DDR Ddr Corp.

DDR Corp. (NYSE: DDR) today announced operating results for the quarter ended December 31, 2017.

“2017 was a transformational year for DDR, highlighted by the announced spin-off of Retail Value Inc., a restructuring of our balance sheet, and a stream-lining of our organization. Our operating results decelerated from the prior year, but same store NOI growth was ahead of our original forecasts and was flat in the continental U.S. portfolio despite a significant decline in occupancy from tenant bankruptcies,” commented David R. Lukes, president and chief executive officer. “Going forward, we remain energized about the prospects of realizing value through dispositions and operations of Retail Value Inc. properties and New DDR’s growth prospects as stronger 2017 operating metrics further validate.”

Results for the Quarter

• Fourth quarter net loss attributable to common shareholders was $226.4 million, or $0.62 per diluted share, as compared to net income of $28.1 million, or $0.08 per diluted share, in the year ago-period. The year-over-year decrease is primarily attributable to impairment charges of $280.1 million of which $258.6 million are a result of the change in hold-period assumptions for the Retail Value Inc. (“RVI”) asset portfolio.
• Fourth quarter operating funds from operations attributable to common shareholders (“Operating FFO” or “OFFO”) was $103.8 million, or $0.28 per diluted share, compared to $111.1 million, or $0.30 per diluted share, in the year ago-period. The year-over-year decrease in OFFO is primarily attributable to the dilutive impact of deleveraging asset sales.

Results for the Year

• Net loss attributable to common shareholders for the year ended December 31, 2017, was $270.4 million, or $0.74 per diluted share, which compares to a net income of $37.6 million, or $0.10 per diluted share for the prior year.
• Generated Operating FFO of $1.18 per diluted share for the full year 2017, which compares to $1.28 per diluted share for 2016.

Significant Fourth Quarter Activity

• On December 14, 2017, DDR announced its intention to spin off 50 assets, representing approximately $2.9 billion of gross book value, comprised of 38 continental U.S. assets and the entirety of the Puerto Rico portfolio, into a separate publicly-traded REIT to be named RVI. DDR recorded approximately $2.3 million of costs related to the transaction in the fourth quarter of 2017.
• In February 2018, in connection with the strategic transformation to spin off RVI, completed $1.35 billion of mortgage financing and repaid $452 million of mortgage debt using proceeds from the new financing and commenced tender offers for any and all of its $300 million aggregate principal amount of its 3.500% senior notes due 2021 and $600 million aggregate principal amount of other series of senior unsecured notes.
• Sold 14 shopping centers and land parcels for an aggregate sales price of $590.1 million, totaling $246.0 million at DDR’s share, including $48.6 million from the repayment of the Company’s preferred equity investment in its two joint ventures with Blackstone.
• Repaid $104 million of mortgage debt scheduled to mature in 2018.

Key Quarterly Operating Results

• The results of “New DDR” described herein represent the results of the assets that will remain in DDR after the completion of both the spin-off of RVI and the previously announced $900 million disposition program
• Reported 0.8% same store net operating income growth on a pro rata basis for New DDR
• Reported -0.4% same store net operating income on a pro rata basis, excluding Puerto Rico for the total portfolio; presentation has been adjusted to include bad debt expense on a comparable basis; these results were impacted by approximately 30 basis points of unbudgeted snow removal costs
• Generated new leasing spreads of 23.9% and renewal leasing spreads of 5.3%, both on a pro rata basis for New DDR for the quarter, and new leasing spreads of 17.2% and renewal leasing spreads of 7.1%, both on a pro rata basis for New DDR for the trailing twelve-month period
• Generated new leasing spreads of 23.9% and renewal leasing spreads of 2.2%, both on a pro rata basis for the total portfolio for the quarter, and new leasing spreads of 11.1% and renewal leasing spreads of 5.2%, both on a pro rata basis for the total portfolio for the trailing twelve-month period
• Reported a leased rate of 93.6% at December 31, 2017 for New DDR on a pro rata basis, compared to 94.4% at December 31, 2016
• Reported a leased rate of 93.2% at December 31, 2017, compared to 95.0% at December 31, 2016, on a pro rata basis for the total portfolio
• Annualized base rent per occupied square foot on a pro rata basis was $17.20 at December 31, 2017 for New DDR, compared to $16.71 at December 31, 2016
• Annualized base rent per occupied square foot on a pro rata basis was $16.46 at December 31, 2017, compared to $15.46 at December 31, 2016 for the total portfolio

Fourth Quarter Update – Hurricane Casualty and Operating

The Company’s 12 shopping centers in Puerto Rico were significantly impacted by Hurricane Maria, which occurred in September 2017. The Company maintains insurance on its assets in Puerto Rico with policy limits of approximately $330 million for property damage and business interruption. The Company has been actively working with its insurer relating to both the property damage and business interruption claims. The Company believes its insurance policies provide adequate coverage of lost revenue related to hurricane damage and related store closures. The Company’s insurance policies remain subject to various terms and conditions, including a deductible of approximately $6 million, which was recorded in the third quarter of 2017. The financial impact on the fourth quarter results is summarized as follows:

• Received payments from its insurer for its estimated business interruption losses for $8.5 million, which are recorded as business interruption income within revenues on the income statement.
• Reported a reduction of revenues from tenants of $9.3 million for the quarter ended December 31, 2017. This loss was netted against the $8.5 million in business interruption income recorded and a $0.2 million true up of uninsured expenses during the quarter with the net impact of $0.6 million excluded from Operating FFO provided later in this release.
• Recorded an additional write-off of real estate assets of $6.4 million based on updated damage assessments of the properties. The aggregate estimated net book value written off year-to-date related to hurricane damage is $71.0 million and remains subject to change.
• The corresponding receivable of $58.6 million at December 31, 2017 related to the estimated casualty insurance recovery reflects the aggregate year-to-date write-off of real estate assets of $71.0 million and other expenses expected to be covered by insurance reduced by the $5.1 million insurance deductible and $10 million advance received by the insurer in the fourth quarter of 2017.

Guidance

The Company’s guidance for 2018, except for OFFO which is for the third quarter of 2018, for New DDR, after an assumed spin-off date of July 2018, is as follows (in millions, except per share data):

       

Guidance2018

      Actual              FY 2017      

Same Store NOI growth(1) At least 1.5% 0.0%   Joint venture fee income $23 – $25 $33.6   Interest income $18 – $22 $28.4  

Additional items(2):

RVI fee income $10 N/A   General and administrative expenses(3) $70 $72.0  

3Q18 Estimates:

Net income attributable to Common Shareholders $0.02 – $0.03 N/A   OFFO per share (basic and diluted) At least $0.15 N/A   (1)   Excludes major redevelopment. 2018 represents New DDR. 2017 represents DDR. (2)

Assumes no dispositions and a 3Q18 spin effective date.

(3) 2017 actual excludes separation charges.                

Reconciliation of Net Income Attributable to DDR to FFO and Operating FFO Estimate

 

3Q2018EPer Share - Diluted

Net income attributable to Common Shareholders $0.02 - $0.03 Depreciation and amortization of real estate 0.11 - 0.13 Equity in net income of JVs (0.01) JVs' FFO 0.02 FFO (NAREIT) and Operating FFO $0.15  

About DDR Corp.

DDR is an owner and manager of 273 value-oriented shopping centers representing 92 million square feet in 33 states and Puerto Rico. The Company owns a high-quality portfolio of open-air shopping centers in major metropolitan areas that provide a highly-compelling shopping experience and merchandise mix for retail partners and consumers. The Company actively manages its assets with a focus on creating long-term shareholder value. DDR is a self-administered and self-managed REIT operating as a fully integrated real estate company, and is publicly traded on the New York Stock Exchange under the ticker symbol DDR. Additional information about the Company is available at www.ddr.com.

Conference Call and Supplemental Information

The Company will hold its quarterly conference call today at 4:45 p.m. Eastern Time. To participate with access to the slide presentation, please visit the Investors portion of DDR's website, www.ddr.com/events, or for audio only, dial 888-317-6003 (U.S.), 866-284-3684 (Canada) or 412-317-6061 (international) using pass code 7769620 at least ten minutes prior to the scheduled start of the call. A replay of the conference call will also be available at www.ddr.com/events for one year after the call. A copy of the Company’s Supplemental package is available on the Company’s website at www.ddr.com.

Non-GAAP Measures

FFO is a supplemental non-GAAP financial measure used as a standard in the real estate industry and is a widely accepted measure of real estate investment trust (“REIT”) performance. Management believes that both FFO and Operating FFO provide additional indicators of the financial performance of a REIT. The Company also believes that FFO and Operating FFO more appropriately measure the core operations of the Company and provide benchmarks to its peer group.

FFO is generally defined and calculated by the Company as net income (loss), adjusted to exclude: (i) preferred share dividends, (ii) gains and losses from disposition of depreciable real estate property and related investments, which are presented net of taxes, (iii) impairment charges on depreciable real estate property and related investments and (iv) certain non-cash items. These non-cash items principally include real property depreciation and amortization of intangibles, equity income (loss) from joint ventures and equity income (loss) from non-controlling interests and adding the Company’s proportionate share of FFO from its unconsolidated joint ventures and non-controlling interests, determined on a consistent basis. The Company’s calculation of FFO is consistent with the NAREIT definition. The Company calculates Operating FFO by excluding certain non-operating charges and gains. Operating FFO is useful to investors as the Company removes non-comparable charges and gains to analyze the results of its operations and assess performance of the core operating real estate portfolio. Other real estate companies may calculate FFO and Operating FFO in a different manner.

The Company also uses net operating income (“NOI”), a non-GAAP financial measure, as a supplemental performance measure. NOI is calculated as property revenues less property-related expenses. The Company believes NOI provides useful information to investors regarding the Company’s financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level and, when compared across periods, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and disposition activity on an unleveraged basis.

The Company presents NOI information herein on a same store basis or “SSNOI.” The Company defines SSNOI as property revenues less property-related expenses, which exclude straight-line rental income and expenses, lease termination income, management fee expense, fair market value of leases and expense recovery adjustments. The Company presents SSNOI both with and without provisions for uncollectible amounts and/or recoveries thereof. SSNOI also excludes activity associated with development and major redevelopment and single tenant assets and includes assets owned in comparable periods (15 months for quarter comparisons). In addition, due to the impact of Hurricanes Irma and Maria on its properties in Puerto Rico in 2017, the Company also excludes its Puerto Rico NOI from SSNOI. SSNOI excludes all non-property and corporate level revenue and expenses. Other real estate companies may calculate NOI and SSNOI in a different manner. The Company believes SSNOI provides investors with additional information regarding the operating performances of comparable assets because it excludes certain non-cash and non-comparable items as noted above.

FFO, Operating FFO, NOI and SSNOI do not represent cash generated from operating activities in accordance with GAAP, are not necessarily indicative of cash available to fund cash needs and should not be considered as alternatives to net income computed in accordance with GAAP as indicators of the Company’s operating performance or as alternatives to cash flow as a measure of liquidity. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in this release and the accompanying financial supplement.

Safe Harbor

DDR Corp. considers portions of the information in this press release to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company's expectation for future periods. Although the Company believes that the expectations reflected in such 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 historical fact may be deemed to be forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including, among other factors, property damage, expenses related thereto and other business and economic consequences (including the potential loss of rental revenues) resulting from extreme weather conditions in locations where we own properties, and the ability to estimate accurately the amounts thereof; sufficiency and timing of any insurance recovery payments related to damages from extreme weather conditions; local conditions such as supply of space or a reduction in demand for real estate in the area; competition from other available space; dependence on rental income from real property; the loss of, significant downsizing of or bankruptcy of a major tenant; redevelopment and construction activities may not achieve a desired return on investment; our ability to buy or sell assets on commercially reasonable terms; our ability to complete acquisitions or dispositions of assets under contract; our ability to secure equity or debt financing on commercially acceptable terms or at all; our ability to enter into definitive agreements with regard to our financing and joint venture arrangements or our failure to satisfy conditions to the completion of these arrangements; the success of our deleveraging strategy; any change in strategy; our ability to complete our previously announced plan to spin-off certain of our assets in a timely manner; the impact of such spin-off on our business and that of the spun-off company; and the ability of the Company and the spin-off company to execute their respective strategies following consummation of the spin-off, including the ability of the spin-off company to sell assets on commercially reasonable terms; entering into management agreements with RVI on commercially reasonable terms; and the finalization of the financial statements for the period ended December 31, 2017. For additional factors that could cause the results of the Company to differ materially from those indicated in the forward-looking statements, please refer to the Company's Form 10-K for the year ended December 31, 2016 and subsequent reports on Form 10-Q. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

DDR Corp.

Income Statement: Consolidated Interests

        $ in thousands, except per share 4Q17   4Q16 12M17   12M16 Revenues (1): Minimum rents (2) $147,140 $167,933 $632,917 $701,208 Percentage rent 2,556 2,827 7,094 7,610 Recoveries 47,465 55,701 211,942 238,419 Other property revenues (3) 3,771 5,707 27,494 22,270 Business interruption income 8,500 0 8,500 0 209,432 232,168 887,947 969,507 Expenses (4): Operating and maintenance 28,224 29,697 122,315 134,297 Real estate taxes 29,911 34,312 128,602 142,787 58,135 64,009 250,917 277,084   Net operating income 151,297 168,159 637,030 692,423   Other income (expense): Fee income 8,124 8,093 33,641 36,298 Interest income 5,999 9,254 28,364 37,054 Interest expense (41,616) (51,740) (188,647) (217,589) Depreciation and amortization (79,834) (99,468) (346,204) (389,519) General and administrative (5) (19,601) (20,941) (89,854) (76,101) Other income (expense), net (2,705) (148) (68,003) 3,322 Impairment charges (280,127) (6,029) (340,480) (110,906) Hurricane casualty and impairment loss (6) 159 0 (5,930) 0 (Loss) income before earnings from JVs and other (258,304) 7,180 (340,083) (25,018)   Equity in net income of JVs 6,408 1,618 8,837 15,699 Reserve of preferred equity interests (377) 0 (61,000) 0 Gain (loss) on sale and change in control 368 0 368 (1,087) Valuation allowance of prepaid tax asset (2,017) 0 (10,794) 0 Tax expense (438) (680) (1,624) (1,781) Gain on disposition of real estate, net 34,147 25,916 161,164 73,386 Net (loss) income (220,213) 34,034 (243,132) 61,199 Non-controlling interests 2,175 (293) 1,447 (1,187) Net (loss) income DDR (218,038) 33,741 (241,685) 60,012 Preferred dividends (8,383) (5,594) (28,759) (22,375) Net (loss) income Common Shareholders ($226,421) $28,147 ($270,444) $37,637   Weighted average shares – Basic – EPS 368,320 365,965 367,362 365,294 Assumed conversion of dilutive securities 0 110 0 267 Weighted average shares – Diluted – EPS 368,320 366,075 367,362 365,561   Earnings per common share – Basic & Diluted ($0.62) $0.08 ($0.74) $0.10   Revenue items: (1) Lost revenue related to hurricanes ($9,249) $0 ($11,806) $0 (2) Ground lease revenue 10,313 10,267 42,626 40,874 (3) Lease termination fees 317 383 10,505 3,512   (4) Operating expenses: Recoverable expenses (53,422) (59,195) (229,776) (253,144) Non-recoverable expenses (4,075) (4,544) (17,911) (21,037) Bad debt expense (638) (270) (3,229) (2,903)   (5) General and administrative expenses: Separation charges (1,320) 0 (17,872) 0 Internal leasing expenses (1,252) (1,527) (5,292) (7,698) Construction administrative costs (capitalized) 1,462 2,411 7,361 8,084   (6) Hurricane casualty and impairment loss Impairment charge (property damage deductible) 0 0 (5,100) 0 Clean up costs and other expenses 159 0 (830) 0 159 0 (5,930) 0        

DDR Corp.

Reconciliation: Net (Loss) Income to FFO and Operating FFO

and Other Financial Information

  $ in thousands, except per share 4Q17   4Q16 12M17   12M16 Net (loss) income attributable to Common Shareholders ($226,421) $28,147 ($270,444) $37,637 Depreciation and amortization of real estate 78,209 97,356 336,346 381,170 Equity in net (income) loss of JVs (6,408) (1,618) (8,837) (15,699) JVs' FFO 8,257 6,868 29,319 26,025 Non-controlling interests 76 76 303 303 Impairment of depreciable real estate (1) 275,890 6,029 330,493 110,906 Gain on disposition of depreciable real estate, net (34,457) (25,698) (160,357) (74,182) FFO attributable to Common Shareholders $95,146 $111,160 $256,823 $466,160   Reserve of preferred equity interests 377 0 61,000 0 Hurricane casualty loss (2) 576 0 4,192 0 Impairment charges – non-depreciable assets 1,803 0 12,653 0 Separation charges 1,320 0 17,872 0 Transaction, debt extinguishment, other, net 2,330 146 69,112 651 Joint ventures - debt extinguishment, transaction, other (52) (2) 726 24 Valuation allowance of Puerto Rico prepaid tax asset 2,017 0 10,794 (326) Loss (gain) on disposition of non-depreciable real estate, net 310 (218) (807) 1,883 Total non-operating items, net 8,681 (74) 175,542 2,232 Operating FFO attributable to Common Shareholders $103,827 $111,086 $432,365 $468,392   Weighted average shares and units – Basic – FFO & OFFO 368,793 366,630 367,859 366,101 Assumed conversion of dilutive securities 18 110 46 267 Weighted average shares and units – Diluted – FFO & OFFO 368,811 366,740 367,905 366,368   FFO per share – Basic & Diluted $0.26 $0.30 $0.70 $1.27 Operating FFO per share – Basic & Diluted $0.28 $0.30 $1.18 $1.28 Common stock dividends declared, per share $0.19 $0.19 $0.76 $0.76   Certain non-cash items (DDR share): Straight-line rent, net ($121) $1,003 ($328) $4,805 Amortization of (above)/below-market rent, net 1,553 2,085 12,156 5,934 Straight-line ground rent income (expense) (51) 594 112 229 Debt fair value and loan cost amortization (1,654) (580) (4,875) (2,421) Capitalized interest expense 474 440 1,879 3,059 Stock compensation expense (1,537) (2,320) (6,590) (7,012) Non-real estate depreciation expense (1,581) (2,064) (9,624) (8,156) Non-cash interest income 0 1,853 1,283 7,737 Capital expenditures (DDR share): Development and redevelopment costs 12,767 14,803 63,047 91,427 Maintenance capital expenditures 4,491 2,439 14,356 17,368 Tenant allowances and landlord work 7,300 6,082 32,257 28,017 Leasing commissions 804 1,188 2,770 4,267   (1) Impairment charges: Hurricane impairment charge (property damage deductible) 0 0 5,100 0 Impairment charge on shopping centers marketed for sale 275,890 6,029 325,393 110,906 275,890 6,029 330,493 110,906 (2) Hurricane casualty loss (DDR Share): Lost tenant revenue 9,288 0 11,859 0 Business interruption income (8,500) 0 (8,500) 0 Clean up costs and other expenses, net (212) 0 833 0 576 0 4,192 0                 DDR Corp.

Balance Sheet: Consolidated Interests

  $ in thousands At Period End 4Q17 4Q16 Assets: Land $1,738,792 $1,990,406 Buildings 5,733,451 6,412,532 Fixtures and tenant improvements 693,280 735,685 8,165,523 9,138,623 Depreciation (1,953,479) (1,996,176) 6,212,044 7,142,447 Construction in progress and land 82,480 105,435 Real estate, net 6,294,524 7,247,882   Investments in JVs 106,037 60,793 Receivable – preferred equity interests, net 277,776 393,338 Cash 92,611 30,430 Restricted cash 2,113 8,795 Notes receivable, net 19,675 49,503 Receivables, net (1) 108,695 121,367 Casualty insurance receivable 58,583 0 Intangible assets, net 182,407 241,598 Other assets, net 27,652 43,812 Total Assets 7,170,073 8,197,518   Liabilities and Equity: Revolving credit facilities 0 0 Unsecured debt 2,810,100 2,913,217 Unsecured term loan 398,130 398,399 Secured debt 641,082 1,182,352 3,849,312 4,493,968 Dividends payable 78,549 75,245 Other liabilities (2) 344,774 382,293 Total Liabilities 4,272,635 4,951,506   Preferred shares 525,000 350,000 Common shares 36,851 36,630 Paid-in capital 5,513,197 5,487,212 Distributions in excess of net income (3,183,134) (2,632,327) Deferred compensation 8,777 15,149 Other comprehensive income (1,106) (4,192) Common shares in treasury at cost (8,653) (14,957) Non-controlling interests 6,506 8,497 Total Equity 2,897,438 3,246,012     Total Liabilities and Equity $7,170,073 $8,197,518   (1) Straight-line rents receivable, net $59,439 $65,072   (2) Below-market leases, net 127,513 147,941         DDR Corp.

Reconciliation of Net Income Attributable to DDR to Same Store NOI (1)

  $ in thousands At DDR Share (Non-GAAP) 4Q17 4Q16 4Q17 4Q16

GAAP Reconciliation:

Net (loss) income attributable to DDR ($218,038) $33,741 ($218,038) $33,741 Fee income (8,124) (8,093) (8,124) (8,093) Interest income (5,999) (9,254) (5,999) (9,254) Interest expense 41,616 51,740 41,616 51,740 Depreciation and amortization 79,834 99,468 79,834 99,468 General and administrative 19,601 20,941 19,601 20,941 Other expense, net 2,705 148 2,705 148 Impairment charges 280,127 6,029 280,127 6,029 Hurricane casualty and impairment loss (159) 0 (159) 0 Equity in net income of joint ventures (6,408) (1,618) (6,408) (1,618) Reserve of preferred equity interests 377 0 377 0 Gain on sale and change in control (368) 0 (368) 0 Valuation allowance of prepaid tax asset 2,017 0 2,017 0 Tax expense 438 680 438 680 Gain on disposition of real estate (34,147) (25,916) (34,147) (25,916) (Loss) income from non-controlling interests (2,175) 293 (2,175) 293 Consolidated NOI 151,297 168,159 151,297 168,159 DDR's consolidated JV     (381) (419) Consolidated NOI, net of non-controlling interests 151,297 168,159 150,916 167,740   Net income from unconsolidated joint ventures 71,955 1,200 6,041 1,251 Interest expense 23,920 32,735 3,723 5,237 Depreciation and amortization 42,361 49,187 5,318 5,661 Impairment charges 7,930 0 397 0 Preferred share expense 7,577 8,411 379 421 Other expense, net 3,782 5,554 763 1,008 Gain on disposition of real estate, net (71,042) (3,006) (3,654) (151) Unconsolidated NOI 86,483 94,081 12,967 13,427   Total Consolidated + Unconsolidated NOI 237,780 262,240 163,883 181,167 Less: Non-Same Store NOI adjustments including Puerto Rico NOI (36,539) (59,238) (31,407) (48,215) Total SSNOI (including bad debt expense) $201,241 $203,002 $132,476 $132,952   Add: bad debt expense 944 509 670 533 Total SSNOI (excluding bad debt expense) $202,185 $203,511 $133,146 $133,485   Total SSNOI (including bad debt expense) $201,241 $203,002 $132,476 $132,952 Less: RVI – continental U.S. and disposition assets (36,963) (38,187) (36,963) (38,187) Total New DDR SSNOI (including bad debt expense) $164,278 $164,815 $95,513 $94,765   SSNOI % Change (including bad debt expense) (0.9%) (0.4%) SSNOI % Change (excluding bad debt expense) (0.7%) (0.3%) SSNOI % Change (New DDR) (0.3%) 0.8%   (1)   Excludes major redevelopment activity; see Investments section for additional detail. See calculation definition in the Non-GAAP Measures section.  

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DDR Corp.Matthew Ostrower, 212-755-5500EVP and Chief Financial Officer