UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2017

OR

For the transition period from                  to                  

Commission file number 1-11690

 

DDR Corp.

(Exact name of registrant as specified in its charter)

 

 

 

3300 Enterprise Parkway, Beachwood, Ohio 44122

(Address of principal executive offices - zip code)

(216) 755-5500

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate 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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of October 26, 2017, the registrant had 368,464,703 outstanding common shares, $0.10 par value per share.

 

 

 

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DDR Corp.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2017

 

TABLE OF CONTENTS

 

 

 

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DDR Corp.

CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except share amounts)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.  

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share amounts)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share amounts)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  

(unaudited; in thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.  

 

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DDR Corp.

CONSOLIDATED STATEMENT OF EQUITY

(unaudited; in thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

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Notes to Condensed Consolidated Financial Statements

 

 

Nature of Business

DDR Corp. and its related consolidated 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, financing and managing shopping centers.  Unless otherwise provided, references herein to the Company or DDR include DDR Corp. and its wholly-owned subsidiaries and consolidated 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 (“GAAP”) 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.  

Reclassifications

Certain reclassifications have been made to the Company’s 2016 financial statements to conform to the 2017 presentation.

Unaudited Interim Financial Statements

These financial statements have been prepared by the Company in accordance with GAAP 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 GAAP 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 nine months ended September 30, 2017 and 2016, 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, 2016.

Principles of Consolidation

The 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”).  All significant inter-company balances and transactions have been eliminated in consolidation.  Investments in real estate joint ventures 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 is included in consolidated net income (loss).  

The Company has two unconsolidated joint ventures included in the Company’s joint venture investments that are considered VIEs for which the Company is not the primary beneficiary.  The Company’s maximum exposure to losses associated with these VIEs is limited to its aggregate investment, which was $334.0 million and $405.4 million as of September 30, 2017 and December 31, 2016, respectively.  

Statements of Cash Flows and Supplemental Disclosure of Non-Cash Investing and Financing Information

Non-cash investing and financing activities are summarized as follows (in millions):

 

 

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Common Shares

The Company declared common share dividends of $0.19 per share and $0.57 per share for both the three and nine months ended September 30, 2017 and 2016, respectively.  

Fee and Other Income

Fee and other income was composed of the following (in thousands):

 

New Accounting Standards Adopted

Business Combinations

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations (Topic 805).  ASU No. 2015-16 provides guidance pertaining to entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized.  The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  Any adjustments should be calculated as if the accounting had been completed at the acquisition date.  The guidance is effective for public companies for fiscal years beginning after December 15, 2016.  In addition, in January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business.  ASU No. 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business.  ASU No. 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption is permitted for both standards.  Application of the guidance is prospective.  

The Company adopted the standards effective January 1, 2017, with respect to its asset acquisitions.  Under these new standards, the Company’s purchase of a shopping center is expected to be classified as an acquisition of an asset and not classified as an acquisition of a business.  Transaction costs from the acquisition of a business are expensed as incurred, in contrast to transaction costs from the acquisition of an asset, which are capitalized to real estate assets upon acquisition.  As a result of these new standards, the majority of the transaction costs incurred related to the acquisition of shopping centers are capitalized to real estate assets (Note 3).  This change did not have a material impact on the Company’s financial statements.  

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows:  Classification of Certain Cash Receipts and Cash Payments.  ASU No. 2016-15 provides guidance on certain specific cash flow issues, including, but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees.  In addition, in November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230: Restricted Cash.  ASU No. 2016-18 clarifies certain existing principles in Accounting Standards Codification (“ASC”) 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statements of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts.  These standards are effective for periods beginning after December 15, 2017, and shall be applied retrospectively where practicable.  Early adoption is permitted.  

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The Company adopted the updated standards effective January 1, 2017.  The adoption of these standards modified the Company's 2017 presentation of certain activities within the consolidated statements of cash flows and related disclosures.

New Accounting Standards to Be Adopted

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers.  The objective of ASU No. 2014-09 is to establish a single comprehensive five-step model for entities to use in accounting for revenue arising from contracts with customers that will supersede most of the existing revenue recognition guidance, including industry-specific guidance.  The core principle of this standard 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.  ASU No. 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the ASC.  The new guidance is effective for public companies for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017.  Entities have the option of using either a full retrospective or modified retrospective approach to adopt ASU No. 2014-09.  The Company plans to adopt using the modified retrospective approach for financial statements issued after January 1, 2018.  

Most significantly for the real estate industry, leasing transactions are not within the scope of the new standard.  A majority of the Company’s tenant-related revenue is recognized pursuant to lease agreements and will be governed by the recently issued leasing guidance discussed below.  The Company completed its assessment of ASU No. 2014-09 and has concluded that the guidance will not have a material impact on the method of revenue recognition, excluding tenant-related revenue with respect to leasing transactions.  The Company anticipates that upon adoption of ASU No. 2014-09, the recognition of lease commission income earned pursuant to its management agreements with unconsolidated joint ventures most likely will be accelerated into an earlier quarter than recognized in current GAAP.  The majority of the Company’s lease commission income is recognized 50% upon lease execution and 50% upon tenant rent commencement.  Under the new standard, the Company anticipates that a lease commission will be recognized in its entirety upon lease execution.  This revenue is not considered material to the Company’s consolidated financial statements.

Accounting for Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases.  Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet.  Other significant provisions of this standard include (i) defining the “lease term” to include the noncancellable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease, (ii) defining the initial lease liability to be recorded on the balance sheet to contemplate only those variable lease payments that depend on an index or that are in substance “fixed,” (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset’s economic benefits and (iv) a requirement to bifurcate certain lease and non-lease components.  The lease standard is effective for fiscal years beginning after December 15, 2018, (including interim periods within those fiscal years) with early adoption permitted.  The Company has not yet selected the method of adoption.  

The Company is in the process of evaluating the impact that the adoption of ASU No. 2016-02 will have on its consolidated financial statements and disclosures.  The Company has currently identified several areas within its accounting policies it believes could be impacted by the new standard.  The Company may have a change in presentation on its consolidated statement of operations with regards to Recoveries from Tenants, which includes reimbursements from tenants for certain operating expenses, real estate taxes and insurance.  Tenant expense reimbursements with a service obligation are not covered within the scope of ASU No. 2016-02.  The Company also has certain lease arrangements with its tenants for space at its shopping centers in which the contractual amounts due under the lease by the lessee are not allocated between the rental and expense reimbursement components (“Gross Leases”).  The aggregate revenue earned under Gross Leases is presented as Minimum Rents in the consolidated statements of operations.  As a result, the Company anticipates it will be required to bifurcate the presentation of certain expense reimbursements as well as allocate the fair value of the embedded revenue associated with these reimbursements for Gross Leases, which represent an immaterial portion of the Company’s lease portfolio, and separately present such amounts in its consolidated statements of operations based upon materiality.  The Company intends to adopt the practicable expedient method in applying this standard to Gross Leases entered into or modified after the effective date of the standard.  In addition, the Company has ground lease agreements in which the Company is the lessee for land underneath all or a portion of the buildings at five shopping centers.  Currently, the Company accounts for these arrangements as operating leases.  Under the new standard, the Company will record its rights and obligations under these leases as an asset and liability on its consolidated balance sheets.  The Company is currently in the process of evaluating the inputs required to calculate the amount that will be recorded on its balance sheet for each ground lease.  Lastly, this standard impacts the lessor’s ability to capitalize

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costs related to the leasing of vacant space.  However, the Company does not believe this change regarding capitalization will have a material impact on its consolidated financial statements.  

 

 

 

At September 30, 2017 and December 31, 2016, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 142 and 151 shopping center properties, respectively.  Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):

 

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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):

 

The Company’s joint venture agreements generally include provisions whereby each partner has the right to trigger a purchase or sale of its interest in the joint venture or to initiate a purchase or sale of the properties after a certain number of years or if either party is in default of the joint venture agreements.  The Company is not obligated to purchase the interests of its outside joint venture partners under these provisions.  

BRE DDR Retail Holdings Joint Ventures

The Company’s two unconsolidated investments with The Blackstone Group L.P. (“Blackstone”), BRE DDR Retail Holdings III (“BRE DDR III”) and BRE DDR Retail Holdings IV (“BRE DDR IV” and, together with BRE DDR III, the “BRE DDR Joint Ventures”), have substantially similar terms and are summarized as follows (in millions, except properties owned):

 

 

An affiliate of Blackstone is the managing member and effectively owns 95% of the common equity of each of the two BRE DDR Joint Ventures, and consolidated affiliates of DDR effectively own the remaining 5%.  The Company provides leasing and property management services to all of the joint venture properties.  The Company cannot be removed as the property and leasing manager until the preferred equity, as discussed below, is redeemed in full (except for certain specified events).  

 

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The Company’s preferred interests are entitled to certain preferential cumulative distributions payable out of operating cash flows and certain capital proceeds pursuant to the terms and conditions of the preferred investments.  The preferred distributions are recognized as Interest Income within the Company’s consolidated statements of operations and are classified as a note receivable in Investments in and Advances to Joint Ventures on the Company’s consolidated balance sheets.  Blackstone has the right to defer up to 23.5% of the preferred fixed distributions as a payment in kind distribution or “PIK.”  The preferred investments have an annual distribution rate of 8.5% including any deferred and unpaid preferred distributions.  Blackstone has made this PIK deferral election since the formation of both joint ventures.  The cash portion of the preferred fixed distributions is generally payable first out of operating cash flows and is current for both BRE DDR Joint Ventures.  The Company has no expectation that the cash portion of the preferred fixed distribution will become impaired.  

The unpaid preferred investment (and any accrued distributions) is payable (1) at Blackstone’s option, in whole or in part, subject to early redemption premiums in certain circumstances during the first three years of the joint ventures; (2) at varying equity sharing levels with the common members under certain circumstances including specified financial covenants, upon a sale of properties over a certain threshold; (3) at DDR’s option after seven years (2021 for BRE DDR III and 2022 for BRE DDR IV); and (4) upon the incurrence of additional indebtedness by the joint ventures in excess of a certain threshold.  Specifically, for BRE DDR III as of September 30, 2017, based upon the cumulative asset sales, net asset sale proceeds will be allocated at 51.9% to the preferred member.  For BRE DDR IV, the preferred investment is collateralized by assets in which DDR has a 5% common equity interest for 95% of the value and by an additional three assets in which DDR has a nominal interest.  The repayment of the BRE DDR IV preferred investment prior to 2022 is first subject to a remaining minimum net asset sales threshold of $4.9 million, of which $1.1 million is allocated to the preferred member.  The net asset sale proceeds generated thereafter are expected to be available to repay the preferred member.  

In the first quarter of 2017, the Company recorded a valuation allowance on each of the BRE DDR III and BRE DDR IV preferred investment interests of $70.0 million and $6.0 million, respectively, or $76.0 million in the aggregate.  The valuation allowances were triggered late in the first quarter by an increase in the estimated market capitalization rates for the underlying real estate collateral of the investments.  The values of open air shopping centers anchored by big box national retailers, particularly in secondary markets, have been under increasing pressure and most recently decreased due to the continued perceived threat of internet retail competition and recent tenant bankruptcies.  Several large national retailers filed for bankruptcy in March and April 2017.  A majority of the shopping centers collateralizing the preferred investments are those which have been most impacted by the rising capitalization rates.  These factors have also reduced the number of potential investors and well-capitalized buyers for these types of assets.  The managing member of the two joint ventures exercises significant influence over the timing of asset sales.  Due to the Company’s expectation regarding the likely timing of asset sales, the valuation of the Company’s investments considers how management believes a third-party market participant would value the securities in the current higher capitalization rate environment.  As a result, the investments were impaired to reflect the risk that the securities are not repaid in full in advance of the Company’s redemption rights in 2021 and 2022.  The Company reassessed the aggregate valuation allowance at September 30, 2017, and based upon actual timing and values of recent property sales as well as current market assumptions, the Company adjusted the allowance on each of the BRE DDR III and BRE DDR IV preferred investment interests by a reduction of $18.1 million and an increase of $2.7 million, respectively, or $15.4 million in the aggregate, resulting in a net valuation allowance of $60.6 million.  The valuation allowance is recorded as Reserve/Adjustment of Preferred Equity Interests on the Company’s consolidated statements of operations.  The Company will continue to monitor the investments and related valuation allowance which could be increased or decreased in future periods, as appropriate.

As discussed above, the preferred 8.5% distribution rate has two components, a cash interest rate of 6.5% and an accrued PIK of 2.0%.  As a result of the valuation allowances recorded, effective in March 2017, the Company no longer recognizes as interest income the 2.0% PIK (aggregating $4.5 million at September 30, 2017).  Although Blackstone has the right to change its payment election, the Company expects future preferred distributions to continue to include the PIK component.  The recognition of the PIK interest income will be reevaluated based upon any future adjustments to the aggregate valuation allowance, as appropriate.

DDRM Properties (formerly DDR Domestic Retail Fund I)

In June 2017, the Company and an affiliate of Madison International Realty (“Madison”) recapitalized a joint venture with 52 shopping centers previously owned by the Company and various partners through the DDR Domestic Retail Fund I, totaling $1.05 billion.  Madison International Real Estate Liquidity Fund VI, an investment fund managed by Madison, acquired 80% of the common equity and an affiliate of the Company retained its 20% interest.  This ownership structure is consistent with the structure of the joint venture prior to the recapitalization.  In addition, the Company will continue to provide leasing and management services.  The recapitalization included the repayment of all outstanding mortgage debt previously held by the joint venture, a majority of which was scheduled to mature in July 2017.  The joint venture obtained new mortgage loan financing aggregating $706.7 million (of which the Company’s pro rata share is $141.3 million) collateralized by the 52 assets with a maturity date of July 2022, including extensions.  The Company contributed $46.9 million in cash to fund its pro rata share of the recapitalization and related debt refinancing.

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The remaining three assets not involved in the recapitalization were distributed to the existing partners of DDR Domestic Retail Fund I at the aggregate book value of $74.0 million (of which the Company’s pro rata share was $14.8 million) and contributed to a new joint venture with the same ownership structure, DDR Manatee Liquidating Holdco I.  The Company retained a 20% interest in the joint venture and will continue to provide leasing and management services.  The assets in the joint venture are unencumbered.

Disposition of Shopping Centers

From January 1, 2017 to September 30, 2017, the BRE DDR Retail Holdings III joint venture sold eight assets for an aggregate sales price of $164.3 million and recorded a gain on sale of $30.9 million.  The DDRTC Core Retail Fund joint venture sold one asset for $17.7 million.  The Company’s prorate share of the aggregate gain form these sales was $2.0 million.

 

In January 2017, the Company acquired one shopping center in Chicago, Illinois, for $81.0 million.  This acquisition was accounted for as an asset acquisition and the fair value was allocated as follows (in thousands):

 

Total consideration for the acquisition was paid in cash.  The costs related to the acquisition of this asset were capitalized to real estate assets (Note 1).  Included in the Company’s consolidated statements of operations are $5.1 million in total revenues from the date of acquisition through September 30, 2017, for the acquired property.

 

 

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.  At September 30, 2017, the Company’s loans outstanding had maturity dates ranging from June 2019 to June 2023 at an interest rate of 9.0%.  At September 30, 2017, the Company did not have any loans outstanding that were past due.  The following table reconciles the loans receivable on real estate (in thousands):

 

 

 

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Other assets consist of the following (in thousands):  

 

 

 

The following table discloses certain information regarding the Company’s Revolving Credit Facilities (as defined below) (in millions):

 

 

In September 2017, the Company amended and restated its unsecured revolving credit facility with a syndicate of financial institutions, arranged by J.P. Morgan Chase Bank, N.A., Wells Fargo Securities, LLC, Citizens Bank, N.A., RBC Capital Markets and U.S. Bank National Association (the “Unsecured Credit Facility”).  The Unsecured Credit Facility was amended to increase borrowings of up to $950 million from $750 million and to extend the maturity date to September 2021, if certain financial covenants are maintained.  The amendment also provided for two six-month options to extend the maturity to September 2022 upon the Company’s request and increased the accordion feature for expansion of availability up to $1.45 billion from $1.25 billion, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level.  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 September 30, 2017.

The Company also maintains a $50 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 was also amended in September 2017 to reflect substantially the same terms as amended 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 LIBOR, plus a specified spread (1.0% at September 30, 2017) or the Prime Rate, as defined in the respective facility.  The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Moody’s Investors Service, Inc. and S&P Global Ratings and their successors.  The Company is required to comply with certain covenants under the Revolving Credit Facilities relating to total outstanding indebtedness, secured indebtedness, value of unencumbered real estate assets and fixed charge coverage.  The Company was in compliance with these financial covenants at September 30, 2017.  

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Senior Notes

 

In August 2017, the Company issued $350.0 million aggregate principal amount of 3.900% senior unsecured notes due August 2024.  An effective discount of $1.0 million was recorded.  Total fees, including underwriting discounts, incurred by the Company were $2.9 million.  In May 2017, the Company issued $450.0 million aggregate principal amount of 4.700% senior unsecured notes due June 2027.  An effective discount of $0.8 million was recorded.  Total fees, including underwriting discounts, incurred by the Company were $4.0 million.  In September 2017, the Company repaid all of its 7.875% senior unsecured notes due September 2020 with an aggregate principal amount outstanding of $300.0 million.  In connection with the redemption of the senior unsecured notes due September 2020, the Company paid a make-whole amount of $51.2 million.  In July 2017, the Company repaid all of its 4.75% senior unsecured notes due April 2018 with an aggregate principal amount outstanding of $300.0 million.  In connection with the redemption of the senior unsecured notes due April 2018, the Company paid a make-whole amount of $7.3 million.  These make-whole amounts are included in Other income (expense), net, in the Company’s consolidated statements of operations.

Unsecured Term Loan

In September 2017, the Company amended its $400 million unsecured term loan with Wells Fargo Bank, National Association, as administrative agent, and PNC Bank, National Association and KeyBank National Association, as syndication agents (the “Unsecured Term Loan”).  As a result, the maturity date of $200 million of Tranche A loans under the Unsecured Term Loan was extended to January 2018, with two one-year extension options upon the Company’s request, provided certain conditions are satisfied and the maturity date for the remaining $200 million of Tranche B loans under the facility was extended to January 2023.  The Company may increase the amount of the facility provided that lenders agree to certain terms.  The interest rate remains unchanged at variable rates based on LIBOR as defined in the loan agreements, plus a specified spread based on the Company’s long-term senior unsecured debt rating (1.1% at September 30, 2017).  

Scheduled Principal Repayments

The Company’s scheduled principal repayments, after reflecting the 2017 refinancings and repayments, are presented in Liquidity, Capital Resources and Financing Activities section of Management’s Discussion and Analysis included herein.

 

The following methods and assumptions were used by the Company in estimating fair value disclosures of financial instruments:

Notes Receivable and Advances to Affiliates

The fair value is estimated using a discounted cash flow analysis in which the Company uses 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 $348.7 million and $445.2 million at September 30, 2017 and December 31, 2016, respectively, as compared to the carrying amounts of $347.3 million and $443.3 million, respectively.  

Debt

The fair market value of senior 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 and all other debt 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 are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.  

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Debt instruments with carrying values that are different than estimated fair values are summarized as follows (in thousands):

 

 

Hurricane Casualty and Impairment Loss

In September 2017, Hurricane Irma made landfall in both Puerto Rico and Florida, and Hurricane Maria made landfall in Puerto Rico.  The Company’s Florida assets were minimally impacted by Hurricane Irma, with the majority of repair costs related to debris removal.  

At September 30, 2017, the Company owned 12 assets in Puerto Rico, aggregating 4.4 million square feet of Company-owned GLA.  One of the 12 assets (Plaza Palma Real, consisting of approximately 0.4 million of Company-owned GLA) was severely damaged; it is currently not operational, except for one tenant, and is not expected to open for the foreseeable future. The other 11 assets incurred varying degrees of damage, including some tenant spaces currently untenantable.  The damage consisted primarily of roof and HVAC system damage and water intrusion.  As of October 31, 2017, nine of these assets had partial to full utility power and were available for occupancy by some tenants, although due to the damage, portions of these properties remain unavailable for occupancy.  With respect to the Company’s anchor spaces comprising greater than 25,000 square feet of GLA in Puerto Rico, 24, or 73% of such tenants, had utility or generator power and were open as of October 31, 2017, including six of seven Walmart stores, a Sam's Club, both Home Depot stores, all three Sears/Kmart and all five grocery stores (including Pueblo, Econo and Selectos Supermarket).

The Company has completed debris removal, roof repairs, interior building mitigation, repairs to building exteriors and repairs to mechanical systems to prevent further water intrusion and related damages at its Puerto Rico shopping centers and continues to assess the scope of necessary repairs.  The schedule of additional repair work, as well as the ability to turn over space to tenants, is highly dependent on the full restoration of utilities at all of its shopping centers in Puerto Rico, and the availability of building materials, supplies and skilled labor.  The Company does not currently know when full utility service will be restored at the shopping centers with partial or no service, or the extent of the services that will be provided in the interim, if any.  As such, the Company is unable to estimate when repair work will be completed or when the remaining tenants will reopen for business.

The Company maintains insurance on its assets in Puerto Rico with policy limits of approximately $330 million for both property damage and business interruption.  The Company's insurance policies are subject to various terms and conditions, including a combined property damage and business interruption deductible of approximately $6.0 million.  The Company expects that its casualty insurance and business interruption claims to include the costs to clean up, repair and rebuild, as well as lost revenue.  The Company also expects to receive casualty insurance proceeds from certain U.S.-based anchor tenants that maintain property insurance of their Company-owned premises.  The Company is unable to estimate the impact of potential increased costs associated with resource constraints in Puerto Rico relating to building materials, supplies and labor.  The Company believes it maintains adequate insurance coverage on each of its properties and is working closely with the insurance carriers to obtain the maximum amount of insurance recovery provided under the policies. However, the Company can give no assurances as to the amounts of such claims, timing of payments and resolution of the claims.

As of September 30, 2017, the estimated net book value of the property damage written off for damage to the Company’s Puerto Rico assets was $64.8 million.  However, the Company is still assessing the impact of the hurricane on its properties, and the final net book value write-offs could vary significantly from this estimate.  Any changes to this estimate will be recorded in the periods in which they are determined.  

The Company recorded a corresponding receivable of $59.7 million for estimated insurance recoveries related to the net book value of the property damage written off, as the Company believes it is probable that the insurance recovery, net of the deductible, will exceed the net book value of the damaged property.  The receivable is recorded within Accounts Receivable on the Company’s consolidated balance sheet as of September 30, 2017.  The net impact of $5.1 million representing the property damage insurance

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deductible is reflected as a hurricane casualty and impairment loss in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2017.  Based on current replacement cost estimates, insurance proceeds are expected to equal or exceed the net book value of the impacted assets; therefore, the Company does not expect to record a loss after insurance proceeds, excluding the impact of the deductible.  

The Company’s business interruption insurance covers lost revenue through the period of property restoration and for up to 365 days following completion of restoration.  The Company recorded a reduction in rental revenues of $2.6 million for Hurricanes Irma and Maria for the three and nine months ended September 30, 2017, related to lost tenant revenue that is expected to be partially defrayed by insurance proceeds.  The Company estimates the waiting period deductible for the business interruption claim to be $0.9 million for the period ended September 30, 2017.  The Company will record revenue for covered business interruption in the period it determines that it is probable it will be compensated. This income recognition criteria will likely result in business interruption insurance recoveries being recorded in a period subsequent to the period that the Company experiences lost revenue from the damaged properties.  In October 2017, the Company received an advance of approximately $2 million of insurance proceeds related to business interruption insurance claims.  This advance has not been reflected in the third-quarter financial statements because it was received after the end of the period.  

At September 30, 2017, six of the Puerto Rico assets were encumbered by mortgage notes aggregating $264.8 million at a weighted-average interest rate of 4.9%.  The Company has contacted the mortgage holders and is complying with all lender requirements and mortgage covenants.

Accrued Expense

The Company recorded separation charges aggregating $16.6 million for the nine months ended September 30, 2017.  The aggregate charge included $9.4 million related to the March 2, 2017, executive management transition, which was the result of the termination without cause of several of the Company’s executives under the terms of their respective employment agreements.  The remaining $7.2 million related to the elimination of 65 positions, including nine officer level roles, in April 2017 as part of organization changes to further centralize key operational decision-making.  The total nine-month charge included stock-based compensation expense of approximately $4.5 million related to the acceleration of expense associated with the grant date fair value of the unvested stock-based awards.  At September 30, 2017, approximately $1.4 million was included in accounts payable and accrued expenses related to the aggregate charges in the Company’s consolidated balance sheet.  

In June 2017, the Company issued $175.0 million aggregate liquidation preference of its newly designated 6.375% Class A cumulative redeemable preferred shares at a price of $500.00 per share (or $25.00 per depositary share) and incurred $6.1 million in issuance costs reflected in paid-in capital.

 

 

The changes in accumulated other comprehensive loss by component are as follows (in thousands):

 

 

 

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In 2017, the Company recorded impairment charges and reserves based on the difference between the carrying value of the assets or investments and the estimated fair market value as follows (in millions):  

 

Items Measured at Fair Value on a Non-Recurring Basis

The Company is required to assess the fair value of certain impaired consolidated and unconsolidated joint venture investments.  The valuation of impaired real estate assets and investments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset, as well as the income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence.  In general, the Company considers multiple valuation techniques when measuring fair value of an investment.  However, in certain circumstances, a single valuation technique may be appropriate.  

For operational real estate assets, the significant valuation assumptions included the capitalization rate used in the income capitalization valuation as well as the projected property net operating income.  For projects under development or not at stabilization, the significant valuation assumptions included the discount rate, the timing and the estimated costs for the construction completion and project stabilization, projected net operating income and the exit capitalization rate.  For the valuation of the preferred equity interests, the significant assumptions used in the discounted cash flow analysis included the discount rate, projected net operating income, the timing of the expected redemption and the exit capitalization rates.  These valuations were calculated based on market conditions and assumptions made by management at the time the valuation adjustments and impairments were recorded, which may differ materially from actual results if market conditions or the underlying assumptions change.  

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 nine months ended September 30, 2017.  The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions).  

 

 

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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, except price per acre (in thousands)):

 

The following table provides a reconciliation of net (loss) income from continuing operations and the number of common shares used in the computations of “basic” earnings per share (“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):

 

 

Shares subject to issuance under the Company’s 2016 VSEP were not considered in the computation of diluted EPS for the three and nine months ended September 30, 2017 and 2016, as the calculation was anti-dilutive.  

 

 

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The tables below present information about the Company’s reportable operating segments (in thousands):

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides readers with a perspective from management on the Company’s financial condition, results of operations, liquidity and other factors that may affect the Company’s future results.  The Company believes it is important to read the MD&A in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2016, as well as other publicly available information.

Executive Summary

The Company is a self-administered and self-managed Real Estate Investment Trust (“REIT”) in the business of acquiring, owning, developing, redeveloping, expanding, leasing, financing and managing shopping centers.  As of September 30, 2017, the Company’s portfolio consisted of 286 shopping centers (including 143 shopping centers owned through joint ventures) aggregating approximately 97 million total square feet of gross leasable area (“GLA”).  These properties consist of 274 shopping centers owned in the United States and 12 in Puerto Rico.  At September 30, 2017, the aggregate occupancy of the Company’s operating shopping center portfolio was 91.5% and the average annualized base rent per occupied square foot was $15.53.  

For the nine months ended September 30, 2017, net income attributable to common shareholders decreased compared to the prior year, primarily due to a $60.6 million valuation allowance recorded on the Company’s preferred investments in two joint ventures, a $66.4 million loss on debt retirement, a $16.6 million aggregate charge associated with the executive management transition and staff restructuring and a $6.1 million hurricane casualty and impairment loss, which were partially offset by an increase in gain on sale of real estate assets and lower impairment charges.

The following provides an overview of the Company’s key financial metrics (see Non-GAAP Financial Measures, described later in this section) (in thousands, except per share amounts):

 

In March 2017, the Company named a new executive team, including David Lukes as president and chief executive officer, Michael Makinen as chief operating officer and Matthew Ostrower as chief financial officer.  The management team, led by Mr. Lukes, completed several key strategic objectives in 2017, which included the streamlining of the Company’s organizational structure, executing several balance sheet improvements, and completing a portfolio review process.  The Company made several organizational changes in an effort to centralize decision-making and lower operating costs, which resulted in the elimination of 65 positions, including nine officer roles, and are expected to generate an annualized stabilized reduction to general and administrative expenses of approximately $6 million.  As outlined below, the Company also took several steps to strengthen its balance sheet, extend its debt maturity profile and reduce its overall risk profile.  Furthermore, the Company made progress toward, and remains committed to lowering leverage and improving overall liquidity.  One of the keys to achieving this objective is to recycle asset disposition proceeds toward its deleveraging effort.  The Company completed a portfolio review process to not only identify asset disposition targets but also support its capital allocation strategy.  Looking forward, the Company seeks to create shareholder value through disciplined capital allocation and best-in-class operations that it believes should translate into net asset value growth over time.  The following is a summary of the Company’s significant transactional and operational activity execution in the first nine months of 2017:

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Third Quarter 2017 - Hurricane Casualty Loss

In September 2017, Hurricane Irma made landfall in both Puerto Rico and Florida, and Hurricane Maria made landfall in Puerto Rico.  The Company’s Florida assets were minimally impacted by Hurricane Irma.  However, the Company’s 12 shopping centers in Puerto Rico and 36 employees based on the island were significantly impacted by Hurricane Maria.  Management’s first priority has been to account for and provide necessary resources to our Puerto Rico-based team.  Second, the Company has been working diligently to make all properties physically safe and protected from further water intrusion.  Third, the Company has worked to remove debris and provide generator power where possible so that tenants can open as soon as possible.  Finally, the Company has been working with its insurance company to assess damage, arrange for advances on business interruption insurance, and begin to make permanent repairs to assets wherever possible. One of the Company’s 12 shopping centers was severely damaged; except for one tenant, it is currently not operational and is not expected to open for the foreseeable future. The other 11 assets incurred varying degrees of damage, including some tenant spaces currently untenantable.  As of November 1, 2017, nine of the assets had partial to full utility power and were available for occupancy by some tenants, although, due to the damage, portions of these properties remain unavailable for occupancy.  The Company estimates its aggregate casualty insurance claim to be in the range of $125 – $150 million, which includes the costs to clean up, repair and rebuild as well as lost revenue estimated through December 31, 2017.  The Company maintains insurance on its assets in Puerto Rico with policy limits of approximately $330 million for both property damage and business interruption.  See further discussion in both “Contractual Obligations and Other Commitments” and Note 9, “Commitments and Contingencies,” to the Company’s consolidated financial statements included herein.

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RESULTS OF OPERATIONS

Shopping center properties owned as of January 1, 2016, but excluding properties under development or redevelopment and those sold by the Company, are referred to herein as the “Comparable Portfolio Properties.”

Revenues from Operations (in thousands)

 

 

 

The following tables present the statistics for the Company’s portfolio affecting base and percentage rental revenues summarized by the following portfolios:  combined shopping center portfolio, wholly-owned shopping center portfolio and joint venture shopping center portfolio.

 

 

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Expenses from Operations (in thousands)

 

 

Depreciation expense for Comparable Portfolio Properties was lower in 2017, primarily as a result of accelerated depreciation charges in 2016 related to changes in the useful lives of certain assets.  

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The Company continues to expense certain internal leasing salaries, legal salaries and related expenses associated with leasing and re-leasing of existing space.  However, the Company expects that upon adoption of the leasing standard in 2019, certain general and administrative expenses that are currently capitalized may be required to be expensed.

Other Income and Expenses (in thousands)

 

The weighted-average loan receivable outstanding and weighted-average interest rate, including loans to affiliates, are as follows:

 

 

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The reduction in the weighted average debt outstanding from the comparable prior-year period is a result of the Company’s overall strategy to reduce leverage.  The weighted-average interest rate (based on contractual rates and excluding fair market value of adjustments and debt issuance costs) was 4.0% and 4.3% for the comparable periods.  

Interest costs capitalized in conjunction with development and redevelopment projects and unconsolidated development and redevelopment joint venture interests were $0.5 million and $1.4 million for the three and nine months ended September 30, 2017, respectively, compared to $0.7 million and $2.6 million, respectively, for the comparable periods in 2016.  The decrease in the amount of interest costs capitalized is a result of a change in the mix of active development projects year over year.

Other Items (in thousands)

 

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Disposition of Real Estate, Non-Controlling Interests and Net (Loss) Income (in thousands)

 

 

NON-GAAP FINANCIAL MEASURES

Definition and Basis of Presentation

The Company believes that Funds from Operations (“FFO”) and Operating FFO, both non-GAAP financial measures, provide additional and useful means to assess the financial performance of REITs.  FFO and Operating FFO are frequently used by the real estate industry, as well as securities analysts, investors and other interested parties, to evaluate the performance of REITs.

FFO excludes GAAP historical cost depreciation and amortization of real estate and real estate investments, which assume that the value of real estate assets diminishes ratably over time.  Historically, however, real estate values have risen or fallen with market conditions, and many companies use different depreciable lives and methods.  Because FFO excludes depreciation and amortization unique to real estate and gains and losses from depreciable property dispositions, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, interest costs and acquisition, disposition and development activities.  This provides a perspective of the Company’s financial performance not immediately apparent from net income determined in accordance with GAAP.

FFO is generally defined and calculated by the Company as net income (loss) (computed in accordance with GAAP), adjusted to exclude (i) preferred share dividends, (ii) gains and losses from disposition of depreciable real estate property and related investments, which are presented net of taxes, (iii) impairment charges on depreciable real estate property and related investments and (iv) certain non-cash items.  These non-cash items principally include real property depreciation and amortization of intangibles, equity income (loss) from joint ventures and equity income (loss) from non-controlling interests and adding the Company’s proportionate share of FFO from its unconsolidated joint ventures and non-controlling interests, determined on a consistent basis.  The Company’s calculation of FFO is consistent with the definition of FFO provided by the National Association of Real Estate Investment Trusts (“NAREIT”).  

The Company believes that certain gains and charges recorded in its operating results are not comparable or reflective of its core operating performance.  As a result, the Company also computes Operating FFO and discusses it with the users of its financial statements, in addition to other measures such as net income (loss) determined in accordance with GAAP and FFO.  Operating FFO is generally defined and calculated by the Company as FFO excluding certain charges and gains that management believes are not comparable and indicative of the results of the Company’s operating real estate portfolio.  Such adjustments include gains on the sale of and/or change in control of interests, gains/losses on the sale of non-depreciable real estate, impairments of non-depreciable real estate, gains/losses on the early extinguishment of debt, transaction costs and other restructuring type costs.  The disclosure of these charges and gains is regularly requested by users of the Company’s financial statements.  The adjustment for these charges and gains may not be comparable to how other REITs or real estate companies calculate their results of operations, and the Company’s calculation of Operating FFO differs from NAREIT’s definition of FFO.  Additionally, the Company provides no assurances that these charges and gains are non-recurring.  These charges and gains could be reasonably expected to recur in future results of operations.

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These measures of performance are used by the Company for several business purposes and by other REITs.  The Company uses FFO and/or Operating FFO in part (i) as a disclosure to improve the understanding of the Company’s operating results among the investing public, (ii) as a measure of a real estate asset’s performance, (iii) to influence acquisition, disposition and capital investment strategies and (iv) to compare the Company’s performance to that of other publicly traded shopping center REITs.

For the reasons described above, management believes that FFO and Operating FFO provide the Company and investors with an important indicator of the Company’s operating performance.  They provide recognized measures of performance other than GAAP net income, which may include non-cash items (often significant).  Other real estate companies may calculate FFO and Operating FFO in a different manner.

Management recognizes the limitations of FFO and Operating FFO when compared to GAAP’s net income.  FFO and Operating FFO do not represent amounts available for dividends, capital replacement or expansion, debt service obligations or other commitments and uncertainties.  Management does not use FFO or Operating FFO as an indicator of the Company’s cash obligations and funding requirements for future commitments, acquisitions or development activities.  Neither FFO nor Operating FFO represents cash generated from operating activities in accordance with GAAP, and neither is necessarily indicative of cash available to fund cash needs.  Neither FFO nor Operating FFO should be considered an alternative to net income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of liquidity.  FFO and Operating FFO are simply used as additional indicators of the Company’s operating performance.  The Company believes that to further understand its performance, FFO and Operating FFO should be compared with the Company’s reported net income (loss) and considered in addition to cash flows determined in accordance with GAAP, as presented in its consolidated financial statements.  Reconciliations of these measures to their most directly comparable GAAP measure of net income (loss) have been provided below.

Reconciliation Presentation

FFO and Operating FFO attributable to common shareholders were as follows (in thousands):

 

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The Company’s reconciliation of net (loss) income attributable to common shareholders to FFO attributable to common shareholders and Operating FFO attributable to common shareholders is as follows (in thousands).  The Company provides no assurances that these charges and gains are non-recurring.  These charges and gains could reasonably be expected to recur in future results of operations.

 

 

 

FFO at DDR ownership interests considers the impact of basis differentials.  Joint ventures’ FFO and Operating FFO are summarized as follows (in thousands):

 

 

 

 

 

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LIQUIDITY, CAPITAL RESOURCES AND FINANCING ACTIVITIES

The Company periodically evaluates opportunities to issue and sell additional debt or equity securities, obtain credit facilities from lenders, or repurchase or refinance long-term debt for strategic reasons or to further strengthen the financial position of the Company.  In the first nine months of 2017, the Company completed two public debt offerings and an issuance of preferred shares in order to refinance maturing debt and improve duration.  

The Company’s consolidated and unconsolidated debt obligations generally require monthly or semi-annual payments of principal and/or interest over the term of the obligation.  While the Company currently believes it has several viable sources to obtain capital and fund its business, including capacity under its facilities described below, no assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.  

The Company has historically accessed capital sources through both the public and private markets.  Acquisitions, developments and redevelopments are generally financed through cash provided from operating activities, Revolving Credit Facilities (as defined below), mortgages assumed, secured debt, unsecured debt, common and preferred equity offerings, joint venture capital and asset sales.  Total consolidated debt outstanding was $4.0 billion and $4.5 billion at September 30, 2017 and December 31, 2016, respectively.

Revolving Credit Facilities

In September 2017, the Company amended and restated its unsecured revolving credit facility with a syndicate of financial institutions, arranged by J.P. Morgan Chase Bank, N.A., Wells Fargo Securities, LLC, Citizens Bank, N.A., RBC Capital Markets and U.S. Bank National Association (the “Unsecured Credit Facility”).  The Unsecured Credit Facility was amended to increase  the maximum amount available to be drawn under the facility from $750 million to $950 million, extend the maturity date to September 2021, add two six-month options to extend the maturity to September 2022 upon the Company’s request and increase the accordion feature for expansion of availability up to $1.45 billion from $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.  The Company also amended its unsecured revolving credit facility with PNC Bank, National Association, which provides for maximum borrowing availability of $50 million (together with the Unsecured Credit Facility, the “Revolving Credit Facilities”), to reflect substantially the same terms as 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 LIBOR, plus a specified spread (1.0% at September 30, 2017) or the Prime Rate, as defined in the respective facility.  The specified spreads vary depending on the Company’s long-term senior unsecured debt ratings from Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings and their successors (“S&P”).

The Revolving Credit Facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness are, or may be, issued contain certain financial and operating covenants including, among other things, leverage ratios and debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions.  These credit facilities and indentures also contain customary default provisions including the failure to make timely payments of principal and interest payable thereunder, the failure to comply with the Company’s financial and operating covenants, the occurrence of a material adverse effect on the Company and the failure of the Company or its majority-owned subsidiaries (i.e., entities in which the Company has a greater than 50% interest) to pay, when due, certain indebtedness in excess of certain thresholds beyond applicable grace and cure periods.  In the event the Company’s lenders or note holders declare a default, as defined in the applicable agreements governing the debt, the Company may be unable to obtain further funding, and/or an acceleration of any outstanding borrowings may occur.  As of September 30, 2017, the Company was in compliance with all of its financial covenants in the agreements governing its debt.  Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities.  The Company believes it will continue to operate in compliance with these covenants in 2018 and beyond.

Certain of the Company’s credit facilities and indentures permit the acceleration of the maturity of the underlying debt in the event certain other debt of the Company has been accelerated. Furthermore, a default under a loan by the Company or its affiliates, a foreclosure on a mortgaged property owned by the Company or its affiliates or the inability to refinance existing indebtedness may have a negative impact on the Company’s financial condition, cash flows and results of operations.  These facts, and an inability to predict future economic conditions, have led the Company to continue to increase financial flexibility.

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Senior Notes

In August 2017, the Company issued $350.0 million aggregate principal amount of 3.900% senior unsecured notes due August 2024.  Net proceeds from the issuance were used to repay all of the Company’s $300.0 million aggregate principal amount of 7.875% senior unsecured notes due September 2020.  In connection with this repayment, the Company paid $51.2 million in make-whole premiums.

In May 2017, the Company issued $450.0 million aggregate principal amount of 4.700% senior unsecured notes due June 2027.  Net proceeds from the issuance were used to repay amounts outstanding under the Revolving Credit Facilities and for general corporate purposes.  In July 2017, the Company repaid all of its $300.0 million aggregate principal amount of 4.75% senior unsecured notes due April 2018 in part with a portion of the net proceeds of the 4.700% senior unsecured notes due June 2027 and the net proceeds from its $175.0 million aggregate liquidation preference of 6.375% Class A cumulative redeemable preferred shares as described below.  In connection with this repayment, the Company paid $7.3 million in make-whole premiums.

Equity

Preferred Shares

In June 2017, the Company issued $175.0 million aggregate liquidation preference, of its newly designated 6.375% Class A cumulative redeemable preferred shares at a price of $500.00 per share (or $25.00 per depositary share).  

Common Shares

The Company has a $250 million continuous equity program.  At November 1, 2017, the Company had $250.0 million available for the future issuance of common shares under that program.

Consolidated Indebtedness – as of September 30, 2017

The Company expects to fund its obligations from available cash, current operations and utilization of its Revolving Credit Facilities; however, the Company may issue long-term debt and/or equity securities in lieu of, or in addition to, borrowing under its Revolving Credit Facilities.   The Company intends to continue to maintain a long-term financing strategy with limited reliance on short-term debt.  The Company believes its Revolving Credit Facilities are sufficient for its liquidity strategy and longer-term capital structure needs.  Part of the Company’s overall strategy includes scheduling future debt maturities in a balanced manner over the long-term.  

The following depicts the Company’s consolidated debt maturities at September 30, 2017, and forecasted thirteen months (October 2018), after deducting debt that has refinancing options, and compares that amount to the cash and restricted cash available to fund debt repayments and availability of the Revolving Credit Facilities (in millions):

 

 

As a result of the refinancings and repayments through November 1, 2017, the scheduled principal payments of the Revolving Credit Facilities and unsecured and secured indebtedness, excluding extension options, are as follows (in thousands):

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At November 1, 2017, the Company’s borrowing capacity on the Revolving Credit Facilities and cash on hand were sufficient to repay debt maturities through 2018.  The Company is looking to strengthen its balance sheet and reduce leverage and, as a result, may utilize net asset sale proceeds to repay debt.  No assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.  These sources of funds could be affected by various risks and uncertainties (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016).

As of November 1, 2017, the Company has addressed all of its 2017 consolidated debt maturities, as well as all of its 2018 consolidated mortgage debt maturities.  Management believes the scheduled debt maturities in future years are manageable.  The Company continually evaluates its debt maturities and, based on management’s assessment, believes it has viable financing and refinancing alternatives.  The Company seeks to manage its debt maturities through executing a strategy to extend debt duration, increase liquidity, lower leverage and improve the Company’s credit profile with the focus of lowering the Company's balance sheet risk and cost of capital.  The result of the unsecured debt and preferred share offerings in the second and third quarters of 2017 and the application of the proceeds therefrom was to extend the Company’s debt duration.

Unconsolidated Joint Ventures Mortgage Indebtedness – as of September 30, 2017

The debt maturities of the Company’s unconsolidated joint ventures at September 30, 2017, and forecasted thirteen months (October 2018), are as follows (in millions):

 

 

It is expected that the joint ventures will fund these obligations from refinancing opportunities, including extension options, or possible asset sales.  No assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.

Cash Flow Activity

The Company’s core business of leasing space to well-capitalized retailers continues to generate consistent and predictable cash flow after expenses, interest payments and preferred share dividends.  This capital is available for use at the Company’s discretion for investment, debt repayment and the payment of dividends on common and preferred shares.

The Company’s cash flow activities are summarized as follows (in thousands):

 

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Changes in cash flow for the nine months ended September 30, 2017, compared to the prior year comparable period are described as follows:

Operating Activities:  Cash provided by operating activities decreased $48.8 million, primarily due to the following:

Investing Activities:  Cash provided by investing activities increased $235.6 million, primarily due to the following:

Financing Activities:  Cash used for financing activities increased $206.8 million, primarily due to the following:

Dividend Distribution

The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable income with declared common and preferred share cash dividends of $230.6 million and $225.3 million for the nine months ended September 30, 2017 and 2016, respectively.  Because actual distributions were greater than 100% of taxable income, federal income taxes were not incurred by the Company in the first nine months of 2017.

The Company declared a quarterly dividend of $0.19 per common share for each of the first three quarters of 2017.  The Board of Directors of the Company expects to continue to monitor the 2017 dividend policy and provide for adjustments as determined to be in the best interests of the Company and its shareholders to maximize the Company’s free cash flow while still adhering to REIT payout requirements.  

 

 

SOURCES AND USES OF CAPITAL

Strategic Transaction Activity

The Company remains committed to strengthening the balance sheet, improving liquidity and lowering leverage, as well as lowering its overall risk profile.  Asset sales continue to represent a potential source of proceeds to be used to achieve these objectives.

Dispositions

As part of the Company’s overall deleveraging strategy, the Company had been marketing less strategic assets for sale.  The new executive management team has evaluated the portfolio on an asset-by-asset basis to determine the most prudent investment decisions.  Changes in investment strategies for assets may impact the Company’s impairment assumptions for those properties.  The disposition of certain assets could result in a loss or impairment recorded in future periods.  The Company evaluates all potential sale opportunities taking into account the long-term growth prospects of the assets, the use of proceeds and the impact to the Company’s balance sheet, in addition to the impact on operating results.

During the nine months ended September 30, 2017, the Company sold 25 shopping center properties, aggregating 4.1 million square feet, which, together with land sales and loan repayments, generated proceeds totaling $506.3 million.  The shopping center sales include two assets in Puerto Rico in June 2017, aggregating 0.4 million square feet, for an aggregate sales price of $57.3 million.  The Company recorded a net gain of $127.0 million.  In addition, two of the Company’s unconsolidated joint ventures sold nine shopping center assets for a gross sales price of $182.0 million.  In October 2017, one asset was sold by the Company and one by the Company’s unconsolidated joint venture for an aggregate price of $190.0 million.  In addition, the Company received $48.6 million in preferred equity repayments from the unconsolidated joint venture asset sale.

DDRM Properties (Recapitalization of DDR Domestic Retail Fund I)

In June 2017, the Company and an affiliate of Madison International Realty (“Madison”) recapitalized a joint venture with 52 shopping centers previously owned by the Company and various partners through the DDR Domestic Retail Fund I (“DRF I”), totaling $1.05 billion.  Madison International Real Estate Liquidity Fund VI, an investment fund managed by Madison, acquired 80% of the common equity and an affiliate of the Company retained its 20% interest, renamed DDRM Properties.  The ownership structure of DDRM Properties is consistent with the structure of the joint venture prior to the recapitalization.  Three properties previously held by DRF I have been excluded from the recapitalization and are being held in a separate joint venture with the previous partners of

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DRF I, including the Company.  In addition, the Company will continue to provide leasing and management services.  The recapitalization included the repayment of all outstanding mortgage debt previously held by the joint venture, a majority of which was scheduled to mature in July 2017.  The joint venture obtained new mortgage loan financing collateralized by the 52 assets aggregating $706.7 million (of which the Company’s pro rata share was $141.3 million) that with extension options matures in July 2022.  DDR contributed $46.9 million in cash to fund its pro rata share of the recapitalization and related debt refinancing.

Acquisition

In January 2017, the Company acquired 3030 North Broadway in Chicago, Illinois, a 131,748 square foot Company-owned GLA grocery-anchored shopping center, for $81.0 million.  The contract for this acquisition was initially executed in mid-2016, but closing was delayed due to the completion of construction.

Development and Redevelopment Opportunities

One of the important benefits of the Company’s asset class is the ability to phase development and redevelopment projects over time until appropriate leasing levels can be achieved.  To maximize the return on capital spending, the Company has generally adhered to strict investment criteria thresholds.  A key component to the Company’s strategic plan will be the evaluation of additional redevelopment potential within the portfolio, particularly as it relates to the efficient use of the real estate and the Company’s ratio of big box tenants versus small shop tenant space.  

The Company will generally commence construction on various developments and redevelopments only after substantial tenant leasing has occurred.  The Company will continue to closely monitor its expected spending in 2017 for redevelopments, as the Company considers this funding to be discretionary spending.  The Company does not anticipate expending significant funds on joint venture redevelopment projects in 2017.

The Company’s consolidated land holdings are classified in two separate line items on the Company’s consolidated balance sheets included herein: (i) Land and (ii) Construction in Progress and Land.  At September 30, 2017, the $1.9 billion of Land primarily consisted of land that is part of the Company’s shopping center portfolio.  However, this amount also includes a small portion of vacant land composed primarily of outlots or expansion pads adjacent to the shopping center properties.  Approximately 135 acres of this land, which has a recorded cost basis of approximately $17 million, is available for future development.

Included in Construction in Progress and Land at September 30, 2017, was $25 million of recorded costs related to undeveloped land for which active construction never commenced or was previously ceased.  The Company evaluates these assets each reporting period and records an impairment charge equal to the difference between the current carrying value and fair value when the expected undiscounted cash flows are less than the asset’s carrying value.  

Development and Redevelopment Projects

As part of its strategy to develop, expand, improve and re-tenant various properties, at September 30, 2017, the Company has invested approximately $152 million in various consolidated active redevelopment projects and expects to bring at least $80 million of development into service in 2017 on a net basis, after deducting sales proceeds from outlot sales.  

At September 30, 2017, the Company had no significant consolidated development projects.

 

The Company’s major redevelopment projects are typically substantially complete within a year of the construction commencement date.  At September 30, 2017, the Company’s significant consolidated redevelopment projects were as follows (in thousands):

 

 

For redevelopment assets completed in 2017, the assets placed in service were completed at a cost of approximately $114 per square foot.

 

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OFF-BALANCE SHEET ARRANGEMENTS

The Company has a number of off-balance sheet joint ventures with varying economic structures.  Through these interests, the Company has investments in operating properties and one development project.  Such arrangements are generally with institutional investors located throughout the United States.  

The Company’s unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $2.7 billion and $3.1 billion at September 30, 2017 and 2016, respectively (see Item 3. Quantitative and Qualitative Disclosures About Market Risk).  Such mortgages are generally non-recourse to the Company and its partners; however, certain mortgages may have recourse to the Company and its partners in certain limited situations, such as misuse of funds and material misrepresentations.

 

 

CAPITALIZATION

At September 30, 2017, the Company’s capitalization consisted of $4.0 billion of debt, $525.0 million of preferred shares and $3.4 billion of market equity (market equity is defined as common shares and OP Units outstanding multiplied by $9.16, the closing price of the Company’s common shares on the New York Stock Exchange at September 30, 2017), resulting in a debt to total market capitalization ratio of 0.51 to 1.0, as compared to the ratio of 0.43 to 1.0 at September 30, 2016.  The closing price of the common shares on the New York Stock Exchange was $17.43 at September 30, 2016.  The Company’s total debt consisted of the following (in billions):  

 

 

It is management’s strategy to have access to the capital resources necessary to manage the Company’s balance sheet and to repay upcoming maturities.  Accordingly, the Company may seek to obtain funds through additional debt or equity financings and/or joint venture capital in a manner consistent with its intention to operate with a conservative debt capitalization policy and to reduce the Company’s cost of capital by maintaining an investment grade rating with Moody’s, S&P and Fitch Ratings, Inc.  The security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization.  Each rating should be evaluated independently of any other rating.  The Company may not be able to obtain financing on favorable terms, or at all, which may negatively affect future ratings.

The Company’s credit facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants, including, among other things, debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions.  Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities.  In addition, certain of the Company’s credit facilities and indentures may permit the acceleration of maturity in the event certain other debt of the Company has been accelerated.  Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would have a negative impact on the Company’s financial condition and results of operations.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

As of November 1, 2017, the Company had addressed all of its 2017 and 2018 consolidated mortgage debt maturities.  As the Company’s strategy is to repay debt and extend maturity, the Company’ s scheduled principal payments as of November 1, 2017, is presented herein in “Liquidity, Capital Markets and Financing Activities.”  The Company expects to fund future maturities through the utilization of its Revolving Credit Facilities, proceeds from asset sales, cash flow from operations and/or additional debt or equity financings.  No assurance can be provided that these obligations will be repaid as currently anticipated or refinanced.  

In conjunction with the development and redevelopment of shopping centers, the Company had entered into commitments with general contractors aggregating approximately $19.0 million for its consolidated properties at September 30, 2017.  These obligations, composed principally of construction contracts, are generally due within 12 to 24 months, as the related construction costs are incurred, and are expected to be financed through operating cash flow, new or existing construction loans, asset sales or borrowings under the Revolving Credit Facilities.

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The Company routinely enters into contracts for the maintenance of its properties.  These contracts typically can be canceled upon 30 to 60 days’ notice without penalty.  The Company’s purchase order obligations related to the maintenance of its properties and general and administrative expenses are typically payable within one year and are not a material amount.

Hurricane Casualty Loss

In September 2017, Hurricane Irma made landfall in both Puerto Rico and Florida, and Hurricane Maria made landfall in Puerto Rico. The Company’s Florida assets were minimally impacted by Hurricane Irma, with the majority of repair costs related to debris removal.  However, the Company’s 12 assets in Puerto Rico, aggregating 4.4 million square feet of Company-owned GLA, were significantly impacted.  One of the 12 assets (Plaza Palma Real, consisting of approximately 0.4 million of Company-owned GLA) was severely damaged; it is currently not operational, except for one tenant, and is not expected to open for the foreseeable future. The other 11 assets incurred varying degrees of damage, including some tenant spaces currently untenantable.  Such damage consisted primarily of roof, HVAC system and water intrusion.  

As of November 1, 2017, nine of the assets had partial to full utility power and were available for occupancy by some tenants, although due to the damage, portions of these properties remain unavailable for occupancy.  Three of the assets (Plaza Escorial, Plaza Palma Real and Plaza Walmart) are without power.  The Company has completed debris removal, roof repairs, interior building mitigation, repairs to building exteriors and repairs to mechanical systems to prevent further water intrusion and related damages at its Puerto Rico shopping centers and continues to assess the scope of necessary repairs.  The schedule of additional repair work, as well as the ability to turn over space to tenants, is highly dependent on the full restoration of utilities at all of its shopping centers in Puerto Rico, and the availability of building materials, supplies and skilled labor.  The Company does not currently know when full utility service will be restored at the shopping centers with partial or no service, or the extent of the services that will be provided in the interim, if any.  As such, the Company is unable to estimate when repair work will be completed or when the remaining tenants will reopen for business.

The Company maintains insurance on its assets in Puerto Rico with policy limits of approximately $330 million for both property damage and business interruption.  The Company's insurance policies are subject to various terms and conditions, including a combined property damage and business interruption deductible of approximately $6.0 million.  The Company estimates its aggregate casualty insurance claim to be in the range of $125 – $150 million, which includes the costs to clean up, repair and rebuild as well as lost revenue estimated through December 31, 2017.  The amount also includes casualty insurance proceeds due from certain U.S.-based anchor tenants that maintain property insurance of their Company-owned premises.  This estimate does not take into account the increased costs associated with resource constraints in Puerto Rico relating to building materials, supplies and labor. The Company’s ability to repair its properties, and the cost of such repairs, could be negatively impacted by circumstances and events beyond the Company’s control, such as access to building materials and the restoration of utility service.  Therefore, there can be no assurance that the Company’s ability to prepare estimates of property damage and lost rental revenue are accurate.  The Company believes it maintains adequate insurance coverage on each of its properties and is working closely with the insurance carriers to obtain the maximum amount of insurance recovery provided under the policies.  However, the Company can give no assurances as to the amounts of such claims, timing of payments and resolution of the claims.

The Company’s business interruption insurance covers lost revenue through the period of property restoration and for up to 365 days following completion of restoration.  For the three and nine months ended September 30, 2017, rental revenues of $2.6 million for Hurricanes Irma and Maria were not recorded related to lost tenant revenue that is expected to be partially defrayed by insurance proceeds.  The Company will record revenue for covered business interruption claims in the period it determines that it is probable it will be compensated.  As such, there could be a delay between the rental period and the recording of revenue.  The amount of any future lost revenue depends on when properties are reopened for tenants, which, in turn, is highly dependent upon the timing and progress of repairs.  The Company expects to make a claim under its business interruption insurance for this lost revenue.  However, there can be no assurance that insurance claims will be resolved favorably to the Company or in a timely manner.  

See further discussion in Note 9, “Commitments and Contingencies,” of the Company’s consolidated financial statements included herein.

INFLATION

Most of the Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation.  Such provisions include clauses enabling the Company to receive additional rental income from escalation clauses that generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales.  Such escalations are determined by negotiation, increases in the consumer price index or similar inflation indices.  In addition, many of the Company’s leases are for terms of less than 10 years, permitting the Company to seek increased rents at market rates upon renewal.  Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.

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ECONOMIC CONDITIONS

The retail shopping sector continues to be affected by the competitive nature of the retail business including the impact of internet shopping and the competition for market share, as well as general economic conditions, where stronger retailers have out-positioned some of the weaker retailers.  These shifts can force some market share away from weaker retailers, which could require them to downsize and close stores and/or declare bankruptcy.  In many cases, the loss of a weaker tenant or downsizing of space creates a value-add opportunity to re-lease space at higher rents to a stronger retailer.  Overall, the Company believes its portfolio remained stable at September 30, 2017, as evidenced by the consistency in the occupancy rate as further described below.  However, there can be no assurance that the loss of a tenant or downsizing of space will not adversely affect the Company in the future (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016).

Despite the recent tenant bankruptcies, the Company continues to believe there is retailer demand for quality locations within well-positioned shopping centers.  Further, the Company continues to see strong demand from a broad range of retailers for its space, particularly in the off-price sector, which the Company believes is a reflection of the general outlook of consumers who are demanding more value for their dollars.  Many of these retailers have store opening plans for 2017 and 2018.  This is evidenced by the continued stable volume of leasing activity, which was 5.5 million square feet of space for new leases and renewals for the first nine months of 2017, as well as approximately nine million square feet of space for new leases and renewals for the year ended December 31, 2016.  The Company also benefits from a diversified tenant base, with only two tenants whose annualized rental revenue equals or exceeds 3% of the Company’s annualized consolidated revenues plus the Company’s proportionate share of unconsolidated joint venture revenues (TJX Companies at 4.0% and Bed Bath & Beyond at 3.5%).  Other significant tenants include Walmart, Target, PetSmart, Dick’s Sporting Goods, Ross Stores, AMC Theatres, Lowe’s, Ulta and Publix, all of which have relatively strong credit ratings, remain well-capitalized and have outperformed other retail categories on a relative basis over time.  In addition, several of the Company’s big box tenants (Walmart, Dick’s Sporting Goods, TJX Companies and Target) have been adapting to an omni-channel retail environment, creating positive overall sales growth over the prior few years.  The Company believes these tenants will continue providing it with a stable revenue base for the foreseeable future, given the long-term nature of these leases.  Moreover, the majority of the tenants in the Company’s shopping centers provide day-to-day consumer necessities with a focus toward value and convenience, versus high-priced discretionary luxury items, which the Company believes will enable many of its tenants to outperform even in a challenging economic environment.

The Company believes that the quality of its shopping center portfolio is strong, as evidenced by the high historical occupancy rates and consistent growth in the average annualized base rent per occupied square foot.  Historical occupancy has generally ranged from 92% to 96% since the Company’s initial public offering in 1993.  The shopping center portfolio occupancy was 91.5% at September 30, 2017, 93.3% at December 31, 2016 and 93.0% at September 30, 2016.  The net decrease in occupancy in the first nine months of 2017 primarily was attributed to expiring anchor leases that were not renewed and tenant bankruptcies, as well as the impact of asset sales with rates that were slightly above the portfolio average occupancy.  The total portfolio average annualized base rent per occupied square foot was $15.53 at September 30, 2017, as compared to $15.00 at December 31, 2016, and $14.72 at September 30, 2016.  The increase primarily was due to the sale of lower quality assets and the acquisition of shopping centers with higher growth potential, as well as continued lease up and renewal of the existing portfolio at positive rental spreads.  Moreover, the Company has been able to achieve these results without significant capital investment in tenant improvements or leasing commissions.  The weighted-average cost of tenant improvements and lease commissions estimated to be incurred over the expected lease term for new leases executed during the first nine months of 2017 was only $4.88 per rentable square foot.  The Company generally does not expend a significant amount of capital on lease renewals.  The quality of the property revenue stream is high and consistent, as it is generally derived from retailers with good credit profiles under long-term leases, with very little reliance on overage rents generated by tenant sales performance.  The Company understands the risks posed by the economy, but believes that the position of its portfolio and the general diversity and credit quality of its tenant base should enable it to successfully navigate through potentially challenging economic times.

As disclosed above in “Contractual Obligations and Commitments,” at September 30, 2017, the Company owned 12 assets on the island of Puerto Rico aggregating 4.4 million square feet of Company-owned GLA.  The Company sold two assets in Puerto Rico in June 2017 for a gross sales price aggregating $57.3 million.  The 12 owned assets represent 11.4% of the Company’s total consolidated revenue and 11.3% of the Company’s consolidated revenue less operating expenses (i.e., net operating income) for the nine months ended September 30, 2017.  These assets account for 6.2% of Company-owned GLA, including the unconsolidated joint ventures at September 30, 2017.  There is continued concern about the status of the Puerto Rican economy, the ability of the government of Puerto Rico to meet its financial obligations and the impact of any government default on the economy of Puerto Rico.  The impact of Hurricane Maria has further exacerbated these concerns.  The Company’s assets experienced varying degrees of damage due to Hurricane Maria.  The Company has been actively working with its insurer relating to both the property damage and business interruption claims.  See Note 9, “Commitments and Contingencies,” to the Company’s consolidated financial statements included herein.  The Company believes that the tenants in these assets (many of which are Continental U.S. retailers such as Walmart and TJX Companies) typically cater to the local consumer’s desire for value and convenience and often provide consumers with day-

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to-day necessities and should withstand redevelopment pressures and reopen their locations in Puerto Rico.  The Company further believes that these tenants represent a source of stable, high-quality cash flow for the Company’s assets.  Nonetheless, the Company’s Board of Directors and management continue to evaluate its investment in the 12 assets and may determine to dispose of all or a portion of these assets.  There can be no assurance that the hurricane relief efforts will be completed in a timely manner, or at all, or that the economic conditions in Puerto Rico will not deteriorate further, which could materially and negatively impact consumer spending and ultimately adversely affect the Company’s assets in Puerto Rico or its ability to dispose of the properties on commercially reasonable terms, or at all (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016).

NEW ACCOUNTING STANDARDS

New Accounting Standards are more fully described in Note 1, “Nature of Business and Financial Statement Presentation,” of the Company’s consolidated financial statements included herein.

FORWARD-LOOKING STATEMENTS

Management’s discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this report.  Historical results and percentage relationships set forth in the Company’s consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations.  The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods.  Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations.  Although the Company believes that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved.  For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements.  Without limiting the foregoing, the words “will,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements.  Readers should exercise caution in interpreting and relying on forward-looking statements because such statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements and that could materially affect the Company’s actual results, performance or achievements.  For additional factors that could cause the results of the Company to differ materially from those indicated in the forward-looking statements, please refer to Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

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The Company’s primary market risk exposure is interest rate risk.  The Company’s debt, excluding unconsolidated joint venture debt (adjusted to reflect the $76.9 million of variable-rate debt that LIBOR was swapped to at a fixed rate of 2.8% at December 31, 2016), is summarized as follows:

 

 

The Company’s unconsolidated joint ventures’ indebtedness at its carrying value, adjusted to reflect the $42.0 million of variable-rate debt ($2.1 million at the Company’s proportionate share) that LIBOR was swapped to at a fixed rate of 1.9% at September 30, 2017 and December 31, 2016, is summarized as follows:

 

 

The Company intends to use retained cash flow, proceeds from asset sales, equity and debt financing and variable-rate indebtedness available under its Revolving Credit Facilities to repay indebtedness and fund capital expenditures of the Company’s shopping centers.  Thus, to the extent the Company incurs additional variable-rate indebtedness, its exposure to increases in interest rates in an inflationary period could increase.  The Company does not believe, however, that increases in interest expense as a result of inflation will significantly impact the Company’s distributable cash flow.  The interest rate risk on variable-rate debt described above has been mitigated through the use of interest rate swap agreements (the “Swaps”) with major financial institutions.  The Company is exposed to credit risk in the event of nonperformance by the counterparties to the Swaps.  The Company believes it mitigates its credit risk by entering into Swaps with major financial institutions.

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The carrying value and the fair value of the Company’s fixed-rate debt is adjusted to (i) include the Swaps reflected in the carrying value and (ii) include the Company’s proportionate share of the joint venture fixed-rate debt.  An estimate of the effect of a 100 basis-point increase at September 30, 2017 and December 31, 2016, is summarized as follows (in millions):

 

The sensitivity to changes in interest rates of the Company’s fixed-rate debt was determined using a valuation model based upon factors that measure the net present value of such obligations that arise from the hypothetical estimate as discussed above.

Further, a 100 basis-point increase in short-term market interest rates on variable-rate debt at September 30, 2017, would result in an increase in interest expense of approximately $4.0 million for the Company and $1.6 million representing the Company’s proportionate share of the joint ventures’ interest expense relating to variable-rate debt outstanding for the nine months ended September 30, 2017.  The estimated increase in interest expense does not give effect to possible changes in the daily balance of the Company’s or joint ventures’ outstanding variable-rate debt.

The Company and its joint ventures intend to continually monitor and actively manage interest costs on their variable-rate debt portfolio and may enter into swap positions based on market fluctuations.  In addition, the Company believes it has the ability to obtain funds through additional equity and/or debt offerings and joint venture capital.  Accordingly, the cost of obtaining such protection agreements in relation to the Company’s access to capital markets will continue to be evaluated.  The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.  As of September 30, 2017, the Company had no other material exposure to market risk.

 

The Company’s management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation, pursuant to Securities Exchange Act of 1934 Rules 13a-15(b) and 15d-15(b), of the effectiveness of our disclosure controls and procedures.  Based on their evaluation as required, the CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of the end of such period to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

During the three months ended September 30, 2017, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 

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PART II

OTHER INFORMATION

 

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.

 

The Company will continue to experience business disruptions at its properties in Puerto Rico until it makes necessary repairs and reopens such properties.

Recent severe weather conditions, including Hurricane Maria, caused substantial damage to property and infrastructure in Puerto Rico, including many of the Company’s shopping centers located there. The Company has made preliminary assessments of the scope of damages to its properties, but the costs ultimately associated with such damages may exceed initial estimates.  Furthermore, the Company will continue to experience business disruptions at its properties until it makes necessary repairs and reopens such properties.  The timing of such repairs will be highly dependent upon factors beyond the Company’s control, such as access to utilities and the availability of building materials, supplies and labor, all of which have been seriously diminished in the wake of Hurricane Maria.  Additionally, any failure of civil authorities to ensure public safety and maintain order may also interfere with the Company’s efforts to reopen properties.  Such delays could increase the duration of business disruptions, as well as the related costs, beyond the Company’s expectations.  Any insurance coverage for losses due to damage or business disruption may prove to be inadequate or unavailable.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

None.

 

Not applicable.

 

None.

 

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Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016, (iv) Consolidated Statement of Equity for the Nine Months Ended September 30, 2017, (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 and (vi) Notes to Condensed Consolidated Financial Statements.

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EXHIBIT INDEX

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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