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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission file number 1-11690
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-1723097
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34555 Chagrin Boulevard Moreland Hills, Ohio 44022
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(Address of principal executive offices - zip code)
(216) 247-4700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
21,589,357 shares outstanding as of May 8, 1996
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1996 and December 31,
1995.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended March 31, 1996 and 1995.
Condensed Consolidated Statements of Cash Flows for the Three Month Periods
ended March 31, 1996 and 1995.
Notes to Condensed Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1996 1995
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ASSETS
Real estate rental property:
Land $ 110,677,561 $ 109,325,006
Land under development 26,108,673 18,440,812
Buildings 689,356,147 688,122,876
Fixtures and tenant improvements 13,987,215 13,677,643
Construction in progress 27,313,922 18,806,999
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867,443,518 848,373,336
Less accumulated depreciation (124,462,976) (120,040,503)
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Real estate, net 742,980,542 728,332,833
Cash and cash equivalents 18,793,703 12,100
Advances to and investments in joint ventures 87,872,874 83,190,388
Other assets 19,645,469 18,524,208
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$ 869,292,588 $ 830,059,529
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 156,746,710 $ 103,731,362
Revolving credit facilities -- 65,000,000
Subordinated convertible debentures 60,000,000 60,000,000
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216,746,710 228,731,362
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Mortgage indebtedness:
Revolving credit facilities -- 22,500,000
Banks and other financial institutions 127,495,087 139,643,352
Construction loans 14,851,074 14,851,074
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142,346,161 176,994,426
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Total indebtedness 359,092,871 405,725,788
Accounts payable and accrued expenses 15,537,824 17,530,130
Dividend payable 12,951,694 --
Other liabilities 3,017,484 2,642,148
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390,599,873 425,898,066
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Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 3,000,000 shares authorized; 421,500 shares
issued and outstanding at March 31, 1996 and December 31, 1995 105,375,000 105,375,000
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 3,000,000 shares authorized; 177,500 and 160,000
shares issued and outstanding at March 31, 1996 and December 31, 1995,
respectively 44,375,000 40,000,000
Non-cumulative redeemable preferred shares, without par value; 3,000,000
shares authorized; none issued -- --
Common shares, without par value, $.10 stated value; 50,000,000 shares
authorized; 21,586,165 and 18,968,943 shares issued and outstanding at
March 31, 1996 and December 31, 1995, respectively 2,158,617 1,896,894
Paid-in-capital 366,907,026 291,843,152
Accumulated dividends in excess of net income (40,122,928) (34,953,583)
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478,692,715 404,161,463
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$ 869,292,588 $ 830,059,529
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
1996 1995
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Revenues from operations:
Minimum rents $22,682,584 $ 19,240,018
Percentage and overage rents 754,208 626,413
Recoveries from tenants 5,743,626 4,306,883
Management fee income 508,809 105,855
Other 945,465 986,071
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30,634,692 25,265,240
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Rental operation expenses:
Operating and maintenance 3,037,213 2,297,342
Real estate taxes and rent 3,413,341 2,741,368
General and administrative 1,732,948 1,568,832
Depreciation and amortization 5,904,605 5,581,307
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14,088,107 12,188,849
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Interest expense 7,343,006 6,700,026
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Income before equity in net income (loss)
of joint ventures, gain on sale of land and 9,203,579 6,376,365
extraordinary item
Equity in net income (loss) of joint ventures 2,012,238 (38,066)
Gain on sale of land -- 93,678
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Income before extraordinary item 11,215,817 6,431,977
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Extraordinary item - extinguishment of debt -- (251,317)
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Net income $11,215,817 $ 6,180,660
=========== ============
Net income applicable to common shareholders $ 7,665,911 $ 6,180,660
=========== ============
Per share data:
Earnings per common share - primary
Income before extraordinary item $ .39 $ .35
Extraordinary item -- (.01)
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Net income $ .39 $ .34
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Earnings per common share - fully diluted
Income before extraordinary item $ .39 $ .35
Extraordinary item -- (.01)
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Net income $ .39 $ .34
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Dividends declared $ .60 $ .54
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
1996 1995
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Net cash flow provided by operating activities $ 14,059,965 $ 8,846,907
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Cash flow provided by (used for) investing activities:
Real estate developed or acquired (23,353,342) (39,820,390)
Repayments from (advances to) joint ventures, net (1,147,884) 132,528
Proceeds from sale of land -- 100,000
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Net cash flow used for investing activities (24,501,226) (39,587,862)
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Cash flow provided by (used for) financing activities:
(Repayment of) proceeds from revolving credit facilities, net (87,500,000) 45,957,100
Principal payments on rental property debt (12,148,265) (81,869,707)
Proceeds from construction loans -- 3,087,123
Proceeds from issuance of Medium Term Notes, net of
underwriting commissions and $106,000 of offering
expenses paid 52,604,000 --
Proceeds from issuance of common shares, net of
underwriting commissions and $300,000 and $400,000
of offering expenses paid in 1996 and 1995, respectively 75,389,307 76,506,250
Proceeds from issuance of Class B preferred shares, net of
underwriting commissions and $200,000 of offering
expenses paid 4,182,050 --
Proceeds from issuance of common shares in conjunction
with exercise of stock options, the Company's 401(k)
plan and dividend reinvestment plan 129,240 113,128
Dividends paid (3,433,468) (10,236,948)
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Net cash flow provided by financing activities 29,222,864 33,556,946
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Increase in cash and cash equivalents 18,781,603 2,815,991
Cash and cash equivalents, beginning of period 12,100 919,040
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Cash and cash equivalents, end of period $ 18,793,703 $ 3,735,031
============ ============
Supplemental disclosure of non cash investing and financing activities:
For the three month period ended March 31, 1996, included in accounts payable
was approximately $0.7 million relating to construction in progress and $13.0
million of dividends declared which did not require the use of cash.
In conjunction with the acquisitions of certain shopping centers, the Company
assumed mortgage debt of approximately $15.7 million and other liabilities of
approximately $0.3 million for the three month period ended March 31, 1995. In
addition, included in accounts payable was approximately $0.7 million relating
to construction in progress which did not require the use of cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company is a self-administered and self-managed real estate
investment trust and is engaged in the business of acquiring, expanding, owning,
developing, managing and operating neighborhood and community shopping centers,
enclosed malls and business centers.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The
information furnished reflects all adjustments which are, in the opinion of
management, necessary to reflect a fair statement of the results for the interim
periods presented, and all such adjustments are of a normal recurring nature.
2. FORMATION OF THE COMPANY, PUBLIC OFFERINGS AND BASIS OF PRESENTATION
Developers Diversified Realty Corporation (the "Company" or "DDRC") was
incorporated in the State of Ohio on November 20, 1992 by issuance of 1,000
common shares (for cash proceeds of $1,000) to the principal
partners/shareholders of Developers Diversified Group ("DDG-Predecessor") for
the purpose of continuing the shopping center, business center and management
company operations then being conducted by DDG.
On February 9, 1993, the Company sold 9,200,000 common shares in an
Initial Public Offering ("IPO"), and received net proceeds of $188.7 million.
The net proceeds from the IPO were primarily used to repay mortgage indebtedness
and acquire the partnership interests associated with certain shopping center
and business center properties, held by unrelated third parties.
The acquisition of the properties acquired by the Company prior to the
IPO and merger of Developers Diversified Management, Inc. were recorded by the
Company at the historical cost reflected in the DDG financial statements, since
these transactions were conducted with entities deemed to be related parties.
Since the completion of the Company's IPO in February 1993, the Company
has accessed the capital markets several times, primarily to finance growth
through acquisitions, developments and expansions. The following is a summary of
the common share, debt and preferred share offerings following the IPO:
Common Share Offerings:
In October 1993, the Company sold 3,950,000 shares of common stock, in an
underwritten offering at $29-7/8 per share. In July 1994, the Company sold
500,000 shares of common stock, in an underwritten offering, to a group of
Institutional Investors at $31-5/8 per share. In January 1995, the Company sold
2,875,000 shares of common stock, in an underwritten offering at $28-1/4 per
share. In March 1996, the Company sold 2,611,500 shares of common stock in an
underwritten offering at $28.95 per share. The aggregate net proceeds of
approximately $278 million from the above four offerings were primarily used to
retire variable rate indebtedness.
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Debt Offerings:
In August 1994, the Company issued $60 million of 7% coupon subordinated
convertible debentures ("Debentures") which mature in August 1999. The
Debentures are non-callable and convertible into common shares any time prior to
maturity at a conversion price of $33-3/8 per share. In December 1994, the
Company issued $100 million of Floating Rate Senior Notes which were repaid at
their stated maturity, in December 1995. In May 1995, the Company issued $100
million of Fixed Rate Senior Notes at a discount to 99.963% with a coupon
interest rate of 7-5/8% due in May 2000. In November and December 1995, the
Company issued, through its Medium Term Note ("MTN") program, an aggregate of $4
million of Senior Fixed Rate Notes at interest rates ranging from 7.15% to 7.28%
and maturities of seven and ten years, respectively. In the first quarter of
1996, the Company issued $53 million of MTN's. These MTN's have terms ranging
from five to seven years with interest at rates ranging from 6.58% to 7.04%. The
aggregate net proceeds of approximately $312 million from the above debt
offerings were primarily used to retire variable rate indebtedness.
Preferred Share Offerings:
In November and December 1995, the Company sold 4,215,000 depositary shares
representing 9.5% Class A Cumulative Redeemable Preferred Shares at $25 per
depositary share. In December 1995, the Company sold 1,600,000 depositary shares
representing 9.44% Class B Cumulative Redeemable Preferred Shares at $25 per
depositary share. An additional 175,000 of Class B depositary shares were sold
in January 1996, in conjunction with the underwriters' over-allotment option.
Both the Class A and Class B depositary shares represent 1/10 of an underlying
share of the respective preferred class. The Class A and Class B depositary
shares are not redeemable by the Company, except in certain circumstances
relating to the preservation of the Company's status as a Real Estate Investment
Trust (REIT), prior to November 15, 2000 and December 26, 2000, respectively.
The aggregate net proceeds of approximately $144 million were used in part to
fund the Company's equity investment relating to the acquisition of the
Community Center Properties (Note 3) and to retire variable rate indebtedness,
primarily the Floating Rate Senior Notes.
New Accounting Standards
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", in the first quarter of
1996. This statement requires, when events or changes in circumstances suggest
that the carrying value of an asset or group of assets is not recoverable, that
the Company measure its long lived assets for impairment utilizing undiscounted
cash flows. This statement also sets forth the measurement criteria for assets
to be sold or disposed and requires the resultant assets to be carried at the
lower of cost or fair market value. The effect of the adoption is not
significant.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes a fair
value based method of accounting for employee stock based compensation plans,
and also permits companies to continue to apply the intrinsic value based
methodology, providing certain pro-forma disclosures are made. The Company
is adopting the standard in 1996 through disclosure only.
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3. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at March 31, 1996 were
comprised of a 50% joint venture interest in four joint ventures ("The Community
Center Joint Ventures"), formed in November 1995 in conjunction with the
acquisition of the Homart Community Center Division of Sears, Roebuck and Co.
("Sears") and a 50% joint venture interest in a 411,977 square foot shopping
center located in Martinsville, Virginia.
On November 17, 1995, the Company, in conjunction with its joint venture
partners, acquired the Homart Community Center Division of Sears, from an
affiliate of General Growth Properties, Inc. General Growth Properties, Inc. had
contracted to purchase the Homart Community Center Division as part of its
acquisition of Homart Development Co., a subsidiary of Sears. The Homart
Community Center Division includes ten power centers, aggregating in excess of
four million square feet of Gross Leasable Area ("GLA"), located in major
metropolitan areas throughout the United States as well as several outlots and
pad sites adjacent to the ten power centers and certain other power centers
previously sold by Sears (the "Community Center Properties"). In addition, in
connection with the primary transaction previously described, the Company
acquired certain rights to acquire several future development sites (in which
its joint venture partners may have certain rights to participate). Construction
of seven of the ten power centers is complete or substantially complete and
three of the power centers are currently under construction. Construction of the
three centers is expected to be substantially complete by mid 1996. Certain
tenants at each of these three centers are currently open for business (or will
open prior to the completion of construction). In addition to owning a 50%
interest in each Community Center Joint Venture, the Company will manage the
Community Center Properties and related developments pursuant to management and
development agreements with each of the Community Center Joint Ventures.
Included in 1996 management fee income is approximately $407,000 of fees earned
from the Company's Joint Venture interests. Other income includes $300,000 of
development fee income from the Community Center Joint Ventures for the three
month period ended March 31, 1996.
The total purchase price for the Community Center Properties aggregated $443.4
million (before post-closing adjustments) and was funded through $295.6 million
of secured indebtedness at the joint venture level, $6.7 million of assumed net
liabilities and $141.1 million of cash of which one-half each was provided by
the Company and its joint venture partners. In addition, the Company paid cash
of approximately $1.1 million relating to the purchase of certain rights to
potential future development sites. The Company's initial cash contribution was
made available through proceeds from the issuance of the 9.5% Class A depositary
shares (Note 2). The final purchase price for the Community Center Properties
will be adjusted to reflect development costs incurred for the period from
November 1, 1995 through November 16, 1995. Adjustments will also be made to
reflect actual assets and liabilities assumed as of November 16, 1995.
Accordingly, the purchase price allocation will be adjusted upon resolution of
these contingencies.
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Summarized combined financial information of the Company's joint venture
investments is summarized as follows:
March 31, December 31,
Combined Balance Sheets 1996 1995
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Real estate, net $485,287,817 $473,913,981
Other assets 20,234,502 18,606,231
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$505,522,319 $492,520,212
============ ============
Mortgage debt $323,705,043 $317,142,199
Amounts payable to DDRC 8,499,555 9,173,195
Other liabilities 17,615,807 16,927,381
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349,820,405 343,242,775
Accumulated equity 155,701,914 149,277,437
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$505,522,319 $492,520,212
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Three Month Period Ended March 31,
Combined Statements of Operations 1996 1995
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Revenues from operations $14,597,439 $ 838,118
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Rental operation expenses 3,780,114 183,453
Depreciation and amortization expense 2,106,297 200,751
Interest expense 4,686,558 530,045
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10,572,969 914,249
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Net income (loss) $ 4,024,470 $ (76,131)
=========== =========
The Company has guaranteed $25 million of joint venture indebtedness
and related interest associated with certain mortgage debt.
4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma operating data is
presented for the three months ended March 31, 1996 as if each of the following
transactions had occurred on January 1, 1996: (i) the sale by the Company of
175,000 depositary shares representing 9.44% Class B Cumulative Redeemable
Preferred Stock in January 1996, (ii) the completion of the sale by the Company
of $53 million of Medium Term Notes during the first quarter of 1996 and (iii)
the sale by the Company of 2,611,500 Common Shares in March 1996. Pro forma
operating data is presented for the three months ended March 31, 1995, as if
each of the following transactions had occurred on January 1, 1995: (i) the
acquisition by the Company of all properties acquired by the Company in 1995,
(ii) the formation of the Community Center Joint Ventures and the related
acquisition of the Community Center Properties, (iii) the completion of the sale
by the Company of 2,875,000 Common Shares in January 1995, (iv) the completion
of the sale by the Company of the $100 million 7-5/8% Fixed Rate Senior Notes in
May 1995, (v) the sale by the Company of 4,215,000 depositary shares
representing 9.5% Class A Cumulative Redeemable Preferred Stock in November and
December 1995 and 1,775,000 depositary
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shares representing 9.44% Class B Cumulative Redeemable Preferred Stock
in December 1995 and January 1996 (vi) the completion of the sale of $57
million of Medium Term Notes during the first quarter of 1996 and the fourth
quarter of 1995 and (vii) the completion of the sale by the Company of
2,611,500 common shares in March 1996.
Three Month Period Ended March 31,
---------------------------------
(in thousands, except per share)
1996 1995
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REVENUES:
Revenues from rental property $ 29,181 $ 26,399
Management fees and other 1,454 1,384
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30,635 27,783
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EXPENSES:
Rental operation expenses 6,451 5,694
General and administrative 1,733 1,669
Depreciation and amortization 5,905 6,014
Interest 6,408 4,022
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20,497 17,399
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10,138 10,384
Equity in net income of joint ventures 2,012 924
Gain on sale of land -- 94
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Income before extraordinary item 12,150 11,402
Less preferred dividends (3,550) (3,550)
-------- --------
Income before extraordinary item applicable to
common shareholders $ 8,600 $ 7,852
======== ========
Per share data:
Income before extraordinary item - primary $ .40 $ .36
======== ========
Pro forma weighted average shares
outstanding (in thousands) 21,582 21,567
======== ========
The 1995 pro forma information above does not include revenues and expenses for
the Company's acquired properties located in Orangeburg, South Carolina;
Anderson, South Carolina; Columbia, South Carolina; and Huntsville, Alabama and
with regard to the acquisition of the Community Center Properties, the shopping
centers located in Durham, North Carolina; Marietta, Georgia; Independence,
Missouri; Atlanta, Georgia; and Phase II of Framingham, Massachusetts because
these shopping centers were either under development or in the lease-up phase
and, accordingly, the related operating information for such centers either does
not exist or would not be meaningful.
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5. SHAREHOLDERS' EQUITY:
The following table summarizes the changes in shareholders' equity
since December 31, 1995:
Class A 9.5% Class B 9.44%
Cumulative Cumulative
Redeemable Redeemable
Preferred Preferred Accumulated
Shares ($250 Shares ($250 Dividends in
Liquidation Liquidation Common Paid-in Excess of
Value) Value) Shares Capital Net Income Total
------------ ----------- ---------- ------------ ------------ ------------
Balance December 31, 1995 $105,375,000 $40,000,000 $1,896,894 $291,843,152 $(34,953,583) $404,161,463
Net income 11,215,817 11,215,817
Dividends declared -
Preferred Shares (3,433,468) (3,433,468)
Dividends declared -
Common Shares (12,951,694) (12,951,694)
Issuance of Common Shares 261,150 75,128,157 75,389,307
Issuance of Preferred Shares 4,375,000 (192,950) 4,182,050
Stock options exercised 526 115,194 115,720
Shares issued through employee
401(k) plan 47 13,473 13,520
------------ ----------- ---------- ------------ ------------ ------------
Balance March 31, 1996 $105,375,000 $44,375,000 $2,158,617 $366,907,026 $(40,122,928) $478,692,715
============ =========== ========== ============ ============ ============
6. REVOLVING CREDIT FACILITIES:
In May 1995, the Company obtained a three year $150 million unsecured
revolving credit facility from a syndicate of financial institutions for which
the First National Bank of Chicago and the First National Bank of Boston serve
as agents (the "Unsecured Credit Facility"). Borrowings under this facility bear
interest at variable rates based on the prime rate or LIBOR plus a specified
spread, currently at 1.5%, depending on the Company's long term senior unsecured
debt rating from Standard and Poor's and Moody's Investors Service. The
Unsecured Credit Facility is used to finance the acquisition of shopping
centers, to provide working capital and general corporate purposes. The
Unsecured Credit Facility replaced a $150 million secured facility. At March 31,
1996 there were no borrowings outstanding.
In July 1995, the Company entered into a three year $25 million secured
revolving credit facility with National City Bank. Borrowings under this
facility bear interest at variable rates based on the prime rate or LIBOR plus a
specified spread, currently at 1.25%, depending on the Company's long term
senior unsecured debt rating from Standard and Poor's and Moody's Investors
Service. At March 31, 1996 there were no borrowings outstanding.
7. EXTRAORDINARY CHARGES:
In January 1995, the Company terminated a $25 million secured revolving
credit facility in conjunction with the successful completion of a 2,875,000
common share offering and recognized an extraordinary charge of $0.3 million in
the first quarter of 1995 primarily relating to the write-off of unamortized
deferred finance costs.
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8. RELATED PARTY TRANSACTIONS
In April 1995, the Company acquired from a partnership owned by the
chairman of the board of directors and an officer of the Company two out parcels
and approximately eight acres of land adjacent to the Company's shopping center
in Macedonia, Ohio at a purchase price of approximately $3 million. The two out
parcels are leased to a restaurant and a video store, and an 81,000 square foot
Kohl's Department store has been constructed on the eight acres of land.
Management believes that the acquisition of this property was completed on terms
at least as favorable to the Company as could have been obtained from an
unrelated third party.
The Company has agreed to acquire, from the affiliates previously
referred to, additional land parcels and expansions under development which are
located adjacent to properties previously acquired. The Company's purchase price
for the remaining parcels and expansion areas has not yet been determined since
it is subject to the leasing and/or construction of vacant space and resolution
of various other contingencies. The Company believes the ultimate payment for
such additional land will approximate $2 million.
9. STOCK OPTION PLAN
Effective January 31, 1993, the Company established an incentive and
non-qualified stock option plan under which 1,556,903 of the Company's common
shares have been reserved for issuance to eligible key employees. Options may be
granted at per share prices not less than fair market value at the date of
grant, and in the case of incentive options, must be exercisable within ten
years thereof (or, with respect to options granted to certain shareholders,
within five years thereof). As of March 31, 1996, options to purchase shares
aggregating 911,788 have been granted to certain eligible employees at the
market price per share on the date of grant. Options granted under the plan
generally become exercisable one year after the date of grant as to one third of
the optioned shares, with the remaining options being exercisable over the
following two year period. As of March 31, 1996 options aggregating 532,226 had
become exercisable, of which 56,378 shares were exercised as of that date. The
option prices range from $22 to $31.25 per share.
In addition to the stock option plan described above, the Company has
granted options for 325,000 shares to its directors and certain officers who are
not employees of the Company. Such options were granted at fair market value on
the date of grant and are exercisable one year from the date of grant with
respect to 25,000 shares and the remaining 300,000 shares become exercisable one
year after the date of grant as to one third of the 300,000 shares with the
remaining options being exercisable over the following two year period. As of
March 31, 1996, options aggregating 158,333 shares had become exercisable, of
which 5,000 shares were exercised as of that date. The option prices range from
$22 to $26.875 per share.
10. EARNINGS PER SHARE
Primary earnings per share for income before extraordinary item
applicable to common shareholders and net income applicable to common
shareholders was computed by dividing common share dividends paid or declared
for the period by the weighted average number of common shares outstanding plus
the undistributed income (loss) before extraordinary item or undistributed net
income (loss) applicable to common shareholders, as appropriate, divided by the
weighted average number of
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common shares and common share equivalents outstanding. Common share equivalents
are excluded from the earnings per share calculation where they would be
antidilutive. The weighted average number of shares outstanding utilized in the
calculations is 19,704,565 and 18,253,177 for the three month periods ended
March 31, 1996 and 1995, respectively.
Fully diluted earnings per common share were calculated by dividing net
income (loss) applicable to common shareholders by the weighted average number
of common shares and common share equivalents during the period. Common share
equivalents included stock options outstanding. The assumed conversion of the
Debentures was antidilutive, and was therefore excluded from the calculation.
Common share equivalents for purposes of the fully diluted earnings per share
were 143,987 and 100,275 for the three month periods ended March 31, 1996 and
1995, respectively.
As required by APB Opinion No. 15, supplementary pro forma income per
share data has been presented in Note 4.
11. SUBSEQUENT EVENTS
On April 29, 1996, the Company's shareholders authorized (i) 1,500,000
Class C Cumulative Preferred Shares, without par value, (ii) 1,500,000 Class D
Cumulative Preferred Shares, without par value, (iii) 1,500,000 Class E
Cumulative Preferred Shares, without par value and (iv) the reduction of the
number of authorized Class A Cumulative Preferred Shares, without par value,
Class B Cumulative Preferred Shares, without par value and Noncumulative
Preferred Shares, without par value from 3,000,000 to 1,500,000 each.
On April 29, 1996 the shareholders also approved the Developers
Diversified Realty Corporation equity-based award plan under which awards may be
granted with respect to an aggregate of not more than 600,000 common shares. The
common shares reserved for issuance under this award plan are in addition to the
1,556,903 common shares reserved for issuance under the Company's 1992 share
incentive plan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and the notes
thereto.
CAPITAL RESOURCES
In February 1993, the Company completed its initial public offering
("IPO"), pursuant to which the Company issued 9,200,000 common shares at a
public offering price of $22 per share and realized net proceeds of
approximately $187 million. Completion of the IPO permitted the Company to
significantly deleverage its real estate portfolio and facilitated the Company's
ability to obtain funds to acquire and develop new shopping centers and expand
or improve existing centers.
Since the IPO, the Company has completed several offerings of its
equity (common shares and preferred shares) and unsecured debt aggregating
approximately $734 million of net proceeds. The proceeds from the offerings were
used (i) to repay indebtedness, (ii) for the acquisition of shopping centers and
(iii) for the development of new shopping centers and expansion of existing
shopping centers. Since the IPO, the Company has acquired 51 shopping centers,
developed 3 new shopping centers, redeveloped two shopping centers and expanded
18 shopping centers and one business center. As of March 31, 1996 the Company
owned 106 shopping centers, including 11 which are owned through joint ventures,
seven business centers and 92 parcels of undeveloped land aggregating
approximately 268 acres.
During the first quarter of 1996, the Company completed the sale of an
additional 175,000 Depositary Shares representing Class B preferred shares, in
conjunction with the exercise of the underwriters' over-allotment option. The
Company also issued $53 million of five to seven year senior unsecured fixed
rate notes with interest rates ranging from 6.58% to 7.04% through its MTN
program. In March 1996 the Company completed an underwritten equity offering in
which 2,611,500 common shares were sold at an offering price net of
underwriting commissions of $28.95 per share. The aggregate net proceeds from
the above transactions were approximately $132 million and were primarily used
to retire revolving credit and mortgage debt.
On November 17, 1995, the Company, in conjunction with certain joint
venture partners acquired the Homart Community Center Division of Sears, Roebuck
and Co. ("Sears") from an affiliate of General Growth Properties, Inc. The
Homart Community Center Division includes ten power centers which will aggregate
in excess of four million square feet of Gross Leasable Area ("GLA") located in
major metropolitan areas throughout the United States and several outlots and
pad sites adjacent to the ten power centers and certain other power centers
previously sold by Sears (the "Community Center Properties"). In addition, in
connection with the primary transaction, the Company acquired certain rights to
acquire several future development sites. Construction of seven of the ten power
centers is complete or substantially complete and three of the power centers are
currently under construction. Construction of the three centers is expected to
be substantially completed by mid 1996. Certain tenants at each of these three
centers are currently open for business or will open prior to the completion of
construction.
The Company, or a wholly owned subsidiary of the Company, and its joint
venture partners each own a 50% interest in each Community Center Joint Venture.
The initial total purchase price of the Community Center Properties aggregated
$443.4 million and was funded through $295.6 million of
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secured indebtedness at the joint venture level, $6.7 million of assumed net
liabilities and $141.1 million of cash of which approximately $70.5 million was
provided by the Company and approximately $70.5 million was provided by its
joint venture partners. In addition, the Company paid cash of approximately $1.1
million relating to the purchase of certain rights to several development sites.
The final purchase price for the Community Center Properties will be adjusted to
reflect development costs incurred for the period from November 1, 1995 through
November 16, 1995. Adjustments will also be made to reflect actual assets and
liabilities assumed as of November 16, 1995. The Company's initial cash
contribution was financed through proceeds from the issuance of Depositary
Shares representing Class A Preferred Shares.
During 1995, the Company acquired ten additional shopping centers
aggregating 1.2 million square feet of Company-owned GLA (gross leasable area
owned by the Company) at an aggregate purchase price of approximately $81.6
million. Since the IPO in 1993, in addition to the 10 properties acquired
through joint ventures, the Company has directly acquired 41 shopping centers
aggregating approximately 7.1 million square feet of Company-owned GLA for an
aggregate purchase price of approximately $413.2 million. These acquisitions
were financed through borrowings from revolving credit facilities of
approximately $319.3 million, debt and liabilities assumed of approximately
$85.8 million and equity of $8.1 million.
At March 31, 1996, the Company's capitalization consisted of $359.1
million of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $161.9 million), $149.8 million of preferred stock and
$634.1 million of market equity (market equity is defined as shares outstanding
multiplied by the closing price of the common shares on the New York Stock
Exchange at March 31, 1996 of $29.375) resulting in a debt to total market
capitalization ratio of 0.31 to 1.0. At March 31, 1996 the Company's debt
consisted of $340.9 million of fixed-rate debt, and $18.2 million of variable
rate debt.
It is management's intention that the Company 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 or debt
financing in a manner consistent with its intention to operate with a
conservative debt capitalization policy. Accordingly, the Company maintains a
shelf registration statement. As of March 31, 1996, the Company had $85.6
million available under its shelf registration statement.
LIQUIDITY
The Company anticipates that cash flow from operating activities will
continue to provide adequate capital for all principal payments, recurring
tenant improvements, as well as dividend payments in accordance with REIT
requirements and that cash on hand, borrowings under its existing revolving
credit facilities, and the use of project financing as well as other debt and
equity alternatives will provide the necessary capital to achieve continued
growth. Cash flow from operating activities for the first three months of 1996
increased to $14.1 million, as compared to $8.8 million in 1995. The increase is
attributable to increased cash flow from the Company's acquisitions,
developments and new leasing, re-tenanting and expansion of the core portfolio
properties.
An increase in the quarterly dividend per common share from $.54 to
$.60 was approved in December 1995 by the Company's Board of Directors. The
Company's common share dividend payout ratio for the first quarter of 1996
approximated 88.9% of the actual Funds From Operations.
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Industry analysts generally consider Funds From Operations to be an
appropriate measure of the operating performance of an equity REIT. Funds From
Operations is defined generally as net income applicable to common shareholders
plus depreciation and amortization of real property, nonrecurring and
extraordinary charges, less gain on sales of land. Adjustments are also made to
reflect the Company's proportionate share of Funds From Operations relating to
its joint venture equity interests. Funds From Operations does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to cash
flow as a measure of liquidity.
As of March 31, 1996 the Company had cash balances aggregating $18.8
million, $150 million available under its $150 million unsecured revolving
credit facility and $25 million available under its $25 million secured
revolving credit facility. In addition, the Company had approximately $2.9
million available through construction loans. On March 31, 1996, the Company
also had 80 operating properties with $20.0 million or 61.7% of the total
revenue for the three month period ended March 31, 1996 which were free of debt
or other restrictions, thereby providing a potential collateral base for future
borrowings.
RESULTS OF OPERATIONS
Revenues from Operations
Revenues from operations increased $5.3 million, or 21.3% to $30.6 million for
the three month period ended March 31, 1996 from $25.3 million for the same
period in 1995. Approximately $0.4 million of the increase in base and
percentage and overage revenues is the result of new leasing, re-tenanting and
expansion of the properties owned since January 1, 1995 ("Core Portfolio
Properties"). The ten shopping centers acquired in 1995 and two new shopping
center developments contributed $3.2 million of the increase in base and
percentage and overage revenues. The increase in recoveries from tenants of
$1.4 million is directly related to the increase in operating and maintenance
expenses and real estate taxes and is primarily related to the 1995 shopping
center acquisitions and developments. Management fee income and other income
increased by approximately $0.4 million which generally relates to an increase
in fee income (primarily management and development fees) of approximately $0.8
million primarily associated with the formation of the Community Center Joint
Ventures. This increase was offset by a reduction in lease termination income
of $0.4 million.
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended March 31, 1996 increased $0.7 million, or 32.2% to $3.0 million as
compared to $2.3 million for the same period in 1995. An increase of $0.5
million is attributable to the 12 shopping centers acquired and developed in
1995 and $0.2 million in the Core Portfolio Properties primarily attributed to
higher snow removal costs in 1996 as compared to 1995.
Real estate taxes increased $0.7 million, or 24.8%, to $3.4 million for
the three month period ended March 31, 1996 as compared to $2.7 million for the
same period in 1995. An increase of $0.4 million is related to the acquisition
of 12 shopping centers acquired and developed in 1995 and an increase of $0.3
million is related to the Core Portfolio Properties.
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General and administrative expenses increased $0.2 million, or 10.5%,
to $1.7 million for the three month period ended March 31, 1996 as compared to
$1.5 million in 1995. The increase is attributable to the growth of the Company
primarily related to the 1995 acquisitions, expansions and developments.
Depreciation and amortization expense increased $0.3 million, or 5.8%,
to $5.9 million for the three month period ended March 31, 1996 as compared to
$5.6 million for the same period in 1995. The increase is primarily attributable
to the growth related to the 12 shopping centers acquired and developed in 1995.
Interest expense increased $0.6 million, or 9.6%, to $7.3 million for
the three month period ended March 31, 1996, as compared to $6.7 million for the
same period in 1995. An increase in interest expense of $0.3 million for the
three month period ended March 31, 1996 is attributable to the debt assumed in
conjunction with the Company's acquisitions in 1995. An increase of $0.6 million
and $0.4 million is related to the Company's public debt issues and revolving
credit facilities, respectively. The aforementioned increases were offset by an
increase in the capitalization of interest costs aggregating $0.2 million
relating to development projects, and a decrease of $0.5 million which relates
to principal amortization and retirement of mortgage debt relating to the Core
Portfolio Properties.
Equity in net income of joint ventures increased $2.1 million, to $2.0
million for the three month period ended March 31, 1996 as compared to a net
loss of $0.1 million in 1995. The increase is attributable to the formation of
the Community Center Joint Ventures during the fourth quarter of 1995 which
contributed $2.1 million of equity in net income of joint ventures.
The extraordinary item which aggregated $0.2 million during the three
month period ended March 31, 1995, primarily relates to the write-off of
deferred financing costs and prepayment penalties associated with debt
(including a $25 million secured revolving credit facility which was scheduled
to mature in May 1995) which was repaid from proceeds of the January 1995,
2,875,000 common share offering.
Net Income
Net income increased $5.0 million to $11.2 million for the three month period
ended March 31, 1996, as compared to net income of $6.2 million for the same
period in 1995. The increase in net income of $5.0 million is primarily
attributable to the increased net operating revenues (total revenues less
operating and maintenance, real estate taxes, rent and general and
administrative expense) aggregating $3.8 million, resulting from new leasing,
retenanting and expansion of Core Portfolio Properties, and the 12 shopping
centers acquired and developed in 1995. An increase of $2.1 million relates to
the formation of the Community Center Joint Ventures and an increase of $0.3
million relates to a decrease in extraordinary charges. The increase in net
operating revenues and equity income from joint ventures and reduction in
extraordinary charges was offset by increases in depreciation and interest
expense of $0.3 million and $0.6 million, respectively, and a decrease in gains
on sales of land of $0.1 million.
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 percentage rentals based on tenants'
gross sales, which generally increase as prices rise, and/or escalation clauses,
which generally increase rental rates during the terms of the leases. Such
escalation
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clauses are often related to increases in the consumer price index or similar
inflation indices. In addition, many of the Company's leases are for terms of
less then ten years, which permits the Company to seek increased rents upon
re-rental 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.
At March 31, 1996, approximately 94.9% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 5.36 years and a weighted average interest
rate of approximately 8.05%. The remainder of the Company's debt bears interest
at variable rates, with a weighted average maturity of approximately 3.1 years
and a weighted average interest rate of approximately 6.6%. As of March 31, 1996
the Company's Community Center Joint Ventures had variable rate debt aggregating
approximately $309.9 million in the form of bridge loans which may be converted
to long-term fixed rate debt through securitizations. Accordingly, the Company's
overall interest expense would be adversely impacted in an inflationary period
in the event that interest rates rise during such a period. Moreover, the
Company intends to utilize variable rate indebtedness available under its
revolving credit facilities to initially fund future acquisitions of shopping
centers. Thus, to the extent that the Company incurs additional variable rate
indebtedness, its exposure to increases in interest rates in an inflationary
period would increase. The Company believes, however, that in no event would
increases in interest expenses as a result of inflation significantly impact the
Company's distributable cash flow.
In December 1994, the Company entered into a one-year $39.0 million
swap agreement with a major financial institution as a hedge against increasing
interest rates associated with the Company's $100 million Floating Rate Senior
Notes, which terminated in conjunction with the repayment of the notes in
December 1995. The Community Center Joint Ventures have entered into swap
agreements with major financial institutions as a hedge against increasing
interest rates associated with the joint ventures' proposed upcoming
securitizations. The Company intends to continuously monitor and actively manage
interest costs on its variable rate debt portfolio and may increase or decrease
its swap position 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. Accordingly,
the cost of obtaining such protection agreements in relation to the Company's
access to capital markets will continue to be evaluated.
ECONOMIC CONDITIONS
Many regions of the United States, including regions in which the
Company owns property, have experienced varying degrees of economic recession. A
continuation of the economic recession, or further adverse changes in general or
local economic conditions, could result in the inability of some existing
tenants of the Company to meet their lease obligations and could otherwise
adversely affect the Company's ability to attract or retain tenants. The
shopping centers are typically anchored by discount department stores (usually
Wal-Mart, Kmart or J.C. Penney), supermarkets, and drug stores which usually
offer day-to-day necessities, rather than high-priced luxury items.
Since these merchants typically perform better in an economic recession
than those who market high priced luxury items, the percentage rents received by
the Company have remained relatively stable. 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.
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During 1995 and 1996, certain national and regional retailers
experienced financial difficulties and several have filed for protection under
bankruptcy laws. No significant bankruptcies have occurred through May 8, 1996
with regard to the Company's portfolio of tenants.
Base rental revenues from Wal-Mart and Kmart represented 10.6% and 6.3%,
respectively, of the Company's aggregate base rental revenues, including
revenues from joint venture properties, for the three month period ended March
31, 1996. The Company could be adversely affected in the event of the
bankruptcy or insolvency of Wal-Mart or Kmart, or a significant downturn in the
business of Wal-Mart or Kmart. In addition, the Company would be adversely
affected in the event that either Wal-Mart or Kmart does not renew its leases
as they expire.
During 1995, Kmart closed three of its stores leased from the Company,
all in communities in which Kmart has constructed new larger stores. Kmart
closed its store in the Company's Chillicothe, Ohio shopping center effective
January 1, 1995, and the Company entered into a new lease with Lowe's. During
the first and second quarters of 1995, Kmart closed its stores in the Company's
Stone Mountain, Georgia and Melbourne, Florida shopping centers. In addition,
during the first quarter of 1995, Kmart closed two anchor stores it owns in the
Company's shopping centers (comprising 137,000 square feet of tenant-owned GLA.)
Kmart had informed the Company that it was intending to close its Westlake, Ohio
store, in order to construct a new larger store; however, that decision was
reversed by Kmart which has since indicated that it will keep the existing store
open. Wal-Mart has informed the Company that it intends to construct new, larger
stores in the Martinsville and Winchester, Virginia communities. As a result,
Wal-Mart intends to close its existing stores leased from the Company at its
centers in each location. The Company and Wal-Mart or Kmart, as the case may be,
are actively pursuing potential substitute tenants. Until the Company
consummates leases with other new tenants or the current leases with Kmart and
Wal-Mart expire or are terminated by the Company, Kmart and Wal-Mart will
continue to be responsible for their obligations under their leases. The Company
does not believe that the closing of the above mentioned Kmart and Wal-Mart
stores will have an adverse financial effect on the Company. The Company could
also be adversely affected in the event of a downturn in the business of the
other major tenants. However, as of March 31, 1996, the Company received no more
than 3.0% of its shopping center base rental revenues, including revenues from
joint venture properties, from any other single tenant.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor,
to its knowledge, is any material litigation threatened against the Company or
its properties, other than routine litigation arising in the ordinary course of
business and which is expected to be covered by the Company's liability
insurance.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
11.1 Earnings per Share
27 (a) Financial Data Schedule
b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
May 13, 1996 /s/ Scott A. Wolstein
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(Date) Scott A. Wolstein, President and
Chief Executive Officer
May 13, 1996 /s/ William H. Schafer
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(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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