DDR Ddr Corp.

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2015

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  x    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  x    No  ¨

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

As of October 29, 2015, the registrant had 362,129,766 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, 2015

 

TABLE OF CONTENTS

 

 

 

 

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DDR Corp.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

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

 

 

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

(In thousands, except per share amounts)

(Unaudited)

 

 

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

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(In thousands, except per share amounts)

(Unaudited)

 

 

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)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,

(In thousands)

(Unaudited)

 

 

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

 

 

 

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DDR Corp.

CONSOLIDATED STATEMENT OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(In thousands)

(Unaudited)

 

 

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

 

 

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DDR Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(In thousands)

(Unaudited)

 

 

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 and managing shopping centers.  In addition, the Company engages in the origination and acquisition of loans and debt securities, which are generally collateralized directly or indirectly by shopping centers.  Unless otherwise provided, references herein to the Company or DDR include DDR Corp., its wholly-owned and majority-owned subsidiaries and its consolidated joint ventures.  The Company’s tenant base primarily includes national and regional retail chains and local retailers.  Consequently, the Company’s credit risk is concentrated in the retail industry.  

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year.  Actual results could differ from those estimates.  

 

Unaudited Interim Financial Statements

 

These financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the periods presented. The results of operations for the three and nine months ended September 30, 2015 and 2014, 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, 2014, as amended.

Principles of Consolidation

The condensed consolidated financial statements include the results of the Company and all entities in which the Company has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity.  All significant inter-company balances and transactions have been eliminated in consolidation.  Investments in real estate joint ventures and companies in which the Company has the ability to exercise significant influence, but does not have financial or operating control, are accounted for using the equity method of accounting.  Accordingly, the Company’s share of the earnings (or loss) of these joint ventures and companies is included in consolidated net income.  

Deferred Tax Assets and Tax Liabilities – Puerto Rico Tax Restructuring

In the first quarter of 2015, in accordance with temporary legislation of the Puerto Rico Internal Revenue Code, the Company restructured the ownership of its 14 assets in Puerto Rico and made a voluntary election to prepay $20.2 million of taxes related to the built-in gains associated with the real estate assets.  This election permitted the Company to step-up its tax basis in the Puerto Rican assets to the current estimated fair value while reducing its effective capital gains tax rate from 29% to 12%.  Further, the Company converted the ownership to a Puerto Rico Real Estate Investment Trust (“REIT”) structure, which reduced the effective tax on the operational activity from 39% to 10%.  The net balance sheet impact to the financial statements related to the restructuring was $16.8 million.  In the first quarter of 2015, the Company recorded a tax expense of $3.4 million related to the 2% effective tax rate spread between the 12% tax payment and the revalued deferred tax asset under the REIT structure using a 10% effective tax rate.

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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):

 

Fee and Other Income

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

 

New Accounting Standards Adopted

Discontinued Operations

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a final standard that changed the criteria for determining which disposals are presented as discontinued operations.  The revised definition of a discontinued operation is “a component or group of components that has been disposed of or is classified as held for sale, together as a group in a single transaction,” and “represents a strategic shift that has (or will have) a major effect on an entity’s financial results.”  The FASB agreed that a strategic shift includes “a disposal of (i) a separate major line of business, (ii) a separate major geographical area of operations or (iii) a combination of parts of (i) or (ii) that make up a major part of an entity’s operations and financial results.”  A business that, upon acquisition, qualifies as held for sale will also be a discontinued operation.  The FASB also reaffirmed its decision to no longer preclude presentation of a disposal as a discontinued operation if (a) there is significant continuing involvement with a component after its disposal, or (b) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations.  Public entities were required to apply the standard in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods.  The Company adopted the standard effective January 1, 2015, and there was no impact to net income in the financial statements for the three months or nine months ended September 30, 2015.  Properties sold prior to January 1, 2015, are not subject to ASU 2014-08 and therefore continue to be classified as discontinued operations using the previous definition.  The adoption resulted in most individual property disposals not qualifying for discontinued operations presentation and thus, the results of those disposals remain in Income from Continuing Operations and any associated gains or losses are included in Gain on Disposition of Real Estate.  

New Accounting Standards

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers.  The objective of ASU 2014-09 is to establish a single comprehensive five-step model for entities to use in accounting for

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revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance.  The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification.  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, as a result, will not be impacted by this standard.  The new guidance is effective for public companies for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017.  Early adoption is permitted for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016.  Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09.  The Company is assessing the impact, if any, the adoption of this standard will have on its financial statements and has not decided upon the method of adoption.  

Debt Issuance Costs

In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount.  The guidance in ASU 2015-03 is limited to the presentation of debt issuance costs.  Debt issuance costs related to revolving lines of credit are not within the scope of this new guidance. Additionally, in August 2015, the FASB issued guidance expanding ASU 2015-03.  It states that, given the absence of authoritative guidance within the update, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset for revolving lines of credit and subsequently amortizing the deferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line of credit. The new guidance is effective for public companies for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years on a retrospective basis.  Early adoption is permitted for financial statements that have not been previously issued.  The Company does not believe ASU 2015-03 will have a material impact on its financial statements.

Business Combinations

In September 2015, FASB issued 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, with early adoption permitted. Application of the guidance is prospective. The Company has not determined when it will adopt this guidance, nor what impact the adoption may have on its consolidated financial statements.

 

 

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At September 30, 2015 and December 31, 2014, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 174 and 188 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.  

Coventry II Fund

 

Coventry Real Estate Advisors L.L.C. (“CREA”) formed Coventry Real Estate Fund II, L.L.C. and Coventry Fund II Parallel Fund, L.L.C. (collectively, the “Coventry II Fund”).  The Coventry II Fund was formed with several institutional investors and CREA as the investment manager. The Company and the Coventry II Fund entered into various joint ventures to invest in a variety of retail properties that presented opportunities for value creation.  In March 2015, the Company, CREA and the Coventry II Fund finalized a settlement agreement in which the Company acquired Coventry II Fund’s 80% interest in Buena Park Place in Orange County, California (Note 3) and the Company transferred to Coventry II Fund its 20% ownership interest in the 21 remaining assets of the Coventry II Fund investments.  The Company accounted for this transaction as a step acquisition and, as a result, recorded a Gain on Change in Control of Interests of $14.3 million related to the difference between the carrying value of its equity investment and the fair value of the asset acquired.  

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Management Company Investment

In June 2015, the Company sold its 50% membership interest in a property management company to its joint venture partner and recorded a Loss on Sale and Change in Control of Interests of $6.5 million.  

 

In the nine months ended September 30, 2015, the Company acquired the following shopping centers (in millions):

 

The fair value of the acquisitions was allocated as follows (in thousands):

 

 

 

The costs related to the acquisition of these assets were expensed as incurred and included in Other Income (Expense), Net.  Included in the Company’s consolidated statements of operations are $5.8 million and $7.7 million in total revenues from the date of acquisition through September 30, 2015 and 2014, respectively, for the acquired properties.

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Pro Forma Information

The following unaudited supplemental pro forma operating data is presented for the three months ended September 30, 2014, and the nine months ended September 30, 2015 and 2014, as if the acquisition of the interests in the properties acquired in 2015 and 2014 were completed on January 1, 2014.  The Gain on Change in Control of Interests related to the acquisition from an unconsolidated joint venture was adjusted to the assumed acquisition date.  The unaudited supplemental pro forma operating data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transactions had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods (in thousands, except per share amounts):

 

 

 

The Company has notes receivable, including accrued interest, that are collateralized by certain rights in development projects, partnership interests, sponsor guaranties and/or real estate assets, some of which are subordinate to other financings.  

Notes receivable consisted of the following (in thousands):

 

 

As of September 30, 2015 and December 31, 2014, the Company had five and six loans receivable outstanding, respectively.  The following table reconciles the loans receivable on real estate for the nine months ended September 30, 2015 and 2014 (in thousands):

 

At September 30, 2015, the Company had one loan outstanding aggregating $9.8 million that had previously matured and was more than 90 days past due and one loan that was fully reserved in prior periods.  The Company is no longer accruing interest income on these notes as no payments have been received.  The $9.8 million loan has a loan loss reserve of $4.8 million based on the estimated value of the underlying real estate collateral.  No other loans outstanding are past due.  

 

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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) and term loans (in millions):

 

Revolving Credit Facilities

The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, arranged by J.P. Morgan Securities, LLC and Wells Fargo Securities, LLC (the “Unsecured Credit Facility”), which was amended in April 2015.  The Unsecured Credit Facility provides for borrowings of up to $750 million, if certain financial covenants are maintained, two six-month options to extend the maturity to June 2020 upon the Company’s request and an accordion feature for expansion of availability up to $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, 2015.  The Unsecured Credit Facility also allows for certain foreign currency-denominated borrowings.

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 April 2015 to reflect terms consistent with those contained in the Unsecured Credit Facility.  

The Company’s borrowings under the Revolving Credit Facilities bear interest at variable rates at the Company’s election, based on either (i) the prime rate plus a specified spread (0.15% at September 30, 2015), as defined in the respective facility, or (ii) LIBOR plus a specified spread (1.0% at September 30, 2015).  The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Moody’s Investors Services (“Moody’s”) and Standard & Poor’s Financial Services LLC (“S&P”).  The Company is required to comply with certain covenants under the Revolving Credit Facilities relating to total outstanding indebtedness,

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secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these covenants at September 30, 2015.  

Unsecured Term Loan

In April 2015, the Company entered into a $400 million unsecured term loan with Wells Fargo Bank, National Association, as administrative agent, and PNC Bank, National Association, as syndication agent (the “Unsecured Term Loan”).  The Unsecured Term Loan has a maturity date of April 2017, with three one-year borrower options to extend upon the Company’s request, provided certain conditions are satisfied.  The Company may increase the amount of the facility provided that lenders agree to certain terms.  The outstanding principal amount under this credit facility may not exceed $600 million. The Unsecured Term Loan bears interest 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, 2015).  The Company is required to comply with covenants similar to those contained in the Revolving Credit Facilities.  The Company was in compliance with these covenants at September 30, 2015.

 

In January 2015, the Company issued $500.0 million aggregate principal amount of 3.625% senior unsecured notes due February 2025.  Net proceeds from the issuance were used to repay $350.0 million of debt under the Company’s unsecured term loan, $100.0 million of debt under the Company’s secured term loan and amounts outstanding under the Revolving Credit Facilities.  Total fees, excluding underwriting discounts, incurred by the Company for the issuance of senior notes were $1.1 million.  As a result of the repayments on term loans, the Company accelerated amortization of debt extinguishment costs aggregating $3.3 million, which are reflected in other expense in the Company’s consolidated statement of operations for the nine months ended September 30, 2015.

 

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

Measurement of Fair Value

At September 30, 2015, the Company used pay-fixed interest rate swaps to manage its exposure to changes in benchmark interest rates (the “Swaps”).  The estimated fair values were determined using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves.  In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential non-performance risk, including the Company’s own non-performance risk and the respective counterparty's non-performance risk.  The Company determined that the significant inputs used to value its derivatives fell within Level 2 of the fair value hierarchy.  

Items Measured at Fair Value on a Recurring Basis

The Company maintains interest rate swap agreements (included in Other Liabilities) and marketable equity securities (included in Other Assets), which include investments in the Company’s elective deferred compensation plan as of September 30, 2015 and December 31, 2014.  The following table presents information about the Company’s financial assets and liabilities and indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions):

 

Other Fair Value Instruments

Investments in unconsolidated joint ventures are considered financial assets.  See discussion of fair value considerations of joint venture investments in Note 11.  

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Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Other Liabilities

The carrying amounts reported in the consolidated balance sheets for these financial instruments approximated fair value because of their short-term maturities.  

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 $361.3 million and $362.2 million at September 30, 2015 and December 31, 2014, respectively, as compared to the carrying amounts of $358.1 million and $358.2 million, respectively.  The fair value of loans to affiliates has been estimated by management based upon its assessment of the interest rate, credit risk and performance risk.  

Debt

The fair market value of senior notes, except senior convertible notes, is determined using the trading price of the Company’s public debt.  The fair market value for all other debt is estimated using a discounted cash flow technique that incorporates future contractual interest and principal payments and a market interest yield curve with adjustments for duration, optionality and risk profile, including the Company’s non-performance risk and loan to value.  The Company’s senior notes, except senior convertible notes, and all other debt including senior convertible notes are classified as Level 2 and Level 3, respectively, in the fair value hierarchy.  

Considerable judgment is necessary to develop estimated fair values of financial instruments.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.  

Debt instruments at September 30, 2015 and December 31, 2014, with carrying values that are different than estimated fair values, are summarized as follows (in thousands):

 

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities.  The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and, from time to time, through the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.  

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements.  To accomplish this objective, the Company generally uses Swaps as part of its interest rate risk management strategy.  The Swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  

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As of September 30, 2015, the Company had one effective Swap with a notional amount of $78.9 million, expiring in September 2017, which converts variable rate mortgage debt to a fixed rate of 2.8%.  The aggregate fair value of the Swap was a liability of $3.3 million, which is included in other liabilities on the consolidated balance sheet.  As of December 31, 2014, the Company had nine Swaps with an aggregate notional amount of $530.0 million.  The aggregate fair value of the Swaps was a net liability of $4.3 million, which is included in other assets and other liabilities on the consolidated balance sheet.

All components of the Swaps were included in the assessment of hedge effectiveness.  The Company expects to reflect within the next 12 months, an increase to interest expense (and a corresponding decrease to earnings) of approximately $2.7 million, which includes amortization of previously settled interest rate contracts.  

The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in Accumulated Other Comprehensive Loss (“OCI”) and is subsequently reclassified into earnings, as interest expense, in the period that the hedged forecasted transaction affects earnings.  The Company is exposed to credit risk in the event of non-performance by the counterparties to the Swaps if the derivative position has a positive balance.  The Company believes it mitigates its credit risk by entering into Swaps with major financial institutions.  The Company continually monitors and actively manages interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap positions or other derivative interest rate instruments based on market conditions.  The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.

Credit Risk-Related Contingent Features

The Company has agreements with each of its Swap counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness the Company could also be declared in default on its Swaps, resulting in an acceleration of payment under the Swaps.  

 

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 changes in Accumulated OCI by component are as follows (in thousands):

 

 

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The Company recorded impairment charges during the three and nine months ended September 30, 2015 and 2014, 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

For a description of the Company’s methodology on determining the fair value, refer to Note 12 of the Company’s Financial Statements filed on its Annual Report on Form 10-K for the year ended December 31, 2014, as amended.

The following table presents information about the Company’s impairment charges on both financial and nonfinancial assets that were measured on a fair value basis for the nine months ended September 30, 2015, and the year ended December 31, 2014.  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 square foot which is in thousands):

 

 

 

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Disposition of Real Estate

 

During the nine months ended September 30, 2015, the Company sold 22 properties and additional non-income producing assets for total proceeds of $297.3 million.  These sales have not been classified as discontinued operations in the financial statements, as these sales do not represent a strategic shift in the Company’s business plan (Note 1).  

 

Discontinued Operations

The Company sold 35 properties in 2014 that are included in discontinued operations.  The following table provides a summary of revenues and expenses from properties included in discontinued operations prior to the newly-adopted guidance for reporting discontinued operations (Note 1) (in thousands):  

 

 

 

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The following table provides a reconciliation of net income (loss) 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):

 

 

The following potentially dilutive securities were considered in the calculation of EPS:

Potentially Dilutive Securities

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Common Shares

Common share dividends declared per share were as follows:

 

 

Non-controlling Interests

In July 2015, 1,043,189 OP Units were converted into an equivalent number of common shares of the Company.  This transaction was treated as a purchase of a non-controlling interest.

 

 

 

At September 30, 2015, the Company had two reportable operating segments:  shopping centers and loan investments.  The Company’s chief operating decision maker may review operational and financial data on a property basis and does not differentiate properties on a geographical basis for purposes of allocating resources or capital.  The Company evaluates individual property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items.  Each consolidated shopping center is considered a separate operating segment; however, each shopping center on a stand-alone basis represents less than 10% of the revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under the applicable standard.  

 

The tables below present information about the Company’s reportable operating segments and reflect the impact of discontinued operations in 2014 (Note 12) (in thousands):

 

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In October 2015, the Company issued $400.0 million aggregate principal amount of 4.25% senior unsecured notes due February 2026.  The Company may use all or a portion of the net proceeds from the issuance of the 4.25% senior unsecured notes due 2026, together with cash on hand, to satisfy the cash obligations in connection with the repurchase, redemption or conversion of the $350 million Convertible Notes, as described below.  Furthermore, the Company may use all or a portion of the net proceeds from the issuance of the 4.25% senior unsecured notes due 2026 to repay debt under the Unsecured Credit Facility and for general corporate purposes, which may include the repayment of secured and unsecured debt from time to time.

 

 

Also in October 2015, the Company commenced an offer to purchase the Convertible Notes for cash in an amount equal to the total aggregate principal amount of the Convertible Notes on November 15, 2015, as required under the terms of the Convertible Notes.  Additionally, the Company called for redemption the balance of the outstanding Convertible Notes, to occur on November 20, 2015.  Calling the Company’s Convertible Notes for redemption triggered a right of conversion for the holders of the Convertible Notes, whereby such holders may require the Company to deliver to them (i) cash in an amount up to the principal amount of Convertible Notes being converted, and (ii) to the extent that the applicable conversion value exceeds the principal amount of the Convertible Notes being converted, such excess amount in cash, common shares or a combination thereof, at the Company’s election.  The Company has elected to satisfy any such excess by delivering common shares.

 

 

 

 

 

 

 

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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, 2014, as amended, 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 and managing shopping centers.  In addition, the Company engages in the origination and acquisition of loans and debt securities collateralized directly or indirectly by shopping centers.  As of September 30, 2015, the Company’s portfolio consisted of 378 shopping centers (including 175 shopping centers owned through joint ventures).  These properties consist of 364 shopping centers owned in the United States and 14 in Puerto Rico.  At September 30, 2015, the Company owned and managed approximately 116 million total square feet of gross leasable area (“GLA”).  

For the nine months ended September 30, 2015, net loss attributable to common shareholders increased compared to the prior-year, primarily due to a greater amount of impairment charges recorded in 2015.  The following provides an overview of the Company’s key financial metrics (see Non-GAAP Financial Measures, FFO described later in this section) (in thousands, except per share amounts):

 

During the first nine months of 2015, the Company continued to pursue opportunities to position itself for long-term growth while lowering the Company’s risk profile and cost of capital.  In the first quarter of 2015, a new senior leadership team was put in place as the Company named a new chief executive officer as well as a new chief financial officer.  Although the overall Company strategy has not changed, as a result of a combination of continual recycling of assets and the overall favorable asset disposition environment, the new senior management team determined to accelerate the portfolio quality improvement initiative and potentially achieve lower leverage more quickly.  Management expects to achieve these goals through the acceleration of asset sales not considered to have long-term growth potential, as well as the re-evaluation of the targeted risk/return criteria for investing in development/redevelopments and new acquisitions of prime assets (i.e., market-dominant prime power centers located in large and supply-constrained markets, occupied by high-quality retailers with strong demographic profiles, which are referred to as “Prime”).  As a result, the Company recorded $279.0 million in impairment charges in the first quarter related to 25 operating shopping centers and five parcels of land previously held for development.  The impairments were triggered by the acceleration of the disposition plans for the operating assets as well as the decision to no longer pursue any potential development related to the land parcels.

Third Quarter 2015 Operating Results

Significant third quarter 2015 transactional activity and October financing activity included the following:

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The Company continued its trend of consistent internal growth and strong operating performance in the first nine months of 2015, as evidenced by the number of leases executed, the upward trend in the average annualized base rental rates, a strong occupancy rate maintained above 92% and the achievement of double-digit rental spreads on new leases.

 

 

RESULTS OF OPERATIONS

 

As disclosed in Note 1, “Nature of Business and Financial Statement Presentation,” of the Company’s condensed consolidated financial statements included herein, the Company adopted FASB Standard, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, as of January 1, 2015.  The Company did not have any asset sales that qualified for discontinued operations presentation in 2015.  However, the 2014 condensed consolidated financial statements continue to be presented in accordance with the accounting standards effective through December 31, 2014.

Shopping center properties owned as of January 1, 2014, 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)

 

 

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The following tables present the statistics for the Company’s operating shopping center 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)

 

 

 

 

The decrease in depreciation expense for the Comparable Portfolio Properties was attributable to assets fully amortized in 2014.  The decrease in development or redevelopment properties was attributable to accelerated depreciation charges related to changes in the estimated useful lives of certain assets in 2014.

 

 

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Other Income and Expenses (in thousands)

 

 

 

 

 

The weighted-average interest rate (based on contractual rates and excluding senior convertible debt accretion, fair market value of adjustments and deferred financing costs) at September 30, 2015 and 2014 was 4.3% and 4.8%, respectively.  

 

Interest costs capitalized in conjunction with development and redevelopment projects and unconsolidated development and redevelopment joint venture interests were $1.9 million and $5.1 million for the three and nine months ended September 30, 2015, respectively, as compared to $2.7 million and $6.6 million for the comparable periods in 2014.  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.

The change in interest expense on the year-over-year comparison for the three and nine months ended September 30, primarily is a result of interest expense that was classified as discontinued operations in 2014.  Interest expense reclassified in 2014 was $2.7 million and $9.2 million for the three and nine months ended September 30, 2014, respectively.

 

 

 

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Other Items (in thousands)

 

 

 

 

 

 

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

 

 

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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 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, acquisition, disposition and development activities and interest costs.  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), 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 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 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 as well as FFO.  Operating FFO is generally defined and calculated by the Company as FFO excluding certain charges and gains that management believes are not indicative of the results of the Company’s operating real estate portfolio.  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.

 

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.

 

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Management recognizes the limitations of FFO and Operating FFO when compared to GAAP’s income from continuing operations.  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 condensed consolidated financial statements.

 

Reconciliation Presentation

 

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

 

 

 

 

The Company’s reconciliation of net income (loss) attributable to common shareholders to FFO attributable to common shareholders and Operating FFO attributable to common shareholders is as follows (in millions):

 

 

 

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

 

 

 

Operating FFO Adjustments

 

The Company’s adjustments to arrive at Operating FFO are composed of the following for the three and nine months ended September 30, 2015 and 2014 (in millions).  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.

 

 

 

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

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, including to further strengthen the financial position of the Company.  In the first nine months of 2015, the Company continued to strategically allocate cash flow from operating and financing activities.  The Company also completed public debt offerings and amended the Revolving Credit Facilities (as defined below) in order to strengthen its balance sheet and reduce risk, finance strategic investments and improve its financial flexibility.

 

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.  

 

In April 2015, the Company amended its unsecured revolving credit facility arranged by J.P. Morgan Securities, LLC and Wells Fargo Securities, LLC (the “Unsecured Credit Facility”).  The Unsecured Credit Facility provides for borrowings of up to $750 million and includes an accordion feature for expansion of availability up to $1.25 billion upon the Company’s request, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level.  In April 2015, the Company also amended its unsecured revolving credit facility with PNC Bank, National Association (together with the Unsecured Credit Facility, the “Revolving Credit Facilities”) to reduce the borrowing capacity from $65 million to $50 million and to match the terms of the primary facility.  The Company’s borrowings under these facilities bear interest at variable rates, which were reduced and set at LIBOR plus 100 basis points, a decrease of 15 basis points from the previous rate, subject to adjustment based on the Company’s current corporate credit ratings from Moody’s Investors Services (“Moody’s”) and Standard & Poor’s Financial Services LLC (“S&P”).

 

The Revolving 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, leverage ratios and debt service coverage, as well as limitations on the Company’s ability to 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, 2015, 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 be able to operate in compliance with these covenants for the remainder of 2015 and beyond.

 

In certain circumstances, if other debt of the Company has been accelerated then the Company’s credit facilities could be 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 strengthen its focus on lowering its balance sheet risk and increasing financial flexibility. 

 

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 following information summarizes the availability of the Revolving Credit Facilities at September 30, 2015 (in millions):

 

 

The Company has a $250 million continuous equity program.  At October 29, 2015, the Company had $234.6 million available for the future issuance of common shares.

 

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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, including incorporating a healthy level of conservatism regarding possible future market conditions.  For additional discussion, see Financing Activities described later in this section.

 

In October 2015, the Company issued $400.0 million aggregate principal amount of 4.25% senior unsecured notes due February 2026.

 

In October 2015, the Company commenced an offer to purchase the $350.0 million 1.75% convertible senior notes due 2040 (“Convertible Notes,”) for cash in an amount equal to the total aggregate principal amount of the Convertible Notes on November 15, 2015, as required under the terms of the Convertible Notes.  Additionally, the Company called for redemption the balance of the outstanding Convertible Notes to occur on November 20, 2015.  Calling the Company’s Convertible Notes for redemption triggered a right of conversion for the holders of the Convertible Notes, whereby such holders may require the Company to deliver to them (i) cash in an amount up to the principal amount of Convertible Notes being converted, and (ii) to the extent that the applicable conversion value exceeds the principal amount of the notes being converted, such excess amount in cash, common shares or a combination thereof, at the Company’s election.  The Company has elected to satisfy any such excess by delivering common shares.

 

The Company may use all or a portion of the net proceeds from the issuance of the 4.25% senior unsecured notes due 2026 in October 2015, together with cash on hand, to satisfy the cash obligations in connection with the repurchase, redemption or conversion of the Convertible Notes.  Furthermore, the Company may use all or a portion of the net proceeds from the issuance of the 4.25% senior unsecured notes due 2026 to repay debt under the Unsecured Credit Facility and for general corporate purposes, which may include the repayment of secured and unsecured debt from time to time.  No assurance can be provided that this obligation will be redeemed as currently anticipated.  

 

In January 2015, the Company issued $500.0 million aggregate principal amount of 3.625% senior unsecured notes due February 2025. Net proceeds from the issuance were used to repay $350.0 million of debt under the Company’s unsecured term loan, $100.0 million of debt under the Company’s secured term loan and amounts outstanding on the Revolving Credit Facilities.

 

At September 30, 2015, the Company’s 2015 debt maturities consisted of the $350.0 million of Convertible Notes, as described above.  There are no other consolidated mortgage maturities until January 2016.    No assurance can be provided that this obligation will be redeemed as currently anticipated.

 

Management believes the scheduled debt maturities 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 continues to evaluate its debt maturities with the goal of executing a strategy to extend debt duration, lower leverage, increase liquidity and improve the Company’s credit ratings with the objective of lowering the Company's balance sheet risk and cost of capital.

 

Unconsolidated Joint Ventures

 

The Company’s unconsolidated joint ventures do not have any mortgage debt maturing for the remainder of 2015.

 

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 preferred and common shares.

 

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

 

 

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Operating Activities:  The change in cash flow from operating activities for the nine months ended September 30, 2015, as compared to the comparable period in 2014, primarily was due to an increase in cash flow from those assets acquired in 2015 and 2014 from the date of acquisition offset by changes in accounts payable and accrued expenses.

 

Investing Activities:  The change in cash flow from investing activities for the nine months ended September 30, 2015, as compared to the comparable period in 2014, primarily was due to a reduction in proceeds from the disposition of real estate investments in 2015, as well as a lower amount of real estate acquired in 2015. The 2014 disposition proceeds included the Company’s sale of its joint venture investment in Brazil.

 

Financing Activities:  The change in cash flow from financing activities for the nine months ended September 30, 2015, as compared to the comparable period in 2014, primarily was due to a higher amount of net debt repayments and redemption of preferred shares in 2014.

 

The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable income with declared common and preferred share cash dividends of $203.8 million for the nine months ended September 30, 2015, as compared to $185.4 million for the same period in 2014.  Because actual distributions were greater than 100% of taxable income, federal income taxes were not incurred by the Company thus far during 2015.

 

The Company declared a quarterly dividend of $0.1725 per common share for each of the first three quarters of 2015.  The Board of Directors of the Company will continue to monitor the 2015 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

 

2015 Strategic Transaction Activity

 

The Company has a portfolio management strategy to recycle capital from lower quality, lower growth potential assets into Prime assets located in large and supply-constrained markets occupied by high credit quality retailers.  Transactions are completed both on balance sheet and through off-balance sheet joint venture arrangements with top tier, well capitalized partners.

 

Acquisitions

 

During the nine months ended September 30, 2015, the Company acquired three Prime assets (Orange County, California; Orlando, Florida and Houston, Texas) and an adjoining outparcel with a combined GLA of 0.8 million square feet for a gross purchase price of $160.1 million.  The asset in Orange County, California, was acquired in connection with the final dissolution of the Company’s joint venture with the Coventry II Fund in exchange for the Company’s transfer of its interest in the remaining 21 joint venture assets.  

 

Dispositions

 

During the nine months ended September 30, 2015, the Company sold 22 shopping center properties, aggregating 2.7 million square feet, plus non-income producing assets, for an aggregate sales price of $297.3 million.  The Company recorded a net gain of $78.2 million. In addition, one of the Company’s unconsolidated joint ventures sold 14 assets generating gross proceeds of $212.9 million, of which the Company’s proportionate share was $10.6 million.

 

As discussed above, a part of the Company’s portfolio management strategy is to opportunistically recycle capital from lower quality, lower growth assets into the acquisition of higher quality assets with long-term growth potential.  In March 2015, the Company’s new senior management team completed an extensive review of the entire portfolio and evaluated potential sale opportunities taking into account the long-term growth prospects of assets being considered for sale, the current overall favorable disposition environment, the use of sale proceeds and the impact to the Company’s balance sheet, in addition to the impact on operating results.  As a result of that review, in the first quarter of 2015, the Company recorded an aggregate impairment charge of $179.7 million related to 25 operating shopping centers. The Company has already sold or has started marketing certain of these assets for sale.  As a result, these shopping centers are no longer considered as long-term holds.

 

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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 generally adheres to strict investment criteria thresholds.  The Company also evaluates the credit quality of the tenants and, in the case of redevelopments, generally seeks to upgrade the retailer merchandise mix. The Company applies this strategy to both its consolidated and certain unconsolidated joint ventures that own assets under development and redevelopment because the Company has significant influence and, in most cases, approval rights over decisions relating to significant capital expenditures.

 

The Company will generally commence construction on various developments only after substantial tenant leasing has occurred and acceptable construction financing is available.  The Company will continue to closely monitor its expected spending for the remainder of 2015 for developments and redevelopments as the Company considers this funding to be discretionary spending.  The Company does not anticipate expending significant funds on joint venture development projects in 2015.

 

The Company’s consolidated land holdings are classified in two separate line items on the consolidated balance sheets included herein, (i) Land and (ii) Construction in Progress and Land.  At September 30, 2015, the $2.2 billion of Land classified on the Company’s balance sheet primarily consisted of land that is part of its operating shopping center portfolio.  However, this amount also includes a small portion of vacant land composed primarily of outlots or expansion pads adjacent to the operating shopping center properties.  Approximately 151 acres of this land, which has a recorded cost basis of approximately $23 million, is available for future development.

 

Included in Construction in Progress and Land at September 30, 2015, were $88 million of recorded costs related to land for which active construction has not yet commenced or was previously ceased.  The Company evaluates its intentions with respect to 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.  In March 2015, the Company determined it would no longer pursue the development of certain of these assets.  Rather, the Company is marketing such parcels for sale in the near term.  As a result, the Company recorded an aggregate impairment charge of $99.3 million on five parcels of land in the first quarter of 2015.  

 

Development and Redevelopment Projects

 

As part of its portfolio management strategy to develop, expand, improve and re-tenant various properties, the Company has invested approximately $462 million at September 30, 2015, in various consolidated active development and redevelopment projects and expects to bring at least $200 million of investments in service in 2015 on a net basis, after deducting sales proceeds from outlot sales.  

 

At September 30, 2015, the Company’s current significant consolidated development projects were as follows (dollars in millions and GLA in thousands):

 

 

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The Company’s redevelopment projects are typically substantially complete within a year of the construction commencement date.  Major redevelopments could take between 12 and 36 months to reach stabilization.  At September 30, 2015, the Company’s significant consolidated redevelopment projects were as follows (in millions):

 

 

For redevelopment assets completed in 2014 and in the first nine months of 2015, the assets placed in service were completed at approximately $137 cost per square foot.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has a number of off-balance sheet joint ventures and other unconsolidated entities 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 also had a preferred equity investment aggregating $310.8 million at September 30, 2015, with an annual interest rate of 8.5% due from its joint venture with Blackstone.

 

The Company’s unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $3.1 billion and $2.6 billion at September 30, 2015 and 2014, 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.  

 

 

FINANCING ACTIVITIES

 

In October 2015, the Company issued $400.0 million aggregate principal amount of 4.25% senior unsecured notes due February 2026.  In addition, the Company commenced an offer to purchase the Convertible Notes for cash in an amount equal to the $350.0 million total aggregate principal amount of the Convertible Notes on November 15, 2015, as required under the terms of the Convertible Notes.  Additionally, the Company called for redemption the balance of the outstanding Convertible Notes, to occur on November 20, 2015 (see Liquidity and Capital Resources).

In April 2015, the Company amended and restated its Revolving Credit Facilities.  The Unsecured Credit Facility maturity date was extended to June 2019, with two six-month borrower options to extend upon the Company’s request, provided certain conditions are satisfied.  The PNC unsecured revolving credit facility was amended to reduce the commitment to $50 million and modify certain other terms to conform to the Unsecured Credit Facility.  Also, pricing on the Revolving Credit Facilities was reduced and set at LIBOR plus 100 basis points, a decrease of 15 basis points from the previous rate, and is determined based upon the Company’s credit ratings from Moody's and S&P.  

In addition, in April 2015, the Company entered into a new $400 million unsecured term loan with Wells Fargo Bank, National Association, as administrative agent, and PNC Bank, National Association, as syndication agent.  The unsecured term loan has a maturity date of April 2017, with three one-year borrower options to extend upon the Company’s request, provided certain conditions are satisfied.  The Company may increase the amount of the facility provided that lenders agree to certain terms.  The outstanding principal amount under this credit facility may not exceed $600 million.  Pricing on the unsecured term loan was set at LIBOR plus 110 basis points and was determined based upon the Company’s credit ratings from Moody's and S&P.  Proceeds from this loan were used to retire unsecured notes that matured in May 2015 and 2015 secured mortgage maturities.  

In January 2015, the Company issued $500.0 million aggregate principal amount of 3.625% senior unsecured notes due February 2025. Net proceeds from the issuance were used to repay $350.0 million of debt under the Company’s unsecured term loan, $100.0 million of debt under the Company’s secured term loan and amounts outstanding on the Revolving Credit Facilities.

 

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CAPITALIZATION

 

At September 30, 2015, the Company’s capitalization consisted of $5.2 billion of debt, $350.0 million of preferred shares and $5.6 billion of market equity (market equity is defined as common shares and OP Units outstanding multiplied by $15.38, the closing price of the Company’s common shares on the New York Stock Exchange at September 30, 2015), resulting in a debt to total market capitalization ratio of 0.47 to 1.0, as compared to the ratio of 0.45 to 1.0 at September 30, 2014.  The closing price of the common shares on the New York Stock Exchange was $16.73 at September 30, 2014.  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, to repay upcoming maturities and to consider making prudent opportunistic investments.  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

 

At September 30, 2015, the Company’s 2015 debt maturities consisted of the $350 million of Convertible Notes.  In October 2015, the Company commenced an offer to repurchase the Convertible Notes on November 15, 2015.  In addition, the Company called for redemption the balance of the Convertible Notes, to occur on November 20, 2015, for cash at 100% of the principal amount of the Convertible Notes.  Calling the Company’s Convertible Notes for redemption triggered a right of conversion for the holders of the Convertible Notes, whereby such holders may require the Company to deliver to them (i) cash in an amount up to the principal amount of Convertible Notes being converted, and (ii) to the extent that the applicable conversion value exceeds the principal amount of the notes being converted, such excess amount in cash, common shares or a combination thereof, at the Company’s election.  The Company has elected to satisfy any such excess by delivering common shares.  

 

The Company may use all or a portion of the net proceeds from the issuance of the 4.25% senior unsecured notes due 2026 in October 2015, together with cash on hand, to satisfy the cash obligations in connection with the repurchase, redemption or conversion of the Convertible Notes.  Furthermore, the Company may use all or a portion of the net proceeds from the issuance of the 4.25% senior unsecured notes due 2026 to repay debt under the Unsecured Credit Facility and for general corporate purposes, which may include the repayment of secured and unsecured debt from time to time. No assurance can be provided that this obligation will be redeemed as currently anticipated.  

 

In conjunction with the development and redevelopment of shopping centers, the Company had entered into commitments with general contractors aggregating approximately $30.8 million for its consolidated properties at September 30, 2015.  These obligations, composed principally of construction contracts, are generally due in 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 Revolving Credit Facilities.

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At September 30, 2015, the Company had letters of credit outstanding of $41.0 million.  The Company has not recorded any obligations associated with these letters of credit, the majority of which are collateral for existing indebtedness and other obligations of the Company.

 

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.  At September 30, 2015, the Company had purchase order obligations, typically payable within one year, aggregating approximately $5.5 million related to the maintenance of its properties and general and administrative expenses.

 

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.

 

ECONOMIC CONDITIONS

 

The Company continues to believe there is a favorable landlord dynamic in the supply-and-demand curve for quality locations within well-positioned shopping centers.  Many retailers have aggressive store opening plans for the remainder of 2015 and 2016.  Further, the Company continues to see strong demand from a broad range of retailers for its space, particularly in the off-price sector, which is a reflection of the general outlook of consumers who are demanding more value for their dollars.  This is evidenced by the continued high volume of leasing activity, which was over eight million square feet of space for new leases and renewals for the first nine months of 2015.  The Company also benefits from its real estate asset class (shopping centers), which typically has a higher return on capital expenditures, as well as a diversified tenant base, with only three tenants exceeding 3% of annualized consolidated revenues and the Company’s proportionate share of unconsolidated joint venture revenues (TJX Companies at 3.6%, Bed Bath & Beyond at 3.2% and Walmart at 3.1%).  Other significant tenants include Target, Kohl’s, PetSmart, Dick’s Sporting Goods, Ross Stores, Lowe’s 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 (Dick’s Sporting Goods, Walmart, TJX Companies and Target) have been rapidly growing their omnichannel platform, creating positive sales growth.  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 continue operating even in a challenging economic environment.

 

The retail shopping sector continues to be affected by the competitive nature of the retail business 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, 2015, as evidenced by the occupancy rate as further described below.  However, there can be no assurance that the loss of a tenant or down-sizing of space will not adversely affect the Company (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as amended).

 

The Company owns 14 assets on the island of Puerto Rico aggregating 4.8 million square feet of Company-owned GLA.  These assets represent 7.6% of the Company’s annualized consolidated revenues for its portfolio at 100%, and 5.7% of Company-owned GLA at September 30, 2015.  There is 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 Company, however, believes that its assets are well positioned to withstand continuing recessionary pressures and represent a source of stable, high quality cash flow because the tenants in these assets (many of which are U.S. retailers such as Walmart, TJX Companies and Bed Bath & Beyond) typically cater to the local consumer’s desire for value and convenience and often provide consumers with day-to-day necessities.  However, there can be no assurance 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 (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as amended).

 

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Historically, the Company’s portfolio has performed consistently throughout many economic cycles, including downward cycles.  Broadly speaking, national retail sales have grown since World War II, including during several recessions and housing slowdowns.  In the past, the Company has not experienced significant volatility in its long-term portfolio occupancy rate.  The Company has experienced downward cycles before and has made the necessary adjustments to leasing and development strategies to accommodate the changes in the operating environment and mitigate risk.  More importantly, 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 believes that the quality of its shopping center portfolio is strong, as evidenced by the high historical occupancy rates, which have generally ranged from 92% to 96% since the Company’s initial public offering in 1993.  The shopping center portfolio occupancy was 92.8% at both September 30, 2015 and 2014.  

 

The total portfolio average annualized base rent per occupied square foot was $14.23 at September 30, 2015, as compared to $13.91 at December 31, 2014, and $13.65 at September 30, 2014.  The Company continues to sign new leases at rental rates that have reflected consistent annual growth.  The increase primarily was due to the Company’s strategic portfolio realignment achieved through the recycling of capital from the sale of lower quality assets into the acquisition of Prime assets 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 third quarter of 2015 was approximately $3.95 per rentable square foot.  The Company generally does not expend a significant amount of capital on lease renewals.  The Company is very conscious of and sensitive to 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 challenging economic times.

 

NEW ACCOUNTING STANDARDS

 

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

 

FORWARD-LOOKING STATEMENTS

 

Management’s discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.  Historical results and percentage relationships set forth in the condensed 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, 2014, as amended.

 

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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 $78.9 million and $530.0 million of variable-rate debt at September 30, 2015 and December 31, 2014, that LIBOR was swapped to at a fixed rate of 2.8% and 1.3%, respectively), is summarized as follows:

 

 

The Company’s unconsolidated joint ventures’ indebtedness (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, 2015 and December 31, 2014) 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 a portion of the Company’s and its unconsolidated joint ventures’ variable-rate debt described above has been mitigated through the use of interest rate swap agreements (the “Swaps”) with major financial institutions.  At September 30, 2015 and December 31, 2014, the interest rate on the Company’s $78.9 million and $530.0 million consolidated floating rate debt, respectively, was swapped to fixed rates.  At September 30, 2015 and December 31, 2014, the interest rate on $42.0 million of unconsolidated joint venture floating rate debt (of which $2.1 million is the Company’s proportionate share) was swapped to fixed rates.  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.

 

The carrying value of the Company’s fixed-rate debt is adjusted to include the $78.9 million and $530.0 million of variable-rate debt that was swapped to a fixed rate at September 30, 2015 and December 31, 2014, respectively.  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, 2015 and December 31, 2014, 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.

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Further, a 100 basis-point increase in short-term market interest rates on variable-rate debt at September 30, 2015, would result in an increase in interest expense of approximately $7.4 million for the Company and $0.7 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, 2015.  The estimated increase in interest expense for the year 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, 2015, 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 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, 2015, 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.

 

None.

 

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, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014, (iv) Consolidated Statement of Equity for the Nine Months Ended September 30, 2015, (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 and (vi) Notes to Condensed Consolidated Financial Statements.

 

 

 

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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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EXHIBIT INDEX

 

 

 

 

 

 

 

Exhibit 31.1

CERTIFICATIONS

I, David J. Oakes, certify that:

 

 

Exhibit 31.2

CERTIFICATIONS

I, Luke J. Petherbridge, certify that:

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Oakes, President and Chief Executive Officer of DDR Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2015, as filed with the Securities and Exchange Commission (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Luke J. Petherbridge, Chief Financial Officer and Treasurer of DDR Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2015, as filed with the Securities and Exchange Commission (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.