Notes to Condensed Consolidated Financial Statements
1.
|
NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
|
DDR Corp. and its related real estate subsidiaries (collectively, the “Company” or “DDR”) and unconsolidated joint ventures are primarily engaged in the business of acquiring, owning, developing, redeveloping, expanding, leasing and managing shopping centers. In addition, the Company engages in the origination and acquisition of loans and debt securities, which are generally collateralized directly or indirectly by shopping centers. Unless otherwise provided, references herein to the Company or DDR include DDR Corp., its wholly-owned and majority-owned subsidiaries and its consolidated and unconsolidated joint ventures. The Company’s tenant base primarily includes national and regional retail chains and local retailers. Consequently, the Company’s credit risk is concentrated in the retail industry.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
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 statement of the results of the periods presented. The results of operations for the three- and six-month periods ended June 30, 2014 and 2013, 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, 2013, as amended.
Principles of Consolidation
The condensed consolidated financial statements include the results of the Company and all entities in which the Company has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). Investments in joint ventures that the Company does not control are accounted for under the equity method of accounting.
All significant inter-company balances and transactions have been eliminated in consolidation. Investments in real estate joint ventures and companies in which the Company has the ability to exercise significant influence, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or loss) of these joint ventures and companies is included in consolidated net income.
Supplemental Disclosure of Non-Cash Investing and Financing Activities
During the six-month period ended June 30, 2014, in connection with the acquisition of real estate, the Company assumed $50.8 million of mortgage debt, reduced loans receivable of $20.6 million and issued Operating Partnership Units (“OP Units”) valued at $18.3 million as part of the consideration. In addition, the Company released $19.7 million of foreign currency translation from accumulated other comprehensive income as a result of the Company’s sale of its entire investment in Brazil (Note 10). During the six months ended June 30, 2013, in conjunction with the acquisition of its partner’s interests in five shopping centers, the Company reversed its previously held equity interest by decreasing Investments in and Advances to Joint Ventures by $15.5 million and increased net assets by $1.0 million for its previously held proportionate share of the assets. At June 30, 2014 and 2013, dividends payable were $61.3 million and $50.0 million, respectively. In conjunction with the redemption of $55.0 million and $150.0 million of the Company’s 7.375% Class H cumulative redeemable preferred shares (“Class H Preferred Shares”) during the six-month period ended June 30, 2014 and 2013, respectively, the Company recorded a charge to net income attributable to common shareholders of $1.9 million and $5.2 million, respectively, related to the write-off of the Class H Preferred Shares’ original issuance costs. At June 30, 2014 and 2013, accounts payable included $30.6 million and $22.7 million, respectively, for accrued but unpaid real estate asset expenditures. The transactions described did not provide for or require the use of cash for the six-month periods ended June 30, 2014 and 2013.
8
New Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016, for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently assessing the impact, if any, that the adoption of this standard will have on its financial statements and has not decided upon the method of adoption.
Discontinued Operations
In April 2014, the FASB issued a final standard that changed the criteria for determining which disposals are presented as discontinued operations. The revised definition of a discontinued operation is “a component or group of components that has been disposed of or is classified as held for sale, together as a group in a single transaction,” and “represents a strategic shift that has (or will have) a major effect on an entity’s financial results.” The FASB agreed that a strategic shift includes “a disposal of (i) a separate major line of business, (ii) a separate major geographical area of operations, or (iii) a combination of parts of (i) or (ii) that make up a major part of an entity’s operations and financial results.” A business that, upon acquisition, qualifies as held for sale will also be a discontinued operation. The FASB also reaffirmed its decision to no longer preclude presentation of a disposal as a discontinued operation if (a) there is significant continuing involvement with a component after its disposal, or (b) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations. The guidance may be applied prospectively to new disposals and new classifications of disposal groups classified as held for sale after the effective date. Public entities will be required to apply the standard in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption of this standard is permitted. Beginning in 2015, the Company will apply the new guidance, as applicable, to future disposals of its shopping centers or classifications as held for sale. The Company believes that a significant portion of its ordinary course shopping center disposals will not qualify for discontinued operations presentation under this new standard upon adoption.
9
2.
|
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
|
At June 30, 2014 and December 31, 2013, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 154 and 170 shopping center properties, respectively. Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Condensed Combined Balance Sheets
|
|
|
|
|
|
|
|
Land
|
$
|
1,158,271
|
|
|
$
|
1,275,232
|
|
Buildings
|
|
3,166,873
|
|
|
|
3,940,806
|
|
Fixtures and tenant improvements
|
|
171,229
|
|
|
|
266,851
|
|
|
|
4,496,373
|
|
|
|
5,482,889
|
|
Less: Accumulated depreciation
|
|
(803,548
|
)
|
|
|
(839,867
|
)
|
|
|
3,692,825
|
|
|
|
4,643,022
|
|
Land held for development and construction in progress
|
|
60,621
|
|
|
|
116,088
|
|
Real estate, net
|
|
3,753,446
|
|
|
|
4,759,110
|
|
Cash and restricted cash
|
|
93,386
|
|
|
|
282,866
|
|
Receivables, net
|
|
63,493
|
|
|
|
101,003
|
|
Other assets
|
|
145,677
|
|
|
|
196,615
|
|
|
$
|
4,056,002
|
|
|
$
|
5,339,594
|
|
|
|
|
|
|
|
|
|
Mortgage debt
|
$
|
2,834,997
|
|
|
$
|
3,282,643
|
|
Notes and accrued interest payable to DDR
(A)
|
|
138,256
|
|
|
|
127,679
|
|
Other liabilities
|
|
158,833
|
|
|
|
245,368
|
|
|
|
3,132,086
|
|
|
|
3,655,690
|
|
Redeemable preferred equity
|
|
72,470
|
|
|
|
71,771
|
|
Accumulated equity
|
|
851,446
|
|
|
|
1,612,133
|
|
|
$
|
4,056,002
|
|
|
$
|
5,339,594
|
|
Company's share of Accumulated Equity
|
$
|
121,531
|
|
|
$
|
365,297
|
|
(A)
|
The Company had amounts receivable from several joint ventures aggregating $4.7 million and $2.7 million at June 30, 2014 and December 31, 2013, respectively, which are included in Investments in and Advances to Joint Ventures on the condensed consolidated balance sheets. The remaining receivables were fully reserved by the Company in prior years
.
|
10
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Condensed Combined Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations
|
$
|
124,289
|
|
|
$
|
175,029
|
|
|
$
|
272,551
|
|
|
$
|
351,798
|
|
Operating expenses
|
|
44,547
|
|
|
|
61,496
|
|
|
|
97,762
|
|
|
|
121,031
|
|
Impairment charges
|
|
600
|
|
|
|
38,323
|
|
|
|
600
|
|
|
|
38,323
|
|
Depreciation and amortization
|
|
38,652
|
|
|
|
55,766
|
|
|
|
84,063
|
|
|
|
116,832
|
|
Interest expense
|
|
45,753
|
|
|
|
55,610
|
|
|
|
99,748
|
|
|
|
113,278
|
|
Other (income) expense, net
|
|
(235
|
)
|
|
|
(620
|
)
|
|
|
2,837
|
|
|
|
313
|
|
|
|
129,317
|
|
|
|
210,575
|
|
|
|
285,010
|
|
|
|
389,777
|
|
Loss before tax expense and discontinued operations
|
|
(5,028
|
)
|
|
|
(35,546
|
)
|
|
|
(12,459
|
)
|
|
|
(37,979
|
)
|
Income tax expense (primarily SSB), net
|
|
(2,425
|
)
|
|
|
(7,238
|
)
|
|
|
(6,565
|
)
|
|
|
(13,853
|
)
|
Loss from continuing operations
|
|
(7,453
|
)
|
|
|
(42,784
|
)
|
|
|
(19,024
|
)
|
|
|
(51,832
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
(373
|
)
|
|
|
(8,410
|
)
|
|
|
(1,053
|
)
|
|
|
(11,611
|
)
|
Gain (loss) on disposition of real estate, net of tax
|
|
2,038
|
|
|
|
(369
|
)
|
|
|
23,511
|
|
|
|
(5,906
|
)
|
(Loss) income before gain on disposition of real estate, net
|
|
(5,788
|
)
|
|
|
(51,563
|
)
|
|
|
3,434
|
|
|
|
(69,349
|
)
|
Gain on disposition of real estate, net
|
|
—
|
|
|
|
164
|
|
|
|
—
|
|
|
|
643
|
|
Net (loss) income
|
$
|
(5,788
|
)
|
|
$
|
(51,399
|
)
|
|
$
|
3,434
|
|
|
$
|
(68,706
|
)
|
Non-controlling interests
|
|
(535
|
)
|
|
|
(6,695
|
)
|
|
|
(2,023
|
)
|
|
|
(13,914
|
)
|
Net (loss) income attributable to unconsolidated joint ventures
|
$
|
(6,323
|
)
|
|
$
|
(58,094
|
)
|
|
$
|
1,411
|
|
|
$
|
(82,620
|
)
|
Company's share of equity in net income (loss) of joint
ventures
|
$
|
1,436
|
|
|
$
|
(1,522
|
)
|
|
$
|
6,167
|
|
|
$
|
1,528
|
|
Amortization of basis differentials
(A)
|
|
(305
|
)
|
|
|
331
|
|
|
|
454
|
|
|
|
235
|
|
Equity in net income (loss) of joint ventures
(B)
|
$
|
1,131
|
|
|
$
|
(1,191
|
)
|
|
$
|
6,621
|
|
|
$
|
1,763
|
|
(A)
|
Related to the amortization of basis differentials, the recognition of deferred gains and differences in gain (loss) on sale of certain assets due to the basis differentials and other than temporary impairment charges.
|
(B)
|
The Company is not recording income or loss from those investments in which its investment basis is zero, as the Company does not have the obligation or intent to fund any additional capital in the joint ventures.
|
Investments in and Advances to Joint Ventures include the following items, which represent the difference between the Company’s investment basis and its share of all of the unconsolidated joint ventures’ underlying net assets (in millions):
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Company's share of accumulated equity
|
$
|
121.5
|
|
|
$
|
365.3
|
|
Redeemable preferred equity and other
(A)
|
|
72.9
|
|
|
|
72.2
|
|
Basis differentials
|
|
3.1
|
|
|
|
10.6
|
|
Deferred development fees, net of portion related to the Company's interest
|
|
(2.8
|
)
|
|
|
(2.8
|
)
|
Amounts payable to DDR
|
|
4.7
|
|
|
|
2.7
|
|
Investments in and Advances to Joint Ventures
|
$
|
199.4
|
|
|
$
|
448.0
|
|
(A)
|
Primarily related to $72.5 million and $71.8 million in preferred equity investments in joint ventures with affiliates of The Blackstone Group L.P. at June 30, 2014 and December 31, 2013, respectively
.
|
Service fees and income earned by the Company through management, financing, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures are as follows (in millions):
|
Three-Month Periods
Ended June 30,
|
|
Six-Month Periods
Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Management and other fees
|
$
|
6.2
|
|
|
$
|
7.8
|
|
|
$
|
12.3
|
|
|
$
|
15.3
|
|
Development fees and leasing commissions
|
|
1.5
|
|
|
|
2.3
|
|
|
|
3.5
|
|
|
|
5.2
|
|
Interest income
|
|
1.7
|
|
|
|
4.6
|
|
|
|
3.4
|
|
|
|
9.1
|
|
11
Sonae Sierra Brazil BV SARL (“SSB”)
On April 28, 2014, affiliates of DDR (the “Sellers”) sold to Mr. Alexander Otto (the “Investor”) and certain of his affiliates (collectively with the Investor, the “Purchasers”) the Company’s 50% ownership interest in SSB for approximately $343.6 million, which represented the Company’s entire investment in Brazil. SSB owns an approximate 66% interest in a publicly traded company in Brazil, Sonae Sierra Brasil, S.A., and an indirect interest in the Parque Dom Pedro shopping center. Sonae Sierra Brasil, S.A. owns 10 shopping centers in Brazil and is headquartered in Sao Paulo. The Company’s effective economic ownership in this investment was 33%. The Company recorded a Gain on Sale of Interests in the second quarter of 2014, which includes the reclassification of foreign currency translation from accumulated other comprehensive income. The weighted-average exchange rate used for recording the equity in net income into U.S. dollars was 2.26 for the Company’s ownership period, January 1, 2014 to April 28, 2014, and 2.02 for the six-month period ended June 30, 2013.
The Investor is deemed to be a related party as a result of his common stock ownership in DDR. Furthermore, Dr. Finne, a director of DDR, is a Managing Director of certain entities affiliated with the Investor that agreed to purchase a portion of the Company’s ownership interest in SSB. The Company believes that the sales price and other terms of the transaction were negotiated on terms equivalent to those prevailing in an arms’ length transaction. The transaction was approved by a special committee of the Company’s Board of Directors, which committee included all directors except for the two board members recommended for nomination by the Investor.
Other Joint Venture Interests
For the six months ended June 30, 2014, the Company’s unconsolidated joint ventures sold eight assets. The joint ventures received aggregate proceeds of $101.7 million, of which $20.3 million was the Company’s proportionate share. The joint ventures recorded an aggregate gain of $23.5 million, of which $6.3 million was the Company’s proportionate share.
In the six-month period ended June 30, 2014, the Company acquired the following shopping centers (dollars in millions):
Location
|
|
Date Acquired
|
|
Gross
Purchase
Price
|
|
Face Value of
Mortgage
Debt
Assumed
|
|
Colorado Springs, Colorado
|
|
|
April 2014
|
|
$
|
29.4
|
|
$
|
12.9
|
|
Roseville, California
|
|
|
May 2014
|
|
|
89.5
|
|
|
—
|
|
Cincinnati, Ohio
|
|
|
May 2014
|
|
|
29.5
|
|
|
—
|
|
Chicago, Illinois
|
|
|
June 2014
|
|
|
98.0
|
|
|
35.5
|
|
|
|
|
|
|
$
|
246.4
|
|
$
|
48.4
|
|
The Company accounted for the acquisitions utilizing the purchase method of accounting. The fair value of acquisitions was allocated as follows (in thousands):
|
|
|
|
|
Weighted Average
Amortization Period
(in Years)
|
Land
|
$
|
52,313
|
|
|
N/A
|
Buildings
|
|
110,062
|
|
|
(B)
|
Tenant improvements
|
|
2,898
|
|
|
(B)
|
Construction in progress
|
|
76,213
|
|
|
N/A
|
In-place leases (including lease origination costs and fair market value of
leases)
(A)
|
|
16,192
|
|
|
7.6
|
Tenant relations
|
|
8,300
|
|
|
9.9
|
Other assets
|
|
362
|
|
|
N/A
|
|
|
266,340
|
|
|
|
Less: Mortgage debt assumed at fair value
|
|
(50,752
|
)
|
|
N/A
|
Less: Below-market leases
|
|
(17,591
|
)
|
|
19.2
|
Net assets acquired
|
$
|
197,997
|
|
|
|
(A)
|
Includes above-market value of leases of $1.8 million.
|
12
(B)
|
Depreciated in accordance with the Company’s policy.
|
Consideration:
|
|
|
|
Cash
|
$
|
159,191
|
|
Repayment of mezzanine loan
|
|
20,550
|
|
Issuance of OP Units
|
|
18,256
|
|
Total consideration
|
$
|
197,997
|
|
The costs related to the acquisition of these assets were expensed as incurred and included in other income (expense), net.
The following unaudited supplemental pro forma operating data is presented for the three- and six-month periods ended June 30, 2014 and 2013, as if the acquisition of the interests in the properties acquired in 2014 and 2013 was completed on January 1, 2013 (in thousands, except per share amounts). Included in the Company’s condensed consolidated statements of operations are $1.9 million and $4.2 million in total revenues from the date of acquisition through June 30, 2014 and 2013, respectively. The unaudited supplemental pro forma operating data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transactions had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods.
|
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Pro forma revenues
|
|
$
|
255,119
|
|
|
$
|
251,230
|
|
|
$
|
511,311
|
|
|
$
|
497,072
|
|
Pro forma income (loss) from continuing operations
|
|
$
|
68,699
|
|
|
$
|
(23,108
|
)
|
|
$
|
40,690
|
|
|
$
|
(32,757
|
)
|
Pro forma income (loss) from discontinued operations
|
|
$
|
6,643
|
|
|
$
|
(21,596
|
)
|
|
$
|
17,280
|
|
|
$
|
(26,526
|
)
|
Pro forma net income (loss) attributable to DDR common shareholders
|
|
$
|
67,734
|
|
|
$
|
(59,145
|
)
|
|
$
|
44,403
|
|
|
$
|
(81,002
|
)
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to DDR common shareholders
|
|
$
|
0.17
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.16
|
)
|
Income (loss) from discontinued operations attributable to DDR common shareholders
|
|
|
0.02
|
|
|
|
(0.06
|
)
|
|
|
0.05
|
|
|
|
(0.07
|
)
|
Net income (loss) attributable to DDR common shareholders
|
|
$
|
0.19
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.23
|
)
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to DDR common shareholders
|
|
$
|
0.17
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.16
|
)
|
Income (loss) from discontinued operations attributable to DDR common shareholders
|
|
|
0.02
|
|
|
|
(0.06
|
)
|
|
|
0.05
|
|
|
|
(0.07
|
)
|
Net income (loss) attributable to DDR common shareholders
|
|
$
|
0.19
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.23
|
)
|
The Company has notes receivable, including accrued interest, that are collateralized by certain rights in development projects, partnership interests, sponsor guaranties and/or real estate assets, some of which are subordinate to other financings.
Notes receivable consisted of the following (in thousands):
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Loans receivable
|
$
|
52,703
|
|
|
$
|
72,218
|
|
Other notes
|
|
1,025
|
|
|
|
1,034
|
|
Tax Increment Financing Bonds ("TIF Bonds")
(A)
|
|
5,135
|
|
|
|
5,086
|
|
|
$
|
58,863
|
|
|
$
|
78,338
|
|
(A)
|
Principal and interest are payable solely from the incremental real estate taxes, if any, generated by the respective shopping center and development project pursuant to the terms of the financing agreement.
|
13
As of June 30, 2014 and December 31, 2013, the Company had six and seven loans receivable outstanding, respectively. The following table reconciles the loans receivable on real estate for the six-month periods ended June 30, 2014 and 2013 (in thousands):
|
2014
|
|
|
2013
|
|
Balance at January 1
|
$
|
72,218
|
|
|
$
|
60,378
|
|
Additions:
|
|
|
|
|
|
|
|
New mortgage loans
|
|
—
|
|
|
|
13,531
|
|
Interest
|
|
810
|
|
|
|
82
|
|
Accretion of discount
|
|
457
|
|
|
|
431
|
|
Deductions:
|
|
|
|
|
|
|
|
Payments of principal and interest
|
|
(232
|
)
|
|
|
(11,560
|
)
|
Other
(A)
|
|
(20,550
|
)
|
|
|
—
|
|
Balance at June 30
|
$
|
52,703
|
|
|
$
|
62,862
|
|
(A)
|
Loan applied towards the purchase price of the asset acquired in Chicago, Illinois (Note 3).
|
At June 30, 2014, the Company had one loan outstanding aggregating $9.8 million that matured in September 2011 and was more than 90 days past due and partially reserved and one loan that is fully reserved. No other loans outstanding are past due. The Company is no longer accruing interest income on these notes as no payments have been received.
Other assets consist of the following (in thousands):
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Intangible assets:
|
|
|
|
|
|
|
|
In-place leases, net
|
$
|
150,346
|
|
|
$
|
159,357
|
|
Above-market rent, net
|
|
55,267
|
|
|
|
59,211
|
|
Tenant relations, net
|
|
171,513
|
|
|
|
191,045
|
|
Total intangible assets, net
(A)
|
|
377,126
|
|
|
|
409,613
|
|
Other assets:
|
|
|
|
|
|
|
|
Accounts receivable, net
(B)
|
|
121,919
|
|
|
|
129,513
|
|
Deferred charges, net
|
|
33,023
|
|
|
|
38,124
|
|
Prepaid expenses
|
|
16,943
|
|
|
|
14,082
|
|
Other assets
|
|
41,710
|
|
|
|
45,403
|
|
Deposits
|
|
8,562
|
|
|
|
8,770
|
|
Total other assets, net
|
$
|
599,283
|
|
|
$
|
645,505
|
|
(A)
|
The Company recorded amortization expense related to its intangibles, excluding above- and below-market leases, of $24.8 million and $7.1 million for the three-month periods ended June 30, 2014 and 2013, respectively, and $53.8 million and $13.8 million for the six-month periods ended June 30, 2014 and 2013, respectively.
|
(B)
|
Includes straight-line rents receivable, net, of $63.0 million and $61.9 million at June 30, 2014 and December 31, 2013, respectively.
|
14
6.
|
REVOLVING CREDIT FACILITIES AND TERM LOANS
|
The following table discloses certain information regarding the Company’s Revolving Credit Facilities (as defined below) and term loans (in millions):
|
Carrying Value at
June 30, 2014
|
|
|
Weighted-Average
Interest Rate at
June 30, 2014
|
|
|
Maturity Date
|
Unsecured indebtedness:
|
|
|
|
|
|
|
|
|
|
Unsecured Credit Facility
|
$
|
28.6
|
|
|
|
2.2
|
%
|
|
April 2017
|
PNC Facility
|
|
—
|
|
|
|
N/A
|
|
April 2017
|
Unsecured term loan – Tranche 1
|
|
50.0
|
|
|
|
2.1
|
%
|
|
January 2017
|
Unsecured term loan – Tranche 2
|
|
300.0
|
|
|
|
3.2
|
%
|
|
January 2019
|
Secured indebtedness:
|
|
|
|
|
|
|
|
|
|
Secured term loan
|
|
400.0
|
|
|
|
1.6
|
%
|
|
April 2017
|
Revolving Credit Facilities
The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, arranged by J.P. Morgan Securities, LLC and Wells Fargo Securities, LLC (the “Unsecured Credit Facility”). The Unsecured Credit Facility provides for borrowings of up to $750 million, if certain financial covenants are maintained, and an accordion feature for expansion of availability up to $1.25 billion upon the Company’s request, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level and the ability to extend the maturity for one year to April 2018, at the Company’s option. The Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to 50% of the facility. The Unsecured Credit Facility also provides for an annual facility fee, which was 20 basis points on the entire facility at June 30, 2014. The Unsecured Credit Facility also allows for foreign currency-denominated borrowings. At June 30, 2014, the Company had US$4.1 million of Euro-denominated borrowings and US$24.5 million of Canadian dollar-denominated borrowings outstanding (Note 7). At June 30, 2014, the Company did not have any US$ borrowings outstanding.
The Company also maintains a $65 million unsecured revolving credit facility with PNC Bank, National Association (the “PNC Facility” and, together with the Unsecured Credit Facility, the “Revolving Credit Facilities”). The PNC Facility reflects terms consistent with those contained in the Unsecured Credit Facility.
The Company’s borrowings under the Revolving Credit Facilities bear interest at variable rates at the Company’s election, based on either (i) the prime rate plus a specified spread (0.15% at June 30, 2014), as defined in the respective facility, or (ii) LIBOR, plus a specified spread (1.15% at June 30, 2014). The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Moody’s Investors Service and Standard and Poor’s. The Company is required to comply with certain covenants under the Revolving Credit Facilities relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The covenants also require that the Company cannot exceed a total dividend payout ratio of 95% of the Company’s pro rata share of Funds From Operations (as defined in the agreements governing the Revolving Credit Facilities) for the prior twelve-month period unless required to maintain Real Estate Investment Trust (“REIT”) status. The Company was in compliance with these covenants at June 30, 2014.
Measurement of Fair Value
At June 30, 2014, the Company used pay-fixed interest rate swaps to manage its exposure to changes in benchmark interest rates (the “Swaps”). The estimated fair values were determined using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential non-performance risk, including the Company’s own non-performance risk and the respective counterparty’s non-performance risk. The Company determined that the significant inputs used to value its derivatives fell within Level 2 of the fair value hierarchy.
Items Measured at Fair Value on a Recurring Basis
The Company maintains interest rate swap agreements (included in Other Assets and Other Liabilities) and marketable securities (included in Other Assets), which include investments in the Company’s elective deferred compensation plan and
15
investments in securities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013. The following table presents information about the Company’s financial assets and liabilities and indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions):
|
|
Fair Value Measurements
|
|
Assets (Liabilities):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
—
|
|
|
$
|
(5.7
|
)
|
|
$
|
—
|
|
|
$
|
(5.7
|
)
|
Marketable Securities
|
|
$
|
5.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.1
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
—
|
|
|
$
|
(3.2
|
)
|
|
$
|
—
|
|
|
$
|
(3.2
|
)
|
Marketable Securities
|
|
$
|
7.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.4
|
|
The unrealized loss of $2.5 million included in other comprehensive income (loss) (“OCI”) is attributable to the net change in fair value during the six-month period ended June 30, 2014, related to derivative financial instruments, none of which were reported in the Company’s condensed consolidated statements of operations because the Swaps are documented and qualify as hedging instruments.
Other Fair Value Instruments
Investments in unconsolidated joint ventures are considered financial assets. See discussion of related fair value considerations in Note 12.
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Marketable Equitable Securities, Accounts Payable, Accrued Expenses and Other Liabilities
The carrying amounts reported in the consolidated balance sheets for these financial instruments approximated fair value because of their short-term maturities. The Company’s marketable equity securities have been classified as available-for-sale and are recorded at fair value.
Notes Receivable and Advances to Affiliates
The fair value is estimated using a discounted cash flow analysis, in which the Company used unobservable inputs such as market interest rates determined by the loan to value and market capitalization rates related to the underlying collateral at which management believes similar loans would be made and classified as Level 3 in the fair value hierarchy. The fair value of these notes was approximately $129.8 million and $148.2 million at June 30, 2014 and December 31, 2013, respectively, as compared to the carrying amounts of $126.6 million and $145.5 million, respectively. The carrying value of the TIF bonds, which was $5.1 million at both June 30, 2014 and December 31, 2013, approximated their fair value.
Debt
The fair market value of senior notes, except senior convertible notes, is determined using the trading price of the Company’s public debt. The fair market value for all other debt is estimated using a discounted cash flow technique that incorporates future contractual interest and principal payments and a market interest yield curve with adjustments for duration, optionality and risk profile including the Company’s non-performance risk and loan to value. The Company’s senior notes, except senior convertible notes, and all other debt including senior convertible notes are classified as Level 2 and Level 3, respectively, in the fair value hierarchy.
Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.
Debt instruments at June 30, 2014 and December 31, 2013, with carrying values that are different than estimated fair values, are summarized as follows (in thousands):
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Senior Notes
|
$
|
2,759,931
|
|
|
$
|
3,060,668
|
|
|
$
|
2,754,120
|
|
|
$
|
2,991,698
|
|
Revolving Credit Facilities and term loans
|
|
778,623
|
|
|
|
787,095
|
|
|
|
779,133
|
|
|
|
787,772
|
|
Mortgage indebtedness
|
|
1,790,384
|
|
|
|
1,831,623
|
|
|
|
1,761,421
|
|
|
|
1,779,375
|
|
|
$
|
5,328,938
|
|
|
$
|
5,679,386
|
|
|
$
|
5,294,674
|
|
|
$
|
5,558,845
|
|
16
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and, from time to time, through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
The Company has interests in consolidated joint ventures that own real estate assets in Canada and Russia. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company uses non-derivative financial instruments to economically hedge a portion of this exposure. The Company manages its currency exposure related to the net assets of its Canadian and European subsidiaries through foreign currency-denominated debt agreements.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements. To accomplish this objective, the Company generally uses interest rate swaps as part of its interest rate risk management strategy. The Swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
As of June 30, 2014 and December 31, 2013, the notional amount of the Swaps was $530.7 million and $631.4 million, respectively. The following table discloses certain information regarding the Company’s outstanding interest rate swaps (nine at June 30, 2014, not including the specified spreads), as well as their classification on the condensed consolidated balance sheets, as of June 30, 2014 and December 31, 2013 (in millions):
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Counterparty
|
|
DDR Pays
|
|
|
Fair Value
|
|
|
|
Amount at
|
|
|
Pays Variable
|
|
Fixed
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Maturity Date
|
|
June 30, 2014
|
|
|
Rate
|
|
Rate
|
|
|
Asset
|
|
|
Liability
|
|
|
Asset
|
|
|
Liability
|
|
June 2014
|
|
N/A
|
|
|
1 Month LIBOR
|
|
|
1.0
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
June 2015
|
|
$
|
50.0
|
|
|
1 Month LIBOR
|
|
|
0.6
|
%
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
|
—
|
|
|
|
(0.2
|
)
|
July 2015
|
|
$
|
100.0
|
|
|
1 Month LIBOR
|
|
|
0.5
|
%
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
|
—
|
|
|
|
(0.4
|
)
|
September 2017
|
|
$
|
80.7
|
|
|
1 Month LIBOR
|
|
|
2.8
|
%
|
|
|
—
|
|
|
|
(4.7
|
)
|
|
|
—
|
|
|
|
(5.0
|
)
|
January 2018
|
|
$
|
100.0
|
|
|
1 Month LIBOR
|
|
|
0.9
|
%
|
|
|
0.6
|
|
|
|
—
|
|
|
|
1.4
|
|
|
|
—
|
|
February 2019
|
|
$
|
100.0
|
|
|
1 Month LIBOR
|
|
|
1.6
|
%
|
|
|
—
|
|
|
|
(0.7
|
)
|
|
|
0.5
|
|
|
|
—
|
|
February 2019
|
|
$
|
100.0
|
|
|
1 Month LIBOR
|
|
|
1.5
|
%
|
|
|
—
|
|
|
|
(0.4
|
)
|
|
|
0.9
|
|
|
|
—
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.6
|
|
|
N/A
|
|
|
$
|
2.8
|
|
|
N/A
|
|
Accounts Payable
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
$
|
(6.3
|
)
|
|
N/A
|
|
|
$
|
(6.0
|
)
|
All components of the Swaps were included in the assessment of hedge effectiveness. The Company expects that within the next 12 months it will reflect an increase to interest expense (and a corresponding decrease to earnings) of approximately $6.4 million, which includes amortization of previously settled interest rate contracts.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2014, such derivatives were used to hedge the forecasted variable cash flows associated with existing or probable future obligations. The ineffective portion of the change in the fair value of derivatives is recognized directly in earnings. During the six-month periods ended June 30, 2014 and 2013, the amount of hedge ineffectiveness recorded was not material.
The Company is exposed to credit risk in the event of non-performance by the counterparties to the Swaps if the derivative position has a positive balance. The Company believes it mitigates its credit risk by entering into swaps with major financial institutions. The Company continually monitors and actively manages interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap positions or other derivative interest rate instruments based on market conditions. The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.
17
Credit Risk-Related Contingent Features
The Company has agreements with each of its Swap counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its Swaps, resulting in an acceleration of payment under the Swaps.
Net Investment Hedges
The Company is exposed to foreign exchange risk from its consolidated and unconsolidated international investments. The Company has foreign currency-denominated debt agreements that expose the Company to fluctuations in foreign exchange rates. The Company has designated these foreign currency borrowings as a hedge of its net investment in its Canadian and European subsidiaries. Changes in the spot rate value are recorded as adjustments to the debt balance with offsetting unrealized gains and losses recorded in OCI. Because the notional amount of the non-derivative instrument substantially matches the portion of the net investment designated as being hedged, and the non-derivative instrument is denominated in the functional currency of the hedged net investment, the hedge ineffectiveness recognized in earnings is not material.
Effect on Net Income (Loss) and OCI
The effect of the Company’s cash flow hedges and net investment hedge instruments on net income (loss) and OCI is as follows (in millions):
|
|
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
|
|
|
Location of
Gain (Loss)
Reclassified
from
Accumulated
OCI
(Effective
Portion)
|
|
|
Amount of Gain (Loss)
Reclassified from
Accumulated OCI
(Effective Portion)
|
|
|
Three-Month
Periods Ended
June 30,
|
|
|
Six-Month
Periods Ended
June 30,
|
|
|
|
Three-Month
Periods Ended
June 30,
|
|
|
Six-Month
Periods Ended
June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Cash flow hedges
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(2.2
|
)
|
|
$
|
10.9
|
|
|
$
|
(2.5
|
)
|
|
$
|
12.6
|
|
|
|
Interest Expense
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro-denominated
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Canadian dollar-denominated
|
|
|
(0.8
|
)
|
|
|
0.9
|
|
|
|
—
|
|
|
|
1.3
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total:
|
|
$
|
(0.8
|
)
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters
Coventry II
The Company is a party to various joint ventures with the Coventry II Fund, through which 10 existing or proposed retail properties, along with a portfolio of former Service Merchandise locations, were acquired at various times from 2003 through 2006. The Company was generally responsible for day-to-day management of the properties through December 2011. On November 4, 2009, Coventry Real Estate Advisors L.L.C., Coventry Real Estate Fund II, L.L.C. and Coventry Fund II Parallel Fund, L.L.C. (collectively, “Coventry”) filed suit against the Company and certain of its affiliates and officers in the Supreme Court of the State of New York, County of New York. The complaint contained allegations including breach of contract, breach of fiduciary duty, fraudulent inducement, misrepresentation, and economic duress. The complaint sought compensatory, consequential and punitive damages.
In response to this action, the Company filed a motion to dismiss the complaint. In June 2010, the court granted the motion in part (which was affirmed on appeal), dismissing Coventry’s claim that the Company breached a fiduciary duty owed to Coventry. The Company also filed an answer to the complaint, and asserted various counterclaims against Coventry. On October 10, 2011, the Company filed a motion for summary judgment, seeking dismissal of all of Coventry’s remaining claims. On April 18, 2013, the court issued an order dismissing most of Coventry’s remaining claims against the Company. The court’s decision denied the Company’s motion solely with respect to several claims for breach of contract under the Company’s prior management agreements in connection with certain assets. Coventry appealed the court’s ruling dismissing its claims. On June 14, 2014, the appellate court issued an opinion affirming the dismissal of most of Coventry’s remaining claims.
18
The Company believes that the few remaining claims in the lawsuit are immaterial and without merit and that it has strong defenses against these claims. The Company will continue to vigorously defend itself against the remaining claims. This lawsuit is subject to the uncertainties inherent in the litigation process and, therefore, no assurance can be given as to its ultimate outcome and no loss provision has been recorded in the accompanying financial statements because a loss contingency is not deemed probable or estimable. However, based on the information presently available to the Company, the Company does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Contract Termination
In January 2008, the Company entered into a Services Agreement (the “Agreement”) with Oxford Building Services, Inc. (“Oxford”), whose obligations were guaranteed by certain affiliates of Oxford. The Agreement required that Oxford identify and contract directly with various service providers (“Vendors”) to provide maintenance, repairs, supplies and a variety of on-site services to certain properties in the Company’s portfolio, in exchange for which Oxford would pay such Vendors for the services. Under the Agreement, the Company remitted funds to Oxford to pay the Vendors under the Vendors’ contracts with Oxford.
On or about January 23, 2013, Oxford advised the Company that Oxford had misapplied approximately $11 million paid by the Company to Oxford and, as a result, Oxford had insufficient funds to pay the Vendors in accordance with the Agreement. On January 28, 2013, the Company terminated the Agreement based upon Oxford’s violations of the Agreement, principally due to its insolvency. Oxford and several affiliates subsequently filed bankruptcy petitions in the United States Bankruptcy Court for the District of New Jersey and are in liquidation under Chapter 7 of the United States Bankruptcy Code.
In its initial filings in the bankruptcy case, Oxford had threatened litigation alleging certain claims against the Company which the Company vigorously denied; however, to date, no such claims have been asserted by Oxford against the Company. On March 18, 2013, the Company filed suit in the Court of Common Pleas, Cuyahoga County, Ohio, which was subsequently removed to the federal district court in Cleveland, Ohio, against certain affiliates and the individual principals of Oxford asserting claims for, among other things, breach of guaranty, fraud, conversion and civil conspiracy
.
In July 2014, the Company and the defendants in the Ohio litigation reached an agreement to settle all claims asserted in the Ohio litigation.
Other
In addition to the litigation discussed above, the Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.
Common Shares
Common share dividends declared per share were as follows:
|
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Common share dividends declared per share
|
|
$
|
0.155
|
|
|
$
|
0.135
|
|
|
$
|
0.31
|
|
|
$
|
0.27
|
|
Preferred Shares
In May 2014, the Company redeemed the remaining $55.0 million of its Class H Preferred Shares at a redemption price of $504.6094 per Class H Preferred Share (the sum of $500.00 per Class H Preferred Share and dividends per Class H Preferred Share of $4.6094 prorated to the redemption date of May 30, 2014) or $25.2305 per depositary share (the sum of $25.00 per depositary share and dividends per depositary share of $0.2305 prorated to the redemption date of May 30, 2014). The Company recorded a charge of $1.9 million in the second quarter of 2014 related to the write-off of the Class H Preferred Shares’ original issuance costs.
19
Non-Controlling Interests
In June 2014, the Company issued 1.0 million OP Units in conjunction with the purchase of an asset in Chicago, Illinois (Note 3).
10.
|
OTHER COMPREHENSIVE LOSS
|
The changes in accumulated other comprehensive loss by component are as follows (in thousands):
|
Gains and
Losses on
Cash
Flow
Hedges
|
|
|
Foreign
Currency
Items
|
|
|
Net
Unrealized
Gains on
Marketable
Securities
|
|
|
Total
|
|
Balance, December 31, 2013
|
$
|
(7,912
|
)
|
|
$
|
(30,624
|
)
|
|
$
|
2,043
|
|
|
$
|
(36,493
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(2,464
|
)
|
|
|
8,370
|
|
|
|
(467
|
)
|
|
|
5,439
|
|
Reclassification adjustment for foreign currency translation
(A)
|
|
—
|
|
|
|
19,715
|
|
|
|
—
|
|
|
|
19,715
|
|
Reclassification adjustment for realized gains on
available-for-sale securities
(B)
|
|
—
|
|
|
|
—
|
|
|
|
(840
|
)
|
|
|
(840
|
)
|
Amounts reclassified from accumulated other comprehensive
loss
(C)
|
|
236
|
|
|
|
—
|
|
|
|
—
|
|
|
|
236
|
|
Net current-period other comprehensive (loss) income
|
|
(2,228
|
)
|
|
|
28,085
|
|
|
|
(1,307
|
)
|
|
|
24,550
|
|
Balance, June 30, 2014
|
$
|
(10,140
|
)
|
|
$
|
(2,539
|
)
|
|
$
|
736
|
|
|
$
|
(11,943
|
)
|
(A)
|
Reflects gain classified as Gain on Sale and Control of Interests in the Company’s condensed consolidated statement of operations for the six months ended June 30, 2014, which was previously recognized in Accumulated Other Comprehensive Income.
|
(B)
|
Realized gains are included in the condensed consolidated statement of operations within Fee and Other Income for the six months ended June 30, 2014.
|
(C)
|
Reflects amortization classified in Interest Expense of $0.3 million, offset by amortization classified in Equity in Net Income of Joint Ventures of $0.1 million, in the Company’s condensed consolidated statement of operations for the six months ended June 30, 2014, which was previously recognized in Accumulated Other Comprehensive Income.
|
Fee and other income from continuing operations was composed of the following (in millions):
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Management, development and other fee income
|
$
|
7.9
|
|
|
$
|
10.2
|
|
|
$
|
16.1
|
|
|
$
|
20.9
|
|
Ancillary and other property income
|
|
6.1
|
|
|
|
7.4
|
|
|
|
12.5
|
|
|
|
13.1
|
|
Lease termination fees
|
|
2.0
|
|
|
|
4.7
|
|
|
|
3.3
|
|
|
|
5.2
|
|
Other
|
|
0.6
|
|
|
|
0.2
|
|
|
|
1.2
|
|
|
|
0.3
|
|
Total fee and other income
|
$
|
16.6
|
|
|
$
|
22.5
|
|
|
$
|
33.1
|
|
|
$
|
39.5
|
|
20
12.
|
IMPAIRMENT CHARGES AND IMPAIRMENT OF JOINT VENTURE INVESTMENTS
|
The Company recorded impairment charges during the three- and six-month periods ended June 30, 2014 and 2013, based on the difference between the carrying value of the assets or investments and the estimated fair market value as follows (in millions):
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Land held for development
(A)
|
$
|
13.2
|
|
|
$
|
—
|
|
|
$
|
13.2
|
|
|
$
|
—
|
|
Undeveloped land
|
|
—
|
|
|
|
2.6
|
|
|
|
0.4
|
|
|
|
2.6
|
|
Assets marketed for sale
(B)
|
|
1.1
|
|
|
|
11.0
|
|
|
|
11.0
|
|
|
|
11.0
|
|
Total continuing operations
|
$
|
14.3
|
|
|
$
|
13.6
|
|
|
$
|
24.6
|
|
|
$
|
13.6
|
|
Sold assets – discontinued operations
|
|
—
|
|
|
|
21.3
|
|
|
|
0.6
|
|
|
|
29.0
|
|
Joint venture investments
(C)
|
|
—
|
|
|
|
—
|
|
|
|
9.1
|
|
|
|
—
|
|
Total impairment charges
|
$
|
14.3
|
|
|
$
|
34.9
|
|
|
$
|
34.3
|
|
|
$
|
42.6
|
|
(A)
|
Amounts reported in the three- and six-month periods ended June 30, 2014, primarily related to land held for development in Canada that is owned through a consolidated joint venture. The asset impairment was triggered primarily by the Company’s decision to sell the land.
|
(B)
|
The impairment charges were triggered primarily due to the Company’s marketing of these assets for sale and management’s assessment of the likelihood and timing of one or more potential transactions.
|
(C)
|
Amount recorded in 2014 represents an “other than temporary impairment” charge on a development project in Canada that is owned through an unconsolidated joint venture. The impairment was triggered by changes in the timing of the project development assumptions that occurred in the first quarter of 2014.
|
Items Measured at Fair Value on a Non-Recurring Basis
For a description of the Company’s methodology on determining fair value, refer to Note 12 of the Company’s Financial Statements filed on its Annual Report on Form 10-K for the year ended December 31, 2013, as amended.
The following table presents information about the Company’s impairment charges on both financial and nonfinancial assets that were measured on a fair value basis for the six-month period ended June 30, 2014 and the year ended December 31, 2013. The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions):
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Total
Losses
|
|
June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110.5
|
|
|
$
|
110.5
|
|
|
$
|
25.2
|
|
Unconsolidated joint venture investments
|
|
|
—
|
|
|
|
—
|
|
|
|
26.8
|
|
|
|
26.8
|
|
|
|
9.1
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used and held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
164.2
|
|
|
|
164.2
|
|
|
|
72.6
|
|
Unconsolidated joint venture investments
|
|
|
—
|
|
|
|
—
|
|
|
|
35.3
|
|
|
|
35.3
|
|
|
|
1.0
|
|
21
The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in millions):
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value at
|
|
|
|
|
|
|
Range
|
Description
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
2014
|
|
2013
|
Impairment of consolidated assets
|
|
$
|
43.5
|
|
|
$
|
88.7
|
|
|
Indicative
Bid
(A)
/
Contracted Price
|
|
Indicative
Bid
(A)
/
Contracted Price
|
|
N/A
|
|
N/A
|
|
|
|
67.0
|
|
|
|
75.5
|
|
|
Income
Capitalization
Approach
(B)
|
|
Market
Capitalization
Rate
|
|
8%
|
|
8% – 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Per
Square Foot
|
|
N/A
|
|
$12 – $117
|
Impairment of joint venture investments
|
|
|
26.8
|
|
|
|
35.3
|
|
|
Discounted
Cash Flow
|
|
Discount
Rate
|
|
8% – 15%
|
|
8% – 15%
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal
Capitalization
Rate
|
|
6%
|
|
6%
|
(A)
|
Fair value measurements based upon indicative bids were developed by third-party sources (including offers and comparable sales values), subject to the Company’s determination of reasonableness. The Company does not have access to certain unobservable inputs used by these third parties to determine these estimated fair values.
|
(B)
|
Vacant space in certain assets was valued based on a price per square foot.
|
13.
|
DISCONTINUED OPERATIONS
|
The Company sold 16 properties (including two properties held for sale at December 31, 2013) during the six-month period ended June 30, 2014. In addition, the Company sold 39 properties in 2013. These asset sales are included in discontinued operations for the three- and six-month periods ended June 30, 2014 and 2013. The operating results related to assets sold as of June 30, 2014, are as follows (in thousands):
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues
|
$
|
305
|
|
|
$
|
11,146
|
|
|
$
|
3,217
|
|
|
$
|
23,534
|
|
Operating expenses
|
|
18
|
|
|
|
3,464
|
|
|
|
1,015
|
|
|
|
7,290
|
|
Impairment charges
|
|
—
|
|
|
|
21,338
|
|
|
|
568
|
|
|
|
29,017
|
|
Interest, net
|
|
54
|
|
|
|
2,566
|
|
|
|
631
|
|
|
|
5,416
|
|
Depreciation and amortization
|
|
77
|
|
|
|
3,311
|
|
|
|
905
|
|
|
|
6,875
|
|
|
|
149
|
|
|
|
30,679
|
|
|
|
3,119
|
|
|
|
48,598
|
|
Income (loss) from discontinued operations
|
|
156
|
|
|
|
(19,533
|
)
|
|
|
98
|
|
|
|
(25,064
|
)
|
Gain (loss) on disposition of real estate, net of tax
|
|
6,487
|
|
|
|
(2,063
|
)
|
|
|
17,182
|
|
|
|
(1,462
|
)
|
Income (loss) from discontinued operations
|
$
|
6,643
|
|
|
$
|
(21,596
|
)
|
|
$
|
17,280
|
|
|
$
|
(26,526
|
)
|
22
The following table calculates the Company’s earnings per share (“EPS”) and provides a reconciliation of net income (loss) from continuing operations and the number of common shares used in the computations of “basic” EPS, which utilizes the weighted-average number of common shares outstanding without regard to dilutive potential common shares, and “diluted” EPS, which includes all such shares (in thousands, except per share amounts):
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Basic Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
68,780
|
|
|
$
|
3
|
|
|
$
|
40,854
|
|
|
$
|
11,484
|
|
Plus: Income (loss) on disposition of real estate
|
|
1,472
|
|
|
|
(1,525
|
)
|
|
|
383
|
|
|
|
(1,582
|
)
|
Plus: Loss attributable to non-controlling interests
|
|
(347
|
)
|
|
|
(153
|
)
|
|
|
(501
|
)
|
|
|
(308
|
)
|
Write-off of preferred share original issuance costs
|
|
(1,943
|
)
|
|
|
(5,246
|
)
|
|
|
(1,943
|
)
|
|
|
(5,246
|
)
|
Preferred dividends
|
|
(6,259
|
)
|
|
|
(7,475
|
)
|
|
|
(12,867
|
)
|
|
|
(14,505
|
)
|
Less: Earnings attributable to unvested shares and operating
partnership units
|
|
(464
|
)
|
|
|
(359
|
)
|
|
|
(777
|
)
|
|
|
(722
|
)
|
Basic
—
Income (loss) from continuing operations
|
|
61,239
|
|
|
|
(14,755
|
)
|
|
|
25,149
|
|
|
|
(10,879
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
—
Income (loss) from discontinued operations
|
|
6,643
|
|
|
|
(21,596
|
)
|
|
|
17,280
|
|
|
|
(26,526
|
)
|
Plus: (Loss) income attributable to non-controlling interests
|
|
(531
|
)
|
|
|
(42
|
)
|
|
|
1,361
|
|
|
|
(78
|
)
|
Basic
—
Net income (loss) attributable to DDR common shareholders
after allocation to participating securities
|
$
|
67,351
|
|
|
$
|
(36,393
|
)
|
|
$
|
43,790
|
|
|
$
|
(37,483
|
)
|
Diluted Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
—
Income (loss) from continuing operations
|
$
|
61,703
|
|
|
$
|
(14,396
|
)
|
|
$
|
25,926
|
|
|
$
|
(10,157
|
)
|
Less: Earnings attributable to unvested shares and operating
partnership units
|
|
(464
|
)
|
|
|
(359
|
)
|
|
|
(777
|
)
|
|
|
(722
|
)
|
Diluted
—
Income (loss) from continuing operations
|
|
61,239
|
|
|
|
(14,755
|
)
|
|
|
25,149
|
|
|
|
(10,879
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
—
Income (loss) from discontinued operations
|
|
6,112
|
|
|
|
(21,638
|
)
|
|
|
18,641
|
|
|
|
(26,604
|
)
|
Diluted
—
Net income (loss) attributable to DDR common shareholders
after allocation to participating securities
|
$
|
67,351
|
|
|
$
|
(36,393
|
)
|
|
$
|
43,790
|
|
|
$
|
(37,483
|
)
|
Number of Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
—
Average shares outstanding
|
|
357,812
|
|
|
|
316,967
|
|
|
|
357,717
|
|
|
|
315,110
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
483
|
|
|
|
—
|
|
|
|
459
|
|
|
|
—
|
|
Diluted
—
Average shares outstanding
|
|
358,295
|
|
|
|
316,967
|
|
|
|
358,176
|
|
|
|
315,110
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to DDR
common shareholders
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.04
|
)
|
Income (loss) from discontinued operations attributable to DDR
common shareholders
|
|
0.02
|
|
|
|
(0.07
|
)
|
|
|
0.05
|
|
|
|
(0.08
|
)
|
Net income (loss) attributable to DDR common shareholders
|
$
|
0.19
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.12
|
)
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to DDR
common shareholders
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.04
|
)
|
Income (loss) from discontinued operations attributable to DDR
common shareholders
|
|
0.02
|
|
|
|
(0.07
|
)
|
|
|
0.05
|
|
|
|
(0.08
|
)
|
Net income (loss) attributable to DDR common shareholders
|
$
|
0.19
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.12
|
)
|
23
The following potentially dilutive securities are considered in the calculation of EPS as described below:
Potentially Dilutive Securities:
|
The Company’s senior convertible notes due 2040, which are convertible into common shares of the Company with a conversion price of $15.08 at June 30, 2014, were not included in the computation of diluted EPS for all periods presented because the Company’s common share price did not exceed 125% of the conversion price in these periods and would therefore be anti-dilutive.
|
|
Shares subject to issuance under the Company’s 2013 Value Sharing Equity Program were not considered in the computation of diluted EPS for the three- and six-month periods ended June 30, 2014, because the calculation was anti-dilutive.
|
|
At June 30, 2014 and 2013, the Company had 1,441,890 and 398,701 OP Units, respectively, outstanding. The exchange into common shares associated with the OP Units was not included in the computation of diluted shares outstanding for all periods presented because the effect of assuming conversion was anti-dilutive.
|
At June 30, 2014, the Company has two reportable operating segments, shopping centers and loan investments. Each consolidated shopping center is considered a separate operating segment; however, each shopping center on a stand-alone basis represents less than 10% of the revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under the applicable standard. Effective April 1, 2014, the Company’s equity method investment in the Brazil equity investment is no longer considered a reportable segment due to the Company’s sale of its entire ownership interest in SSB (Note 2). The operating segment information for the three- and six-month periods ended June 30, 2013, has been restated to conform to the current presentation.
The tables below present information about the Company’s reportable operating segments and reflect the impact of discontinued operations (Note 13) (in thousands):
|
Three-Month Period Ended June 30, 2014
|
|
|
Shopping
Centers
|
|
|
Loan
Investments
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
$
|
253,569
|
|
|
$
|
91
|
|
|
|
|
|
|
$
|
253,660
|
|
Operating expenses
(A)
|
|
(86,355
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(86,356
|
)
|
Net operating income
|
|
167,214
|
|
|
|
90
|
|
|
|
|
|
|
|
167,304
|
|
Depreciation and amortization
|
|
(99,826
|
)
|
|
|
|
|
|
|
|
|
|
|
(99,826
|
)
|
Interest income
|
|
|
|
|
|
3,158
|
|
|
|
|
|
|
|
3,158
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
$
|
(4,510
|
)
|
|
|
(4,510
|
)
|
Gain on sale and change in control of interests, net
|
|
83,830
|
|
|
|
|
|
|
|
|
|
|
|
83,830
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
(82,307
|
)
|
|
|
(82,307
|
)
|
Equity in net income of joint ventures
|
|
964
|
|
|
|
|
|
|
|
167
|
|
|
|
1,131
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,780
|
|
|
Three-Month Period Ended June 30, 2013
|
|
|
Shopping
Centers
|
|
|
Loan
Investments
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
$
|
207,691
|
|
|
$
|
9
|
|
|
|
|
|
|
$
|
207,700
|
|
Operating expenses
(A)
|
|
(72,620
|
)
|
|
|
(151
|
)
|
|
|
|
|
|
|
(72,771
|
)
|
Net operating income (loss)
|
|
135,071
|
|
|
|
(142
|
)
|
|
|
|
|
|
|
134,929
|
|
Depreciation and amortization
|
|
(67,047
|
)
|
|
|
|
|
|
|
|
|
|
|
(67,047
|
)
|
Interest income
|
|
|
|
|
|
5,797
|
|
|
|
|
|
|
|
5,797
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
$
|
1,895
|
|
|
|
1,895
|
|
Gain on sale and change in control of interests
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
1,066
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
(75,446
|
)
|
|
|
(75,446
|
)
|
Equity in net (loss) income of joint ventures
|
|
(5,687
|
)
|
|
|
|
|
|
|
4,496
|
|
|
|
(1,191
|
)
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3
|
|
24
|
Six-Month Period Ended June 30, 2014
|
|
|
Shopping
Centers
|
|
|
Loan
Investments
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
$
|
506,630
|
|
|
$
|
127
|
|
|
|
|
|
|
$
|
506,757
|
|
Operating expenses
(A)
|
|
(170,189
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
(170,240
|
)
|
Net operating income
|
|
336,441
|
|
|
|
76
|
|
|
|
|
|
|
|
336,517
|
|
Depreciation and amortization
|
|
(208,295
|
)
|
|
|
|
|
|
|
|
|
|
|
(208,295
|
)
|
Interest income
|
|
|
|
|
|
6,285
|
|
|
|
|
|
|
|
6,285
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
$
|
(9,124
|
)
|
|
|
(9,124
|
)
|
Gain on sale and change in control of interests, net
|
|
83,830
|
|
|
|
|
|
|
|
|
|
|
|
83,830
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
(165,880
|
)
|
|
|
(165,880
|
)
|
Equity in net income of joint ventures
|
|
6,135
|
|
|
|
|
|
|
|
486
|
|
|
|
6,621
|
|
Impairment of joint venture investments
|
|
(9,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,100
|
)
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,854
|
|
As of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross real estate assets
|
$
|
10,352,011
|
|
|
|
|
|
|
|
|
|
|
$
|
10,352,011
|
|
Notes receivable, net
(C)
|
|
|
|
|
$
|
125,173
|
|
|
$
|
(66,310
|
)
|
|
$
|
58,863
|
|
|
Six-Month Period Ended June 30, 2013
|
|
|
Shopping
Centers
|
|
|
Loan
Investments
|
|
|
Other
|
|
|
Total
|
|
Total revenues
|
$
|
406,912
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
406,927
|
|
Operating expenses
(A)
|
|
(130,194
|
)
|
|
|
(301
|
)
|
|
|
|
|
|
|
(130,495
|
)
|
Net operating income (loss)
|
|
276,718
|
|
|
|
(286
|
)
|
|
|
|
|
|
|
276,432
|
|
Depreciation and amortization
|
|
(132,671
|
)
|
|
|
|
|
|
|
|
|
|
|
(132,671
|
)
|
Interest income
|
|
|
|
|
|
13,674
|
|
|
|
|
|
|
|
13,674
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
$
|
(1,005
|
)
|
|
|
(1,005
|
)
|
Gain on sale and change in control of interests
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
1,066
|
|
Unallocated expenses
(B)
|
|
|
|
|
|
|
|
|
|
(147,775
|
)
|
|
|
(147,775
|
)
|
Equity in net (loss) income of joint ventures
|
|
(7,017
|
)
|
|
|
|
|
|
|
8,780
|
|
|
|
1,763
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,484
|
|
As of June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross real estate assets
|
$
|
8,761,681
|
|
|
|
|
|
|
|
|
|
|
$
|
8,761,681
|
|
Notes receivable, net
(C)
|
|
|
|
|
$
|
261,894
|
|
|
$
|
(190,818
|
)
|
|
$
|
71,076
|
|
(A)
|
Includes impairment charges of $14.3 and $13.6 million for the three-month periods ended June 30, 2014 and 2013, respectively, and $24.6 million and $13.6 million for the six-month periods ended June 30, 2014 and 2013, respectively.
|
(B)
|
Unallocated expenses consist of general and administrative expenses, interest expense and tax benefit/expense as listed in the condensed consolidated statements of operations.
|
(C)
|
Amount includes loans to affiliates classified in Investments in and Advances to Joint Ventures on the condensed consolidated balance sheet.
|
25