UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission file number
1-11690
DEVELOPERS DIVERSIFIED REALTY CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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34-1723097
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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3300 Enterprise Parkway, Beachwood, Ohio 44122
(Address of principal
executive offices - zip code)
(216) 755-5500
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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
þ
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.
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if smaller reporting company)
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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 October 29, 2010, the registrant had 256,161,006 outstanding common shares, $0.10 par
value per share.
PART I
FINANCIAL INFORMATION
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Item 1.
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FINANCIAL STATEMENTS Unaudited
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- 1 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
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September 30, 2010
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December 31, 2009
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Assets
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Land
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$
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1,834,172
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$
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1,971,782
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Buildings
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5,451,694
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5,694,659
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Fixtures and tenant improvements
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320,067
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287,143
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7,605,933
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7,953,584
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Less: Accumulated depreciation
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(1,412,607
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)
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(1,332,534
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)
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6,193,326
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6,621,050
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Land held for development and construction in progress
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817,742
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858,900
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Real estate held for sale, net
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2,471
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10,453
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Total real estate assets, net (variable interest entities $369.8 million at September 30, 2010)
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7,013,539
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7,490,403
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Investments in and advances to joint ventures
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417,750
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420,541
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Cash and cash equivalents
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21,335
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26,172
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Restricted cash
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14,383
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95,673
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Notes receivable, net
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119,585
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74,997
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Other assets, net (variable interest entities $6.3 million at September 30, 2010)
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290,487
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318,820
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$
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7,877,079
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$
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8,426,606
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Liabilities and Equity
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Unsecured indebtedness:
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Senior notes
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$
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1,746,387
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$
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1,689,841
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Revolving credit facilities
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483,138
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775,028
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2,229,525
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2,464,869
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Secured indebtedness:
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Term debt
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800,000
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800,000
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Mortgage and other secured indebtedness (variable interest entities $42.9 million at September 30, 2010)
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1,365,777
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1,913,794
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2,165,777
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2,713,794
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Total indebtedness
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4,395,302
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5,178,663
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Accounts payable and accrued expenses (variable interest entities $13.9 million at September 30, 2010)
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154,839
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130,404
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Dividends payable
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12,044
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10,985
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Other liabilities
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145,085
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153,591
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Total liabilities
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4,707,270
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5,473,643
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Redeemable operating partnership units
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627
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627
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Commitments and contingencies (Note 8)
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Developers Diversified Realty Corporation Equity:
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Class G 8.0% cumulative redeemable preferred shares, without par value, $250
liquidation value; 750,000 shares authorized; 720,000 shares issued and outstanding at September 30, 2010
and December 31, 2009
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180,000
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180,000
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Class H 7.375% cumulative redeemable preferred shares, without par value, $500 liquidation value; 750,000 shares authorized; 410,000 shares issued and outstanding at September 30, 2010 and December 31, 2009
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205,000
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205,000
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Class I 7.5% cumulative redeemable preferred shares, without par value, $500 liquidation value; 750,000 shares authorized; 340,000 shares issued and outstanding at September 30, 2010 and December 31, 2009
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170,000
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170,000
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Common shares, with par value, $0.10 stated value; 500,000,000 shares authorized; 256,155,006 and 201,742,589 shares issued at September 30, 2010 and December 31, 2009, respectively
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25,616
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20,174
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Paid-in-capital
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3,813,293
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3,374,528
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Accumulated distributions in excess of net income
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(1,278,423
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)
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(1,098,661
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)
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Deferred compensation obligation
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12,984
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17,838
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Accumulated other comprehensive income
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14,283
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9,549
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Less: Common shares in treasury at cost: 509,570 and 657,012 shares at September 30, 2010 and December 31, 2009, respectively
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(11,887
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)
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(15,866
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)
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Non-controlling interests (variable interest entities $27.5 million at September 30, 2010)
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38,316
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89,774
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Total equity
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3,169,182
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2,952,336
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$
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7,877,079
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$
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8,426,606
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
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2010
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2009
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Revenues from operations:
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Minimum rents
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$
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133,549
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$
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130,938
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Percentage and overage rents
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1,016
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1,183
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Recoveries from tenants
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44,431
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42,475
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Ancillary and other property income
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5,846
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5,223
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Management fees, development fees and other fee income
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12,961
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14,693
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Other
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995
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1,191
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198,798
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195,703
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Rental operation expenses:
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Operating and maintenance
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33,676
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34,521
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Real estate taxes
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29,518
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26,023
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Impairment charges
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5,063
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500
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General and administrative
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20,180
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25,886
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Depreciation and amortization
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54,903
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51,379
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143,340
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138,309
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Other income (expense):
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Interest income
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1,614
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3,257
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Interest expense
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(53,774
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)
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(52,736
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)
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Gain on debt retirement, net
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333
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23,881
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Loss on equity derivative instruments
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(11,278
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)
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(118,174
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)
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Other (expense) income, net
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(3,899
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)
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2,235
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(67,004
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)
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(141,537
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)
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Loss from continuing operations before impairment of joint ventures, equity in net loss of joint ventures, tax expense of taxable REIT subsidiaries and state franchise and income taxes and gain on disposition of real estate, net of tax
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(11,546
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)
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(84,143
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)
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Impairment of joint ventures
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|
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(61,200
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)
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Equity in net loss of joint ventures
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(4,801
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)
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(183
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)
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Loss from continuing operations before tax expense of taxable REIT subsidiaries and state franchise and income taxes and gain on disposition of real estate, net of tax
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(16,347
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)
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(145,526
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)
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Tax expense of taxable REIT subsidiaries and state franchise and income taxes
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|
|
(1,120
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)
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|
|
(610
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)
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|
|
|
|
|
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Loss from continuing operations
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(17,467
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)
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|
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(146,136
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)
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Discontinued operations:
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Loss from discontinued operations
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(4,548
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)
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(6,090
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)
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Gain on deconsolidation of interests
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5,221
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|
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Gain on disposition of real estate, net of tax
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|
889
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|
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4,448
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|
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|
|
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1,562
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(1,642
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)
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|
|
|
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Loss before gain on disposition of real estate
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|
(15,905
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)
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(147,778
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)
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Gain on disposition of real estate, net of tax
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|
|
145
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|
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|
7,128
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|
|
|
|
|
|
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Net loss
|
|
|
(15,760
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)
|
|
|
(140,650
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)
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Loss attributable to non-controlling interests
|
|
|
1,450
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|
|
|
2,804
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|
|
|
|
|
|
|
|
Net loss attributable to DDR
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$
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(14,310
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)
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$
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(137,846
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)
|
|
|
|
|
|
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Preferred dividends
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(10,567
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)
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|
|
(10,567
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)
|
|
|
|
|
|
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Net loss attributable to DDR common shareholders
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|
$
|
(24,877
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)
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|
$
|
(148,413
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)
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|
|
|
|
|
|
|
|
|
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|
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Per share data:
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Basic earnings per share data:
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|
|
|
|
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Loss from continuing operations attributable to DDR common shareholders
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$
|
(0.11
|
)
|
|
$
|
(0.91
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)
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Income from discontinued operations attributable to DDR common shareholders
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|
0.01
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|
|
|
0.01
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|
|
|
|
|
|
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Net loss attributable to DDR common shareholders
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|
$
|
(0.10
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)
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$
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(0.90
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)
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|
|
|
|
|
|
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Diluted earnings per share data:
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|
|
|
|
|
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Loss from continuing operations attributable to DDR common shareholders
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|
$
|
(0.11
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)
|
|
$
|
(0.91
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)
|
Income from discontinued operations attributable to DDR common shareholders
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
Net loss attributable to DDR common shareholders
|
|
$
|
(0.10
|
)
|
|
$
|
(0.90
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)
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Revenues from operations:
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
$
|
401,606
|
|
|
$
|
395,319
|
|
Percentage and overage rents
|
|
|
3,700
|
|
|
|
4,397
|
|
Recoveries from tenants
|
|
|
133,242
|
|
|
|
131,232
|
|
Ancillary and other property income
|
|
|
15,330
|
|
|
|
14,884
|
|
Management fees, development fees and other fee income
|
|
|
40,122
|
|
|
|
43,194
|
|
Other
|
|
|
6,803
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
600,803
|
|
|
|
595,198
|
|
|
|
|
|
|
|
|
Rental operation expenses:
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
|
|
104,599
|
|
|
|
99,734
|
|
Real estate taxes
|
|
|
82,466
|
|
|
|
76,827
|
|
Impairment charges
|
|
|
78,189
|
|
|
|
12,739
|
|
General and administrative
|
|
|
62,546
|
|
|
|
73,469
|
|
Depreciation and amortization
|
|
|
165,544
|
|
|
|
164,017
|
|
|
|
|
|
|
|
|
|
|
|
493,344
|
|
|
|
426,786
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,425
|
|
|
|
9,420
|
|
Interest expense
|
|
|
(166,809
|
)
|
|
|
(161,691
|
)
|
Gain on debt retirement, net
|
|
|
333
|
|
|
|
142,360
|
|
Loss on equity derivative instruments
|
|
|
(14,618
|
)
|
|
|
(198,199
|
)
|
Other expense, net
|
|
|
(18,398
|
)
|
|
|
(8,897
|
)
|
|
|
|
|
|
|
|
|
|
|
(195,067
|
)
|
|
|
(217,007
|
)
|
|
|
|
|
|
|
|
Loss from continuing operations before impairment of joint ventures, equity in net loss of joint ventures, tax benefit (expense) of taxable REIT subsidiaries and state franchise and income taxes and gain on disposition of real estate, net of tax
|
|
|
(87,608
|
)
|
|
|
(48,595
|
)
|
Impairment of joint ventures
|
|
|
|
|
|
|
(101,571
|
)
|
Equity in net loss of joint ventures
|
|
|
(3,777
|
)
|
|
|
(8,984
|
)
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit (expense) of taxable REIT subsidiaries and state franchise and income taxes and gain on disposition of real estate, net of tax
|
|
|
(91,385
|
)
|
|
|
(159,150
|
)
|
Tax benefit (expense) of taxable REIT subsidiaries and state franchise and income taxes
|
|
|
1,518
|
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(89,867
|
)
|
|
|
(159,576
|
)
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(76,323
|
)
|
|
|
(145,558
|
)
|
Gain on deconsolidation of interests
|
|
|
5,221
|
|
|
|
|
|
Loss on disposition of real estate, net of tax
|
|
|
(2,602
|
)
|
|
|
(19,965
|
)
|
|
|
|
|
|
|
|
|
|
|
(73,704
|
)
|
|
|
(165,523
|
)
|
|
|
|
|
|
|
|
Loss before gain on disposition of real estate
|
|
|
(163,571
|
)
|
|
|
(325,099
|
)
|
Gain on disposition of real estate, net of tax
|
|
|
61
|
|
|
|
8,222
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(163,510
|
)
|
|
|
(316,877
|
)
|
Loss attributable to non-controlling interests
|
|
|
38,378
|
|
|
|
39,848
|
|
|
|
|
|
|
|
|
Net loss attributable to DDR
|
|
$
|
(125,132
|
)
|
|
$
|
(277,029
|
)
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
(31,702
|
)
|
|
|
(31,702
|
)
|
|
|
|
|
|
|
|
Net loss attributable to DDR common shareholders
|
|
$
|
(156,834
|
)
|
|
$
|
(308,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to DDR common shareholders
|
|
$
|
(0.45
|
)
|
|
$
|
(1.26
|
)
|
Loss from discontinued operations attributable to DDR common shareholders
|
|
|
(0.20
|
)
|
|
|
(0.85
|
)
|
|
|
|
|
|
|
|
Net loss attributable to DDR common shareholders
|
|
$
|
(0.65
|
)
|
|
$
|
(2.11
|
)
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to DDR common shareholders
|
|
$
|
(0.45
|
)
|
|
$
|
(1.26
|
)
|
Loss from discontinued operations attributable to DDR common shareholders
|
|
|
(0.20
|
)
|
|
|
(0.85
|
)
|
|
|
|
|
|
|
|
Net loss attributable to DDR common shareholders
|
|
$
|
(0.65
|
)
|
|
$
|
(2.11
|
)
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Net cash flow provided by operating activities:
|
|
$
|
211,038
|
|
|
$
|
216,651
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Real estate developed or acquired, net of liabilities assumed
|
|
|
(123,808
|
)
|
|
|
(168,669
|
)
|
Equity contributions to joint ventures
|
|
|
(24,999
|
)
|
|
|
(18,817
|
)
|
Repayments (issuance) of joint venture advances, net
|
|
|
28
|
|
|
|
(7,335
|
)
|
Proceeds from sale and refinancing of joint venture interests
|
|
|
5,109
|
|
|
|
7,442
|
|
Return of investments in joint ventures
|
|
|
19,084
|
|
|
|
15,314
|
|
Issuance of notes receivable, net
|
|
|
(62,848
|
)
|
|
|
(5,173
|
)
|
Decrease in restricted cash
|
|
|
76,075
|
|
|
|
9,076
|
|
Proceeds from disposition of real estate
|
|
|
120,671
|
|
|
|
304,490
|
|
|
|
|
|
|
|
|
Net cash flow provided by investing activities:
|
|
|
9,312
|
|
|
|
136,328
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of revolving credit facilities, net
|
|
|
(286,697
|
)
|
|
|
(217,448
|
)
|
Repayment of senior notes
|
|
|
(539,127
|
)
|
|
|
(725,131
|
)
|
Proceeds from issuance of senior notes, net of underwriting commissions and offering expenses of $843 and $200 in 2010 and 2009, respectively
|
|
|
590,710
|
|
|
|
294,685
|
|
Proceeds from mortgage and other secured debt
|
|
|
4,460
|
|
|
|
343,369
|
|
Principal payments on mortgage debt
|
|
|
(384,151
|
)
|
|
|
(278,818
|
)
|
Payment of debt issuance costs
|
|
|
(2,537
|
)
|
|
|
(3,590
|
)
|
Proceeds from issuance of common shares, net of underwriting commissions and issuance costs of $956 and $524 in 2010 and 2009, respectively
|
|
|
440,472
|
|
|
|
267,457
|
|
Payment from issuance of common shares in conjunction with the exercise of stock options and dividend reinvestment plan
|
|
|
(630
|
)
|
|
|
(1,576
|
)
|
Contributions from non-controlling interests
|
|
|
486
|
|
|
|
5,640
|
|
Return on investment non-controlling interests
|
|
|
(2,358
|
)
|
|
|
|
|
Distributions to non-controlling interest and redeemable operating partnership units
|
|
|
(24
|
)
|
|
|
(1,454
|
)
|
Dividends paid
|
|
|
(45,722
|
)
|
|
|
(37,838
|
)
|
|
|
|
|
|
|
|
Net cash flow used for financing activities
|
|
|
(225,118
|
)
|
|
|
(354,704
|
)
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(4,768
|
)
|
|
|
(1,725
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(69
|
)
|
|
|
(1,354
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
26,172
|
|
|
|
29,494
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
21,335
|
|
|
$
|
26,415
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
At September 30, 2010, dividends payable were $12.0 million. As disclosed in Note 1, the
Company deconsolidated one entity in connection with the adoption of the consolidation rules
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.
At September 30, 2010, in accordance with ASC 810, 26 assets were deconsolidated. This
deconsolidation resulted in a reduction of real estate assets, net of approximately $156.3 million,
restricted cash of approximately $5.2 million, and mortgages payable by approximately $166.7
million, In addition, non controlling interest increased by $3.9 million as a result of the
deconsolidation. The foregoing transactions did not provide for or require the use of cash for the
nine-month period ended September 30, 2010.
At September 30, 2009, dividends payable were $10.9 million. In connection with the
acquisition of a joint venture interest, the Company acquired real estate of approximately $22.0
million and assumed mortgage debt of $17.0 million in September 2009. The foregoing transactions
did not provide for or require the use of cash for the nine-month period ended September 30, 2009.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
DEVELOPERS DIVERSIFIED REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
Developers Diversified Realty Corporation and its related real estate joint ventures and
subsidiaries (collectively, the Company or DDR) are primarily engaged in the business of
acquiring, expanding, owning, developing, redeveloping, leasing, managing and operating shopping
centers. Unless otherwise provided, references herein to the Company or DDR include Developers
Diversified Realty Corporation, its wholly-owned and majority-owned subsidiaries and its
consolidated and unconsolidated joint ventures.
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.
Unaudited Interim Financial Statements
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
statement of the results of the periods presented. The results of operations for the three- and
nine-month periods ended September 30, 2010 and 2009 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 Companys audited financial statements and notes thereto included
in the Companys Form 10-K for the year ended December 31, 2009.
Principles of Consolidation
In June 2009, the Financial Accounting Standards Board (FASB) amended its guidance on
accounting for variable interest entities (VIEs) and issued Accounting Standards Codification No.
810,
Consolidation
(ASC 810) and introduced a more qualitative approach to evaluating VIEs for
consolidation. The new accounting guidance resulted in a change in the Companys accounting policy
effective January 1, 2010. This standard requires a company to perform an analysis to determine
whether its variable interests give it a controlling financial interest in a VIE. This analysis
identifies the primary beneficiary of a VIE as the entity that has (a) the power to direct the
activities of the VIE that most significantly affect the VIEs economic performance and (b) the
obligation to absorb losses or the right to receive benefits that could potentially be significant
to the VIE. In determining whether
- 6 -
it has the power to direct the activities of the VIE that most significantly affect the VIEs
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 reassessments 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 Companys adoption of this standard resulted in the deconsolidation of one entity in which
the Company has a 50% interest (the Deconsolidated Land Entity). The Deconsolidated Land 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 Land Entity at its carrying amount.
The difference between the net amount removed from the balance sheet of the Deconsolidated Land
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 Land Entity. The Companys maximum exposure
to loss at September 30, 2010 is equal to its investment in the Deconsolidated Land Entity of $12.5
million and certain future fees that may be earned by the Company.
The Company has a 50% interest in a joint venture with EDT Retail Trust (formerly, Macquarie
DDR Trust (MDT)), DDR MDT MV, that currently owns the underlying real estate of 25 assets
formerly occupied by Mervyns, which declared bankruptcy in 2008 and vacated all sites as of
December 31, 2008 ( the Mervyns Joint Venture). In connection with the recapitalization of MDT in
June 2010, EDT Retail Trust (ASX: EDT) (EDT) assumed MDTs 50% interest in the Mervyns Joint
Venture. The Company holds a 50% economic interest in the Mervyns Joint Venture, which is
considered a VIE. DDR provided management, financing, expansion, re-tenanting and oversight
services for this real estate investment through August 2010.
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 was entitled to earn certain fees from the Mervyns Joint Venture. All fees earned from the
joint venture were eliminated in consolidation. The amounts relating to this entity are aggregated
with the Companys other consolidated VIEs on the Companys condensed consolidated balance sheet at
December 31, 2009.
In August 2010, the assets owned by the Mervyns Joint Venture were transferred to the control
of a court appointed receiver. As a result, the Company no longer has a controlling financial
interest in the entity. Consequently, the Mervyns Joint Venture was deconsolidated as the Company
was no longer in control of the entity. Upon deconsolidation, the Company recorded a gain of
approximately $5.6 million because the carrying value of the non-recourse debt exceeded the
carrying value of the collateralized assets of the joint venture. Following the deconsolidation,
the Company will no longer have any economic rights or obligations in the Mervyns Joint Venture.
The revenues and expenses associated with the Mervyns Joint Venture for all of the periods
presented, including the $5.6 million gain, are classified within discontinued operations in the
condensed consolidated statements of
- 7 -
operations (Note 12). Subsequent to deconsolidating this joint venture, the Company accounts
for its retained interest in this joint venture investment, which approximates zero at September
30, 2010, under the cost method of accounting because the Company does not have the ability to
exercise significant influence.
Comprehensive Loss
Comprehensive loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net loss
|
|
$
|
(15,760
|
)
|
|
$
|
(140,650
|
)
|
|
$
|
(163,510
|
)
|
|
$
|
(316,877
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest-rate contracts
|
|
|
1,708
|
|
|
|
4,093
|
|
|
|
9,278
|
|
|
|
7,315
|
|
Amortization of interest-rate contracts
|
|
|
(46
|
)
|
|
|
(93
|
)
|
|
|
(200
|
)
|
|
|
(279
|
)
|
Foreign currency translation
|
|
|
9,136
|
|
|
|
24,806
|
|
|
|
(7,021
|
)
|
|
|
48,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
|
10,798
|
|
|
|
28,806
|
|
|
|
2,057
|
|
|
|
55,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(4,962
|
)
|
|
$
|
(111,844
|
)
|
|
$
|
(161,453
|
)
|
|
$
|
(261,598
|
)
|
Comprehensive (income) loss attributable to non-controlling interests
|
|
|
(249
|
)
|
|
|
930
|
|
|
|
41,055
|
|
|
|
36,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss attributable to DDR
|
|
$
|
(5,211
|
)
|
|
$
|
(110,914
|
)
|
|
$
|
(120,398
|
)
|
|
$
|
(224,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 8 -
2. EQUITY INVESTMENTS IN JOINT VENTURES
At September 30, 2010 and December 31, 2009, the Company had ownership interests in various
unconsolidated joint ventures which owned 245 and 327 shopping center properties, respectively.
Condensed combined financial information of the Companys unconsolidated joint venture investments
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Condensed Combined Balance Sheets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,605,772
|
|
|
$
|
1,782,431
|
|
Buildings
|
|
|
4,858,997
|
|
|
|
5,207,234
|
|
Fixtures and tenant improvements
|
|
|
150,455
|
|
|
|
146,716
|
|
|
|
|
|
|
|
|
|
|
|
6,615,224
|
|
|
|
7,136,381
|
|
Less: Accumulated depreciation
|
|
|
(707,053
|
)
|
|
|
(636,897
|
)
|
|
|
|
|
|
|
|
|
|
|
5,908,171
|
|
|
|
6,499,484
|
|
Land held for development and
construction in progress
(A)
|
|
|
173,293
|
|
|
|
130,410
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
|
6,081,464
|
|
|
|
6,629,894
|
|
Receivables, net
|
|
|
126,394
|
|
|
|
113,630
|
|
Leasehold interests
|
|
|
10,586
|
|
|
|
11,455
|
|
Other assets
|
|
|
305,909
|
|
|
|
342,192
|
|
|
|
|
|
|
|
|
|
|
$
|
6,524,353
|
|
|
$
|
7,097,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt
|
|
$
|
3,997,117
|
|
|
$
|
4,547,711
|
|
Notes and accrued interest payable to DDR
|
|
|
85,780
|
|
|
|
73,477
|
|
Other liabilities
|
|
|
211,362
|
|
|
|
194,065
|
|
|
|
|
|
|
|
|
|
|
|
4,294,259
|
|
|
|
4,815,253
|
|
Accumulated equity
|
|
|
2,230,094
|
|
|
|
2,281,918
|
|
|
|
|
|
|
|
|
|
|
$
|
6,524,353
|
|
|
$
|
7,097,171
|
|
|
|
|
|
|
|
|
DDR share of accumulated equity
|
|
$
|
482,723
|
|
|
$
|
473,738
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The Deconsolidated Land Entity (Note 1) was combined with the unconsolidated
investments effective January 1, 2010.
|
- 9 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Condensed Combined Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations
|
|
$
|
169,730
|
|
|
$
|
206,423
|
|
|
$
|
507,766
|
|
|
$
|
617,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
60,838
|
|
|
|
81,076
|
|
|
|
196,846
|
|
|
|
237,446
|
|
Impairment charges
(A)
|
|
|
8,815
|
|
|
|
|
|
|
|
19,737
|
|
|
|
|
|
Depreciation and amortization of real estate investments
|
|
|
47,684
|
|
|
|
57,267
|
|
|
|
143,227
|
|
|
|
172,153
|
|
Interest expense
|
|
|
54,025
|
|
|
|
78,686
|
|
|
|
174,186
|
|
|
|
219,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,362
|
|
|
|
217,029
|
|
|
|
533,996
|
|
|
|
629,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense, other (expense) income,
discontinued operations and (loss) gain on disposition of real
estate
|
|
|
(1,632
|
)
|
|
|
(10,606
|
)
|
|
|
(26,230
|
)
|
|
|
(12,017
|
)
|
Income tax expense (primarily Sonae Sierra Brasil), net
|
|
|
(4,114
|
)
|
|
|
(2,513
|
)
|
|
|
(13,947
|
)
|
|
|
(7,065
|
)
|
Other (expense) income, net
|
|
|
|
|
|
|
(3,602
|
)
|
|
|
|
|
|
|
5,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(5,746
|
)
|
|
|
(16,721
|
)
|
|
|
(40,177
|
)
|
|
|
(13,249
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(2,192
|
)
|
|
|
(1,682
|
)
|
|
|
(4,110
|
)
|
|
|
(35,263
|
)
|
Loss on disposition of real estate, net of tax
(B)
|
|
|
(13,340
|
)
|
|
|
(13,767
|
)
|
|
|
(25,303
|
)
|
|
|
(19,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before (loss) gain on disposition of real estate, net
|
|
|
(21,278
|
)
|
|
|
(32,170
|
)
|
|
|
(69,590
|
)
|
|
|
(68,364
|
)
|
(Loss) gain on disposition of real estate, net
(C)
|
|
|
|
|
|
|
(74
|
)
|
|
|
17
|
|
|
|
(26,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,278
|
)
|
|
$
|
(32,244
|
)
|
|
$
|
(69,573
|
)
|
|
$
|
(95,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of equity in net loss of joint ventures
(D)
|
|
$
|
(4,193
|
)
|
|
$
|
(1,302
|
)
|
|
$
|
(4,362
|
)
|
|
$
|
(12,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
For the three and nine months ended September 30, 2010, impairment charges were
recorded on three and four assets, respectively, of which the Companys proportionate share
of the loss was approximately $0.3 million and $0.7 million, respectively.
|
|
(B)
|
|
For the nine months ended September 30, 2010, loss on disposition of discontinued
operations includes the sale of properties by four separate unconsolidated joint ventures.
The Companys proportionate share of the loss for the assets sold during the three- and
nine-month periods ended September 30, 2010, was approximately $2.8 million and $4.1
million, respectively. In the fourth quarter of 2009, these joint ventures recorded
impairment charges aggregating $170.9 million related to certain of these asset sales in
anticipation of the sales transactions. For the nine months ended September 30, 2009, loss
from discontinued operations consisted of the sale of 12 properties by three separate
unconsolidated joint ventures resulting in a loss of $19.9 million of which the Companys
proportionate share was $1.4 million.
|
|
(C)
|
|
In the first quarter of 2009, a joint venture with Coventry transferred its interest in
the Kansas City, Missouri project (Ward Parkway) to the lender. The joint venture
recorded a loss of $26.7 million on the transfer, which is included in loss on disposition
of real estate in the condensed combined statements of operations for the nine months ended
September 30, 2009. The Company recorded a $5.8 million loss in March 2009 related to the
write-off of the book value of its equity investment, which is included within equity in
net loss of joint ventures in the condensed consolidated statements of operations.
|
- 10 -
|
|
|
(D)
|
|
The difference between the Companys share of net loss, as reported above, and the
amounts included in the condensed consolidated statements of operations is attributable to
the amortization of basis differentials, deferred gains and differences in gain (loss) on
sale of certain assets due to the basis differentials and other than temporary impairment
charges. Adjustments to the Companys share of joint venture net loss for these items are
reflected as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
Nine-Month Periods
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
(Loss) income, net
|
|
$
|
(0.6
|
)
|
|
$
|
1.2
|
|
|
$
|
0.6
|
|
|
$
|
3.4
|
|
Investments in and advances to joint ventures include the following items, which
represent the difference between the Companys investment and its share of all of the
unconsolidated joint ventures underlying net assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Companys share of accumulated equity
|
|
$
|
482.7
|
|
|
$
|
473.7
|
|
Basis differentials
(A)
|
|
|
(148.3
|
)
|
|
|
(123.5
|
)
|
Deferred development fees, net of portion
relating to the Companys interest
|
|
|
(3.4
|
)
|
|
|
(4.4
|
)
|
Notes receivable from investments
|
|
|
1.0
|
|
|
|
1.2
|
|
Amounts payable to DDR
|
|
|
85.8
|
|
|
|
73.5
|
|
|
|
|
|
|
|
|
Investments in and advances to joint ventures
|
|
$
|
417.8
|
|
|
$
|
420.5
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
This amount represents the aggregate difference between the Companys historical cost
basis and the equity basis reflected at the joint venture level. Basis differentials
recorded upon transfer of assets are primarily associated with assets previously owned by
the Company that have been transferred into an unconsolidated joint venture at fair value.
Other basis differentials occur primarily when the Company has purchased interests in
existing unconsolidated joint ventures at fair market values, which differ from their
proportionate share of the historical net assets of the unconsolidated joint ventures. In
addition, certain acquisition, transaction and other costs, including capitalized interest
and impairments of the Companys investments that were other than temporary may not be
reflected in the net assets at the joint venture level. Certain basis differentials
indicated above are amortized over the life of the related assets.
|
Service fees and income earned by the Company through management, acquisition, financing,
leasing and development activities performed related to all of the Companys unconsolidated joint
ventures are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
Nine-Month Periods
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Management and other fees
|
|
$
|
8.3
|
|
|
$
|
12.2
|
|
|
$
|
25.2
|
|
|
$
|
36.6
|
|
Financing and other fees
|
|
|
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
1.0
|
|
Development fees and leasing commissions
|
|
|
1.5
|
|
|
|
2.1
|
|
|
|
5.2
|
|
|
|
5.8
|
|
Interest income
|
|
|
0.1
|
|
|
|
2.1
|
|
|
|
0.3
|
|
|
|
5.9
|
|
- 11 -
3. OTHER ASSETS, NET
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
In-place leases (including lease origination
costs and fair market value of leases), net
|
|
$
|
9,260
|
|
|
$
|
15,556
|
|
Tenant relations, net
|
|
|
9,453
|
|
|
|
11,318
|
|
|
|
|
|
|
|
|
Total intangible assets
(A)
|
|
|
18,713
|
|
|
|
26,874
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
(B)
|
|
|
134,066
|
|
|
|
146,809
|
|
Deferred charges, net
|
|
|
31,157
|
|
|
|
33,162
|
|
Prepaids, deposits and other assets
|
|
|
106,551
|
|
|
|
111,975
|
|
|
|
|
|
|
|
|
Total other assets, net
|
|
$
|
290,487
|
|
|
$
|
318,820
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The Company recorded amortization expense of $1.6 million and $1.7 million
for the three-month periods ended September 30, 2010 and 2009, respectively, and $5.0
million and $5.3 million for the nine-month periods ended September 30, 2010 and 2009,
respectively, related to these intangible assets. The amortization periods of the in-place
leases and tenant relations are approximately two to 31 years and ten years, respectively.
|
|
(B)
|
|
Includes straight-line rent receivables, net, of $55.6 million and $54.9 million at
September 30, 2010 and December 31, 2009, respectively.
|
4. REVOLVING CREDIT FACILITIES
At September 30, 2010, the Company maintained an unsecured revolving credit facility with a
syndicate of financial institutions, for which JP Morgan Securities, Inc. serves as the
administrative agent (the Unsecured Credit Facility). A new facility was entered into in October
2010 to replace this facility (Note 16). The prior Unsecured Credit Facility provided for
borrowings of $1.25 billion, if certain financial covenants were maintained, and an accordion
feature for expansion to $1.4 billion upon the Companys request, provided that new or existing
lenders agreed to the existing terms of the facility and increased their commitment level, and had
a maturity date of June 2011. The prior Unsecured Credit Facility included a competitive bid
option on periodic interest rates for up to 50% of the facility. The Companys borrowings under the
prior Unsecured Credit Facility bore interest at variable rates at the Companys election, based on
either (i) the prime rate plus a specified spread (-0.125% at September 30, 2010), as defined in
the facility, or (ii) LIBOR, plus a specified spread (0.75% at September 30, 2010). The specified
spreads varied depending on the Companys long-term senior unsecured debt rating from Standard and
Poors (S&P) and Moodys Investors Service (Moodys). The Company was 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 September 30, 2010. The Unsecured Credit Facility was used to temporarily finance
redevelopment, development and acquisition of shopping center properties, to provide working
capital and for general corporate purposes. The Unsecured Credit Facility also provided for an
annual facility fee of 0.175% on the entire facility. At September 30, 2010, total borrowings under
the Unsecured Credit Facility aggregated $463.6 million with a weighted average interest rate of
1.2%.
- 12 -
The Company also maintained a $75 million unsecured revolving credit facility with PNC Bank,
National Association ( the PNC Facility and together with the Unsecured Credit Facility,
the Revolving Credit Facilities). A new facility was also entered into in October 2010 to replace
the PNC Facility (Note 16). This prior facility had a maturity date of June 2011. The prior PNC
Facility reflected terms consistent with those contained in the prior Unsecured Credit Facility.
Borrowings under this prior facility bore interest at variable rates based on (i) the prime rate
plus a specified spread (0.125% at September 30, 2010), as defined in the facility, or (ii) LIBOR,
plus a specified spread (1.0% at September 30, 2010). The specified spreads are dependent on the
Companys long-term senior unsecured debt rating from S&P and Moodys. The Company was 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 September 30, 2010. At September 30, 2010, total borrowings
under the PNC Facility aggregated $19.5 million with a weighted average interest rate of 1.3%.
5. SENIOR NOTES
During the nine months ended September 30, 2010, the Company purchased approximately
$256.6 million aggregate principal amount of its outstanding senior unsecured notes of which $138.1
million related to the senior convertible notes. The amount of the gain or loss recognized by the
Company relating to the purchases of the senior convertible notes is based on the difference
between the amount of consideration paid as compared to the carrying amount of the debt, net of the
unamortized discount and unamortized deferred financing fees. The Company recorded a write-off of
$5.9 million for the nine-month period ended September 30, 2010, related to unamortized deferred
financing costs and accretion related to the senior unsecured notes repurchased, which is included
in gain on debt retirement in the condensed consolidated statements of operations.
In August 2010, the Company issued $300 million aggregate principal amount of 7.875% senior
unsecured notes with an effective yield to maturity of 8.0% due September 2020. Proceeds from the
issuance were used to repay amounts outstanding on the Revolving Credit Facilities.
In March 2010, the Company issued $300 million aggregate principal amount of 7.5% senior
unsecured notes with an effective yield to maturity of 7.5% 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. MORTGAGES PAYABLE
As disclosed in Note 1, the Company owns a 50% interest in the Mervyns Joint Venture, which
was deconsolidated by the Company during the third quarter of 2010. In June 2010, the Mervyns
Joint Venture received a notice of default from the servicer for the non-recourse loan secured by
all of the remaining former Mervyns stores, due to the non-payment of required monthly debt
service. In August 2010, the court appointed a third-party receiver to manage and liquidate the
remaining former Mervyns stores. The amount outstanding under this mortgage note payable was
$155.7 million upon deconsolidation. Upon deconsolidation, the assets and liabilities of the
Mervyns Joint Venture, including the mortgage note payable, are no longer reflected in the
Companys condensed consolidated balance sheet at September 30, 2010. The loan matured on October
1, 2010.
- 13 -
7. FINANCIAL INSTRUMENTS
Measurement of Fair Value
At September 30, 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.
In the third quarter of 2010, the Company has determined that the significant inputs used to
value its derivatives fall within Level 2 of the fair value hierarchy. Previously, the credit
valuation adjustments associated with the Companys counterparties and its own credit risk utilized
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 had determined that its derivative
valuations in their entirety were classified in Level 3 of the fair value hierarchy. These inputs
reflect the Companys assumptions.
Items Measured at Fair Value on a Recurring Basis
The following table presents information about the Companys financial assets and liabilities
(in millions), which consist of interest rate swap agreements and marketable securities included in
the Companys elective deferred compensation plan that are both included in other liabilities at
September 30, 2010, measured at fair value on a recurring basis as of September 30, 2010, and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine
such fair value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
September 30, 2010
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Derivative financial instruments
|
|
$
|
|
|
|
$
|
(6.2
|
)
|
|
$
|
|
|
|
$
|
(6.2
|
)
|
Marketable securities
|
|
$
|
(3.4
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3.4
|
)
|
The Company transferred its derivatives into Level 2 from Level 3 during the third
quarter of 2010 due to changes in the significance on the Companys derivatives valuation as a
result of changes in nonperformance risk associated with the Companys credit standing. 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):
|
|
|
|
|
|
|
Derivative
|
|
|
|
Financial
|
|
|
|
Instruments
|
|
Balance of Level 3 at December 31, 2009
|
|
$
|
(15.4
|
)
|
Total unrealized gain included in other comprehensive
(loss) income
|
|
|
7.6
|
|
|
|
|
|
Balance of Level 3 at June 30, 2010
|
|
|
(7.8
|
)
|
Transfers into Level 2
|
|
|
7.8
|
|
|
|
|
|
Balance of Level 3 at September 30, 2010
|
|
$
|
|
|
|
|
|
|
- 14 -
The unrealized gain of $9.2 million included in other comprehensive (loss) income (OCI)
is attributable to the net change in unrealized gains or losses relating to derivative liabilities
that remain outstanding at September 30, 2010, none of which were reported in the Companys
condensed consolidated statements of operations because they are documented and qualify as hedging
instruments.
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable,
Accrued Expenses and Other Liabilities
The carrying amounts reported in the condensed consolidated balance sheets 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, excluding those that are fully
reserved, was approximately $120.5 million and $74.6 million at September 30, 2010 and December 31,
2009, respectively, as compared to the carrying amounts of $122.2 million and $76.2 million,
respectively. The carrying value of the tax increment financing bonds, which was $12.7 million and
$14.2 million at September 30, 2010 and December 31, 2009, respectively, approximated its fair
value at September 30, 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 Companys 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.
Debt instruments at September 30, 2010 and December 31, 2009, with carrying values that are
different than estimated fair values, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Senior notes
|
|
$
|
1,746,387
|
|
|
$
|
1,844,482
|
|
|
$
|
1,689,841
|
|
|
$
|
1,691,445
|
|
Revolving Credit Facilities and Term Debt
|
|
|
1,283,138
|
|
|
|
1,273,609
|
|
|
|
1,575,028
|
|
|
|
1,544,481
|
|
Mortgage payables and other indebtedness
|
|
|
1,365,777
|
|
|
|
1,401,694
|
|
|
|
1,913,794
|
|
|
|
1,875,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,395,302
|
|
|
$
|
4,519,785
|
|
|
$
|
5,178,663
|
|
|
$
|
5,111,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 15 -
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 Companys
derivative financial instruments are used to manage differences in the amount, timing and duration
of the Companys known or expected cash receipts and its known or expected cash payments
principally related to the Companys 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 may use 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 Companys 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. The Company has one Swap that expires in 2012 with an aggregate
notional amount of $100 million, which effectively converts variable-rate debt to a fixed-rate of
4.8% at September 30, 2010.
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 an increase to interest expense
(and a corresponding decrease to earnings) of approximately $4.5 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 forcasted 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 nine-month periods ended September 30, 2010 and September 30,
2009, the amount of hedge ineffectiveness recorded was not material.
- 16 -
The table below presents the fair value of the Companys Swaps as well as their classification
on the condensed consolidated balance sheets as of September 30, 2010 and December 31, 2009, as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
September 30, 2010
|
|
December 31, 2009
|
Derivatives Designated as
|
|
Balance Sheet
|
|
Fair
|
|
Balance Sheet
|
|
|
Hedging Instruments
|
|
Location
|
|
Value
|
|
Location
|
|
Fair Value
|
Interest rate products
|
|
Other liabilities
|
|
$
|
6.2
|
|
|
Other liabilities
|
|
$
|
15.4
|
|
The effect of the Companys derivative instruments on net loss is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified
|
|
Amount of Gain Reclassified from
|
|
|
Amount of Gain Recognized in OCI
|
|
from
|
|
Accumulated OCI into Loss
|
|
|
on Derivatives (Effective Portion)
|
|
Accumulated
|
|
(Effective Portion)
|
Derivatives
|
|
Three-Month
|
|
Nine-Month
|
|
OCI into
|
|
Three-Month
|
|
Nine-Month
|
in Cash
|
|
Periods Ended
|
|
Periods Ended
|
|
Loss
|
|
Periods Ended
|
|
Periods Ended
|
Flow
|
|
September 30
|
|
September 30
|
|
(Effective
|
|
September 30
|
|
September 30
|
Hedging
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Portion)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Interest rate
products
|
|
$
|
1.7
|
|
|
$
|
1.6
|
|
|
$
|
9.2
|
|
|
$
|
1.8
|
|
|
Interest expense
|
|
|
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
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. 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 swap 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 Swaps resulting in an acceleration of payment.
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 of its 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.
- 17 -
The effect of the Companys net investment hedge derivative instruments on OCI is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI
|
|
|
on Derivatives (Effective Portion)
|
|
|
Three-Month
|
|
Nine-Month
|
|
|
Periods Ended
|
|
Periods Ended
|
|
|
September 30
|
|
September 30
|
Derivatives in Net Investment Hedging Relationships
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Euro denominated revolving
credit facilities
designated as hedge of the
Companys net investment in
its subsidiary
|
|
$
|
(4.9
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
7.5
|
|
|
$
|
(4.1
|
)
|
Canadian denominated
revolving credit facilities
designated as hedge of the
Companys net investment in
its subsidiaries
|
|
$
|
(2.1
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(12.4
|
)
|
See discussion of equity derivative instruments in Note 9.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company 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., which funds are advised and managed by Coventry Real Estate
Advisors 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 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 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. In June 2010, the court granted in part and denied in part the
Companys motion. Coventry has filed a notice of appeal regarding that portion of the motion
granted by the court. The Company filed an answer to the complaint, and has asserted various
counterclaims against Coventry.
- 18 -
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 Companys
financial condition, results of operations or cash flows.
On November 18, 2009, the Company filed a complaint against Coventry 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 the 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 Companys
motion (and Coventrys opposition) and on December 4, 2009 issued a ruling in the Companys 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
Companys favor. A trial on the Companys request for a permanent injunction is currently scheduled
in January 2011. 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 attorneys
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 appealed the verdict. In July 2010, the California Court of Appeals entered an order
affirming the jury verdict. Included in other liabilities on the condensed consolidated balance
sheet at September 30, 2010 is a provision of $11.1 million that represents the full amount of the
verdict, plaintiffs attorneys fees and accrued interest. An charge of approximately $2.7
million, net of tax, was recorded in the second quarter of 2010 relating to this matter.
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 Companys liquidity, financial position or results of operations.
- 19 -
9. EQUITY
The following table summarizes the changes in equity since December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developers Diversified Realty Corporation Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Excess of
|
|
|
Deferred
|
|
|
Other
|
|
|
Treasury
|
|
|
Non-
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in-
|
|
|
Net Income
|
|
|
Compensation
|
|
|
Comprehensive
|
|
|
Stock at
|
|
|
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Obligation
|
|
|
Income (Loss)
|
|
|
Cost
|
|
|
Interests
|
|
|
Total
|
|
Balance, December 31, 2009
|
|
$
|
555,000
|
|
|
$
|
20,174
|
|
|
$
|
3,374,528
|
|
|
$
|
(1,098,661
|
)
|
|
$
|
17,838
|
|
|
$
|
9,549
|
|
|
$
|
(15,866
|
)
|
|
$
|
89,774
|
|
|
$
|
2,952,336
|
|
Cumulative effect of
adoption of a new accounting
standard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,384
|
)
|
|
|
(20,232
|
)
|
Deconsolidation of interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,876
|
|
|
|
3,876
|
|
Issuance of common shares
related to dividend
reinvestment plan and director
compensation
|
|
|
|
|
|
|
13
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
847
|
|
Issuance of common shares
related to cash offerings
|
|
|
|
|
|
|
5,279
|
|
|
|
433,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,678
|
|
|
|
|
|
|
|
440,472
|
|
Contributions from
non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486
|
|
|
|
486
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
150
|
|
|
|
(197
|
)
|
|
|
|
|
|
|
619
|
|
|
|
|
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
(971
|
)
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
3,029
|
|
|
|
|
|
|
|
(5,473
|
)
|
|
|
|
|
|
|
3,612
|
|
|
|
|
|
|
|
1,168
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,816
|
|
Dividends declared-common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,080
|
)
|
Dividends declared-preferred
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,702
|
)
|
Distributions to
non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,381
|
)
|
|
|
(2,381
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,378
|
)
|
|
|
(163,510
|
)
|
Other comprehensive (loss)
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of
interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,278
|
|
|
|
|
|
|
|
|
|
|
|
9,278
|
|
Amortization of interest
rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,344
|
)
|
|
|
|
|
|
|
(2,677
|
)
|
|
|
(7,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,132
|
)
|
|
|
|
|
|
|
4,734
|
|
|
|
|
|
|
|
(41,055
|
)
|
|
|
(161,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
555,000
|
|
|
$
|
25,616
|
|
|
$
|
3,813,293
|
|
|
$
|
(1,278,423
|
)
|
|
$
|
12,984
|
|
|
$
|
14,283
|
|
|
$
|
(11,887
|
)
|
|
$
|
38,316
|
|
|
$
|
3,169,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 20 -
Common Shares Issued
In 2010, the Company issued common shares of which substantially all net proceeds were used to
repay debt and invest in two loans aggregating $58.3 million that are collateralized by seven
shopping centers, six of which are managed and leased by the Company. The issuances are as follows
(in millions):
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Shares
|
|
|
Gross Proceeds
|
|
January 2010
|
|
|
5.0
|
|
|
$
|
46.1
|
|
February 2010
|
|
|
42.9
|
|
|
|
350.0
|
|
September 2010
|
|
|
5.1
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
Total issued
|
|
|
53.0
|
|
|
$
|
454.4
|
|
|
|
|
|
|
|
|
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 common
shares and 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 Company issued 32.9 million common shares to the Otto
Family in two closings, May and September 2009. The purchase price for the common shares was
subject to a downward adjustment if the weighted average purchase price of all additional common
shares sold, as defined, from February 23, 2009, until the applicable closing date was less than
$2.94 per share. 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 ending in 2014. None of the warrants had been exercised as of
September 30, 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
Companys 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 Companys equity derivative instruments as well
as their classification on the condensed consolidated balance sheet as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
September 30, 2010
|
|
December 31, 2009
|
Derivatives not Designated
|
|
Balance Sheet
|
|
Fair
|
|
Balance Sheet
|
|
|
as Hedging Instruments
|
|
Location
|
|
Value
|
|
Location
|
|
Fair Value
|
Warrants
|
|
Other liabilities
|
|
$
|
(70.7
|
)
|
|
Other liabilities
|
|
$
|
(56.1
|
)
|
- 21 -
The effect of the Companys equity derivative instruments on net loss is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
Derivatives not Designated
|
|
Income Statement
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
as Hedging Instruments
|
|
Location
|
|
|
Loss
|
|
|
Loss
|
|
Warrants
|
|
Loss on equity derivative instruments
|
|
$
|
(11.3
|
)
|
|
$
|
(35.0
|
)
|
|
$
|
(14.6
|
)
|
|
$
|
(45.4
|
)
|
Equity forward issued shares
|
|
Loss on equity derivative instruments
|
|
|
|
|
|
|
(83.2
|
)
|
|
|
|
|
|
|
(152.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11.3
|
)
|
|
$
|
(118.2
|
)
|
|
$
|
(14.6
|
)
|
|
$
|
(198.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above losses for the warrant contracts were derived principally from changes in the
Companys stock price from the date of issuance. The above losses for the equity forward were a
result of the increase in the stock price through the date of issuance of the shares.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
September 30, 2010 (in millions)
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(70.7
|
)
|
|
$
|
(70.7
|
)
|
The table presented below presents a reconciliation of the beginning and ending balances of
the equity derivative instruments that are included in other liabilities as noted above having fair
value measurements based on significant unobservable inputs (Level 3) (in millions):
|
|
|
|
|
|
|
Equity
|
|
|
|
Derivative
|
|
|
|
Instruments
|
|
|
|
Liability
|
|
Balance of Level 3 at December 31, 2009
|
|
$
|
(56.1
|
)
|
Unrealized loss
|
|
|
(14.6
|
)
|
|
|
|
|
Balance of Level 3 at September 30, 2010
|
|
$
|
(70.7
|
)
|
|
|
|
|
- 22 -
Dividends
Common share dividends declared were $0.02 and $0.06 per share for the three- and nine-month
periods ended September 30, 2010, respectively, which were paid in cash. The Company declared an
all-cash dividend of $0.02 per common share in the third quarter of 2009. The Company declared a
common share dividend in both the first and second quarter of 2009 of $0.20 per share that was paid
in a combination of cash and the Companys common shares. The aggregate amount of cash paid to
shareholders was limited to 10% of the total dividend paid. In connection with the first and
second quarter of 2009 dividends, the Company issued approximately 8.3 million and 6.1 million
common shares, respectively, based on the volume weighted average trading price of $2.80 and $4.49
per share, respectively, and paid $2.6 million and $3.1 million, respectively, in cash.
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 $5.5 million.
10. OTHER REVENUES
Other revenues were comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Lease termination fees
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
$
|
4.1
|
|
|
$
|
3.4
|
|
Financing fees
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
0.9
|
|
Other miscellaneous
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
2.0
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.0
|
|
|
$
|
1.2
|
|
|
$
|
6.8
|
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 23 -
11. IMPAIRMENT CHARGES
The Company recorded impairment charges during the three- and nine-month periods ended
September 30, 2010 and 2009, on the following consolidated assets and unconsolidated joint venture
investments because the book basis of the assets was in excess of the estimated fair market value
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Land held for development
(A)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54.3
|
|
|
$
|
|
|
Undeveloped land
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
0.4
|
|
Assets marketed for sale
(B)
|
|
|
5.1
|
|
|
|
0.5
|
|
|
|
19.0
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments from continuing operations
|
|
$
|
5.1
|
|
|
$
|
0.5
|
|
|
$
|
78.2
|
|
|
$
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold assets included in discontinued
operations
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
29.5
|
|
|
|
71.9
|
|
Assets formerly occupied by Mervyns
included in discontinued operations
(C)
|
|
|
|
|
|
|
|
|
|
|
35.3
|
|
|
|
61.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
64.8
|
|
|
|
132.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture investments
|
|
|
|
|
|
|
61.2
|
|
|
|
|
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges
|
|
$
|
7.1
|
|
|
$
|
63.9
|
|
|
$
|
143.0
|
|
|
$
|
247.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Amounts reported in the nine-month period ended September 30, 2010, relate to land held
for development in Togliatti and Yaroslavl, Russia, of which the Companys proportionate
share was $41.9 million after adjusting for the allocation of loss to the non-controlling
interest in this consolidated joint venture. The asset impairments were triggered
primarily due to a change in the Companys investment plans for these projects. Both
investments relate to large-scale development projects in Russia. During the second
quarter of 2010, the Company determined that it was no longer committed to invest the
necessary amount of capital to complete the projects without alternative sources of capital
from third-party investors or lending institutions.
|
|
(B)
|
|
The impairment charges were triggered primarily due to the Companys marketing of these
assets for sale during the nine months ended September 30, 2010. These assets were not
classified as held for sale as of September 30, 2010, due to outstanding substantive
contingencies associated with the respective contracts.
|
|
(C)
|
|
As discussed in Notes 1 and 6, these assets were deconsolidated in the third quarter of
2010 and all operating results have been reclassified as discontinued operations.
|
|
|
|
For the nine-month period ended September 30, 2010, the Companys proportionate share of
these impairment charges was $16.5 million after adjusting for the allocation of loss to the
non-controlling interest in this consolidated joint venture. The 2010 impairment charges
were triggered primarily due to a change in the Companys business plans for these assets
and the resulting impact on its holding period assumptions for this substantially vacant
portfolio. During the second quarter of 2010, the Company determined it was no longer
committed to the long-term management and investment in these assets.
|
- 24 -
For the three- and nine-month periods ended September 30, 2009, the Companys proportionate
share of these impairments was $29.7 million after adjusting for the allocation of loss to
the non-controlling interest in this consolidated joint venture. The 2009 impairment
charges were triggered primarily due to the Companys marketing of certain assets for sale
combined with the then overall economic downturn in the retail real estate environment. A
full write down of this portfolio was not recorded in 2009 due to the Companys then holding
period assumptions and future investment plans for these assets.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the Companys impairment charges that were
measured on a fair value basis for the nine months ended September 30, 2010. The table indicates
the fair value hierarchy of the valuation techniques utilized by the Company to determine such
fair value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Losses
|
Long-lived assets
held and used and
held for sale
|
|
$
|
|
|
|
$
|
|
|
|
$
|
223.4
|
|
|
$
|
223.4
|
|
|
$
|
143.0
|
|
12. DISCONTINUED OPERATIONS
All revenues and expenses of discontinued operations sold have been reclassified in the
condensed consolidated statements of operations for the three- and nine-month periods ended
September 30, 2010 and 2009. The Company has one asset considered held for sale at September 30,
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. Additionally, the
activity associated with the Mervyns Joint Venture (Note 1), which was deconsolidated during the
three-month period ended September 30, 2010 is included in discontinued operations for all periods
presented. Included in discontinued operations for the three- and nine-month periods ended
September 30, 2010 and 2009, are 23 properties sold in 2010 (including one held for sale at
December 31, 2009), one property held for sale at September 30, 2010 and 26 other properties that
were deconsolidated for accounting purposes aggregating 4.3 million square feet, and 32 properties
sold in 2009 aggregating 3.8 million square feet, respectively. The balance sheet relating to the
asset held for sale and the operating results relating to assets sold or designated as held for
sale as of September 30, 2010, are as follows (in thousands):
|
|
|
|
|
|
|
September 30, 2010
|
|
Land
|
|
$
|
1,025
|
|
Building
|
|
|
3,403
|
|
|
|
|
|
|
|
|
4,428
|
|
Less: Accumulated depreciation
|
|
|
(1,957
|
)
|
|
|
|
|
Total assets held for sale
|
|
$
|
2,471
|
|
|
|
|
|
- 25 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues from operations
|
|
$
|
2,084
|
|
|
$
|
8,762
|
|
|
$
|
9,913
|
|
|
$
|
37,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,571
|
|
|
|
5,326
|
|
|
|
7,754
|
|
|
|
19,275
|
|
Impairment charges
|
|
|
2,000
|
|
|
|
2,153
|
|
|
|
64,833
|
|
|
|
132,924
|
|
Interest, net
|
|
|
2,473
|
|
|
|
4,588
|
|
|
|
9,588
|
|
|
|
17,822
|
|
Depreciation and amortization
|
|
|
588
|
|
|
|
2,785
|
|
|
|
4,061
|
|
|
|
13,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
6,632
|
|
|
|
14,852
|
|
|
|
86,236
|
|
|
|
183,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before disposition of real estate
|
|
|
(4,548
|
)
|
|
|
(6,090
|
)
|
|
|
(76,323
|
)
|
|
|
(145,558
|
)
|
Gain on deconsolidation of interests, net
|
|
|
5,221
|
|
|
|
|
|
|
|
5,221
|
|
|
|
|
|
Gain (loss) on disposition of real
estate, net
|
|
|
889
|
|
|
|
4,448
|
|
|
|
(2,602
|
)
|
|
|
(19,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,562
|
|
|
$
|
(1,642
|
)
|
|
$
|
(73,704
|
)
|
|
$
|
(165,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. TRANSACTIONS WITH RELATED PARTIES
In May 2010, the Company repaid a $60 million collateralized loan, at par, with an affiliate
of the Otto Family, which was included in mortgage and other secured indebtedness on the condensed
consolidated balance sheet at December 31, 2009.
In September 2010, the Company funded a $31.7 million mezzanine loan to a subsidiary of EDT
collateralized by equity interests in six shopping center assets owned by EDT and managed by the
Company. The mezzanine loan bears interest at a fixed rate of 10% and matures in 2017. Although
the Companys interest in these assets was redeemed in 2009, the Company retained two board
positions on EDTs board of directors.
14. EARNINGS PER SHARE
The Companys 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 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):
- 26 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended
|
|
|
Nine-Month Periods Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Basic and Diluted Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(17,467
|
)
|
|
$
|
(146,136
|
)
|
|
$
|
(89,867
|
)
|
|
$
|
(159,576
|
)
|
Plus: Gain on disposition of real estate
|
|
|
145
|
|
|
|
7,128
|
|
|
|
61
|
|
|
|
8,222
|
|
Plus: (Income) loss attributable to
non-controlling interests
|
|
|
(108
|
)
|
|
|
(198
|
)
|
|
|
12,088
|
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
attributable to DDR
|
|
|
(17,430
|
)
|
|
|
(139,206
|
)
|
|
|
(77,718
|
)
|
|
|
(152,060
|
)
|
Less: Preferred dividends
|
|
|
(10,567
|
)
|
|
|
(10,567
|
)
|
|
|
(31,702
|
)
|
|
|
(31,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss from continuing
operations attributable to DDR common
shareholders
|
|
|
(27,997
|
)
|
|
|
(149,773
|
)
|
|
|
(109,420
|
)
|
|
|
(183,762
|
)
|
Less: Earnings attributable to unvested
shares and operating partnership units
|
|
|
(46
|
)
|
|
|
(30
|
)
|
|
|
(138
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss from continuing
operations
|
|
$
|
(28,043
|
)
|
|
$
|
(149,803
|
)
|
|
$
|
(109,558
|
)
|
|
$
|
(183,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
1,562
|
|
|
|
(1,642
|
)
|
|
|
(73,704
|
)
|
|
|
(165,523
|
)
|
Plus: Loss attributable to
non-controlling interests
|
|
|
1,558
|
|
|
|
3,003
|
|
|
|
26,292
|
|
|
|
40,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income (loss) from
discontinued operations
|
|
|
3,120
|
|
|
|
1,361
|
|
|
|
(47,412
|
)
|
|
|
(124,957
|
)
|
Net loss attributable to DDR common
shareholders after allocation to participating
securities
|
|
$
|
(24,923
|
)
|
|
$
|
(148,442
|
)
|
|
$
|
(156,970
|
)
|
|
$
|
(308,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Average shares outstanding
|
|
|
249,139
|
|
|
|
165,073
|
|
|
|
241,679
|
|
|
|
146,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable
to DDR common shareholders
|
|
$
|
(0.11
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.26
|
)
|
Income (loss) from discontinued
operations attributable to DDR common
shareholders
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.20
|
)
|
|
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to DDR common
shareholders
|
|
$
|
(0.10
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(2.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable
to DDR common shareholders
|
|
$
|
(0.11
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.26
|
)
|
Income (loss) from discontinued
operations attributable to DDR common
shareholders
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.20
|
)
|
|
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to DDR common
shareholders
|
|
$
|
(0.10
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(2.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following potentially dilutive securities are considered in the calculation of EPS as
described below:
- 27 -
|
|
|
Options to purchase 3.3 million and 3.4 million common shares were outstanding at
September 30, 2010 and 2009, respectively, all of which were anti-dilutive in the
calculations at September 30, 2010 and 2009. Accordingly, the anti-dilutive options were
excluded from the computations.
|
|
|
|
|
Shares subject to issuance under the Companys value sharing equity program (VSEP) are
not considered in the computation of diluted EPS for the three- and nine-month periods
ended September 30, 2010, as the shares were considered anti-dilutive due to the Companys
net loss from continuing operations. In July 2010, approximately 1.0 million common shares
were awarded in accordance with the first measurement date of the VSEP.
|
|
|
|
|
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 are not considered in the
computation of basic and diluted EPS for the three- and nine-month periods ended September
30, 2010 and 2009, as the warrants were considered anti-dilutive due to the Companys net
loss from continuing operations.
|
|
|
|
|
The Companys two series of senior convertible notes,
which are convertible into common shares of the Company with conversion prices of approximately $74.56 and $64.23 at
September 30, 2010 and 2009, respectively, were not included in the computation of diluted
EPS for the three- and nine-month periods ended September 30, 2010 and 2009, because the
Companys 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.
|
15. 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 segments and meets the majority of the aggregation criteria under the applicable
accounting standard.
The following table summarizes the Companys combined shopping and business center portfolios
as of each balance sheet date:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2010
|
|
2009
|
Shopping centers owned
|
|
|
541
|
|
|
|
664
|
|
Unconsolidated joint ventures
|
|
|
245
|
|
|
|
318
|
|
Consolidated joint ventures
|
|
|
3
|
|
|
|
35
|
|
States
(A)
|
|
|
42
|
|
|
|
44
|
|
Business centers
|
|
|
6
|
|
|
|
6
|
|
States
|
|
|
4
|
|
|
|
4
|
|
|
|
|
(A)
|
|
Excludes shopping centers owned in Puerto Rico and Brazil.
|
- 28 -
The tables below present information about the Companys reportable segments (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2010
|
|
|
|
Other
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
1,316
|
|
|
$
|
197,482
|
|
|
|
|
|
|
$
|
198,798
|
|
Operating expenses
|
|
|
(419
|
)
|
|
|
(67,838
|
)
|
(A)
|
|
|
|
|
|
(68,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
897
|
|
|
|
129,644
|
|
|
|
|
|
|
|
130,541
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
$
|
(143,207
|
)
|
|
|
(143,207
|
)
|
Equity in net loss of joint ventures
|
|
|
|
|
|
|
(4,801
|
)
|
|
|
|
|
|
|
(4,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended September 30, 2009
|
|
|
|
Other
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
1,327
|
|
|
$
|
194,376
|
|
|
|
|
|
|
$
|
195,703
|
|
Operating expenses
|
|
|
(466
|
)
|
|
|
(60,578
|
)
|
(A)
|
|
|
|
|
|
(61,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
861
|
|
|
|
133,798
|
|
|
|
|
|
|
|
134,659
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
$
|
(219,412
|
)
|
|
|
(219,412
|
)
|
Equity in net loss of joint ventures
|
|
|
|
|
|
|
(61,383
|
)
|
|
|
|
|
|
|
(61,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(146,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2010
|
|
|
|
Other
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
3,714
|
|
|
$
|
597,089
|
|
|
|
|
|
|
$
|
600,803
|
|
Operating expenses
|
|
|
(1,682
|
)
|
|
|
(263,572
|
)
|
(A)
|
|
|
|
|
|
(265,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
2,032
|
|
|
|
333,517
|
|
|
|
|
|
|
|
335,549
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
$
|
(421,639
|
)
|
|
|
(421,639
|
)
|
Equity in net loss of joint ventures
and impairment of joint ventures
|
|
|
|
|
|
|
(3,777
|
)
|
|
|
|
|
|
|
(3,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(89,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
49,573
|
|
|
$
|
8,378,529
|
|
|
|
|
|
|
$
|
8,428,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 29 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2009
|
|
|
|
Other
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
|
$
|
4,134
|
|
|
$
|
591,064
|
|
|
|
|
|
|
$
|
595,198
|
|
Operating expenses
|
|
|
(1,898
|
)
|
|
|
(187,402
|
)
|
(A)
|
|
|
|
|
|
(189,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
2,236
|
|
|
|
403,662
|
|
|
|
|
|
|
|
405,898
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
$
|
(454,919
|
)
|
|
|
(454,919
|
)
|
Equity in net loss of joint ventures
and impairment of joint ventures
|
|
|
|
|
|
|
(110,555
|
)
|
|
|
|
|
|
|
(110,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(159,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
49,469
|
|
|
$
|
8,727,430
|
|
|
|
|
|
|
$
|
8,776,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Includes impairment charges of $5.1 million and $0.5 million for the
three-month periods ended September 30, 2010 and 2009, respectively, and $78.2 million
and $12.7 million for the nine-month periods ended September 30, 2010 and 2009,
respectively.
|
|
(B)
|
|
Unallocated expenses consist of general and administrative, depreciation and
amortization, other income/expense and tax benefit/expense as listed in the condensed
consolidated statements of operations.
|
16. SUBSEQUENT EVENTS
In November 2010, the Company issued $350 million aggregate principal amount of 1.75%
convertible senior notes due November 2040. The notes have an initial conversion rate of 61.0361 per
$1,000 principal amount of the notes, representing a conversion price of approximately $16.38 per
common share. The initial conversion rate is subject to adjustment under certain circumstances.
The Company may redeem the notes anytime on or after November 15, 2015 in whole or in part for cash
equal to 100% of the principal amount of the notes plus accrued and unpaid interest to but
excluding the redemption date. Holders may require the Company to repurchase the notes in whole or
in part for cash at 100% of the principal amount of the notes plus accrued and unpaid interest to
but excluding the repurchase date, on November 15, 2015; November 15, 2020; November 15, 2025;
November 15, 2030; and November 15, 2035, as well as following the occurrence of certain change of
control transactions. Additionally, the holders of the notes may convert the notes upon the
occurrence of specified events, as well as anytime during the period beginning on May 15, 2040
through the second business day preceding the maturity date. In these instances, the principal
amount of the notes will be converted into cash and the remainder, if any, of the conversion value
in excess of such principal amount will be converted into cash, the Companys common shares or a
combination thereof (at the Companys election).
In October 2010, the Company entered into a new unsecured revolving credit facility with a
syndicate of financial institutions arranged by JP Morgan Chase Bank, N.A. and Wells Fargo Bank,
N.A. (Note 4) (the New Unsecured Credit Facility). The syndicates in the new facility are
substantially the same as the original facility. The size of the New Unsecured Credit Facility was
reduced from $1.25 billion to $950 million with an accordion feature up to $1.2 billion. In
addition, the Company also entered into a new $65 million unsecured credit facility with PNC Bank,
N.A. ( the
- 30 -
New PNC Facility and, together with the New Unsecured Credit Facility, the New Revolving
Credit Facilities) (Note 4). The size of the New PNC Facility was reduced from $75 million to $65
million. Both of the New Revolving Credit Facilities mature in February 2014 and currently bear
interest at variable rates based on LIBOR plus 275 basis points and, subject to adjustment as
determined by the Companys current corporate credit ratings from Moodys and S&P.
The New Unsecured Credit Facility includes a competitive bid option on periodic interest rates
for up to 50% of the facility. The New Revolving Credit Facilities require the Company to comply
with certain covenants relating to total outstanding indebtedness, secured indebtedness,
maintenance of unencumbered real estate assets, unencumbered debt yield and fixed charge coverage.
The New Unsecured Credit Facility also provides for an annual facility fee, currently at 0.50% on
the entire facility. The New PNC Facility generally reflects terms consistent with those contained
in the New Unsecured Credit Facility.
In October 2010, the Company amended its secured term loan with KeyBank National Association
to conform the covenants to the New Revolving Credit Facility provisions and repaid $200 million of
the outstanding balance using proceeds drawn on the New Unsecured Revolving Credit Facility.
- 31 -
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
is designed to provide a reader of these financial statements with a narrative from the perspective
of management on the Companys financial condition, results of operations, liquidity and other
factors that may affect the Companys future results. The Company believes it is important to read
the MD&A in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2009 as
well as other publicly available information.
Executive Summary
The Company is a self-administered and self-managed real estate investment trust (REIT), in
the business of owning, managing and developing a portfolio of shopping centers. As of September
30, 2010, the Companys portfolio consisted of 541 shopping centers, including 245 shopping centers
owned through unconsolidated joint ventures and three that are otherwise consolidated by the
Company, and six business centers. These properties consist of shopping centers, lifestyle centers
and enclosed malls owned in the United States, Puerto Rico and Brazil. At September 30, 2010, the
Company owned and/or managed approximately 117.7 million total square feet of gross leasable area
(GLA), which includes all of the aforementioned properties and 41 properties owned by a third
party. The Company also owns land in Canada and Russia at which active development is currently
deferred. At September 30, 2010, the aggregate occupancy of the Companys shopping center
portfolio was 88.0%, as compared to 87.1% at September 30, 2009. The Company owned 664 shopping
centers and six business centers at September 30, 2009. The average annualized base rent per
occupied square foot was $12.95 at September 30, 2010, as compared to $12.59 at September 30, 2009.
Net loss applicable to DDR common shareholders for the three-month period ended September 30,
2010, was $24.9 million, or $0.10 per share (diluted and basic), compared to net loss applicable to
DDR common shareholders of $148.4 million, or $0.90 per share (diluted and basic), for the
prior-year comparable period. Net loss applicable to DDR common shareholders for the nine-month
period ended September 30, 2010, was $156.8 million, or $0.65 per share (diluted and basic),
compared to net loss applicable to DDR common shareholders of $308.7 million, or $2.11 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 September 30, 2010, was
$37.1 million compared to a loss of $90.1 million for the three-month period ended September 30,
2009. FFO applicable to DDR common shareholders for the nine-month period ended September 30,
2010, was $32.7 million compared to a loss of $116.6 million for the nine-month period ended
September 30, 2009. The increase in FFO for both the three- and nine-month periods ended September
30, 2010, was primarily the result of a decrease in impairment-related charges, gain on debt
retirement and the equity derivative adjustment associated with the Otto Family investment in the
Company.
Third Quarter 2010 Operating Results
In the third quarter of 2010, the Company continued to focus on improving its operational and
financial objectives. On the operational side, leasing momentum and deal volume continued to
- 32 -
improve during the quarter. Improvements in economic lease terms vary depending on market and
property type. Overall, the Company is experiencing the most improvement in the junior anchor
category. As available retail space supply continues to be absorbed and minimal new space is
expected to come online, retailers, especially in the anchor and junior anchor categories, appear
to be securing the space necessary to meet their store opening plans for 2011 and 2012. In
addition, the increasing demand for temporary space continues to put upward pressure on rents.
The Company remains encouraged by the continued leasing of large-box space (generally greater
than 20,000 GLA). In the third quarter, the Company executed 14 new leases for 397,000 square feet
of large-box space. Re-tenanting these large-box vacancies provide potential for income growth and
an improved quality of the tenants in the portfolio. The Companys retail tenants continue to
demonstrate flexibility in their size and configuration for their new store openings. Smaller and
more flexible prototypes have enabled retailers to gain market-share by opening stores in smaller
markets or adding another store within an existing proven market. Much of the space that the
Company has leased over the past year has not yet taken occupancy and therefore is not yet paying
rent. Most of the junior anchor leases that are expected to be signed in the next several quarters
are not expected to impact the Companys revenues until late 2011 or early 2012.
The Company continues to remain focused on its initiatives to delever the balance sheet and
identify opportunities to extend debt maturities. As of September 30, 2010, total consolidated
outstanding indebtedness was $4.4 billion as compared to $5.2 billion at December 31, 2009. In
October 2010, the Company refinanced its unsecured revolving credit facilities, which now have an
aggregate capacity of just over $1.0 billion and each has a 40-month term that expires in February
2014. The refinancing of the unsecured revolving credit facilities was a significant financial
goal and an important step toward extending the maturity profile of the Companys debt and lowering
its corporate risk profile. The reduction in the overall size of the credit facilities is
consistent with the Companys plan to continue to implement a longer-term financing strategy and
shift away from reliance on short-term debt. The Companys financial covenants remained largely
the same, with the exception of the unencumbered asset coverage test, which now has a 1.67 times
minimum ratio as compared to 1.60 times minimum ratio in the previous agreements and the addition
of an unencumbered net operating income (NOI) yield covenant, which measures unencumbered asset
NOI to unsecured debt. In conjunction with the refinancings, the Company repaid $200.0 million of
its secured term loan using proceeds from the revolving credit facilities. The pricing on the term
loan remains the same, at LIBOR plus 120 basis points, and the maturity remains February 2012.
In the third quarter of 2010, the Company issued approximately 5.1 million common shares
through the use of its continuous equity program, generating $58.3 million of gross proceeds that
were used for investments in two loans that are collateralized by seven high quality shopping
centers, six of which the Company leases and manages. The Company prudently evaluates the
underwriting of its loan investments and only invests in opportunities in which the Company
believes both the loan investment and loan collateral are aligned with the Companys long-term
strategic goals.
Through September 30, 2010, the Company generated more than approximately $625 million of
proceeds from the sale of wholly-owned and joint venture assets, of which the Companys share was
more than approximately $185 million. The Company continues to be focused on selling those assets
that are not part of its prime portfolio, including non-income producing or negative income
- 33 -
producing assets. Prime assets are considered those assets that the Company intends to hold
for a long term and not offer for sale to a third party. The Company intends to pursue additional
sales of non-prime assets where pricing and terms are acceptable.
The Company has addressed all of its consolidated debt maturing in 2010. At September
30, 2010, the Companys share of unconsolidated mortgages maturing in 2010 was approximately $51.8
million, all of which is non-recourse to DDR. The Company anticipates that these unconsolidated
mortgages will be refinanced, extended or repaid by the applicable joint venture. The Company has
extended its weighted average debt duration to over four years. The issuance of $300 million
aggregate principal amount of 10-year unsecured notes completed in August 2010, the 40-month term
on the new credit facilities and the issuance of $350 million aggregate principal amount of 30-year
convertible unsecured notes completed in November 2010 contributed to the extended duration, and
have helped to balance the Companys debt maturity profile.
The Company continues to be selective in development spending. Capital spending on
developments in through the first nine months of 2010 was primarily related to new tenants in
existing developments or redevelopments.
The Company continues to monitor the economic environment in which it operates and believes
the careful operating decisions will allow the Company to take advantage of opportunities and
challenges that arise, and to create value for its shareholders. Overall, the Company is pleased
with its progress on these initiatives. The Company remains committed to its disciplined strategy
of simplifying the business and reducing risk for its shareholders, bondholders and lenders.
Results of Operations
Continuing Operations
Shopping center properties owned as of January 1, 2009, but excluding properties under
development or redevelopment and those classified in discontinued operations, are referred to
herein as the Core Portfolio Properties.
- 34 -
Revenues from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Base and percentage rental revenues
|
|
$
|
134,565
|
|
|
$
|
132,121
|
|
|
$
|
2,444
|
|
|
|
1.9
|
%
|
Recoveries from tenants
|
|
|
44,431
|
|
|
|
42,475
|
|
|
|
1,956
|
|
|
|
4.6
|
|
Ancillary and other property income
|
|
|
5,846
|
|
|
|
5,223
|
|
|
|
623
|
|
|
|
11.9
|
|
Management fees, development fees
and other fee income
|
|
|
12,961
|
|
|
|
14,693
|
|
|
|
(1,732
|
)
|
|
|
(11.8
|
)
|
Other
|
|
|
995
|
|
|
|
1,191
|
|
|
|
(196
|
)
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
198,798
|
|
|
$
|
195,703
|
|
|
$
|
3,095
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Base and percentage rental revenues
(A)
|
|
$
|
405,306
|
|
|
$
|
399,716
|
|
|
$
|
5,590
|
|
|
|
1.4
|
%
|
Recoveries from tenants
(B)
|
|
|
133,242
|
|
|
|
131,232
|
|
|
|
2,010
|
|
|
|
1.5
|
|
Ancillary and other property income
(C)
|
|
|
15,330
|
|
|
|
14,884
|
|
|
|
446
|
|
|
|
3.0
|
|
Management fees, development fees and other fee
income
(D)
|
|
|
40,122
|
|
|
|
43,194
|
|
|
|
(3,072
|
)
|
|
|
(7.1
|
)
|
Other
(E)
|
|
|
6,803
|
|
|
|
6,172
|
|
|
|
631
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
600,803
|
|
|
$
|
595,198
|
|
|
$
|
5,605
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The increase was due to the following (in millions):
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
Increase
|
|
Core Portfolio Properties
|
|
$
|
(1.8
|
)
|
Acquisition of real estate assets
|
|
|
7.9
|
|
Development/redevelopment of shopping center properties
|
|
|
0.1
|
|
Straight-line rents
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
$
|
5.6
|
|
|
|
|
|
|
|
|
|
|
The decrease in Core Portfolio Properties is primarily attributable to the major tenant
bankruptcies that occurred in the first quarter of 2009. These bankruptcies have also
significantly contributed to the current lower occupancy level compared to the Companys
historical levels. The Company acquired three assets in the fourth quarter of 2009
contributing to the increase above.
|
- 35 -
|
|
|
|
|
The following tables present the operating statistics impacting base and percentage rental
revenues summarized by the following portfolios: combined shopping center portfolio,
business center portfolio, wholly-owned shopping center portfolio and joint venture shopping
center portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shopping Center
|
|
Business Center
|
|
|
Portfolio
|
|
Portfolio
|
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Centers owned
|
|
|
541
|
|
|
|
664
|
|
|
|
6
|
|
|
|
6
|
|
Aggregate occupancy rate
|
|
|
88.0
|
%
|
|
|
87.1
|
%
|
|
|
80.7
|
%
|
|
|
71.4
|
%
|
Average annualized base
rent per occupied
square foot
|
|
$
|
12.95
|
|
|
$
|
12.59
|
|
|
$
|
11.00
|
|
|
$
|
12.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-Owned
|
|
Joint Venture Shopping
|
|
|
Shopping Centers
|
|
Centers
|
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Centers owned
|
|
|
293
|
|
|
|
311
|
|
|
|
245
|
|
|
|
318
|
|
Consolidated centers
primarily owned through a
joint venture previously
occupied by Mervyns in 2009
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
3
|
|
|
|
35
|
|
Aggregate occupancy rate
|
|
|
88.3
|
%
|
|
|
89.8
|
%
|
|
|
87.9
|
%
|
|
|
84.8
|
%
|
Average annualized base rent
per occupied square foot
|
|
$
|
11.96
|
|
|
$
|
11.73
|
|
|
$
|
14.31
|
|
|
$
|
13.36
|
|
|
|
|
|
(B)
|
|
The increase in recoveries is primarily a function of the acquisition of three assets
in 2009. Recoveries were approximately 71.2% and 74.3% of operating expenses and real
estate taxes including the impact of bad debt expense recognized for the nine months ended
September 30, 2010 and 2009, respectively. The decrease in the recoveries percentage is
primarily a function of real estate tax assessments discussed below that may not be
recoverable from tenants at varying amounts.
|
|
(C)
|
|
Ancillary revenue opportunities have historically included short-term and seasonal
leasing programs, outdoor advertising programs, wireless tower development programs, energy
management programs, sponsorship programs and various other programs.
|
|
(D)
|
|
Decreased primarily due to the following (in millions):
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
Increase
|
|
Development fee income
|
|
$
|
0.2
|
|
Leasing commissions
|
|
|
1.2
|
|
Management fee income associated with asset sales
|
|
|
(2.6
|
)
|
Property and asset management fee income at various
unconsolidated joint ventures
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
$
|
(3.1
|
)
|
|
|
|
|
- 36 -
|
|
|
(E)
|
|
Composed of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Lease terminations
|
|
$
|
4.1
|
|
|
$
|
3.4
|
|
Financing fees
|
|
|
0.7
|
|
|
|
0.9
|
|
Other miscellaneous
|
|
|
2.0
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
$
|
6.8
|
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
Expenses from Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Operating and maintenance
|
|
$
|
33,676
|
|
|
$
|
34,521
|
|
|
$
|
(845
|
)
|
|
|
(2.4
|
)%
|
Real estate taxes
|
|
|
29,518
|
|
|
|
26,023
|
|
|
|
3,495
|
|
|
|
13.4
|
|
Impairment charges
(B)
|
|
|
5,063
|
|
|
|
500
|
|
|
|
4,563
|
|
|
|
912.6
|
|
General and administrative
|
|
|
20,180
|
|
|
|
25,886
|
|
|
|
(5,706
|
)
|
|
|
(22.0
|
)
|
Depreciation and amortization
|
|
|
54,903
|
|
|
|
51,379
|
|
|
|
3,524
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
143,340
|
|
|
$
|
138,309
|
|
|
$
|
5,031
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Operating and maintenance
(A)
|
|
$
|
104,599
|
|
|
$
|
99,734
|
|
|
$
|
4,865
|
|
|
|
4.9
|
%
|
Real estate taxes
(A)
|
|
|
82,466
|
|
|
|
76,827
|
|
|
|
5,639
|
|
|
|
7.3
|
|
Impairment charges
(B)
|
|
|
78,189
|
|
|
|
12,739
|
|
|
|
65,450
|
|
|
|
513.8
|
|
General and administrative
(C)
|
|
|
62,546
|
|
|
|
73,469
|
|
|
|
(10,923
|
)
|
|
|
(14.9
|
)
|
Depreciation and amortization
(A)
|
|
|
165,544
|
|
|
|
164,017
|
|
|
|
1,527
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
493,344
|
|
|
$
|
426,786
|
|
|
$
|
66,558
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The changes for the nine months ended September 30, 2010 compared to 2009, are due to
the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
Depreciation
|
|
|
|
and
|
|
|
Real Estate
|
|
|
and
|
|
|
|
Maintenance
|
|
|
Taxes
|
|
|
Amortization
|
|
Core Portfolio Properties
|
|
$
|
1.0
|
|
|
$
|
4.1
|
|
|
$
|
(2.6
|
)
|
Acquisitions of real estate assets
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
1.9
|
|
Development/redevelopment of
shopping center properties
|
|
|
2.7
|
|
|
|
0.1
|
|
|
|
1.2
|
|
Personal property
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.9
|
|
|
$
|
5.6
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in real estate taxes is primarily due to an approximately $3.0 million real
estate tax assessment retroactive to 2006 for one of the Companys largest properties in
California. The entire expense for the four-year supplemental tax bill is included in the
2010 results. In addition, the real estate taxes for the Puerto Rico assets increased $1.4
million due to a reassessment effective in the third quarter of 2009. The Company continues
to aggressively appeal real estate tax valuations, as
|
- 37 -
|
|
|
|
|
appropriate, particularly for those shopping centers impacted by major tenant bankruptcies.
The fluctuations in depreciation expense are attributable to accelerated depreciation and
real estate assets written off in 2009 related to major tenant bankruptcies. This decrease
in depreciation expense was partially offset by the impact of additional assets placed in
service in 2010.
|
|
(B)
|
|
The Company recorded impairment charges during the three- and nine-month periods ended
September 30, 2010 and 2009, on the following consolidated assets and investments (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Land held for development
(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54.3
|
|
|
$
|
|
|
Undeveloped land
(2)
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
0.4
|
|
Assets marketed for sale
(2)
|
|
|
5.1
|
|
|
|
0.5
|
|
|
|
19.0
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments from continuing operations
|
|
$
|
5.1
|
|
|
$
|
0.5
|
|
|
$
|
78.2
|
|
|
$
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold assets included in discontinued
operations
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
29.5
|
|
|
|
71.9
|
|
Assets formerly occupied by Mervyns
included in discontinued
operations
(3)
|
|
|
|
|
|
|
|
|
|
|
35.3
|
|
|
|
61.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
64.8
|
|
|
|
132.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture investments
|
|
|
|
|
|
|
61.2
|
|
|
|
|
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges
|
|
$
|
7.1
|
|
|
$
|
63.9
|
|
|
$
|
143.0
|
|
|
$
|
247.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts relate to land held for development in Togliatti and Yaroslavl,
Russia, of which the Companys proportionate share was $41.9 million after
adjusting for the allocation of loss to the non-controlling interest in this
consolidated joint venture. The asset impairments were triggered primarily due to
a change in the Companys investment plans for these projects. Both investments
relate to large-scale development projects in Russia. During the second quarter
of 2010, the Company determined that it was no longer committed to invest the
necessary amount of capital to complete the projects without alternative sources
of capital from third-party investors or lending institutions.
|
|
(2)
|
|
The impairment charges were triggered primarily due to the Companys
marketing of these assets for sale. These assets were not classified as held for
sale as of September 30, 2010, due to outstanding substantive contingencies
associated with the respective contracts.
|
|
(3)
|
|
These assets were deconsolidated in the third quarter of 2010 and all
operating results have been reclassified as discontinued operations.
|
|
|
|
For the nine-month period ended September 30, 2010, the Companys proportionate
share of these impairments was $16.5 million after adjusting for the allocation of
loss to the non-controlling interest in this previously consolidated joint venture.
The 2010 impairment charges were triggered primarily due to a change in the
Companys holding period assumptions for this substantially vacant portfolio.
During the second quarter of 2010, the Company determined it was no longer
committed to the long-term management and investment in these assets. (See
discussion of the default status of the joint ventures mortgage note payable and
asset receivership status in Liquidity and Capital Resources.)
|
|
|
|
For the nine-month period ended September 30, 2009, the Companys proportionate
share of these impairments was $29.7 million after adjusting for the allocation of
loss to the non-controlling interest in this consolidated joint venture. The 2009
impairment charges were triggered primarily due to the Companys marketing of
certain assets for sale combined with the then overall economic downturn in the
retail real estate environment. A full write down of this portfolio was not
recorded in 2009 due to the Companys then holding period assumptions and future
investment plans for these assets.
|
- 38 -
|
|
|
(C)
|
|
Total general and administrative expenses were approximately 5.0% and 5.6% of total
revenues, including total revenues of unconsolidated joint ventures and managed properties
and discontinued operations, for the nine-month periods ended September 30, 2010 and 2009,
respectively. During the nine months ended September 30, 2010, the Company incurred a $2.1
million separation charge relating to the departure of an executive officer. During the
nine months ended September 30, 2009, the Company recorded an accelerated charge of
approximately $15.4 million related to certain equity awards as a result of the Companys
change in control provisions included in its equity-based award plans. The Company
continues to expense internal leasing salaries, legal salaries and related expenses
associated with certain leasing and re-leasing of existing space.
|
Other Income and Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Interest income
|
|
$
|
1,614
|
|
|
$
|
3,257
|
|
|
$
|
(1,643
|
)
|
|
|
(50.5
|
)%
|
Interest expense
|
|
|
(53,774
|
)
|
|
|
(52,736
|
)
|
|
|
(1,038
|
)
|
|
|
2.0
|
|
Gain on retirement of debt, net
|
|
|
333
|
|
|
|
23,881
|
|
|
|
(23,548
|
)
|
|
|
(98.6
|
)
|
Loss on equity derivative instruments
|
|
|
(11,278
|
)
|
|
|
(118,174
|
)
|
|
|
106,896
|
|
|
|
(90.5
|
)
|
Other (expense) income, net
|
|
|
(3,899
|
)
|
|
|
2,235
|
|
|
|
(6,134
|
)
|
|
|
(274.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(67,004
|
)
|
|
$
|
(141,537
|
)
|
|
$
|
74,533
|
|
|
|
(52.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Interest income
(A)
|
|
$
|
4,425
|
|
|
$
|
9,420
|
|
|
$
|
(4,995
|
)
|
|
|
(53.0
|
)%
|
Interest expense
(B)
|
|
|
(166,809
|
)
|
|
|
(161,691
|
)
|
|
|
(5,118
|
)
|
|
|
3.2
|
|
Gain on retirement of debt, net
(C)
|
|
|
333
|
|
|
|
142,360
|
|
|
|
(142,027
|
)
|
|
|
(99.8
|
)
|
Loss on equity derivative instruments
(D)
|
|
|
(14,618
|
)
|
|
|
(198,199
|
)
|
|
|
183,581
|
|
|
|
(92.6
|
)
|
Other expense, net
(E)
|
|
|
(18,398
|
)
|
|
|
(8,897
|
)
|
|
|
(9,501
|
)
|
|
|
106.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(195,067
|
)
|
|
$
|
(217,007
|
)
|
|
$
|
(21,940
|
)
|
|
|
(10.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Decreased primarily due to interest earned from mortgage receivables, which aggregated
$102.9 million and $123.7 million, net of reserves, at September 30, 2010 and 2009,
respectively. In the fourth quarter of 2009, the Company established a full reserve on an
advance to an affiliate of $66.9 million and ceased the recognition of interest income.
The Company recorded $5.7 million of interest income for the nine-month period ended
September 30, 2009 relating to this advance. In addition, $58.3 million in mortgage
receivables were issued in mid-September 2010 and thus did not reflect a full period of
income in 2010.
|
- 39 -
|
|
|
(B)
|
|
The weighted-average debt outstanding and related weighted-average interest rates including
amounts allocated to discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended
|
|
|
September 30,
|
|
|
2010
|
|
2009
|
Weighted-average debt outstanding (in billions)
|
|
$
|
4.7
|
|
|
$
|
5.6
|
|
Weighted-average interest rate
|
|
|
5.0
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
2010
|
|
2009
|
Weighted-average interest rate
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
The increase in 2010 interest expense is primarily due to an increase in short-term interest
rates, partially offset by a reduction in outstanding debt. The Company ceases the
capitalization of interest as assets are placed in service or upon the suspension of
construction. Interest costs capitalized in conjunction with development and expansion
projects and unconsolidated development joint venture interests were $3.3 million and $9.5
million for the three and nine months ended September 30, 2010, respectively, as compared to
$5.7 million and $17.3 million for the respective periods in 2009. Because the Company has
suspended certain construction activities, the amount of capitalized interest has
significantly decreased in 2010.
|
|
(C)
|
|
Primarily relates to the Companys purchase of approximately $256.6 million and $673.6
million aggregate principal amount of its outstanding senior unsecured notes, including
senior convertible notes, at a net discount to par during the nine months ended September
30, 2010 and 2009, respectively. Approximately $83.1 million and $250.1 million aggregate
principal amount of senior unsecured notes repurchased in March 2010 and September 2009,
respectively, occurred through cash tender offers. The Company recorded $5.9 million and
$22.0 million during the nine months ended September 30, 2010 and 2009, respectively,
related to the required write-off of unamortized deferred financing costs and accretion
related to the senior unsecured notes repurchased.
|
|
(D)
|
|
Represents the impact of the valuation adjustments for the equity derivative
instruments issued as part of the stock purchase agreement with Mr. Alexander Otto (the
Investor) and certain members of the Otto family (collectively with the Investor, the
Otto Family). The valuation and resulting charges/gains primarily relate to the
difference between the closing trading value of the Companys common shares from January 1,
2010 to September 30, 2010 with respect to the warrants and April 9, 2009 through the
actual purchase date with respect to the common shares or April 9, 2009 through September
30, 2009 with respect to the warrants.
|
- 40 -
|
|
|
(E)
|
|
Other (expenses) income were comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Litigation-related expenses
|
|
$
|
(13.5
|
)
|
|
$
|
(4.3
|
)
|
Debt extinguishment costs
|
|
|
(3.3
|
)
|
|
|
(0.3
|
)
|
Note receivable reserve
|
|
|
0.1
|
|
|
|
(5.4
|
)
|
Gain from change in control
|
|
|
|
|
|
|
0.4
|
|
Gain on sale of MDT units
|
|
|
|
|
|
|
2.7
|
|
Abandoned projects and other expenses
|
|
|
(1.7
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(18.4
|
)
|
|
$
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The nine-month period ended September 30, 2010 included a $5.1 million reserve recorded in
connection with a legal matter at a property in Long Beach, California (see discussion in
Economic Conditions Legal Matters). This reserve was partially offset by a tax benefit
of approximately $2.4 million, classified in the tax (expense) benefit of taxable REIT
subsidiaries and state franchise and income taxes line item in the condensed consolidated
statement of operations, because the asset is owned through the Companys taxable REIT
subsidiary. Litigation-related expenses also include costs incurred by the Company to
defend the Coventry II Fund litigation (see discussion in Economic Conditions Legal
Matters). Total litigation-related expenditures, net of the tax benefit, were $11.1 million
for the nine-month period ended September 30, 2010.
|
Other Items (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Equity in net loss of joint ventures
|
|
$
|
(4,801
|
)
|
|
$
|
(183
|
)
|
|
$
|
(4,618
|
)
|
|
|
2,523.5
|
%
|
Impairment of joint venture investments
|
|
|
|
|
|
|
(61,200
|
)
|
|
|
61,200
|
|
|
|
(100.0
|
)
|
Tax expense of taxable REIT
subsidiaries and state franchise and
income taxes
|
|
|
(1,120
|
)
|
|
|
(610
|
)
|
|
|
(510
|
)
|
|
|
83.6
|
|
|
|
|
Nine-Month Periods Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Equity in net loss of joint ventures
(A)
|
|
$
|
(3,777
|
)
|
|
$
|
(8,984
|
)
|
|
$
|
5,207
|
|
|
|
(58.0
|
)%
|
Impairment of joint venture investments
|
|
|
|
|
|
|
(101,571
|
)
|
|
|
101,571
|
|
|
|
(100.0
|
)
|
Tax benefit (expense) of taxable REIT subsidiaries
and state franchise and income taxes
(B)
|
|
|
1,518
|
|
|
|
(426
|
)
|
|
|
1,944
|
|
|
|
(456.3
|
)
|
|
|
|
(A)
|
|
The reduced loss of equity in net loss of joint ventures for the nine months ended
September 30, 2010 compared to the prior year period is primarily a result of both a
decrease in impairments and losses from joint ventures sold prior to January 1, 2010 and
losses from Coventry II investments recorded in 2009. Because the Company wrote off its
basis in certain of the Coventry II investments in 2009, and it has no intention or
obligation to fund any additional losses, no additional losses were recorded in 2010 (see
Coventry II Fund discussion in Off Balance Sheet Arrangements).
|
|
(B)
|
|
The increase in tax benefit is primarily a result of a change in the net taxable income
position in 2010 of the Companys wholly-owned taxable REIT subsidiary and certain state
tax refunds. The Company has
|
- 41 -
|
|
|
|
|
a gross deferred tax asset of $50.3 million as of September 30, 2010 relating primarily to
three components: tax basis in assets in excess of GAAP basis, interest expense loss
carryforwards and net operating loss carryforwards. The Company does not have a valuation
allowance recorded for this deferred tax asset based on the Companys projection of future
income to be recognized.
|
Discontinued Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Loss from discontinued operations
|
|
$
|
(4,548
|
)
|
|
$
|
(6,090
|
)
|
|
$
|
1,542
|
|
|
|
(25.3
|
)%
|
Gain on deconsolidation of interests, net
|
|
|
5,221
|
|
|
|
|
|
|
|
5,221
|
|
|
|
100.0
|
|
Gain on
disposition of real estate, net of tax
|
|
|
889
|
|
|
|
4,448
|
|
|
|
(3,559
|
)
|
|
|
(80.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,562
|
|
|
$
|
(1,642
|
)
|
|
$
|
3,204
|
|
|
|
(195.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Loss from discontinued operations
(A)
|
|
$
|
(76,323
|
)
|
|
$
|
(145,558
|
)
|
|
$
|
69,235
|
|
|
|
(47.6
|
)%
|
Gain on deconsolidation of interests, net
|
|
|
5,221
|
|
|
|
|
|
|
|
5,221
|
|
|
|
100.0
|
|
Loss on disposition of real estate, net of tax
|
|
|
(2,602
|
)
|
|
|
(19,965
|
)
|
|
|
17,363
|
|
|
|
(87.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(73,704
|
)
|
|
$
|
(165,523
|
)
|
|
$
|
91,819
|
|
|
|
(55.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Included in discontinued operations for the three- and nine-month periods ended
September 30, 2010 and 2009, are 23 properties sold in 2010 (including one property held
for sale at December 31, 2009), one property held for sale at September 30, 2010 and 26
other properties that were deconsolidated for accounting purposes at September 30, 2010,
aggregating 4.3 million square feet, and 32 properties sold in 2009 aggregating 3.8 million
square feet, respectively. In addition, included in the reported loss for the nine months
ended September 30, 2010 and 2009, is $64.8 million and $132.9 million, respectively, of
impairment charges related to these assets reflected as discontinued operations. Gain on
deconsolidation of interests is primarily the result of the deconsolidation of the Mervyns
Joint Venture (as defined below), which resulted in a $5.6 million gain as the carrying
value of the non-recourse debt exceeded the carrying value of the collateralized assets.
(See Mervyns Joint Venture discussion in Liquidity and Capital Resources.)
|
Gain on Disposition of Real Estate (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Gain on disposition of real estate, net
|
|
$
|
145
|
|
|
$
|
7,128
|
|
|
$
|
(6,983
|
)
|
|
|
(98.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Gain on disposition of real estate, net
(A)
|
|
$
|
61
|
|
|
$
|
8,222
|
|
|
$
|
(8,161
|
)
|
|
|
(99.3
|
)%
|
- 42 -
|
|
|
(A)
|
|
The Company recorded net gains on disposition of real estate and real estate
investments as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Land sales
|
|
$
|
0.4
|
|
|
$
|
7.3
|
|
Previously deferred gains and other gains and
losses on dispositions
|
|
|
(0.3
|
)
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
$
|
0.1
|
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sales of land did not meet the criteria for discontinued operations because the land did
not have any significant operations prior to disposition. The previously deferred gains are
a result of assets that were contributed to joint ventures in prior years.
|
Non-Controlling Interests (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Loss attributable
to non-controlling
interests
|
|
$
|
1,450
|
|
|
$
|
2,804
|
|
|
$
|
(1,354
|
)
|
|
|
(48.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Loss attributable
to non-controlling
interests
(A)
|
|
$
|
38,378
|
|
|
$
|
39,848
|
|
|
$
|
(1,470
|
)
|
|
|
(3.7
|
)%
|
|
|
|
(A)
|
|
The Company recorded Loss attributable to non-controlling interests as follows (in
millions):
|
|
|
|
|
|
|
|
(Increase)
|
|
|
|
Decrease
|
|
Mervyns Joint Venture (owned approximately 50% by the Company)
|
|
$
|
(14.3
|
)
|
Other non-controlling interests
|
|
|
12.7
|
|
Decrease in the quarterly distribution to operating partnership
unit investments
|
|
|
0.1
|
|
|
|
|
|
|
|
$
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
DDR MDT MV (Mervyns Joint Venture) owns real estate formerly occupied by Mervyns, which declared
bankruptcy in 2008 and vacated all sites as of December 31, 2008. The change in the
non-controlling interest is primarily a result of the decrease in the amount of impairment charges
recorded in 2010 compared to 2009. The share of impairment charges for the holder of the
non-controlling interest was approximately $18.8 million for the nine-month period ended September
30, 2010 compared to $61.0 million for the nine-month period ended September 30, 2009, including
discontinued operations. This entity was deconsolidated for accounting purposes by the Company in
the third quarter of 2010 and the operating results are reported as a component of discontinued
operations. (See discussion of the default status of the joint ventures mortgage note payable and
asset receivership status in Liquidity and Capital Resources.) Partially offsetting this decrease
is income primarily attributable to impairment charges recorded in the second quarter of 2010 by
one of the Companys 75% owned consolidated investments, which owns land held for development in
Togliatti and Yaroslavl, Russia.
|
- 43 -
Net Loss (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Net loss attributable to DDR
|
|
$
|
(14,310
|
)
|
|
$
|
(137,846
|
)
|
|
$
|
123,536
|
|
|
|
(89.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
Net loss attributable to DDR
|
|
$
|
(125,132
|
)
|
|
$
|
(277,029
|
)
|
|
$
|
151,897
|
|
|
|
(54.8
|
)%
|
The increase in net loss attributable to DDR for the three and nine months ended
September 30, 2010 compared to 2009, was primarily the result of a decrease in impairment-related
charges, gain on debt retirement and the equity derivative adjustment associated with the Otto
Family investment in the Company.
A summary of changes in 2010 as compared to 2009 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three-Month
|
|
|
Nine-Month
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
Increase (decrease) in net operating revenues
(total revenues in excess of operating and
maintenance expenses and real estate taxes)
|
|
$
|
0.3
|
|
|
$
|
(4.9
|
)
|
Increase in impairment charges
|
|
|
(4.6
|
)
|
|
|
(65.5
|
)
|
Decrease in general and administrative expenses
|
|
|
5.7
|
|
|
|
10.9
|
|
Increase in depreciation expense
|
|
|
(3.5
|
)
|
|
|
(1.5
|
)
|
Decrease in interest income
|
|
|
(1.6
|
)
|
|
|
(5.0
|
)
|
Increase in interest expense
|
|
|
(1.0
|
)
|
|
|
(5.1
|
)
|
Decrease in gain on retirement of debt, net
|
|
|
(23.5
|
)
|
|
|
(142.0
|
)
|
Decrease in loss on equity derivative instruments
|
|
|
106.9
|
|
|
|
183.6
|
|
Change in other expense (income)
|
|
|
(6.1
|
)
|
|
|
(9.5
|
)
|
(Increase) decrease in equity in net loss of joint
ventures
|
|
|
(4.6
|
)
|
|
|
5.2
|
|
Decrease in impairment of joint venture investments
|
|
|
61.2
|
|
|
|
101.6
|
|
Change in income tax (expense) benefit
|
|
|
(0.5
|
)
|
|
|
2.0
|
|
Increase from discontinued operations
|
|
|
3.2
|
|
|
|
91.8
|
|
Increase in net loss on disposition of real estate
|
|
|
(7.0
|
)
|
|
|
(8.2
|
)
|
Change in non-controlling interests
|
|
|
(1.4
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
Decrease in net loss attributable to DDR
|
|
$
|
123.5
|
|
|
$
|
151.9
|
|
|
|
|
|
|
|
|
- 44 -
Funds From Operations
The Company believes that FFO, which is a non-GAAP financial measure, provides an additional
and useful means to assess the financial performance of REITs. FFO is frequently used by securities
analysts, investors and other interested parties to evaluate the performance of REITs, most of
which present FFO along with net income as calculated in accordance with GAAP.
FFO excludes GAAP historical cost depreciation and amortization of real estate and real estate
investments, which assumes that the value of real estate assets diminishes ratably over time.
Historically, however, real estate values have risen or fallen with market conditions, and many
companies utilize different depreciable lives and methods. Because FFO excludes depreciation and
amortization unique to real estate, gains and certain losses from depreciable property
dispositions, and extraordinary items, it can provide a performance measure that, when compared
year over year, reflects the impact on operations from trends in occupancy rates, rental rates,
operating costs, acquisition and development activities and interest costs. This provides a
perspective of the Companys financial performance not immediately apparent from net income
determined in accordance with GAAP.
FFO is generally defined and calculated by the Company as net income (loss), adjusted to
exclude (i) preferred share dividends, (ii) gains from disposition of depreciable real estate
property, except for those properties sold through the Companys merchant building program, which
are presented net of taxes, and those gains that represent the recapture of a previously recognized
impairment charge, (iii) extraordinary items and (iv) certain non-cash items. These non-cash items
principally include real property depreciation, equity income (loss) from joint ventures and equity
income (loss) from non-controlling interests, and adding the Companys proportionate share of FFO
from its unconsolidated joint ventures and non-controlling interests, determined on a consistent
basis.
For the reasons described above, management believes that FFO and Operating FFO (as described
below) provide the Company and investors with an important indicator of the Companys operating
performance. It provides a recognized measure of performance other than GAAP net income, which may
include non-cash items (often significant). Other real estate companies may calculate FFO and
Operating FFO in a different manner.
These measures of performance are used by the Company for several business purposes and by
other REITs. The Company uses FFO and/or Operating FFO in part (i) as a measure of a real estate
assets performance, (ii) to shape acquisition, disposition and capital investment strategies, and
(iii) to compare the Companys performance to that of other publicly traded shopping center REITs.
Management recognizes FFOs and Operating FFOs limitations when compared to GAAPs income
from continuing operations. FFO and Operating FFO do not represent amounts available for needed
capital replacement or expansion, debt service obligations, or other commitments and uncertainties.
Management does not use FFO or Operating FFO as an indicator of the Companys cash obligations and
funding requirements for future commitments, acquisitions or development activities. Neither FFO
nor Operating FFO represents cash generated from operating activities in accordance with GAAP and
neither is necessarily indicative of cash available to fund cash needs, including the payment of
dividends. Neither FFO nor Operating FFO should be considered an alternative to net
- 45 -
income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of
liquidity. FFO and Operating FFO are simply used as additional indicators of the Companys
operating performance.
For the three-month period ended September 30, 2010, FFO applicable to DDR common shareholders
was $37.1 million, compared to a loss of $90.1 million for the same period in 2009. For the
nine-month period ended September 30, 2010, FFO applicable to DDR common shareholders was $32.7
million, compared to a loss of $116.6 million for the same period in 2009. The increase in FFO for
the nine-month period ended September 30, 2010, was primarily the result of a decrease in
impairment-related charges, gain on debt retirement and the equity derivative adjustment associated
with the Otto Family investment in the Company.
The Companys calculation of FFO is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended
|
|
|
Nine-Month Periods Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net loss applicable to common
shareholders
(A)
|
|
$
|
(24,877
|
)
|
|
$
|
(148,413
|
)
|
|
$
|
(156,834
|
)
|
|
$
|
(308,731
|
)
|
Depreciation and amortization of
real estate investments
|
|
|
53,026
|
|
|
|
51,635
|
|
|
|
161,769
|
|
|
|
170,236
|
|
Equity in net loss of joint ventures
|
|
|
4,801
|
|
|
|
183
|
|
|
|
3,777
|
|
|
|
8,557
|
|
Joint ventures FFO
(B)
|
|
|
10,457
|
|
|
|
13,584
|
|
|
|
32,319
|
|
|
|
32,553
|
|
Non-controlling interests (OP Units)
|
|
|
8
|
|
|
|
8
|
|
|
|
24
|
|
|
|
167
|
|
Gain on disposition of depreciable
real estate
(C)
|
|
|
(6,339
|
)
|
|
|
(7,130
|
)
|
|
|
(8,394
|
)
|
|
|
(19,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO applicable to common
shareholders
|
|
|
37,076
|
|
|
|
(90,133
|
)
|
|
|
32,661
|
|
|
|
(116,623
|
)
|
Preferred dividends
|
|
|
10,567
|
|
|
|
10,567
|
|
|
|
31,702
|
|
|
|
31,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFO
|
|
$
|
47,643
|
|
|
$
|
(79,566
|
)
|
|
$
|
64,363
|
|
|
$
|
(84,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Includes straight-line rental revenue of approximately $0.4 million and $1.1 million
for the three-month periods ended September 30, 2010 and 2009, respectively, and $1.7
million and $2.5 million for the nine-month periods ended September 30, 2010 and 2009,
respectively. In addition, includes straight-line ground rent expense of approximately
$0.5 million and $0.6 million for the three-month periods ended September 30, 2010 and
2009, respectively, and $1.5 million and $1.4 million for the nine-month periods ended
September 30, 2010 and 2009, respectively (including discontinued operations).
|
|
(B)
|
|
At September 30, 2010 and 2009, the Company owned unconsolidated joint venture
interests relating to 245 and 318 operating shopping center properties, respectively.
|
Joint ventures FFO is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
|
Nine-Month Periods
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net loss
(1)
|
|
$
|
(21,278
|
)
|
|
$
|
(32,244
|
)
|
|
$
|
(69,573
|
)
|
|
$
|
(95,179
|
)
|
Loss on sale of real estate
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
Depreciation and
amortization of real
estate investments
|
|
|
47,814
|
|
|
|
62,434
|
|
|
|
149,815
|
|
|
|
189,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
26,536
|
|
|
$
|
30,190
|
|
|
$
|
80,195
|
|
|
$
|
94,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDRs share of FFO
|
|
$
|
10,457
|
|
|
$
|
13,584
|
|
|
$
|
32,319
|
|
|
$
|
32,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 46 -
|
|
|
(1)
|
|
Revenues for the three- and nine-month periods includes the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods
|
|
Nine-Month Periods
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Straight-line rents
|
|
$
|
0.9
|
|
|
$
|
1.4
|
|
|
$
|
3.0
|
|
|
$
|
3.0
|
|
DDRs proportionate share
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
|
|
(C)
|
|
The amount reflected as gains on disposition of real estate and real estate investments
from continuing operations in the condensed consolidated statements of operations includes
residual land sales, which management considers to be the disposition of non-depreciable
real property and the sale of newly developed shopping centers. These dispositions are
included in the Companys FFO and therefore are not reflected as an adjustment to FFO. For
the nine-month period ended September 30, 2010, the Company recorded $0.4 million of gain
on land sales. Net gains resulting from residual land sales aggregated $7.3 million for
both the three- and nine-month periods ended September 30, 2009.
|
Operating FFO
FFO excluding the net non-operating charges detailed below, or Operating FFO, is useful to
investors as the Company removes these net charges to analyze the results of its operations and
assess performance of the core operating real estate portfolio.
- 47 -
The Company incurred non-operating charges and gains for the three months ended September 30,
2010 and 2009, aggregating $26.1 million and $164.6 million, respectively, and for the nine months
ended September 30, 2010 and 2009, aggregating $160.7 million and $352.0 million, respectively,
summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month
|
|
|
For the Nine-Month
|
|
|
|
Periods Ended
|
|
|
Periods Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Impairment charges consolidated assets
|
|
$
|
5.1
|
|
|
$
|
0.5
|
|
|
$
|
78.2
|
|
|
$
|
12.7
|
|
Less portion of impairment charges allocated
to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(31.2
|
)
|
|
|
(31.4
|
)
|
Executive separation charge
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
Gain on debt retirement, net
|
|
|
(0.3
|
)
|
|
|
(23.9
|
)
|
|
|
(0.3
|
)
|
|
|
(142.4
|
)
|
Loss on equity derivative instruments related
to Otto investment
|
|
|
11.3
|
|
|
|
118.2
|
|
|
|
14.6
|
|
|
|
198.2
|
|
Litigation expenditures, debt extinguishment
costs, and other expenses, net of tax
|
|
|
3.9
|
|
|
|
|
|
|
|
16.0
|
|
|
|
|
|
Loss on asset sales and impairment charges
equity method investments
|
|
|
3.0
|
|
|
|
0.7
|
|
|
|
6.4
|
|
|
|
16.4
|
|
Consolidated impairment charges and loss on
sales discontinued operations
|
|
|
7.3
|
|
|
|
5.2
|
|
|
|
75.3
|
|
|
|
171.9
|
|
FFO associated with Mervyns Joint Venture, net
of non-controlling interest
|
|
|
1.0
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
Gain on deconsolidation of interests, net
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
(5.2
|
)
|
|
|
|
|
Change in control compensation charge
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
15.4
|
|
(Gain) loss on sale of MDT units, net loan
loss reserve and other expenses
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
9.6
|
|
Impairment charges on equity method investments
|
|
|
|
|
|
|
61.2
|
|
|
|
|
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating items
|
|
|
26.1
|
|
|
|
164.6
|
|
|
|
160.7
|
|
|
|
352.0
|
|
FFO attributable to DDR common shareholders
|
|
|
37.1
|
|
|
|
(90.1
|
)
|
|
|
32.7
|
|
|
|
(116.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating FFO attributable to DDR common
shareholders
|
|
$
|
63.2
|
|
|
$
|
74.5
|
|
|
$
|
193.4
|
|
|
$
|
235.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, due to the volatility and volume of significant and unusual accounting
charges and gains recorded in the Companys operating results, management began computing Operating
FFO and discussing it with the users of the Companys financial statements, in addition to other
measures such as net loss determined in accordance with GAAP as well as FFO. The Company believes
that FFO and Operating FFO along with reported GAAP measures, enables management to analyze the
results of its operations and assess the performance of its operating real estate and also may be
useful to investors. The Company will continue to evaluate the usefulness and relevance of the
reported non-GAAP measures, and such reported measures could change. Additionally, the Company
provides no assurances that these charges and gains are non-recurring. These charges and gains
could be reasonably expected to recur in future results of operations.
Operating FFO is a non-GAAP financial measure and, as described above, its use combined with
the required primary GAAP presentations, has been beneficial to management in improving the
understanding of the Companys operating results among the investing public and making comparisons
of other REITs operating results to the Companys more meaningful. The adjustments above may not
be comparable to how other REITs or real estate companies calculate their results of
- 48 -
operations and
the Companys calculation of Operating FFO differs from NAREITs definition of FFO.
Operating FFO has the same limitations as FFO as described above and should not be considered
as an alternative to net income (determined in accordance with GAAP) as an indication of the
Companys performance. Operating FFO does not represent cash generated from operating activities
determined in accordance with GAAP, and is not a measure of liquidity or an indicator of the
Companys ability to make cash distributions. The Company believes that to further understand its
performance, Operating FFO should be compared with the Companys reported net loss and considered
in addition to cash flows in accordance with GAAP, as presented in its condensed consolidated
financial statements.
Liquidity and Capital Resources
The Company periodically evaluates opportunities to issue and sell additional debt or equity
securities, obtain credit facilities from lenders, or repurchase, refinance or otherwise
restructure long-term debt for strategic reasons, or to further strengthen the financial position
of the Company. In 2010, the Company has strategically allocated cash flow from operating and
financing activities. The Company utilized public debt and equity offerings to strengthen the
balance sheet and improve its financial flexibility.
In October 2010, the Company entered into a new unsecured revolving credit facility with a
syndicate of financial institutions arranged by JP Morgan Chase Bank, N.A. and Wells Fargo Bank,
N.A. (the New Unsecured Credit Facility). The syndicates in the New Unsecured Credit Facility
are substantially the same as the original facility. The size of the New Unsecured Credit Facility
was reduced from $1.25 billion to $950 million with an accordion feature up to $1.2 billion upon
the Companys request, provided that new or existing lenders agree to the existing terms of the
facility and certain financial covenants are maintained. In addition, the Company also entered
into a new $65 million unsecured credit facility with PNC Bank, N.A. (the New PNC Facility and,
together with the New Unsecured Credit Facility, the New Revolving Credit Facilities). The size
of the New PNC Facility was reduced from $75 million to $65 million. Both of the New Revolving
Credit Facilities mature in February 2014 and, currently bear interest at variable rates based on
LIBOR plus 275 basis points and, subject to adjustment as determined by the Companys current
corporate credit ratings from Moodys Investors Service (Moodys) and Standard and Poors
(S&P).
The New Revolving Credit Facilities and the indentures under which the Companys senior and
subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating
covenants and require the Company to comply with certain covenants including, among other things,
leverage ratios and debt service coverage and fixed charge coverage ratios, as well as limitations
on the Companys ability to incur secured and unsecured indebtedness, sell all or substantially all
of the Companys assets, and engage in mergers and certain acquisitions. These credit facilities
and indentures also contain customary default provisions including the failure to make timely
payments of principal and interest payable thereunder, the failure to comply with the Companys
financial and operating covenants, the occurrence of a material adverse effect on the Company, and
the failure of the Company or its majority-owned subsidiaries (i.e., entities in which the Company
has a greater than 50% interest) to pay when due certain indebtedness in excess of certain
thresholds beyond applicable
- 49 -
grace and cure periods. In the event the Companys lenders or
bondholders declare a default, as defined in the applicable debt documentation, this could result
in the Companys inability to obtain
further funding and/or an acceleration of any outstanding borrowings. As of September 30,
2010, the Company was in compliance with all of its financial covenants. The Companys current
business plans indicate that it will continue to be able to operate in compliance with these
covenants for the remainder of 2010 and beyond.
The Company anticipates that cash flow from operating activities will continue to provide
adequate capital to funds its obligations such as all scheduled interest and monthly principal
payments on outstanding indebtedness, recurring tenant improvements and dividend payments in
accordance with REIT requirements. Certain of the Companys credit facilities and indentures
permit the acceleration of the maturity of the underlying debt in the event certain other debt of
the Company has been accelerated. Furthermore, a default under a loan to the Company or its
affiliates, a foreclosure on a mortgaged property owned by the Company or its affiliates or the
inability to refinance existing indebtedness may have a negative impact on the Companys financial
condition, cash flows and results of operations. These facts, and an inability to predict future
economic conditions, have encouraged the Company to adopt a strict focus on lowering leverage and
increasing financial flexibility.
The Company expects to fund its obligations from available cash, current operations and
utilization of its New Revolving Credit Facilities. The following information summarizes the
availability of the New Revolving Credit Facilities based on the borrowing capacity of the new
facilities entered into in October 2010 and reflecting the borrowings outstanding at September 30,
2010 (in millions):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21.3
|
|
|
|
|
|
|
|
|
|
|
New Revolving Credit Facilities
|
|
$
|
1,015.0
|
|
Less:
|
|
|
|
|
Amount outstanding
|
|
|
(483.1
|
)
|
Letters of credit
|
|
|
(20.4
|
)
|
|
|
|
|
Borrowing capacity available
|
|
$
|
511.5
|
|
|
|
|
|
As of September 30, 2010, the Company also had unencumbered consolidated operating properties
generating approximately $259.1 million of NOI for the twelve-month trailing period ended September
30, 2010, as calculated pursuant to the New Revolving Credit Facilities, thereby providing a
potential collateral base for future borrowings or to sell to generate cash proceeds, subject to
consideration of the financial covenants on unsecured borrowings.
The Company is committed to prudently managing and minimizing discretionary operating and
capital expenditures and raising the necessary equity and debt capital to maximize liquidity, repay
outstanding borrowings as they mature and comply with financial covenants in 2010 and beyond. Over
the past 12 months, the Company has already implemented several steps integral to the successful
execution of its capital raising plans through a combination of retained capital, the issuance of
common shares, debt financing and refinancing, and asset sales.
- 50 -
The Company intends to continue implementing a longer-term financing strategy and reduce its
reliance on short-term debt. The Company believes its New Revolving Credit Facilities should be
appropriately sized for the Companys liquidity strategy. The execution of these agreements was an
integral part of the Companys strategy to extend debt maturities and align the New Revolving
Credit Facilities with longer term capital structure needs.
Part of the Companys overall strategy includes addressing debt maturing in 2010 and years
following. As part of this strategy, through September 30, 2010, the Company purchased
approximately $256.6 million aggregate principal amount of its outstanding senior unsecured notes,
which includes the repurchase of $83.1 million aggregate principal amount of outstanding senior
unsecured notes repurchased through a cash tender offer at par in March 2010.
In March 2010, the Company issued $300 million aggregate principal amount of its 7.5% senior
unsecured notes due April 2017. In August 2010, the Company issued $300 million aggregate
principal amount of its 7.875% senior unsecured notes due September 2020. In November 2010, the
Company issued $350 million aggregate principal amount of its 1.75% convertible senior unsecured
notes due November 2040. In addition, the Company issued 53.0 million of its common shares in 2010
for aggregate gross proceeds of $454.4 million. Substantially all of the net proceeds from these
offerings were used to repay debt with shorter-term maturities, to repay amounts outstanding on the
Revolving Credit Facilities and to invest in two loans aggregating $58.3 million that are secured
by seven shopping centers, six of which are managed and leased by the Company.
The Company has been focused on balancing the amount and timing of its debt maturities. As a
result of the debt repurchases, unsecured debt issuances and New Revolving Credit Facilities all
completed in 2010, the Company extended its weighted average debt duration to over four years in
October 2010. At September 30, 2010, the Company did not have any remaining consolidated 2010 debt
maturities. The Company is focused on the timing and deleveraging opportunities for the
consolidated debt maturing in 2011. In October 2010, the Company extended the maturity date of the
New Revolving Credit Facilities to 2014 and repaid $200 million of the term loan maturing in 2011.
The wholly-owned maturities for 2011 include the remainder of the term loan, unsecured notes due in
April and August 2011 aggregating $180.6 million and mortgage maturities of approximately $210
million. The Company continually evaluates its debt maturities, and based on managements current
assessment, believes it has viable financing and refinancing alternatives.
The Company continues to look beyond 2010 to ensure that it executes its strategy to lower
leverage, increase liquidity, improve the Companys credit ratings and extend debt duration with
the goal of lowering the Companys risk profile and long-term cost of capital.
Unconsolidated Joint Ventures
At September 30, 2010, the Companys unconsolidated joint venture mortgage debt maturing in
2010 was $285.2 million (of which the Companys proportionate share was $51.8 million). Of this
amount, $250.1 million (of which the Companys proportionate share was $41.1 million) is
attributable to the Coventry II Fund assets (see Coventry II Fund discussion below) that all have
matured and two of which are in default as of November 8, 2010. At September 30, 2010, the
remainder of the Companys unconsolidated joint venture mortgage debt maturing in 2010 aggregated
- 51 -
$35.1 million, of which the Companys proportionate share was approximately $10.7 million. At
September 30, 2010, the Companys unconsolidated joint venture mortgage debt maturing in 2011 was
$763.9 million (of which the Companys proportionate share is $250.7 million). Of this amount,
$64.4 million (of which
the Companys proportionate share was $12.9 million) was attributable to the Coventry II Fund
assets (see Coventry II Fund discussion below).
These obligations generally require monthly payments of principal and/or interest over the
term of the obligation. In light of the current economic conditions, no assurance can be provided
that the aforementioned obligations will be refinanced or repaid as currently anticipated. Also,
additional financing may not be available at all or on terms favorable to the Company or its joint
ventures (see Contractual Obligations and Other Commitments).
Deconsolidation of Mervyns Joint Venture
As of September 30, 2010, the Companys joint venture with EDT Retail Trust (formerly
Macquarie DDR Trust, (MDT)), Mervyns Joint Venture, owned the underlying real estate of 25 assets
formerly occupied by Mervyns, which declared bankruptcy in 2008 and vacated all sites as of
December 31, 2008. The Company owns a 50% interest in the Mervyns Joint Venture, which was
previously consolidated by the Company. In June 2010, the Mervyns Joint Venture received a notice
of default from the servicer for the non-recourse loan secured by all of the remaining former
Mervyns stores due to the non-payment of required monthly debt service. In August 2010, a court
appointed a third-party receiver to manage and liquidate the remaining former Mervyns stores. The
amount outstanding under this mortgage note payable was $155.7 million at August 31, 2010. In
October 2010, the mortgage note matured.
During the second quarter of 2010, the Company changed its holding period assumptions for this
primarily vacant portfolio as it was no longer committed to providing any additional capital. This
triggered the recording of consolidated impairment charges of approximately $37.6 million on the
Mervyns Joint Venture assets of which the Companys proportionate share was $16.5 million after
adjusting for the allocation of loss to the non-controlling interest. Due to the appointment of a
third-party receiver, the Company no longer has the contractual ability to direct the activities
that most significantly impact the economic performance of the Mervyns Joint Venture nor does it
have the obligation to absorb losses or receive benefit from the Mervyns Joint Venture that could
potentially be significant to the entity. As a result, in September 2010, the Company
deconsolidated the assets and obligations of the Mervyns Joint Venture. Upon deconsolidation, the
Company recorded a gain of approximately $5.6 million because the carrying value of the nonrecourse
debt exceeded the carrying value of the collateralized assets of the joint venture. The revenues
and expenses associated with the Mervyns Joint Venture for all of the periods presented, including
the $5.6 million gain, are classified within discontinued operations in the condensed consolidated
statements of operations.
Cash Flow Activity
The Companys core business of leasing space to well-capitalized retailers continues to
perform well, as the Companys primarily discount-oriented tenants gain market share from retailers
offering higher price points and more discretionary goods. These long-term leases generate
consistent and predictable cash flow after expenses, interest payments and preferred share
dividends. This capital
- 52 -
is available for use at the Companys discretion for investment, debt
repayment, share repurchases and the payment of dividends on the common shares.
The Companys cash flow activities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended
|
|
|
September 30,
|
|
|
2010
|
|
2009
|
Cash flow provided by operating activities
|
|
$
|
211,038
|
|
|
$
|
216,651
|
|
Cash flow provided by investing activities
|
|
|
9,312
|
|
|
|
136,328
|
|
Cash flow used for financing activities
|
|
|
(225,118
|
)
|
|
|
(354,704
|
)
|
Operating Activities:
The decrease in cash flow from operating activities in the nine
months ended September 30, 2010, as compared to the same period in 2009 was primarily due to the
impact of asset sales.
Investing Activities:
The change in cash flow from investing activities for the nine months
ended September 30, 2010, as compared to the same period in 2009 was primarily due to a reduction
in capital expenditure spending for redevelopment and ground-up development projects as well as the
release of restricted cash partially offset by the issuance of notes receivable and a reduction in
proceeds from the disposition of real estate.
Financing Activities:
The change in cash flow used for financing activities for the nine
months ended September 30, 2010, as compared to the same period in 2009 was primarily due to
proceeds received from the issuance of common shares and senior notes in 2010.
The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable
income with declared common and preferred share cash dividends of $46.8 million for the nine months
ended September 30, 2010, as compared to $92.2 million of dividends paid in a combination of cash
and the Companys shares for the same period in 2009. Because actual distributions were greater
than 100% of taxable income, federal income taxes have not been incurred by the Company thus far
during 2010.
The Company declared a quarterly dividend of $0.02 per common share for the first three
quarters of 2010. The Company will continue to monitor the 2010 dividend policy and provide for
adjustments, as determined to be in the best interests of the Company and its shareholders, to
maximize the Companys free cash flow while still adhering to REIT payout requirements.
Sources and Uses of Capital
Dispositions
During the nine-month period ended September 30, 2010, the Company sold 23 consolidated
properties, aggregating 2.1 million square feet, generating gross proceeds of $116.9 million, and
recorded an aggregate loss on disposition of approximately $2.6 million. The Company previously
recorded approximately $69.8 million of impairment charges in prior quarters relating to these
disposed assets. Four separate unconsolidated joint ventures sold 25 properties, aggregating 4.7
million square feet through September 30, 2010, generating gross proceeds of $495.5 million. The
- 53 -
Companys proportionate share of the aggregate loss recorded by these joint ventures was
approximately $4.1 million.
As part of the Companys deleveraging strategy, the Company has been marketing non-prime
assets for sale. The Company is focusing on selling single-tenant assets and smaller shopping
centers with limited opportunity for growth. For certain real estate assets for which the Company
has entered into agreements that are subject to contingencies, including contracts executed
subsequent to September 30, 2010, a loss of approximately $15 million could be recorded if all such
sales were consummated on the terms currently being negotiated. Given the current state of the
financial markets and the Companys experience over the past few years, it is difficult for many
buyers to complete these transactions in the timing contemplated or at all. The Company has not
recorded an impairment charge on these assets at September 30, 2010 as the undiscounted cash flows,
when considering and evaluating the various alternative courses of action that may occur, exceed
the assets current carrying value. The Company evaluates all potential sale opportunities taking
into account the long-term growth prospects of assets being sold, the use of proceeds and the
impact to the Companys balance sheet, including financial covenants, in addition to the impact on
operating results. As a result, it is possible that additional assets could be sold for a loss
after taking into account the above considerations and such loss could be material.
Developments, Redevelopments and Expansions
In 2010, the Company expects to expend an aggregate of approximately $93.4 million, net, of
which approximately $77.1 million, net, was spent through September 30, 2010 to develop, expand,
improve and re-tenant various consolidated properties.
The Company will continue to closely monitor its spending in 2010 and 2011 for developments
and redevelopments, both for consolidated and unconsolidated projects, as the Company considers
this funding to be discretionary spending. The Company does not anticipate expending a significant
amount of funds on joint venture development projects in 2010 or 2011. One of the important
benefits of the Companys asset class is the ability to phase development projects over time until
appropriate leasing levels can be achieved. To maximize the return on capital spending and balance
the Companys de-leveraging strategy, the Company has revised its investment criteria thresholds.
The revised underwriting criteria include a higher cash-on-cost project return threshold, a longer
period before the leases commence and a higher stabilized vacancy rate. The Company applies this
revised strategy to both its consolidated and certain unconsolidated joint ventures that own assets
under development because the Company has significant influence and, in some cases, approval rights
over decisions relating to capital expenditures.
The Company has two consolidated projects that are being developed in phases at a projected
aggregate net cost of approximately $204 million. At September 30, 2010, approximately $183.9
million of costs had been incurred in relation to these projects. The Company is also currently
expanding/redeveloping a wholly-owned shopping center in Miami (Plantation), Florida, at a
projected aggregate net cost of approximately $51.6 million. At September 30, 2010, approximately
$37.8 million of costs had been incurred in relation to this redevelopment project.
- 54 -
At September 30, 2010, the Company had approximately $537.4 million of recorded costs related
to land and projects under development, for which active construction has ceased. Based on the
Companys current intentions and business plans, the Company believes that the expected
undiscounted cash flows exceed its current carrying value. However, if the Company were to dispose
of certain of these assets in the current market, the Company would likely incur a loss, which
would be material. The Company evaluates its intentions with respect to these assets each
reporting period and records an impairment charge equal to the difference between the current
carrying value and fair value when the expected undiscounted cash flows is less than the assets
carrying value.
The Company and its joint venture partners intend to commence construction on various other
developments, including several international projects only after substantial tenant leasing has
occurred and acceptable construction financing is available.
Off-Balance Sheet Arrangements
The Company has a number of off-balance sheet joint ventures and other unconsolidated entities
with varying economic structures. Through these interests, the Company has investments in operating
properties, development properties and two management and development companies. Such arrangements
are generally with institutional investors and various developers located throughout the United
States.
The unconsolidated joint ventures that have total assets greater than $250 million (based on
the historical cost of acquisition by the unconsolidated joint venture) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
|
|
Effective
|
|
|
|
Owned Square
|
|
|
Unconsolidated Real Estate
|
|
Ownership
|
|
|
|
Feet
|
|
Total Debt
|
Ventures
|
|
Percentage
(A)
|
|
Assets Owned
|
|
(Thousands)
|
|
(Millions)
|
|
DDRTC Core Retail Fund LLC
|
|
|
15.0
|
%
|
|
49 shopping centers in several states
|
|
|
12,161
|
|
|
$
|
1,230.6
|
|
Domestic Retail Fund
|
|
|
20.0
|
%
|
|
63 shopping centers in several states
|
|
|
8,282
|
|
|
|
965.8
|
|
Sonae Sierra Brasil BV Sarl
|
|
|
47.8
|
%
|
|
10 shopping centers and a management company in Brazil
|
|
|
3,803
|
|
|
|
94.8
|
|
DDR SAU Retail Fund
|
|
|
20.0
|
%
|
|
28 shopping centers in several states
|
|
|
2,371
|
|
|
|
196.3
|
|
|
|
|
(A)
|
|
Ownership may be held through different investment structures. Percentage ownerships
are subject to change, as certain investments contain promoted structures.
|
Funding for Joint Ventures
In connection with the development of shopping centers owned by certain affiliates and for
which the Company is the development manager, the Company and/or its equity affiliates have agreed
to fund the required capital associated with approved development projects aggregating
approximately $5.0 million at September 30, 2010. These obligations, composed principally of
construction contracts, are generally due in 12 to 36 months as the related construction costs are
incurred and are expected to be financed through new or existing construction loans, revolving
credit facilities and retained capital.
The Company has provided loans and advances to certain unconsolidated entities and/or related
partners in the amount of $71.1 million at September 30, 2010, for which the Companys joint
venture partners have not funded their proportionate share. Included in this amount, the Company
has
- 55 -
advanced $66.9 million of financing to one of its unconsolidated joint ventures, which accrues
interest at the greater of LIBOR plus 700 basis points or 12%, and has a default rate of 16% and an
initial maturity of July 2011. The Company established a reserve for the full amount recorded
related to this advance in 2009 (see Coventry II Fund discussion below).
Coventry II Fund
At September 30, 2010, Coventry Real Estate Advisors L.L.C. sponsored, and its affiliate
served as managing member of, Coventry Real Estate Fund II, L.L.C. and Coventry Fund II Parallel
Fund, L.L.C. (collectively the Coventry II Fund) which, along with the Company, through a series
of joint ventures, owned nine value-added retail properties and 38 sites formerly occupied by
Service Merchandise. The Company co-invested approximately 20% in each joint venture and is
generally responsible for day-to-day management of the properties. Pursuant to the terms of the
joint venture, the Company earns fees for property management, leasing and construction management.
The Company also could earn a promoted interest, along with Coventry Real Estate Advisors L.L.C.,
above a preferred return after return of capital to fund investors (see Legal Matters).
As of September 30, 2010, the aggregate carrying amount of the Companys net investment in the
Coventry II Fund joint ventures was approximately $13.9 million. The Company advanced $66.9
million of financing to one of the Coventry II Fund joint ventures, Coventry II DDR Bloomfield
which is subordinate to a senior lender. At September 30, 2010, this advance was fully reserved.
In addition to its existing equity and note receivable, the Company has provided partial payment
guaranties to third-party lenders in connection with the financings for five of the Coventry II
Fund projects. The amount of each such guaranty is not greater than the proportion to the Companys
investment percentage in the underlying project, and the aggregate amount of the Companys
guaranties is approximately $39.7 million at September 30, 2010.
Although the Company will not acquire additional assets through the Coventry II Fund joint
ventures, additional funds may be required to address ongoing operational needs and costs
associated with the joint ventures undergoing development or redevelopment. The Coventry II Fund is
exploring a variety of strategies to obtain such funds, including potential dispositions and
financings. The Company continues to maintain the position that it does not intend to fund any of
its joint venture partners capital contributions or their share of debt maturities.
In 2009, in connection with the Bloomfield Hills, Michigan project, the senior secured lender
sent to the borrower a formal notice of default and filed a foreclosure action, and initiated legal
proceedings against the Coventry II Fund for its failure to fund its 80% payment guaranty. The
Company paid its 20% guarantee of this loan in July 2009.
Also in 2009, the mortgages on the Kirkland, Washington project and the Benton Harbor,
Michigan project matured. The Company provided payment guaranties with respect to such loans. In
June 2010, these loans were extended for one year.
Also in 2009, the lenders for the Service Merchandise portfolio, the Orland Park, Illinois
project and the Cincinnati, Ohio project sent to the borrowers formal notices of default. The
Company provided a partial payment guaranty for the Service Merchandise portfolio loan. In
September 2010,
- 56 -
the Service Merchandise loan was extended for two years. The Coventry II Fund is
exploring a variety of strategies with the lenders for the Orland Park and Cincinnati projects.
On July 23, 2010, the construction loan for the Allen, Texas project matured, and on August 2,
2010, the borrower received from the lender formal notice of default. The Company provided a
payment guaranty with respect to such loan. The loan has been extended until November 20,
2010. The Coventry II Fund is exploring a variety of further extension and forbearance strategies.
Other Joint Ventures
The Company is involved with overseeing the development activities for several of its
unconsolidated joint ventures that are constructing, redeveloping or expanding shopping centers.
The Company earns a fee for its services commensurate with the level of oversight provided. The
Company generally provides a completion guaranty to the third party lending institution(s)
providing construction financing.
The Companys unconsolidated joint ventures had aggregate outstanding indebtedness to third
parties of approximately $4.0 billion and $5.6 billion at September 30, 2010 and 2009, respectively
(see Item 3. Quantitative and Qualitative Disclosures About Market Risk). Such mortgages and
construction loans are generally non-recourse to the Company and its partners; however, certain
mortgages may have industry-standard recourse provisions to the Company and its partners in certain
limited situations, such as misuse of funds and material misrepresentations. In connection with
certain of the Companys unconsolidated joint ventures, the Company agreed to fund any amounts due
to the joint ventures lender if such amounts are not paid by the joint venture based on the
Companys pro rata share of such amount which aggregated $43.5 million at September 30, 2010,
including guarantees associated with the Coventry II Fund.
The Company entered into an unconsolidated joint venture that owns real estate assets in
Brazil and has generally chosen not to mitigate any of the residual foreign currency risk through
the use of hedging instruments for this entity. The Company will continue to monitor and evaluate
this risk and may enter into hedging agreements at a later date.
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 hedge this exposure. The Company
manages currency exposure related to the net assets of the Companys Canadian and European
subsidiaries primarily through foreign currency-denominated debt agreements into which the Company
enters. Gains and losses in the parent companys net investments in its subsidiaries are
economically offset by losses and gains in the parent companys foreign currency-denominated debt
obligations.
For the nine months ended September 30, 2010, $5.2 million of net gains related to the foreign
currency-denominated debt agreements was included in the Companys cumulative translation
adjustment. 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
- 57 -
the functional currency of the hedged net investment, the hedge ineffectiveness
recognized in earnings was not material.
Financing Activities
The Company has historically accessed capital sources through both the public and private
markets. The Companys acquisitions, developments, redevelopments and expansions are generally
financed through cash provided from operating activities, revolving credit facilities, mortgages
assumed, construction loans, secured debt, unsecured debt, common and preferred equity offerings,
joint venture capital, preferred OP Units and asset sales. Total consolidated debt outstanding at
September 30, 2010, was approximately $4.4 billion, as compared to approximately $5.2 billion at
both December 31, 2009 and September 30, 2009.
In November 2010, the Company issued $350 million aggregate principal amount of 1.75%
convertible senior notes due November 2040. The notes have an initial conversion rate of 61.0361 per
$1,000 principal amount of the notes, representing a conversion price of approximately $16.38 per
common share. The initial conversion rate is subject to adjustment under certain circumstances.
The Company may redeem the notes anytime on or after November 15, 2015 in whole or in part for cash
equal to 100% of the principal amount of the notes plus accrued and unpaid interest to but
excluding the redemption date. Holders may require the Company to repurchase the notes in whole or
in part for cash at 100% of the principal amount of the notes plus accrued and unpaid interest to
but excluding the repurchase date, on November 15, 2015; November 15, 2020; November 15, 2025;
November 15, 2030; and November 15, 2035, as well as following the occurrence of certain change of
control transactions. Additionally, the holders of the notes may convert the notes upon the
occurrence of specified events, as well as anytime during the period beginning on May 15, 2040
through the second business day preceding the maturity date. In these instances, the principal
amount of the notes will be converted into cash and the remainder, if any, of the conversion value
in excess of such principal amount will be converted into cash, the Companys common shares or a
combination thereof (at the Companys election).
In October 2010, the Company entered into the New Unsecured Credit Facility and the New PNC
Facility. The size of the New Unsecured Credit Facility was reduced from $1.25 billion to $950
million with an accordion feature up to $1.2 billion. The size of New PNC Facility was reduced
from $75 million to $65 million. Both of the New Revolving Credit Facilities mature in February
2014 and, currently bear interest at variable rates based on LIBOR plus 275 basis points and,
subject to adjustment as determined by the Companys current corporate credit ratings from Moodys
and S&P.
In October 2010, the Company amended its secured term loan with KeyBank National Association
to conform the covenants to the New Unsecured Revolving Credit Facility provisions and repaid $200
million of the outstanding balance.
In August 2010, the Company issued $300 million aggregate principal amount of 7.875% senior
unsecured notes due September 2020. In March 2010, the Company issued $300 million aggregate
principal amount of 7.5% senior unsecured notes due April 2017. Net proceeds from these
- 58 -
offerings
were used to repay debt with shorter-term maturities and to reduce amounts outstanding on the
Companys unsecured credit facilities.
In the first nine months of 2010, the Company purchased approximately $256.6 million aggregate
principal amount of its outstanding senior unsecured notes, including senior convertible notes, at
a discount to par, resulting in a gross gain of approximately $5.9 million prior to the write-off
of $5.9 million of unamortized convertible debt accretion, unamortized deferred financing
costs and unamortized discount. Included in the first quarter purchases was approximately $83.1
million aggregate principal amount of near-term outstanding senior unsecured notes repurchased
through a cash tender offer at par in March 2010. These purchases included debt maturities in 2010
and 2011 as well as convertible senior unsecured notes due in 2012.
In 2010, the Company issued common shares of which substantially all net proceeds were used to
repay amounts outstanding on the Revolving Credit Facilities and invest in two loans aggregating
$58.3 million that are secured by seven shopping centers, six of which are managed and leased by
the Company. The issuances are as follows (in millions):
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Shares
|
|
|
Gross Proceeds
|
|
January 2010
|
|
|
5.0
|
|
|
$
|
46.1
|
|
February 2010
|
|
|
42.9
|
|
|
|
350.0
|
|
September 2010
|
|
|
5.1
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
Total issued
|
|
|
53.0
|
|
|
$
|
454.4
|
|
|
|
|
|
|
|
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Capitalization
At September 30, 2010, the Companys capitalization consisted of $4.4 billion of debt, $555.0
million of preferred shares and $2.9 billion of market equity (market equity is defined as common
shares and OP Units outstanding multiplied by $11.22, the closing price of the Companys common
shares on the New York Stock Exchange at September 30, 2010), resulting in a debt to total market
capitalization ratio of 0.6 to 1.0, as compared to a ratio of 0.7 to 1.0 at September 30, 2009. The
closing price of the common shares on the New York Stock Exchange was $9.24 at September 30, 2009.
At September 30, 2010, the Companys total debt consisted of $3.1 billion of fixed-rate debt and
$1.3 billion of variable-rate debt, including $100.0 million of variable-rate debt that had been
effectively swapped to a fixed rate through the use of interest rate derivative contracts. At
September 30, 2009, the Companys total debt consisted of $3.8 billion of fixed-rate debt and $1.4
billion of variable-rate debt, including $600 million of variable-rate debt that had been
effectively swapped to a fixed rate through the use of interest rate derivative contracts.
It is managements current strategy to have access to the capital resources necessary to
manage its balance sheet, to repay upcoming maturities and to consider making prudent investments
should such opportunities arise. Accordingly, the Company may seek to obtain funds through
additional debt or equity financings and/or joint venture capital in a manner consistent with its
intention to operate with a conservative debt capitalization policy and to reduce the Companys
cost of capital by maintaining an investment grade rating with Moodys and re-establish an
investment grade rating with S&P and Fitch. The security rating is not a recommendation to buy,
sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating
organization. Each rating should be
- 59 -
evaluated independently of any other rating. In light of the
current economic conditions, the Company may not be able to obtain financing on favorable terms, or
at all, which may negatively affect future ratings.
Contractual Obligations and Other Commitments
The Company has repaid all consolidated debt maturities for the remainder of 2010. The
Company has turned its focus to the timing and deleveraging opportunities for the consolidated debt
maturing in 2011. In October 2010, the Company extended the maturity date of the New Revolving
Credit Facilities to 2014 and repaid $200 million of the term loan maturing in 2011. The
wholly-owned maturities for 2011 include the remainder of the term loan, unsecured notes due in
April and August 2011 aggregating $180.6 million and mortgage maturities of approximately $210
million. The Company expects to repay this indebtedness through new debt or equity issuances,
extension of existing lending options, refinancing or utilizing the availability on its New
Revolving Credit Facilities. No assurance can be provided that the aforementioned obligations will
be refinanced or repaid as anticipated (see Liquidity and Capital Resources).
At September 30, 2010, the Company had letters of credit outstanding of approximately $54.0
million on its consolidated assets. The Company has not recorded any obligation associated with
these letters of credit. The majority of letters of credit are collateral for existing
indebtedness and other obligations of the Company.
In conjunction with the development of shopping centers, the Company has entered into
commitments aggregating approximately $38.1 million with general contractors for its wholly-owned
and consolidated joint venture properties at September 30, 2010. These obligations, comprised
principally of construction contracts, are generally due in 12 to 18 months as the related
construction costs are incurred and are expected to be financed through operating cash flow and/or
new or existing construction loans, assets sales or revolving credit facilities.
The Company routinely enters into contracts for the maintenance of its properties, which
typically can be cancelled upon 30 to 60 days notice without penalty. At September 30, 2010, the
Company had purchase order obligations, typically payable within one year, aggregating
approximately $3.7 million related to the maintenance of its properties and general and
administrative expenses.
The Company continually monitors its obligations and commitments. There have been no other
material items entered into by the Company since December 31, 2003, through September 30, 2010,
other than as described above. (see discussion of commitments relating to the Companys joint
ventures and other unconsolidated arrangements in Off-Balance Sheet Arrangements.)
Inflation
Most of the Companys long-term leases contain provisions designed to mitigate the adverse
impact of inflation. Such provisions include clauses enabling the Company to receive additional
rental income from escalation clauses that generally increase rental rates during the terms of the
leases and/or percentage rentals based on tenants gross sales. Such escalations are determined by
negotiation, increases in the consumer price index or similar inflation indices. In addition, many
of the
- 60 -
Companys leases are for terms of less than ten years, permitting the Company to seek
increased rents at market rates upon renewal. Most of the Companys leases require the tenants to
pay their share of operating expenses, including common area maintenance, real estate taxes,
insurance and utilities, thereby reducing the Companys exposure to increases in costs and
operating expenses resulting from inflation.
Economic Conditions
The retail market in the United States significantly weakened in 2008 and continued to be
challenged in 2009. Retail sales declined and tenants became more selective for new store openings.
Some retailers closed existing locations and, as a result, the Company experienced a loss in
occupancy compared to its historic levels. The reduction in occupancy in 2009 has continued to have
a negative impact on the Companys consolidated cash flows, results of operations and financial
position in 2010. However, the Company believes there is an improvement in the level of optimism
within its tenant base. Many retailers executed contracts in 2010 to open new stores and have
strong store opening plans for 2011 and 2012. The lack of new supply is causing retailers to
reconsider opportunities to open new stores in quality locations in well positioned shopping
centers. The Company continues to see strong demand from a broad range of retailers, particularly
in the off-price sector, which is a reflection on the general outlook of consumers who are
responding to the broader economic uncertainty by demanding more value for their dollars.
Offsetting some of the impact resulting from the reduced occupancy is that the Company has a low
occupancy cost relative to other retail formats and historic averages, as well as a diversified
tenant base with only one tenant exceeding 2.0% of total 2010 consolidated revenues (Walmart at
5.0%). Other significant tenants include Target, Lowes, Home Depot, Kohls, T.J. Maxx/Marshalls,
Publix Supermarkets, PetSmart and Bed Bath & Beyond, all of which have relatively strong credit
ratings, remain well-capitalized and have outperformed other retail categories on a relative basis.
The Company believes these tenants should continue providing it with a stable revenue base for the
foreseeable future, given the long-term nature of these leases. Moreover, the majority of the
tenants in the Companys shopping centers provide day-to-day consumer necessities with a focus
toward value and convenience versus high-priced discretionary luxury items, which the Company
believes will enable many of the tenants to continue operating within this challenging economic
environment.
The Company continously monitors potential credit issues of its tenants, and analyzes the
possible effects to the financial statements of the Company and its unconsolidated joint ventures.
In addition to the collectability assessment of outstanding accounts receivable, the Company
evaluates the related real estate for recoverability, as well as any tenant related deferred
charges for recoverability, which may include straight-line rents, deferred lease costs, tenant
improvements, tenant inducements and intangible assets (Tenant Related Deferred Charges). The
Company routinely evaluates its exposure relating to tenants in financial distress. Where
appropriate, the Company has either written off the unamortized balance or accelerated depreciation
and amortization expense associated with the Tenant Related Deferred Charges for such tenants.
The retail shopping sector has been affected by the competitive nature of the retail business
and the competition for market share as well as general economic conditions where stronger
retailers have out-positioned some of the weaker retailers. These shifts have forced some market
share away from weaker retailers and required them, in some cases, to declare bankruptcy and/or
close stores.
- 61 -
Certain retailers have announced store closings even though they have not filed for
bankruptcy protection. However, these store closings often represent a relatively small percentage
of the Companys overall gross leasable area and, therefore, the Company does not expect these
closings to have a material adverse effect on the Companys overall long-term performance. Overall,
the Companys portfolio remains stable. However, there can be no assurance that these events will
not
adversely affect the Company (see Item 1A. Risk Factors in the Companys Annual Report of Form
10-K for the year ended December 31, 2009).
Historically, the Companys portfolio has performed consistently throughout many economic
cycles, including downward cycles. Broadly speaking, national retail sales have grown since World
War II, including during several recessions and housing slowdowns. In the past, the Company has not
experienced significant volatility in its long-term portfolio occupancy rate. The Company has
experienced downward cycles before and has made the necessary adjustments to leasing and
development strategies to accommodate the changes in the operating environment and mitigate risk.
In many cases, the loss of a weaker tenant creates an opportunity to re-lease space at higher rents
to a stronger retailer. More importantly, the quality of the property revenue stream is high and
consistent, as it is generally derived from retailers with good credit profiles under long-term
leases, with very little reliance on overage rents generated by tenant sales performance. The
Company believes that the quality of its shopping center portfolio is strong, as evidenced by the
high historical occupancy rates, which have previously ranged from 92% to 96% since the Companys
initial public offering in 1993. Although the Company experienced a significant decline in
occupancy in 2009 due to the major tenant bankruptcies, the shopping center portfolio occupancy was
at 88.0% at September 30, 2010. Notwithstanding the decline in occupancy compared to historic
levels, the Company continues to sign a large number of new leases at rental rates that are
returning to historic averages. Moreover, the Company has been able to achieve these results
without significant capital investment in tenant improvements or leasing commissions. The Company
is very conscious of, and sensitive to, the risks posed to the economy, but is currently
comfortable that the position of its portfolio and the general diversity and credit quality of its
tenant base should enable it to successfully navigate through these challenging economic times.
Legal Matters
The Company 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., which funds are advised and managed by Coventry Real Estate
Advisors 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 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
- 62 -
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 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. In June 2010, the court granted in part and denied in part the Companys
motion. Coventry has filed a notice of appeal regarding that portion of the motion granted by the
court. The Company filed an answer to the complaint, and had asserted various counterclaims against
Coventry.
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 Companys
financial condition, results of operations or cash flows.
On November 18, 2009, the Company filed a complaint against Coventry 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 the 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 Companys
motion (and Coventrys opposition) and on December 4, 2009 issued a ruling in the Companys 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
Companys favor. A trial on the Companys request for a permanent injunction is currently scheduled
in January 2011. 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 attorneys
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 appealed the verdict. In July 2010, the California Court of Appeals entered an order
affirming the jury verdict. Included in other liabilities on the condensed consolidated balance
sheet at September 30, 2010 is a provision of $11.1 million that represents the full amount of the
verdict, plaintiffs attorneys fees and
- 63 -
accrued interest. A charge of approximately $5.1 million
($2.7 million net of tax), was recorded in the second quarter of 2010 relating to this matter.
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 Companys liquidity, financial position or results of operations.
New Accounting Standards Implemented
Amendments to Consolidation of Variable Interest Entities
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification No. 810,
Consolidation
(ASC 810), which was effective for fiscal years beginning
after November 15, 2009, and introduced a more qualitative approach to evaluating Variable Interest
Entities (VIEs) for consolidation. This standard requires a company to perform an analysis to
determine whether its variable interests give it a controlling financial interest in a VIE. This
analysis identifies the primary beneficiary of a VIE as the entity that has (a) the power to direct
the activities of the VIE that most significantly affect the VIEs economic performance and (b) the
obligation to absorb losses or the right to receive benefits that could 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 VIEs 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
reassessments 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 Companys adoption of this standard resulted in the deconsolidation of one entity in which
the Company has a 50% interest. 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 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.
As previously discussed in Liquidity and Capital Resources, the Company deconsolidated the
Mervyns Joint Venture, which had total assets and non-recourse liabilities of $151.3 million and
$156.9 million, respectively, upon the appointment by the court of a receiver (Receivership) in
August 2010. As a result of the Receivership agreement, the Company deconsolidated the Mervyns
Joint Venture because it no longer has the contractual ability to direct the activities that most
- 64 -
significantly impact the Mervyns Joint Ventures economic performance nor does it have the
obligation to absorb losses or receive benefits from the Mervyns Joint Venture that could
potentially be significant to the entity. The Companys accounting policy for evaluating
receivership transactions is based upon ASC 810, whereas diversity in practice exists whereby
others may apply the provisions of ASC 360-20,
Property, Plant, and EquipmentReal Estate Sales
(Alternative View). Under the Alternative View, the Company would likely not record a gain (or
loss) and would continue to
consolidate the entity (and its assets and non-recourse liabilities) until it legally
transferred the title of the underlying assets and was relieved of its obligations. The Emerging
Issues Task Force (EITF) of the FASB discussed this type of transaction at its September 2010
meeting but did not reach a conclusion. The EITF determined that further research was necessary to
more fully understand the scope and implications of the matter, prior to issuing a consensus for
exposure. If the EITF reaches a consensus in favor of the Alternative View, the Company will
evaluate the impact of such conclusion on its financial statements.
Forward-Looking Statements
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 Companys 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 Companys
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 Companys 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:
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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 Companys tenants, or new tenants, to enter into new leases or the ability of the
Companys existing tenants to renew their leases at rates at least as favorable as their
current rates;
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- 65 -
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The Company could be adversely affected by changes in the local markets where its
properties are located, as well as by adverse changes in national economic and market
conditions;
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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;
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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;
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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;
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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;
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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;
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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
Companys ability to promptly make changes to its portfolio to respond to economic and
other conditions;
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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;
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The Company may not complete development projects on schedule as a result of
various factors, many of which are beyond the Companys 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;
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- 66 -
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The Companys 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
Companys 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 Companys business or financial condition;
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Changes in interest rates could adversely affect the market price of the Companys
common shares, as well as its performance and cash flow;
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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;
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Disruptions in the financial markets could affect the Companys ability to obtain
financing on reasonable terms and have other adverse effects on the Company and the
market price of the Companys common shares;
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The Company is subject to complex regulations related to its status as a REIT and
would be adversely affected if it failed to qualify as a REIT;
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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;
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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 Companys instructions, requests, policies or
objectives, including the Companys 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 Companys 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;
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The outcome of pending or future litigation, including litigation with tenants or
joint venture partners, may adversely affect the Companys results of operations and
financial condition;
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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;
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|
|
International development and ownership activities carry risks in addition to those
the Company faces with the Companys domestic properties and operations. These risks
include:
|
- 67 -
|
|
|
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 earnings and cash;
|
|
|
|
Although the Companys 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;
|
|
|
|
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 and
|
|
|
|
The Company may have to restate certain financial statements as a result of changes
in, or the adoption of, new accounting rules and regulations to which the Company is
subject, including accounting rules and regulations affecting the Companys accounting
policies.
|
- 68 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys primary market risk exposure is interest rate risk. The Companys debt,
excluding unconsolidated joint venture debt, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Amount
|
|
Maturity
|
|
Interest
|
|
Percentage
|
|
Amount
|
|
Maturity
|
|
Interest
|
|
Percentage
|
|
|
(Millions)
|
|
(Years)
|
|
Rate
|
|
of Total
|
|
(Millions)
|
|
(Years)
|
|
Rate
|
|
of Total
|
Fixed-Rate Debt
(A)
|
|
$
|
3,077.1
|
|
|
|
4.4
|
|
|
|
6.2
|
%
|
|
|
70.0
|
%
|
|
$
|
3,684.0
|
|
|
|
3.3
|
|
|
|
5.7
|
%
|
|
|
71.1
|
%
|
Variable-Rate Debt
(A)
|
|
$
|
1,318.2
|
|
|
|
1.7
|
|
|
|
1.5
|
%
|
|
|
30.0
|
%
|
|
$
|
1,494.7
|
|
|
|
2.0
|
|
|
|
1.5
|
%
|
|
|
28.9
|
%
|
|
|
|
(A)
|
|
Adjusted to reflect the $100 million and $400 million of variable-rate debt that LIBOR
was swapped to a fixed-rate of 4.8% and 5.0% at September 30, 2010 and December 31, 2009,
respectively.
|
The Companys unconsolidated joint ventures fixed-rate indebtedness is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
Joint
|
|
Companys
|
|
Weighted-
|
|
Weighted-
|
|
Joint
|
|
Companys
|
|
Weighted-
|
|
Weighted-
|
|
|
Venture
|
|
Proportionate
|
|
Average
|
|
Average
|
|
Venture
|
|
Proportionate
|
|
Average
|
|
Average
|
|
|
Debt
|
|
Share
|
|
Maturity
|
|
Interest
|
|
Debt
|
|
Share
|
|
Maturity
|
|
Interest
|
|
|
(Millions)
|
|
(Millions)
|
|
(Years)
|
|
Rate
|
|
(Millions)
|
|
(Millions)
|
|
(Years)
|
|
Rate
|
Fixed-Rate Debt
|
|
$
|
3,305.9
|
|
|
$
|
710.6
|
|
|
|
4.2
|
|
|
|
5.7
|
%
|
|
$
|
3,807.2
|
|
|
$
|
785.4
|
|
|
|
4.8
|
|
|
|
5.6
|
%
|
Variable-Rate Debt
|
|
$
|
691.2
|
|
|
$
|
131.0
|
|
|
|
1.5
|
|
|
|
3.3
|
%
|
|
$
|
740.5
|
|
|
$
|
131.6
|
|
|
|
0.6
|
|
|
|
3.0
|
%
|
The Company intends to utilize retained cash flow, proceeds from asset sales, financing
and variable-rate indebtedness available under its Revolving Credit Facilities to repay
indebtedness and fund capital expenditures of the Companys shopping centers. Thus, to the extent
the Company incurs additional variable-rate indebtedness, its exposure to increases in interest
rates in an inflationary period would increase. The Company does not believe, however, that
increases in interest expense as a result of inflation will significantly impact the Companys
distributable cash flow.
The interest rate risk on a portion of the Companys and its unconsolidated joint ventures
variable-rate debt described above has been mitigated through the use of interest rate swap
agreements (the Swaps) with major financial institutions. At September 30, 2010 and December 31,
2009, the interest rate on the Companys $100 million and $400 million, respectively, consolidated
floating rate debt, was swapped to fixed rates. The Company is exposed to credit risk in the event
of nonperformance by the counterparties to the Swaps. The Company believes it mitigates its credit
risk by entering into Swaps with major financial institutions.
- 69 -
The fair value of the Companys fixed-rate debt is adjusted to include (i) include the $100
million and $400 million that were swapped to a fixed rate at September 30, 2010 and December 31,
2009, respectively, and (ii) the Companys proportionate share of the joint venture fixed-rate
debt. An estimate of the effect of a 100-point increase at September 30, 2010 and December 31,
2009, is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
100 Basis Point
|
|
|
|
|
|
|
|
|
|
100 Basis Point
|
|
|
|
|
|
|
|
|
|
|
Increase in
|
|
|
|
|
|
|
|
|
|
Increase in
|
|
|
Carrying
|
|
Fair
|
|
Market Interest
|
|
Carrying
|
|
Fair
|
|
Market Interest
|
|
|
Value
|
|
Value
|
|
Rates
|
|
Value
|
|
Value
|
|
Rates
|
Companys fixed-rate debt
|
|
$
|
3,077.1
|
|
|
$
|
3,218.6
|
(A)
|
|
$
|
3,111.6
|
(B)
|
|
$
|
3,684.0
|
|
|
$
|
3,672.1
|
(A)
|
|
$
|
3,579.4
|
(B)
|
Companys proportionate
share of joint venture
fixed-rate debt
|
|
$
|
710.6
|
|
|
$
|
683.0
|
|
|
$
|
661.6
|
|
|
$
|
785.4
|
|
|
$
|
703.1
|
|
|
$
|
681.0
|
|
|
|
|
(A)
|
|
Includes the fair value of interest rate swaps, which was a liability of $6.2
million and $15.4 million at September 30, 2010 and December 31, 2009, respectively.
|
|
(B)
|
|
Includes the fair value of interest rate swaps, which was a liability of $4.9
million and $12.2 million at September 30, 2010 and December 31, 2009, respectively.
|
The sensitivity to changes in interest rates of the Companys fixed-rate debt was
determined utilizing a valuation model based upon factors that measure the net present value of
such obligations that arise from the hypothetical estimate as discussed above.
Further, a 100 basis point increase in short-term market interest rates on variable-rate debt
at September 30, 2010 would result in an increase in interest expense of approximately $9.9 million
for the Company and $1.0 million representing the Companys proportionate share of the joint
ventures interest expense relating to variable-rate debt outstanding for the nine-month period.
The estimated increase in interest expense for the year does not give effect to possible changes in
the daily balance for the Companys or joint ventures outstanding variable-rate debt.
The Company and its joint ventures intend to continually monitor and actively manage interest
costs on their 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 and joint venture capital. Accordingly, the cost of
obtaining such protection agreements in relation to the Companys access to capital markets will
continue to be evaluated. The Company has not entered, and does not plan to enter, into any
derivative financial instruments for trading or speculative purposes. As of September 30, 2010, the
Company had no other material exposure to market risk.
- 70 -
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as required by Securities Exchange Act Rules 13a-15(b) and
15d-15(b), the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have
concluded that the Companys disclosure controls and procedures (as defined in Securities Exchange
Act Rule 13a-15(e)) are effective as of the end of the period covered by this quarterly report on
Form 10-Q to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms and were
effective as of the end of such period to ensure that information required to be disclosed by the
Company issuer in reports that it files or submits under the Securities Exchange Act is accumulated
and communicated to the Companys management, including its CEO and CFO, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
During the three-month period ended September 30, 2010, there were no changes in the Companys
internal control over financial reporting that materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting.
- 71 -
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as described below and other than routine litigation and administrative proceedings
arising in the ordinary course of business, the Company is not currently involved in any litigation
nor, to its knowledge, is any litigation threatened against the Company or its properties that is
reasonably likely to have a material adverse effect on the liquidity or results of operations of
the Company other than described below.
The Company 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., which funds are advised and managed by Coventry Real Estate
Advisors 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 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 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. In June 2010, the court granted in part and denied in part the
Companys motion. Coventry has filed a notice of appeal regarding that portion of the motion
granted by the court. The Company filed an answer to the complaint, and has asserted various
counterclaims against Coventry.
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 Companys
financial condition, results of operations or cash flows.
On November 18, 2009, the Company filed a complaint against Coventry 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
- 72 -
and the various joint ventures because the Company believes that the 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 Companys motion (and Coventrys opposition) and on December 4, 2009 issued a ruling in the
Companys 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 Companys favor. A trial on the Companys request for a permanent
injunction is currently scheduled in January 2011. 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 attorneys
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 appealed the verdict. In July 2010, the California Court of Appeals entered an order
affirming the jury verdict. Included in other liabilities on the condensed consolidated balance
sheet at September 30, 2010 is a provision of $11.1 million that represents the full amount of the
verdict, plaintiffs attorneys fees and accrued interest.
ITEM 1A. RISK FACTORS
None.
- 73 -
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number
|
|
|
(d) Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part
|
|
|
Dollar Value) of
|
|
|
|
|
|
|
|
|
|
|
|
of Publicly
|
|
|
Shares that May Yet
|
|
|
|
(a) Total number of
|
|
|
(b) Average Price
|
|
|
Announced Plans
|
|
|
Be Purchased Under
|
|
|
|
shares purchased
(1)
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
the Plans or Programs
|
|
July 1 31, 2010
|
|
|
96
|
|
|
$
|
10.03
|
|
|
|
|
|
|
|
|
|
August 1 31, 2010
|
|
|
72,301
|
|
|
|
11.35
|
|
|
|
|
|
|
|
|
|
September 1 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
72,397
|
|
|
$
|
11.35
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of common shares surrendered or deemed surrendered to the Company to satisfy minimum tax withholding obligations in
connection with the vesting and/or exercise of awards under the Companys equity-based compensation plans.
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
None
- 74 -
ITEM 6. EXHIBITS
|
|
|
4.1
|
|
Eleventh Supplemental Indenture, dated as of August 12, 2010, by and between the Company and
U.S. Bank National Association
|
|
|
|
31.1
|
|
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Exchange Act
of 1934
|
|
|
|
31.2
|
|
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Exchange Act
of 1934
|
|
|
|
32.1
|
|
Certification of CEO pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of this report pursuant to the Sarbanes-Oxley Act of
2002
1
|
|
|
|
32.2
|
|
Certification of CFO pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of this report pursuant to the Sarbanes-Oxley Act of
2002
1
|
|
|
|
101.INS
|
|
XBRL Instance Document.
2
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document.
2
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
2
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
2
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document.
2
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
2
|
|
|
|
1
|
|
Pursuant to SEC Release No. 34-4751, these exhibits are deemed to
accompany this report and are not filed as part of this report.
|
|
2
|
|
Submitted electronically herewith.
|
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible
Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2010
and December 31, 2009, (ii) Condensed Consolidated Statements of Operations for the Three-Month
Periods Ended September 30, 2010 and 2009, (iii) Condensed Consolidated Statements of Operations
for the Nine-Month Periods Ended September 30, 2010 and 2009, (iv) Condensed Consolidated
Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2010 and 2009, and (v)
Notes to Condensed Consolidated Financial Statements.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to
this Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of
the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of
any
- 75 -
registration or other document filed under the Securities Act or the Exchange Act, except as
shall be expressly set forth by specific reference in such filing.
- 76 -
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
|
|
|
|
|
|
|
/s/ Christa A. Vesy
Christa A. Vesy, Senior Vice President and Chief
|
|
|
|
|
Accounting Officer (Authorized Officer)
|
|
|
- 77 -
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
|
Filed Herewith or
|
Under Reg.
|
|
Form 10-Q
|
|
|
|
Incorporated Herein
|
S-K Item 601
|
|
Exhibit No.
|
|
Description
|
|
by Reference
|
4.1
|
|
|
4.1
|
|
|
Eleventh Supplemental Indenture,
dated as of August 12, 2010, by and
between the Company and U.S. Bank
National Association
|
|
Filed herewith
|
|
|
|
|
|
|
|
|
|
31
|
|
|
31.1
|
|
|
Certification of principal executive
officer pursuant to Rule 13a-14(a) of
the Exchange Act of 1934
|
|
Filed herewith
|
|
|
|
|
|
|
|
|
|
31
|
|
|
31.2
|
|
|
Certification of principal financial
officer pursuant to Rule 13a-14(a) of
the Exchange Act of 1934
|
|
Filed herewith
|
|
|
|
|
|
|
|
|
|
32
|
|
|
32.1
|
|
|
Certification of CEO pursuant to Rule
13a-14(b) of the Exchange Act and 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of this report
pursuant to the Sarbanes-Oxley Act of
2002 1
|
|
Filed herewith
|
|
|
|
|
|
|
|
|
|
32
|
|
|
32.2
|
|
|
Certification of CFO pursuant to Rule
13a-14(b) of the Exchange Act and 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of this report
pursuant to the Sarbanes-Oxley Act of
2002 1
|
|
Filed herewith
|
|
|
|
|
|
|
|
|
|
101
|
|
101.INS
|
|
XBRL Instance Document
|
|
Submitted electronically herewith
|
|
|
|
|
|
|
|
|
|
101
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
Submitted electronically herewith
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101
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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Submitted electronically herewith
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101
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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Submitted electronically herewith
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101
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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Submitted electronically herewith
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101
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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Submitted electronically herewith
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