For the quarterly period ended March 31, 2010

OR

o		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

3300 Enterprise Parkway, Beachwood, Ohio 44122

(216) 755-5500

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of April 30, 2010, the registrant had 250,044,910 outstanding common shares, $0.10 par value per share.

 

 

TABLE OF CONTENTS

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

Supplemental disclosure of non-cash investing and financing activities:

     At March 31, 2010, dividends payable were $12.0 million. As disclosed in Note 1, the Company deconsolidated one entity in connection with the adoption of ASC 810 effective January 1, 2010. This resulted in a reduction to Real Estate Assets, net of approximately $28.7 million, an increase to Investments in and Advances to Joint Ventures of approximately $8.4 million, a reduction in Non-controlling Interests of approximately $12.4 million and an increase to Accumulated Distributions in Excess of Net income of approximately $7.8 million. In addition, the Company foreclosed on its interest in a note receivable secured by a development project resulting in an increase to Real Estate Assets and a decrease to Notes Receivable of approximately $19.0 million. The foregoing transactions did not provide for or require the use of cash for the three-month period ended March 31, 2010.

     At March 31, 2009, dividends payable were $32.8 million. The foregoing transaction did not provide for or require the use of cash for the three-month period ended March 31, 2009.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

DEVELOPERS DIVERSIFIED REALTY CORPORATION

potentially be significant to the VIE. In determining whether it has the power to direct the activities of the VIE that most significantly affect the VIE’s performance, this standard requires a company to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed. This standard requires continuous reassessment of primary beneficiary status rather than periodic, event-driven assessments as previously required and incorporates expanded disclosure requirements. This new accounting guidance was effective for the Company on January 1, 2010, and is being applied prospectively.

     The Company’s adoption of this standard resulted in the deconsolidation of one entity in which the Company has a 50% interest (“Deconsolidated Entity”). The Deconsolidated Entity owns one real estate project, consisting primarily of land under development, which had $28.5 million of assets as of December 31, 2009. As a result of the initial application of ASC 810, the Company recorded its retained interest in the Deconsolidated Entity at its carrying amount. The difference between the net amount removed from the balance sheet of the Deconsolidated Entity and the amount reflected in Investments in and Advances to Joint Ventures of approximately $7.8 million was recognized as a cumulative effect adjustment to accumulated distributions in excess of net income. This difference was primarily due to the recognition of an other than temporary impairment charge that would have been recorded had ASC 810 been effective when the Company first became involved with the Deconsolidated Entity. The Company’s maximum exposure to loss is equal to its investment in the Deconsolidated Entity of $12.4 million and certain fees earned by the Company.

     At March 31, 2010, the Company’s joint venture with Macquarie DDR Trust, DDR MDT MV, owned the underlying real estate of 30 assets formerly occupied by Mervyns. DDR provides management, financing, expansion, re-tenanting and oversight services for this real estate investment. The Company holds a 50% economic interest in DDR MDT MV, which is considered a VIE. The Company was determined to be the primary beneficiary due to related party considerations, as well as being the member determined to have a greater exposure to variability in expected losses as DDR is entitled to earn certain fees from the joint venture. All fees earned from the joint venture are eliminated in consolidation. The Company’s condensed consolidated balance sheet discloses the amounts relating to this entity aggregated with the Company’s other consolidated VIEs.

2. EQUITY INVESTMENTS IN JOINT VENTURES

     At March 31, 2010 and December 31, 2009, the Company had ownership interests in various unconsolidated joint ventures which owned 258 and 327 shopping center properties, respectively.

     Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):

     Investments in and advances to joint ventures include the following items, which represent the difference between the Company’s investment and its share of all of the unconsolidated joint ventures’ underlying net assets (in millions):

     Service fees and income earned by the Company through management, acquisition, financing, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures are as follows (in millions):

3. OTHER ASSETS, NET

4. REVOLVING CREDIT FACILITIES

     The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, for which JP Morgan serves as the administrative agent (the “Unsecured Credit Facility”). The Unsecured Credit Facility provides for borrowings of $1.25 billion, if certain financial covenants

are maintained, and an accordion feature for a future expansion to $1.4 billion upon the Company’s request, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level, and a maturity date of June 2010, with a one-year extension option at the option of the Company subject to certain customary closing conditions. The Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to 50% of the facility. The Company’s borrowings under the Unsecured Credit Facility bear interest at variable rates at the Company’s election, based on either (i) the prime rate plus a specified spread (-0.125% at March 31, 2010), as defined in the facility, or (ii) LIBOR, plus a specified spread (0.75% at March 31, 2010). The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Unsecured Credit Facility is used to temporarily finance redevelopment, development and acquisition of shopping center properties, to provide working capital and for general corporate purposes. The Company was in compliance with these covenants at March 31, 2010. The Unsecured Credit Facility also provides for an annual facility fee of 0.175% on the entire facility. At March 31, 2010, total borrowings under the Unsecured Credit Facility aggregated $346.0 million with a weighted average interest rate of 2.4%.

     The Company also maintains a $75 million unsecured revolving credit facility with PNC Bank, National Association (“PNC”) (together with the Unsecured Credit Facility, the “Revolving Credit Facilities”). This facility has a maturity date of June 2010, with a one-year extension option at the option of the Company subject to certain customary closing conditions. The PNC facility reflects terms consistent with those contained in the Unsecured Credit Facility. Borrowings under this facility bear interest at variable rates based on (i) the prime rate plus a specified spread (0.125% at March 31, 2010), as defined in the facility, or (ii) LIBOR, plus a specified spread (1.0% at March 31, 2010). The specified spreads are dependent on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these covenants at March 31, 2010. At March 31, 2010 there were no borrowings under the PNC facility.

5. SENIOR NOTES

     During the three months ended March 31, 2010, the Company purchased approximately $155.9 million aggregate principal amount of its outstanding senior unsecured notes (of which $71.7 million related to the senior convertible notes) at a discount to par resulting in a net gain of approximately $1.1 million. The amount of the gain recognized by the Company relating to the purchases of the senior convertible notes is based on the difference on the amount of consideration paid that was allocated to the liability component as compared to the carrying amount of the debt, net of the unamortized discount and unamortized deferred financing fees.

     In March 2010, the Company issued $300 million aggregate principal amount of 7.5% senior unsecured notes due April 2017. Proceeds from the issuance were used to repay debt with shorter-term maturities and to repay amounts outstanding on the Revolving Credit Facilities.

6. FINANCIAL INSTRUMENTS

      Measurement of Fair Value

     At March 31, 2010, the Company used pay-fixed interest rate swaps to manage its exposure to changes in benchmark interest rates. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.

     Although the Company has determined that the significant inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. These inputs reflect the Company’s assumptions.

      Items Measured at Fair Value on a Recurring Basis

     The following table presents information about the Company’s financial assets and liabilities (in millions) which consists of interest rate swap agreements and marketable securities included in the Company’s elective deferred compensation plan that are included in other liabilities at March 31, 2010, measured at fair value on a recurring basis as of March 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

     The table presented below presents a reconciliation of the beginning and ending balances of interest rate swap agreements that are included in other liabilities having fair value measurements based on significant unobservable inputs (Level 3) (in millions):

     The unrealized gain of $3.4 million above included in other comprehensive (loss) income (“OCI”) is attributable to the net change in unrealized gains or losses relating to derivative liabilities that are still held at March 31, 2010, none of which were reported in the Company’s condensed consolidated statements of operations because they are documented and qualify as hedging instruments.

      Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable, Accruals and Other Liabilities

     The carrying amounts reported in the balance sheet for these financial instruments, excluding the liability associated with the equity derivative instruments, approximated fair value because of their short-term maturities.

      Notes Receivable and Advances to Affiliates

     The fair value is estimated by discounting the current rates at which management believes similar loans would be made. The fair value of these notes was approximately $59.2 million and $74.6 million at March 31, 2010 and December 31, 2009, respectively, as compared to the carrying amounts of $60.5 million and $76.2 million, respectively. The carrying value of the tax increment financing bonds approximated its fair value at March 31, 2010 and December 31, 2009. The fair value of loans to affiliates is not readily determinable and has been estimated by management based upon its assessment of the interest rate, credit risk and performance risk.

Debt

     The fair market value of debt is determined using the trading price of public debt, or a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile including the Company’s non-performance risk.

     Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.

     Financial instruments at March 31, 2010 and December 31, 2009, with carrying values that are different than estimated fair values based on the valuation methods outlined in the standard, Fair Value Measurements , at March 31, 2010 and December 31, 2009, are summarized as follows (in thousands):

      Risk Management Objective of Using Derivatives

     The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources and

duration of its debt funding and, from time to time, the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

     The Company entered into consolidated joint ventures that own real estate assets in Canada and Russia. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. As such, the Company uses non-derivative financial instruments to economically hedge a portion of this exposure. The Company manages currency exposure related to the net assets of its Canadian and European subsidiaries primarily through foreign currency-denominated debt agreements.

      Cash Flow Hedges of Interest Rate Risk

     The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements. To accomplish this objective, the Company generally uses interest rate swaps (“Swaps”) as part of its interest rate risk management strategy. Swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

     All components of the Swaps were included in the assessment of hedge effectiveness. The Company expects that within the next 12 months, it will reflect as an increase to interest expense (and a corresponding decrease to earnings) approximately $9.1 million.

     The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2010, such derivatives were used to hedge the variable cash flows associated with existing obligations. The ineffective portion of the change in fair value of derivatives is recognized directly in earnings. During the three-month periods ended March 31, 2010 and March 31, 2009, the amount of hedge ineffectiveness recorded was not material.

     Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of March 31, 2010, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

     The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009, as follows (in millions):

     The effect of the Company’s derivative instruments on net (loss) and income is as follows (in millions):

Amount of Gain

Amount of Gain

Reclassified from

Recognized in OCI

Location of Gain or

Accumulated OCI into

on Derivative

(Loss) Reclassified

(Loss) Income (Effective

(Effective Portion)

from Accumulated

Portion)

Three-Month Periods

OCI into (Loss)

Three-Month Periods

Derivatives in Cash

Ended March 31

Income (Effective

Ended March 31

Flow Hedging

2010

2009

Portion)

2010

2009

Interest rate products

$

3.4

$

4.5

Interest expense

$

0.1

$

0.1

     The Company is exposed to credit risk in the event of non-performance by the counterparties to the Swaps. The Company believes it mitigates its credit risk by entering into Swaps with major financial institutions. The Company continually monitors and actively manages interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap positions or other derivative interest rate instruments based on market conditions. In addition, the Company continually assesses its ability to obtain funds through additional equity and/or debt offerings, including the issuance of unsecured senior notes and joint venture capital. Accordingly, the cost of obtaining interest rate protection agreements in relation to the Company’s access to capital markets will continue to be evaluated. The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes.

      Credit-Risk-Related Contingent Features

     The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations resulting in an acceleration of payment under those derivative obligations.

      Net Investment Hedges

     The Company is exposed to foreign exchange risk from its consolidated and unconsolidated international investments. The Company has foreign currency-denominated debt agreements, which exposes the Company to fluctuations in foreign exchange rates. The Company has designated these foreign currency borrowings as a hedge to the net investment in its Canadian and European subsidiaries. Changes in the spot rate value are recorded as adjustments to the debt balance with offsetting unrealized gains and losses recorded in OCI. As the notional amount of the non-derivative instrument substantially matches the portion of the net investment designated as being hedged and the non-derivative instrument is denominated in the functional currency of the hedged net investment, the hedge ineffectiveness recognized in earnings was not material.

     The effect of the Company’s net investment hedge derivative instruments on OCI is as follows (in millions):

     See discussion of equity derivative instruments in Note 9.

7. COMMITMENTS AND CONTINGENCIES

      Legal Matters

     The Company, along with Coventry Real Estate Advisors L.L.C., is a party to various joint ventures with Coventry Real Estate Fund II, L.L.C. and Coventry Fund II Parallel Fund, L.L.C. (collectively the “Coventry II Fund”) through which 11 existing or proposed retail properties, along with a portfolio of former Service Merchandise locations, were acquired at various times from 2003 through 2006. The properties were acquired by the joint ventures as value-add investments, with major renovation and/or ground-up development contemplated for many of the properties. The Company is generally responsible for day-to-day management of the retail properties. On November 4, 2009, Coventry Real Estate Advisors L.L.C., Coventry Real Estate Fund II, L.L.C. and Coventry Fund II

Parallel Fund, L.L.C. (collectively, “Coventry”) filed suit against the Company and certain of its affiliates and officers in the Supreme Court of the State of New York, County of New York. The complaint alleges that the Company: (i) breached contractual obligations under a co-investment agreement and various joint venture limited liability company agreements, project development agreements and management and leasing agreements, (ii) breached its fiduciary duties as a member of various limited liability companies, (iii) fraudulently induced the plaintiffs to enter into certain agreements and (iv) made certain material misrepresentations. The complaint also requests that a general release made by Coventry in favor of the Company in connection with one of the joint venture properties should be voided on the grounds of economic duress. The complaint seeks compensatory and consequential damages in an amount not less than $500 million as well as punitive damages. In response, the Company filed a motion to dismiss the complaint or, in the alternative, to sever the plaintiffs’ claims. The court has not yet ruled on the Company’s motion.

     The Company believes that the allegations in the lawsuit are without merit and that it has strong defenses against this lawsuit. The Company will vigorously defend itself against the allegations contained in the complaint. This lawsuit is subject to the uncertainties inherent in the litigation process and, therefore, no assurance can be given as to its ultimate outcome. However, based on the information presently available to the Company, the Company does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

     On November 18, 2009, the Company filed a complaint in the Court of Common Pleas, Cuyahoga County, Ohio, seeking, among other things, a temporary restraining order enjoining Coventry from terminating “for cause” the management agreements between the Company and the various joint ventures because the Company believes that requisite conduct in a “for-cause” termination (i.e., fraud or willful misconduct committed by an executive of the Company at the level of at least senior vice president) did not occur. The court heard testimony in support of the Company’s motion (and Coventry’s opposition) and on December 4, 2009 issued a ruling in the Company’s favor. Specifically, the court issued a temporary restraining order enjoining Coventry from terminating the Company as property manager “for cause.” The court found that the Company was likely to succeed on the merits, that immediate and irreparable injury, loss or damage would result to the Company in the absence of such restraint, and that the balance of equities favored injunctive relief in the Company’s favor. A trial on the Company’s request for a permanent injunction is currently scheduled for September 27, 2010. The temporary restraining order will remain in effect until the trial. Due to the inherent uncertainties of the litigation process, no assurance can be given as to the ultimate outcome of this action.

     The Company is also a party to litigation filed in November 2006 by a tenant in a Company property located in Long Beach, California. The tenant filed suit against the Company and certain affiliates, claiming the Company and its affiliates failed to provide adequate valet parking at the property pursuant to the terms of the lease with the tenant. After a six-week trial, the jury returned a verdict in October 2008, finding the Company liable for compensatory damages in the amount of approximately $7.8 million. In addition, the trial court awarded the tenant attorney’s fees and expenses in the amount of approximately $1.5 million. The Company filed motions for a new trial and for judgment notwithstanding the verdict, both of which were denied. The Company strongly disagrees with the verdict, as well as the denial of the post-trial motions. As a result, the Company is pursuing an

appeal of the verdict. Included in other liabilities on the condensed consolidated balance sheets is a provision that represents management’s best estimate of loss based upon a range of liability. The Company will continue to monitor the status of the litigation and revise the estimate of loss as appropriate. Although the Company believes it has a meritorious basis for reversing the jury verdict, there can be no assurance that the Company will be successful in its appeal.

     In addition to the litigation discussed above, the Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

8. REDEEMABLE OPERATING PARTNERSHIP UNITS

     At March 31, 2010 and December 31, 2009, the Company had 29,524 operating partnership units (“OP Units”) outstanding, which are classified as redeemable operating partnership units on the condensed consolidated balance sheets. These OP Units, issued to different partnerships, are exchangeable, at the election of the OP Unit holder, and under certain circumstances at the option of the Company, into an equivalent number of the Company’s common shares or for the equivalent amount of cash. The OP Unit holders are entitled to receive distributions, per OP Unit, generally equal to the per share distributions on the Company’s common shares. Redeemable OP Units are presented at the greater of their carrying amount (at March 31, 2010 and December 31, 2009) or redemption value at the end of each reporting period. Changes in the value from period to period are charged to paid in capital in the Company’s condensed consolidated balance sheets. Below is a table reflecting the activity of the redeemable OP units (in thousands):

9. EQUITY

     The following table summarizes the changes in equity since December 31, 2009 (in thousands):

      Common Shares Issued

     In February 2010, the Company issued approximately 42.9 million of its common shares at $8.16 per share in an underwritten offering for net proceeds of approximately $338.1 million. In January 2010, the Company also sold approximately 5.0 million of its common shares through its continuous equity program, generating gross proceeds of approximately $46.1 million at a weighted-average price of $9.30 per share. Substantially all net proceeds from equity issuances were used to repay debt.

      Equity Derivative Instruments — Otto Transaction

     In February 2009, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Mr. Alexander Otto (the “Investor”) and certain members of the Otto family (collectively with the Investor, the “Otto Family”) which provided for the issuance of warrants to purchase up to 10.0 million common shares with an exercise price of $6.00 per share to members of the Otto Family. The exercise price of the warrants is subject to downward adjustment if the weighted average purchase price of all additional common shares sold, as defined, from the date of issuance of the applicable warrant is less than $6.00 per share (herein referred to as “Downward Price Protection Provisions”). Each warrant may be exercised at any time on or after the issuance thereof for a five-year term. None of the warrants had been exercised as of March 31, 2010.

     The Downward Price Protection Provisions described above resulted in the warrants being required to be recorded at fair value as of the shareholder approval date of the Stock Purchase Agreement of April 9, 2009, and marked-to-market through earnings as of each balance sheet date thereafter until exercise or expiration.

     These equity instruments were issued as part of the Company’s overall deleveraging strategy and were not issued in connection with any speculative trading activity or to mitigate any market risks.

     The table below presents the fair value of the Company’s equity derivative instruments as well as their classification on the condensed consolidated balance sheet as follows (in millions):

Liability Derivatives

March 31, 2010

December 31, 2009

Derivatives not Designated as

Balance Sheet

Fair

Balance Sheet

Hedging Instruments

Location

Value

Location

Fair Value

Warrants

Other liabilities

$

81.0

Other liabilities

$

56.1

     The effect of the Company’s equity derivative instruments on net loss is as follows (in millions):

Three-Month Periods Ended

March 31,

2010

2009

Derivatives not Designated

Income Statement

as Hedging Instruments

Location

Gain (Loss)

Loss on equity

derivative

Warrants

instruments

$

(24.9

)

$

—

     The above loss for the warrant contracts was derived principally from the increase of the Company’s stock price from January 1, 2010 to March 31, 2010.

Measurement of Fair Value — Equity Derivative Instruments Valued on a Recurring Basis

     The valuation of these instruments is determined using a Bloomberg pricing model. The Company has determined that the warrants fall within Level 3 of the fair value hierarchy due to the significance of the volatility and dividend yield assumptions in the overall valuation. The Company

utilized historical volatility assumptions as it believes this better reflects the true valuation of the instruments. Although the Company considered using an implied volatility based upon certain short-term publicly traded options on its common shares, it instead utilized its historical share price volatility when determining an estimate of fair value of its five-year warrants. The Company believes that the long-term historic volatility better represents long-term future volatility and is more consistent with how an investor would view the value of these securities. The Company will continually evaluate its significant assumptions to determine what it believes provides the most relevant measurements of fair value at each reporting date.

      Dividends

     Common share dividends declared were $0.02 per share for the three-month period ended March 31, 2010, which will be paid in cash. Common share dividends declared were $0.20 per share for the three-month period ended March 31, 2009, which were paid in a combination of cash and common stock.

      Deferred Obligations

     Certain officers elected to have their deferred compensation distributed in 2010, which resulted in a reduction of the deferred obligation and corresponding increase to paid in capital of approximately $5.2 million.

10. OTHER REVENUES

     Other revenues were comprised of the following (in millions):

11. IMPAIRMENT CHARGES

     During the three-month periods ended March 31, 2010 and 2009, the Company recorded impairment charges from continuing operations of $2.1 million and $7.3 million, respectively, on its consolidated real estate investments. In addition, for the three-month periods ended March 31, 2010 and 2009, impairment charges of $1.0 million and $3.6 million, respectively, are reflected in discontinued operations (Note 12). The asset impairments were triggered primarily due to the Company’s marketing of these assets for sale and changes in the Company’s estimated hold period.

      Items Measured at Fair Value on a Non-Recurring Basis

The following table presents information about the Company’s impairment charges that were measured on a fair value basis for the three months ended March 31, 2010. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in millions).

12. DISCONTINUED OPERATIONS

     All revenues and expenses of discontinued operations sold have been reclassified in the condensed consolidated statements of operations for the three-month periods ended March 31, 2010 and 2009. The Company has one asset considered held for sale at March 31, 2010. The Company considers assets held for sale when the transaction has been approved by the appropriate levels of management and there are no known significant contingencies relating to the sale such that the sale of the property within one year is considered probable. Included in discontinued operations for the three-month periods ended March 31, 2010 and 2009, are five properties sold in 2010, (including one held for sale at December 31, 2009) and one property held for sale at March 31, 2010 aggregating 1.0 million square feet, and 32 properties sold in 2009 aggregating 3.8 million square feet, respectively. The operating results relating to assets sold or designated as held for sale as of March 31, 2010, are as follows (in thousands):

13. EARNINGS PER SHARE

     The Company’s unvested restricted share units contain rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share (“EPS”). Under the two-class method, EPS is computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period. The following table provides a reconciliation of net (loss) income from continuing operations and the number of common shares used in the computations of “basic” EPS, which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and “diluted” EPS, which includes all such shares (in thousands, except per share amounts):

     Options to purchase 3.4 million and 3.6 million common shares were outstanding at March 31, 2010 and 2009, respectively, all of which were anti-dilutive in the calculations at March 31, 2010 and 2009. Accordingly, the anti-dilutive options were excluded from the computations.

     Shares subject to issuance under the Company’s value sharing equity program are not considered in the computation of diluted EPS for three-month period ended March 31, 2010, as the shares were considered anti-dilutive due to the Company’s net loss from continuing operations. There were no awards outstanding under this program at March 31, 2009.

     The Company’s two issuances of senior convertible notes, which are convertible into common shares of the Company with conversion prices of approximately $74.56 and $64.23 at March 31, 2010 and 2009, respectively, were not included in the computation of diluted EPS for the three-month periods ended March 31, 2010 and 2009, because the Company’s stock price did not exceed the conversion price of the conversion feature of the senior convertible notes in these periods and would therefore be anti-dilutive. In addition, the purchased option related to the senior convertible notes is not included in the computation of diluted EPS as the purchase option is anti-dilutive.

     The Company has excluded from its basic and diluted EPS for the three-month period ended March 31, 2010 warrants to purchase 5.0 million common shares issued in May 2009 and warrants to purchase 5.0 million common shares issued in September 2009 because the warrants were considered anti-dilutive due to the Company’s net loss from continuing operations.

14. SEGMENT INFORMATION

     The Company has two reportable segments, shopping centers and other investments. Each shopping center is considered a separate operating segment; however, each shopping center on a stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under the applicable standard.

     The following table summarizes the Company’s combined shopping and business center portfolios as of each balance sheet date:

     The table below presents information about the Company’s reportable segments (in thousands).

15. SUBSEQUENT EVENTS

     In May 2010, the Company repaid a $60 million secured loan with an affiliate of the Otto Family, which is included in Mortgage and other secured indebtedness on the Condensed Consolidated Balance Sheets.

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations. The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability, and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Readers should exercise caution in interpreting and relying on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements and that could materially affect the Company’s actual results, performance or achievements.

     Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

	•		The Company is subject to general risks affecting the real estate industry, including the need to enter into new leases or renew leases on favorable terms to generate rental revenues, and the economic downturn may adversely affect the ability of the Company’s tenants, or new tenants, to enter into new leases or the ability of the Company’s existing tenants to renew their leases at rates at least as favorable as their current rates;
	•		The Company could be adversely affected by changes in the local markets where its properties are located, as well as by adverse changes in national economic and market conditions;
	•		The Company may fail to anticipate the effects on its properties of changes in consumer buying practices, including catalog sales and sales over the internet and the resulting retailing practices and space needs of its tenants or a general downturn in its tenants’ businesses, which may cause tenants to close stores or default in payment of rent;
	•		The Company is subject to competition for tenants from other owners of retail properties, and its tenants are subject to competition from other retailers and methods of distribution. The Company is dependent upon the successful operations and financial condition of its tenants, in particular of its major tenants, and could be adversely affected by the bankruptcy of those tenants;

	•		The Company relies on major tenants, which makes it vulnerable to changes in the business and financial condition of, or demand for its space, by such tenants;
	•		The Company may not realize the intended benefits of acquisition or merger transactions. The acquired assets may not perform as well as the Company anticipated, or the Company may not successfully integrate the assets and realize the improvements in occupancy and operating results that the Company anticipates. The acquisition of certain assets may subject the Company to liabilities, including environmental liabilities;
	•		The Company may fail to identify, acquire, construct or develop additional properties that produce a desired yield on invested capital, or may fail to effectively integrate acquisitions of properties or portfolios of properties. In addition, the Company may be limited in its acquisition opportunities due to competition, the inability to obtain financing on reasonable terms or any financing at all, and other factors;
	•		The Company may fail to dispose of properties on favorable terms. In addition, real estate investments can be illiquid, particularly as prospective buyers may experience increased costs of financing or difficulties obtaining financing, and could limit the Company’s ability to promptly make changes to its portfolio to respond to economic and other conditions;
	•		The Company may abandon a development opportunity after expending resources if it determines that the development opportunity is not feasible due to a variety of factors, including a lack of availability of construction financing on reasonable terms, the impact of the economic environment on prospective tenants’ ability to enter into new leases or pay contractual rent, or the inability of the Company to obtain all necessary zoning and other required governmental permits and authorizations;
	•		The Company may not complete development projects on schedule as a result of various factors, many of which are beyond the Company’s control, such as weather, labor conditions, governmental approvals, material shortages or general economic downturn resulting in limited availability of capital, increased debt service expense and construction costs, and decreases in revenue;
	•		The Company’s financial condition may be affected by required debt service payments, the risk of default, and restrictions on its ability to incur additional debt or to enter into certain transactions under its credit facilities and other documents governing its debt obligations. In addition, the Company may encounter difficulties in obtaining permanent financing or refinancing existing debt. Borrowings under the Company’s revolving credit facilities are subject to certain representations and warranties and customary events of default, including any event that has had or could reasonably be expected to have a material adverse effect on the Company’s business or financial condition;
	•		Changes in interest rates could adversely affect the market price of the Company’s common shares, as well as its performance and cash flow;
	•		Debt and/or equity financing necessary for the Company to continue to grow and operate its business may not be available or may not be available on favorable terms;

	•		Disruptions in the financial markets could affect the Company’s ability to obtain financing on reasonable terms and have other adverse effects on the Company and the market price of the Company’s common shares;
	•		The Company is subject to complex regulations related to its status as a real estate investment trust (“REIT”) and would be adversely affected if it failed to qualify as a REIT;
	•		The Company must make distributions to shareholders to continue to qualify as a REIT, and if the Company must borrow funds to make distributions, those borrowings may not be available on favorable terms or at all;
	•		Joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that a partner or co-venturer may become bankrupt, may at any time have different interests or goals than those of the Company and may take action contrary to the Company’s instructions, requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT. In addition, a partner or co-venturer may not have access to sufficient capital to satisfy its funding obligations to the joint venture. The partner could cause a default under the joint venture loan for reasons outside of the Company’s control. Furthermore, the Company could be required to reduce the carrying value of its equity method investments if a loss in the carrying value of the investment is other than temporary;
	•		The outcome of pending or future litigation, including litigation with tenants or joint venture partners, may adversely effect the Company’s results of operations and financial condition;
	•		The Company may not realize anticipated returns from its real estate assets outside the United States. The Company expects to continue to pursue international opportunities that may subject the Company to different or greater risks than those associated with its domestic operations. The Company owns assets in Puerto Rico, an interest in an unconsolidated joint venture that owns properties in Brazil and an interest in consolidated joint ventures that were formed to develop and own properties in Canada and Russia;
	•		International development and ownership activities carry risks in addition to those the Company faces with the Company’s domestic properties and operations. These risks include:

	•		Adverse effects of changes in exchange rates for foreign currencies;
	•		Changes in foreign political or economic environments;
	•		Challenges of complying with a wide variety of foreign laws, including tax laws, and addressing different practices and customs relating to corporate governance, operations and litigation;
	•		Different lending practices;
	•		Cultural and consumer differences;

	•		Changes in applicable laws and regulations in the United States that affect foreign operations;
	•		Difficulties in managing international operations and
	•		Obstacles to the repatriation of cash;

	•		Although the Company’s international activities are currently a relatively small portion of its business, to the extent the Company expands its international activities, these risks could significantly increase and adversely affect its results of operations and financial condition;
	•		The Company is subject to potential environmental liabilities;
	•		The Company may incur losses that are uninsured or exceed policy coverage due to its liability for certain injuries to persons, property or the environment occurring on its properties and
	•		The Company could incur additional expenses in order to comply with or respond to claims under the Americans with Disabilities Act or otherwise be adversely affected by changes in government regulations, including changes in environmental, zoning, tax and other regulations.

Executive Summary

     The Company is a self-administered and self-managed REIT, in the business of owning, managing and developing a portfolio of shopping centers. As of March 31, 2010, the Company’s portfolio consisted of 597 shopping centers and six business centers (including 258 owned through unconsolidated joint ventures and 33 that are otherwise consolidated by the Company). These properties consist of shopping centers, lifestyle centers and enclosed malls owned in the United States, Puerto Rico and Brazil. At March 31, 2010, the Company owned and/or managed approximately 118.1 million total square feet of Gross Leasable Area (“GLA”), which includes all of the aforementioned properties and 42 properties owned by a third party. The Company owns land in Canada and Russia at which development was deferred. At March 31, 2010, the aggregate occupancy of the Company’s shopping center portfolio was 86.4%, as compared to 88.3% at March 31, 2009. Excluding the impact of the Mervyns vacancy, the aggregate occupancy of the Company’s shopping center portfolio was 88.5% at March 31, 2010. The Company owned 694 shopping centers and six business centers at March 31, 2009. The average annualized base rent per occupied square foot was $12.77 at March 31, 2010, as compared to $12.30 at March 31, 2009.

     Net loss applicable to DDR common shareholders for the three-month period ended March 31, 2010 was $34.8 million, or $0.15 per share (diluted and basic), compared to net income applicable to DDR common shareholders of $76.8 million, or $0.59 per share (diluted and basic), for the prior-year comparable period. Funds from operations (“FFO”) applicable to DDR common shareholders for the three-month period ended March 31, 2010 was $28.4 million compared to $140.0 million for the three-month period ended March 31, 2009. The decrease in FFO for the three-month period ended March 31, 2010, is primarily the result of a decrease in the gain recognized on the repurchases of senior notes, the loss on equity derivative instruments and the impact of 2009 asset sales.

First quarter 2010 operating results

     The Company continues to demonstrate progress in its balance sheet initiatives since the end of 2009 and believes this improvement underscores its unwavering commitment to reduce debt and enhance the quality of its portfolio. The Company continues to be focused on its operating and balance sheet initiatives, and believes it will continue to make strides throughout the remainder of 2010 as new leases commence. In addition to enhancing the quality of the Company’s shopping centers through the commencement of new leases, the Company remains focused on overall portfolio management by selling non-prime assets.

     The Company’s liquidity position continued to improve in the first quarter of 2010. Proceeds from the Company’s various capital raising activities this past quarter were utilized primarily to repay debt. As a result, the Company reduced total consolidated debt from $5.2 billion at December 31, 2009 to $4.7 billion as of March 31, 2010. Additionally, the Company’s liquidity increased to approximately $1.0 billion of cash and availability on its revolving credit facilities as of March 31, 2010 from $0.1 billion at March 31, 2009.

     The retail environment continues to show signs of improvement. Many retailers announced stronger sales this year and solid earnings growth, which could translate into expansion plans for some retailers. Quality space continues to be in demand, which could result in additional occupancy in the Company’s portfolio. Deal economics are still challenged and lease spreads remain negative; however, the Company is encouraged by some improvement in deal economics. The Company’s anchor store redevelopment team continues to make progress with backfilling big-box vacancies that occurred in 2008 and 2009.

     The Company continues to minimize ground-up development spending in its domestic portfolio, and instead allocates capital to the lease-up of existing projects because the Company believes there may be opportunities to redevelop many of its existing assets. These redevelopments should create a future growth opportunity of the Company’s existing assets and create future value without the level of risk or capital required for a new development.

     As evidenced by the Company’s capital markets activity this quarter, the Company continued to opportunistically raise capital, reduce leverage and extend the Company’s debt duration. In January 2010, the Company raised gross proceeds of approximately $46.1 million through the use of its continuous equity program at a weighted-average price of $9.30 per share. In February, the Company completed a common equity offering generating net proceeds of approximately $338.1 million and in March, the Company issued $300 million aggregate principal amount of senior unsecured notes with a seven-year term. The Company also repurchased through a cash tender offer $83.1 million aggregate principal amount of its senior unsecured notes due in 2010 and 2011, sold $456.4 million of wholly-owned and joint venture assets in addition to generating retained earnings, all of which contributed to leverage reduction. The net capital from all of this activity was predominately used to de-lever and also to reinvest in the Company’s assets.

     In April, the Company also participated, through one of its unconsolidated joint ventures, DDR Domestic Retail Fund, in one of the first multi-borrower CMBS transactions to close since 2008. This

$30 million financing has a five-year term at an interest rate of 4.2%. It replaces three loans with a comparable balance maturing in 2010.

     The Company had a very active first quarter and made significant progress on its balance sheet and operating initiatives. The Company has been executing capital raising activities proactively and prudently based on opportunities in the market. For the last year, the Company believes it has articulated a strategy of lowering leverage, increasing liquidity and extending debt maturities with the goal of lowering the Company’s risk profile and long-term cost of capital. The Company intends to remain focused on continuing such improvement for the remainder of 2010.

Results of Operations

Continuing Operations

     Shopping center properties owned as of January 1, 2009, but excluding properties under development/redevelopment and those classified in discontinued operations, are referred to herein as the “Core Portfolio Properties.”