DDR Reports Third Quarter 2017 Operating Results

BEACHWOOD, Ohio, Nov. 2, 2017 /PRNewswire/ -- DDR Corp. (NYSE: DDR) today announced operating results for the quarter ended September 30, 2017.

"Our third quarter results were characterized by better than expected operations in our Continental U.S. portfolio, ongoing improvement to our balance sheet, and an intensive recovery effort in Puerto Rico. All of DDR is working to support our Puerto Rico team, whose dedication amid very difficult conditions has allowed us to achieve reopening of roughly 67% of our leased GLA on the island. Continental U.S. same store performance was above our expectations due to improved operating margins backed up by steady leasing progress. Finally, our recent bond issuance and expanded line of credit significantly improved our liquidity and maturity schedule," commented David R. Lukes, president and chief executive officer.

Financial Highlights

Third quarter net loss attributable to common shareholders was $7.4 million, or $0.02 per diluted share as compared to a net loss of $66.0 million, or $0.18 per diluted share, in the year ago-period. The year-over-year increase in net income attributable to common shareholders is primarily attributable to reduction of $15.4 million in the valuation allowance recorded in the first quarter of 2017 on the Company's preferred investment in two joint ventures, lower impairment charges and a higher gain on sale of real estate assets, partially offset by loss on debt retirement of $65.8 million and hurricane casualty and impairment loss.
Third quarter operating funds from operations attributable to common shareholders ("Operating FFO" or "OFFO") was $111.2 million or $0.30 per diluted share, compared to $120.6 million or $0.33 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.

Significant Third Quarter Activity

Asset Sales

Sold 16 shopping centers and land parcels for an aggregate sales price of $392.1 million, totaling $173.1 million at DDR's share

Capital Markets

Issued $350 million aggregate principal amount of 3.900% senior unsecured notes due 2024
Extended the maturity of the Company's revolving credit facilities and increased borrowing capacity to $1.0 billion
Extended the maturity of $200 million of $400 million unsecured term loan
Repaid $300 million 7.875% senior unsecured notes due September 2020
Repaid $300 million 4.75% senior unsecured notes due April 2018
Repaid $200 million secured term loan with 2018 maturity date

Key Operating Results

Reported flat same store net operating income on a prorata basis, excluding Puerto Rico; including Puerto Rico same store net operating income decreased -0.9% on a pro rata basis; presentation has been adjusted to include bad debt expense on a comparable basis and exclude hurricane-related activity
Executed 315 new leases and renewals for 1.8 million square feet
Generated new leasing spreads of 6.8% and renewal leasing spreads of 6.1%, both on a pro rata basis and including Puerto Rico for the quarter, and new leasing spreads of 7.3% and renewal leasing spreads of 6.1%, both on a pro rata basis and including Puerto Rico for the trailing twelve-month period
Reported a portfolio leased rate of 93.4% at September 30, 2017, compared to 95.4% at September 30, 2016, on a pro rata basis
Annualized base rent per occupied square foot on a pro rata basis was $16.16 at September 30, 2017, compared to $15.36 at September 30, 2016
Reported a non-cash lease termination fee of $8.2 million related to the receipt of a 132,700 square foot building triggered by Sears not exercising its option of a ground lease at the Riverdale Village shopping center in Coon Rapids, MN
Recognized a $65.8 million loss on extinguishment of debt included in Other income (expense), net. The charge is primarily related to the repayment of the April 2018 and September 2020 unsecured notes in the third quarter

Hurricane casualty, operating and impairment loss

The Company's 12 shopping centers in Puerto Rico were impacted by Hurricane Maria and to a lesser extent Hurricane Irma in September 2017. The physical damage and revenue loss related to Hurricane Irma was minor. However, the impact of Hurricane Maria was more significant.
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 and has already received an advance. The Company's insurance policies remain subject to various terms and conditions, including a deductible of approximately $6 million. The financial impact on the quarterly results from hurricanes Irma and Maria is summarized as follows:
- Reported a reduction of revenues from tenants of $2.6 million related to the period of time in September the Company's tenants were unable to operate; lost revenue in excess of the approximately $0.9 million business interruption deductible will be included in the Company's business interruption claim. Since quarter end, the Company has received an advance from its insurer for its business interruption claim in the amount of $2 million, which is expected to be recorded in the fourth quarter. The Company believes its insurance policy provides adequate coverage of lost revenue related to hurricane damage and related store closures.
- Incurred $1.0 million of Hurricane Irma-related expenses that are within the insurance deductible included in Hurricane casualty and impairment loss on the income statement.
- Recorded a write-off of real estate assets of $64.8 million, representing the estimated net book value of the damage to shopping centers; established a corresponding receivable of $59.7 million for the related estimated insurance recovery. The net charge of a $5.1 million represents the estimated insurance deductible on the Company's property damage claim included in Hurricane casualty and impairment loss on the income statement and added back to FFO. These write-offs are subject to change based on the ongoing damage assessment and repair process.
- Recorded a valuation allowance of $8.8 million on a Puerto Rico related prepaid tax asset.
- The above losses were excluded from the Operating FFO calculations and same store net operating income calculations provided later in this release.

Guidance

The Company's 2017 Continental U.S. operating assumptions are as follows:

Revised expected annual growth in same store net operating income range to (0.5%) – 0.5%,for the Continental U.S. Portfolio at DDR's share from a previous range of (1.0%) – 0.5%
The Company is withdrawing Puerto Rico same store net operating income guidance due to the uncertainties surrounding the timing of business interruption insurance payments. Although the Company expects to be reimbursed under its business interruption insurance policy for its lost net operating income, there is generally a lag related to the receipt of insurance recoveries impacting period-over-period comparability.
Expected leased rate at year end for the Continental U.S. Portfolio of 93.25% to 93.75%
Revised expected General and Administrative expenses of approximately $72 million from a previous range of $72 to $75 million
Expected Fee income of $30 to $33 million
Expected Interest income of $26 to $29 million
Expected redevelopment activity placed in service of $80 million (approximately $40 million of incremental same store NOI) weighted towards the second half of the year at high single-digit yields

About DDR Corp.
DDR is an owner and manager of 286 value-oriented shopping centers representing 97 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 8:30 a.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 7794199 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). SSNOI excludes all non-property and corporate level revenue and expenses as well as hurricane-related losses. 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 impact or results from the Company's portfolio transition or any change in strategy; and the finalization of the financial statements for the period ended September 30, 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. 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
		3Q17	3Q16	9M17	9M16
	Revenues (1):
	Minimum rents (2)	$153,925	$177,844	$485,777	$533,275
	Percentage rent	1,016	1,193	4,538	4,783
	Recoveries	51,368	59,743	164,477	182,718
	Other property revenues (3)	13,824	6,458	23,723	16,563
		220,133	245,238	678,515	737,339
	Expenses (4):
	Operating and maintenance	28,950	32,012	94,091	104,600
	Real estate taxes	30,618	36,157	98,691	108,475
		59,568	68,169	192,782	213,075

	Net operating income	160,565	177,069	485,733	524,264

	Other income (expense):
	Fee income	7,291	8,562	25,517	28,205
	Interest income	6,807	9,304	22,365	27,800
	Interest expense	(46,296)	(53,940)	(147,031)	(165,849)
	Depreciation and amortization	(85,210)	(95,451)	(266,370)	(290,051)
	General and administrative (5)	(16,425)	(18,785)	(70,253)	(55,160)
	Other income (expense), net	(64,340)	(384)	(65,298)	3,470
	Impairment charges	(10,284)	(104,877)	(60,353)	(104,877)
	Hurricane casualty and impairment loss (6)	(6,089)	0	(6,089)	0
	Loss before earnings from JVs and other	(53,981)	(78,502)	(81,779)	(32,198)

	Equity in net income (loss) of JVs	4,811	(1,457)	2,429	14,081
	Adjustment (reserve) of preferred equity interests	15,377	0	(60,623)	0
	Loss on sale and change in control	0	(1,087)	0	(1,087)
	Valuation allowance of prepaid tax asset	(8,777)	0	(8,777)	0
	Tax expense	(490)	(398)	(1,186)	(1,101)
	Gain on disposition of real estate, net	44,291	21,368	127,017	47,470
	Net income (loss)	1,231	(60,076)	(22,919)	27,165
	Non-controlling interests	(248)	(284)	(728)	(894)
	Net income (loss) DDR	983	(60,360)	(23,647)	26,271
	Preferred dividends	(8,383)	(5,594)	(20,376)	(16,781)
	Net (loss) income Common Shareholders	($7,400)	($65,954)	($44,023)	$9,490

	Weighted average shares – Basic – EPS	367,686	365,508	367,039	365,062
	Assumed conversion of dilutive securities	0	0	0	320
	Weighted average shares – Diluted – EPS	367,686	365,508	367,039	365,382

	Earnings per common share – Basic & Diluted	($0.02)	($0.18)	($0.12)	$0.02

	Revenue items:
(1)	Lost revenue related to hurricanes	($2,558)	$0	($2,558)	$0
(2)	Ground lease revenue	10,625	10,267	32,314	30,607
(3)	Lease termination fees	9,380	1,684	10,188	3,129

(4)	Operating expenses:
	Recoverable expenses	(54,001)	(62,802)	(176,355)	(193,949)
	Non-recoverable expenses	(4,232)	(4,961)	(13,836)	(16,493)
	Bad debt expense	(1,335)	(406)	(2,591)	(2,633)

(5)	General and administrative expenses:
	Separation charges	0	0	(16,552)	0
	Internal leasing expenses	(1,190)	(1,992)	(4,040)	(6,053)
	Construction administrative costs (capitalized)	1,681	1,773	5,899	5,673

(6)	Hurricane casualty and impairment loss
	Impairment charge (property damage deductible)	(5,100)	0	(5,100)	0
	Clean up costs and other expenses	(989)	0	(989)	0
		(6,089)	0	(6,089)	0



	DDR Corp. Reconciliation: Net (Loss) Income to FFO and Operating FFO and Other Financial Information
	$ in thousands, except per share
		3Q17	3Q16	9M17	9M16
	Net (loss) income attributable to Common Shareholders	($7,400)	($65,954)	($44,023)	$9,490
	Depreciation and amortization of real estate	81,064	93,334	258,137	283,814
	Equity in net (income) loss of JVs	(4,811)	1,457	(2,429)	(14,081)
	JVs' FFO	8,268	6,581	21,062	19,157
	Non-controlling interests	76	76	227	227
	Impairment of depreciable real estate (1)	13,620	104,877	54,603	104,877
	Gain on disposition of depreciable real estate, net	(44,477)	(20,234)	(125,900)	(48,484)
	FFO attributable to Common Shareholders	$46,340	$120,137	$161,677	$355,000

	(Adjustment) reserve of preferred equity interests	(15,377)	0	60,623	0
	Hurricane casualty loss (2)	3,616	0	3,616	0
	Impairment charges –non-depreciable assets	1,764	0	10,850	0
	Separation charges	0	0	16,552	0
	Transaction, debt extinguishment, other, net	65,835	540	66,782	179
	Joint ventures - debt extinguishment, transaction, other	95	6	778	26
	Valuation allowance of Puerto Rico prepaid tax asset	8,777	0	8,777	0
	Loss (gain) on disposition of non-depreciable real estate, net	186	(47)	(1,117)	2,101
	Total non-operating items, net	64,896	499	166,861	2,306
	Operating FFO attributable to Common Shareholders	$111,236	$120,636	$328,538	$357,306

	Weighted average shares and units – Basic – FFO & OFFO	368,160	366,220	367,544	365,924
	Assumed conversion of dilutive securities	36	267	56	320
	Weighted average shares and units – Diluted – FFO & OFFO	368,196	366,487	367,600	366,244

	FFO per share – Basic & Diluted	$0.13	$0.33	$0.44	$0.97
	Operating FFO per share – Basic & Diluted	$0.30	$0.33	$0.89	$0.98
	Common stock dividends declared, per share	$0.19	$0.19	$0.57	$0.57

	Certain non-cash items (DDR share):
	Straight-line rent, net	($864)	$1,149	($207)	$3,802
	Amortization of (above)/below-market rent, net	2,369	2,293	10,603	3,849
	Straight-line ground rent income (expense)	(53)	(89)	162	(365)
	Debt fair value and loan cost amortization	(1,096)	(546)	(3,221)	(1,840)
	Capitalized interest expense	529	672	1,405	2,619
	Stock compensation expense	(1,561)	(1,394)	(5,053)	(4,692)
	Non-real estate depreciation expense	(4,101)	(2,067)	(8,043)	(6,092)
	Non-cash interest income	0	1,985	1,283	5,884
	Capital expenditures (DDR share):
	Development and redevelopment costs	20,315	25,737	50,280	76,624
	Maintenance capital expenditures	5,841	7,881	9,865	14,929
	Tenant allowances and landlord work	5,874	7,844	24,957	21,935
	Leasing commissions	589	924	1,966	3,079

(1)	Impairment charges:
	Hurricane impairment charge (property damage deductible)	5,100	0	5,100	0
	Impairment charge on shopping centers marketed for sale	8,520	104,877	49,503	104,877
		13,620	104,877	54,603	104,877
(2)	Hurricane casualty loss (DDR Share):
	Lost tenant revenue	2,571	0	2,571	0
	Clean up costs and other expenses	1,045	0	1,045	0
		3,616	0	3,616	0



	DDR Corp. Balance Sheet: Consolidated Interests
	$ in thousands
				At Period End
				3Q17	4Q16
	Assets:
	Land			$1,903,805	$1,990,406
	Buildings			6,002,788	6,412,532
	Fixtures and tenant improvements			673,738	735,685
				8,580,331	9,138,623
	Depreciation			(1,942,051)	(1,996,176)
				6,638,280	7,142,447
	Construction in progress and land			116,746	105,435
	Real estate, net			6,755,026	7,247,882

	Investments in JVs			107,643	60,793
	Receivable – preferred equity interests, net			327,309	393,338
	Cash			18,268	30,430
	Restricted cash			1,826	8,795
	Notes receivable, net			19,591	49,503
	Receivables, net (1)			176,561	121,367
	Intangible assets, net			199,486	241,598
	Other assets, net			34,987	43,812
	Total Assets			7,640,697	8,197,518

	Liabilities and Equity:
	Revolving credit facilities			60,000	0
	Unsecured debt			2,809,404	2,913,217
	Unsecured term loan			397,858	398,399
	Secured debt			750,269	1,182,352
				4,017,531	4,493,968
	Dividends payable			78,419	75,245
	Other liabilities (2)			355,731	382,293
	Total Liabilities			4,451,681	4,951,506

	Preferred shares			525,000	350,000
	Common shares			36,782	36,630
	Paid-in capital			5,505,855	5,487,212
	Distributions in excess of net income			(2,886,547)	(2,632,327)
	Deferred compensation			10,381	15,149
	Other comprehensive income			(1,471)	(4,192)
	Common shares in treasury at cost			(9,907)	(14,957)
	Non-controlling interests			8,923	8,497
	Total Equity			3,189,016	3,246,012

	Total Liabilities and Equity			$7,640,697	$8,197,518

(1)	Straight-line rents receivable, net			$61,158	$65,072

(2)	Below-market leases, net			132,850	147,941



	DDR Corp. Reconciliation of Net Income Attributable to DDR to Same Store NOI (1)
	$ in thousands
				At DDR Share (Non-GAAP)
		3Q17	3Q16	3Q17	3Q16
	GAAP Reconciliation:
	Net income (loss) attributable to DDR	$983	($60,360)	$983	($60,360)
	Fee income	(7,291)	(8,562)	(7,291)	(8,562)
	Interest income	(6,807)	(9,304)	(6,807)	(9,304)
	Interest expense	46,296	53,940	46,296	53,940
	Depreciation and amortization	85,210	95,451	85,210	95,451
	General and administrative	16,425	18,785	16,425	18,785
	Other expense, net	64,340	384	64,340	384
	Impairment charges	10,284	104,877	10,284	104,877
	Hurricane casualty and impairment loss	6,089	0	6,089	0
	Equity in net (income) loss of joint ventures	(4,811)	1,457	(4,811)	1,457
	(Adjustment) reserve of preferred equity interests	(15,377)	0	(15,377)	0
	Loss on sale and change in control	0	1,087	0	1,087
	Valuation allowance of prepaid tax asset	8,777	0	8,777	0
	Tax expense	490	398	490	398
	Gain on disposition of real estate	(44,291)	(21,368)	(44,291)	(21,368)
	Income from non-controlling interests	248	284	248	284
	Consolidated NOI	160,565	177,069	160,565	177,069
	DDR's consolidated JV	0	0	(381)	(417)
	Consolidated NOI, net of non-controlling interests	160,565	177,069	160,184	176,652

	Net income (loss) from unconsolidated joint ventures	36,080	(16,600)	3,733	(1,835)
	Interest expense	24,276	33,567	3,675	5,322
	Depreciation and amortization	45,291	47,955	5,518	5,639
	Impairment charges	2,160	13,598	432	2,720
	Preferred share expense	8,307	8,438	416	422
	Other expense, net	6,577	5,829	892	971
	Gain on disposition of real estate, net	(31,740)	(658)	(1,572)	(45)
	Unconsolidated NOI	90,951	92,129	13,094	13,194

	Total Consolidated + Unconsolidated NOI	251,516	269,198	173,278	189,846
	Less: Non-Same Store NOI adjustments	(22,302)	(38,249)	(17,944)	(33,048)
	Total SSNOI (including Puerto Rico and bad debt expense)	$229,214	$230,949	$155,334	$156,798

	Less: Puerto Rico Same Store NOI	(20,221)	(21,625)	(20,221)	(21,625)
	Total SSNOI excluding Puerto Rico (including bad debt expense)	$208,993	$209,324	$135,113	$135,173

	Add: bad debt expense	790	610	532	313
	Total SSNOI (excluding bad debt expense)	$230,004	$231,559	$155,866	$157,111

	SSNOI % Change (including Puerto Rico and bad debt expense)	(0.8%)		(0.9%)
	SSNOI % Change (excluding Puerto Rico)	(0.2%)		0.0%
	SSNOI % Change (excluding bad debt expense)	(0.7%)		(0.8%)

	(1) Excludes major redevelopment activity; see Investments section for additional detail. See calculation definition in the Non-GAAP Measures section.