DDR Judicious: Outlook Echoes - Analyst Blog

Developers Diversified Realty Corp. (DDR), a leading real estate investment trust (REIT), has recently provided an outlook for fiscal 2011  considering few discreet  investment  propositions to improve liquidity and credit metrics. The company expects 2011 operating FFO (fund from operations) in the range of $0.90 to $1.05 per share, with pro-rata EBITDA (earnings before interest, tax, depreciation and amortization) of $600 million to $625 million. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income. Fiscal 2011 guidance is based on a same-store net operating income growth of about 3%, with core portfolio expected to be over 93% leased. Consolidated debt to EBITDA on an annualized basis is expected to be 6x by year-end 2011, while total consolidated debt is anticipated to reduce to $4.1 billion.

Developers Diversified also provided an update on total investments in 2010. The company completed $2.7 billion worth of capital transactions and financing activities during the fiscal, including a secondary offering of $454 million worth of shares. Developers Diversified issued $350 million of 1.75% convertible senior notes and $600 million of 7- and 10-year senior unsecured notes at a weighted average interest rate of 7.69%. At the same time, the company purchased $259 million of senior unsecured notes and refinanced two senior unsecured revolving credit facilities that promise to offer $1.0 billion of borrowing capacity upto February 2014. Consequently, Developers Diversified was able to reduce its consolidated debt in 2010 from $5.2 billion to $4.3 billion.

Despite challenging market conditions, Developers Diversified got engaged in strong leasing activities during 2010. The company leased 11.3 million square feet of retail space and increased average annualized base rent per occupied square foot by approximately 2.6% for the entire portfolio. The core portfolio of the company was 92.3% leased at year-end 2010, compared to 91.2% in the year-ago period. We remain encouraged by the continued leasing activities of the company.

Developers Diversified also sold non-strategic assets to improve portfolio demographics and increase liquidity. The company sold over 50 non-core assets for $791 million, of which its pro-rata share was $250 million. Developers Diversified is holding tight  to its strategy of minimizing ground-up development spending in its domestic portfolio and diverting its capital to prepare for the lease-up of existing projects, as it believes there may be opportunities to redevelop many of its existing assets. These redevelopments should create a growth opportunity for the company's existing assets and create future value while escaping the level of risk or capital requirement that a new development entails. The company reduced its total development expenditures by 56% in 2010 on a year-over-year basis. Developers Diversified expects to record approximately $73 million of non-cash charges in fourth quarter 2010 related to an abandoned development project and a tax-related reserve.

We maintain our ‘Neutral' rating on Developers Diversified for the long term. The company presently has a Zacks #2 Rank, which translates into a short-term ‘Buy' recommendation. We also have a ‘Neutral' recommendation and Zacks #3 Rank (short-term ‘Hold') for Kimco Realty Corporation (KIM), one of the competitors of Developers Diversified.

 
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