The
MENDOCINO COUNTRY Independent
Posted June 27, 2009
DDR Department
Store in Moscow
DDR
FIRST IN LINE FOR GOVERNMENT
STIMULUS LOANS
On June 17, Developers Diversified Realty announced
plans to pursue up to $600 million through the Federal Reserve Board’s
new lending program for commercial mortgage-backed securities. The
federal Term Assets-Backed Securities Loan Facility (TALF) is designed
to repair the capital market and make more money available for the
richest and most powerful Americans.
TALF is a new central bank lender, with $700 billion
of emergency funds for cash-strapped corporate tycoons.
The corporation has prepared two issues of
commercial mortgage backed securities to be sold in September, one for
$250 million and another for $300 million making the US government a
major stockholder in the near bankrupt corporation.
According to a company official, DDR may be the
first to sign up for the new program.
Developers Diversified Realty Corporation (NYSE -
DDR) is a self administered and managed real estate investment trust
(REIT). Through subsidiaries, it acquires, develops, re-develops, owns,
leases and manages commercial properties.
As of February 2009, it owned 696 shopping centers
and six business centers, including 329 in unconsolidated joint
ventures and 35 in company-consolidated ventures. At about that time,
the company owned and managed more than 117.6 million square feet of
gross leasable area, including one property owned by third party.
About the same time, it held more than 2,000 acres
of undeveloped land and had 10 wholly owned shopping centers under
development and redevelopment.
The corporation's profits are not taxed to the
extent it distributes 90 percent of its annual income to shareholders.
The problem is that DDR has had a negative net income for over a year.
It needs refinancing to stay afloat, pay salaries
and maintain its oppulent, powerful image.
Commercial real estate lending sources largely have
dried up and while life insurers are traditionally a source of
such loans, they don't have enough money to satisfy DDR's monumenal
debt.
Loans through the Fed program will cost at least 100
basis points less than conventional commercial loans, making them very
attractive to corporate plunderers.
Billions of dollars in exising loans to DDR mature
in 2010, 2011 and 2012. The government loans don't mature until 2014,
and after that, the company intends to extend them one year at a
time.
NEGATIVE
REVENUE AND NET PROFIT
DDR has had a negative net profit of about 5 or 6
percent for the last 52 weeks. In late May, DDR had posted a $64.5
million net loss from a year ago and a negative 6.17 percent profit
margin. Income it may have had since then is not from normal operations
but from sale of assets.
There is no income to distribute to shareholders:
Same-store net operating income for the first quarter of 2009 (1 Jan to
31 Mar 09) decreased 2.2 percent from the prior year's comparable
period. The company is now trying to re-lease millions of square feet
of floor space it recaptured from tenant bankruptcies (Mervyn's,
Circuit City).
DDR is paying preferred shareholders with new issues
of stock, that is, printed certificates that dilute the value of
existing stock.
DDR's core portfolio leased rate was 90.7 percent as
of 31 Mar 09, compared to 95.5 percent on 31 Mar 2008. That is, for
that period last year, vacancies were 4.5 percent compared to this
year's 9.3 percent.
PLUMMETING
SHARE PRICE
The corporation's stock had reached a high of $72.33
per share in February 2007. It hit a low of $1.38 in March 2009. On 11
May 2009 the corporation inaugurated a complex transfer of 30 percent
of the company (30 million shares) to the Otto Family, owners of a
major European shopping center developer, for $118.5 million, in two
phases at $3.50 then $4.00 per share. DDR also sold it five-year
warrants for 10 million shares at $6.00 a share. The stock closed on 19
June at $4.80.
SHRUNKEN
CORPORATE EQUITY
On 12 May, the Buffalo (NY) Times reported that DDR
had arranged through one of its lenders, Maquarie Group, LLC, of
Australia, to sell 52 centers in the U.S. to raise $1.9 billion in
exchange for the lender's not defaulting its loan to DDR. That's an
asking price of $36.5 million per center.
At the January 2007 peak, DDR's corporate equity was
$7 billion. That works out to about $10 million per center. Its equity
today may be around $650 to $700 million. When last observed in
mid-May, corporate equity was about $525 million. Even if is now $700
million from sale of assets, that's still about a 90 percent drop, and
revenue first needs to pay off outstanding loans.
Current corporate equity, if up to $700 million,
would be about $1 million per center, based on the average price of the
52 properties marketed through Maquarie Group. By the above
calculation, a current approximate $1 million equity per center is just
under 3 percent.
LOANS
OUTSTANDING, UNDER-CAPITALIZATION, JUNK BOND STATUS
Lenders are now requiring 30 percent equity for commercial
development loans, which can be for five, seven, or up to 10 years.
Undercapitalized as DDR is, with single-digit equity, it must resort to
higher-interest bridge loans, with an average 2-year duration.
In delisting DDR from reported stocks for its
under-capitalized condition, Standard & Poor's downgraded the
corporation's securities to junk status, noting also that about 75
percent of DDR's loans are due from 2010 through 2012.
The other two rating services, Moody's and Fitch,
also downgraded DDR securities to junk status. In its report, Fitch
stated on 19 May that DDR's capacity has weakened to a
point where the company is now primarily depen-dent upon retained cash
flow, asset sales and secured debt refinancings for
liquidity. That is, income from its normal operations won't
sustain it, so it is using savings, refinancing debt and selling what
it can.
SALE
BACK OF CENTERS AT 30% REDUCTION
In „Shopping center developer in financial turmoil.‰
one James Cullen on 9 June quoted that the Buffalo (NY) News that DDR
was set to close a deal to sell back 11 properties purchased from a
privately held owner. DDR had acquired 110
properties in 2004 for $2.3 billion, an average price of $21 million.
DDR was sell-ing back the 11 centers for an average price of $15
million, a 30 percent discount from the 2004 price. The writer (I
missed the source here but it's online) said a 30 percent discount from
a 2004 price implies a significantly higher discount from the 2007
peak. (Even taking the discounted price as an average shop-ping center
value, DDR's equity would be about 4.75 percent.) Cullen cited a source
who calculated that the final closing discount from the peak may have
been roughly 50 percent.
Opinion: James Cullen commented, „it's important to
draw a dis-tinc-tion between distressed assets and distressed sellers.
There is nothing to in-di-cate that the properties themselves are in
poor condition, but the same cannot be said for Developers Diversified.
[Fact:] Preferred issues from the company are trading around 45 cents
on the dollar, and at $5.60 (the share price on 8 or 9 June), common
shares are off more than 90 percent from their early 2007 high above
$70. „[Opinion:] ... they are fire sale prices for
forced sellers and do not necessarily indicate much for REITs with
adequate capital levels.‰
VACANT
LAND HOLDINGS
The corporation's approximate 2,000 acres of vacant
land, as reported by Reuters, including 76 in Mendocino County, are
idle and now depreciated. Many if not all are bur-dened with interest
payments.
SUSPENDED
PROJECTS
The corporation suspended construction on projects
in Bloomfield, Ill., and Oconomowoc, Wis. It has suspended projects in
the planning stage. The city council of Newburyport, N.H., halted DDR's
project in nearby Seabrook for DDR's refusal or inability to provide
required traffic improvements on highways adjacent to the site.
POOR
QUICK OR ACID-TEST RATIO
The Motley Fool investment column (a reasonably
reliable if brash source) ran a piece last month titled "5 Deathbed
Stocks" which included DDR, the lowest scoring of the five. DDR's
current ratio (assets to liabilities) was 1.3. The more critical quick
or acid-test ratio (assets stripped to ready cash and the like) was
0.5. A healthy quick ratio is typically 1.0 or above. DDR's was far
below the other four corporations' ratios.