1
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 September 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
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Commission file number 1-11690
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
-----------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1723097
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Enterprise Parkway, Beachwood, Ohio 44122
----------------------------------------------
(Address of principal executive offices - zip code)
(216) 755-5500
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(Registrant's telephone number, including area code)
-------------------------------
(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:
Indicate the number of shares outstanding of each of the issuer's classes
of common shares as of the latest practicable date.
59,764,989 shares outstanding as of November 12, 1999
---------- -----------------
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31,
1998.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended September 30, 1999 and 1998.
Condensed Consolidated Statement of Operations for the Nine Month Periods ended
September 30, 1999 and 1998.
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods ended
September 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)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Real estate rental property:
Land $ 342,169 $ 317,823
Buildings 1,501,607 1,404,734
Fixtures and tenant improvements 32,693 24,131
Land under development 12,556 34,534
Construction in progress 119,140 115,541
----------- -----------
2,008,165 1,896,763
Less accumulated depreciation (238,810) (203,097)
----------- -----------
Real estate, net 1,769,355 1,693,666
Cash and cash equivalents 1,461 2,260
Investments in and advances to joint ventures 304,155 266,257
Minority equity investment 137,970 80,710
Notes receivable 5,954 49,008
Other assets 48,489 34,623
----------- -----------
$ 2,267,384 $ 2,126,524
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 592,272 $ 592,154
Revolving credit facility 233,000 132,000
Subordinated convertible debentures -- 40,065
----------- -----------
825,272 764,219
Mortgage indebtedness 256,603 236,262
----------- -----------
Total indebtedness 1,081,875 1,000,481
Accounts payable and accrued expenses 52,659 50,380
Dividends payable 21,460 20,072
Other liabilities 11,274 11,878
----------- -----------
1,167,268 1,082,811
----------- -----------
Minority equity interest 8,202 8,177
Preferred operating partnership interests 104,776 32,101
Operating partnership minority interests 102,956 100,650
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 September 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 September 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 September 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 September 30, 1999 and December 31, 1998 54,000 54,000
Common shares, without par value, $.10 stated value; 100,000,000 shares
authorized; 61,313,218 and 61,289,186 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 6,131 6,129
Paid-in-capital 674,320 673,910
Accumulated dividends in excess of net income (99,866) (80,697)
----------- -----------
884,335 903,092
Less: Unearned compensation - restricted stock (153) (307)
----------- -----------
884,182 902,785
----------- -----------
$ 2,267,384 $ 2,126,524
=========== ===========
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 SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1999 1998
-------- ---------
Revenues from operations:
Minimum rents $ 48,314 $ 47,607
Percentage and overage rents 616 324
Recoveries from tenants 11,709 11,970
Management fee income 1,268 964
Interest income 1,100 1,376
Other 3,219 1,153
-------- --------
66,226 63,394
-------- --------
Rental operation expenses:
Operating and maintenance 6,004 5,861
Real estate taxes 6,645 7,248
General and administrative 4,037 3,244
Interest 16,728 17,149
Depreciation and amortization 13,324 12,417
-------- --------
46,738 45,919
-------- --------
Income before equity in net income of joint
ventures, minority equity investment, minority
interests and loss on disposition of real estate 19,488 17,475
Equity in net income of joint ventures 4,599 4,457
Equity in net income from minority equity investment 1,478 154
Minority interests (2,928) (1,338)
Loss on disposition of real estate -- (36)
-------- --------
Net income $ 22,637 $ 20,712
======== ========
Net income applicable to common shareholders $ 15,821 $ 14,702
======== ========
Per share data:
Earnings per common share -
Basic $ 0.26 $ 0.26
======== ========
Diluted $ 0.25 $ 0.25
======== ========
Dividends declared $ 0.35 $ 0.3275
======== ========
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 NINE MONTH PERIOD ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1999 1998
--------- ----------
Revenues from operations:
Minimum rents $ 141,148 $ 123,453
Percentage and overage rents 3,191 2,251
Recoveries from tenants 34,701 30,797
Management fee income 3,875 2,570
Interest income 4,815 3,078
Other 7,948 3,766
--------- ---------
195,678 165,915
--------- ---------
Rental operation expenses:
Operating and maintenance 17,376 14,167
Real estate taxes 19,614 19,742
General and administrative 13,244 9,247
Interest 50,081 41,917
Depreciation and amortization 39,110 31,638
--------- ---------
139,425 116,711
--------- ---------
Income before equity in net income of joint
ventures, minority equity investment, minority interests,
loss on disposition of real estate and extraordinary item 56,253 49,204
Equity in net income of joint ventures 13,940 10,169
Equity in net income from minority equity investment 4,925 154
Minority interests (7,718) (1,628)
Loss on disposition of real estate (1,753) (36)
--------- ---------
Income before extraordinary item 65,647 57,863
Extraordinary item -- (882)
--------- ---------
Net income $ 65,647 $ 56,981
========= =========
Net income applicable to common shareholders $ 45,200 $ 43,872
========= =========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.74 $ 0.79
Extraordinary item -- (0.01)
--------- ---------
Net income $ 0.74 $ 0.78
========= =========
Earnings per common share - diluted:
Income before extraordinary item $ 0.71 $ 0.76
Extraordinary item -- (0.01)
--------- ---------
Net income $ 0.71 $ 0.75
========= =========
Dividends declared $ 1.05 $ 0.9825
========= =========
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 NINE MONTH PERIOD ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
--------- ---------
Net cash flow provided by operating activities $ 107,858 $ 99,755
--------- ---------
Cash flow provided by (used for) investing activities:
Real estate developed or acquired (117,803) (525,125)
Investments in and advances to joint ventures and minority
equity investment, net (121,099) (73,677)
Acquisition of minority equity interest -- (16,293)
Repayment (issuance) of notes receivable, net 5,130 (25,801)
Proceeds from transfer of properties to joint ventures and repayment of
advances from affiliates 66,150 234,377
Proceeds from disposition of real estate 11,211 5,007
--------- ---------
Net cash flow used for investing activities (156,411) (401,512)
--------- ---------
Cash flow provided by (used for) financing activities:
Proceeds from (Repayment of) revolving credit facilities, net 101,000 (25,700)
Proceeds from construction loans and other mortgage debt 37,010 20,311
Principal payments on rental property debt (34,670) (15,669)
Repayment of convertible debentures (40,040) --
Proceeds from issuance of Medium Term Notes, net of underwriting commission,
and $459 of offering expenses paid in 1998 -- 197,910
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 (360) (469)
Proceeds from issuance of Class C and D preferred shares, net of
underwriting commissions and $869 of offering expenses paid in 1998 -- 148,280
Proceeds from issuance of preferred partnership units net of $450 of offering
expenses paid 72,675 --
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan, dividend reinvestment
plan and restricted stock plan 494 2,691
Payment of distributions to operating partnership minority interests (4,927) --
Dividends paid (83,428) (49,158)
--------- ---------
Net cash flow provided by financing activities 47,754 303,430
--------- ---------
(Decrease) increase in cash and cash equivalents (799) 1,673
Cash and cash equivalents, beginning of period 2,260 18
--------- ---------
Cash and cash equivalents, end of period $ 1,461 $ 1,691
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisition of certain shopping centers, the Company
assumed mortgage debt of approximately $18.0 million and recorded minority
equity interests aggregating approximately $2.7 million during the nine month
period ended September 30, 1999. Also, the Company applied the balance of
approximately $22.0 million of notes receivable towards the acquisition of one
shopping center in Phoenix, Arizona and additional shares of American Industrial
Properties and transferred $21.2 million of development costs in connection with
the formation of three joint ventures. In addition, included in accounts payable
was approximately $0.2 million relating to construction in progress and $21.5
million of dividends declared at September 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 and liabilities aggregating $137.0 million and recorded
minority equity interest aggregating approximately $96.7 million during the nine
month period ended September 30, 1998. The Company also had approximately $6.1
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 and
$19.1 million of dividends declared. Also, in conjunction with the acquisition
of a minority equity investment, the Company transferred land and buildings with
a net book value of $7.4 million in exchange for approximately 1.3 million
common shares of American Industrial Properties. Similarly, in conjunction with
the formation of a joint venture, the Company transferred property to the joint
venture with a net book value, after reduction for cash received, of $27.6
million in exchange for a 50% equity interest. The foregoing transactions did
not provide for or require the use of cash.
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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 (SFAS No. 137 deferred the effective date
from December 31, 2000). The Company does not expect this pronouncement to have
a material impact on the Company's financial position or cash flows.
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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 and 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 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 nine months ended
September 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 September 30, 1999
consisted of the following:
o A 50% joint venture interest in 24 operating shopping centers (one
of which was acquired in 1999 and three of which were acquired in
1998);
o A 35% joint venture interest in one operating shopping center;
o A 57% joint venture interest in one shopping center which is under
development;
o A 50% interest in eight joint ventures each of which is developing a
shopping center;
o A 25% interest in one joint venture which is developing a shopping center;
o An 80% joint venture interest in two operating shopping center properties
acquired in 1998;
o A 50% joint venture interest in a real estate management company and a
development company, both acquired in 1998;
o A 50% joint venture interest in a limited partnership acquired in 1998
which is developing six shopping centers;
o 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. This entity owns a 25% joint venture interest in an
opportunity fund formed in 1998 which has acquired a retail site in
Longbeach, CA, which is being redeveloped, and retail sites in Kansas
City, KS a 75% joint venture interest which owns 13 retail sites formerly
occupied by Best Products, and a 12.5% interest in a joint venture
interest which is developing a shopping center;
o 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.
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Summarized combined financial information of the Company's joint venture
investments is as follows (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Combined Balance Sheets:
Land $ 235,867 $ 232,105
Buildings 842,487 826,521
Fixtures and tenant improvements 4,465 2,467
Construction in progress 211,560 67,898
----------- -----------
1,294,379 1,128,991
Less accumulated depreciation (76,103) (59,580)
----------- -----------
Real estate, net 1,218,276 1,069,411
Other assets 83,025 57,527
----------- -----------
$ 1,301,301 $ 1,126,938
=========== ===========
Mortgage debt $ 790,043 $ 718,846
Amounts payable to DDR 126,357 85,846
Other liabilities 85,555 21,193
----------- -----------
1,001,955 825,885
Accumulated equity 299,346 301,053
----------- -----------
$ 1,301,301 $ 1,126,938
=========== ===========
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1999 1998 1999 1998
------- ------- -------- -------
Combined Statements of Operations:
Revenues from operations $41,365 $29,287 $121,934 $74,233
------- ------- -------- -------
Rental operation expenses 12,689 7,240 36,713 17,770
Depreciation and amortization expense
of real estate investments 5,748 4,081 16,949 10,618
Interest expense 14,547 10,548 43,142 28,190
------- ------- -------- -------
32,984 21,869 96,804 56,578
------- ------- -------- -------
Income before gain on sale of real estate 8,381 7,418 25,130 17,655
Gain on sale of real estate -- 5,897 344 8,710
------- ------- -------- -------
Net income $ 8,381 $13,315 $ 25,474 $26,365
======= ======= ======== =======
Included in management fee income for the nine month period ended
September 30, 1999 and 1998, is approximately $3.6 and $2.1 million,
respectively, of management fees earned by the Company for services rendered to
the joint ventures. Similarly, other income for the nine month period ended
September 30, 1999 and 1998, includes $2.2 million and $1.3 million,
respectively, of development fee income and commissions for services rendered to
the joint ventures, net of amounts eliminated related to the Company's
proportionate share.
In the second and third quarters of 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, agreed to acquire the
Company's 50% joint venture interests relating to the development of six
shopping centers. The Company was reimbursed approximately $74.3 million,
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relating to advances previously made to these joint ventures, associated with
development costs incurred on each of these projects. In addition, the Company
transferred its interest in a shopping center under development in Coon Rapids,
MN, a suburb of Minneapolis, to a joint venture in which the Company retained a
25% interest and was reimbursed $2.5 million relating to development costs
previously incurred on this project.
In June 1999, DD Development Company, a company in which DDR owns an
equity ownership interest, acquired Prudential Real Estate Investors' ("PREI")
limited partnership interest in a joint venture, Hendon/DDR/BP, LLC, which owned
15 sites formerly occupied by Best Products at a cost of approximately $29.7
million. As a result, the Company's aggregate investment in the joint venture
increased to approximately $36 million. Ten of the sites are leased as of
September 30, 1999 and two were sold as of September 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 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.
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 common shares of AIP, representing 34.5% of AIP's total
outstanding common shares. In January 1999, the Company acquired 1,543,005
common shares of AIP at a price of $15.50 per share and 1,867,610 common shares
of AIP at a price of $14.93 per common share. In August 1999, the Company
acquired 354,839 common shares of AIP at a price of $15.50 per share. At
September 30, 1999, the Company owned 9,656,650 common shares in AIP
representing approximately 46.0% of AIP's total outstanding common shares.
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Summarized financial information of AIP is as follows (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Balance Sheet:
Land $ 161,916 $ 108,891
Buildings 482,988 396,241
--------- ---------
644,904 505,132
Less accumulated depreciation (42,862) (33,449)
--------- ---------
Real estate, net 602,042 471,683
Other assets 31,602 28,647
--------- ---------
$ 633,644 $ 500,330
========= =========
Mortgage debt $ 346,107 $ 252,481
Other liabilities 28,654 42,270
--------- ---------
374,761 294,751
Accumulated equity 258,883 205,579
--------- ---------
$ 633,644 $ 500,330
========= =========
Three month Nine month For the period
period ended period ended July 30, 1998 to
September 30, 1999 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
Statement of Operations:
Revenues from operations $ 22,329 $ 64,173 $ 8,720
-------- -------- -------
Rental operation expenses 7,824 22,665 3,380
Depreciation and amortization
Expense 3,370 9,993 1,632
Interest expense 6,884 19,718 2,738
-------- -------- -------
18,078 52,376 7,750
-------- -------- -------
4,251 11,797 970
Minority interests (89) (260) (39)
Loss on sale of real estate (113) (75) --
-------- -------- -------
Income before extraordinary item 4,049 11,462 931
Extraordinary item (585) (585) --
-------- -------- -------
Net Income $ 3,464 $ 10,877 $ 931
======== ======== =======
4. PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma operating data is
presented for the nine month period ended September 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 and 1999;
(ii) the completion of the sale by the Company of 669,639 common shares
(pre-split) in April 1998 and 1999; (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
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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).
Nine Month Period
Ended September 30,
1998
-------------------
Pro forma revenues $ 167,292
=========
Pro forma income before extraordinary item $ 60,054
=========
Pro forma net income applicable
to common shareholders $ 41,450
=========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.74
Extraordinary item (0.02)
---------
Net income $ 0.72
=========
Earnings per common share - diluted:
Income before extraordinary item $ 0.71
Extraordinary item (0.02)
---------
Net income $ 0.69
=========
The 1998 pro forma information above does not include revenues and
expenses for seven of the 41 properties acquired by the Company in 1998, the one
property acquired in 1999 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.
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 65,647 65,647
Dividends declared -
Common Shares (64,369) (64,369)
Dividends declared -
Preferred Shares (20,447) (20,447)
Vesting of restricted stock 154 154
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 2 339 341
--------- -------- -------- -------- ----- --------
Balance September 30, 1999 $ 303,750 $ 6,131 $674,320 $(99,866) $(153) $884,182
========= ======== ======== ======== ===== ========
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During the nine month period ended September 30, 1999, in conjunction
with certain earnouts relating to the acquisition of two shopping centers which
were initially purchased in 1998 and the purchase of joint venture interests,
the Company issued operating partnership units ("OP Units") which are
exchangeable, under certain circumstances and at the option of the Company, into
139,276 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 Bank One, NA
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
September 30, 1999, $233.0 million was outstanding under this facility with a
weighted average interest rate of 6.2%.
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 September 30, 1999, there were no borrowings
outstanding under this facility.
7. RELATED PARTY TRANSACTIONS
In September 1999, the Company transferred its interest in a shopping
center under development in Coon Rapids, MN, a suburb of Minneapolis, to a joint
venture in which the Company retained a 25% interest. The remaining 75% interest
is held by an entity owned in part by a director of the Company. The Company was
reimbursed $2.5 million by the joint venture partner relating to development
costs previously incurred on this development. In addition, the Company received
a development fee of approximately $0.5 million during the three month period
ended September 30, 1999 from the entity owned in part by a director of the
Company.
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
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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.
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.
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
-------------------------- --------------------------
(in thousands, except per share amounts)
1999 1998 1999 1998
-------- -------- -------- --------
Income before extraordinary item $ 22,637 $ 20,712 $ 65,647 $ 57,863
Less: Preferred stock dividend (6,816) (6,010) (20,447) (13,109)
-------- -------- -------- --------
Basic - Income before
extraordinary item applicable to
common shareholders 15,821 14,702 45,200 44,754
Effect of dilutive securities:
Joint venture partnerships 132 (141) -- (640)
-------- -------- -------- --------
Diluted - Income before
extraordinary item applicable to
common shareholders plus
assumed conversions $ 15,953 $ 14,561 $ 45,200 $ 44,114
======== ======== ======== ========
NUMBER OF SHARES:
Basic - average shares outstanding 61,327 57,257 61,314 56,500
Effect of dilutive securities:
Joint venture partnerships 2,978 778 2,147 479
Stock options 113 730 176 876
Performance Units 30 -- 83 --
Restricted stock -- -- 4 --
-------- -------- -------- --------
Diluted - average shares outstanding 64,448 58,765 63,724 57,855
======== ======== ======== ========
PER SHARE AMOUNT:
Income before extraordinary item
Basic $ 0.26 $ 0.26 $ 0.74 $ 0.79
======== ======== ======== ========
Diluted $ 0.25 $ 0.25 $ 0.71 $ 0.76
======== ======== ======== ========
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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: debentures
(matured August 15, 1999), the Company's joint venture partner's interest in the
San Antonio, Merriam (dilutive three months ended September 30, 1999 and 1998
and for the nine months ended September 30, 1998), Community Centers, DDRA V and
DDRA VI (1999 only; dilutive three months ended September 30, 1999) 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).
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.
10. SUBSEQUENT EVENTS
Commencing in October 1999 through November 12, 1999, the Company
purchased in open market transactions, 1,550,500 of its common shares, at prices
ranging from $13.44 to $14.00, for an aggregate purchase price of approximately
$21.6 million. In February and August 1999, the Company's Board of Directors
authorized the officers of the Company to implement a common share repurchase
program in response to what the Company believed was a distinct undervaluation
of the Company's common shares in the public market. Under the terms authorized
by the Company's Board, as amended in November 1999, the Company may purchase in
the open market, subject to certain requirements, common shares of the Company,
up to a maximum value of $200 million. The Company may invest proceeds from the
sale of assets to purchase these shares. It is not the Company's intention to
increase the leverage on its balance sheet to implement this stock repurchase
program.
In November 1999, the Company acquired, through a 50% owned joint
venture, the fourth phase of a shopping center in Phoenix, AZ which aggregates
125,000 square feet. The total purchase price for the fourth phase of this
center aggregated approximately $15.5 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 and 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:
o 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;
o 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;
o 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;
o 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;
o 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;
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o 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;
o 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;
o The Company is subject to potential environmental liabilities;
o 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;
o The Company could be adversely affected by changes in government
regulations, including changes in environmental, zoning, tax and other
regulations;
o 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
o 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 $2.8 million, or 4.5%, to $66.2 million for
the three month period ended September 30, 1999 from $63.4 million for the same
period in 1998. Total revenues increased $29.8 million, or 17.9%, to $195.7
million for the nine month period ended September 30, 1999 from $165.9 million
for the same period in 1998. Base and percentage rents for the three month
period ended September 30, 1999 increased $1.0 million, or 2.1%, to $48.9
million as compared to $47.9 million for the same period in 1998. Base and
percentage rents increased $18.6 million, or 14.8%, to $144.3 million for the
nine month period ended September 30, 1999 from $125.7 million for the same
period in 1998.
Approximately $5.0 million of the increase in base and percentage
rental income, for the nine month period ended September 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 5.8%
over 1998 revenues from Core Portfolio Properties. The 35 shopping centers
acquired by the Company in 1999 and 1998 contributed $27.1 million of additional
base and percentage rental revenue and seven new shopping center developments
contributed $2.9 million. These increases were offset by a decrease of $16.4
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 September 30, 1999, the in-place occupancy rate of the Company's
portfolio stood at 95.6% as compared to 95.9% at September 30, 1998. The average
annualized base rent per leased square foot, including those properties owned
through joint ventures, was $9.02 at September 30, 1999 as compared
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to $8.79 at September 30, 1998. Same store sales, for those tenants required to
report such information, representing approximately 18.8 million square feet,
increased 3.2% to $233 per square foot for the twelve month period.
The increase in recoveries from tenants of $3.9 million for the nine
months ended September 30, 1999 is directly related to the increase in operating
and maintenance expenses and real estate taxes primarily associated with the
1999 and 1998 shopping center acquisitions and developments. Recoveries were
approximately 93.8% of operating expenses and real estate taxes for the nine
month period ended September 30, 1999 as compared to 91.1% for the same period
in 1998. This increase is generally associated with increased occupancy.
Management fee income increased by approximately $1.3 million for the nine month
period ended September 30, 1999 compared to the same period in 1998, primarily
associated with the formation of new joint ventures in 1998. Interest income
increased $1.7 million, for the nine month period ended September 30, 1999
compared to the same period in 1998, primarily associated with advances made to
certain joint ventures. Other income increased by approximately $4.2 million
which generally reflects an increase in lease termination's and development,
leasing and financing fees, from the Company's joint ventures, relating to the
ownership interest held by third party investors.
Other income was comprised of the following (in thousands):
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1999 1998 1999 1998
------ ------ ------ ------
Temporary tenant rentals (Kiosks) $ 129 $ 135 $ 315 $ 360
Lease termination fees 2,014 233 2,552 1,130
Development fees 911 431 3,526 1,188
Other 165 354 1,555 1,088
------ ------ ------ ------
$3,219 $1,153 $7,948 $3,766
====== ====== ====== ======
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended September 30, 1999 increased $0.1 million, or 2.4%, to $6.0 million as
compared to $5.9 million for the same period in 1998. Rental operating and
maintenance expenses increased $3.2 million, or 22.7%, to $17.4 million for the
nine month period ended September 30, 1999 from $14.2 million for the same
period in 1998. For the nine month period ended September 30, 1999, an increase
of $2.9 million is attributable to the 42 shopping centers acquired and
developed in 1999 and 1998 and $1.7 million in the Core Portfolio Properties is
primarily attributable to an increase in snow removal costs and other
maintenance related costs. These increases were offset by a decrease of $1.4
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 for the three month period ended September 30, 1999
decreased $0.6 million, or 8.3%, to $6.6 million as compared to $7.2 million for
the same period in 1998. Real estate taxes decreased $0.1 million, or 0.7%, to
$19.6 million for the nine month period ended September 30, 1999 from $19.7
million for the same period in 1998. An increase of $3.2 million is related to
the 42 shopping centers acquired and developed in 1999 and 1998 and $0.4 million
in the Core Portfolio Properties. These increases were offset by a decrease of
$3.7 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 AIP in August 1998.
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General and administrative expenses increased $0.8 million, or 24.5%,
to $4.0 million for the three month period ended September 30, 1999 as compared
to $3.2 million in 1998. General and administrative expenses increased $4.0
million, or 43.2%, to $13.2 million for the nine month period ended September
30, 1999 from $9.2 million for the same period in 1998. Total general and
administrative expenses were approximately 4.2% (3.9% after excluding the
severance charge) and 3.9% of total revenues, including total revenues of joint
ventures, for the nine month period ended September 30, 1999 and 1998,
respectively.
The increase in general and administrative expenses is attributable to
the growth of the Company primarily related to acquisitions, expansions and
developments, relocation of the Company Headquarters to a new office, additional
consulting costs, professional services, several new key executives, and a
severance charge of $0.8 million. The increase was offset by adjustments to
certain variable rate executive incentive compensation accruals of approximately
$0.9 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.
Depreciation and amortization expense increased $0.9 million, or 7.3%,
to $13.3 million for the three month period ended September 30, 1999 as compared
to $12.4 million for the same period in 1998. Depreciation and amortization
increased $7.5 million, or 23.6%, to $39.1 million for the nine month period
ended September 30, 1999 from $31.6 million for the same period in 1998. An
increase of $9.7 million is related to the 42 shopping centers acquired and
developed in 1999 and 1998, $1.5 million is related to Core Portfolio Properties
and $0.3 million is related to personal property. These increases were offset by
a decrease of $4.0 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 decreased $0.4 million, or 2.5%, to $16.7 million for
the three month period ended September 30, 1999, as compared to $17.1 million
for the same period in 1998. Interest expense increased $8.2 million, or 19.5%,
to $50.1 million for the nine month period ended September 30, 1999 from $41.9
million for the same period in 1998 and 1999. The overall increase in interest
expense for the nine month period ended September 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 nine month period
ended September 30, 1999 and related weighted average interest rate was $1.1
billion and 7.2%, respectively, compared to $872.3 million and 7.4%,
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,
expansion projects and development joint venture interests, were $3.7 million
and $10.4 million for the three and nine month periods ended September 30, 1999,
as compared to $3.3 million and $6.6 million for the same periods in 1998.
Equity in net income of joint ventures increased $0.1 million, or 3.2%,
to $4.6 million for the three month period ended September 30, 1999 as compared
to $4.5 million for the same period in 1998. Equity in net income of joint
ventures increased $3.8 million, or 37.1%, to $13.9 million for the nine month
period ended September 30, 1999 from $10.1 million for the same period in 1998.
This increase is primarily attributable to approximately $4.9 million of income
from the Company's thirteen joint
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venture interests acquired/formed during 1998 and 1999. This increase is offset
by a $1.1 million decrease relating primarily to the reduction of lease
termination income from the Company's Community Center Joint Venture.
Equity in net income of minority equity investment increased $1.3
million, to $1.5 million for the three month period ended September 30, 1999, as
compared to $0.2 million for the same period in 1998. Equity in net income of
minority equity investment increased $4.7 million, to $4.9 million for the nine
month period ended September 30, 1999, as compared to $0.2 million for the same
period in 1998. This increase relates to the Company's investment in AIP which
commenced in August 1998.
The minority equity interest expense increased $1.6 million, to $2.9
million for the three month period ended September 30, 1999, as compared to $1.3
million for the same period in 1998. The minority equity interest expense
increased $6.1 million, to $7.7 million for the nine month period ended
September 30, 1999, as compared to $1.6 million for the same period in 1998.
This increase relates to the Company's purchase of 22 shopping centers in 1998
and 1999 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 4.7 million common shares of the Company or for cash
and the issuance of preferred operating partnership units in December 1998 and
September 1999. This expense represents the income allocation associated with
the priority distributions associated with the minority equity interests.
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 nine
month period ended September 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 $1.9 million, or 9.3%, to $22.6 million for the
three month period ended September 30, 1999, as compared to net income of $20.7
million for the same period in 1998. Net income increased $8.6 million, or
15.2%, to $65.6 million for the nine month period ended September 30, 1999, as
compared to $57.0 million for the same period in 1998. The increase in net
income of $8.6 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 $22.7 million, resulting from
new leasing, retenanting and expansion of Core Portfolio Properties and the 42
shopping centers acquired and developed in 1999 and 1998, an increase of $8.5
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 $7.5 million, $8.2 million, $6.1 million and $1.7
million, respectively.
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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 September 30, 1999, FFO increased $5.3
million, or 17.6%, to $35.4 million as compared to $30.1 million for the same
period in 1998. For the nine month period ended September 30, 1999, FFO
increased $22.2 million, or 27.1%, to $104.1 million as compared to $81.9
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):
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1999 1998 1999 1998
-------- --------- --------- --------
Net income applicable to
common shareholders (1) $15,821 $14,702 $ 45,200 $ 43,872
Depreciation of real estate investments 13,034 12,274 38,416 31,243
Equity in net income of joint ventures (4,599) (4,457) (13,940) (10,169)
Equity in net income of minority equity investment (1,478) (154) (4,925) (154)
Joint Ventures' FFO (2) 7,661 5,940 22,437 14,377
Minority equity investment FFO 3,326 428 9,493 428
Minority interest expense (OP Units) 1,646 1,300 4,895 1,411
Loss on sale of real estate -- 36 1,753 36
Extraordinary and non-recurring items -- -- 802 882
------- ------- -------- --------
$35,411 $30,069 $104,131 $ 81,926
======= ======= ======== ========
(1) Includes straight line rental revenues of approximately $1.1
million and $1.0 million for the three month periods ended September 30, 1999
and 1998, respectively, and approximately $3.2 million and $2.5 million for the
nine month periods ended September 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 Nine Month Period
Ended September 30, Ended September 30,
1999 1998 1999 1998
------- -------- -------- --------
Net income (a) $ 8,381 $13,315 $25,474 $26,365
Gain on sales of real estate -- (5,897) (344) (8,709)
Depreciation of real estate investments 5,748 4,081 16,949 10,618
------- ------- ------- -------
$14,129 $11,499 $42,079 $28,274
======= ======= ======= =======
DDRC Ownership interests (b) $ 7,661 $ 5,940 $22,437 $14,377
======= ======= ======= =======
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(a) Revenues for the three month periods ended September 30, 1999 and
1998 include approximately $1.0 million and $0.8 million,
respectively, resulting from the recognition of straight line
rents of which the Company's proportionate share is $0.5 million
and $0.4 million, respectively. Revenue for the nine month period
ended September 30, 1999 and 1998, include approximately $3.1
million, and $2.1 million, respectively, resulting from the
recognition of straight line rents of which the Company's
proportionate share is $1.5 million and $1.0 million,
respectively.
(b) At September 30, 1999, 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 September 30,
1998, the Company owned joint venture interests in 25 operating
shopping center properties.
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 nine month period ended September 30, 1999 increased to
$107.9 million as compared to $99.8 million for the same period in 1998. The
increase is attributable to the 42 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 $0.35
from $0.3275 was approved in February 1999 by the Company's Board of Directors.
The Company's common share dividend payout ratio for the first three quarters of
1999 approximated 61.8% of the actual FFO as compared to 67.9% 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 nine month period ended September 30, 1999, the Company and
its joint ventures invested $237.7 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 and its joint ventures have completed ten
expansion projects at an aggregate cost of $49.6 million. The Company is
currently expanding/redeveloping seven of its shopping centers. The Company is
also scheduled to commence expansion/redevelopment projects at six additional
shopping centers.
Acquisitions:
In July 1999, the Company acquired Deer Valley Towne Center, a 198,000
square foot shopping center in Phoenix, Arizona, for an aggregate purchase price
of $25.8 million.
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In June 1999, DD Development Company, a Company in which DDR owns an
equity ownership interest, acquired Prudential Real Estate Investors' ("PREI")
limited partnership interest in a joint venture, Hendon/DDR/BP, LLC, which owned
15 sites formerly occupied by Best Products at a cost of approximately $29.7
million. As a result, the Company's aggregate investment in the joint venture
increased to approximately $36 million. Ten of the sites are leased as of
September 30, 1999 and two were sold as of September 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 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.
Through December 31, 1998, the Company acquired 5,891,196 common shares of AIP
at aggregate cost of $91.3 million. In January 1999, the Company acquired 3.4
million additional common shares of AIP for approximately $51.8 million. In
August 1999, the Company purchased an additional 354,839 common shares of AIP
for approximately $5.5 million. At September 30, 1999, the Company's investment
in AIP approximated $138.0 million. The Company currently holds approximately
46.0% of the outstanding common shares of AIP.
Development (Wholly Owned):
Through the first nine months of 1999, the Company completed
construction of the following two shopping centers:
o A 185,000 square foot shopping center in Solon, Ohio, which is anchored
by Borders, Bed Bath & Beyond, Mustard Seed (a gourmet grocery store),
Old Navy, Talbots, Pier I and Newman Outfitters.
o A 200,000 square foot second phase of its Erie, Pennsylvania center
anchored by Home Depot (not owned by the Company), PETsMART and Circuit
City.
The Company has three shopping centers under construction and scheduled for
completion in 2000:
o 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 (all of which opened this fall).
o A 210,000 square foot shopping center in Oviedo, Florida (a suburb of
Orlando), Phase I of this project includes Office Max, Michael's, Ross
Dress for Less and Shoe Carnival (all of which opened this fall).
o A 416,000 square foot shopping center in Meridian, Idaho (a suburb of
Boise), 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.
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o The Company is also in the initial phase of development relating to a
shopping center located in Riverdale, UT.
Development (Joint Venture):
Through the first nine months of 1999 the Company and its joint
ventures completed construction of the following two shopping centers:
o The Village Shoppes of Salem, a 170,278 square foot shopping center in
Salem, New Hampshire, which is anchored by Best Buy, Linens N' Things,
MVP Sports, Comp USA, Michael's and Big Party.
o Phase I of The Commons, a 310,475 square foot shopping center in
Salisbury, Maryland. Phase I is anchored by Michael's, Office Max,
PETsMART, Home Depot (not owned) and Target (not owned).
During 1998 and 1999, the Company entered into joint venture
development agreements on an additional eight shopping center projects with
various regional developers. These eight projects have an aggregate projected
cost of approximately $342.2 million. Several of these projects have commenced
development and are currently scheduled for completion in 1999 and 2000. The
Company is currently financing the projects located in Round Rock, TX; Everett,
MA; Hagerstown, MD; Deer Park, IL and Plainville, CT through the Prudential/DDR
Retail Value Fund and also intends to finance its investment in the Fenton, MO
project through this Fund.
During the third quarter of 1999, the Company entered into a joint
venture relating to the 642,000 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 will own a 25%
equity interest.
The Company, through its affiliate DDR Oliver McMillan, continues to
pursue six urban entertainment and retail projects aggregating 1.2 million
square feet of GLA at a projected cost of approximately $233 million. Two of
these projects are under construction. The remaining projects are scheduled to
commence 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, mortgage debt assumed, construction loans, sale of property,
issuance of OP Units and other joint venture capital. Total debt outstanding at
September 30, 1999 was $1.1 billion compared to $1.0 billion at December 31,
1998.
Commencing in October 1999 through November 12, 1999, the Company
purchased in open market transactions, 1,550,500 of its common shares, at prices
ranging from $13.44 to $14.00, for an aggregate purchase price of approximately
$21.6 million. In February and August 1999, the Company's Board of Directors
authorized the officers of the Company to implement a common share repurchase
program in response to what the Company believed was a distinct undervaluation
of the Company's common shares in the public market. Under the terms authorized
by the Company's Board, as amended in November 1999, the Company may purchase in
the open market, subject to certain requirements, common shares of the Company,
up to a maximum value of $200 million. The Company
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may invest proceeds from the sale of assets to purchase these shares. It is not
the Company's intention to increase the leverage on its balance sheet to
implement this stock repurchase program.
During the second and third quarters of 1999, the Prudential/DDR Retail
Value Fund ("Fund"), a joint venture in which the Company effectively owns a 25%
interest, agreed to acquire the Company's 50% joint venture interests relating
to the development of six shopping centers. The Company was reimbursed by the
Fund approximately $74.3 million associated with development costs incurred on
each of these projects. In addition, the Company transferred its interest in a
shopping center under development in Coon Rapids, MN, a suburb of Minneapolis,
to a joint venture in which the Company retained a 25% interest and was
reimbursed $2.5 million relating to development costs previously incurred on
this project. The Company also sold certain land parcels adjacent to its
shopping center in Wilmington, NC and received aggregate proceeds of
approximately $6.1 million.
In September 1999, the Company completed a $75 million private
placement of 300,000, 8.875% perpetual preferred "down-REIT" preferred
partnership units with an institutional investor. The units are exchangeable,
under certain circumstances, for Class K, 8.875% cumulative preferred shares.
The units may be exchanged into common shares if the Company fails to pay
dividends for six consecutive quarters. The net proceeds of approximately $73.1
million were effectively used to repay approximately $25.8 million in mortgage
indebtedness and $40.1 million in convertible debentures which matured on
August 15, 1999. The balance of these proceeds was used to repay variable rate
borrowings under the Company's revolving credit facilities.
During the nine month period ended September 30, 1999, the Company
issued $2.7 million in OP Units in conjunction with the purchase of certain
expansion areas at two recently acquired shopping centers and the purchase of
joint venture interests. These OP Units are, in certain circumstances and at the
election of the Company, exchangeable into approximately 139,000 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 1999, the joint venture entered
into a 10 year, fixed rate mortgage for $55.5 million at 7.31%.
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 September 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 $430.0 million), $413.8 million of preferred shares
and preferred partnership units and $924.2 million of market equity (market
equity is defined as common shares and OP Units outstanding multiplied by the
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closing price per common share on the New York Stock Exchange at September 30,
1999 of $14.00), resulting in a debt to total market capitalization ratio of
0.45 to 1. At September 30, 1999, the Company's total debt consisted of $791.9
million of fixed rate debt and $290.0 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 September 30, 1999, the Company had $750.0 million available under its
shelf registration statement. In addition, as of September 30, 1999, the Company
had cash of $1.5 million and $167 million available under its $400 million of
revolving credit facilities. On September 30, 1999, the Company also had 113
operating properties with $146.9 million, or 71.4%, of the total revenue for the
nine month period ended September 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 provide for
fixed rate rental increases or 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.
If not corrected, computer programs that have
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time-sensitive hardware and software may interpret a date using "00" as the year
1900 rather than the year 2000. This situation could result in a system failure
or erroneous results.
The Company believes that it has identified all of its information
technology ("IT") and non-IT systems to assess their Year 2000 readiness.
Critical IT systems include: accounts receivable and rent collections, accounts
payable and general ledger, human resources and payroll (both property and
corporate levels), cash management, fixed assets and computer equipment
(including desktop/laptop computers and data networking equipment). Critical
non-IT systems include property environmental, health safety and security
systems (including elevators and alarm systems) as well as telephone systems,
fax machines and copy machines.
The Company has completed an assessment of its critical IT systems.
Based on that assessment and the assurances of third party software and hardware
system providers, the Company's critical IT systems have been remediated, and
the Company believes that these systems are Year 2000 compliant as of September
30, 1999. The Company has determined its exposure to non-IT systems that are not
Year 2000 compliant and believes that all such systems have been identified and
evaluated. Written confirmation of Year 2000 compliance has been received from
most vendors of non-IT equipment and services; written confirmation of
compliance from some utility service providers is still pending as of September
30, 1999. The Company expects to obtain the remaining written confirmations of
compliance during the fourth quarter of 1999.
To date, the Company has expended approximately $76,000 and expects to
expend an additional $34,000 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 achieve complete Year 2000 compliance 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.
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 September 30, 1999, approximately 73.2% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 7.2 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 1.5 years and
a weighted average interest rate of approximately 6.4%. As of September 30,
1999, the Company's aggregate joint ventures indebtedness, excluding the
minority equity investment, aggregated $702.5
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million of fixed rate debt, of which the Company's proportionate share was
$354.8 million, and $147.1 million of variable rate debt, of which the Company's
proportionate share was $75.2 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 September 30, 1999, the fair value of the Company's fixed rate debt
amounted to a liability of $769.4 million (excluding joint venture debt)
compared to its carrying amount of $791.9 million. The fair value of the
Company's proportionate share of joint venture fixed rate debt was $338.0
million compared to its carrying amount of $354.8 million. The Company estimates
that a 100 basis point decrease in market interest rates at September 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 $807.1
million and $350.7 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
In September 1999, the Company issued 300,000 preferred partnership
units which are exchangeable, under certain circumstances, into Class K, 8.875%
cumulative preferred shares. The units are exchangeable for the Company's common
shares if the Partnership fails to make distributions for six consecutive
quarters. This transaction was conducted as a private placement in reliance on
the exemption from registrations provided by Section 4(2) of the securities Act
of 1933, as amended.
In July 1999, the Company issued limited partnership units (the
"Units") which are redeemable for an amount equal to the value of approximately
47,190 of the Company's common shares. The Units are redeemable, subject to the
Company's right to purchase such units for cash or for Company common shares on
a one-for-one basis. This transaction was conducted as a private placement in
reliance on the exemption from registrations 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 INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
3(i) Company's amended articles of corporation
10.1 Employment Agreement, dated April 2, 1999, between the Company and
Scott A. Wolstein
10.2 Employment Agreement, dated April 2, 1999, between the Company and
James A. Schoff
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a) Exhibits -
27 (a) Financial Data Schedule
(b) Date of Report Items Reported
April 23, 1999 Item 5. Other Events
Item 7. Financial Statements,
Proforma 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
November 15, 1999 /s/ Scott A. Wolstein
----------------- ----------------------------------------
(Date) Scott A. Wolstein, Chairman of the Board
and Chief Executive Officer
November 15, 1999 /s/ William H. Schafer
----------------- -----------------------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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