas (McKinney), Texas
Construct 87,757 sf of retail shops and outparcels
Redevelopments and Expansions (Unconsolidated Joint Ventures)
The Company’s unconsolidated joint ventures are currently expanding/redeveloping the following
shopping centers at a projected gross cost of $567.6 million, which includes the initial
acquisition costs for the redevelopment projects that have Coventry II as a joint venture partner. At June 30, 2007, approximately
$448.5 million of costs had been incurred in relation to these projects.
Unconsolidated Joint Venture Redevelopment and Expansion Projects
Currently in Progress
DDR’s
Effective
Joint Venture
Ownership
Property
Partner
Percentage
Description
Phoenix, Arizona
Coventry II
20.0
%
Large-scale redevelopment of
enclosed mall to open-air
format
Buena Park, California
Coventry II
20.0
%
Large-Scale redevelopment of
enclosed mall to open-air
format
Los Angeles
(Lancaster),
California
Prudential Real
Estate Investors
20.0
%
Relocate Wal-Mart and redevelop
former Wal-Mart space
Benton Harbor,
Michigan
Coventry II
20.0
%
Construct 89,000 sf of anchor
space and retail shops
Kansas City, Missouri
Coventry II
20.0
%
Relocate retail shops and
retenant former retail shop
space
Cincinnati, Ohio
Coventry II/Thor
Equities
18.0
%
Redevelop former JC Penney space
Cleveland
(Macedonia), Ohio
Ohio State
Teachers Retirement
50.0
%
Retenant former retail shop
space
The Company’s unconsolidated joint ventures anticipate commencing expansion/redevelopment
projects at the following shopping centers:
Unconsolidated Joint Venture Redevelopment and Expansion Projects
to Commence Construction in 2007
DDR’s
Effective
Joint Venture
Ownership
Property
Partner
Percentage
Description
Chicago (Deer
Park), Illinois
Prudential Real
Estate Investors
25.75
%
Retenant former
retail shop space
with junior anchor
and construct
13,500 sf
multi-tenant
outparcel building
Seattle (Kirkland),
Washington
Coventry II
20.00
%
Large-scale
redevelopment of
shopping center
Sao Paulo (Sao
Bernado de Campo),
Brazil
Sonae Sierra
47.20
%
Expansion and
renovation of the
existing mall
to accommodate
theater tenant and
redesign
of the food court
Off Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and other unconsolidated entities
with varying economic structures. Through these interests, the Company has investments in operating
properties, development properties and a management and development company. Such arrangements are
generally with institutional investors and various developers located throughout the United States.
In connection with the development of shopping centers owned by certain of these affiliates,
the Company and/or its equity affiliates have agreed to fund the required capital associated with
approved development projects aggregating approximately $23.5 million at June 30, 2007. These
obligations,
comprised principally of construction contracts, are generally due in 12 to 18 months as the
related construction costs are incurred and are expected to be financed through new or existing
construction loans.
The Company has provided loans and advances to certain unconsolidated entities and/or related
partners in the amount of $3.2 million at June 30, 2007, for which the Company’s joint venture
partners have not funded their proportionate share. These entities are current on all debt service
owed to DDR. The Company guaranteed base rental income from one to three years at certain centers
held through the Service Holdings LLC Joint Venture, aggregating $2.8 million at June 30, 2007. The
Company has not recorded a liability for the guarantee, as the subtenants of the Service Holdings
LLC Joint Venture affiliates are paying rent as due. The Company has recourse against the other
parties in the partnership for their pro rata share of any liability under this guarantee.
As a result of the IRRETI merger, the Company assumed certain environmental and non-recourse
obligations of the Inland-SAU Joint Venture pursuant to eight guaranty and environmental indemnity
agreements. The Company’s guarantee is capped at $43.1 million in the aggregate, unless the
Company and/or its affiliates derive economic benefit as a result of certain events, such as fraud,
intentional misrepresentation or misappropriation of funds.
The Company is involved with overseeing the development activities for several of its joint
ventures that are constructing, redeveloping or expanding shopping centers. The Company earns a fee
for its services commensurate with the level of oversight provided. The Company generally provides
a completion guarantee to the third party lending institution(s) providing construction financing.
The Company’s joint ventures have aggregate outstanding indebtedness to third parties of
approximately $5.5 billion and $2.3 billion at June 30, 2007 and 2006, respectively. Such mortgages
and construction loans are generally non-recourse to the Company and its partners. Certain
mortgages may have recourse to the Company’s partners in certain limited situations, such as misuse
of funds and material misrepresentations. In connection with certain of the Company’s joint
ventures, the Company agreed to fund any amounts due 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 aggregating
$57.5 million at June 30, 2007. The Company and its joint venture partner provided a $33.0 million
payment and performance guaranty on behalf of the Mervyns Joint Venture to the joint venture’s
lender in certain events such as the bankruptcy of Mervyns. The Company’s maximum obligation is
equal to its approximate 50% ownership percentage, or $16.5 million.
In October 2006, the Company entered into a joint venture that owns real estate assets in
Brazil. The Company has chosen not to mitigate any of the foreign currency risk through the use of
hedging instruments. The Company will continue to monitor and evaluate this risk and may enter into
hedging agreements at a later date.
Financing Activities
During the second quarter of 2007, the Company received net cash proceeds of approximately
$1.6 billion relating to the sale of assets to joint ventures and third parties. These proceeds
were used to repay the balance outstanding on the IRRETI bridge financing of $550 million,
redemption of $484
million, net, of preferred operating partnership units and the balance of approximately $0.6
billion was used to repay revolving credit facility borrowings.
Preferred F Shares
In April 2007, the Company redeemed all outstanding shares of its 8.6% Class F Cumulative
Redeemable Preferred Shares, aggregating $150 million, at a redemption price of $25.10750 per Class
F Preferred Share (the sum of $25.00 per share and a dividend per share of $0.10750 prorated to the
redemption date). The Company had the right to revoke the notice of redemption of theses shares
until April 2, 2007, the redemption date. The Company recorded a non-cash dividend to net income
available to common shareholders of $5.4 million in the second quarter of 2007 relating to the
write-off of original issuance costs.
Term Loan
In February 2007, the Company amended its secured term loan agreement with Key Bank National
Association. This term loan was amended to increase the loan to $550 million, to allow for an
accordion feature for a future expansion to $800 million, to extend the maturity date to February
2011 and to reduce the interest rate to LIBOR plus 0.70% based on the Company’s current credit
rating.
Bridge Financing
In February 2007, the Company entered into a $750 million unsecured bridge facility (the
“Bridge Facility”) with Bank of America, N.A. in connection with the financing of the IRRETI
merger. The Bridge Facility had a maturity date of August 2007 and bore interest at LIBOR plus
0.75%. This bridge facility was repaid in June 2007 with proceeds received from contributing
assets into joint ventures. The Company does not have the right to draw on this facility.
Common Shares
In addition to the 5.7 million shares issued to the IRRETI shareholders valued at
approximately $394.2 million in February 2007, the Company received approximately $751.0 million in
exchange for 11.6 million of its common shares upon the settlement of the forward sale agreements
entered into in December 2006.
Preferred Operating Partnership Units
In February 2007, a consolidated subsidiary of the Company issued to a designee of Wachovia
Bank, N.A. (“Wachovia”), 20,000,000 preferred units (the “Preferred Units”), with a liquidation
preference of $25 per unit, aggregating $500 million of the net assets of the Company’s
consolidated subsidiary. In accordance with terms of the agreement, the Preferred Units were
redeemed at 97.0% of par in the second quarter of 2007 with proceeds received from contributing
assets into joint ventures.
In March 2007, the Company issued $600 million of Senior Convertible Notes due 2012 (the
“Senior Convertible Notes”). The Senior Convertible Notes were issued at par and pay interest in
cash semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15,2007. The Senior Convertible Notes are senior unsecured obligations and rank equally with all
other senior unsecured indebtedness. The Senior Convertible Notes are subject to net settlement and have an initial conversion price of
approximately $74.75 per common share. If certain conditions are met,
the incremental value can be settled in cash or the Company’s common shares, at the Company’s option. The Senior Convertible
Notes may only be converted prior to maturity based on certain provisions in the governing note
documents. A total of $117.0 million of the net proceeds from Senior Convertible Notes was used to
repurchase the Company’s common shares in private transactions.
Concurrent with the issuance of the Senior Convertible Notes, the Company purchased an option
on its common stock in a private transaction in order to effectively increase the conversion
premium from 20% to 40% or a conversion price of $87.21 per share at
June 30, 2007. This purchase option
allows the Company to receive a number of the Company’s common shares, up to a
maximum of approximately 1.1 million shares, from counterparties equal to the amounts of common
stock and/or cash related to the excess conversion value that it would pay to the holders of the
Senior Convertible Notes upon conversion. The option, which cost $32.6 million, was recorded as a
reduction of shareholders’ equity.
Capitalization
At June 30, 2007, the Company’s capitalization consisted of $5.1 billion of debt, $555
million of preferred shares, and $6.6 billion of market equity (market equity is defined as common
shares and OP Units outstanding multiplied by the closing price of the common shares on the New
York Stock Exchange at June 30, 2007, of $52.71), resulting in a debt to total market
capitalization ratio of 0.42 to 1.0. At June 30, 2007, the Company’s total debt consisted of $4.6
billion of fixed-rate debt and $0.5 billion of variable-rate debt, including $500 million of
variable-rate debt that was effectively swapped to a fixed rate. At June 30, 2006, the Company’s
total debt consisted of $3.3 billion of fixed-rate debt and $0.8 billion of variable-rate debt,
including $60 million of fixed-rate debt which was effectively swapped to a variable rate and $200
million of variable-rate debt that was effectively swapped to a fixed rate.
It is management’s intent to have access to the capital resources necessary to expand and
develop its business. Accordingly, the Company may seek to obtain funds through additional equity
offerings, debt financings or joint venture capital in a manner consistent with its intention to
operate with a conservative debt capitalization policy and maintain its investment grade ratings
with Moody’s Investors Service and Standard and Poor’s. 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.
unencumbered operating properties generating $257.0 million, or 51.2%, of the total revenue of
the Company for the six-months ended June 30, 2007, thereby providing a potential collateral base
for future borrowings, subject to consideration of the financial covenants on unsecured borrowings.
Contractual Obligations and Other Commitments
In 2007, debt maturities are anticipated to be repaid through several sources. The $64.5
million in mortgage loans will be refinanced or paid from operating cash flow. The unsecured notes
aggregating $97.0 million are expected to be repaid from operating cash flow, revolving credit
facilities and/or other unsecured debt or equity financings and asset dispositions. No assurance
can be provided that the aforementioned obligations will be refinanced or repaid as anticipated.
At June 30, 2007, the Company had letters of credit outstanding of approximately $31.1
million. The Company has not recorded any obligation associated with these letters of credit. The
majority of letters of credit are collateral for existing indebtedness and other obligations of the
Company.
In conjunction with the development of shopping centers, the Company has entered into
commitments aggregating approximately $87.3 million with general contractors for its wholly-owned
properties at June 30, 2007. These obligations, comprised principally of construction contracts,
are generally due in 12 to 18 months as the related construction costs are incurred and are
expected to be financed through operating cash flow and/or new or existing construction loans or
revolving credit facilities.
The Company entered into master lease agreements during 2004 through 2007 in connection with
the transfer of properties to certain joint ventures, which are recorded as a liability and
reduction of its gain. The Company is responsible for the monthly base rent, all operating and
maintenance expenses and certain tenant improvements and leasing commissions for units not yet
leased at closing for a three-year period. At June 30, 2007, the Company’s material master lease
obligations, included in accounts payable and other expenses, were incurred with the properties
transferred to the following joint ventures (in millions):
DDR Markaz II
$
0.5
Dividend Capital Total Realty Trust Joint Venture
1.7
MDT Joint Venture
1.5
MDT Preferred Joint Venture
2.8
$
6.5
The Company routinely enters into contracts for the maintenance of its properties which
typically can be cancelled upon 30-60 days notice without penalty. At June 30, 2007, the Company
had purchase order obligations, typically payable within one year, aggregating approximately $10.5
million related to the maintenance of its properties and general and administrative expenses.
The Company has guaranteed certain special assessment and revenue bonds issued by the Midtown
Miami Community Development District. The bond proceeds were used by the District to finance
certain infrastructure and parking facility improvements. As of June 30, 2007, the remaining
debt service obligation guaranteed by the Company was $10.7 million. In the event of a debt
service shortfall, the Company is responsible for satisfying the shortfall. There are no assets
held as collateral or liabilities recorded related to these guarantees. To date, tax revenues have
exceeded the debt service payments for both the Series A and Series B bonds.
Inflation
Substantially all 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 upon renewal at market rates. 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.
Economic Conditions
Historically, real estate has been subject to a wide range of cyclical economic conditions
that affect various real estate markets and geographic regions with differing intensities and at
different times. Different regions of the United States have been experiencing varying degrees of
economic growth. Adverse changes in general or local economic conditions could result in the
inability of some tenants of the Company to meet their lease obligations and could otherwise
adversely affect the Company’s ability to attract or retain tenants. The Company’s shopping centers
are typically anchored by two or more national tenants (Wal-Mart and Target), home improvement
stores (Home Depot and Lowe’s Home Improvement) and two or more junior tenants (Bed Bath & Beyond,
Kohl’s, Circuit City, T.J. Maxx or PETsMART), which generally offer day-to-day necessities, rather
than high-priced luxury items. In addition, the Company seeks to reduce its operating and leasing
risks through ownership of a portfolio of properties with a diverse geographic and tenant base.
The retail shopping sector has been affected by the competitive nature of the retail business
and the competition for market share where stronger retailers have out-positioned some of the
weaker retailers. These shifts have forced some market share away from weaker retailers and
required them, in some cases, to declare bankruptcy and/or close stores. Certain retailers have
announced store closings even though they have not filed for bankruptcy protection. Notwithstanding
any store closures, the Company does not expect to have any significant losses associated with
these tenants. Overall, the Company’s portfolio remains stable. While negative news relating to
troubled retail tenants tends to attract attention, the vacancies created by unsuccessful tenants
may also create opportunities to increase rent.
Although certain individual tenants within the Company’s portfolio have filed for bankruptcy
protection, the Company believes a substantial portion of its major tenants, including Wal-Mart,
Home Depot, Kohl’s, Target, Lowe’s Home Improvement, T.J. Maxx and Bed Bath & Beyond, are
financially secure retailers based upon their credit quality. This stability is further evidenced
by the tenants’
relatively constant same store tenant sales growth in this economic environment. In addition,
the Company believes that the quality of its shopping center portfolio is strong, as evidenced by
the high historical occupancy rates, which have ranged from 92% to 96% since 1993. Also, average
base rental rates have increased from $5.48 to $12.03 since the Company’s public offering in 1993.
Legal Matters
The Company and its subsidiaries are subject to various legal proceedings, which, taken
together, are not expected to have a material adverse effect on the Company. The Company is also
subject to a variety of legal actions for personal injury or property damage arising in the
ordinary course of its business, most of which are covered by insurance. While the resolution of
all matters cannot be predicted with certainty, management believes that the final outcome of such
legal proceedings and claims will not have a material adverse effect on the Company’s liquidity,
financial position or results of operations.
New Accounting Standards Implemented
Accounting for Uncertainty in Income Taxes — FIN 48
In January 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of Statement
of Financial Accounting Standard (“SFAS”) No. 109” (“FIN 48”). FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present and disclose in its financial statements
uncertain tax positions that the company has taken or expects to take on a tax return (including a
decision whether to file or not to file a return in a particular jurisdiction). This statement is
effective for financial statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years.
The Company’s policy for classifying estimated interest and penalties is to include such
amounts as “Income Tax of Taxable REIT Subsidiaries and Franchise Taxes” in the Condensed
Consolidated Statements of Operations. The amount of interest and penalties at June 30, 2007 and
for the three and six-month periods ended June 30, 2007 and 2006 was not material. The Company
does not have any unrecognized tax benefits related to uncertain tax
provisions that, if recognized, would impact the effective tax
rate and does not expect this position to change within the next twelve months. The Company is no
longer subject to income tax audits by taxing authorities for years through 2003. The effect of
FIN 48 did not have a material impact on the Company’s financial position, results of operations or
cash flows.
New Accounting Standards to be Implemented
Fair Value Measurements — SFAS 157
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement
defines fair value and establishes a framework for measuring fair value in generally accepted
accounting principles. The key changes to current practice are (1) the definition of fair value,
which focuses on an exit price rather than an entry price; (2) the methods used to measure fair
value, such as emphasis that fair value is a market-based measurement, not an entity-specific
measurement, as well as the inclusion of an adjustment for risk, restrictions and credit standing
and (3) the expanded disclosures
about fair value measurements. This statement does not require any new fair value
measurements. This statement applies only to those items under other accounting pronouncements for
which the FASB previously concluded that fair value is the relevant measurement attribute and does
not require or permit any new fair value measurements.
This statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is required to adopt
SFAS 157 in the first quarter of 2008. The Company is currently evaluating the impact that this
statement will have on its financial statements.
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 — SFAS 159
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This
statement allows measurement at fair value of eligible financial assets and liabilities that are
not otherwise measured at fair value. If the fair value option for an eligible item is elected,
unrealized gains and losses for that item are to be reported in current earnings at each subsequent
reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to
draw comparison between the different measurement attributes a company elects for similar types of
assets and liabilities.
This statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is required to adopt SFAS 159 in the first quarter of 2008. The
Company is currently evaluating the impact that this statement will have on its financial
statements.
Accounting for Convertible Debt Instruments
In July 2007, the Board
directed the staff to prepare a proposed FSP that would require the liability and equity
components of convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s
nonconvertible debt borrowing rate. If issued in its current form, the proposed FSP would require
that the initial debt proceeds from the sale of the Company’s convertible and exchangeable
senior unsecured notes be allocated between a liability component and an equity component.
The resulting debt discount would be amortized over the period the debt is expected to be
outstanding as additional interest expense. The proposed FSP would be effective for financial
statements issued for fiscal years beginning after December 15, 2007, and interim periods within
those fiscal years. The guidance in the proposed FSP would be applied retrospectively to all
periods presented and could result in additional annual interest expense recognized by the Company
if adopted and final, as proposed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market risk exposure is interest rate risk. The Company’s debt,
excluding unconsolidated joint venture debt, is summarized as follows:
Adjusted to reflect the $500 million and $200 million of variable-rate debt,
which was
swapped to a fixed rate of 5.0% and 5.2% at June 30, 2007 and 2006, respectively, and $60 million of
fixed-rate
debt, which was swapped to a variable rate at June 30, 2006.
The Company’s unconsolidated joint ventures’ fixed-rate indebtedness, including $557.3
million and $220 million of variable-rate debt, which was swapped to a weighted average fixed rate
of approximately 5.3% at June 30, 2007 and 2006, is summarized as follows:
The Company intends to utilize variable-rate indebtedness available under its revolving
credit facilities and construction loans in order to initially fund future acquisitions,
developments and expansions of shopping centers. Thus, to the extent the Company incurs additional
variable-rate indebtedness, its exposure to increases in interest rates in an inflationary period
would increase. The Company does not believe, however, that increases in interest expense as a
result of inflation will significantly impact the Company’s distributable cash flow.
The interest rate risk on the Company’s and its unconsolidated joint ventures’ variable rate
debt described above has been mitigated through the use of interest rate swap agreements (the
“Swaps”) with major financial institutions. At June 30, 2007 and 2006, the interest rate on the
Company’s $500 million and $200 million, respectively, consolidated floating rate debt was swapped
to fixed rates. At June 30, 2007 and 2006, the interest rate on the Company’s $557.3 million and
$220 million, respectively, of joint venture floating rate debt (of which $80.8 million and $31.9
million, respectively, is the Company’s proportionate share) was swapped to fixed rates. The
Company is exposed to credit risk in the event of non-performance by the counter-parties to the
Swaps. The Company believes it mitigates its credit risk by entering into these Swaps with major
financial institutions.
In February 2007, a consolidated affiliate of the Company entered into approximately $600.0
million of forward starting interest rate swaps. These swaps were designated to hedge the
forecasted issuance of fixed rate mortgage debt. The treasury locks were terminated in connection
with the formation and financing of the DDR Domestic Retail Fund I Joint Venture in the second
quarter of 2007.
At December 31, 2006, the Company had a variable-rate interest swap that carried a notional
amount of $60 million, a fair value which represented an asset of $0.1 million at December 31,2006, and converted fixed-rate debt to a variable rate of 7.2%.
The fair value of the Company’s fixed-rate debt adjusted to: (i) include the $500 million and
$200 million that was swapped to a fixed rate at June 30, 2007 and 2006, respectively; (ii)
exclude the $60 million which was swapped to a variable rate at June 30, 2006; (iii) include the
Company’s proportionate share of the joint venture fixed-rate debt; and (iv) include the Company’s
proportionate share of $80.8 million and $31.9 million that was swapped to a fixed rate at June 30,2007 and 2006, respectively, and an estimate of the effect of a 100 point decrease in market
interest rates, is summarized as follows (in millions):
Company’s
proportionate share of
joint venture fixed-rate
debt
$
878.8
$
856.6
(3)
$
904.1
(4)
$
377.1
$
367.4
(3)
$
381.6
(4)
(1)
Includes the fair value of interest rate swaps, which was an asset of $2.7 million
and $2.8 million at June 30, 2007 and 2006, respectively.
(2)
Includes the fair value of interest rate swaps, which was a liability of $9.3
million and $4.2 million at June 30, 2007 and 2006, respectively.
(3)
Includes the Company’s proportionate share of the fair value of interest rate
swaps that was an asset of $1.3 million and $0.4 million at June 30, 2007 and 2006,
respectively.
(4)
Includes the Company’s proportionate share of the fair value of interest rate
swaps that was a liability of $2.7 million and an asset of $1.1 million at June 30,2007 and 2006, respectively.
The sensitivity to changes in interest rates of the Company’s fixed rate debt was
determined utilizing a valuation model based upon factors that measure the net present value of
such obligations arising from the hypothetical estimate as discussed above.
Further, a 100 basis point increase in short-term market interest rates at June 30, 2007 and
2006, would result in an increase in interest expense of approximately $2.5 million and $4.0
million, respectively, for the Company for the respective six-month periods, and $0.8 million and
$0.6 million, respectively, representing the Company’s proportionate share of the joint ventures’
interest expense relating to variable-rate debt outstanding, for the respective six-month periods.
The estimated increase in interest expense for the six-month periods does not give effect to
possible changes in the daily balance for the Company’s or joint ventures’ outstanding variable
rate debt.
The Company also has made advances to several partnerships in the form of notes receivable
that accrue interest at rates ranging from 6.3% to 12%. Maturity dates range from payment on
demand to February 2012. The following table summarizes the aggregate notes receivable, the
percentage at fixed rates with the remainder at variable rates, and the effect of a 100 basis point
decrease in market interest rates. The estimated increase in interest income does not give effect
to possible changes in the daily outstanding balance of the variable rate loan receivables.
Impact on fair value of 100 basis point
decrease in market interest rates
$
16.5
$
122.5
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, including the issuance of medium term notes 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as required by Securities Exchange Act Rules 13a-15(b) and
15d-15(b), the 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)) are effective as of the end of the period covered by this quarterly report on
Form 10-Q to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms and were
effective as of the end of such period to ensure that information required to be disclosed by the
Company issuer in reports that it files or submits under the Securities Exchange Act is accumulated
and communicated to the 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 June 30, 2007, there were no changes in the Company’s internal control
over financial reporting that materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
Other than routine litigation and administrative proceedings arising in the ordinary course of
business, the Company is not presently involved in any litigation nor, to its knowledge, is any
litigation threatened against the Company or its properties, which is reasonably likely to have a
material adverse effect on the liquidity or results of operations of the Company.
ITEM 1A. RISK FACTORS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 26, 2007, the Board of Directors authorized a common share repurchase program. Under
the terms of the program authorized by the Board, the Company may purchase up to a maximum value of
$500 million of its common shares during the following two years. At June 30, 2007, no repurchases
have been made through this program.
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total
(d) Maximum
Number of
Number (or
Shares
Approximate
Purchased as
Dollar Value) of
Part of Publicly
Shares that May
(a) Total number
(b) Average
Announced
Yet Be Purchased
of shares
Price Paid per
Plans or
Under the Plans
purchased
Share
Programs
or Programs
April 1 – 30, 2007
—
—
—
—
May 1 – 31, 2007
4,330
$
63.99
—
—
June 1 – 30, 2007
—
—
—
—
Total
4,330
$
63.99
—
—
Shares
acquired as payment of the strike price for stock options exercised pursuant to
the Company’s equity-based award plans.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 8, 2007, the Company held its annual meeting of shareholders. The matters presented to
shareholders for vote and the vote on such matters were as follows:
1.
To fix the number of directors at nine;
For
Against
Abstain
109,486,587
409,024
165,780
2.
To elect nine directors, each to serve until the next annual meeting of shareholders and
until a successor has been duly elected and qualified;
To approve an amendment to the Company’s Amended and Restated Article of Incorporation to
increase the number of authorized common shares of the Company from 200,000,000 to
300,000,000, which results in an increase in the total authorized shares of the Company from
211,000,000 to 311,000,000;
For
Against
Abstain
108,181,048
1,690,129
190,207
4.
To approve an amendment to the Company’s Code of Regulations to authorize the Company to
notify shareholders of record of shareholder meetings by electronic or other means of
communication authorized by the shareholders;
To approve an amendment to the Company’s Code of Regulations to authorize shareholders and
other persons entitled to vote at shareholder meetings to appoint proxies by electronic or
other verifiable communications;
For
Against
Abstain
109,368,855
541,673
150,864
6.
To approve an amendment to the Company’s Code of Regulations to authorize the Company to
issue shares without physical certificates;
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Exchange Act
of 1934
31.3
Certification of CEO pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of
2002 1
31.4
Certification of CFO pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of
2002 1
1
Pursuant to SEC Release No. 34-4751, these exhibits are deemed to
accompany this report and are not “filed” as part of this report.
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.
