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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11690
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)
(440) 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)
Indicated by check u 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 u No
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes
of common shares as of the latest practicable date.
28,574,796 shares outstanding as of May 11, 1998
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31,
1997.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended March 31, 1998 and 1997.
Condensed Consolidated Statements of Cash Flows for the Three Month Periods
ended March 31, 1998 and 1997.
Notes to Condensed Consolidated Financial Statements.
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
1998 1997
----------- -----------
Real estate rental property:
Land $ 201,706 $ 183,809
Land under development 23,043 23,668
Construction in progress 45,964 28,130
Buildings 1,155,635 1,071,717
Fixtures and tenant improvements 20,205 18,418
----------- -----------
1,446,553 1,325,742
Less accumulated depreciation (180,843) (171,737)
----------- -----------
Real estate, net 1,265,710 1,154,005
Other real estate investments 7,760 72,149
Cash and cash equivalents 14,101 18
Investments in and advances to joint ventures 162,977 136,267
Other assets 32,704 29,479
----------- -----------
$ 1,483,252 $ 1,391,918
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 492,036 $ 392,254
Revolving credit facilities 95,000 139,700
Subordinated convertible debentures 44,142 46,891
----------- -----------
631,178 578,845
Mortgage indebtedness:
Banks and other financial institutions 136,927 89,676
----------- -----------
Total indebtedness 768,105 668,521
Accounts payable and accrued expenses 33,021 28,601
Other liabilities 10,354 9,100
Minority equity interests -- 16,293
Operating partnership minority interests 3,151 353
----------- -----------
814,631 722,868
=========== ===========
Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 421,500 shares
issued and outstanding at March 31, 1998 and December 31, 1997 105,375 105,375
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 177,500 shares
issued and outstanding at March 31, 1998 and December 31, 1997 44,375 44,375
Common shares, without par value, $.10 stated value; 50,000,000
shares authorized; 27,822,166 and 27,687,576 shares issued and
outstanding at March 31, 1998 and December 31, 1997, respectively 2,782 2,769
Paid-in-capital 584,648 580,509
Accumulated dividends in excess of net income (68,098) (63,517)
----------- -----------
669,082 669,511
Less: Unearned compensation - restricted stock (461) (461)
----------- -----------
668,621 669,050
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$ 1,483,252 $ 1,391,918
=========== ===========
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,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1998 1997
-------- --------
Revenues from operations:
Minimum rents $ 36,132 $ 27,566
Percentage and overage rents 1,103 1,057
Recoveries from tenants 9,038 7,226
Management fee income 755 723
Other 2,471 881
-------- --------
49,499 37,453
-------- --------
Rental operation expenses:
Operating and maintenance 4,054 3,673
Real estate taxes 5,959 4,391
General and administrative 2,932 2,360
Interest expense 11,453 8,047
Depreciation and amortization 9,136 7,406
-------- --------
33,534 25,877
-------- --------
Income before equity in net income
of joint ventures, gain on sale of real
estate, allocation to minority interest
and extraordinary item 15,965 11,576
Equity in net income of joint ventures 2,238 2,717
Gain on sales of real estate -- 3,526
-------- --------
Income before allocation to minority interests
and extraordinary item 18,203 17,819
Income allocated to minority equity interests (189) (265)
-------- --------
Income before extraordinary item 18,014 17,554
Extraordinary item - extinguishment of
debt - deferred finance costs written-off (882) --
-------- --------
Net income $ 17,132 $ 17,554
======== ========
Net income applicable to common shareholders $ 13,582 $ 14,004
======== ========
Comprehensive income $ 13,582 $ 14,004
======== ========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.52 $ 0.57
Extraordinary item (0.03) --
-------- --------
Net income $ 0.49 $ 0.57
======== ========
Earnings per common share - diluted:
Income before extraordinary item $ 0.50 $ 0.56
Extraordinary item (0.03) --
-------- --------
Net income $ 0.47 $ 0.56
======== ========
Dividends declared $ .655 $ .63
======== ========
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,
(DOLLARS IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
(UNAUDITED)
1998 1997
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Net cash flow provided by operating activities $ 29,600 $ 21,107
-------- ---------
Cash flow provided by (used for) investing activities:
Real estate developed or acquired (77,141) (114,017)
Investments in and advances to joint ventures, net (11,873) (5,462)
Issuance of notes receivable (911) --
Proceeds from transfer of joint venture interests 41,526 --
Proceeds from sales of real estate -- 5,452
-------- ---------
Net cash flow used for investing activities (48,399) (114,027)
-------- ---------
Cash flow provided by (used for) financing activities:
Repayment of revolving credit facilities, net (44,700) (76,500)
Proceeds from issuance of Medium Term Notes, net of
underwriting commissions and $220 of offering expenses
paid in 1998 98,897 --
Principal payments on rental property debt (608) (609)
Proceeds from issuance of Fixed Rate Senior Notes, net of
underwriting commissions and discounts and $500 of
offering expenses paid -- 74,147
Proceeds from call premium of Fixed Rate Senior Notes -- 1,430
Payment of deferred finance costs (bank borrowings) (426) --
Proceeds from issuance of common shares, net of
underwriting commissions and $425 of offering expenses
paid in 1997 -- 115,832
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan,
restricted stock plan and dividend reinvestment plan 1,433 614
Dividends paid (21,714) (19,324)
-------- ---------
Net cash flow provided by financing activities 32,882 95,590
-------- ---------
Increase in cash and cash equivalents 14,083 2,670
Cash and cash equivalents, beginning of period 18 12
-------- ---------
Cash and cash equivalents, end of period $ 14,101 $ 2,682
======== =========
Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisition of certain shopping centers, the Company
assumed mortgage debt, liabilities and recorded a minority equity interest
aggregating approximately $51.6 million during the three month period ended
March 31, 1998. The Company also had approximately $2.7 million of debentures
convert into common shares of the Company, which did not require the use of
cash. In addition, included in accounts payable was approximately $0.2 million
relating to construction in progress. The foregoing transactions not require the
use of cash.
In conjunction with the acquisitions of certain shopping centers, the Company
assumed liabilities and recorded a minority interest aggregating approximately
$22.9 million during the three month period ended March 31, 1997. In addition,
included in accounts payable was approximately $0.3 million relating to
construction in progress. The foregoing transactions 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.
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
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.
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 130 - Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the changes in equity of a business during a
period from transactions and other events and circumstances from nonowner
sources. The new standard becomes effective for the Company for the year ending
December 31, 1998, and requires that comparative information from earlier years
be restated to conform to the requirements of this standard. There were no
required adjustments necessary to reflect comprehensive income for the period
ended March 31, 1998 or 1997.
2. OFFERING
In January 1998, the Company issued $100 million of Unsecured Fixed
Rate Senior Notes pursuant to its Medium Term Note program. These notes have a
term of ten years and a coupon interest rate of 6.625%. The aggregate net
proceeds received of approximately $99.1 were primarily used to retire variable
rate indebtedness on the Company's revolving credit facilities.
3. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at March 31, 1998
were comprised of (i) a 50% joint venture interest in four community center
joint ventures, formed in November 1995,
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which own and operate ten shopping center properties located in nine different
states aggregating approximately 4.0 million square feet; (ii) a 50% joint
venture interest, formed in September 1996, with The Ohio State Teachers
Retirement Systems (OSTRS) which owns and operates two shopping centers
aggregating approximately 0.5 million square feet; (iii) a 50% joint venture
interest, formed in October 1996, in conjunction with the development of
shopping center in Merriam, Kansas, aggregating approximately 0.4 million
square feet; (iv) a 35% joint venture interest in a limited partnership, formed
in January 1997, that owns a 0.3 million square foot shopping center located in
San Antonio, Texas; (v) a 50% joint venture interest in a limited partnership,
that owns a 0.4 million square foot shopping center located in Martinsville,
Virginia which was formed in January 1993; (vi) a 50% interest in four separate
joint ventures which are currently developing four shopping centers; (vii) a
50% joint venture interest acquired in March 1998, which owns a shopping center
aggregating 0.3 million square feet, in Columbus, Ohio; (viii) a 79.45%
joint venture interest acquired in March 1998, which owns a shopping center
aggregating 0.3 million square feet, in Columbus, Ohio; and (ix) a 25% joint
venture interest in the retail value fund formed with Prudential Real Estate
Investors in February 1998, which acquired 33 retail sites located in 13
different states. These sites were formerly occupied by Best Products and are
currently being redeveloped.
Summarized combined financial information of the Company's joint venture
investments is as follows (in thousands):
March 31, December 31,
Combined Balance Sheets 1998 1997
--------- ---------
Land $ 161,770 $ 147,466
Buildings 513,026 482,153
Fixtures and tenant improvements 1,326 1,315
Construction in progress 82,453 19,172
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758,575 650,106
Less accumulated depreciation (31,171) (26,113)
--------- ---------
Real estate, net 727,404 623,993
Other assets 34,356 25,817
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$ 761,760 $ 649,810
========= =========
Mortgage debt $ 443,319 $ 389,160
Amounts payable to DDRC 27,731 32,667
Other liabilities 10,396 9,549
--------- ---------
481,446 431,376
Accumulated equity 280,314 218,434
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$ 761,760 $ 649,810
========= =========
Three Month Period
Ended March 31,
Combined Statements of Operations 1998 1997
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Revenues from operations $20,509 $19,304
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Rental operation expenses 4,789 4,659
Depreciation and amortization expenses 3,044 2,704
Interest expense 8,127 6,428
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15,960 13,791
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Net income $ 4,549 $ 5,513
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The amount of advances to and investments in joint ventures is reduced
by a deferred gain of approximately $5.9 million related to the contribution of
the real estate property and mortgage debt to the OSTRS Joint Venture.
Included in management fee income for the three month period ended
March 31, 1998 and 1997, is approximately $0.7 million and $0.6 million,
respectively, of fees earned by the Company for services rendered to the joint
ventures. Similarly, other income for the three month period ended March 31,
1998 and 1997, includes $0.4 million and $0.1 million, respectively, of
development fee income for services rendered to the joint ventures.
4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
During the three month period ended March 31, 1998, the Company
completed the acquisition of, or investment in, twelve shopping centers with an
aggregate of approximately 1.7 million Company owned gross leasable square feet
(GLA) at an initial aggregate investment of approximately $198 million. These
properties are summarized as follows:
Effective
Year Date of Company
Location Built Acquisition GLA
-------- ----- ----------- ---
Country Club Mall - Idaho Falls, Idaho 1976 February 25, 1998 148,593
Bel Air Centre - Detroit, Michigan 1989 March 10, 1998 343,502
Perimeter Shopping Center - Dublin, Ohio 1996 March 23, 1998 137,610
OfficeMax - Barboursville, West Virginia 1985 March 23, 1998 70,900
Big Bear - Bellefontaine, Ohio 1995 March 28, 1998 54,780
Roundy's - Hamilton, Ohio 1986 March 23, 1998 30,110
Hoggies Center- Gahanna, Ohio 1995 March 23, 1998 39,285
Roundy's/Rite Aid - Pataskala, Ohio 1980 March 23, 1998 33,270
Shoppes at Turnberry - Pickerington, Ohio 1990 March 23, 1998 59,495
Derby Square Shopping Center - Grove City, Ohio 1992 March 23, 1998 128,050
Lennox Town Center - Columbus, Ohio (1) 1997 March 23, 1998 336,044
Sun Center - Columbus, Ohio (2) 1995 March 23, 1998 317,581
(1) Property acquired through a joint venture in which the Company
owns a 50% interest.
(2) Property acquired through a joint venture in which the Company
owns a 79.45% interest
The operating results of the acquired shopping centers are included in
the results of operations of the Company from the effective date of acquisition.
The following unaudited supplemental pro forma operating data is
presented for the three months ended March 31, 1998 as if each of the following
transactions had occurred on January 1, 1998; (i) the acquisition of all
properties acquired, or interests therein, by the Company in 1998, (ii) the
completion of the sale by the Company of $100 million of Medium Term Notes in
January 1998 and (iii) the purchase by the Company of the minority interest of a
shopping center in Cleveland, Ohio, in March 1998.
The following unaudited supplemental pro forma operating data is
presented for the three months ended March 31, 1997 as if each of the following
transactions had occurred on January 1, 1997:
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(i) the acquisition of all properties acquired, or interests therein, by the
Company in 1997 and 1998, (ii) the completion of the sale by the Company of
$202 million of Medium Term Notes in 1997 and 1998, (iii) the completion of the
sale by the Company of 3,350,000 common shares in January 1997, (iv) the
completion of the sale by the Company of the $75 million 7.125% Pass through
Asset Trust Securities in March 1997, (v) the completion of the sale by the
Company of 1,300,000 common shares in June 1997, (vi) the completion of the
sale by the Company of 507,960 common shares in September 1997, (vii) the
completion of the sale by the Company of 316,800 common shares in December 1997
and (viii) the purchase by the Company of the minority interest of a shopping
center in Cleveland, Ohio in March 1998.
Three Month Period Ended March 31,
----------------------------------
(in thousands, except per share)
1998 1997
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Pro forma revenues $ 51,862 $ 41,460
========== ==========
Pro forma income before extraordinary item $ 14,261 $ 14,179
========== ==========
Pro forma net income applicable
to common shareholders $ 13,379 $ 14,179
========== ==========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.51 $ 0.57
Extraordinary item (0.03) --
---------- ----------
Net income $ 0.48 $ 0.57
========== ==========
Earnings per common share - diluted:
Income before extraordinary item $ 0.50 $ 0.56
Extraordinary item (0.03) --
---------- ----------
Net income $ 0.47 $ 0.56
========== ==========
The 1997 pro forma information above does not include revenues and
expenses for four of the seven properties acquired by the Company in 1997 prior
to their respective acquisition dates 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 AND OPERATING PARTNERSHIP UNITS:
The following table summarizes the changes in shareholders' equity since
December 31, 1997 (in thousands):
Class A 9.5% Class B 9.44%
Cumulative Cumulative
Redeemable Redeemable
Preferred Preferred Common Accumulated Unearned
Shares ($250 Shares ($250 Shares Dividends in Compensation
Stated Stated ($.10 stated Paid-in Excess of Restricted
Value) Value) Value) Capital Net Income Stock Total
--------- -------- -------- --------- --------- ---------- ---------
Balance December 31, 1997 $ 105,375 $ 44,375 $ 2,769 580,509 $ (63,517) $ (461) $ 669,050
Net income 17,132 17,132
Dividends declared -
Common Shares (18,163) (18,163)
Dividends declared -
Preferred Shares (3,550) (3,550)
Conversion of Debentures 8 2,712 2,720
Issuance of common shares
related to exercise of stock
options, employee 401(k) plan
and dividend reinvestment plan 5 1,427 1,432
--------- -------- -------- --------- --------- ---------- ---------
Balance March 31, 1998 $ 105,375 $ 44,375 $ 2,782 $ 584,648 $ (68,098) $ (461) $ 668,621
========= ======== ======== ========= ========= ========== =========
In March 1998, in conjunction with the acquisition of ten shopping
centers, the Company formed a limited partnership which issued 69,936 limited
partnership units which are exchangeable, at the option of the Company, on a
one-for-one basis into the Company's common shares or for cash.
In 1997, in conjunction with the acquisition of two shopping centers
the Company formed limited partnerships which issued 8,942 limited partnership
units which are exchangeable, at the option of the Company, on a one-for-one
basis into the Company's common shares or for cash.
6. REVOLVING CREDIT FACILITIES:
In February 1998, the Company and a amend and restate the Company's primary
revolving credit facility (the "Unsecured Credit Facility") to increase the
facility to $250 million from $150 million. The new agreement also provides for
a reduction in pricing and an extension of the term for an additional year
through April 2001. The amended and restated facility also continues to provides
for a competitive bid option for up to 50% of the facility amount. During the
first quarter of 1998, the Company recognized a non-cash extraordinary charge of
approximately $0.9 million ($0.03 per share), relating to the write-off of
unamortized deferred finance costs associated with the former revolving credit
facility. The Company's borrowings under this facility bear interest at variable
rates based on the prime rate or LIBOR plus a specified spread (currently
0.85%), 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 properties, to provide working capital and
for general corporate purposes. At March 31, 1998, $95.0 million was outstanding
under this facility.
In addition, the Company maintains a $10 million unsecured 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 1.10%) depending on the Company's long term senior
unsecured debt rating from Standard and Poor's and Moody's Investors Service. At
March 31, 1998 there was no indebtedness outstanding under this facility.
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7. RELATED PARTY TRANSACTIONS
In February 1998, the Company acquired a shopping center located in
Idaho Falls, Idaho from a limited partnership in which the Company's
Chairman Emeritus, The Chairman of the Board, and the Vice-Chairman of the
Board owned, in the aggregate, through a separate partnership, a 1% general
partnership interest. The shopping center aggregates approximately 0.2 million
of Company GLA. The initial purchase price of the property was approximately
$6.5 million. In accordance with the purchase agreement, the Company may be
required to pay the seller an additional $0.8 million upon the leasing of
vacant space in the center.
In addition, the Company paid to a partnership owned by the Chairman
Emeritus approximately $0.1 million for leasing/sales commissions associated
with leasing or sale of certain shopping center outlots. Also, the Company paid
approximately $0.4 million to a company owned by the brother-in-law of the
Chairman of the Board relating to fees and commissions on the acquisition of
several shopping centers in 1998. Management believes that the fees and
commissions paid were at least as favorable to the Company as could have been
obtained from an unrelated third party.
8. EARNINGS AND DIVIDENDS PER SHARE
Earnings per Share (EPS) have been computed pursuant to the provisions
of Statement of Financial Accounting Standards No. 128 which became effective
for all financial statements issued after December 15, 1997. All periods prior
thereto have been restated to conform with the provisions of this Statement.
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The following table provides a reconciliation of both income before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilized the weighted average number of common shares
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares.
For the three month period ended March 31,
(in thousands, except per share amounts)
1998 1997
-------- --------
Income before extraordinary item $ 18,014 $ 17,554
Less: Preferred stock dividend (3,550) (3,550)
-------- --------
Basic EPS - Income before
extraordinary item applicable to
common shareholders 14,464 14,004
Effect of dilutive securities:
Joint venture partnership (314) --
-------- --------
Diluted EPS - Income before
extraordinary item applicable to
common shareholders plus
assumed conversions $ 14,150 $ 14,004
======== ========
Number of Shares:
Basic - average shares outstanding 27,750 24,515
Effect of dilutive securities:
Joint venture partnership 164 --
Stock options 449 419
Restricted stock 3 3
-------- --------
Diluted - average shares outstanding 28,366 24,937
======== ========
PER SHARE AMOUNT:
Income before extraordinary item
Basic $ 0.52 $ 0.57
======== ========
Diluted $ 0.50 $ 0.56
======== ========
9. CONVERTIBLE SUBORDINATED DEBENTURES
During the three month period ended March 31, 1998, debentures in the
principal amount of $2.7 million were converted into approximately 82,000 common
shares. The related accrued but unpaid interest was forfeited by the holders. In
addition, upon conversion of the debentures approximately $29,000 of unamortized
debenture issue costs were charged to additional paid-in-capital.
10. SUBSEQUENT EVENTS
In April 1997, the Company completed a 669,639 common share offering
and received net proceeds of approximately $25.3 million which were primarily
used to retire variable rate debt.
In April 1998, the Company acquired from Continental Real Estate
Companies of Columbus, Ohio, interests in three additional shopping centers,
located in the Columbus, Ohio area. Combined, these shopping centers will have
approximately 1.0 million square feet of total gross leasable area. The
Company's proportionate share
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of the investment will approximate $93.4 million upon completion of
approximately 345,000 square feet which is currently under construction. The
portion under construction has an estimated cost of approximately $42.4 million
and the Company is scheduled to close on the investment periodically throughout
1998.
In addition, in April 1998, the Company acquired the remaining
ownership interest in a 584,000 square foot shopping center in Princeton, New
Jersey at a total cost of approximately $36.4 million for consideration in the
form of $27.9 million of debt assumed and $0.7 million of operating partnership
units and cash. The Company had invested approximately $7.8 million in the
shopping center as of December 31, 1997.
On May 11, 1998, at the Company's annual shareholder meeting, the
shareholders approved the following; (1) Amended the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized shares
of the Company from 59,000,000 to 109,000,000 and (2) Approved the 1998
Developers Diversified Realty Corporation Equity Based Award 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.
The Company considers portions of this information 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. Although the
Company believes that the expectations reflected in such 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 may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believed," "anticipates," "plans," "seeks," "estimates," and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements,
including, among other factors, local conditions such as an oversupply of space
or a reduction in demand for real estate in the area, competition from other
available space, dependence on rental income from real property or the loss of a
major tenant.
RESULTS OF OPERATIONS
Revenues from Operations
Total revenues increased $12.0 million, or 32.2%, to $49.5 million for
the three month period ended March 31, 1998 from $37.5 million for the same
period in 1997. Base and percentage rents for the three month period ended March
31, 1998 increased $8.6 million, or 30.1%, to $37.2 million as compared to $28.6
million for the same period in 1996.
Approximately $1.6 million of the increase in base and percentage
rental income, for the three month period ended March 31, 1998 is the result of
new leasing, re-tenanting and expansion of the Core Portfolio Properties
(shopping center properties owned as of January 1, 1997), an increase of 5.9%
over 1997 revenues from Core Portfolio Properties. The 17 shopping centers
acquired by the Company in 1998 and 1997 contributed $6.1 million of additional
base and percentage rental revenue and the three new shopping center
developments contributed $1.1 million. These increases were offset by a decrease
of $0.2 million relating to the sale of one shopping center in December 1997.
At March 31, 1998 the in-place occupancy rate of the Company's
portfolio was at 95.2% as compared to 94.1% at March 31, 1997. The average
annualized base rent per leased square foot, including those properties owned
through joint ventures, was $8.56 at March 31, 1998 as compared to $8.16 at
March 31, 1997. Same store sales, for those tenants required to report such
information, representing approximately 13.4 million square feet, increased 3.6%
to $231 per square foot as compared to $222 per square foot for the prior twelve
month period.
The increase in recoveries from tenants of $1.8 million is directly
related to the increase in operating and maintenance expenses and real estate
taxes primarily associated with the 1998 and 1997 shopping center acquisitions
and developments. Recoveries were approximately 90.3% of operating expenses and
real estate taxes for the three month period ended March 31, 1998 as compared to
89.6%
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for the same period in 1997. Management fee income and other income increased by
approximately $1.6 million which generally relates to an increase in interest
income and lease termination fees.
Other income was comprised of the following (in thousands):
Three Month Period
Ended March 31,
1998 1997
-------- ------
Interest $ 912 $394
Temporary tenant
rentals (Kiosks) 112 121
Lease termination fees 825 146
Development fees 362 156
Other 260 64
------ ----
$2,471 $881
====== ====
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended March 31, 1998 increased $0.4 million, or 10.4% to $4.1 million as
compared to $3.7 million for the same period in 1997. An increase of $0.7
million is attributable to the 20 shopping centers acquired and developed in
1997 and 1998 offset by a decrease of $0.3 million in the Core Portfolio
Properties.
Real estate taxes increased $1.6 million, or 35.7%, to $6.0 million for
the three month period ended March 31, 1998 as compared to $4.4 million for the
same period in 1997. An increase of $1.0 million is related to the 20 shopping
centers acquired and developed in 1997 and 1998 and $0.6 million in the Core
Portfolio Properties.
General and administrative expenses increased $0.6 million, or 24.3%,
to $2.9 million for the three month period ended March 31, 1998 as compared to
$2.3 million in 1997. The increase is attributable to the growth of the Company
primarily related to acquisitions, expansions and developments. The Company
continues to maintain a conservative policy with regard to the expensing of all
internal leasing salaries, legal salaries and related expenses associated with
the leasing and re-leasing of existing space. In addition, the Company has
expensed all internal costs associated with acquisitions. Total general and
administrative expenses were approximately 4.2% of total revenues, including
revenues of joint ventures, for the three month periods ended March 31, 1998 and
1997.
Depreciation and amortization expense increased $1.7 million, or 23.4%,
to $9.1 million for the three month period ended March 31, 1998 as compared to
$7.4 million for the same period in 1997. An increase of $1.4 million is related
to the 20 shopping centers acquired and developed in 1998 and 1997 and $0.3
million in the Core Portfolio Properties.
Interest expense increased $3.4 million, or 42.3%, to $11.5 million for
the three month period ended March 31, 1998, as compared to $8.1 million for the
same period in 1997. This increase is primarily related to the acquisition and
development of shopping centers during 1998 and 1997. The weighted average debt
outstanding during the three month period ended March 31, 1998 and related
weighted average interest rate was $702.1 million and 7.4%, respectively,
compared to $430.9 million and 7.8%, respectively, for the same period in 1997.
Interest costs capitalized, in conjunction with
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development and expansion projects, were $1.8 million for the three month period
ended March 31, 1998, as compared to $0.8 million, for the same period in 1997.
Equity in net income of joint ventures decreased $0.5 million, or
17.6%, to $2.2 million for the three month period ended March 31, 1998 as
compared to $2.7 million for the same period in 1997. This decrease is primarily
attributable to an increase in interest expense at the Community Center Joint
Ventures which refinanced its mortgage debt in May 1997 aggregating $322.5
million from a variable interest rate to a fixed interest rate.
The minority equity interest expense decreased $0.1 million,or 28.5%,
to $0.2 million for the three month period ended March 31, 1998, as compared to
$0.3 million for the same period in 1997. The decrease relates to the Company's
purchase in March 1998 of the minority interest in one shopping center located
in Cleveland, Ohio, for approximately $16.3 million. The minority equity
interest expense represents the priority distribution associated with such
interests.
Gain on sales of real estate aggregated $3.5 million for the three
month period ended March 31, 1997. In March 1997, the Company sold two business
centers in Highland Heights, Ohio aggregating approximately 113,000 square feet
for approximately $5.7 million. The two business centers had been vacant for
approximately 18 months.
The extraordinary item, which aggregated $0.9 million for the three
month period ended March 31, 1998, relates to the write-off of unamortized
deferred finance costs with the amended and restated $250 million revolving
credit agreement. (See Financing Activities).
Net Income
Net income decreased $0.4 million, or 2.4%, to $17.1 million for the
three month period ended March 31, 1998, as compared to net income of $17.5
million for the same period in 1997. The decrease in net income of $0.4 million
is primarily attributable to a reduction in the gain on sale of assets
aggregating $3.5 million and an extraordinary charge of $0.9 million.
The Changes in net income were comprised of increases in net operating
revenues (total revenues less operating and maintenance, real estate taxes
and general and administrative expense) aggregating $9.5 million, resulting
from new leasing, retenanting and expansion of Core Portfolio Properties,
and the 20 shopping centers acquired and developed in 1997 and 1998. An
increase of $0.1 million relates to a decrease in minority equity interest
expense. The increase in net operating revenues and decrease in minority equity
interest expense was offset by increases in depreciation, interest expense,
equity income from joint ventures, gain on sales of real estate and
extraordinary item of $1.7 million, $3.4 million, $0.5 million, $3.5 million
and $0.9 million, respectively.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") provides an
additional indicator of the financial performance of a Real Estate Investment
Trust. FFO is defined generally as net income applicable to common shareholders
excluding gains (losses) on sale of property, nonrecurring and extraordinary
items, adjusted for certain non-cash items, principally real property
depreciation and equity income (loss) from its joint ventures and adding the
Company's proportionate share of FFO of its unconsolidated joint ventures,
determined on a consistent basis. The Company calculates FFO in accordance with
the foregoing definition, which is substantially the same as the definition
currently used by the National Association of Real Estate Investment Trusts
("NAREIT"). Certain other real
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estate companies may calculate funds from operations in a different manner. For
the three month period ended March 31, 1998, FFO increased $5.9 million, or
30.7%, to $25.0 million as compared to $19.1 million for the same period in
1997. The increase is attributable to increases in revenues from Core Portfolio
Properties, acquisitions and developments. The Company's calculation of FFO is
as follows (in thousands):
Three Month Period
Ended March 31,
1998 1997
-------- --------
Net income applicable to
common shareholders (1) $ 13,582 $ 14,004
Depreciation of real property 9,035 7,322
Equity in net income of joint ventures (2,238) (2,717)
Minority interest expense
(OP Units) 11 --
Joint Ventures FFO (2) 3,731 4,051
Gain on sales of real estate -- (3,526)
Extraordinary item 882 --
-------- --------
$ 25,003 $ 19,134
======== ========
(1) Includes straight line rental revenues of approximately $0.7 million and
$0.3 million for the three month period ended March 31, 1998 and 1997,
respectively, primarily related to recent acquisitions and new
developments.
(2) Joint Venture Funds From Operations are summarized as follows:
Net income (a) $ 4,549 $ 5,513
Depreciation of real property 3,044 2,704
---------- ----------
$ 7,593 $ 8,217
========== ==========
DDRC Ownership interests (b) $ 3,731 $ 4,051
========== ==========
(a) Revenues for the three month periods ended March 31, 1998 and 1997
include approximately $0.6 million, resulting from the recognition of
straight line rents of which the Company's proportionate share is $0.3
million.
(b) At March 31, 1998 the Company owned a 50% joint venture interest
relating to 14 operating shopping center properties, a 79.45% joint
venture interest in one operating shopping center property and a 35%
joint venture interest in one operating shopping center property. At
March 31, 1997 the Company owned a 50% joint venture interest in 13
operating shopping center properties and a 35% joint venture interest
in one shopping center.
LIQUIDITY AND CAPITAL RESOURCES
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 available under its existing
revolving credit facilities, as well as other debt and equity alternatives will
provide the necessary capital to achieve continued growth. Cash flow from
operating activities for the three month period ended March 31, 1998 increased
to $29.6 million as compared to $21.1 million for the same period in 1997. The
increase is attributable to the 20 shopping center acquisitions and developments
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completed in 1998 and 1997, new leasing, expansion and re-tenanting of the core
portfolio properties and the equity offerings completed in 1998 and 1997.
An increase in the 1998 quarterly dividend per common share to $.655
from $.63 was approved in December 1997 by the Company's Board of Directors. The
Company's common share dividend payout ratio for the first quarter of 1998
approximated 72.6% of the actual Funds From Operations as compared to 82.4% for
the same period in 1997. It is anticipated that the current dividend level will
result in a more conservative payout ratio as compared to prior years. A lower
payout ratio will enable the Company to retain more capital which will be
utilized for attractive investment opportunities in the development, acquisition
and expansion of portfolio properties.
During the three month period ended March 31, 1998, the Company and its joint
ventures invested $105.6 million, net, to acquire, develop, expand, improve and
re-tenant its properties. The Company's expansion acquisition and development
activity is summarized below:
Expansions:
The Company is currently expanding/redeveloping ten of its shopping centers and
will continue to pursue additional expansion opportunities aggregating
approximately 750,000 square feet of Company owned GLA. The Company is also
scheduled to commence expansion/redevelopment projects during 1998 at eight
additional shopping centers.
Acquisitions:
During the first quarter of 1998, the Company completed the acquisition
of, or investment in 12 shopping centers. The Company purchased Belair Centre,
located in Detroit, Michigan, aggregating approximately 450,000 square feet for
approximately $33.7 million. The Company also acquired Country Club Mall,
located in Idaho Falls, Idaho, aggregating approximately 150,000 square feet for
approximately $6.5 million.
In March 1998, in a single transaction with Continental Real Estate
Companies ("Continental") of Columbus, Ohio, the Company completed the
acquisition of 10 shopping centers, two of which were acquired through joint
ventures. The 10 shopping centers total 1.2 million gross square feet of
Company-owned retail space. The Company's aggregate cost associated with these
centers was $91.9 million. The Company's net investment was initially funded
through its revolving credit facilities, cash and liabilities assumed of
approximately $31.6 million, mortgages assumed of approximately $57.5 million
(including $29.3 million of joint venture mortgage debt) and the issuance of
69,936 Operating Partnership Units valued at approximately $2.8 million. These
Units are exchangeable on a one for one basis into shares of the Company's
common stock.
In April 1998, the Company acquired from Continental interests in three
additional shopping centers, located in the Columbus, Ohio area. Combined, these
shopping centers will have approximately 1.0 million square feet of total gross
leasable area. The Company's investment will approximate $93.4 million upon
completion of approximately 345,000 square feet which is currently under
construction. The portion under construction has an estimated cost of
approximately $42.4 million and the Company is scheduled to close on this
investment periodically throughout 1998.
In addition, in April 1998, the Company acquired the remaining
ownership interest in a 584,000 square foot shopping center in Princeton, New
Jersey at a total cost of approximately $36.4 million including
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$27.9 million of debt assumed and $0.7 million of operating partnership units
and cash. The Company had invested approximately $7.8 million in the shopping
center at the end of December 1997.
In March, 1998 the Company acquired the remaining ownership interest in
Great Northern Shopping Center located in North Olmsted, Ohio at a cost of $16.3
million. This was previously reflected as minority equity interest on the
Company's balance sheet.
Developments:
The Company has commenced construction on two shopping centers. The
first is a 200,000 gross square foot Phase II development located adjacent to
the Company's Erie, Pennsylvania center, and is to be anchored by Home Depot
(not owned by the Company), PETsMART and Circuit City. The second is a 445,000
gross square foot shopping center in Merriam, Kansas which is being developed
through a joint venture formed in October 1996, 50% of which is owned by the
Company. This center will be anchored by Home Depot (not owned by the Company),
Cinemark Theaters, Hen House Supermarket, OfficeMax, Marshalls, Old Navy and
PETsMART as anchor tenants. Both the Erie, Pennsylvania (Phase II) and Merriam,
Kansas shopping centers are scheduled for completion during the last half of
1998.
The Company has also commenced the initial development of three
additional shopping centers which include: (i) a 240,000 square foot shopping
center in Toledo, Ohio; (ii) a 170,000 square foot shopping center in Solon,
Ohio and (iii) a 230,000 square foot shopping center in Oviedo, Florida (a
suburb of Orlando). All three centers are scheduled for completion during the
fourth quarter of 1998.
The Company has entered, or intends to enter, into joint venture
agreements for seven additional projects with various developers throughout the
country at a projected cost aggregating approximately $277 million. The majority
of these projects should commence development in 1998 and are currently
scheduled for completion in 1999.
FINANCING ACTIVITIES
The acquisitions, developments and expansions were financed through
cash provided from operating activities, revolving credit facilities, mortgages
assumed and debt and equity offerings. Total debt outstanding at March 31, 1998
was $768.1 million compared to $477.4 million at March 31, 1997.
In January 1998, the Company issued $100 million of senior unsecured
fixed rate notes through its Medium Term Note program with a maturity of ten
years and an interest rate of 6.625%. The proceeds were used to repay variable
rate borrowings on the Company's revolving credit facilities primarily
associated with 1997 shopping center acquisitions.
In March 1998, the Company amended and restated its revolving credit
facility and increased the available borrowings to $250 million from $150
million, reduced the pricing to .85% over LIBOR from 1.10% over LIBOR and
extended the term for an additional year through April 2001. The amended and
restated facility also continues to provide for a competitive bid option for up
to 50% of the facility amount. The Company recognized a non cash extraordinary
charge of approximately $0.9 million ($0.03 per share) in the first quarter of
1998 relating to the write-off of unamortized deferred finance costs associated
with the former revolving credit facility.
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In April 1998, the Company completed a 669,639 common share offering,
through a registered unit investment trust, and received net proceeds of
approximately $25.3 million which were primarily used to repay revolving
credit facility borrowings.
At March 31, 1998, the Company's capitalization consisted of $768.1
million of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $224.3 million), $149.8 million of preferred stock and
$1,140.5 million of market equity (market equity is defined as common shares and
OP Units (approximately 79,000) outstanding multiplied by the closing price of
the common shares on the New York Stock Exchange at March 31, 1998 of $40.875)
resulting in a debt total market capitalization ratio of 0.37 to 1.0. At March
31, 1998, the Company's total debt consisted of $670.4 million of fixed rate
debt and $97.7 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 and maintain its investment grade
ratings with Moody's Investor Services and Standard and Poor's. As of March 31,
1998, the Company had $336.0 million available under its shelf registration
statement. In addition, as of March 31, 1998, the Company had cash of $14.1
million and $165.0 million available under its $260.0 million of unsecured
revolving credit facilities. On March 31, 1998, the Company also had 103
operating properties with $40.1 million, or 76.9%, of the total revenue for the
three month period ended March 31, 1998 which were unencumbered thereby
providing a potential collateral base for future borrowings.
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 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 than 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, 1998, approximately 87.3% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 5.6 years and a weighted average interest rate
of approximately 7.5%. The remainder of the Company's debt bears interest at
variable rates, with a weighted average maturity of approximately 3.3 years and
a weighted average interest rate of approximately 6.4%. As of March 31, 1998,
the Company's joint venture indebtedness aggregated $419.2 million of fixed rate
debt, of which the Company's proportionate share was $212.2 million, and $24.1
million of variable rate debt, of which the Company's proportionate share was
$12.1 million. The Company intends to utilize variable rate indebtedness
available under its revolving credit facilities to initially fund future
acquisitions. 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
increases in interest expense as a result of inflation would not significantly
impact the Company's distributable cash flow.
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The Company intends to continuously monitor and actively manage
interest costs on its 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. 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
Historically, real estate has been subject to a wide range of cyclical
economic conditions which affect various real estate sectors and geographic
regions with differing intensities and at different times. 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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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in
the ordinary course of business, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
In March 1998, in conjunction with the acquisition of twelve shopping
centers in Ohio and one shopping center in West Virginia, the Company formed a
limited partnership which issued approximately 128,163 limited partnership units
(the "Units") which are convertible on a one-for-one basis into the Company's
common shares. The Units are convertible at any time after February 4, 1999,
subject to the Company's right to redeem such units for cash in lieu of
delivering such common shares. This transaction was conducted as a private
placement in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.
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 -
27 (a) Financial Data Schedule
b) Date of Report Items Reported
February 25, 1998 Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
February 25, 1998 Item 5. Other Events
Item 7. Financial Statements, Pro Forma
Financial/Information and Exhibits
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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 15, 1998 /s/ Scott A. Wolstein
- ---------------------------- --------------------------------------
(Date) Scott A. Wolstein, President and
Chief Executive Officer
May 15, 1998 /s/ William H. Schafer
- ---------------------------- -------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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