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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 June 30, 1999
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.)
3300 Enterprise Parkway, Beachwood, Ohio 44122
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(Address of principal executive offices - zip code)
(216) 755-5500
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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 x whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
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Indicate the number of shares outstanding of each of the issuer's classes
of common shares as of the latest practicable date.
61,312,531 shares outstanding as of August 13, 1999
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended June 30, 1999 and 1998.
Condensed Consolidated Statement of Operations for the Six Month Periods ended
June 30, 1999 and 1998.
Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended
June 30, 1999 and 1998.
Notes to Condensed Consolidated Financial Statements.
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
1999 1998
----------- -----------
ASSETS
Real estate rental property:
Land $ 326,744 $ 317,823
Buildings 1,452,055 1,404,734
Fixtures and tenant improvements 29,400 24,131
Land under development 25,020 34,534
Construction in progress 129,008 115,541
----------- -----------
1,962,227 1,896,763
Less accumulated depreciation (226,181) (203,097)
----------- -----------
Real estate, net 1,736,046 1,693,666
Cash and cash equivalents 1,675 2,260
Investments in and advances to joint ventures 294,062 266,257
Minority equity investment 133,199 80,710
Notes receivable 13,840 49,008
Other assets 40,767 34,623
----------- -----------
$ 2,219,589 $ 2,126,524
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 592,233 $ 592,154
Revolving credit facility 205,500 132,000
Subordinated convertible debentures 40,040 40,065
----------- -----------
837,773 764,219
Secured indebtedness:
Mortgage indebtedness 263,309 236,262
Revolving credit facility 9,550 --
----------- -----------
Total indebtedness 1,110,632 1,000,481
Accounts payable and accrued expenses 44,500 50,380
Dividends payable 21,457 20,072
Other liabilities 11,017 11,878
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1,187,606 1,082,811
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Minority equity interest 8,192 8,177
Preferred operating partnership interests 32,101 32,101
Operating partnership minority interests 102,130 100,650
Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 421,500 shares
issued and outstanding at June 30, 1999 and December 31, 1998 105,375 105,375
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 177,500 shares
issued and outstanding at June 30, 1999 and December 31, 1998 44,375 44,375
Class C - 8.375% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 400,000 shares issued
and outstanding at June 30, 1999 and December 31, 1998 100,000 100,000
Class D- 8.68% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 216,000 shares issued
and outstanding at June 30, 1999 and December 31, 1998 54,000 54,000
Common shares, without par value, $.10 stated value; 100,000,000 shares
authorized; 61,306,416 and 61,289,186 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 6,130 6,129
Paid-in-capital 674,214 673,910
Accumulated dividends in excess of net income (94,227) (80,697)
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889,867 903,092
Less: Unearned compensation - restricted stock (307) (307)
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889,560 902,785
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$2,219,589 $2,126,524
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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 JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1999 1998
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Revenues from operations:
Minimum rents $ 46,578 $ 39,713
Percentage and overage rents 825 824
Recoveries from tenants 11,337 9,790
Management fee income 1,308 810
Interest income 1,520 790
Other 2,746 1,054
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64,314 52,981
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Rental operation expenses:
Operating and maintenance 5,286 4,211
Real estate taxes 6,501 6,536
General and administrative 4,563 3,071
Interest 16,079 13,314
Depreciation and amortization 13,147 10,084
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45,576 37,216
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Income before equity in net income of joint
ventures, minority equity investment, minority
interests and loss on disposition of real estate 18,738 15,765
Equity in net income of joint ventures 4,551 3,473
Equity in net income from minority equity investment 2,008 --
Minority interests (2,402) (101)
Loss on disposition of real estate (1,753) --
------------ ------------
Net income $ 21,142 $ 19,137
============ ============
Net income applicable to common shareholders $ 14,326 $ 15,587
============ ============
Per share data:
Earnings per common share -
Basic $ 0.23 $ 0.27
============ ============
Diluted $ 0.22 $ 0.27
============ ============
Dividends declared $ 0.35 $ 0.3275
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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 SIX MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1999 1998
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Revenues from operations:
Minimum rents $ 92,834 $ 75,846
Percentage and overage rents 2,575 1,927
Recoveries from tenants 22,991 18,827
Management fee income 2,607 1,605
Interest income 3,715 1,702
Other 4,730 2,613
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129,452 102,520
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Rental operation expenses:
Operating and maintenance 11,372 8,305
Real estate taxes 12,969 12,494
General and administrative 9,207 6,003
Interest 33,353 24,767
Depreciation and amortization 25,787 19,220
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92,688 70,789
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Income before equity in net income of joint
ventures, minority equity investment, minority interests,
loss on disposition of real estate and extraordinary item 36,764 31,731
Equity in net income of joint ventures 9,341 5,712
Equity in net income from minority equity investment 3,447 --
Minority interests (4,789) (291)
Loss on disposition of real estate (1,753) --
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Income before extraordinary item 43,010 37,152
Extraordinary item -- (882)
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Net income $ 43,010 $ 36,270
========= =========
Net income applicable to common shareholders $ 29,379 $ 29,170
========= =========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.48 $ 0.54
Extraordinary item -- (0.02)
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Net income $ 0.48 $ 0.52
========= =========
Earnings per common share - diluted:
Income before extraordinary item $ 0.46 $ 0.52
Extraordinary item -- (0.02)
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Net income $ 0.46 $ 0.50
========= =========
Dividends declared $ 0.70 $ 0.655
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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 SIX MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
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Net cash flow provided by operating activities $ 66,982 $ 53,972
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Cash flow provided by (used for) investing activities:
Real estate developed or acquired (77,243) (107,047)
Investments in and advances to joint ventures and minority
equity investment, net (96,972) (27,001)
Acquisition of minority equity interest -- (16,293)
Repayment (issuance) of notes receivable, net 10,073 (11,414)
Proceeds from transfer of properties to joint ventures -- 41,526
Repayment of advances from affiliates 38,853 --
Proceeds from disposition of real estate 5,131 --
--------- ---------
Net cash flow used for investing activities (120,158) (120,229)
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Cash flow provided by (used for) financing activities:
Proceeds from (repayment of) revolving credit facilities, net 83,050 (700)
Proceeds from construction loans and other mortgage debt 34,697 --
Principal payments on rental property debt (7,650) (13,127)
Proceeds from issuance of Medium Term Notes, net of underwriting commission,
and $220 of offering expenses paid in 1998 -- 98,897
Proceeds from issuance of common shares, net of underwriting commissions and
$26 of offering expenses paid in 1998 -- 25,234
Payment of deferred finance costs (99) (521)
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan, and
dividend reinvestment plan 234 2,341
Payment of distributions to operating partnership minority interests (2,486) --
Dividends paid (55,155) (44,003)
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Net cash flow provided by financing activities 52,591 68,121
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Increase (decrease) in cash and cash equivalents (585) 1,864
Cash and cash equivalents, beginning of period 2,260 18
--------- ---------
Cash and cash equivalents, end of period $ 1,675 $ 1,882
========= =========
Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisition of certain shopping centers, the Company
recorded minority equity interests aggregating approximately $1.8 million during
the six month period ended June 30, 1999. Also, the Company forgave
approximately $14.1 of notes receivable in conjunction with the acquisition of
additional shares of American Industrial Properties. In addition, included in
accounts payable was approximately $0.9 million relating to construction in
progress and $21.5 million of dividends declared at June 30, 1999. The foregoing
transactions did not provide for or require the use of cash.
In conjunction with the acquisition of certain shopping centers, the Company
assumed mortgage debt, liabilities and recorded a minority equity interest
aggregating approximately $84.5 million during the six month period ended June
30, 1998. The Company also had approximately $5.6 million of debentures
converted into common shares of the Company. The Company also issued
approximately 29 million common shares pursuant to the Company's two-for-one
stock split, resulting in the reclassification of approximately $2.9 million
from paid-in-capital to common shares. In addition, included in accounts payable
was approximately $0.2 million relating to construction in progress. The
foregoing transactions did not provide for or 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 AND FINANCIAL STATEMENT PRESENTATION
Developers Diversified Realty Corporation, and its subsidiaries,
(collectively, the "Company" or "DDR"), related real estate joint ventures and
its minority equity investment are engaged in the business of acquiring,
expanding, owning, developing, managing and operating neighborhood and community
shopping centers, enclosed malls and business centers.
Reclassifications
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
Share Split
Effective August 3, 1998, the Company effected a two for one share
split to shareholders of record on July 27, 1998 in the form of a share
dividend. All per share amounts and the number of common shares outstanding
reflect this split, unless otherwise indicated.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
New Accounting Standard
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities. This statement requires fair value
accounting for all derivatives including recognizing all such instruments on the
balance sheet with an offsetting amount recorded in the income statement or as
part of comprehensive income. The new standard becomes effective for the Company
for the year ending December 31, 2001. The Company does not expect this
pronouncement to have a material impact on the Company's financial position or
cash flows.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and all majority owned subsidiaries and
investees where the Company has financial and operating control. Investments in
real estate joint ventures and companies for which the Company has the ability
to exercise significant influence over but does not have financial operating
control are accounted for using the equity method of accounting. These financial
statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and the
applicable rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all information and footnotes required by
generally accepted
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accounting principles for complete financial statements. However, in the
opinion of management, the interim financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results of the periods presented. The results of the
operations for the six months ended June 30, 1999 and 1998 are not necessarily
indicative of the results that may be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
2. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at June 30, 1999 consisted of
the following:
- - A 50% joint venture interest in 24 operating shopping centers;
- - A 35% joint venture interest in one operating shopping center;
- - A 57% joint venture interest, which is developing one shopping center;
- - A 50% interest in six joint ventures each of which is developing a shopping
center;
- - An 80% joint venture interest in two operating shopping center properties
acquired in 1998;
- - A 50% joint venture interest in a real estate management company and a
development company, both acquired in 1998;
- - A 50% joint venture interest in a limited partnership acquired in 1998
which is developing six shopping centers;
- - A 95% economic interest in a management service subsidiary formed in
1998 of which the Company owns 1% of the voting and 100% of the
non-voting common stock which owns a 25% joint venture interest in an
opportunity fund formed in 1998 which acquired several retail sites
which are being redeveloped and a 25% joint venture which is developing
a shopping center;
- - An 81% economic interest in a management service subsidiary formed in
1998 of which the Company owns 9% of the voting and 100% of the
non-voting common stock.
Summarized combined financial information of the Company's joint venture
investments is as follows (in thousands):
June 30, December 31,
Combined Balance Sheets: 1999 1998
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Land $ 233,699 $ 232,105
Buildings 849,716 826,521
Fixtures and tenant improvements 4,726 2,467
Construction in progress 153,193 67,898
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1,241,334 1,128,991
Less accumulated depreciation (70,623) (59,580)
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Real estate, net 1,170,711 1,069,411
Other assets 72,076 57,527
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$ 1,242,787 $ 1,126,938
=========== ===========
Mortgage debt $ 764,098 $ 718,846
Amounts payable to DDR 115,077 85,846
Other liabilities 65,558 21,193
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944,733 825,885
Accumulated equity 298,054 301,053
----------- -----------
$ 1,242,787 $ 1,126,938
=========== ===========
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Three Month Period Six Month Period
Ended June 30, Ended June 30,
Combined Statements of Operations: 1999 1998 1999 1998
---------- ---------- ---------- --------
Revenues from operations $40,698 $24,436 $80,568 $44,946
------- ------- ------- -------
Rental operation expenses 12,645 5,740 24,023 10,529
Depreciation and amortization expense
of real estate investments 5,720 3,492 11,201 6,537
Interest expense 14,572 9,515 28,596 17,642
------- ------- ------- -------
32,937 18,747 63,820 34,708
------- ------- ------- -------
Income before gain on sale of real estate 7,761 5,689 16,748 10,238
Gain on sale of real estate 253 2,812 344 2,812
------- ------- ------- -------
Net income $ 8,014 $ 8,501 $17,092 $13,050
======= ======= ======= =======
Included in management fee income for the six month period ended June
30, 1999 and 1998, is approximately $2.4 and $1.4 million, respectively, of
management fees earned by the Company for services rendered to the joint
ventures. Similarly, other income for the six month period ended June 30, 1999
and 1998, includes $1.4 million and $1.2 million, respectively, of development
fee income and commissions for services rendered to the joint ventures.
In June 1999, the DD Development Company, in which the Company owns 1%
of the voting and 100% of the non-voting common stock, acquired Prudential Real
Estate Investors' ("PREI") limited partnership interest in a joint venture,
Hendon/DDR/BP, LLC, which owns 15 sites formerly occupies by Best Products at a
cost of approximately $29.7 million. As a result, the Company's aggregate
investment increased to approximately $36 million and a 75% economic ownership
interest. Nine of the sites are leased as of June 30, 1999 and one has been sold
as of June 30, 1999. In addition, in June 1999, Hendon/DDR/BP, LLC, entered into
a $25 million mortgage, with a financial institution secured by the leased
sites. The net financing proceeds were used to repay advances made by the
Company to the joint venture.
In June 1999, the Company entered into agreements with Prudential/DDR
Retail Value Fund (the "Fund"), a joint venture in which the company effectively
owns a 25% interest, to acquire the Company's 50% joint venture interests
relating to the development of four shopping centers. The Company was reimbursed
approximately $38.9 million, relating to advances previously made to these joint
ventures, associated with development costs incurred on each of these projects.
In April 1999, the Company acquired a 50% interest in a 206,000 square
foot shopping center in St. Louis, MO. The joint venture's aggregate purchase
price was $16.6 million.
In January 1999, the Company repaid a third party mortgage of a 50%
owned joint venture partnership aggregating approximately $49.2 million. The
joint venture entered into a corresponding mortgage note payable to the Company
bearing an interest rate of LIBOR plus 2.75%. In addition, the Company received
a loan origination fee for this transaction of $0.4 million. In March 1999, the
joint venture obtained a bridge loan, which was converted into a permanent
mortgage in June 1999, and used the proceeds to repay the mortgage note to the
Company.
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3. MINORITY EQUITY INVESTMENT:
On August 4, 1998, the Company announced the execution of a definitive
agreement providing for the strategic investment in American Industrial
Properties REIT [NYSE:IND] ("AIP") by the Company. At December 31, 1998, the
Company owned 5,891,196 shares of AIP, representing 34.5% of AIP's total
outstanding common shares. In January 1999, the Company acquired 1,543,005
shares of AIP's common stock at a price of $15.50 per share and 1,867,610 shares
of AIP's common stock at a price of $14.93 per common share. At June 30, 1999,
the Company owned 9,301,817 common shares of beneficial interest in AIP
representing approximately 45.0% of AIP's total outstanding common shares.
Summarized financial information of AIP is as follows (in thousands):
June 30, December 31,
1999 1998
-------- ---------
Balance Sheet:
Land $155,553 $108,891
Buildings 482,671 396,241
-------- --------
638,224 505,132
Less accumulated depreciation (39,806) (33,449)
-------- --------
Real estate, net 598,418 471,683
Other assets 28,633 28,647
-------- --------
$627,051 $500,330
======== ========
Mortgage debt $345,151 $252,481
Other liabilities 27,001 42,270
-------- --------
372,152 294,751
Accumulated equity 254,899 205,579
-------- --------
$627,051 $500,330
======== ========
Three month Six month
period ended period ended
June 30, 1999 June 30, 1999
------------- --------------
Statement of Operations:
Revenues from operations $ 21,522 $ 41,844
-------- --------
Rental operation expenses 7,591 14,841
Depreciation and amortization expense 3,150 6,623
Interest expense 6,564 12,834
-------- --------
17,305 34,298
-------- --------
4,217 7,546
Minority interests (91) (171)
Gain on sale of real estate 38 38
-------- --------
Net income $ 4,164 $ 7,413
======== ========
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4. PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma operating data is
presented for the six month period ended June 30, 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 669,639 common shares (pre-split) in
April 1998; (iii) the completion of the sale by the Company of $200 million of
Medium Term Notes in January and July 1998; (iv) the purchase by the Company of
the minority interest of a shopping center in Cleveland, Ohio in March 1998; (v)
the completion of the sale by the Company of 4,000,000 Class C Depositary shares
in July 1998 each representing 1/10 of a Class C Preferred Share; (vi) the
completion of the sale by the Company of 2,160,000 Class D Depositary shares in
August and September 1998 each representing 1/10 of a Class D Preferred Share;
(vii) the transfer of six properties owned by the Company into a 50% owned joint
venture in September 1998, and (viii) the completion of the sale by the Company
of 3,000,000 common shares in December 1998 (in thousands, except per share).
Six Month Period
Ended June 30, 1998
-------------------
Pro forma revenues $ 109,587
===========
Pro forma income before extraordinary item $ 41,314
===========
Pro forma net income applicable
to common shareholders $ 28,719
===========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.52
Extraordinary item (0.02)
-----------
Net income $ 0.50
===========
Earnings per common share - diluted:
Income before extraordinary item $ 0.50
Extraordinary item (0.02)
-----------
Net income $ 0.48
===========
The 1998 pro forma information above does not include revenues and
expenses for seven of the 41 properties acquired by the Company in 1998 and the
one joint venture entered into in 1999 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. In addition, the 1998
pro forma information does not include the results of shopping center expansions
occurring at five of the shopping centers acquired by the Company.
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5. SHAREHOLDERS' EQUITY AND OPERATING PARTNERSHIP UNITS:
The following table summarizes the changes in shareholders' equity
since December 31, 1998 (in thousands):
Preferred Common Accumulated Unearned
Shares ($250 Shares Dividends in Compensation
Stated ($.10 stated Paid-in Excess of Restricted
Value) Value) Capital Net Income Stock Total
-------- -------- -------- -------- -------- --------
Balance December 31, 1998 $303,750 $ 6,129 $673,910 $(80,697) $ (307) $902,785
Net income 43,010 43,010
Dividends declared -
Common Shares (42,909) (42,909)
Dividends declared -
Preferred Shares (13,631) (13,631)
Conversion of Debentures 25 25
Conversion of OP Units 46 46
Issuance of common shares
related to exercise of stock
options, employee 401(k) plan
and dividend reinvestment plan 1 233 234
-------- -------- -------- -------- -------- --------
Balance June 30, 1999 $303,750 $ 6,130 $674,214 $ (94,227) $ (307) $889,560
======== ======== ======== ======== ======== ========
During the six month period ended June 30, 1999, in conjunction with
certain earnouts relating to the acquisition of two shopping centers which were
initially purchased in 1998, the Company issued operating partnership units ("OP
Units") which are exchangeable, under certain circumstances and at the option of
the Company, into 92,086 of the Company's common shares or for cash.
6. REVOLVING CREDIT FACILITIES:
The Company maintains a $375 million unsecured revolving credit
facility with a syndicate of financial institutions, for which the First
National Bank of Chicago serves as the administrative agent, (the "Unsecured
Credit Facility") for a term through April 2001. The Unsecured Credit Facility
includes a competitive bid option for up to 50% of the facility amount. 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 and development of properties, to provide working capital and
for general corporate purposes. At June 30, 1999, $205.5 million was outstanding
under this facility with a weighted average interest rate of 5.9%.
In March 1999, the Company amended its other unsecured revolving credit
facility with National City Bank to increase the available borrowings to $25
million from $20 million and to convert it to a secured revolving credit
facility. This credit facility is secured by certain partnership investments.
The Company maintains the right to reduce this facility to $20 million and to
convert the borrowings to an unsecured revolving credit facility. Borrowings
under this facility continue to 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. At June 30, 1999, $9.6 million was outstanding under
this facility with a weighted average interest rate of 5.9%.
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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, Chairman of the Board and Chief Executive Officer, Vice-Chairman of
the Board and the Chief Investment Officer owned, in the aggregate, through a
separate partnership, a 1% general partnership interest. The shopping center
aggregates approximately 0.2 million square feet of Company GLA. The initial
purchase price of the property was approximately $6.5 million. In 1999, the
Company paid the seller an additional $0.6 million upon the leasing of vacant
space.
During 1999, the Company periodically advanced funds to the Chairman of
the Board and Chief Executive Officer in amounts up to $0.1 million. The
advances, which were made to reduce the outstanding principal balance of, and to
prevent the sale of common shares in the Company from, a margin account loan,
were outstanding for a period of up to 40 days with an interest rate of LIBOR
plus 0.85%.
During 1999, the Company paid approximately $0.1 million to a Company
owned by brother-in-law of the Chairman of the Board relating to fees and
commissions on the acquisitions of several shopping centers in 1998.
In conjunction with the establishment of DDR's equity investment in
certain entities, the Company's Chairman and Chief Executive Officer owns voting
stock in these entities in order to comply with certain REIT qualification
requirements.
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. Further, all per share
amounts and average shares outstanding have been restated to reflect the stock
split described in Note 1.
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.
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Three Month Period Six Month Period
Ended June 30, Ended June 30,
------------------------- -------------------------
(in thousands, except per share amounts)
1999 1998 1999 1998
-------- -------- -------- --------
Income before extraordinary item $ 21,142 $ 19,137 $ 43,010 $ 36,270
Less: Preferred stock dividend (6,816) (3,550) (13,631) (7,100)
-------- -------- -------- --------
Basic - Income before
extraordinary item applicable to
common shareholders 14,326 15,587 29,379 29,170
Effect of dilutive securities:
Joint venture partnerships 113 (184) 199 (499)
-------- -------- -------- --------
Diluted - Income before
extraordinary item applicable to
common shareholders plus
assumed conversions $ 14,439 $ 15,403 $ 29,578 $ 28,671
======== ======== ======== ========
NUMBER OF SHARES:
Basic - average shares outstanding 61,311 56,703 61,307 56,105
Effect of dilutive securities:
Joint venture partnerships 2,451 326 2,547 326
Stock options 229 967 208 956
Restricted stock 1 7 1 7
-------- -------- -------- --------
Diluted - average shares outstanding 63,992 58,003 64,063 57,394
======== ======== ======== ========
PER SHARE AMOUNT:
Income before extraordinary item
Basic $ 0.23 $ 0.27 $ 0.48 $ 0.54
======== ======== ======== ========
Diluted $ 0.22 $ 0.27 $ 0.46 $ 0.52
======== ======== ======== ========
The conversion of the following potentially dilutive securities into
the Company's common shares were not included in the computation of diluted EPS
for the periods presented because the effect was antidilutive: performance
units, debentures, the Company's joint venture partner's interest in the San
Antonio (dilutive three months ended June 30, 1999), Community Centers, DDRA V
(1999 only) and DDRA VI (1999 only) joint ventures, a joint venture with two
operating properties, a joint venture in one operating property (1999 only),
minority interests (OP Units), and the redemption of preferred units through
the exercise of a warrant (1999 only).
The conversion into common stock of the minority interests were not
included in the computation of diluted EPS in 1999 and 1998 because the effect
of assuming conversion was antidilutive.
The redemption of the preferred units through the exercise of the
warrant into common shares was not included in the computation of diluted EPS
because the effect was antidilutive (1999 only).
9. DISPOSITION OF REAL ESTATE
The loss on disposition of real estate aggregating $1.8 million relates
to the sale of residual land and redevelopment of the undepreciated portion of a
shopping center in Pensacola, Florida. The majority of the center was vacant
prior to redevelopment. The real estate was sold to a major retailer for
approximately $4.7 million.
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10. SUBSEQUENT EVENTS
In July 1999, the Company acquired a 198,000 square foot shopping
center in Phoenix, AZ for an aggregate purchase price of $25.8 million.
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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
consolidated financial statements, the notes thereto. Historical results and
percentage relationships set forth in the consolidated financial statements,
including trends which might appear, should not be taken as indicative of future
operations. The Company considers portions of this information to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
both as amended, with respect to the Company's expectations for future periods.
Forward-looking statements include, without limitation, statements related to
acquisitions (including any related pro forma financial information) and other
business development activities, future capital expenditures, financing sources
and availability, the effects of environmental and other regulations, as well as
the costs, timing and effectiveness of year 2000 readiness. Although the Company
believes that the expectations reflected in those forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes", "anticipates",
"plans", "expects", "seeks", "estimates", and similar expressions are intended
to identify forward-looking statements. Readers should exercise caution in
interpreting and relying on forward-looking statements since they involve known
and unknown risks, uncertainties and other factors which are, in some cases,
beyond the Company's control and could materially affect the Company's actual
results, performance or achievements.
Factors that could cause actual results, performance or achievements to
differ materially from those expressed or implied by forward-looking statements
include, but are not limited to, the following:
- The Company is subject to general risks affecting the real estate
industry, including the need to enter into new leases or renew leases on
favorable terms to generate rental revenues;
- The Company is subject to competition for tenants from other owners of
retail properties and its tenants are subject to competition from other
retailers and methods of distribution, the Company is dependent upon the
successful operations and financial condition of its tenants,
particularly certain of its major tenants, and could be adversely
affected by the bankruptcy of those tenants;
- The Company may fail to anticipate the effects on its properties of
changes in consumer buying practices and the resulting retailing
practices and space needs of its tenants;
- The Company may fail to identify, acquire, construct or develop
additional properties, the Company may develop or acquire properties
that do not produce a desired yield on invested capital, or the Company
may fail to effectively integrate acquisitions of properties or
portfolios of properties;
- Debt and equity financing may not be available, or may not be available
on favorable terms, for the Company to continue to grow and operate its
business;
- The Company must make distributions to shareholders to continue to
qualify as a REIT, and if the Company borrows funds to make
distributions then those borrowings may not be available on favorable
terms;
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- The Company could be adversely affected by changes in the local markets
where its properties are located, as well as by adverse changes in
national economic and market conditions;
- The Company is subject to potential environmental liabilities;
- The Company is subject to complex regulations related to its status as a
real estate investment trust ("REIT") and would be adversely affected if
it failed to qualify as a REIT;
- The Company could be adversely affected by changes in government
regulations, including changes in environmental, zoning, tax and other
regulations;
- The Company, its tenants and its suppliers may experience unanticipated
delays or expenses related to achieving year 2000 readiness or resulting
from year 2000 related problems; and
- Changes in interest rates could adversely affect the market price for
the Company's common shares, as well as its performance and cash flow.
RESULTS OF OPERATIONS
Revenues from Operations
Total revenues increased $11.3 million, or 21.4%, to $64.3 million for
the three month period ended June 30, 1999 from $53.0 million for the same
period in 1998. Total revenues increased $27.0 million, or 26.3%, to $129.5
million for the six month period ended June 30, 1999 from $102.5 million for the
same period in 1998. Base and percentage rents for the three month period ended
June 30, 1999 increased $6.9 million, or 16.9%, to $47.4 million as compared to
$40.5 million for the same period in 1998. Base and percentage rents increased
$17.6 million, or 22.7%, to $95.4 million for the six month period ended June
30, 1999 from $77.8 million for the same period in 1998.
Approximately $3.1 million of the increase in base and percentage
rental income, for the six month period ended June 30, 1999 is the result of new
leasing, re-tenanting and expansion of the Core Portfolio Properties (shopping
center properties owned as of January 1, 1998), an increase of 5.4% over 1998
revenues from Core Portfolio Properties. The 34 shopping centers acquired by the
Company in 1999 and 1998 contributed $24.6 million of additional base and
percentage rental revenue and five new shopping center developments contributed
$1.6 million. These increases were offset by a decrease of $11.7 million
relating to the transfer of six shopping center properties into a joint venture
in September 1998 and the transfer of five business center properties to
American Industrial Properties (NYSE: IND) ("AIP") in August 1998.
At June 30, 1999, the in-place occupancy rate of the Company's
portfolio was 96.3% as compared to 95.9% at June 30, 1998. The average
annualized base rent per leased square foot, including those properties owned
through joint ventures, was $9.06 at June 30, 1999 as compared to $8.54 at June
30, 1998. Same store sales, for those tenants required to report such
information, representing approximately 18.5 million square feet, increased 3.1%
to $232 per square foot for the twelve month period.
The increase in recoveries for the six months ended June 30, 1999 from
tenants of $4.2 million is directly related to the increase in operating and
maintenance expenses and real estate taxes primarily
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associated with the 1999 and 1998 shopping center acquisitions and developments.
Recoveries were approximately 94.5% of operating expenses and real estate taxes
for the six month period ended June 30, 1999 as compared to 90.5% for the same
period in 1998. This increase is generally associated with increased occupancy.
Management fee income increased by approximately $1.0 million for the six month
period ended June 30, 1999 compared to the same period in 1998, primarily
associated with the formation of new joint ventures in 1998. Interest income
increased $2.0 million, for the six month period ended June 30, 1999 compared to
the same period in 1998, primarily associated with advances made to certain
joint ventures. Other income increased by approximately $2.1 million which
generally reflects an increase in development, leasing and financing fees, from
the Company's joint ventures.
Other income was comprised of the following (in thousands):
Three Month Period Six Month Period
Ended June 30, Ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
Temporary tenant rentals (Kiosks) $ 104 $ 113 $ 186 $ 226
Lease termination fees 188 73 537 898
Development fees 1,833 394 2,616 757
Other 621 474 1,391 732
------ ------ ------ ------
$2,746 $1,054 $4,730 $2,613
====== ====== ====== ======
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended June 30, 1999 increased $1.1 million, or 25.5%, to $5.3 million as
compared to $4.2 million for the same period in 1998. Rental operating and
maintenance expenses increased $3.1 million, or 36.9%, to $11.4 million for the
six month period ended June 30, 1999 from $8.3 million for the same period in
1998. For the six month period ended June 30, 1999, an increase of $2.2 million
is attributable to the 39 shopping centers acquired and developed in 1999 and
1998 and $1.8 million in the Core Portfolio Properties. These increases were
offset by a decrease of $0.9 million relating to the transfer of six shopping
center properties into a joint venture in September 1998 and the transfer of
five business center properties to AIP in August 1998.
Real estate taxes remained unchanged at $6.5 million for the three
month periods ended June 30, 1999 and 1998. Real estate taxes increased $0.5
million, or 3.8%, to $13.0 million for the six month period ended June 30, 1999
from $12.5 million for the same period in 1998. An increase of $2.9 million is
related to the 39 shopping centers acquired and developed in 1999 and 1998 and
$0.2 million in the Core Portfolio Properties. These increases were offset by a
decrease of $2.6 million relating to the transfer of six shopping center
properties into a joint venture in September 1998 and the transfer of five
business center properties to AIP in August 1998.
General and administrative expenses increased $1.5 million, or 48.6%,
to $4.6 million for the three month period ended June 30, 1999 as compared to
$3.1 million in 1998. General and administrative expenses increased $3.2
million, or 53.4%, to $9.2 million for the six month period ended June 30, 1999
from $6.0 million for the same period in 1998. The increase is attributable to
the growth of the Company primarily related to acquisitions, expansions and
developments, relocation of the Company Headquarters to a new office, and a
severance charge of $0.8 million. 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. Total
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general and administrative expenses were approximately 4.4% (4.0% after
excluding the severance charge) and 4.1% of total revenues, including total
revenues of joint ventures, for the six month period ended June 30, 1999 and
1998, respectively.
Depreciation and amortization expense increased $3.1 million, or 30.4%,
to $13.2 million for the three month period ended June 30, 1999 as compared to
$10.1 million for the same period in 1998. Depreciation and amortization
increased $6.6 million, or 34.2%, to $25.8 million for the six month period
ended June 30, 1999 from $19.2 million for the same period in 1998. An increase
of $6.7 million is related to the 39 shopping centers acquired and developed in
1999 and 1998 and $2.7 million relating to Core Portfolio Properties. These
increases were offset by a decrease of $2.8 million relating to the transfer of
six shopping center properties into a joint venture in September 1998 and the
transfer of five business center properties to AIP in August 1998.
Interest expense increased $2.8 million, or 20.8%, to $16.1 million for
the three month period ended June 30, 1999, as compared to $13.3 million for the
same period in 1998. Interest expense increased $8.6 million, or 34.7%, to $33.4
million for the six month period ended June 30, 1999 from $24.8 million for the
same period in 1998. The overall increase in interest expense for the six month
period ended June 30, 1999 as compared to the same period in 1998 is primarily
related to the acquisition and development of shopping centers during 1999 and
1998.
The weighted average debt outstanding during the six month period ended
June 30, 1999 and related weighted average interest rate was $1.1 billion and
7.1%, respectively, compared to $750.7 million and 7.5%, respectively, for the
same period in 1998. The increase in the weighted average debt is primarily
attributable to the acquisitions, developments and expansions in 1999 and 1998.
Interest costs capitalized, in conjunction with development and expansion
projects, were $4.0 million and $6.7 million for the three and six month periods
ended June 30, 1999, as compared to $1.5 million and $3.2 million for the same
periods in 1998.
Equity in net income of joint ventures increased $1.1 million, or
31.0%, to $4.6 million for the three month period ended June 30, 1999 as
compared to $3.5 million for the same period in 1998. Equity in net income of
joint ventures increased $3.6 million, or 63.5%, to $9.3 million for the six
month period ended June 30, 1999 from $5.7 million for the same period in 1998.
This increase is primarily attributable to approximately $3.9 million of income
from the Company's nine joint venture interests acquired/formed during 1998.
This increase is offset by $0.3 million relating primarily to the Company's
Community Center Joint Venture.
Equity in net income of minority equity investment of $2.0 million and
$3.4 million for the three and six month periods ended June 30, 1999,
respectively, relates to the Company's investment in AIP which commenced in
August 1998.
The minority equity interest expense increased $2.3 million, to $2.4
million for the three month period ended June 30, 1999, as compared to $0.1
million for the same period in 1998. The minority equity interest expense
increased $4.5 million, to $4.8 million for the six month period ended June 30,
1999, as compared to $0.3 million for the same period in 1998. This increase
relates to the Company's purchase of 21 shopping centers in 1998 and as
consideration, the related issuance of operating partnership units ("OP Units")
which are exchangeable, in certain circumstances and at the option of the
Company, into 4.6 million common shares of the Company or for cash and the
issuance of preferred operating partnership units in December 1998. This expense
represents the income allocation associated with the priority distributions
associated with the minority equity interests.
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The loss on disposition of real estate aggregating $1.8 million relates
to the sale of residual land and redevelopment of the undepreciated portion of
a shopping center in Pensacola, Florida. The majority of the center was vacant
prior to redevelopment. The real estate was sold to a major retailer for
approximately $4.7 million.
The extraordinary item, which aggregated $0.9 million for the six month
period ended June 30, 1998, relates to the write-off of unamortized deferred
finance costs associated with the amended and restated $375 million unsecured
revolving credit facility.
Net Income
Net income increased $2.0 million, or 10.5%, to $21.1 million for the
three month period ended June 30, 1999, as compared to net income of $19.1
million for the same period in 1998. Net income increased $6.7 million, or
18.6%, to $43.0 million for the six month period ended June 30, 1999, as
compared to $36.3 million for the same period in 1998. The increase in net
income of $6.7 million is primarily attributable to increases in net operating
revenues (total revenues less operating and maintenance, real estate taxes and
general and administrative expense) aggregating $20.2 million, resulting from
new leasing, retenanting and expansion of Core Portfolio Properties and the 39
shopping centers acquired and developed in 1999 and 1998, an increase of $7.1
million relating to equity in net income from joint ventures and minority equity
investment and an increase of $0.9 million relating to the 1998 extraordinary
item. The aggregate increase in net operating revenues, equity in net income
from joint ventures and minority equity investment and extraordinary item was
offset by increases in depreciation, interest, minority interest expense and a
loss on sale of real estate of $6.6 million, $8.6 million, $4.5 million and $1.8
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 estate companies may calculate FFO in a different
manner. For the three month period ended June 30, 1999, FFO increased $7.7
million, or 28.6%, to $34.6 million as compared to $26.9 million for the same
period in 1998. For the six month period ended June 30, 1999, FFO increased
$16.8 million, or 32.4%, to $68.7 million as compared to $51.9 million for the
same period in 1998. 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):
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Three Month Period Six Month Period
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income applicable to common shareholders (1) $ 14,326 $ 15,587 $ 29,379 $ 29,170
Depreciation of real estate investments 12,919 9,933 25,382 18,969
Equity in net income of joint ventures (4,551) (3,473) (9,341) (5,712)
Equity in net income of minority equity investment (2,008) -- (3,447) --
Joint Ventures' FFO (2) 7,202 4,706 14,778 8,437
Minority equity investment FFO 3,284 -- 6,166 --
Minority interest expense (OP Units) 1,633 101 3,249 111
Loss on sale of real estate 1,753 -- 1,753 --
Extraordinary and non-recurring items -- -- 802 882
-------- -------- -------- --------
$ 34,558 $ 26,854 $ 68,721 $ 51,857
======== ======== ======== ========
(1) Includes straight line rental revenues of approximately $1.0 million
for the three month periods ended June 30, 1999 and 1998 and
approximately $2.1 million and $1.5 million for the six month periods
ended June 30, 1999 and 1998, respectively, primarily related to
recent acquisitions and new developments.
(2) Joint Ventures Funds From Operations are summarized as follows:
Three Month Period Six Month Period
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income (a) $ 8,014 $ 8,501 $ 17,092 $ 13,050
Gain on sales of real estate (253) (2,812) (344) (2,812)
Depreciation of real estate investments 5,720 3,492 11,201 6,537
-------- -------- -------- --------
$ 13,481 $ 9,181 $ 27,949 $ 16,775
======== ======== ======== ========
DDRC Ownership interests (b) $ 7,202 $ 4,706 $ 14,778 $ 8,437
======== ======== ======== ========
(a) Revenues for the three month periods ended June 30, 1999 and 1998
include approximately $1.0 million and $0.7 million, respectively,
resulting from the recognition of straight line rents of which the
Company's proportionate share is $0.5 million and $0.3 million,
respectively. Revenue for the six month period ended June 30, 1999 and
1998 include approximately $2.1 million, and $1.3 million,
respectively, resulting from the recognition of straight line rents of
which the Company's proportionate share is $1.0 million and $0.6
million, respectively.
(b) At June 30, the Company owned joint venture interests relating to 27
operating shopping center properties, a 25% interest in the Prudential
Retail Value Fund and a 50% joint venture in a real estate management
company. At June 30, 1998 the Company owned joint venture interests in
19 operating shopping center properties.
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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,
including the issuance of OP Units and joint venture capital, will provide the
necessary capital to achieve continued growth. Cash flow from operating
activities for the six month period ended June 30, 1999 increased to $67.0
million as compared to $54.0 million for the same period in 1998. The increase
is attributable to the 39 shopping center acquisitions and developments
completed in 1999 and 1998, new leasing, expansion and re-tenanting of the core
portfolio properties.
An increase in the 1999 quarterly dividend per common share to $.35
from $.3275 was approved in February 1999 by the Company's Board of Directors.
The Company's common share dividend payout ratio for the first two quarters of
1999 approximated 62.4% of the actual FFO as compared to 71.2% for the same
period in 1998. 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 six month period ended June 30, 1999, the Company and its
joint ventures invested $159.8 million, net, to acquire, develop, expand,
improve and re-tenant its properties. The Company's expansion acquisition and
development activity is summarized below:
Expansions:
During 1999, the Company completed or partially completed four
expansion projects at an aggregate cost of $32.0 million. The Company is
currently expanding/redeveloping seven of its shopping centers. The Company is
also scheduled to commence expansion/redevelopment projects during the second
half of 1999 at eight additional shopping centers.
Acquisitions:
In June 1999, the DD Development Company, in which the Company owns 1%
of the voting and 100% of the non-voting common stock, acquired Prudential Real
Estate Investors' ("PREI") limited partnership interest in a joint venture,
Hendon/DDR/BP, LLC, which owns 15 sites formerly occupies by Best Products at a
cost of approximately $29.7 million. As a result, the Company's aggregate
investment increased to approximately $36 million and a 75% economic ownership
interest. Nine of the sites are leased as of June 30, 1999 and one has been sold
as of June 30, 1999. In addition, in June 1999, Hendon/DDR/BP, LLC, entered into
a $25 million mortgage, with a financial institution secured by the leased
sites. The net financing proceeds were used to repay advances made by the
Company to the joint venture.
In June 1999, the Company entered into agreements with Prudential/DDR
Retail Value Fund (the "Fund"), a joint venture in which the company effectively
owns a 25% interest, to acquire the Company's 50% joint venture interests
relating to the development of four shopping centers. The Company was reimbursed
approximately $38.9 million, relating to advances previously made to these joint
ventures, associated with development costs incurred on each of these projects.
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In April 1999, the Company acquired a 50% interest in a 206,000 square
foot shopping center in St. Louis, MO. The joint venture's aggregate purchase
price was $16.6 million and included the assumption of debt aggregating $13.0
million.
In August 1998, the Company announced a strategic investment in AIP. In
January 1999, the Company acquired 3.4 million additional common shares of
beneficial interest of AIP for approximately $51.8 million. At June 30, 1999,
the Company's investment in AIP approximated $133.2 million. The Company
currently holds approximately 45.0% of the outstanding shares of beneficial
interest of AIP.
Developments (Wholly Owned):
The Company has six shopping centers under construction and scheduled
for completion in 1999 and 2000:
- A 185,000 square foot shopping center in Solon, Ohio, which is
substantially completed and is anchored by Borders, Bed Bath &
Beyond, Mustard Seed (a gourmet grocery store), Old Navy, Talbots
and Newman Outfitters.
- A 200,000 gross square foot second phase of its Erie, Pennsylvania
shopping center scheduled to be completed in the fall of 1999 and
anchored by Home Depot (not owned by the Company), PETsMART and
Circuit City.
- A 280,000 square foot shopping center in Toledo, Ohio, anchored by
Kohl's which opened in the fourth quarter of 1998, Gander Mountain,
Bed Bath & Beyond and Babies R Us.
- A 210,000 square foot shopping center in Oviedo, Florida (a suburb of
Orlando) Phase I of which will include Office Max, Michael's and Ross
Dress for Less.
- A 416,000 square foot shopping center in Meridian, Idaho, which is
scheduled for completion in 2000 and is expected to be anchored by
Wal-Mart (not owned by the Company), Shepler's, Shopko, Bed Bath &
Beyond, Office Depot and Old Navy.
- A 644,000 square foot shopping center in Coon Rapids, Minnesota, the
initial phase of which is scheduled to be completed in December 1999
and is anchored by a Kohl's and Jo-Ann ETC.
The Company is also in the initial phase of development relating to a
shopping center located in Riverdale, UT.
Developments (Joint Ventures):
During 1998 and 1999, the Company entered into joint venture
development agreements on eight shopping center projects with leading regional
developers. These eight projects have an aggregate projected cost of
approximately $297 million. Several of these projects have commenced development
and are currently scheduled for completion in 1999 and 2000. The Company is
currently financing four of these projects through the Prudential/DDR Retail
Value Fund and also intends to finance its investment in three of the remaining
four projects through this Fund.
In 1998, the Company formed DDR Oliver McMillan a private real estate
investment trust created to develop, acquire, operate and manage urban
entertainment and retail projects throughout the United States. There are
currently six projects being pursued aggregating 1.2 million square feet of GLA
at a projected cost of approximately $233 million. Two of these projects are
under construction
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and the remaining projects are scheduled to commence in the
fourth quarter of 1999 and in 2000 with completion in 2000 and 2001.
FINANCING ACTIVITIES
The acquisitions, developments and expansions in 1999 and 1998 were
financed through cash provided from operating activities, revolving credit
facilities and OP Units. Total debt outstanding at June 30, 1999 was $1.1
billion compared to $1.0 billion at December 31, 1998.
During the six month period ended June 30, 1999, the Company issued
$1.8 million in OP Units in conjunction with the purchase of certain expansion
areas at two recently acquired shopping centers. These OP Units are, in certain
circumstances and at the election of the Company, exchangeable into
approximately 92,000 common shares of the Company or for cash.
In January 1999, the Company repaid a third party mortgage of a 50%
owned joint venture partnership aggregating approximately $49.2 million. In
return, the joint venture entered into a corresponding mortgage note payable to
the Company bearing an interest rate of LIBOR plus 2.75%. In addition, the
Company received a loan origination fee for this transaction of $0.4 million. In
March 1999, the joint venture obtained a bridge loan and used the proceeds to
repay the mortgage note to the Company. In June, the joint venture entered into
a 10 year, fixed rate mortgage for $55.5 million at 7.31%.
In February 1999, the Company's Board of Directors authorized the
executive officers of the Company the right to implement a common share
repurchase program in response to what the Company's executive committee and the
Board of Directors believe is a distinct undervaluation of the Company's common
shares. Under the terms authorized by the Company's Board, the Company may,
during the six month period beginning February 22, 1999, purchase in the open
market, subject to certain requirements, common shares of the Company, up to a
maximum aggregate value of $50 million. Repurchase of shares may also be made to
avoid shareholder dilution through the issuance of OP Units in conjunction with
property acquisitions. The Company may also use a portion of the proceeds from
the sale of properties, if any, in order to purchase its own shares. It is not
the Company's intention to increase the leverage on its balance sheet through
this share repurchase program. The Company has not purchased any shares pursuant
to this program as of August 13, 1999.
In March 1999, the Company filed a $750 million shelf registration
statement with the SEC in which the Company may issue common shares, preferred
shares, warrants for common shares or debt.
In March 1999, the Company amended its revolving credit facility with
National City Bank to increase the available borrowings to $25 million from $20
million and to convert it to a secured facility. The credit facility is secured
by certain partnership investments. The Company also maintains the right to
convert the credit facility back to an unsecured credit facility and to reduce
the credit facility amount to $20 million.
At June 30, 1999, the Company's capitalization consisted of $1.1
billion of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $390.3 million), $338.8 million of preferred shares
and preferred partnership units and $1.1 billion of market equity (market equity
is defined as common shares and OP Units outstanding multiplied by the closing
price per common share on the New York Stock Exchange at June 30, 1999 of
$16.875) resulting in a debt to
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total market capitalization ratio of 0.43 to 1. At June 30, 1999, the Company's
total debt consisted of $858.8 million of fixed rate debt and $251.8 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 or joint venture capital in a manner consistent with its intention to
operate with a conservative debt capitalization policy and maintain its
investment grade ratings with Moody's Investor Services and Standard and Poor's.
As of June 30, 1999, the Company had $750 million available under its shelf
registration statement. In addition, as of June 30, 1999, the Company had cash
of $1.7 million and $169.5 million available under its $375 million of unsecured
revolving credit facility. On June 30, 1999, the Company also had 107 operating
properties with $92.4 million, or 69.1%, of the total revenue for the six month
period ended June 30, 1999 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.
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.
YEAR 2000
The Year 2000 issue ("Year 2000") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have time-sensitive hardware and
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, collect rents, or engage in similar normal business
activities.
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The Company believes that is has identified all of its information
technology ("IT") and non-IT systems to assess their Year 2000 readiness.
Critical IT systems include, but are not limited to: accounts receivable and
rent collections, accounts payable and general ledger, human resources and
payroll (both property and corporate levels), cash management, fixed assets, all
IT hardware (such as desktop/laptop computers and data networking equipment).
Critical non-IT systems include telephone systems, fax machines, copy machines
as well as property environmental, health safety and security systems (such as
elevators and alarm systems).
The Company has conducted an assessment of its core internal and
external IT systems. The majority of these systems are currently Year 2000
compliant or are in the process of being modified to be compliant. The Company
is currently in the process of determining its exposure to any non-IT systems
that are not Year 2000 compliant and believes that all such systems will have
been identified, evaluated and completed with respect to their Year 2000
compliance by the close of the third quarter of 1999.
To date, the Company has expended approximately $68,000 and expects to
expend an additional $42,000 in connection with upgrading building management,
mechanical and computer systems. The costs of the project and the date on which
the Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
In some cases, various third party vendors have been queried on their
Year 2000 readiness. The Company continues to question its significant suppliers
and vendors to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. To date, the Company is not aware of any significant suppliers or
vendors with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources. However, there can be no
assurances that the systems of other companies, on which the Company's systems
rely, will be timely converted and would not have an adverse effect on the
Company's systems.
The Company believes it has an effective program in place that will
resolve the Year 2000 issue in a timely manner. Aside from catastrophic failure
of banks, utilities, or governmental agencies, the Company believes that it
could continue its normal business operations if compliance by the Company is
delayed. The Company does not intend to develop a formal contingency plan, as
the Company believes that all critical systems will be Year 2000 compliant. The
Company does not believe that the Year 2000 issue with materially impact its
results of operations, liquidity or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 1999, approximately 77.3% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 6.9 years and a weighted average interest rate
of approximately 7.6%. The remainder of the Company's debt bears interest at
variable rates, with a weighted average maturity of approximately 1.8 years and
a weighted average interest rate of approximately 6.0%. As of June 30, 1999, the
Company's joint ventures indebtedness, excluding the minority equity investment,
aggregated $679.2 million of fixed rate debt, of which the Company's
proportionate share was $348.7 million, and $84.9 million of variable rate debt,
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of which the Company's proportionate share was $41.6 million. The Company
intends to utilize variable rate indebtedness available under its revolving
credit facilities to initially fund future acquisitions and developments. 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.
At June 30, 1999, the fair value of the Company's fixed rate debt
amounted to a liability of $837.6 million (excluding joint venture debt)
compared to its carrying amount of $858.8 million. The fair value of the
Company's proportionate share of joint venture fixed rate debt was $352.4
million compared to its carrying amount of $348.7 million. The Company estimates
that a 100 basis point decrease in market interest rate June 30, 1999 would have
changed the fair value of the Company's fixed rate debt and proportionate share
of joint ventures fixed rate debt to a liability of $876.7 million and $356.2
million, respectively. The sensitivity to changes in interest rate of the
Company's fixed rate debt was determined with a valuation model based upon
changes that measure the net present value of such obligations which arise from
the hypothetical estimate discussed above.
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 and joint venture
capital. Accordingly, the cost of obtaining such protection agreements in
relation to the Company's access to capital markets will continue to be
evaluated.
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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. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) On May 26, 1999, the Board of Directors of the Company adopted a
Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the Rights
Agreement, the Board of Directors declared a dividend distribution of one
Preferred Share Purchase Right (a "Right") for each outstanding common share,
without par value, of the Company (the "Common Shares") to shareholders of
record as of the close of business on June 16, 1999 (the "Record Date"). In
addition, one Right will automatically attach to each Common Share issued after
the Record Date and prior to the date the Rights become exercisable. Each Right
entitles the registered holder thereof to purchase from the Company a unit (a
"Preferred Unit") consisting of one one-thousandth of a Class A Series 1999-A
Noncumulative Preferred Share, without par value, at a cash exercise price of
$40.00 per Preferred Unit, subject to adjustment.
Initially, the Rights are not exercisable and are attached to and trade
with the Common Shares outstanding as of, and all Common Shares issued after,
the Record Date. The Rights will separate from the Common Shares, separate
certificates will be distributed to holders of the Common Shares and the Rights
will become exercisable under certain circumstances following the acquisition
of, or the announcement of the commencement of a tender or exchange offer that
if consummated would result in, beneficial ownership of 15% or more of the
outstanding Common Shares by any person or group. After the acquisition of 15%
or more of the outstanding Common Shares by any person or group, proper
provision will be made so that each holder of a Right (other than that person or
group, whose Rights will become null and void) thereafter has the right to
receive upon exercise that number of Preferred Units having a market value of
two times the exercise price of the Right.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in a transaction not approved by the Board of Directors of the Company. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors of the Company, since the Rights Agreement
may be amended, subject to certain limitations, or the Rights may be redeemed,
also subject to certain limitations prior to the Company's entering into a
merger or other business combination.
A copy of the Rights Agreement was filed with the Securities and
Exchange Commission on June 10, 1999 as an Exhibit to a Registration Statement
on Form 8-A. This description of the Rights does not purport to be complete and
is qualified in its entirety by reference to that Registration Statement on Form
8-A and the Rights Agreement.
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ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 1999 the Company held its Annual Meeting of Shareholders.
The matters presented to the shareholders for a vote and the vote on such
matters were as follows:
a) Election of Directors to serve until the next Annual Meeting of
Shareholders:
For Abstain
--- -------
Scott A. Wolstein 51,347,253 387,778
James A. Schoff 51,352,603 382,428
William N. Hulett, III 51,351,626 383,405
Ethan Penner 45,750,768 5,984,263
Albert T. Adams 50,976,196 758,835
Dean S. Adler 51,342,746 392,285
Barry A. Sholem 51,344,546 390,485
b) Proposal to amend Section 5 (b)(1) of each of Divisions A-I,
A-II, A-II, A-IV, A-V and A-VI of the Company's Amended and
Restated Articles of Incorporation to delete the words "for a
number of consecutive dividend payment periods which in the
aggregate contain at least 540 days" and replace them with the
words "for a number of dividend payment periods, whether
consecutive or not, which in the aggregate contain at least 540
days" in the section related to the voting rights of each class
of the Company's preferred shares following the non-payment of
dividends for 540 days, as requested by the New York Stock
Exchange, Inc.
For Against Abstain
--- ------- -------
50,323,181 987,260 424,589
c) Proposal to amend Article Four of the Company's Amended and
Restated Articles of Incorporation to:
(1) reduce from 1,500,000 to 750,000 the number of authorized
shares in each of the following classes of preferred shares
(i) Class A. Cumulative Preferred Shares, without par value;
(ii) Class B Cumulative Preferred Shares, without par value;
(iii) Class C Cumulative Preferred shares, without par
value; (iv) Class D Cumulative Preferred Shares, without par
value, (v) Class E Cumulative Preferred Shares, without par
value; and (vi) Noncumulative Preferred Shares, without par
value; and
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(2) authorize 750,000 shares in, and establish the terms of,
each of the following classes of preferred shares (i) Class
F Cumulative Preferred shares, without par value; (ii) Class
G Cumulative Preferred Shares, without par value; (iii)
Class H Cumulative Preferred Shares, without par value; (iv)
Class I Cumulative Preferred Shares, without par value; (v)
Class J Cumulative Preferred Shares, without par value; and
(vi) Class K Cumulative Preferred Shares, without par value.
For Against Abstain
--- ------- -------
36,871,809 4,823,226 394,672
(d) Proposal to amend the Company's Code of Regulations to provide
that the number of members of the Board of Directors of the
Company will automatically increase if, pursuant to the terms of
the Company's Amended and Restated Articles of Incorporation,
holders of any class of preferred shares authorized pursuant to
the proposal described in (c), above, Three are entitled to elect
members of the Board of Directors of the Company.
For Against Abstain
--- ------- -------
37,840,998 3,868,483 380,227
No other matters were submitted to the shareholders for a vote.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
3.1 Amended and Restated Articles of Incorporation, as amended
3.2 Code of Regulations, as amended
4.1 Shareholder Rights Agreement dated as of May 26, 1999 between
the Company and National City Bank, as rights agent*
10.1 Employment Agreement dated as of April 21, 1999 between the
Company and David M. Jacobstein
10.2 Change of Control Agreement dated as of May 17, 1999 between
the Company and David M. Jacobstein
10.3 Employment Agreement dated as of April 12, 1999 between the
Company and Eric M. Mallory
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10.4 Change of Control Agreement dated as of April 12, 1999 between
the Company and Eric M. Mallory
10.5 Employment Agreement dated as of May 25, 1999 between the
Company and Daniel B. Hurwitz
10.6 Change of Control Agreement dated as of May 25, 1999 between
the Company and Daniel B. Hurwitz
* Previously filed as Exhibit 1 to the Company's Registration Statement
on Form 8-A filed with the Securities and Exchange Commission on June
10, 1999 and incorporated by reference herein.
27 (a) Financial Data Schedule
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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
August 16, 1999 /s/ Scott A. Wolstein
- ------------------------------- -------------------------------------------
(Date) Scott A. Wolstein, Chairman of the Board and
Chief Executive Officer
August 16, 1999 /s/ William H. Schafer
- ------------------------------- -------------------------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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