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 March 31, 2003
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
| Ohio | 34-1723097 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
3300 Enterprise Parkway, Beachwood, Ohio 44122
(216) 755-5500
| Indicated by check ü 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 ü No __ |
| Indicated by check mark whether the registrant is an accelerated files (as defined in Rule 12 b-2 of the Exchange Act) Yes ü No __ |
| As of May 12, 2003, the registrant had 85,207,243 outstanding common shares, without par value. |
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002.
Condensed Consolidated Statements of Operations for the Three Month Periods ended March 31, 2003 and 2002.
Condensed Consolidated Statements of Cash Flows for the Three Month Periods ended March 31, 2003 and 2002.
Notes to Condensed Consolidated Financial Statements.
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DEVELOPERS DIVERSIFIED REALTY
CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share
amounts)
(Unaudited)
| March 31, 2003 | December 31, 2002 | |||||||||||
Assets |
||||||||||||
Real estate rental property: |
||||||||||||
Land |
$ | 800,712 | $ | 488,292 | ||||||||
Buildings |
2,641,665 | 2,109,675 | ||||||||||
Fixtures and tenant improvements |
75,520 | 72,674 | ||||||||||
Construction in progress |
382,287 | 133,415 | ||||||||||
| 3,900,184 | 2,804,056 | |||||||||||
Less accumulated depreciation |
(428,702 | ) | (408,792 | ) | ||||||||
Real estate, net |
3,471,482 | 2,395,264 | ||||||||||
Cash and cash equivalents |
26,356 | 16,371 | ||||||||||
Investments in and advances to joint ventures |
301,998 | 258,610 | ||||||||||
Notes receivable |
11,855 | 11,662 | ||||||||||
Other assets |
108,133 | 94,945 | ||||||||||
| $ | 3,919,824 | $ | 2,776,852 | |||||||||
Liabilities and Shareholders’ Equity |
||||||||||||
Unsecured indebtedness: |
||||||||||||
Fixed rate notes |
$ | 540,215 | $ | 404,900 | ||||||||
Variable rate term debt |
300,000 | 22,120 | ||||||||||
Revolving credit facility |
473,000 | 433,500 | ||||||||||
| 1,313,215 | 860,520 | |||||||||||
Secured indebtedness: |
||||||||||||
Revolving credit facility |
15,000 | 12,500 | ||||||||||
Mortgage and other secured indebtedness |
839,194 | 625,778 | ||||||||||
| 854,194 | 638,278 | |||||||||||
Total indebtedness |
2,167,409 | 1,498,798 | ||||||||||
Accounts payable and accrued expenses |
80,919 | 68,438 | ||||||||||
Dividends payable |
34,859 | 25,378 | ||||||||||
Other liabilities |
47,225 | 23,632 | ||||||||||
| 2,330,412 | 1,616,246 | |||||||||||
Minority equity interest |
21,452 | 22,049 | ||||||||||
Preferred operating partnership interests |
— | 175,010 | ||||||||||
Operating partnership minority interests |
19,520 | 17,986 | ||||||||||
| 2,371,384 | 1,831,291 | |||||||||||
| Commitments
and contingencies Shareholders’ equity: |
||||||||||||
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 March 31, 2003 and
December 31, 2002 |
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 March 31, 2003 and
December 31, 2002 |
54,000 | 54,000 | ||||||||||
Class F – 8.60% cumulative redeemable preferred shares, without par value, $250 liquidation value;
750,000 shares authorized; 600,000 shares issued and outstanding at March 31, 2003 and
December 31, 2002 |
150,000 | 150,000 | ||||||||||
Class G – 8.0% cumulative redeemable preferred shares, without par value, $250 liquidation value;
750,000 shares authorized; 720,000 shares issued and outstanding at March 31, 2003 |
180,000 | — | ||||||||||
Voting preferred shares – 9.375% cumulative redeemable preferred shares, without par value, $25
liquidation value; 2,000,000 shares authorized, issued and outstanding at March 31, 2003 |
50,000 | — | ||||||||||
Common shares, without par value, $.10 stated value; 200,000,000 shares authorized; 91,626,914
and 73,247,627 shares issued at March 31, 2003 and December 31, 2002, respectively |
9,163 | 7,325 | ||||||||||
Paid-in-capital |
1,262,202 | 881,777 | ||||||||||
Accumulated distributions in excess of net income |
(162,744 | ) | (154,621 | ) | ||||||||
Accumulated other comprehensive loss |
(969 | ) | (588 | ) | ||||||||
Less: Unearned compensation – restricted stock |
(3,991 | ) | (3,111 | ) | ||||||||
Common stock in treasury at cost: 6,639,004 shares at March 31, 2003 and December
31, 2002 |
(89,221 | ) | (89,221 | ) | ||||||||
| 1,548,440 | 945,561 | |||||||||||
| $ | 3,919,824 | $ | 2,776,852 | |||||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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DEVELOPERS DIVERSIFIED REALTY
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31,
(Dollars in thousands, except per share amounts)
(Unaudited)
| 2003 | 2002 | |||||||||
Revenues from operations: |
||||||||||
Minimum rents |
$ | 74,371 | $ | 60,701 | ||||||
Percentage and overage rents |
1,185 | 907 | ||||||||
Recoveries from tenants |
19,773 | 15,554 | ||||||||
Ancillary income |
358 | 354 | ||||||||
Other property related income |
74 | 225 | ||||||||
Management fee income |
2,604 | 2,762 | ||||||||
Development fee income |
329 | 505 | ||||||||
Interest income |
1,634 | 677 | ||||||||
Other |
3,063 | 3,736 | ||||||||
| 103,391 | 85,421 | |||||||||
Rental operation expenses: |
||||||||||
Operating and maintenance |
13,190 | 9,275 | ||||||||
Real estate taxes |
12,206 | 10,008 | ||||||||
General and administrative |
7,724 | 6,488 | ||||||||
Interest |
19,083 | 18,939 | ||||||||
Depreciation and amortization |
20,038 | 21,004 | ||||||||
| 72,241 | 65,714 | |||||||||
Income before equity in net income of joint ventures,
minority interests, discontinued operations and gain on disposition of real estate
and real estate investments |
31,150 | 19,707 | ||||||||
Equity in net income of joint ventures |
10,099 | 6,726 | ||||||||
Income before minority interests, discontinued
operations and gain on disposition of real estate and real estate
investments |
41,249 | 26,433 | ||||||||
Minority interests: |
||||||||||
Minority equity interests |
(451 | ) | (450 | ) | ||||||
Preferred operating partnership minority interests |
(2,236 | ) | (4,770 | ) | ||||||
Operating partnership minority interests |
(377 | ) | (384 | ) | ||||||
| (3,064 | ) | (5,604 | ) | |||||||
Income from continuing operations |
38,185 | 20,829 | ||||||||
Income from discontinued operations |
— | 348 | ||||||||
Income
before gain on disposition of real estate and real estate investments |
38,135 | 26,685 | ||||||||
Gain on disposition of real estate and real estate
investments |
200 | 2,754 | ||||||||
Net income |
$ | 38,385 | $ | 23,931 | ||||||
Net income applicable to common shareholders |
$ | 26,510 | $ | 16,936 | ||||||
Per share data: |
||||||||||
Basic earnings per share data: |
||||||||||
Income
from continuing operations applicable to common shareholders |
$ | 0.38 | $ | 0.27 | ||||||
Income from discontinued operations |
— | 0.01 | ||||||||
Net income applicable to common shareholders |
$ | 0.38 | $ | 0.28 | ||||||
Diluted earnings per share data: |
||||||||||
Income
from continuing operations applicable to common shareholders |
$ | 0.37 | $ | 0.27 | ||||||
Income from discontinued operations |
— | — | ||||||||
Net income applicable to common shareholders |
$ | 0.37 | $ | 0.27 | ||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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DEVELOPERS DIVERSIFIED REALTY
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31,
(Dollars in thousands)
(Unaudited)
| 2003 | 2002 | |||||||||
Net cash flow provided by operating activities |
$ | 51,959 | $ | 40,344 | ||||||
Cash flow from investing activities: |
||||||||||
Real estate developed or acquired, net of liabilities assumed |
(61,126 | ) | (67,448 | ) | ||||||
Investments in and advances to joint ventures, net |
(32,304 | ) | 1,728 | |||||||
Repayment (issuance) of notes receivable |
7,567 | (22,495 | ) | |||||||
Advances to affiliates |
(11,565 | ) | (4,351 | ) | ||||||
Proceeds from disposition of real estate and real estate investments |
3,986 | 25,679 | ||||||||
Net cash flow used for investing activities |
(93,442 | ) | (66,887 | ) | ||||||
Cash flow from financing activities: |
||||||||||
Repayment of revolving credit facilities, net |
(187,000 | ) | (166,750 | ) | ||||||
Borrowings from term loan |
300,000 | — | ||||||||
Proceeds from construction loans and mortgages |
150,000 | 32,194 | ||||||||
Repayment of senior notes |
(100,000 | ) | — | |||||||
Proceeds from issuance and exchange of medium term notes, net of
underwriting commissions and $226 of offering expenses |
— | 17,094 | ||||||||
Principal payments on rental property debt and term loan |
(70,610 | ) | (2,734 | ) | ||||||
Payment of deferred finance costs |
(4,144 | ) | (114 | ) | ||||||
Proceeds from the issuance of common shares, net of underwriting
commissions and $119 of offering expenses |
— | 33,087 | ||||||||
Proceeds from issuance of preferred shares, net of underwriting
commissions and $724 and $540 of offering expenses paid in 2003
and 2002 |
173,605 | 144,735 | ||||||||
Redemption of preferred operating partnership units |
(180,000 | ) | — | |||||||
Proceeds from issuance of common shares in conjunction with the
exercise of stock options, dividend reinvestment plan and restricted
stock plan |
6,024 | 8,917 | ||||||||
Purchase of treasury stock
|
— | (11 | ) | |||||||
Distributions to preferred and operating partnership minority interests |
(4,371 | ) | (5,172 | ) | ||||||
Dividends paid |
(32,036 | ) | (28,717 | ) | ||||||
Net cash flow provided by financing activities |
51,468 | 32,529 | ||||||||
Increase in cash and cash equivalents |
9,985 | 5,986 | ||||||||
Cash and cash equivalents, beginning of period |
16,371 | 19,069 | ||||||||
Cash and cash equivalents, end of period |
$ | 26,356 | $ | 25,055 | ||||||
Supplemental disclosure of non-cash investing and financing activities:
For the three months ended March 31, 2003, in conjunction with the acquisition of a shopping center, the Company assumed liabilities of approximately $8.4 million. In connection with the merger of JDN Realty Corporation, the Company issued approximately 18.0 million common shares at an aggregate value of $381.8 million, $50.0 million of preferred stock, assumed mortgage and unsecured debt at a fair value of approximately $606.2 million and other liabilities of approximately $40.0 million. At March 31, 2003, dividends payable were $34.8 million. Other liabilities include approximately $0.7 million, which represents the fair value of the Company’s interest rate swaps. Included in other assets and debt is approximately $7.3 million, which represents the fair value of the Company’s reverse interest rate swaps. The foregoing transactions did not provide for or require the use of cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31,
(Dollars in thousands)
(Unaudited)
For the three months ended March 31, 2002, in conjunction with the acquisition of two shopping center properties, the Company issued approximately 2.5 million common shares in a registered offering at an aggregate value of $49.2 million and assumed mortgage debt and other liabilities of approximately $1.8 million. In conjunction with the formation of a joint venture, the Company transferred property to the joint venture with a net book value of $24.3 million for partial consideration of a 10% equity interest. At March 31, 2002 dividends payable were $24.5 million. Other liabilities include $5.7 million representing the aggregate fair value of the Company’s interest rate swaps. The foregoing transactions did not provide for or require the use of cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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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 subsidiaries (collectively the “Company” or “DDR”), are engaged in the business of acquiring, expanding, owning, developing, redeveloping, leasing, managing and operating shopping centers and business centers.
The Company and JDN Realty Corporation’s (“JDN”) shareholders approved a definitive merger agreement pursuant to which JDN shareholders received 0.518 common shares of DDR in exchange for each share of JDN common stock on March 13, 2003. The transaction valued JDN at approximately $1.1 billion, which included approximately $606.2 million of assumed debt at the fair market value and $50 million of voting preferred shares. Through this merger, DDR acquired 102 retail assets aggregating 23 million square feet including 16 development properties comprising approximately 6 million square feet of total GLA. Additionally, DDR acquired a development pipeline of nine properties representing 1.9 million square feet of total GLA with a total estimated cost of approximately $120 million.
Reclassifications
Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 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.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all majority owned subsidiaries and investments 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 the three months ended March 31,
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2003 and 2002 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, 2002.
New Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46” or “Interpretation”), “Consolidation of Variable Interest Entities.” The objective of this interpretation is to provide guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, non-controlling interest, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interest in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 Also requires additional disclosure by primary beneficiaries and other significant variable interest holders. The disclosure provisions of this Interpretation became effective upon issuance. The Consolidation requirements of this Interpretation apply immediately to variable interest entities created after January 31, 2003 and in the first fiscal year or interim period beginning after June 15, 2003 to existing variable interest entities.
The Company is in the process of evaluating all of its joint venture relationships in order to determine whether the entities are variable interest entities and whether the Company is considered to be the primary beneficiary or whether it holds a significant variable interest. The Company believes that it is reasonably possible that the two taxable REIT subsidiaries are variable interest entities where the Company is a primary beneficiary, which may require consolidation under this interpretation. These entities own certain operating properties, development projects and a 79% equity interest in Coventry Real Estate Partners. The Company has several other joint venture arrangements where it is possible that they will be determined to be variable interest entities where the Company is considered to be a primary beneficiary or holds a significant variable interest. It is possible that the Company will be required to consolidate certain of these entities where the Company is the primary beneficiary or make additional disclosures related to its involvement with the entity. All of these joint ventures are included in the summarized financial information in Note 2.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” – an amendment of SFAS 123. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has not yet determined whether any changes to its existing method of accounting for stock based compensation will be made.
The Company applies APB 25, “Accounting for Stock Issued to Employees” in accounting for its stock based plans. Accordingly, the Company does not recognize compensation cost for stock options when the option exercise price equals or exceeds the market value on the date of the grant. Assuming application of the fair value method pursuant to SFAS 123, the compensation cost, which is required to be charged against income for all of the stock based plans, was $1.3 million and $0.6 million for March 31, 2003 and 2002, respectively. The amounts charged to expense are presented in the aforementioned paragraph.
| Three Month Periods Ended March 31 | |||||||||||||
| 2003 | 2002 | ||||||||||||
Net income |
As reported | $ | 38,385 | $ | 23,931 | ||||||||
| Pro forma | $ | 37,879 | $ | 24,008 | |||||||||
Basic |
As reported | $ | 0.38 | $ | 0.28 | ||||||||
| Pro forma | $ | 0.37 | $ | 0.28 | |||||||||
Diluted |
As reported | $ | 0.37 | $ | 0.27 | ||||||||
| Pro forma | $ | 0.37 | $ | 0.27 | |||||||||
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments”. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities. The new standard is effective for contracts entered into or modified after June 30, 2003. The provisions of this statement that relate to SFAS 133 implementation issues that have been effective prior to January
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1, 2003 have been adopted by the Company, as applicable. The Company does not expect this pronouncement to have a material impact on the Company’s financial position, results of operations, or cash flows.
Comprehensive Income
Comprehensive income for the three month periods ended March 31, 2003 and 2002 was $38,003,000 and $26,102,000, respectively.
2. EQUITY INVESTMENTS IN JOINT VENTURES
At March 31, 2003 and December 31, 2002, the Company had an ownership interest in various joint ventures, which own 51 and 49 operating shopping center properties, respectively, and 88 and 102 shopping center sites formerly owned by Service Merchandise Corporation, respectively.
Combined condensed financial information of the Company’s joint venture investments are as follows (in thousands):
| March 31, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
Combined Balance Sheets: |
|||||||||
Land |
$ | 406,579 | $ | 368,520 | |||||
Buildings |
1,267,881 | 1,219,947 | |||||||
Fixtures and tenant improvements |
23,915 | 24,356 | |||||||
Construction in progress |
108,080 | 91,787 | |||||||
| 1,806,455 | 1,704,610 | ||||||||
Less accumulated depreciation |
(150,178 | ) | (153,537 | ) | |||||
Real estate, net |
1,656,277 | 1,551,073 | |||||||
Receivables, net |
51,171 | 64,642 | |||||||
Investment in joint ventures |
13,855 | 12,147 | |||||||
Leasehold interests |
|||||||||