Developers Diversified Realty (NYSE: DDR) ("Company"), the nation's
leading owner, developer and manager of market-dominant shopping
centers, today provided updates regarding the status of its joint
venture investment in stores occupied by Mervyns and additional
disclosures with regard to the strength of its balance sheet.
Recent speculation regarding both topics has prompted the Company's
desire to ensure that the facts are readily available.
Scott A. Wolstein, Developers Diversified's Chairman and Chief
Executive Officer, stated, "I have learned first-hand through an
unfortunate series of margin calls relating to my significant
investment in the shares of Developers Diversified that there are
potentially severe consequences to an over-leveraged balance sheet
in a capital constrained environment. I am committed to applying
those lessons to ensure that Developers Diversified meaningfully
reduces its financial leverage to enable it to succeed in spite of
the challenges of today's capital markets. While I believe we are
positioned to meet all of our financial obligations over the next
several years, I am extremely committed to taking additional
proactive steps, making use of all necessary financial measures, to
meaningfully reduce leverage and, in so doing, enhance our
financial flexibility and provide additional comfort to both our
equity and our fixed income investors."
Mervyns Investment Updates
Developers Diversified also today provided updated information
regarding its investment in stores occupied by Mervyns, a
privately-owned retailer with 38 locations within the Company's
730-property portfolio. Developers Diversified does not expect its
financial results to be materially impacted by the retailer's
recent announcement that it would liquidate, due to the protections
provided to the Company by letters of credit aggregating over $32
million and significant tenant interest already expressed for the
locations currently occupied by Mervyns by numerous higher credit
quality retailers.
Investment Summary
Developers Diversified owns 37 real estate locations leased to
Mervyns in a consolidated 50% joint venture with Macquarie DDR
Trust ("MDT"). These assets were acquired for $407 million and
subsequently leased to Mervyns for 15 years at an annual initial
triple-net rental rate of $30.5 million, increasing at 2% annually.
The transaction was purposefully structured to provide the joint
venture with sufficient credit enhancements in the event Mervyns
defaulted or declared bankruptcy. The structure also offered a
stable income stream with limited operating risk, no financial
impact to the Company's corporate overhead, and no additional
required capital investment. The specific stores acquired
represented less than 20% of Mervyns' entire portfolio at the time
of acquisition, and were specifically selected for their locations,
quality and potential attractiveness to other retailers.
The acquisition was financed with cross-collateralized mortgage
financing, which was exclusively secured by these Mervyns assets
and which is non-recourse to Developers Diversified and MDT.
Pursuant to the terms of the financing, the variable rate portion
of the loan, which has a principal balance of approximately $46
million, was recently extended through October 2009, and has a
subsequent extension available at the borrower's option through
October 2010. The fixed rate portion of the loan, which is also
non-recourse, and which has a principal balance of approximately
$213 million, has a concurrent maturity in October 2010.
The equity contribution of the acquisition was funded on a 50%
basis each by Developers Diversified and MDT, of which the
Company's portion was approximately $75 million. Developers
Diversified has already received approximately $25 million in net
cash flow after debt service since the Company acquired the
portfolio approximately three years ago.
Developers Diversified's investment is protected by two letters
of credit available for the benefit of the Company and the joint
venture. First, the terms of the acquisition contained a contingent
purchase price adjustment secured by a $25 million letter of credit
from the seller of the portfolio. This letter of credit has been
drawn in full and funds are available for re-tenanting expenses.
Second, another approximately $7.5 million letter of credit was
provided by Mervyns as security deposits on the Mervyns leases. The
Company's aggregate financial exposure, including one wholly-owned
asset, is $17.6 million in pro rata annual base revenues, or less
than $10 million ($0.08 per share) in net cash flows after debt
service. The Company confirms that Mervyns is current on all rental
payments through the end of October 2008.
Retenanting Outlook
Since Mervyns' bankruptcy filing was announced in July,
Developers Diversified has received strong interest from many
retailers interested in leasing or buying space currently occupied
by Mervyns. However, Mervyns has not yet rejected any leases, nor
has it announced a definitive auction date for many of its
locations. Therefore, it is possible that retailers or other
interested parties, including owners of adjacent retail assets, may
still acquire the Mervyns lease locations through the bankruptcy
proceedings, in which case the buyer of such locations will be
obligated to perform under the current Mervyns lease and neither
the joint venture nor Developers Diversified would be obligated to
spend any funds to retenant such space or would experience any
interruption in rental payments.
At the time of acquisition, Developers Diversified and its
partner recognized the potential risk associated with Mervyns'
credit and underwrote the investment based upon the long-term value
of the underlying real estate. The majority of these assets are
located in high-quality, market-dominant community centers and
enclosed regional malls. Twenty-seven of the Mervyns assets are
located in California, with nearly 1.0 million square feet in the
Los Angeles metropolitan area and over 500,000 square feet in the
San Francisco area. The remaining assets are located in Arizona
(5), Nevada (5) and Texas (1). Due to the infill nature of most of
these markets where retail sites are extremely difficult to entitle
and develop, or costly to acquire, the Company is confident of its
ability to retenant the stores that it is able to recapture and
aware of several retailers that view the portfolio as an important
opportunity to gain market share in markets that are difficult to
penetrate.
Balance Sheet Strength
Developers Diversified today provided additional details with
respect to its upcoming debt maturities and potential sources of
capital that are expected to satisfy its cash needs in 2009 and
beyond. In addition, the Company confirms that it is compliant with
its debt covenants as of the end of the third quarter and
anticipates that it will continue to satisfy these requirements
going forward, as it has in its 14 years since receiving its
investment grade credit rating. The Company is currently rated BBB
with a stable outlook and Baa2 with a stable outlook from Standard
& Poor's and Moody's, respectively.
Cash Flow Generation
Developers Diversified's core business of leasing space to
well-capitalized retailers continues to perform well, as the
Company's primarily discount-oriented tenants gain market share
from retailers offering higher price points and offering more
discretionary goods. These long-term leases generate consistent and
predictable cash flow after expenses, interest payments, and
preferred stock dividends of more than $300 million per year. This
capital is available for use at the Company's discretion for
investment, debt repayment, and the payment of dividends on our
common stock.
In addition to this operating cash flow, and notwithstanding the
current dislocation in the financial markets, Developers
Diversified continues to raise capital from asset sales. The
Company is currently in negotiations regarding outright sale of
assets to third parties, as well as advanced negotiations regarding
the creation of joint ventures with institutional investors through
which we extract significant equity from a group of our existing
assets. The Company has sold over $100 million of assets
year-to-date, including $73 million within the third quarter. The
Company has another $69 million of assets under contract for sale
and $94 million subject to letters of intent on behalf of itself
and its joint ventures. Recent and prospective buyers include local
individuals, regional private investors, insurance companies, and
large REITs. Despite the challenges in the financial markets, the
Company believes that asset sales will continue to generate
considerable proceeds.
Developers Diversified also continues to receive proceeds from
secured debt financings. Year-to-date, the Company has originated
or extended approximately $1.2 billion of mortgage capital, of
which approximately $1.1 billion represents new financings. Based
on negotiations with lenders currently underway, the Company
continues to receive quotes on refinancing and new debt, and
anticipates successful financings to continue to occur during the
remainder 2008 and throughout 2009, despite the current disruption
in the financial markets. Further, some transactional activity
continues to occur generally within the broad unsecured corporate
debt market, although currently at considerably wider spreads than
other forms of financing. The Company has historically actively
accessed this market on a regular basis, and will continue to
monitor it as the Federal Reserve, U.S. Treasury, and FDIC seek to
restore normalcy.
Developers Diversified has $1.325 billion in aggregate capacity
on its unsecured corporate credit facilities and, as of September
30, 2008, had $364 million in availability. The credit facilities
are funded by more than 30 participating lenders, none of which
represents more than 10% of total capacity. The Company also
maintains a portfolio of unencumbered, wholly-owned real estate
assets, with an estimated value of approximately $5.5 billion,
which could provide a future borrowing base or could be sold in
order to repay unsecured indebtedness.
Use of Funds
Excluding loans that Developers Diversified has the option to
extend, the Company has approximately $400 million of consolidated
debt and approximately $350 million of joint venture debt, of which
its share is less than $60 million, maturing in 2009. Unsecured
indebtedness comprises approximately $275 million of the 2009
aggregate amount. Total consolidated and joint venture debt
maturing in 2010 without extension options aggregate approximately
$2.0 billion, of which the Company's share is approximately $1.2
billion. Approximately $500 million of the 2010 aggregate amount is
comprised of unsecured indebtedness. The great majority of the
secured debt is non-recourse to the Company. Notably, no
significant maturities occur from February 2009 through April 2010,
thereby providing considerable time to ensure that all future
maturities can be appropriately addressed.
With respect to capital expenditures, Developers Diversified has
significantly reduced expected spending related to its development
and redevelopment portfolios. Further, the Company views this form
of expenditure to be completely discretionary. The Company is able
to control capital expenditures by phasing construction until a
sufficient level of pre-leasing is achieved and financing is in
place.
Development spending on projects in Russia is expected to be
suspended for 2009 and potentially beyond. No additional spending
will occur unless and until locally-funded construction loans
become available on commercially acceptable terms. Development
spending in Brazil is also expected to be curtailed and further
expenditures will only be funded from recycling internally
generated joint venture capital. The Company's highly leased
shopping center in Manaus will open in April 2009 and additional
development projects are not expected to commence in the immediate
future.
The Company intends to utilize a combination of equity raised
from expected asset sales, including sales to joint ventures,
retained capital, and existing and prospective financings to fund
its debt maturities and, to the extent the Company determines
appropriate, any incremental capital expenditures. While the
Company reviews numerous investment opportunities at highly
favorable pricing and terms, it does not expect to invest
significant capital in these projects until debt maturities are
appropriately addressed. Moreover, in the unlikely event that the
capital markets remain indefinitely closed, the Company believes
that it can rely on its free cash flow, asset sales, and
unencumbered asset pool as sources of funding.
Developers Diversified Realty owns and manages approximately 730
retail operating and development properties in 45 states, plus
Puerto Rico, Brazil, Russia, and Canada, totaling approximately 157
million square feet. The Company is a self-administered and
self-managed real estate investment trust (REIT) operating as a
fully integrated real estate company which acquires, develops and
leases shopping centers. Additional information about Developers
Diversified Realty is available on the Internet at
http://www.ddr.com.
Macquarie DDR Trust (ASX: MDT) ("MDT") is an Australian Real
Estate Investment Trust which is managed by an affiliate of
Macquarie Group Limited (ASX: MQR), an international investment
bank, advisor and manager of specialized real estate funds, and
Developers Diversified.
Developers Diversified Realty Corporation considers portions of
this information to be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, both as amended, with
respect to the Company's expectation for future periods. Although
the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions,
it can give no assurance that its expectations will be achieved.
For this purpose, any statements contained herein that are not
historical fact may be deemed to be forward-looking statements.
There are a number of important factors that could cause the
results of the Company to differ materially from those indicated by
such forward-looking statements, including, among other factors,
local conditions such as oversupply of space or a reduction in
demand for real estate in the area; competition from other
available space; dependence on rental income from real property;
the loss of a major tenant; constructing properties or expansions
that produce a desired yield on investment; our ability to sell
assets on commercially acceptable terms; our ability to secure
equity or debt financing on commercially acceptable terms; our
ability to enter into definitive agreements with regard to our
financing and joint venture arrangements or our failure to satisfy
conditions to the completion of these arrangements. For additional
factors that could cause the results of the Company to differ
materially from these indicated in the forward-looking statements,
please refer to the Company's Annual Report on Form 10-K for the
year ended December 31, 2007. The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
Contact: Michelle M. Dawson Vice President of Investor Relations
Developers Diversified Realty Email: Email Contact Phone: (216)
755-5500
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