DDR Reports Mixed Earnings - Analyst Blog

DDR Corp. (DDR) reported first quarter 2013 operating FFO (funds from operations) per share of 27 cents, in line with the Zacks Consensus Estimate. This comfortably surpassed the year- ago operating FFO of 24 cents. The year-over–year increase was mainly aided by organic growth and investments related to property acquisitions.

Including non-recurring items, DDR reported first quarter 2013 FFO of $82.5 million or 26 cents per share, compared with $59.7 million or 21 cents per share in the year-ago quarter.

Inside the Headlines

Total revenue for the quarter increased 10.6% to $210.8 million from $190.6 million reported in the year-ago quarter. Moreover, total revenue also outpaced the Zacks Consensus Estimate of $206 million.

Leasing and Operating Activity

DDR executed strong leasing activities during the quarter under review. The company signed 198 new leases and 233 renewal leases spanning 0.9 million square feet and 1.2 million square feet, respectively.

As of March 31, 2013, the company’s core portfolio was 94.4% leased – a 70 bps (basis point) expansion over the prior-year end figure of 93.7%.

During the quarter under review, rental rates for new leases increased 10.7% (cash) over prior rents and renewals increased 7.0%, resulting in an overall blended spread of 7.6%. Also, same-store net operating income (NOI) increased 3.3% on a year-over-year basis.

Portfolio Restructuring Activity

In tune with its long-term strategic objectives of restructuring the overall portfolio by upgrading the quality of shopping centers, DDR acquired two premium assets in the 4th and 11^th largest MSA (Metropolitan Statistical Areas) of U.S.; in Texas and Calif. – for $81 million. Both the assets were funded through a combination of proceeds from asset dispositions and new common equity.

DDR purchased the first asset – Marketplace at Highland Village – for $40 million. Strategically positioned in Dallas, the property (spanning 400,000 square feet and 90% leased) boasts industry-leading tenants such as, Wal-Mart Stores, Inc. (WMT), T.J. Maxx and Office Depot Inc. (ODP). With this upscale asset acquisition, DDR now boasts a solid portfolio of 6 major power centers comprising 1.8 million square feet in Dallas.

Whole Foods at Bay Place, the second asset, was acquired for $41 million. The property (spanning 57,000 square feet) is based in downtown Oakland and features WholeFoods Market Inc.’s (WFM) property, operating in a thickly populated high barrier-to-entry urban infill location.

Also, during the quarter, DDR sold 7 operating shopping centers (spanning around 0.4 million square feet) for a gross proceed of roughly $24.7 million. Moreover, the company also divested $7.3 million worth of non-income producing assets. With this, the company generated an aggregate net gain of about $0.5 million from assets divesture in the first quarter of 2013.

In addition, DDR’s unconsolidated joint ventures sold 15 assets and generated gross proceeds of approximately $14.5 million (of which DDR's proportionate share was $2.9 million).

Subsequent to the quarter-end, in April 2013, DDR bought 85% interest of its partner in five major shopping centers for $94 million.

Liquidity

As of Mar 31, 2013, DDR had $18.9 million of cash compared to $31.2 million as of Dec 31, 2012.

During the first quarter, DDR refinanced its 2 unsecured revolving credit facilities (having a total availability of $815 million) and a secured term loan worth $400 million. The refinanced primary unsecured revolving credit facility worth $750 million has an initial maturity in April 2017 with one year extension option. Also, it contains an important feature that provides it with a potential availability of $1.25 billion. On the other hand, the refinanced secured term loan also has an initial maturity in April 2017 with one year extension option. Such measures led to a reduction in interest expenses of DDR.

During the quarter, DDR issued 2.3 million new common shares under its at-the-market (ATM) common equity program at an average price of $17.57 per share. It helped the company to generate gross proceeds of $40 million, which DDR partially utilized to finance the acquisition of upscale assets.

2013 Guidance Reaffirmed

For full year 2013, DDR reiterated its operating FFO guidance of $1.07–$1.11 per share.

Our Viewpoint

We are impressed with the DDR’s quarterly results on the back of its consistent strong portfolio restructuring activity. Moreover, DDR’s long-term strategy of improving the balance sheet by reducing leverage also added to the bliss. In particular, the addition of upscale assets to its high-end assets kitty along with strengthening of the tenant base promises steady rental revenue. 

However, DDR has a significant development pipeline, which increases its operational risks. In addition, excess retail space in a number of its markets and the rise in consumer purchases through catalogs and the Internet could hurt the demand for it’s properties.

DDR currently holds a Zacks Rank #2 (Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

DDR CORP (DDR): Free Stock Analysis Report

OFFICE DEPOT (ODP): Free Stock Analysis Report

WHOLE FOODS MKT (WFM): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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