<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 June 30, 2000
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.)
3300 Enterprise Parkway, Beachwood, Ohio 44122
-------------------------------------------------------------------------------
(Address of principal executive offices - zip code)
(216) 755-5500
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicated by check [X] 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.
54,874,426 common shares, without par value, outstanding as of August 9,
2000
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended June 30, 2000 and 1999.
Condensed Consolidated Statements of Operations for the Six Month Periods ended
June 30, 2000 and 1999.
Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended
June 30, 2000 and 1999.
Notes to Condensed Consolidated Financial Statements.
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<PAGE> 3
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
---------- ------------
<S> <C> <C>
Real estate rental property:
Land $ 351,399 $ 342,859
Buildings 1,571,770 1,542,333
Fixtures and tenant improvements 39,111 34,176
Land under development 47,358 53,213
Construction in progress 121,716 95,693
----------- -----------
2,131,354 2,068,274
Less accumulated depreciation (274,027) (249,912)
----------- -----------
Real estate, net 1,857,327 1,818,362
Cash and cash equivalents 2,875 5,992
Investments in and advances to joint ventures 288,663 299,176
Minority equity investment 135,953 137,234
Notes receivable 2,563 5,590
Other assets 61,256 54,506
----------- -----------
$ 2,348,637 $ 2,320,860
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 492,382 $ 592,311
Variable rate debt 377,000 272,000
----------- -----------
869,382 864,311
Secured indebtedness:
Revolving credit facility 21,500 18,775
Mortgage and other secured indebtedness 265,696 268,965
----------- -----------
Total indebtedness 1,156,578 1,152,051
Accounts payable and accrued expenses 48,248 49,860
Dividends payable 19,812 20,826
Other liabilities 14,028 29,867
----------- -----------
1,238,666 1,252,604
----------- -----------
Minority equity interest 8,257 8,219
Preferred operating partnership interests 207,111 104,736
Operating partnership minority interests 102,083 102,956
Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 421,500 shares
issued and outstanding at June 30, 2000 and December 31, 1999 105,375 105,375
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 177,500 shares
issued and outstanding at June 30, 2000 and December 31, 1999 44,375 44,375
Class C - 8.375% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 400,000 shares issued
and outstanding at June 30, 2000 and December 31, 1999 100,000 100,000
Class D - 8.68% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 750,000 shares authorized; 216,000 shares issued
and outstanding at June 30, 2000 and December 31, 1999 54,000 54,000
Common shares, without par value, $.10 stated value; 100,000,000 shares
authorized;
61,463,531 and 61,364,035 shares issued at June 30, 2000 and
December 31, 1999, respectively 6,146 6,136
Paid-in-capital 676,201 674,735
Accumulated dividends in excess of net income (103,352) (105,757)
----------- -----------
882,745 878,864
Less: Unearned compensation - restricted stock (1,523) (674)
Common stock in treasury at cost: 6,601,250 and 1,860,300 shares at
June 30, 2000 and December 31, 1999, respectively (88,702) (25,845)
----------- -----------
792,520 852,345
----------- -----------
$ 2,348,637 $ 2,320,860
=========== ===========
</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 JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Revenues from operations:
Minimum rents $ 50,376 $ 46,578
Percentage and overage rents 885 825
Recoveries from tenants 14,289 11,337
Management fee income 1,431 1,308
Interest income 362 1,520
Other 4,367 2,746
-------- --------
71,710 64,314
-------- --------
Rental operation expenses:
Operating and maintenance 6,064 5,286
Real estate taxes 9,344 6,501
General and administrative 5,081 4,563
Interest 18,666 16,079
Depreciation and amortization 13,609 12,325
-------- --------
52,764 44,754
-------- --------
Income before equity in net income of joint
ventures and minority equity investment, gain (loss) on
disposition of real estate and minority interests 18,946 19,560
Equity in net income of joint ventures 3,414 3,852
Equity in net income from minority equity investment 1,259 1,885
Gain (loss) on disposition of real estate and real estate
investments 202 (1,753)
-------- --------
Income before minority interests 23,821 23,544
Minority Interests:
Minority equity interests (78) (25)
Preferred operating partnership minority interests (3,353) (744)
Operating partnership minority interests (1,677) (1,633)
-------- --------
(5,108) (2,402)
-------- --------
Net income $ 18,713 $ 21,142
======== ========
Net income applicable to common shareholders $ 11,898 $ 14,326
======== ========
Per share data:
Earnings per common share -
Basic $ 0.22 $ 0.23
======== ========
Diluted $ 0.21 $ 0.22
======== ========
Dividends declared $ 0.36 $ 0.35
======== ========
</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 SIX MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Revenues from operations:
Minimum rents $ 99,468 $ 92,834
Percentage and over rents 2,736 2,575
Recoveries from tenants 27,465 22,991
Management fee income 3,066 2,607
Interest income 1,811 3,715
Other 5,970 4,730
--------- ---------
140,516 129,452
--------- ---------
Rental operation expenses:
Operating and maintenance 12,692 11,372
Real estate taxes 16,913 12,969
General and administrative 10,168 9,207
Interest 36,790 33,353
Depreciation and amortization 26,857 24,461
--------- ---------
103,420 91,362
--------- ---------
Income before equity in net income of joint ventures and
minority equity investment, gain (loss)
on disposition of real estate and minority interests 37,096 38,090
Equity in net income of joint ventures 8,834 8,426
Equity in net income from minority equity investment 2,909 3,036
Gain (loss) on disposition of real estate and real estate
investments 17,089 (1,753)
--------- ---------
Income before minority interests 65,928 47,799
Minority interests:
Minority equity interests (107) (53)
Preferred operating partnership minority interests (5,761) (1,487)
Operating partnership minority interests (3,370) (3,249)
--------- ---------
(9,238) (4,789)
--------- ---------
Net income $ 56,690 $ 43,010
========= =========
Net income applicable to common shareholders $ 43,059 $ 29,379
========= =========
Per share data:
Earnings per common share
Basic $ 0.75 $ 0.48
========= =========
Diluted $ 0.75 $ 0.46
========= =========
Dividends declared $ 0.72 $ 0.70
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 6
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net cash flow provided by operating activities $ 69,614 $ 66,982
--------- ---------
Cash flow (used for) provided by investing activities:
Real estate developed or acquired (39,064) (77,243)
Investments in and advances to joint ventures and minority
equity investment, net (45,102) (96,972)
Repayment of notes receivable, net 3,026 10,073
(Advances to) repayment of advances from affiliates (20,833) 38,853
Proceeds from disposition of real estate and real estate investments 75,279 5,131
--------- ---------
Net cash flow used for investing activities (26,694) (120,158)
--------- ---------
Cash flow provided by (used for) financing activities:
Proceeds from revolving credit facilities and
temporary bridge loans, net 85,725 83,050
Proceeds from construction loans -- 34,697
Repayment of senior notes (100,000) --
Principal payments on rental property debt (4,628) (7,650)
Payment of deferred finance costs (bank borrowings) (3,574) (99)
Net proceeds from issuance of preferred operating partnership units 102,375 --
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan, dividend reinvestment
plan and restricted stock plan 329 234
Purchase of treasury stock (62,866) --
Payment of distributions to operating partnership minority interests (8,099) (2,486)
Dividends paid (55,299) (55,155)
--------- ---------
Net cash flow (used for) provided by financing activities (46,037) 52,591
--------- ---------
Decrease in cash and cash equivalents (3,117) (585)
Cash and cash equivalents, beginning of period 5,992 2,260
--------- ---------
Cash and cash equivalents, end of period $ 2,875 $ 1,675
========= =========
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
During the period ended June 30, 2000, in conjunction with the formation of a
joint venture, the Company transferred property to the joint venture with a net
book value of $25.6 million and debt of $18.0 million in exchange for a 50%
equity interest. In conjunction with the acquisition of a shopping center the
Company assumed mortgage debt and other liabilities of approximately $16.6
million. Due to the consolidation of a certain joint venture interests
previously accounted for under the equity method, the Company recorded
property with a net book value of $39.2 million and debt of $24.9 million.
Included in accounts payable was approximately $0.2 million relating to
construction in progress and $19.8 million of dividends declared at June 30,
2000. The foregoing transactions did not provide for or require the use of
cash.
In conjunction with the acquisition of certain shopping centers, the Company
recorded minority equity interest aggregating approximately $1.8 million during
the six month period ended June 30, 1999. Also, the Company exchanged
approximately $14.1 million of notes receivable in conjunction with the
acquisition of additional shares of American Industrial Properties. In addition,
included in accounts payable was approximately $0.9 million relating to
construction in progress and $21.5 million of dividends declared at June 30,
1999. The foregoing transactions did not provide for or require the use of cash.
The company received common shares of a major retailer valued at approximately
$2.9 million as settlement for bankruptcy related claims as part of operating
activities.
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 AND FINANCIAL STATEMENT PRESENTATION
Developers Diversified Realty Corporation, related real estate joint
ventures and its minority equity investment (collectively the "Company" or
"DDR"), are engaged in the business of acquiring, expanding, owning, developing,
managing and operating neighborhood and community shopping centers, enclosed
malls and business centers.
Reclassifications
Certain reclassifications have been made to the 1999 financial
statements to conform to the 2000 presentation.
Use of Estimates
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,
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.
New Accounting Standard
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities. This statement requires fair value
accounting for all derivatives including recognizing all such instruments on the
balance sheet with an offsetting amount recorded in the income statement or as
part of comprehensive income. The new standard becomes effective for the Company
for the year ending December 31, 2001 (SFAS No. 137 deferred the effective date
from December 31, 2000). The Company does not expect this pronouncement to have
a material impact on the Company's financial position or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements, " which among other things,
provides guidance on lessors' accounting for contingent rent. The Company plans
to adopt this bulletin, as required, in the fourth quarter of 2000. The Company
does not anticipate this bulletin to have a material impact on the Company's
results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44 - Accounting for
Certain Transactions Involving Stock Compensation. This interpretation
clarifies the application of APB Opinion No. 25 - Accounting for Stock Issued
to Employees for certain issues. This interpretation is effective for the
Company on July 1, 2000. The Company does not anticipate this Interpretation
to have a material impact on the Company's results of operations or financial
position.
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<PAGE> 8
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and all majority owned subsidiaries and
investees where the Company has financial
and operating control. Investments in real estate joint ventures and companies
for which the Company has the ability to exercise significant influence over but
does not have financial and operating control are accounted for using the equity
method of accounting.
These financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and the applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the interim
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results of the
periods presented. The results of the operations for six months ended June 30,
2000 and 1999 are not necessarily indicative of the results that may be expected
for the full year. These condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
2. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at June 30, 2000 consisted of
the following:
- A 50% joint venture interest in 15 operating shopping centers (one of which
was transferred from the Company to a joint venture in 2000 and two of
which were acquired in 1999);
- A 35% joint venture interest in one operating shopping center;
- A 20% joint venture interest in 10 operating shopping centers. (As
described below prior to February 29, 2000, the Company owned a 50% joint
venture interest in these properties);
- A 50% interest in six joint ventures each of which is developing a shopping
center;
- A 12.5% interest in two joint ventures formed in 1999 each of which is
developing a shopping center;
- An 80% joint venture interest in two operating shopping center properties;
- A 50% joint venture interest in a real estate management company and a
development company;
- A 50% joint venture interest in a limited partnership which is developing
six shopping centers;
- A 25% interest in one joint venture which is developing a shopping center;
- A 95% economic interest in a management service subsidiary of which the
Company owns 1% of the voting and 100% of the non-voting common stock. This
entity owns a 25% joint venture interest in an opportunity fund ("Retail
Value Fund") which acquired a retail site in Long Beach, CA, which is being
redeveloped, 6 operating retail shopping centers in Kansas City, Kansas and
Kansas City, Missouri acquired in 1999, a 75% joint venture interest which
owns 12 retail sites formerly occupied by Best Products, and a 12.5%
interest in a joint venture interest which is developing a shopping center;
- An 81% economic interest in a management service subsidiary of which the
Company owns 9% of the voting and 100% of the non-voting common stock.
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<PAGE> 9
Summarized combined financial information of the Company's joint venture
investments is as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
Combined Balance Sheets: 2000 1999
----------- -----------
<S> <C> <C>
Land $ 268,036 $ 262,485
Buildings 945,906 917,507
Fixtures and tenant improvements 6,839 5,010
Construction in progress 219,152 187,825
----------- -----------
1,439,933 1,372,827
Less accumulated depreciation (94,409) (82,481)
----------- -----------
Real estate, net 1,345,524 1,290,346
Other assets 82,425 76,173
----------- -----------
$ 1,427,949 $ 1,366,519
=========== ===========
Mortgage debt $ 909,409 $ 887,650
Amounts payable to DDR 151,193 123,743
Other liabilities 55,203 48,913
----------- -----------
1,115,805 1,060,306
Accumulated equity 312,144 306,213
----------- -----------
$ 1,427,949 $ 1,366,519
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
Combined Statements of Operations: 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues from operations $45,777 $40,698 $92,259 $80,568
------- ------- ------- -------
Rental operation expenses 13,506 12,645 26,310 24,023
Depreciation and amortization expense
of real estate investments 6,212 5,720 12,742 11,201
Interest expense 16,640 14,572 32,196 28,596
------- ------- ------- -------
36,358 32,937 71,248 63,820
------- ------- ------- -------
Income before gain on sale of real estate 9,419 7,761 21,011 16,748
Gain on sale of real estate -- 253 -- 344
------- ------- ------- -------
Net income $ 9,419 $ 8,014 $21,011 $17,092
======= ======= ======= =======
</TABLE>
Included in management fee income for the six month period ended June
30, 2000 and 1999, is approximately $2.8 and $2.4 million, respectively, of
management fees earned by the Company for services rendered to the joint
ventures. Similarly, other income for the six month period ended June 30, 2000
and 1999, includes $1.3 million and $1.4 million, respectively, of development
fee income and commissions for services rendered to the joint ventures, net of
amounts eliminated related to the Company's proportionate share.
On May 1, 2000, the Company elected to terminate its entity level
involvement with DDR OliverMcMillan ("DDROM"). The Company and OliverMcMillan
are in the process of restructuring the ownership of the urban entertainment and
retail projects which DDROM was pursuing. Two of the projects, located in San
Diego, CA and Oceanside, CA, are under construction with completion scheduled in
2001. One of the projects, located in Reno, NV, has been completed. The
remaining projects are scheduled to commence in 2000 with completion scheduled
in 2001 and 2002.
-9-
<PAGE> 10
In February 2000, the Company entered into an agreement to sell 60% of
its half interest in the Community Centers Joint Venture to DRA Advisors, Inc.
at a price of approximately $163 million comprised of cash of approximately $66
million and debt assumed of $97 million. In conjunction with this transaction,
the Company recognized a gain of approximately $15.4 million associated with
this sale. The Company's ownership in the joint venture subsequent to this
transaction is effectively 20% with investment funds advised by DRA Advisors,
Inc. owning 80%. The Company will continue to be responsible for the day-to-day
management of the shopping centers owned by the joint venture and receive fees
for such services.
In February 2000, the Company formed a joint venture with DRA Advisors,
Inc. whereby the Company contributed a wholly owned shopping center property in
Phoenix, Arizona valued at approximately $26.7 million and related mortgage debt
of $18.0 million and, in exchange, received a 50% equity ownership interest in
the joint venture and cash proceeds of approximately $4.3 million. In
conjunction with this transaction, the Company recognized a gain of
approximately $0.5 million associated with the sale of its partial interest. The
Company will continue to manage and operate the shopping center and will receive
fees for such services.
In addition, the Company transferred its interest in two joint ventures
in the first quarter of 2000 which each own a shopping center under development
to the Retail Value Fund.
3. MINORITY EQUITY INVESTMENT:
In 1998, the Company announced the execution of a definitive agreement
providing for the strategic investment in American Industrial Properties REIT
(NYSE: IND) ("AIP") by the Company. At December 31, 1999 and June 30, 2000, the
Company owned 9,656,650 common shares in AIP representing approximately 46.1%
and 46.0%, respectively, of AIP's total outstanding commons shares.
Summarized financial information of AIP, as reflected on the accounts of AIP, is
as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Balance Sheet:
Land $ 155,488 $ 159,566
Buildings 477,184 482,620
--------- ---------
632,672 642,186
Less accumulated depreciation (51,866) (46,931)
--------- ---------
Real estate, net 580,806 595,255
Other assets 27,027 25,427
--------- ---------
$ 607,833 $ 620,682
========= =========
Mortgage debt $ 321,821 $ 334,873
Other liabilities 24,622 27,321
--------- ---------
346,443 362,194
Accumulated equity 261,390 258,488
--------- ---------
$ 607,833 $ 620,682
========= =========
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
Three month period Six month period
ended June 30, ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statement of Operations:
Revenues from operations $ 22,287 $ 21,522 $ 44,507 $ 41,844
-------- -------- -------- --------
Rental operation expenses 7,619 7,591 15,418 14,841
Depreciation and amortization
Expense 3,714 3,150 7,328 6,623
Interest expense 6,406 6,564 12,956 12,834
-------- -------- -------- --------
17,739 17,305 35,702 34,298
-------- -------- -------- --------
4,548 4,217 8,805 7,546
Minority interests (104) (91) (195) (171)
Equity earnings in joint venture -- -- 70 --
Gain (loss) on sales of real estate (106) 38 3,010 38
-------- -------- -------- --------
Income before extraordinary item 4,338 4,164 11,690 7,413
Extraordinary item -- -- (329) --
-------- -------- -------- --------
Net income $ 4,338 $ 4,164 $ 11,361 $ 7,413
======== ======== ======== ========
</TABLE>
In conjunction with the Company's equity investment in AIP, certain adjustments
were made, to the Company's accounts, to reflect the fair market value of the
assets at the date the Company invested in AIP. Accordingly, the Company's
equity in net income from minority equity investment is adjusted to reflect
amortization of these basis differences.
4. SHAREHOLDERS' EQUITY AND OPERATING PARTNERSHIP UNITS:
The following table summarizes the changes in shareholders' equity
since December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Preferred Common Accumulated Unearned
Shares ($250 Shares Dividends in Compensation Treasury
Stated ($.10 stated Paid-in Excess of Restricted Stock
Value) Value) Capital Net Income Stock at Cost Total
------------ ------------ --------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999 $ 303,750 $ 6,136 $674,735 $ (105,757) $ (674) $ (25,845) $ 852,345
Net income 56,690 56,690
Dividends declared -
common shares (40,654) (40,654)
Dividends declared -
preferred shares (13,631) (13,631)
Issuance of restricted stock and
conversion of OP units 9 1,354 (849) 9 523
Purchases of common shares (62,866) (62,866)
Issuance of common shares
related to exercise of stock
options, employee 401(k) plan
and dividend reinvestment plan 1 112 113
---------- ---------- -------- ---------- ------- --------- ----------
Balance June 30, 2000 $ 303,750 $ 6,146 $676,201 $ (103,352) $(1,523) $ (88,702) $ 792,520
========== ========== ======== ========== ======= ========= ==========
</TABLE>
In February and August 1999, the Company's Board of Directors
authorized the officers of the Company to implement a common share repurchase
program in response to what the Company believed was a distinct under valuation
of the Company's common shares in the public market. At June 30, 2000 and
December 31, 1999, treasury stock recorded on the Company's consolidated balance
sheet consisted of 6,601,250 and 1,860,300 common shares at a cost of $88.7
million and $25.8 million, respectively.
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<PAGE> 12
5. REVOLVING CREDIT FACILITIES:
In June, 2000, the Company renegotiated, expanded and extended its
primary unsecured revolving credit facility with a syndicate of financial
institutions, for which Bank One, NA serves as the administrative agent (the
"Unsecured Credit Facility"). The amended facility increased the available
borrowing capacity to $550 million from $375 million, adjusted the spread over
LIBOR to 1.10%, modified certain covenants and extended the term for an
additional two years to May 31, 2003. The Unsecured Credit Facility includes a
competitive bid option for up to 50% of the facility amount. The Company's
borrowings under this facility bear interest at variable rates based on the
prime rate or LIBOR plus a specified spread (currently 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 and development of properties, to provide working capital and for
general corporate purposes. At June 30, 2000, $277.0 million was outstanding
under this facility with a weighted average interest rate of 7.8%.
The Company also maintains a secured revolving credit facility with
National City Bank of $25 million. This credit facility is secured by certain
partnership investments. The Company maintains the right to reduce this facility
to $20 million and to convert the borrowings to an unsecured revolving credit
facility. Borrowings under this facility bear interest at variable rates based
on the prime rate or LIBOR plus a specified spread (currently 0.85%) depending
on the Company's long term senior unsecured debt rating from Standard and Poor's
and Moody's Investors Service. At June 30, 2000, $21.5 million was outstanding
under this facility with a weighted average interest rate of 7.5%.
6. RELATED PARTY TRANSACTIONS
In conjunction with the establishment of DDR's equity investment in
certain entities, the Company's Chairman and Chief Executive Officer owns voting
stock in these entities in order to comply with certain REIT qualification
requirements.
7. EARNINGS AND DIVIDENDS PER SHARE
Earnings Per Share (EPS) have been computed pursuant to the provisions
of Statement of Financial Accounting Standards No. 128.
The following table provides a reconciliation of both income before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilizes the weighted
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<PAGE> 13
average number of common shares outstanding without regard to dilutive potential
common shares, and "diluted" EPS, which includes all such shares.
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
-------------------- --------------------
(in thousands, except per share amounts)
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 18,713 $ 21,142 $ 56,690 $ 43,010
Less: Preferred stock dividend (6,815) (6,816) (13,631) (13,631)
-------- -------- -------- --------
Basic - Income before
extraordinary item applicable to
common shareholders 11,898 14,326 43,059 29,379
Effect of dilutive securities:
Operating partnership minority interests -- -- 3,370 --
Joint Venture partnerships -- 113 -- 199
-------- -------- -------- --------
Diluted - Income before
extraordinary item applicable to
common shareholders plus
assumed conversions $ 11,898 $ 14,439 $ 46,429 $ 29,578
======== ======== ======== ========
NUMBER OF SHARES:
Basic - average shares outstanding 55,222 61,311 57,134 61,307
Effect of dilutive securities:
Operating partnership minority interests -- -- 4,681 --
Joint venture partnerships -- 2,451 -- 2,547
Stock options 219 229 120 208
Restricted stock 36 1 61 1
-------- -------- -------- --------
Diluted - average shares outstanding 55,477 63,992 61,996 64,063
======== ======== ======== ========
PER SHARE AMOUNT:
Income before extraordinary item
Basic $ 0.22 $ 0.23 $ 0.75 $ 0.48
======== ======== ======== ========
Diluted $ 0.21 $ 0.22 $ 0.75 $ 0.46
======== ======== ======== ========
</TABLE>
The weighted average contingently issuable OP units which were exchangeable, in
certain circumstances, into common shares aggregated 2.0 million for the six
month period ended June 30, 1999. In July 2000, the Company settled these
contingently issuable OP Units for cash.
The conversions of the Company joint venture partners' interest in several joint
ventures were not included in the computation of diluted EPS because the effect
was antidilutive in 1999. Significant estimates were utilized by the Company in
the determination of fair value for certain of the Company's joint ventures
where the joint venture partner has the right to convert its interest in the
partnership into common shares of the Company or cash, at the election of the
Company. These estimates were used to determine the number of common shares
assumed to be issued by the Company upon conversion, for purposes of determining
dilution, if any. However, in 1999, the Company made the determination that it
will settle these conversions, if any, in cash, and therefore, the calculation
of EPS for the period ended June 30, 2000 excludes these conversions.
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<PAGE> 14
8. SUBSEQUENT EVENTS
In July 2000, the Company acquired the remaining ownership interest
associated with the 11 Hermes Properties acquired in July, 1998 at an aggregate
cost of approximately $81.9 million. As a result, 3.6 million of operating
partnership units ("OP Units") were redeemed and all restrictions and
obligations were settled.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto. Historical results and
percentage relationships set forth in the consolidated financial statements,
including trends which might appear, should not be taken as indicative of future
operations. The Company considers portions of this information to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
both as amended, with respect to the Company's expectations for future periods.
Forward-looking statements include, without limitation, statements related to
acquisitions (including any related pro forma financial information) and other
business development activities, future capital expenditures, financing sources
and availability, the effects of environmental and other regulations. Although
the Company believes that the expectations reflected in those 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 statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", "seeks", "estimates", and similar
expressions are intended to identify forward-looking statements. Readers should
exercise caution in interpreting and relying on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond the Company's control and could materially affect the
Company's actual results, performance or achievements.
Factors that could cause actual results, performance or achievements to
differ materially from those expressed or implied by forward-looking statements
include, but are not limited to, the following:
- The Company is subject to general risks affecting the real estate industry,
including the need to enter into new leases or renew leases on favorable
terms to generate rental revenues;
- The Company is subject to competition for tenants from other owners of
retail properties and its tenants are subject to competition from other
retailers and methods of distribution. The Company is dependent upon the
successful operations and financial condition of its tenants, particularly
certain of its major tenants, and could be adversely affected by the
bankruptcy of those tenants;
- The Company may fail to anticipate the effects on its properties of changes
in consumer buying practices, including sales over the Internet, and the
resulting retailing practices and space needs of its tenants;
- E-commerce may affect the sales volume of the Company's tenants which may
reduce the amount of percentage rental income;
- The Company may fail to identify, acquire, construct or develop additional
properties that produce a desired yield on invested capital or may fail to
effectively integrate acquisitions of properties or portfolios of
properties;
- Debt and equity financing necessary for the Company to continue to grow and
operate its business may not be available or may not be available on
favorable terms;
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<PAGE> 16
- The Company is subject to complex regulations related to its status as a
real estate investment trust ("REIT") and would be adversely affected if it
failed to qualify as a REIT;
- The Company must make distributions to shareholders to continue to qualify
as a REIT, and if the Company borrows funds to make distributions then
those borrowings may not be available on favorable terms;
- The Company could be adversely affected by changes in the local markets
where its properties are located, as well as by adverse changes in national
economic and market conditions;
- The Company is subject to potential environmental liabilities;
- The Company could be adversely affected by changes in government
regulations, including changes in environmental, zoning, tax and other
regulations and
- Changes in interest rates could adversely affect the market price for the
Company's common shares, as well as its performance and cash flow.
RESULTS OF OPERATIONS
Revenues from Operations
Total revenues increased $7.4 million, or 11.5%, to $71.7 million for
the three month period ended June 30, 2000 from $64.3 million for the same
period in 1999. Total revenues increased $11.0 million, or 8.5% to $140.5
million for the six month period ended June 30, 2000 from $129.5 million for the
same period in 1999.
Base and percentage rents for the three month period ended June 30,
2000 increased $3.9 million, or 8.1%, to $51.3 million as compared to $47.4
million for the same period in 1999. Base and percentage rents increased $6.8
million, or 7.1%, to $102.2 million for the six month period ended June 30, 2000
from $95.4 million for the same period in 1999. Increase in aggregate base,
percentage and overage revenues relating to new leasing, re-tenanting and
expansion of the Core Portfolio Properties (shopping center properties owned as
of January 1, 1999) increased approximately $3.1 million, or 3.8% for the six
month period ended June 30, 2000 as compared to the same period in 1999.
Including the impact of bankruptcies discussed below, actual base and percentage
revenues increased approximately $1.4 million, or 1.5%, for the six month period
ended June 30, 2000 as compared to the same period in 1999. The two shopping
centers acquired by the Company in 2000 and 1999 contributed $0.9 million of
additional base and percentage rental revenue and the eight new shopping center
developments contributed $5.0 million. These increases were offset by a $0.5
million decrease from the sale of three properties in 1999 and 2000.
At June 30, 2000, the in-place occupancy rate of the Company's
portfolio stood at 94.8% as compared to 96.3% at June 30, 1999 and 95.6% at
December 31, 1999. The decrease in occupancy rate is primarily attributable to
bankruptcies associated with Home Quarters, Service Merchandise and Just For
Feet. A substantial portion of the space associated with the bankrupt tenants
has been released with revenues commencing in the second half of 2000.
The average annualized base rent per leased square foot, including
those properties owned through joint ventures, was $9.20 at June 30, 2000 as
compared to $9.06 at June 30, 1999. Same store
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<PAGE> 17
sales, for those tenants required to report such information, representing
approximately 19.2 million square feet, increased 3.8% to $241 per square foot
for the twelve month period.
The increase in recoveries from tenants of $4.5 million for the six
months ended June 30, 2000 is primarily related to the increase in operating and
maintenance expenses and real estate taxes associated with the 2000 and 1999
shopping center acquisitions and developments. Recoveries were approximately
92.8% and 94.5% of operating expenses and real estate taxes for the six month
period ended June 30, 2000 and 1999, respectively.
Management fee income increased by approximately $0.5 million for the
six month period ended June 30, 2000 compared to the same period in 1999,
primarily associated with the formation of new joint ventures in 1999 and 2000.
Interest income decreased $1.9 million, for the six month period ended June 30,
2000 compared to the same period in 1999, primarily associated with advances
made to certain joint ventures and notes receivable outstanding in 1999.
Other income increased by approximately $1.2 million which generally
reflects an increase in lease termination and bankruptcy settlements revenues of
approximately $3.4 million offset by a decrease in development fees of
approximately $1.4 million and other income consisting of commissions and
financing fees aggregating approximately $0.8 million primarily from the
Company's joint ventures, relating to the ownership interest held by third party
investors.
Other income was comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
2000 1999 2000 1999
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Temporary tenant rentals (Kiosks) $ 91 $ 104 $ 303 $ 186
Lease termination and bankruptcy
settlement revenues 3,715 188 3,903 537
Development fees 265 1,833 1,223 2,616
Other 296 621 541 1,391
------ ------ ------ ------
$4,367 $2,746 $5,970 $4,730
====== ====== ====== ======
</TABLE>
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended June 30, 2000 increased $0.8 million, or 14.7%, to $6.1 million as
compared to $5.3 million for the same period in 1999. Rental operating and
maintenance expenses increased $1.3 million or 11.6%, to $12.7 million for the
six month period ended June 30, 2000 from $11.4 million for the same period in
1999. An increase of $0.8 million is attributable to the ten shopping centers
acquired and developed in 2000 and 1999 and $0.5 million is related to the Core
Portfolio Properties and is primarily attributable to an increase in various
maintenance items.
Real estate taxes for the three month period ended June 30, 2000
increased $2.8 million, or 43.7%, to $9.3 million as compared to $6.5 million
for the same period in 1999. Real estate taxes increased $3.9 million, or 30.4%,
to $16.9 million for the six month period ended June 30, 2000 from $13.0 million
for the same period in 1999. An increase of $0.8 million is related to the ten
shopping centers acquired and developed in 2000 and 1999 and $3.1 million is
related to the Core Portfolio Properties primarily associated with recently
developed and acquired properties which were not fully assessed.
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<PAGE> 18
General and administrative expenses increased $0.5 million, or 11.4%,
to $5.1 million for the three month period ended June 30, 2000 as compared to
$4.6 million in 1999. General and administrative expenses increased $1.0
million, or 10.4%, to $10.2 million for the six month period ended June 30, 2000
from $9.2 million for the same period in 1999. Total general and administrative
expenses were approximately 4.4% of total revenues, including total revenues of
joint ventures, for the six month periods ended June 30, 2000 and 1999 (4.0% in
1999 after excluding a severance charge).
The increase in general and administrative expenses is attributable to
the growth of the Company primarily related to recent acquisitions, expansions
and developments, relocation of the Company Headquarters to a new office in 1999
and several new key executives. 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.
Depreciation and amortization expense increased $1.3 million, or 10.4%,
to $13.6 million for the three month period ended June 30, 2000 as compared to
$12.3 million for the same period in 1999. Depreciation and amortization
increased $2.4 million, or 9.8%, to $26.9 million for the six month period ended
June 30, 2000 from $24.5 million for the same period in 1999. An increase of
$1.4 million is related to the ten shopping centers acquired and developed in
2000 and 1999, $0.8 million is related to Core Portfolio Properties and $0.2
million is related to personal property primarily associated with the relocation
of the Company's headquarters.
Interest expense increased $2.6 million, or 16.1%, to $18.7 million for
the three month period ended June 30, 2000, as compared to $16.1 million for the
same period in 1999. Interest expense increased $3.4 million, or 10.3%, to $36.8
million for the six month period ended June 30, 2000 from $33.4 million for the
same period in 1999. The overall increase in interest expense for the six month
period ended June 30, 2000 as compared to the same period in 1999 is primarily
related to the acquisition and development of shopping centers during 2000 and
1999 and an increase in short term interest rates. The weighted average debt
outstanding during the six month period ended June 30, 2000 and related weighted
average interest rate was $1.1 billion and 7.6%, respectively, compared to $1.1
billion and 7.1%, respectively, for the same period in 1999. Interest costs
capitalized, in conjunction with development, expansion projects and development
joint venture interests were, $3.6 million and $6.7 million for the three and
six month periods ended June 30, 2000, as compared to $4.0 million and $6.7
million for the same periods in 1999.
Equity in net income of joint ventures decreased $0.5 million, or
11.4%, to $3.4 million for the three month period ended June 30, 2000 as
compared to $3.9 million for the same period in 1999. Equity in net income of
joint ventures increased $0.4 million, or 4.8%, to $8.8 million for the six
month period ended June 30, 2000 as compared to $8.4 million for the same period
in 1999. An increase of $0.7 million is related to the joint ventures formed in
1999 and 2000 and an additional $0.7 million related to various other joint
ventures formed prior to 1999. These additions were offset by a decrease of $1.0
million relating to the Company's sale of 60% of its half interest in the
Community Centers Joint Venture.
Equity in net income of minority equity investment decreased $0.6
million, to $1.3 million, or 33.2%, for the three month period ended June 30,
2000, as compared to $1.9 million for the same period in 1999. Equity in net
income of minority equity investment decreased $0.1 million, after reflecting
the impact of basis differentials which resulted in adjustments to depreciation
and amortization and gain (loss) on sale of assets, or 4.2%, to $2.9 million for
the six month period ended June 30, 2000 from $3.0 million for the
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<PAGE> 19
same period in 1999. As of June 30, 2000, the Company owned approximately 9.7
million shares of AIP which approximates 46.0% of AIP's outstanding common
shares.
The minority equity interest expense increased $2.7 million, to $5.1
million for the three month period ended June 30, 2000, as compared to $2.4
million for the same period in 1999. The minority equity interest expense
increased $4.4 million, to $9.2 million for the six month period ended June 30,
2000, as compared to $4.8 million for the same period in 1999. An increase of
$4.3 million relates to the Company's issuance of preferred operating
partnership minority units ("Units") in September 1999 and May 2000. These Units
may be exchanged, under certain circumstances, into preferred shares of the
Company. The remaining increase of $0.1 million relates to a minority equity
interest associated to with the ownership of a phase of a operating shopping
center in Maryland.
Gain on disposition of real estate and real estate investments
aggregated $17.1 million for the six month period ended June 30, 2000. In
February 2000, The Company sold a property in Stone Mountain, Georgia and
recorded a gain of approximately $1.0 million. The Company also sold 60% of its
half interest in a joint venture which owns 10 operating shopping centers and
recognized a gain of approximately $15.4 million. In connection with the
formation of one joint venture, the Company sold one property, received cash and
a 50% partnership interest and recognized a gain of approximately $0.5 million.
In addition, the Company sold residual land at a shopping center and recognized
a gain of $0.2 million.
The loss on disposition of real estate aggregating $1.8 million in 1999
relates to the sale of a portion of a shopping center and residual land in
Pensacola, Florida. The shopping center was sold to a major retailer for
approximately $4.7 million. In connection with this disposition, the Company
developed a 17,000 square foot shopping center adjacent to the site sold.
Net Income
Net income decreased $2.4 million, or 11.5%, to $18.7 million for the
three month period ended June 30, 2000, as compared to net income of $21.1
million for the same period in 1999. Net income increased $13.7 million or
31.8%, to $56.7 million for the six month period ended June 30, 2000 as compared
to $43.0 million for the same period in 1999. The increase in net income of
$13.7 million is primarily attributable to the increase in gain on sale of real
estate and real estate investments of $18.8 million, increases in net operating
revenues (total revenues less operating and maintenance, real estate taxes and
general and administrative expense) aggregating $4.8 million, resulting from new
leasing, retenanting and expansion of Core Portfolio Properties and the ten
shopping centers acquired and developed in 2000 and 1999 and an increase of $0.3
million relating to equity in net income from joint ventures and minority equity
investment. This aggregate increase was offset by increases in depreciation,
interest and minority interest expense of $2.4 million, $3.4 million and $4.4
million, respectively.
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, extraordinary items, adjusted 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
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<PAGE> 20
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 FFO in a
different manner. For the three month period ended June 30, 2000, FFO decreased
$2.2 million, to $32.4 million as compared to $34.6 million for the same period
in 1999. For the six month period ended June 30, 2000, FFO decreased $1.3
million, to $66.6 million as compared to $67.9 million for the same period in
1999 as adjusted to comply with NAREIT's revised definition of FFO effective
January 1, 2000. The decrease in total FFO is principally attributable to the
sale of real estate assets and joint venture interests in February, 2000, valued
at approximately $180 million. Proceeds were used to repay indebtedness and
repurchase common shares. The decrease is offset by 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 Six Month Period
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income applicable to
common shareholders (1) $ 11,898 $ 14,326 $ 43,059 $ 29,379
Depreciation of real estate investments 13,318 12,097 26,281 24,056
Equity in net income of joint ventures (3,414) (3,852) (8,834) (8,426)
Equity in net income of minority equity investment (1,259) (1,885) (2,909) (3,036)
Joint Ventures' FFO (2) 6,684 7,202 15,520 14,777
Minority equity investment FFO 3,679 3,284 7,210 6,166
Minority interest expense (OP Units) 1,677 1,633 3,370 3,249
(Gain) loss on disposition of real estate and real estate
investments (202) 1,753 (17,089) 1,753
-------- -------- -------- --------
$ 32,381 $ 34,558 $ 66,608 $ 67,918
======== ======== ======== ========
</TABLE>
(1) Includes straight line rental revenues of approximately $1.0 million for
the three month periods ended June 30, 2000 and 1999 and approximately $1.9
million and $2.1 million for the six month periods ended June 30, 2000 and
1999, respectively.
(2) Joint ventures' Funds From Operations are summarized as follows:
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (a) $ 9,419 $ 8,014 $ 21,011 $ 17,092
Gain on sales of real estate -- (253) -- (344)
Depreciation of real estate investments 6,212 5,720 12,742 11,201
-------- -------- -------- --------
$ 15,631 $ 13,481 $ 33,753 $ 27,949
======== ======== ======== ========
DDRC ownership interests (b) $ 6,684 $ 7,202 $ 15,520 $ 14,777
======== ======== ======== ========
</TABLE>
(a) Revenues for the three month periods ended June 30, 2000 and 1999 include
approximately $1.1 million and $1.0 million, respectively, resulting from
the recognition of straight line rents of which the Company's proportionate
share is $0.4 million and $0.5 million, respectively. Revenue for the six
month periods ended June 30, 2000 and 1999 include approximately $2.0
million, and $2.1 million, respectively, resulting from the recognition of
straight line rents of which the Company's proportionate share is $0.8
million and $1.0 million, respectively.
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<PAGE> 21
(b) At June 30, 2000, the Company owned joint venture interests relating to 41
operating shopping center properties, a 25% interest in the Prudential
Retail Value Fund and a 50% joint venture in a real estate management
company. At June 30, 1999, the Company owned joint venture interests in 27
operating shopping center properties, a 25% interest in the Prudential
Retail Value Fund and a 50% joint venture in a real estate management
company.
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,
including the issuance of OP Units and joint venture capital, will provide the
necessary capital to achieve continued growth. Cash flow from operating
activities for the six month period ended June 30, 2000 was $69.6 million as
compared to $67.0 million for the same period in 1999. The decrease is primarily
attributable to the sale of real estate assets and joint venture interests in
February, 2000 and an increase interest and other financial costs relating to
rate increases and common share repurchases. The decrease was partially offset
by shopping center acquisitions and developments completed in 2000 and 1999, new
leasing, expansion and re-tenanting of the core portfolio properties.
An increase in the 2000 quarterly dividend per common share to $0.36
from $0.35 was approved in March 2000 by the Company's Board of Directors. The
Company's common share dividend payout ratio for the first quarter of 2000
approximated 61.0% of the actual FFO as compared to 62.4% for the same period in
1999. 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 six month period ended June 30, 2000, the Company and its
joint ventures invested $88.5 million, net, to acquire, develop, expand, improve
and re-tenant its properties. The Company's expansion acquisition and
development activity is summarized below:
Expansions:
Through the first six months of 2000, the Company completed two
expansion projects at an aggregate cost of $2.9 million.
In addition, the Company and it's joint ventures are currently
expanding/redeveloping eight of its shopping centers at an aggregate projected
cost of $15.5 million. These expansion projects include:
- A 75,000 square foot Old Navy and Best Buy expansion/redevelopment at the
Spring Creek Centre in Fayetteville, Arkansas;
- A 91,000 square foot expansion/redevelopment, which includes Office Depot,
Carolina Pottery, T.J. Maxx and additional retail, at Wando Crossings in
Mt. Pleasant, South Carolina;
- A 30,000 square foot Bed, Bath & Beyond redevelopment at the Stow Community
Shopping Center in Stow, Ohio;
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<PAGE> 22
- A 60,000 square foot redevelopment for Bassett Direct Furniture and Room
Stores at the Ahwatukee Foothills Towne Center in Phoenix, Arizona;
- A 51,000 square foot expansion for Dick's Clothing and Sporting Goods and
Hallmark at the Merriam Towne Center in Merriam, Kansas;
- A 30,000 square foot redevelopment for Ross Stores at the Family Center at
Fort Union in Midvale, Utah;
- An 18,000 square foot expansion for Furniture Galleries at the Broadway
Marketplace in Denver, Colorado and
- A 16,000 square foot multi-tenant retail expansion at the West Bay Plaza in
Westlake, Ohio.
The Company is also scheduled to commence expansion/redevelopment
projects at three additional shopping centers located in Wilmington, NC; Crystal
River, FL; and Taylorsville, UT.
Acquisitions:
In April 2000, the Company purchased a 199,000 square foot shopping
center in Brentwood, Tennessee for approximately $22.6 million.
Development (Consolidated):
The consolidated development projects are as follows:
- A 416,000 square foot shopping center in Meridian, Idaho (a suburb of
Boise), which is scheduled for completion in 2001 and will be anchored by a
Wal-Mart Supercenter (not owned by the Company), Shepler's, Shopko (which
opened during the fourth quarter of 1999), Bed, Bath & Beyond, Office Depot
and Old Navy;
- A 607,000 square foot shopping center in Everett, Massachusetts, which is
scheduled for completion in 2001 and will be anchored by Target (not owned
by the Company), Home Depot (not owned by the Company), Bed, Bath & Beyond,
OfficeMax, Old Navy, and PetsMart;
- Phase II of a 185,000 square foot shopping center in Oviedo, Florida, which
is scheduled for completion in 2000 and includes the following tenants:
Linens N Things, TJ Maxx, PetsMart and miscellaneous retail shops;
- Phase II of a 282,000 square foot shopping center in Toledo, Ohio, which is
scheduled for completion in 2000 and includes the following tenants: Old
Navy, Shoe Carnival, The Avenue and miscellaneous retail shops and
- The Company is in the early stages of development relating to a shopping
center located in Riverdale, UT.
Development (Joint Ventures):
The Company has joint venture development agreements for an additional
ten shopping center projects with leading regional developers. These ten
projects have an aggregate projected cost of approximately $312.9 million. All
of these projects have commenced development and are currently scheduled for
completion in 2000 and 2001. The Company is currently financing five of these
projects through the Prudential/DDR Retail Value Fund. These projects are
located in Plainville, CT; Round Rock, TX; Hagerstown, MD; Deer Park, IL and
Long Beach, CA and the Company expects to finance an additional project located
in San Antonio, TX through this Fund. The remaining four projects are located in
Coon Rapids, MN; Salisbury, MD (Phase II); Fenton, MO and St. Louis, MO.
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<PAGE> 23
On May 1, 2000, the Company elected to terminate its entity level
involvement with DDR OliverMcMillan ("DDROM"). The Company and OliverMcMillan
are in the process of restructuring the ownership of the urban entertainment and
retail projects which DDROM was pursuing. Two of the projects, located in San
Diego, CA and Oceanside, CA, are under construction with completion schedule in
2001. One of the projects, located in Reno, NV, has been completed. The
remaining projects are scheduled to commence in 2000 with completion scheduled
in 2001 and 2002.
DISPOSITIONS:
In July, 2000, the Company sold 12,500 square feet of a 62,000 square
foot shopping center located in Las Vegas, Nevada for approximately $2.3 million
and will recognize a gain in the third quarter of 2000 of approximately $1.0
million.
In February, 2000, the Company entered into an agreement to sell 60% of
its half interest in the Community Centers Joint Venture to DRA Advisors, Inc.
at a price of approximately $163 million comprised of cash of approximately $66
million and debt assumed of $97 million. In conjunction with this transaction,
the Company recognized a gain of approximately $15.4 million associated with
this sale. The Company's ownership in the joint venture, subsequent to this
transaction, is effectively 20% with investment funds advised by DRA Advisors,
Inc. owning 80%. The Company will continue to be responsible for the day-to-day
management of the shopping centers owned by the joint venture and will receive
fees for such services.
In February, 2000, the Company formed a joint venture with DRA
Advisors, Inc. whereby the Company contributed a wholly owned shopping center
property in Phoenix, Arizona valued at approximately $26.7 million and related
mortgage debt of $18.0 million and, in exchange, received a 50% equity ownership
interest in the joint venture and cash proceeds of approximately $4.3 million.
In conjunction with this transaction, the Company recognized a gain of
approximately $0.5 million associated with this sale. The Company will continue
to manage and operate the shopping center and will receive fees for such
services.
In February, 2000, the Company sold a shopping center in Stone
Mountain, Georgia, a suburb of Atlanta, for approximately $1.8 million and
recognized a gain of approximately $1.0 million.
FINANCING ACTIVITIES:
In June, 2000, the Company amended its primary Unsecured Credit
Facility with a syndicate of financial institutions for which Bank One, NA
serves as agent. The amended facility increased the availability to $550 million
from $375 million and extended the term for an additional two years to May 31,
2003. The current stated interest rate on the facility is at LIBOR plus 1.10%.
The Company also can competitively bid up to 50% of the facility amount.
In May, 2000, the Company entered into a $100 million bridge loan
agreement with Bank of America. The proceeds from this facility were used to
repay the $100 million, 7-5/8% Unsecured Senior Notes which matured on May 15,
2000. The bridge loan matures in November, 2000 and bears interest at LIBOR plus
1.10%.
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In May, 2000, the Company issued $105 million, 9.0% perpetual preferred
"down-REIT" operating partnership units to an institutional investor and
received net proceeds of approximately $102.4 million. The units may be
exchanged, under certain circumstances, for Class J, 9.0% cumulative redeemable
perpetual preferred shares.
In July, 2000, the Company acquired the remaining ownership interest
associated with the 11 Hermes Properties acquired in July, 1998 at an aggregate
cost of approximately $81.9 million. As a result, 3,630,668 operating
partnership units ("OP Units") were redeemed and all restrictions and
obligations were settled.
From February 29, 2000 through June 30, 2000, the Company purchased, in
open market transactions, 4,741,700 of its common shares, at prices ranging from
$11.61 to $14.88, for an aggregate purchase price of approximately $62.9 million
in accordance with the stock repurchase plan approved by the Company's Board of
Directors. Beginning in the fourth quarter of 1999, the Company has acquired
6,602,000 shares at an aggregate cost of $88.7 million. From the fourth quarter
of 1999 through July 31, 2000, total common shares and operating partnership
units repurchased/converted aggregated 10.3 million shares and units of which
8.4 million shares and units have been repurchased/converted in 2000.
At June 30, 2000, the Company's capitalization consisted of $1.2
billion of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $351.3 million), $518.8 million of preferred shares
and preferred partnership units and $890.0 million of market equity (market
equity is defined as common shares and OP Units outstanding multiplied by the
closing price per common share on the New York Stock Exchange at June 30, 2000
of $14.953), resulting in a debt to total market capitalization ratio of .45 to
1.0. At June 30, 2000, the Company's total debt consisted of $665.2 million of
fixed rate debt and $491.4 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 or joint venture capital 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 June 30, 2000, the Company had $750.0 million available under its shelf
registration statement. In addition, as of June 30, 2000, the Company had cash
of $2.9 million and $276.5 million available under its $575 million of revolving
credit facilities. On June 30, 2000, the Company also had 116 operating
properties with $106.6 million, or 71.7%, of the total revenue for the six month
period ended June 30, 2000 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 provide for
fixed rate rental increases or 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
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<PAGE> 25
area maintenance, real estate taxes, insurance and utilities, thereby reducing
the Company's exposure to increases in costs and operating expenses resulting
from inflation.
ECONOMIC CONDITIONS
Historically, real estate has been subject to a wide range of cyclical
economic conditions which affect various real estate sectors 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
(Wal-Mart, Kmart or Target), off price department stores (Kohl's, TJ
Maxx/Marshalls), home improvement stores (Home Depot, Lowes) and supermarkets
which generally 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At
June 30, 2000 and 1999, approximately 57.5% and 77.3%, respectively, of the
Company's debt (excluding joint venture debt) bore interest at fixed rates with
a weighted average maturity of approximately 8.3 years and 6.9 years,
respectively, and a weighted average interest rate of approximately 7.5% and
7.6%, respectively. The remainder of the Company's debt bears interest at
variable rates with a weighted average maturity of approximately 1.8 years and a
weighted average interest rate of approximately 7.9% and 6.0%, respectively, at
June 30, 2000 and 1999. As of June 30, 2000 and 1999, the Company's joint
ventures' indebtedness aggregated $720.7 million and $679.2 million,
respectively, of fixed rate debt, of which the Company's proportionate share was
$263.2 million and $348.7 million, respectively, and $226.3 million and $84.9
million, respectively, of variable rate debt, of which the Company's
proportionate share was $86.2 million and $41.6 million, respectively. The
Company intends to utilize variable rate indebtedness available under its
revolving credit facilities and construction loans in order to initially fund
future acquisitions, developments and expansions 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 in no event would increases in
interest expense as a result of inflation significantly impact the Company's
distributable cash flow.
At June 30, 2000 and 1999, the fair value of the Company's fixed rate
debt amounted to a liability of $625.6 million and $837.6 million (excluding
joint venture debt), respectively, compared to its carrying amount of $665.2
million and $858.8 million, respectively. The fair value of the Company's
proportionate share of joint venture fixed rate debt was $253.6 million and
$352.4 million, respectively, compared to its carrying amount $263.2 million and
$348.7 million, respectively. The Company estimates that a 100 basis point
decrease in market interest rates at June 30, 2000 and 1999 would have changed
the fair value of the Company's fixed rate debt to a liability of $660.2 million
and $876.7 million, respectively, and would have changed the fair value of the
Company's proportionate share of joint ventures fixed rate debt to a liability
of $264.1 million and $356.2 million, respectively. The sensitivity to changes
in interest rate of the Company's fixed rate debt was determined utilizing a
valuation model based upon factors that measure the net present value of such
obligations which arise from the hypothetical estimate as discussed above.
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<PAGE> 26
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. 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 and joint venture
capital. Accordingly, the cost of obtaining such protection agreements in
relation to the Company's access to capital markets will continue to be
evaluated.
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<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. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 2000, the Company issued 420,000 preferred partnership units
which are exchangeable, under certain circumstances, into Class J, 9.0%
cumulative preferred shares. The units are exchangeable for the Company's common
shares if the Partnership fails to make distributions for six consecutive
quarters. 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
On May 15, 2000, the Company held its Annual Meeting of Shareholders.
The matters presented to the shareholders for a vote and the vote on such
matters were as follows:
a) To fix the number of directors at ten.
For Against Abstain
--- ------- -------
36,585,564 176,846 119,573
b) Election of Directors to serve until the next Annual Meeting of
Shareholders:
For Abstain
--- -------
Scott A. Wolstein 50,847,537 435,347
James A. Schoff 47,916,159 3,366,725
William N. Hulett, III 50,850,019 432,865
Ethan Penner 47,921,983 3,360,901
Albert T. Adams 49,942,473 1,340,411
Dean S. Adler 50,748,055 534,829
Barry A. Sholem 50,847,154 435,730
David M. Jacobstein 50,787,576 495,308
Terrance R. Ahern 50,782,567 500,317
Robert H. Gidel 50,830,487 452,397
ITEM 5. OTHER INFORMATION
None
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<PAGE> 28
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
4.1 Third Amended and Restated Credit Agreement Dated as of June 27,
2000 among the Company and Banc One Capital Markets, Inc., and
other lenders named therein
4.2 Term Loan Agreement dated as of May 12, 2000 between the Company
and Bank of America, National Association
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<PAGE> 29
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
August 14, 2000 /s/ Scott A. Wolstein
-------------------------- ------------------------------------------
(Date) Scott A. Wolstein,
Chairman of the Board and
Chief Executive Officer
August 14, 2000 /s/ William H. Schafer
-------------------------- ------------------------------------------
(Date) William H. Schafer,
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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