<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------
Commission file number 1-11690
-----------------------
DEVELOPERS DIVERSIFIED REALTY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1723097
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34555 Chagrin Boulevard Moreland Hills, Ohio 44022
- --------------------------------------------------------------------------------
(Address of principal executive offices - zip code)
(440) 247-4700
- --------------------------------------------------------------------------------
(Registrant's 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 X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common shares as of the latest practicable date.
27,167,564 shares outstanding as of November 11, 1997
----------- -----------------
-1-
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1997 and December 31,
1996.
Condensed Consolidated Statements of Operations for the Three Month Period ended
September 30, 1997 and 1996.
Condensed Consolidated Statements of Operations for the Nine Month Period ended
September 30, 1997 and 1996.
Condensed Consolidated Statements of Cash Flows for the Nine Month Period ended
September 30, 1997 and 1996.
Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 3
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Real estate rental property:
Land $ 173,669,683 $ 122,696,277
Land under development 24,538,164 27,304,847
Buildings 1,002,917,910 798,476,568
Fixtures and tenant improvements 17,019,451 14,805,101
Construction in progress 24,032,552 28,364,167
--------------- ---------------
1,242,177,760 991,646,960
Less accumulated depreciation (163,552,946) (142,039,284)
--------------- ---------------
Real estate, net 1,078,624,814 849,607,676
Cash and cash equivalents 875,642 12,600
Advances to and investments in joint ventures 122,996,359 106,795,688
Other assets 28,255,926 18,709,976
--------------- ---------------
$ 1,230,752,741 $ 975,125,940
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 341,603,398 $ 215,492,754
Revolving credit facilities 23,000,000 95,500,000
Subordinated convertible debentures 53,212,000 60,000,000
--------------- ---------------
417,815,398 370,992,754
Mortgage indebtedness:
Banks and other financial institutions 105,753,683 107,439,535
--------------- ---------------
Total indebtedness 523,569,081 478,432,289
Accounts payable and accrued expenses 31,399,438 20,920,765
Other liabilities 6,699,373 6,436,667
--------------- ---------------
561,667,892 505,789,721
--------------- ---------------
Minority equity interests 16,645,078 --
Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 421,500 shares
issued and outstanding at September 30, 1997
and December 31, 1996 105,375,000 105,375,000
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 177,500 shares
issued and outstanding at September 30, 1997
and December 31, 1996 44,375,000 44,375,000
Common shares, without par value, $.10 stated value; 50,000,000
shares authorized; 27,078,549 and 21,682,917 shares issued
and outstanding at September 30, 1997 and December 31, 1996,
respectively 2,707,855 2,168,292
Paid-in-capital 560,450,451 369,417,186
Accumulated dividends in excess of net income (60,007,285) (51,384,259)
--------------- ---------------
652,901,021 469,951,219
Less:Unearned compensation - restricted stock (461,250) (615,000)
--------------- ---------------
652,439,771 469,336,219
--------------- ---------------
$ 1,230,752,741 $ 975,125,940
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues from operations:
Minimum rents $ 31,871,155 $ 25,281,060
Percentage and overage rents 348,168 317,296
Recoveries from tenants 8,023,744 6,365,724
Management fee income 668,733 599,381
Other 1,760,930 1,971,122
------------ ------------
42,672,730 34,534,583
------------ ------------
Rental operation expenses:
Operating and maintenance 3,818,097 3,136,528
Real estate taxes 5,143,221 3,929,348
General and administrative 2,619,333 2,163,879
Interest expense 8,982,080 7,942,508
Depreciation and amortization 8,303,138 6,574,424
------------ ------------
28,865,869 23,746,687
------------ ------------
Income before equity in net income
of joint ventures and minority equity interest 13,806,861 10,787,896
Equity in net income of joint ventures 3,200,873 2,138,678
Minority equity interest (260,776) --
------------ ------------
Net income $ 16,746,958 $ 12,926,574
============ ============
Net income applicable to common shareholders $ 13,197,052 $ 9,376,667
============ ============
Net income per share:
Primary $ 0.50 $ .43
============ ============
Fully diluted $ 0.49 $ .43
============ ============
Dividends declared $ .63 $ .60
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revenues from operations:
Minimum rents $ 89,074,677 $ 71,000,683
Percentage and overage rents 1,955,212 1,502,002
Recoveries from tenants 22,794,127 17,684,581
Management fee income 2,183,973 1,744,397
Other 4,984,444 5,141,920
------------- -------------
120,992,433 97,073,583
------------- -------------
Rental operation expenses:
Operating and maintenance 10,941,639 9,077,931
Real estate taxes 14,467,766 10,705,083
General and administrative 7,645,653 5,682,656
Interest expense 25,460,288 21,921,738
Depreciation and amortization 23,509,419 18,452,926
------------- -------------
82,024,765 65,840,334
------------- -------------
Income before equity in net income
of joint ventures, minority equity interest and
gain on sales of real estate 38,967,668 31,233,249
Equity in net income of joint ventures 8,534,925 6,012,851
Minority equity interest (786,678) --
Gain on sales of real estate 3,525,785 --
------------- -------------
Net income $ 50,241,700 $ 37,246,100
============= =============
Net income applicable to common shareholders $ 39,591,981 $ 26,596,381
============= =============
Net income per share:
Primary $ 1.56 $ 1.27
============= =============
Fully diluted $ 1.53 $ 1.25
============= =============
Dividends declared $ 1.89 $ 1.80
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net cash flow provided by operating activities $ 69,178,676 $ 53,082,020
------------- -------------
Cash flow provided by (used for) investing activities:
Real estate developed or acquired (235,688,664) (156,317,856)
Investments in and advances to joint ventures, net (15,311,795) (7,543,262)
Proceeds from sales of real estate 5,452,034 1,246,843
------------- -------------
Net cash flow used for investing activities (245,548,425) (162,614,275)
------------- -------------
Cash flow provided by (used for) financing activities:
Repayment of revolving credit facilities, net (72,500,000) 16,915,000
Proceeds from construction loans -- 2,923,926
Proceeds from issuance of Medium Term Notes, net of
underwriting commissions and $55,000 and $190,000
of offering expenses paid in 1997 and 1996, respectively 49,669,759 91,068,543
Principal payments on rental property debt (1,685,852) (31,714,190)
Proceeds from issuance of Fixed Rate Senior Notes, net of
underwriting commissions and discounts and $500,000 of
offering expenses paid 75,577,000 --
Proceeds from issuance of common shares, net of
underwriting commissions and $840,000 and $300,000
of offering expenses paid in 1997 and 1996, respectively 183,919,038 75,389,307
Proceeds from issuance of Class B preferred shares, net of
underwriting commissions and $200,000 of offering
expenses paid -- 4,182,050
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan,
restricted stock plan and dividend reinvestment plan 1,117,572 700,682
Dividends paid (58,864,726) (49,401,836)
------------- -------------
Net cash flow provided by financing activities 177,232,791 110,063,482
------------- -------------
Increase in cash and cash equivalents 863,042 531,227
Cash and cash equivalents, beginning of period 12,600 12,100
------------- -------------
Cash and cash equivalents, end of period $ 875,642 $ 543,327
============= =============
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisitions of certain shopping centers, the Company
assumed certain liabilities and recorded a minority equity interest aggregating
approximately $18.1 million during the nine month period ended September 30,
1997. In addition, included in accounts payable was approximately $0.2 million
relating to construction in progress which did not require the use of cash.
In conjunction with the acquisitions of certain shopping centers, the Company
assumed certain liabilities of approximately $1.1 million during the nine month
period ended September 30, 1996. In addition during this period, in conjunction
with the formation of a joint venture, the Company transferred land and building
with a net book value of $41.6 million and related mortgage debt of $36.4
million creating an equity investment in joint ventures of $5.2 million. The
foregoing transactions did not require the use of cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
DEVELOPERS DIVERSIFIED REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company is a self-administered and self-managed real estate
investment trust and is engaged in the business of acquiring, expanding, owning,
developing, managing and operating neighborhood and community shopping centers,
enclosed malls and business centers.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The
information furnished reflects all adjustments which are, in the opinion of
management, necessary to reflect a fair statement of the results for the interim
periods presented, and all such adjustments are of a normal recurring nature.
Certain reclassifications have been made to the 1996 financial
statements to conform to the 1997 presentation.
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 and
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.
2. OFFERINGS
Common Shares:
In January 1997, the Company sold 3,350,000 common shares in an
underwritten offering at $36.625 per share. In June 1997, the Company sold
1,300,000 common shares in an underwritten offering at $38.145 per share. In
September 1997, the Company sold 507,960 common shares in an underwritten
offering at $39.1875 per share.
Debt:
In March 1997, the Company issued $75 million of 7.125% Pass-Through
Asset Trust Securities which mature in March 2012 with a put date of March 2002.
In July 1997, the Company issued $50 million of Unsecured Fixed Rate Senior
Notes pursuant to its Medium Term Note program. These notes have terms ranging
from five to ten years and interest rates ranging from 6.80% to 7.02%.
The aggregate net proceeds of approximately $309.2 million from the
above offerings were primarily used to retire variable rate indebtedness on the
Company's revolving credit facilities.
3. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at September 30,
1997 were comprised of (i) a 50% joint venture interest in four community center
joint ventures, formed in November 1995 in conjunction with the acquisition of
the Homart Community Center Division of Sears, Roebuck and Co.
7
<PAGE> 8
("Sears"), which own and operate ten shopping center properties aggregating
approximately 3,970,000 square feet of GLA and located in nine different states
(ii) a 50% joint venture interest, formed in September 1996, with The Ohio State
Teachers Retirement Systems (OSTRS) which owns and operates two shopping centers
located in Macedonia, Ohio and Canton, Ohio aggregating 465,000 square feet of
GLA, (iii) a 50% joint venture interest, formed in October 1996, in
conjunction with the development of a 443,000 square foot shopping center in
Merriam, Kansas, (iv) a 35% joint venture interest in a limited partnership,
formed in January 1997, that owns a 286,388 square foot shopping center located
in San Antonio, Texas and (v) a 50% joint venture interest in a limited
partnership, formed in 1989, that owns a 411,977 square foot shopping center
located in Martinsville, Virginia.
Summarized combined financial information of the Company's joint venture
investments is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
Combined Balance Sheets 1997 1996
------------ ------------
<S> <C> <C> <C>
Real estate, net (1) $622,578,525 $561,624,478
Other assets 28,150,839 16,012,336
------------ ------------
$650,729,364 $577,636,814
============ ============
Mortgage debt $389,268,533 $360,113,705
Amounts payable to DDRC 18,844,337 10,747,149
Other liabilities 21,334,943 7,782,117
------------ ------------
429,447,813 378,642,971
Accumulated equity 221,281,551 198,993,843
------------ ------------
$650,729,364 $577,636,814
============ ============
</TABLE>
(1) Includes approximately $19.5 million and $43.4 million of construction
in progress at September 30, 1997 and December 31, 1996, respectively.
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
Combined Statements of Operations 1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from operations $20,896,518 $16,114,687 $60,848,584 $45,635,928
----------- ----------- ----------- -----------
Rental operation expenses 4,757,765 4,240,174 14,483,451 12,158,146
Depreciation and amortization expenses 2,904,845 2,164,178 8,571,414 6,370,694
Interest expense 7,844,126 5,432,979 21,563,346 15,081,386
----------- ----------- ----------- -----------
15,506,736 11,837,331 44,618,211 33,610,226
----------- ----------- ------------ -----------
Income before gain on sale of land 5,389,782 4,277,356 16,230,373 12,025,702
Gain on sale of land 1,085,148 - 1,085,146 -
----------- ----------- ----------- -----------
Net income $ 6,474,930 $ 4,277,356 $17,315,519 $12,025,702
=========== =========== =========== ===========
</TABLE>
The amount of advances to and investments in joint ventures is reduced
by a deferred gain of approximately $6.2 million related to the contribution
of the real estate property and mortgage debt to the OSTRS Joint Venture.
8
<PAGE> 9
Included in 1997 management fee income for the nine month period ended
September 30, 1997 and 1996, is approximately $2.0 million and $1.5 million,
respectively, of fees earned by the Company for services rendered to the joint
ventures. Similarly, other income for the nine month period ended September 30,
1997 and 1996, includes $0.5 million and $0.6 million, respectively, of
development fee income for services rendered to the joint ventures.
4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
During the nine month period ended September 30, 1997, the Company
completed the acquisition of, or investment in, seven shopping centers with an
aggregate of approximately 2.2 million Company owned gross leasable square feet
(GLA) at an initial aggregate investment of approximately $212.0 million.
These properties are summarized as follows:
<TABLE>
<CAPTION>
Year Effective Date Company
Location Built of Acquisition GLA
------------------------------ ----- ----------------- --------
<S> <C> <C> <C>
Cleveland (North Olmsted), OH 1958 January 1, 1997 463,440
Cleveland (North Olmsted), OH 1987 January 1, 1997 142,947
San Antonio, TX (1) 1996 January 23, 1997 286,388
Phoenix, AZ 1996 February 21, and
March 27, 1997 490,885
Eagan, MN 1997 July 1, 1997 224,350
St. Paul, MN 1997 July 11, 1997 309,876
Brunswick, ME 1965 August 14, 1997 290,784
-----------
2,208,670
===========
</TABLE>
(1) Property acquired through a joint venture in which the Company
owns a 35% interest
The operating results of the acquired shopping centers are included in
the results of operations of the Company from the effective date of acquisition.
The following unaudited supplemental pro forma operating data is
presented for the nine months ended September 30, 1997 as if each of the
following transactions had occurred on January 1, 1997: (i) the acquisition by
the Company of all properties acquired by the Company in 1997, (ii) the
completion of the sale by the Company of 3,350,000 common shares in January
1997, (iii) the completion of the sale by the Company of the $75 million 7.125%
Pass through Asset Trust Securities in March 1997, (iv) the completion of the
sale by the Company of 1,300,000 common shares in June 1997, (v) the completion
of the sale by the Company of $50 million of Medium Term Notes in July 1997 and
(vi) the completion of the sale by the Company of 507,960 common shares in
September 1997.
The following unaudited supplemental pro forma operating data is
presented for the nine months ended September 30, 1996 as if each of the
following transactions had occurred on January 1, 1996: (i) the acquisition by
the Company of all properties acquired by the Company in 1996 and 1997, (ii) the
sale by the Company of 175,000 depositary shares representing 9.44% Class B
Cumulative Redeemable Preferred Shares in January 1996, (iii) the completion of
the sale by the Company of $161.7 million of Medium Term Notes in 1996, (iv) the
completion of the sale by the Company of 2,611,500 Common Shares in March 1996,
(v) the completion of the sale by the Company of 3,350,000 common shares in
January 1997, (vi) the completion of the sale by the Company of the $75 million
7.125% Pass through Asset Trust Securities in March 1997, (vii) the completion
of the sale by the Company of 1,300,000
9
<PAGE> 10
common shares in June 1997, (viii) the completion of the sale by the Company of
$50 million of Medium Term Notes in July 1997 and (ix) the completion of the
sale by the Company of 507,960 common shares in September 1997.
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
-------------------------------------
(in thousands, except per share)
--------------------------------
1997 1996
-------- --------
<S> <C> <C>
Pro forma revenues $122,899 $104,303
======== ========
Pro forma net income applicable
to common shareholders $ 40,885 $ 29,119
======== ========
Pro forma net income
per common share $ 1.60 $ 1.28
======== ========
</TABLE>
The pro forma information above does not include revenues and expenses
for four of the seven properties acquired by the Company in 1997 and the five
properties acquired by the Company in 1996 prior to their respective acquisition
dates because these shopping centers were either under development or in the
lease-up phase and, accordingly, the related operating information for such
centers either does not exist or would not be meaningful.
5. SHAREHOLDERS' EQUITY AND OPERATION PARTNERSHIP UNITS:
The following table summarizes the changes in shareholders' equity
since December 31, 1996:
<TABLE>
<CAPTION>
Class A 9.5% Class B 9.44%
Cumulative Cumulative
Redeemable Redeemable
Preferred Preferred Common Accumulated
Shares ($250 Shares ($250 Shares Dividends in
Liquidation Liquidation ($.10 par Paid-in Excess of Restricted
Value) Value) value) Capital Net Income Stock Total
------------ ----------- ----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 $105,375,000 $44,375,000 $2,168,292 $369,417,186 $(51,384,259) $ (615,000) $469,336,219
Net income 50,241,700 50,241,700
Dividends declared -
Common Shares (48,215,006) (48,215,006)
Dividends declared -
Preferred Shares (10,649,720) (10,649,720)
Issuance of Common Shares 515,796 183,403,242 183,919,038
Conversion of Debentures 20,337 6,669,631 6,689,968
Stock options exercised 3,052 813,748 816,800
Shares issued through employee
401(k) plan 137 51,757 51,894
Shares issued through Dividend
Reinvestment Plan 241 94,887 95,128
Restricted Stock Plan 153,750 153,750
------------ ----------- ----------- ------------ ------------ ---------- ------------
Balance September 30, 1997 $105,375,000 $44,375,000 $ 2,707,855 $560,450,451 $(60,007,285) $ (461,250) $652,439,771
============ =========== =========== ============ ============ ========== ============
</TABLE>
In August 1997, in conjunction with the acquisition of a shopping center in
Brunswick, Maine the Company formed a limited partnership which issued 8,909
limited partnership units which are convertible on a one-for-one basis into the
Company's common shares.
6. REVOLVING CREDIT FACILITIES:
In May 1995, the Company obtained a three year $150 million unsecured
revolving credit facility from a syndicate of financial institutions for which
the First National Bank of Chicago, the First National Bank of Boston and Bank
of America NT&SA serve as agents (the "Unsecured Credit Facility"). In March
1997, the Company renegotiated the terms of this facility to extend the
agreement to May 2000,
10
<PAGE> 11
reduce the specified spread over LIBOR by 15 basis points and introduce a
competitive bid feature for up to $75 million of borrowings. Borrowings under
this facility bear interest at variable rates based on the prime rate or LIBOR
plus a specified spread, currently at 1.10%, depending on the Company's long
term senior unsecured debt rating from Standard and Poor's and Moody's Investors
Service. The Unsecured Credit Facility is used to finance the acquisition of
shopping centers, to provide working capital and for general corporate purposes.
At September 30, 1997, $23 million was outstanding under this facility.
In addition, the Company maintains a $10 million unsecured revolving
credit facility with National City Bank. In April 1997, the Company renegotiated
the terms of the facility to extend the agreement to November 2000 and reduce
the interest rate by 15 basis points. Borrowings under this facility bear
interest at variable rates based on the prime rate or LIBOR plus a specified
spread, currently at 1.10%, depending on the Company's long term senior
unsecured debt rating from Standard and Poor's and Moody's Investors Service. At
September 30, 1997 there was no indebtedness outstanding under this facility.
7. EARNINGS PER SHARE
Primary earnings per share for net income applicable to common
shareholders was computed by dividing common share dividends paid or declared
for the period by the weighted average number of common shares outstanding plus
the undistributed net income applicable to common shareholders, as appropriate,
divided by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents are excluded from the earnings
per share calculation where they would be antidilutive. The weighted average
number of shares outstanding utilized in the calculations is 25,423,324 and
20,973,816 for the nine month periods ended September 30, 1997 and 1996,
respectively and 26,558,980 and 21,619,082 for the three month periods ended
September 30, 1997 and 1996, respectively.
Fully diluted earnings per common share were calculated by dividing net
income applicable to common shareholders by the weighted average number of
common shares and common share equivalents during the period. Common share
equivalents included stock options outstanding and the assumed conversion of the
Debentures. The assumed conversion of the Debentures was antidilutive, and was
therefore excluded from the calculation. Common share equivalents for purposes
of the fully diluted earnings per share were 484,785 and 232,006 for the nine
month periods ended September 30, 1997 and 1996 respectively and 497,225 and
244,427 for the three month periods ended September 30, 1997 and 1996,
respectively.
As required by APB Opinion No. 15, supplementary pro forma income per
share data has been presented in Note 8.
The Company is required to adopt Statement of Financial Accounting
Standard No. 128 ("SFAS 128"), Earnings Per Share as of December 31, 1997;
earlier application is not permitted. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share. The Company
does not believe that the adoption of SFAS 128 will have a material effect on
the Company's method of calculation or display of earnings per share amounts.
11
<PAGE> 12
8. CONVERTIBLE SUBORDINATED DEBENTURES
During the nine month period ended September 30, 1997, debentures in
the principal amount of $6,788,000 were converted into approximately 203,000
common shares. The majority of these debentures were converted on or before the
record date for the third quarter dividend. The related debenture interest was
forfeited by the debenture holders in accordance with the indenture. In
addition, approximately $98,000 of unamortized debenture issue costs were
reclassified to additional paid-in-capital. Had all converted debentures been
converted as of the beginning of the periods, net income available to common
shareholders per common share would have been $0.50 and $1.57 per share for the
three and nine month periods ended September 30, 1997, respectively.
9. SUBSEQUENT EVENTS
In October 1997, the Company acquired a shopping center located in
Denver, CO. This center will aggregate approximately 414,000 square feet, once
construction of approximately 96,000 square feet is completed. The purchase
price for the shopping center was approximately $39.1 million subject to
adjustment to approximately $55.6 million upon completion of construction and
leasing of the aforementioned 96,000 square feet within an agreed upon period.
In October 1997, the Company filed a shelf registration statement with
the Securities and Exchange Commission under which an aggregate of $500 million
of debt securities, preferred shares or common shares may be issued.
12
<PAGE> 13
10. PRO FORMA INFORMATION
During the period June 1, 1997 through November 11, 1997, through
individual transactions, the Company completed the acquisition of four shopping
centers (the "Acquisition Properties"), none of which individually constitutes a
"significant subsidiary". The shopping centers total 1,460,906 square feet of
retail space, of which 1,143,101 square feet is Company-owned gross leasable
area. The Company's net investment in the Acquisition Properties aggregated
approximately $101.2 million, before any contingent consideration. In
conjunction with the acquisition of three of the shopping centers, the aggregate
purchase price is subject to possible upward adjustments by approximately $30.7
million upon completion of construction of approximately 202,000 additional
square feet within an agreed upon periods. The Company's net investment was
initial funded through proceeds made available through revolving credit
facilities and cash. In addition, the Company entered into an agreement to
acquire a shopping center in Fayetteville, Arkansas. This shopping center has
approximately 140,000 square feet of GLA and the estimated purchase price is
approximately $12.0 million. This property is referred to herein as the
"Probable Acquisition Property." Although the Company believes it is probable
that this property will be acquired, there can be no assurance that the purchase
transaction will be consummated. Information and financial statements regarding
the Acquisition Properties and the Probable Acquisition Property were filed in
the Company's 8-K dated November 7, 1997.
The unaudited pro forma condensed statement of operations for the nine month
period ended September 30, 1997 is presented as if each of the following
transactions had occurred on January 1, 1997; (i) the acquisition by the Company
of the properties, which had an operating history, purchased from January 1,
1997 through November 11, 1997; (ii) the acquisition of the Probable Acquisition
Property; (iii) the sale by the Company of 3,350,000 common shares in January
1997; (iv) the sale by the Company of $75 million of 7.125% Pass-through Asset
Trust Securities in March 1997; (v) the sale by the Company of 1,300,000 common
shares in June 1997; (vi) the sale by the Company of $50 million of Medium Term
Notes in July 1997 and (vii) the sale by the Company of 507,960 common shares in
September 1997.
The foregoing pro forma information is based upon the historical consolidated
results of operations of the Company for the nine month period September 30,
1997 giving effect to the transactions described above. The pro forma condensed
consolidated statement of operations should be read in conjunction with the pro
forma condensed consolidated balance sheet of the Company presented in the
Company's 8-K dated November 7, 1997, and the historical financial statements
and notes thereto of the Company included herein.
The unaudited pro forma condensed consolidated statements of operations are not
necessarily indicative of what the actual results of operations of the Company
would have been assuming the transactions had been completed as set forth above,
nor do they purport to represent the Company's results of operations for future
periods.
13
<PAGE> 14
DEVELOPERS DIVERSIFIED REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTH PERIOD SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------
Acquisitions,
Common
Share and Probable Company
Company Debt Share Acquisition Pro Forma
Historical Offerings Property (b) (Unaudited)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from rental properties $ 113,824 $ 1,907 (a) $ 977 $ 116,708
Management fees and other income 7,168 -- 7,168
--------- --------- --------- ---------
120,992 1,907 977 123,876
--------- --------- --------- ---------
Operating and maintenance 10,941 404 (a) 121 11,466
Real estate taxes 14,468 154 (a) 41 14,663
Depreciation and amortization 23,509 301 (a) 228 24,038
General and administrative expenses 7,646 -- -- 7,646
Interest expense 25,460 889 (a)(d) 674 25,201
(1,238)(c)(f)
(584)(e)(g)
--------- --------- --------- ---------
82,024 (74) 1,064 83,014
--------- --------- --------- ---------
Income (loss) before equity in net
income of joint ventures, minority
equity interest and gain on sales of
real estate 38,968 1,981 (87) 40,862
Equity in net income of
joint ventures 8,535 -- -- 8,535
Minority equity interest (787) (14)(a) -- (801)
Gain on sales of real estate 3,526 -- -- 3,526
--------- --------- --------- ---------
Net income (loss) $ 50,242 $ 1,967 $ (87) $ 52,122
========= ========= ========= =========
Per share data:
Income available to common shareholders:
Primary $ 1.56 $ 1.61 (h)
========= =========
Fully diluted $ 1.53 $ 1.58 (h)
========= =========
Weighted average number of common
shares (in thousands):
Primary 25,423 25,769
========= =========
Fully diluted 25,908 26,254
========= =========
</TABLE>
14
<PAGE> 15
DEVELOPERS DIVERSIFIED REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
(Unaudited)
(a) Reflects revenues and expenses for the properties acquired during 1997, for
the period January 1, 1997 through the earlier of the date of acquisition, or
September 30, 1997 as follows:
<TABLE>
<CAPTION>
Effective Real
Date of Estate Operating & Minority
Shopping Center Acquisition Revenues Taxes Maintenance Depreciation Interest Interest
--------------- ----------- -------- ------ ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Great Northern Shopping
Center - North, Cleveland,
(North Olmsted), OH (1) 01/01/97 $ -- $ -- $ -- $ -- $ -- $ --
Great Northern Shopping
Center - South, Cleveland,
(North Olmsted) OH (1) 01/01/97 -- -- -- -- -- --
Plaza Del Norte, San
Antonio, TX (2), (3) 01/23/97 -- -- -- -- -- --
Foothills Towne Center -- -- --
Awatukee, AZ (2) 02/21/97 -- -- -- -- -- --
Eagan Promenade
Minneapolis, MN (2) 07/01/97 -- -- -- -- -- --
Midway Marketplace
St. Paul, MN (2) 07/11/97 -- -- -- -- -- --
Cooks Corner
Brunswick, ME 08/14/97 1,907 154 404 301 889 14
Centennial Promenade
Denver, CO (2) 10/02/97 -- -- -- -- -- --
-------- ------ ------------ ------ ------ ------
$ 1,907 $ 154 $ 404 $ 301 $ 889 $ 14
======== ====== ============ ====== ====== ======
</TABLE>
(1) Included in historical statement of operation for the nine
months ended September 30, 1997.
(2) No revenues or expenses have been included in the pro forma
statement of operations since the center was either under
development or in the lease-up phase during 1996 and 1997.
(3) Property acquired through a joint venture in which the Company
owns a 35% interest.
(b) Reflects revenues and expenses of the Probable Acquisition Property
contemplated as of November 11, 1997, for the period January 1, 1997
through September 30, 1997 as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Real
Estate Operating &
Shopping Center Revenues Taxes Maintenance Depreciation Interest
--------------- -------- ----- ----------- ------------ --------
Spring Creek Centre
Fayetteville, AR $ 977 $ 41 $ 121 $ 228 $ 674
========== ===== ====== ====== ==========
</TABLE>
(c) Reflects the reduction of interest costs relating to variable rate
indebtedness effectively repaid with the proceeds from the sale of
3,350,000 common shares completed in January 1997.
15
<PAGE> 16
DEVELOPERS DIVERSIFIED REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
(d) Interest expense relating to the issuance of $75 million of 7.125%
Pass-through Asset Trust Securities completed in March 1997 is not
reflected herein as the proceeds thereof were considered to be used to
acquire shopping centers with no previous operating history.
Accordingly, the Company would not have issued these securities until
the time of acquisition.
(e) Reflects the reduction of interest costs relating to variable rate
indebtedness effectively repaid with the proceeds from the sale of
1,300,000 common shares completed in June 1997. See Note (h) with
regard to shares included in earnings per share calculation.
(f) Interest expense relating to the issuance of $50 million of Medium Term
Notes completed in July 1997 is not reflected herein as the proceeds
thereof were considered to be used to acquire shopping centers with no
previous operating history and/or for properties currently under
development. Accordingly, the Company would not have issued these
securities until the time of acquisition.
(g) The issuance of 507,960 common shares completed in September 1997 is
not reflected herein as the proceeds thereof were considered to be used
to acquire shopping centers with no previous operating history and/or
for properties currently under development. Accordingly, the Company
would not have issued these securities until the time of acquisition.
(h) Pro forma income per common share is based upon the weighted average
number of common shares assumed to be outstanding during 1997 and
includes all shares issued in conjunction with the 3,350,000 common
share offering in January 1997 and 273,000 shares of the 1,300,000
common share offering completed in June 1997 and 507,960 common shares
completed in September 1997. The remaining 1,027,000 shares issued in
June 1997 and the entire 507,960 shares issued in September 1997 were
not reflected in the pro forma statement of operations as the proceeds
were not considered to be received until the date the newly developed
shopping centers were acquired in 1997, since such centers had no
operating history.
In accordance with the Accounting Principles Board Opinion No. 15,
primary earnings per share before extraordinary item is calculated as
follows:
<TABLE>
<S> <C>
Undistributed loss:
Income available to common shareholders . . . . . $ 41,472
Total dividends declared - $1.89 per common share . (48,703)
----------
Undistributed loss $ (7,231)
==========
Per share data
Dividends declared . . . . . . . . . . . $ 1.89
Undistributed loss . . . . . . . . . . . . . (0.28)
----------
Primary . . . . . . . . . . . . . . . . .$ 1.61
==========
Weighted average number of Common Shares:
Primary . . . . . . . . . . . . . . . . . 25,769
----------
Fully diluted . . . . . . . . . . . . . . . 26,254
==========
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and the notes
thereto.
RESULTS OF OPERATIONS
Revenues from Operations
Total revenues increased $8.1 million, or 23.6%, to $42.7 million for
the three month period ended September 30, 1997 from $34.5 million for the same
period in 1996. Total revenues increased $23.9 million, or 24.6%, to $121.0
million for the nine month period ended September 30, 1997 from $97.1 million
for the same period in 1996. Base and percentage rents for the three month
period ended September 30, 1997 increased $6.6 million, or 25.9%, to $32.2
million as compared to $25.6 million for the same period in 1996. Base and
percentage rents increased $18.5 million, or 25.6%, to $91.0 million for the
nine month period ended September 30, 1997 from $72.5 million for the same
period in 1996.
Approximately $2.4 million of the increase in base and percentage
rental income, for the nine month period ended September 30, 1997 is the result
of new leasing, re-tenanting and expansion of the Core Portfolio Properties
(shopping center properties owned as of January 1, 1996), an increase of 3.7%
over 1996 revenues from Core Portfolio Properties. The eleven shopping centers
acquired by the Company in 1997 and 1996 contributed $16.2 million of additional
base and percentage rental revenue and the four new shopping center developments
contributed $2.9 million. The above increases were offset by the transfer of two
properties to a joint venture in September 1996 which reduced base and
percentage rental revenue by $3.0 million.
At September 30, 1997 the in-place occupancy rate of the Company's
portfolio was at 96.0% as compared to 94.4% at September 30, 1996. The average
annualized base rent per leased square foot, including those properties owned
through joint ventures, was $8.30 at September 30, 1997 as compared to $7.85 at
December 31, 1996. Same store sales, for the current twelve month period,
increased 3.8% to $230.4 per square foot as compared to $222.0 per square foot
for the prior twelve month period.
The increase in recoveries from tenants of $5.1 million is directly
related to the increase in operating and maintenance expenses and real estate
taxes primarily associated with the 1997 and 1996 shopping center acquisitions
and developments. Recoveries were approximately 89.7% of operating expenses and
real estate taxes for the nine month period ended September 30, 1997 as compared
to 89.4% for the same period in 1996. Management fee income and other income
increased by approximately $0.3 million which generally relates to an increase
in management fee income associated with the formation of several joint
ventures.
17
<PAGE> 18
Other income was comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest $ 488 $ 288 $1,362 $ 925
Temporary tenant
rentals (Kiosks) 79 111 327 294
Lease termination fees 401 1,453 1,835 2,976
Development fees 455 103 870 570
Other 338 16 590 377
------ ------ ------ ------
$1,761 $1,971 $4,984 $5,142
====== ====== ====== ======
</TABLE>
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended September 30, 1997 increased $0.7 million, or 21.7%, to $3.8 million as
compared to $3.1 million for the same period in 1996. Rental operating and
maintenance expenses increased $1.8 million, or 20.5%, to $10.9 million for the
nine month period ended September 30, 1997 from $9.1 million for the same period
in 1996. An increase of $1.5 million is attributable to the 15 shopping centers
acquired and developed in 1996 and 1997 and $0.3 million in the Core Portfolio
Properties.
Real estate taxes increased $1.2 million, or 30.9%, to $5.1 million for
the three month period ended September 30, 1997 as compared to $3.9 million for
the same period in 1996. Real estate taxes increased $3.8 million, or 35.1%, to
$14.5 million for the nine month period ended September 30, 1997 from $10.7
million for the same period in 1996. An increase of $3.6 million is related to
the 15 shopping centers acquired and developed in 1996 and 1997 and $0.2 million
in the Core Portfolio Properties.
General and administrative expenses increased $0.5 million, or 21.0%,
to $2.6 million for the three month period ended September 30, 1997 as compared
to $2.1 million in 1996. General and administrative expenses increased $2.0
million, or 34.5%, to $7.7 million for the nine month period ended September 30,
1997 from $5.7 million for the same period in 1996. The increase is attributable
to the growth of the Company primarily related to acquisitions, expansions and
developments. The Company continues to maintain a conservative policy with
regard to the expensing of all internal leasing salaries, legal salaries and
related expenses associated with the leasing and re-leasing of existing space
and also expenses all internal costs associated with acquisitions. Total general
and administrative expenses were approximately 4.2% and 4.0% of total revenues,
including revenues of joint ventures for the nine month period ended September
30, 1997 and 1996, respectively.
Depreciation and amortization expense increased $1.7 million, or 26.3%,
to $8.3 million for the three month period ended September 30, 1997 as compared
to $6.6 million for the same period in 1996. Depreciation and amortization
increased $5.0 million, or 27.4%, to $23.5 million for the nine month period
ended September 30, 1997 from $18.5 million for the same period in 1996. An
increase of $4.2 million is related to the 15 shopping centers acquired and
developed 1996 and 1997 and $1.4 million in the Core Portfolio Properties. The
above increases were offset by the transfer of two properties to a joint venture
in September 1996 which reduced depreciation expense by $0.6 million.
18
<PAGE> 19
Interest expense increased $1.1 million, or 13.1%, to $9.0 million for
the three month period ended September 30, 1997, as compared to $7.9 million for
the same period in 1996. Interest expense increased $3.6 million, or 16.1%, to
$25.5 million for the nine month period ended September 30, 1997 from $21.9
million for the same period in 1996. The overall increase in interest expense
for the three and nine month periods ended September 30, 1997 as compared to the
same periods in 1996 is primarily related to the acquisition and development of
shopping centers during 1997 and 1996. The weighted average debt outstanding
during the nine month period ended September 30, 1997 and related weighted
average interest rate was $475.8 million and 7.9%, respectively, compared to
$397.2 million and 8.3%, respectively, for the same period in 1996. Interest
costs capitalized, in conjunction with development and expansion projects, were
$1.2 million and $3.0 million for the three and nine month periods ended
September 30, 1997, respectively, as compared to $0.8 million and $2.4 million,
respectively, for the same periods in 1996.
Equity in net income of joint ventures increased $1.1 million, or
50.0%, to $3.2 million for the three month period ended September 30, 1997 as
compared to $2.1 million for the same period in 1996. Equity in net income of
joint ventures increased $2.5 million, or 41.9%, to $8.5 million for the nine
month period ended September 30, 1997 from $6.0 million for the same period in
1996. An increase of $1.3 million is attributable to the Community Center Joint
Ventures primarily associated with the completion of construction at five of the
ten shopping centers which were under construction at the date of acquisition.
An increase of $0.8 million is related to the formation of a joint venture with
Ohio State Teachers Retirement Systems ("OSTRS") in September 1996. An increase
of $0.3 million is related to the formation of a joint venture in January 1997
which owns a shopping center in San Antonio, Texas. An increase of $0.1 million
is related to the expansion and redevelopment of the Liberty Fair Joint Venture.
The minority equity interest of $0.3 million and $0.8 million for the
three and nine month periods ended September 30, 1997, respectively, relates to
the Company's investment in three shopping center properties. The amount
represents the priority distribution associated with the minority equity
interest.
Gain on sales of real estate aggregated $3.5 million for the nine month
period ended September 30, 1997. In March 1997, the Company sold two business
centers in Highland Heights, Ohio aggregating approximately 113,000 square feet
for approximately $5.7 million. The two business centers had been vacant for
approximately 18 months.
Net Income
Net income increased $3.8 million, or 29.6%, to $16.7 million for the
three month period ended September 30, 1997, as compared to net income of $12.9
million for the same period in 1996. Net income increased $13.0 million, or
34.9%, to $50.2 million for the nine month period ended September 30, 1997 from
$37.2 million for the same period in 1996. The increase in net income of $13.0
million is primarily attributable to the increased net operating revenues (total
revenues less operating and maintenance, real estate taxes and general and
administrative expense) aggregating $16.3 million, resulting from new leasing,
retenanting and expansion of Core Portfolio Properties, and the 15 shopping
centers acquired and developed in 1996 and 1997. An increase of $2.5 million
relates to increased equity income from joint ventures and an increase of $3.5
million relates to a gain on sale of real estate. The increase in net operating
revenues, equity income from joint ventures and gain on sale of real estate was
offset by increases in depreciation, interest expense and minority equity
interest of $5.0 million, $3.5 million and $0.8 million, respectively.
19
<PAGE> 20
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") provides an
additional indicator of the financial performance of a Real Estate Investment
Trust. FFO is defined generally as net income applicable to common shareholders
excluding gains (losses) on sale of property, nonrecurring and extraordinary
items, adjusting for certain non-cash items, principally real property
depreciation and equity income (loss) from its joint ventures and adding the
Company's proportionate share of FFO of its unconsolidated joint ventures,
determined on a consistent basis. The Company calculates FFO in accordance with
the foregoing definition, which is substantially the same as the definition
currently used by the National Association of Real Estate Investment Trusts
("NAREIT"). Certain other real estate companies may calculate funds from
operations in a different manner. For the three month period ended September 30,
1997, FFO increased $5.3 million, or 31.2%, to $22.3 million as compared to
$17.0 million for the same period in 1996. For the nine month period ended
September 30, 1997, FFO increased $14.9 million, or 31.0%, to $63.0 million from
$48.1 million for the same period in 1996. The increase is attributable to
increases in revenues from Core Portfolio Properties, acquisitions and
developments. The Company's calculation of FFO is as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income applicable to
common shareholders (1) $ 13,197 $ 9,377 $ 39,592 $ 26,596
Depreciation of real property 8,217 6,524 23,249 18,295
Equity in net income of
joint ventures (3,201) (2,139) (8,535) (6,013)
Joint Ventures FFO (2) 4,083 3,221 12,206 9,198
Gain on sales of real estate -- -- (3,526) --
-------- -------- -------- --------
$ 22,296 $ 16,983 $ 62,986 $ 48,076
======== ======== ======== ========
</TABLE>
(1) Includes straight line rental revenues of approximately $0.5 million
and $0.2 for the three month period ended September 30, 1997 and 1996,
respectively, and approximately $1.3 million and $0.4 million for the
nine month periods ended September 30, 1997 and 1996, respectively,
primarily related to recent acquisitions and new developments.
(2) Joint Venture Funds From Operations are summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
Net income (a) $ 6,475 $ 4,278 $ 17,315 $ 12,026
Gain on sale of land (1,085) -- (1,085) --
Depreciation of real property 2,905 2,164 8,571 6,371
-------- -------- -------- --------
$ 8,295 $ 6,442 $ 24,801 $ 18,397
======== ======== ======== ========
DDRC Ownership interests (b) $ 4,083 $ 3,221 $ 12,206 $ 9,198
======== ======== ======== ========
</TABLE>
(a) Revenues for the three month periods ended September 30, 1997 and 1996
include approximately $0.7 million and $0.6 million, respectively,
resulting from the recognition of straight line rents of which the
Company's proportionate share is $0.3 million and $0.3 million,
respectively. Revenues for the nine month period ended September 30,
1997 and 1996 include approximately $2.1 million and $1.7 million,
respectively, resulting from the recognition of straight line rents of
which the Company's proportionate share is $1.0 million and $0.85
million, respectively.
20
<PAGE> 21
(b) At September 30, 1997 the Company owned a 50% joint venture interest
relating to 13 shopping center properties and a 35% joint venture
interest in one shopping center property. At September 30, 1996 the
Company owned a 50% joint venture interest in 12 shopping center
properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities will continue
to provide adequate capital for all principal payments, recurring tenant
improvements, as well as dividend payments in accordance with REIT requirements
and that cash on hand, borrowings available under its existing revolving credit
facilities, as well as other debt and equity alternatives will provide the
necessary capital to achieve continued growth. Cash flow from operating
activities for the nine month period ended September 30, 1997 increased to $69.2
million as compared to $53.1 million for the same period in 1996. The increase
is attributable to the 15 acquisitions and developments completed in 1997 and
1996, new leasing, expansion and re-tenanting of the core portfolio properties
and the equity offerings completed in 1997 and 1996.
An increase in the 1997 quarterly dividend per common share to $.63 from $.60
was approved in December 1996 by the Company's Board of Directors. The Company's
common share dividend payout ratio for the first three quarters of 1997
approximated 76.5% of the actual Funds From Operations as compared to 80.8% for
the same period in 1996. It is anticipated that the current dividend level will
result in a more conservative payout ratio as compared to prior years. A lower
payout ratio will enable the Company to retain more capital which will be
utilized for attractive investment opportunities in the development, acquisition
and expansion of portfolio properties.
During the nine month period ended September 30, 1997, the Company and its joint
ventures invested $283 million, net, to acquire, develop, expand, improve and
re-tenant its properties. The Company's expansion acquisition and development
activity is summarized below:
Expansions:
During 1997, the Company and its Joint Ventures completed the
expansion/redevelopment of seven of its shopping centers including; (i) a 30,000
square foot Kroger Supermarket expansion at Chillicothe Place Shopping Center in
Chillicothe, Ohio; (ii) a 50,000 square foot redevelopment at Great Northern
Shopping Center in North Olmsted, Ohio which involved the reconfiguration of
various retail space and adding HomePlace; (iii) a 109,000 square foot expansion
and redevelopment at Liberty Fair Mall in Martinsville, Virginia, which involved
retenanting and expanding the former Wal-Mart space to include Goody's, Kroger
Supermarket and OfficeMax; (iv) a 48,000 square foot expansion relating to
SteinMart, Blockbuster Video and additional retail space at Towne Center Prado
in Marietta, Georgia; (v) a 36,000 square foot Supermarket expansion at Town
Fair Center in Bedford, Indiana; (vi) a 130,000 square foot redevelopment at
Apple Blossom Corners in Winchester, Virginia which involved the retenanting and
expansion of the former Wal-Mart space to include Kohl's, OfficeMax and
Book-a-Million and (vii) a 61,000 square foot redevelopment of the former
Pharmor space at Del Prado Mall in Cape Coral, Florida to include TJ Maxx and
OfficeMax.
The Company is currently expanding/redeveloping ten of its shopping centers,
including (i) a 49,000 square foot OfficeMax and additional retail expansion at
Brookhighland Plaza, in Birmingham, Alabama; (ii) a 92,000 square foot expansion
including Beall's, Big Party and additional retail at Mariner Square Shopping
Center in Spring Hill, Florida; (iii) a 190,000 square foot Wal-Mart Superstore
expansion at Pamlico Plaza in Washington, North Carolina; (iv) a 45,500 square
foot expansion/redevelopment at
21
<PAGE> 22
Rivertowne Square Shopping Center in New Bern, North Carolina including Goody's
and Books-A-Million; (v) a 79,000 square foot expansion/redevelopment at Tarpon
Square Shopping Center in Tarpon Springs, Florida including Big Lots and
Beall's, which replaced a former J. Byrons Store, and additional retail space;
(vi) a 23,500 square foot OfficeMax expansion at Chillicothe Place Shopping
Center in Chillicothe, Ohio; (vii) a 7,500 square foot Hollywood Video expansion
at Westpark Square Shopping Center in Xenia, Ohio; (viii) a 23,500 square foot
OfficeMax expansion/redevelopment at Cascade Crossing Shopping Center in Sault
Ste. Marie, Michigan; (ix) a 66,300 square foot expansion/redevelopment at
Berlin Mall in Berlin, Vermont where a major department store is replacing
Rich's Department Store and (x) a 16,800 square foot Family Toy Warehouse
expansion at Kmart Plaza in East Norriton, Pennsylvania.
Acquisitions:
Total acquisitions completed during 1997 through September 30, 1997 aggregated
six shopping centers at a total year to date cost of approximately $212.5
million, including proportionate share of joint venture interests and
approximately $6.5 million of earnouts relating to prior year acquisitions. In
addition, the Company expects to close on an additional three shopping centers
aggregating approximately $120 million during the fourth quarter of 1997.
During the first quarter of 1997, the Company acquired two adjacent shopping
center properties in Ahwatukee, Arizona (a suburb of Phoenix), aggregating
490,885 square feet for an aggregate purchase price of approximately $68.9
million. The Company also acquired a majority ownership interest in two adjacent
shopping center properties aggregating 606,387 square feet and valued at $57.2
million in North Olmsted, Ohio (a suburb of Cleveland). The Company's investment
is approximately $40.9 million and the balance is owned through a minority
interest.
The Company also acquired a 35% ownership interest in a 286,000 square foot
shopping center in San Antonio, Texas during the first quarter of 1997. This
shopping center was acquired at a cost of approximately $38.3 million of which
the Company's proportionate share aggregated approximately $13.4 million.
In addition, the Company acquired two shopping centers in Minnesota, in July
1997. The first center, located in Minneapolis, Minnesota will aggregate
approximately 271,000 square feet once construction of approximately 46,000
square feet is completed. The Company paid approximately $29.0 million for the
completed portion of the center. The second center, located in St. Paul,
Minnesota, will aggregate approximately 324,000 square feet, once construction
of approximately 14,000 square feet is completed. The Company paid approximately
$22.4 million for the completed portion of this center.
In August 1997, the Company acquired a 330,000 square foot shopping center in
Brunswick, ME. The Company formed a limited partnership in which the Company
contributed approximately $19.3 million of cash and issued approximately 8,900
limited partnership units which are convertible on a one-to-one basis into the
Company's common stock.
In October 1997, the Company acquired a shopping center located in Denver, CO.,
through a limited partnership. This center will aggregate approximately 414,000
square feet, once construction of approximately 96,000 square feet is completed.
The Company paid approximately $39.1 million cash for the completed portion. A
significant portion of the balance of the purchase price of approximately $16.5
is expected to be financed through the issuance of limited partnership units,
which will be convertible into the Company's common stock.
22
<PAGE> 23
On October 14, 1997, the Company announced that it had entered into a letter of
intent with Prudential Real Estate Investors to form an Opportunity Fund
("Fund"). The Fund will invest in retail properties within the United States
that are in need of substantial retenanting and market repositioning. This Fund
may also make equity or debt investments in companies owning or managing retail
properties as well as in third party development projects that provide
significant growth opportunities. The retail property investments may include
enclosed malls, neighborhood centers or other potential commercial redevelopment
opportunities which would not generally be pursued for acquisition by the
Company.
Developments:
During 1997 the Company has substantially completed the construction of four
shopping centers which include: (i) a 235,000 square foot Phase II development
of the Canton, Ohio center which includes Service Merchandise, JoAnn Fabrics ETC
(both opened third quarter), PETsMART and HomePlace as anchor tenants; (ii) a
500,000 square foot shopping center in Boardman, Ohio which includes Wal-Mart,
Lowe's, Dick's Sporting Goods, Giant Eagle Supermarket, Staples and PETsMART as
anchor tenants (the Lowe's, Wal-Mart and Dick's Sporting Goods stores opened
during the first quarter of 1997 and Staples and PETsMART opened during the
third quarter of 1997); (iii) a 475,000 square foot shopping center in Stow,
Ohio which includes Target (not owned by the Company), Giant Eagle Supermarket
(opened fourth quarter 1996), Stein Mart and OfficeMax (both opened first half
of 1997) as anchor tenants and (iv) an 84,000 square foot community shopping
center in Aurora, Ohio with a Heinen's Supermarket (not owned by the Company)
and Revco Drug Store as anchor tenants.
Development activity also nears completion at the Company's shopping centers in
Atlanta, Georgia and Framingham, Massachusetts which were acquired in connection
with the Community Center Joint Ventures in November 1995. The Atlanta and
Framingham centers are scheduled to be substantially completed by the end of
1997. The majority of tenants have opened at each center.
The Company has commenced construction on two additional shopping centers which
include a 200,000 square foot Phase II development of the Erie, Pennsylvania
center, which includes Home Depot (not owned by the Company), PETsMART and
Circuit City as anchor tenants and a 445,000 square foot shopping center in
Merriam, Kansas which is being developed through a joint venture formed in
October 1996, 50% of which is owned by the Company. This center will include
Home Depot (not owned by the Company), Cinemark Theaters, Hen House Supermarket,
OfficeMax, Marshalls, Old Navy and PETsMART as anchor tenants. The Erie,
Pennsylvania (Phase II) and Merriam, Kansas shopping centers are scheduled for
completion during the first three quarters of 1998.
23
<PAGE> 24
The Company has also commenced the initial development of three additional
shopping centers which include: (i) a 240,000 square foot shopping center in
Toledo, Ohio; (ii) a 170,000 square foot shopping center in Solon, Ohio and
(iii) a 230,000 square foot shopping center in Oviedo, Florida (a suburb of
Orlando). All three centers are scheduled for completion during the second half
of 1998.
The Company is also involved with, or pursuing, joint venture development
opportunities on nine additional projects with various developers throughout the
country. The majority of projects will commence development in 1998 and are
scheduled for completion in 1999.
FINANCING ACTIVITIES
The acquisitions, developments and expansions were financed through cash
provided from operating activities, revolving credit facilities, mortgages
assumed and debt and equity offerings. Total debt outstanding at September 30,
1997 was $523.6 million compared to $449.4 million at September 30, 1996.
In January 1997, the Company completed a 3,350,000 common share offering and
received net proceeds of approximately $116 million which were primarily used to
retire variable rate debt. In June 1997, the Company completed a 1,300,000
common share offering and received net proceeds of approximately $49.4 million
which were primarily used to retire variable rate debt. In September 1997, the
Company completed a 507,960 common share offering through a registered unit
trust and received net proceeds of approximately $18.8 million which were
primarily used to retire variable rate debt. The common share offerings
significantly strengthened the Company's balance sheet and positioned the
Company to continue to take advantage of attractive acquisition, development and
expansion opportunities discussed above.
In March 1997, the Company issued $75 million of senior unsecured Putable Asset
Trust Securities (PATS). The PATS were issued at a discount of 99.53%, have a
coupon rate of 7.125%, mature on March 15, 2012 and have a put date of March 15,
2002. The effective yield to the put date, after adjusting for the call premium
and debt issue costs, is approximately 6.9%.
In March 1997, the Company extended its $150 million unsecured revolving credit
facility, agented by the First National Bank of Chicago, the First National Bank
of Boston and Bank of America NT&SA, for an additional year, through May 2000,
and reduced the interest rate 15 basis points. The amendment also introduced a
competitive bid feature for up to $75 million of borrowings.
In March 1997, the Company sold two business centers in Highland Heights, Ohio
aggregating approximately 113,000 square feet for approximately $5.7 million and
recognized a gain of approximately $3.5 million. The net proceeds of
approximately $5.4 million were used to repay revolving credit debt.
In April 1997, the Company extended its $10 million unsecured revolving credit
facility with National City Bank through November 2000, and reduced the interest
rate 15 basis points.
In May 1997, the Company refinanced $322.5 million of non-recourse joint venture
indebtedness relating to the Community Centers Joint Ventures. This indebtedness
now bears interest at a fixed coupon rate of 7.378% and matures in May 2002.
24
<PAGE> 25
In July 1997, the Company issued $50 million of Senior unsecured fixed rate
notes through its Medium Term Note program with maturities ranging from five to
ten years and interest rates ranging from 6.80% to 7.02%. The proceeds were used
to repay variable rate borrowings on the Company's revolving credit facilities
primarily associated with the July 1997 shopping center acquisitions.
At September 30, 1997, the Company's capitalization consisted of $523.6 million
of debt (excluding the Company's proportionate share of joint venture mortgage
debt aggregating $190.3 million), $149.8 million of preferred stock and $1,083.1
million of market equity (market equity is defined as common shares outstanding
multiplied by the closing price of the common shares on the New York Stock
Exchange at September 30, 1997 of $40.00) resulting in a debt total market
capitalization ratio of 0.30 to 1.0. At September 30, 1997, the Company's total
debt consisted of $497.7 million of fixed rate debt, and $25.9 million of
variable rate debt.
It is management's intention that the Company have access to the capital
resources necessary to expand and develop its business. Accordingly, the Company
may seek to obtain funds through additional equity offerings or debt financing
in a manner consistent with its intention to operate with a conservative debt
capitalization policy and maintain its investment grade ratings with Moody's
Investor Services and Standard and Poor's. As of September 30, 1997, the Company
had $99.1 million available under its shelf registration statement. In October
1997, the Company filed a shelf registration statement with the Securities and
Exchange Commission under which an aggregate of $500 million of debt securities,
preferred shares or common shares may be issued. In addition, as of September
30, 1997, the Company had cash of $0.9 million and $137 million available under
its $160 million of unsecured revolving credit facilities. On September 30,
1997, the Company also had 97 operating properties with $95.3 million, or 74.5%,
of the total revenue for the nine month period ended September 30, 1997 which
were unencumbered thereby providing a potential collateral base for future
borrowings.
INFLATION
Substantially all of the Company's long-term leases contain provisions
designed to mitigate the adverse impact of inflation. Such provisions include
clauses enabling the Company to receive percentage rentals based on tenants'
gross sales, which generally increase as prices rise, and/or escalation clauses,
which generally increase rental rates during the terms of the leases. Such
escalation clauses are often related to increases in the consumer price index or
similar inflation indices. In addition, many of the Company's leases are for
terms of less than ten years, which permits the Company to seek increased rents
upon re-rental at market rates. Most of the Company's leases require the tenants
to pay their share of operating expenses, including common area maintenance,
real estate taxes, insurance and utilities, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
At September 30, 1997, approximately 95.1% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 4.4 years and a weighted average interest rate
of approximately 7.7%. The remainder of the Company's debt bears interest at
variable rates, with a weighted average maturity of approximately 3.5 years and
a weighted average interest rate of approximately 6.5%. As of September 30, 1997
the Company's Community Center Joint Ventures had fixed rate debt aggregating
approximately $322.5 million. The Company's OSTRS Joint Venture has variable
rate debt aggregating $24.3 million. The Company's joint venture in San Antonio,
Texas has fixed rate debt aggregating $28.7 million. The Company intends to
utilize variable rate indebtedness available under its revolving credit
facilities to initially fund future
25
<PAGE> 26
acquisitions of shopping centers. Thus, to the extent that the Company incurs
additional variable rate indebtedness, its exposure to increases in interest
rates in an inflationary period would increase. The Company believes, however,
that increases in interest expense as a result of inflation would not
significantly impact the Company's distributable cash flow.
The Company intends to continuously monitor and actively manage
interest costs on its variable rate debt portfolio and may enter into swap
positions based on market fluctuations. At September 30, 1997 the Company had
entered into a $1.5 million SWAP Agreement with a major financial institution as
a hedge against increasing interest rates associated with refinancing of certain
mortgage debt which matures in November 1997. In addition, the Company believes
that it has the ability to obtain funds through additional equity and/or debt
offerings, including the issuance of medium term notes. Accordingly, the cost of
obtaining such protection agreements in relation to the Company's access to
capital markets will continue to be evaluated.
ECONOMIC CONDITIONS
Historically, real estate has been subject to a wide range of
cyclical economic conditions which affect various real estate sections and
geographic regions with differing intensities and at different times. Adverse
changes in general or local economic conditions, could result in the inability
of some existing tenants of the Company to meet their lease obligations and
could otherwise adversely affect the Company's ability to attract or retain
tenants. The shopping centers are typically anchored by discount department
stores (usually Wal-Mart, Kmart or J.C. Penney), supermarkets, and drug stores
which usually offer day-to-day necessities, rather than high-priced luxury
items. Since these merchants typically perform better in an economic recession
than those who market high priced luxury items, the percentage rents received by
the Company have remained relatively stable. In addition, the Company seeks to
reduce its operating and leasing risks through ownership of a portfolio of
properties with a diverse geographic and tenant base.
During 1996 and 1997, certain national and regional retailers
experienced financial difficulties and several have filed for protection under
bankruptcy laws. Although the Company has experienced an increase in the number
of tenants filing for protection under bankruptcy laws, no significant
bankruptcies have occurred through November 12, 1997 with regard to the
Company's portfolio of tenants.
26
<PAGE> 27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in
the ordinary course of business, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
In August 1997, in conjunction with the acquisition of a shopping
center in Brunswick, Maine, the Company formed a limited partnership
which issued approximately 8,900 limited partnership units (the
"Units") which are convertible on a one-for-one basis into the
Company's common shares. The Units are convertible at any time after
August 1998, subject to the Company's right to redeem such units for
cash in lieu of delivering such common shares. This transaction was
conducted as a private placement in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
11.1 Earnings per Share
27 (a) Financial Data Schedule
b) Reports on Form 8-K
None
27
<PAGE> 28
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
November 13, 1997 /s/ Scott A. Wolstein
- ---------------------------- ----------------------------------------
(Date) Scott A. Wolstein, President and
Chief Executive Officer
November 13, 1997 /s/ William H. Schafer
- ---------------------------- ----------------------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
28
<PAGE> 1
EXHIBIT 11.1
DEVELOPERS DIVERSIFIED REALTY CORPORATION
Earning per share
For the Three Month Periods Ended September 30,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Primary - per APB -15,
Interpretation 102
Dividends declared per weighted
average share outstanding
(26,558,980 shares) $ 0.63
Dividends declared per weighted
average share outstanding
(21,619,082 shares) $ 0.60
Undistributed loss per share:
($3,441,186) divided by
26,558,980 shares (0.13)
---------------
($3,584,412) divided by
21,619,082 shares (0.17)
-----------
Income per share $ 0.50 $ 0.43
=============== ===========
Undistributed loss:
Income available to common shareholders per
statement of operations $13,197,052 $ 9,376,667
Dividends declared (16,638,238) (12,961,079)
----------- -----------
(3,441,186) ($ 3,584,412)
=============== ============
Note: Common stock equivalents are antidilutive due to undistributed
losses during the period.
Fully diluted:
Income available to common shareholders' $ 13,197,052 = $0.49 $ 9,376,667 = $0.43
--------------- ------------
Weighted average number of shares and equivalents 27,056,205 21,863,509
</TABLE>
<PAGE> 2
EXHIBIT 11.1
DEVELOPERS DIVERSIFIED REALTY CORPORATION
Earning per share
For the Nine Month Periods Ended September 30,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Primary - per APB -15,
Interpretation 102
Dividends declared per weighted
average share outstanding
(25,423,324 shares) $ 1.90
Dividends declared per weighted
average share outstanding
(20,973,816 shares) $1.85
Undistributed loss per share:
($8,623,025) divided by
25,423,324 shares (0.34)
-----------
($12,272,175) divided by
20,973,816 shares (0.58)
------------
Income per share $ 1.56 $ 1.27
=========== ============
Undistributed loss:
Income available to common shareholders per
statement of operations $39,591,981 $ 26,596,381
Dividends declared (48,215,006) (38,868,556)
----------- ------------
($ 8,623,025) ($12,272,175)
============ ============
Note: Common stock equivalents are antidilutive due to undistributed losses during the period.
Fully diluted:
Income available to common shareholders' $ 39,591,981 = 1.53 $ 26,596,381 = $1.25
------------ -------------
Weighted average number of shares and equivalents 25,908,109 21,205,822
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 875,642
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,242,177,760
<DEPRECIATION> 163,552,946
<TOTAL-ASSETS> 1,230,752,742
<CURRENT-LIABILITIES> 0
<BONDS> 523,569,081
0
149,750,000
<COMMON> 2,707,855
<OTHER-SE> 499,981,916
<TOTAL-LIABILITY-AND-EQUITY> 1,230,752,741
<SALES> 0
<TOTAL-REVENUES> 120,992,433
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,055,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,460,288
<INCOME-PRETAX> 50,241,700
<INCOME-TAX> 0
<INCOME-CONTINUING> 50,241,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,241,700
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.53
</TABLE>
