UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from                      to                     
Commission file number      1-11690                    

DEVELOPERS DIVERSIFIED REALTY CORPORATION

     3300 Enterprise Parkway, Beachwood, Ohio 44122

(216) 755-5500

Indicated by check mark 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 þ No o

Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act) Yes þ No o

As of May 2, 2005, the registrant had 108,572,218 outstanding common shares, without par value.

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS — Unaudited

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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

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)

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)

Supplemental disclosure of non-cash investing and financing activities:

For the three months ended March 31, 2005, in conjunction with the acquisition of 15 assets, the Company assumed mortgage debt at a fair value of approximately $673.2 and other liabilities of approximately $4.4 million. At March 31, 2005, dividends payable were $65.6 million. Included in other assets and debt is approximately $1.2 million, which represents the fair value of the Company’s reverse interest rate swaps at March 31, 2005. In January 2005, in accordance with a performance units plan, the Company issued 200,000 restricted shares to the Chairman and Chief Executive Officer, of which 30,000 shares vested, as of the date of issuance. The remaining 170,000 shares will vest in 2006 through 2009. The foregoing transactions did not provide for or require the use of cash for the three month period ended March 31, 2005.

At March 31, 2004, dividends payable were $43.7 million. In 2004, in conjunction with stock for stock option exercises, the Company recorded $1.9 million to deferred obligation. The deferred obligation represent the portion of the common shares issuable upon exercise that were not currently issued but rather deferred pursuant to a deferral plan for which the Company maintains a separate trust. In connection with the adoption of FIN 46, the Company consolidated real estate assets, net of $26.4 million and a mortgage payable of $20.0 million. In connection with the acquisitions of its partner’s 50% interest in a shopping center, the Company acquired a property with a book value of $63.6 million and assumed debt of $47.0 million. Other liabilities include approximately $0.5 million, which represents the fair value of the Company’s fixed rate interest rate swaps. Included in other assets and debt is approximately $5.8 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

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. In January 2005, the Company completed the acquisition of 15 Puerto Rican retail real estate assets from Caribbean Property Group, LLC and its related entities (“CPG”), at an aggregate cost of approximately $1.15 billion. The Company accounted for the acquisition of assets utilizing the purchase method of accounting. The amounts reported are based on the Company’s preliminary purchase price allocation and certain estimates. As a result, the purchase price allocation is preliminary and subject to change.

Reclassifications

     Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 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 Company consolidates certain entities in which it owns less than a 100% equity interest if it is deemed to be the primary beneficiary in a variable interest entity, as defined in FIN No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). The Company also consolidates entities in which it has a controlling direct or indirect voting interest. The equity method of accounting is applied to entities in which the Company does not have a controlling direct or indirect voting interest, but can exercise influence over the entity with respect to its operations and major decisions.

     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, 2005 and 2004 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

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financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2004.

New Accounting Standards

Stock Based Compensation – SFAS 123R

     In December 2004, the FASB issued SFAS 123R, “Share-Based Payment.” Public companies with calendar year-ends would be required to adopt the provisions of the standard effective for fiscal years beginning after June 15, 2005, rather than periods beginning after January 1, 2005. The Company is currently evaluating the effects of this proposed standard, but does not expect it to materially impact its financial position, results of operations, cash flows or its future compensation strategies.

Comprehensive Income

     Comprehensive income (in thousands) for the three month periods ended March 31, 2005 and 2004 was $114,835 and $50,861, respectively.

Stock Based Compensation

     The Company applies APB 25, “Accounting for Stock Issued to Employees,” in accounting for its 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 as amended by SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, the compensation cost, which is required to be charged against income for all plans, was $1.4 million for both the three months ended March 31, 2005 and 2004 (in thousands, except per share amounts).

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2. EQUITY INVESTMENTS IN JOINT VENTURES

     At March 31, 2005 and December 31, 2004, the Company had ownership interests in various joint ventures, which owned 111 and 103 shopping center properties, respectively, and 60 and 63 shopping center sites, respectively, formerly owned by Service Merchandise Company, Inc.

     Combined condensed financial information of the Company’s joint venture investments is as follows (in thousands):

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     Service fees earned by the Company through management, acquisition and financing fees, leasing and development activities performed related to the Company’s joint ventures are as follows (in millions):

MDT Joint Venture

     During the first quarter of 2005, the Company sold nine properties to the MDT Joint Venture for approximately $284.2 million and recognized gains totaling $62.6 million and deferred a gain of approximately $10.6 million relating to the Company’s effective 14.5% interest in the MDT Joint Venture. The Company has been engaged to perform all day-to-day operations of the properties and will receive its share of ongoing fees for property management, leasing and construction management, plus periodic fees for financing and due diligence.

3. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION

     In January 2005, the Company completed the acquisition of 15 Puerto Rican retail real estate assets from CPG for approximately $1.15 billion. The financing for the transaction was provided by the assumption of approximately $660 million of existing debt and line of credit borrowings on the Company’s $1.0 billion senior unsecured credit facility and the application of a $30 million deposit funded in 2004.

     In March 2004, the Company entered into an agreement to purchase interests in 110 retail real estate assets with approximately 18.8 million square feet of GLA from Benderson Development Company, Inc. and related entities (“Benderson”). The purchase price of the assets, including associated expenses, was approximately $2.3 billion, less assumed debt and the value of a 2% equity interest in certain assets initially valued at approximately $16.2 million, which are classified as operating partnership minority interests on the Company’s consolidated balance sheet. At March 31,

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2005, the book value of this interest is $14.2 million as certain of these assets were sold to a joint venture with Prudential Real Estate Investors.

     The Company completed the purchase of 107 properties (of which 93 were purchased by the Company and 14 were purchased directly by the MDT Joint Venture) at various dates commencing May 14, 2004 through December 21, 2004. The remaining three properties will not be acquired.

     The Company funded the transaction through a combination of new debt financing of approximately $450 million, net proceeds of approximately $164.2 million from the issuance of 6.8 million cumulative preferred shares, net proceeds of approximately $491 million from the issuance of 15.0 million common shares, asset transfers to the MDT Joint Venture which generated net proceeds of approximately $194.3 million (Note 2), line of credit borrowings and assumed debt. With respect to the assumed debt, the fair value was approximately $400 million, which included an adjustment of approximately $30 million to increase its stated principal balance, based on rates for debt with similar terms and remaining maturities as of May 2004. The Company entered into this transaction to acquire the largest, privately owned retail shopping center portfolio in markets where the Company previously did not have a strong presence.

     Benderson also entered into a five-year master lease for vacant space that was either covered by a letter of intent as of the closing date or a new lease with respect to which the tenant had not begun to pay rent as of the closing date. During the five-year master lease, Benderson agreed to pay the rent for such vacant space, until each applicable tenant’s rent commencement date. The Company recorded the master lease receivable as part of the purchase price allocation. At March 31, 2005, the master lease receivable from Benderson aggregated $3.3 million.

     The following supplemental pro forma operating data is presented for the three month period ended March 31, 2005 as if the acquisition of properties from CPG was completed on January 1, 2005. The following supplemental pro forma operating data is presented for the three month period ended March 31, 2004, as if the acquisition of assets from Benderson and related financing and the acquisition of properties from CPG and the common share offering completed in December 2004 were completed on January 1, 2004.

     The 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. The Company accounted for or will account for the acquisition of assets utilizing the purchase method of accounting. The pro forma adjustments relating to the acquisition of properties from CPG are based on the Company’s preliminary purchase price allocation and certain estimates. The Company engaged an appraiser to perform valuations of the real estate and certain other assets. As a result, the purchase price allocation is preliminary and subject to change. Therefore, the amounts included in the pro forma adjustments are preliminary and could change. There can be no assurance that the final adjustments will not be materially different from those included herein.

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4. OTHER ASSETS

Other assets consist of the following (in thousands):