10-Q 1 ddr-10q_20180331.htm 10-Q ddr-10q_20180331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                  

Commission file number 1-11690

 

DDR Corp.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34-1723097

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

3300 Enterprise Parkway, Beachwood, Ohio 44122

(Address of principal executive offices - zip code)

(216) 755-5500

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

 

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

As of April 27, 2018, the registrant had 369,277,668 outstanding common shares, $0.10 par value per share.

 

 

 


DDR Corp.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED March 31, 2018

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements - Unaudited

 

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

2

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

3

 

Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2018 and 2017

4

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2018

5

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4.

Controls and Procedures

41

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

 

 

 

SIGNATURES

44

 

 

1


DDR Corp.

CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except share amounts)

 

 

March 31, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

Land

$

1,700,502

 

 

$

1,738,792

 

Buildings

 

5,599,708

 

 

 

5,733,451

 

Fixtures and tenant improvements

 

696,787

 

 

 

693,280

 

 

 

7,996,997

 

 

 

8,165,523

 

Less: Accumulated depreciation

 

(1,963,427

)

 

 

(1,953,479

)

 

 

6,033,570

 

 

 

6,212,044

 

Construction in progress and land

 

77,033

 

 

 

82,480

 

Total real estate assets, net

 

6,110,603

 

 

 

6,294,524

 

Investments in and advances to joint ventures, net

 

333,659

 

 

 

383,813

 

Cash and cash equivalents

 

16,560

 

 

 

92,611

 

Restricted cash

 

49,257

 

 

 

2,113

 

Accounts receivable, net

 

100,464

 

 

 

108,695

 

Casualty insurance receivable

 

65,547

 

 

 

58,583

 

Notes receivable, net

 

19,675

 

 

 

19,675

 

Other assets, net

 

214,681

 

 

 

210,059

 

 

$

6,910,446

 

 

$

7,170,073

 

Liabilities and Equity

 

 

 

 

 

 

 

Unsecured indebtedness:

 

 

 

 

 

 

 

Senior notes

$

1,917,833

 

 

$

2,810,100

 

Unsecured term loan

 

198,452

 

 

 

398,130

 

Revolving credit facilities

 

120,000

 

 

 

 

 

 

2,236,285

 

 

 

3,208,230

 

Secured indebtedness:

 

 

 

 

 

 

 

Mortgage indebtedness

 

1,505,235

 

 

 

641,082

 

 

 

1,505,235

 

 

 

641,082

 

Total indebtedness

 

3,741,520

 

 

 

3,849,312

 

Accounts payable and other liabilities

 

317,916

 

 

 

344,774

 

Dividends payable

 

78,687

 

 

 

78,549

 

Total liabilities

 

4,138,123

 

 

 

4,272,635

 

Commitments and contingencies

 

 

 

 

 

 

 

DDR Equity

 

 

 

 

 

 

 

Class A—6.375% cumulative redeemable preferred shares, without par value, $500 liquidation value;

   750,000 shares authorized; 350,000 shares issued and outstanding at March 31, 2018 and

   December 31, 2017

 

175,000

 

 

 

175,000

 

Class J—6.5% cumulative redeemable preferred shares, without par value, $500 liquidation value;

   750,000 shares authorized; 400,000 shares issued and outstanding at March 31, 2018 and

   December 31, 2017

 

200,000

 

 

 

200,000

 

Class K—6.25% cumulative redeemable preferred shares, without par value, $500 liquidation value;

   750,000 shares authorized; 300,000 shares issued and outstanding at March 31, 2018 and

   December 31, 2017

 

150,000

 

 

 

150,000

 

Common shares, with par value, $0.10 stated value; 600,000,000 shares authorized; 369,344,148 and

   368,512,410 shares issued at March 31, 2018 and December 31, 2017, respectively

 

36,934

 

 

 

36,851

 

Additional paid-in capital

 

5,522,874

 

 

 

5,513,197

 

Accumulated distributions in excess of net income

 

(3,315,974

)

 

 

(3,183,134

)

Deferred compensation obligation

 

7,668

 

 

 

8,777

 

Accumulated other comprehensive loss

 

(1,311

)

 

 

(1,106

)

Less: Common shares in treasury at cost: 584,236 and 612,629 shares at March 31, 2018 and

   December 31, 2017, respectively

 

(7,774

)

 

 

(8,653

)

Total DDR shareholders' equity

 

2,767,417

 

 

 

2,890,932

 

Non-controlling interests

 

4,906

 

 

 

6,506

 

Total equity

 

2,772,323

 

 

 

2,897,438

 

 

$

6,910,446

 

 

$

7,170,073

 

 

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

 

2


DDR Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share amounts)

 

 

Three Months

 

 

Ended March 31,

 

 

2018

 

 

2017

 

Revenues from operations:

 

 

 

 

 

 

 

Minimum rents

$

146,887

 

 

$

167,229

 

Percentage and overage rents

 

1,808

 

 

 

1,699

 

Recoveries from tenants

 

51,354

 

 

 

57,476

 

Fee and other income

 

13,019

 

 

 

14,017

 

Business interruption income

 

2,000

 

 

 

 

 

 

215,068

 

 

 

240,421

 

Rental operation expenses:

 

 

 

 

 

 

 

Operating and maintenance

 

29,757

 

 

 

32,991

 

Real estate taxes

 

32,023

 

 

 

34,329

 

Impairment charges

 

30,444

 

 

 

21,973

 

Hurricane casualty loss

 

750

 

 

 

 

General and administrative

 

16,115

 

 

 

31,072

 

Depreciation and amortization

 

74,424

 

 

 

90,884

 

 

 

183,513

 

 

 

211,249

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

5,341

 

 

 

8,392

 

Interest expense

 

(44,040

)

 

 

(51,827

)

Other income (expense), net

 

(61,607

)

 

 

(4

)

 

 

(100,306

)

 

 

(43,439

)

Loss before earnings from equity method investments and other items

 

(68,751

)

 

 

(14,267

)

Equity in net income (loss) of joint ventures

 

8,786

 

 

 

(1,665

)

Reserve of preferred equity interests

 

(3,961

)

 

 

(76,000

)

Loss before tax expense

 

(63,926

)

 

 

(91,932

)

Tax benefit (expense) of taxable REIT subsidiaries and state franchise and income taxes

 

18

 

 

 

(223

)

Loss from continuing operations

 

(63,908

)

 

 

(92,155

)

Gain on disposition of real estate, net

 

10,011

 

 

 

38,127

 

Net loss

$

(53,897

)

 

$

(54,028

)

Income attributable to non-controlling interests, net

 

(256

)

 

 

(213

)

Net loss attributable to DDR

$

(54,153

)

 

$

(54,241

)

Preferred dividends

 

(8,383

)

 

 

(5,594

)

Net loss attributable to common shareholders

$

(62,536

)

 

$

(59,835

)

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

Basic

$

(0.17

)

 

$

(0.16

)

Diluted

$

(0.17

)

 

$

(0.16

)

 

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

3


DDR Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME  

(unaudited; in thousands)

 

 

Three Months

 

 

 

Ended March 31,

 

 

 

2018

 

 

2017

 

 

Net loss

$

(53,897

)

 

$

(54,028

)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Foreign currency translation, net

 

(399

)

 

 

192

 

 

Change in fair value of interest-rate contracts

 

3

 

 

 

435

 

 

Change in cash flow hedges reclassed to earnings

 

117

 

 

 

178

 

 

Total other comprehensive (loss) income

 

(279

)

 

 

805

 

 

Comprehensive loss

$

(54,176

)

 

$

(53,223

)

 

Comprehensive income attributable to non-controlling interests:

 

 

 

 

 

 

 

 

Allocation of net income

 

(256

)

 

 

(213

)

 

Foreign currency translation, net

 

74

 

 

 

(45

)

 

Total comprehensive income attributable to non-controlling

   interests

 

(182

)

 

 

(258

)

 

Total comprehensive loss attributable to DDR

$

(54,358

)

 

$

(53,481

)

 

 

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

 

4


DDR Corp.

CONSOLIDATED STATEMENT OF EQUITY

(unaudited; in thousands)

 

 

DDR Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Shares

 

 

Common Shares

 

 

Additional

Paid-in

Capital

 

 

Accumulated Distributions

in Excess of

Net Income

 

 

Deferred Compensation Obligation

 

 

Accumulated Other Comprehensive Loss

 

 

Treasury

Stock at

Cost

 

 

Non-

Controlling

Interests

 

 

Total

 

Balance, December 31, 2017

$

525,000

 

 

$

36,851

 

 

$

5,513,197

 

 

$

(3,183,134

)

 

$

8,777

 

 

$

(1,106

)

 

$

(8,653

)

 

$

6,506

 

 

$

2,897,438

 

Issuance of common shares related

   to stock plans

 

 

 

 

83

 

 

 

5,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,865

 

Stock-based compensation, net

 

 

 

 

 

 

 

3,015

 

 

 

 

 

 

(1,109

)

 

 

 

 

 

879

 

 

 

 

 

 

2,785

 

Distributions to non-controlling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(193

)

 

 

(193

)

Redemption of OP Units

 

 

 

 

 

 

 

880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,589

)

 

 

(709

)

Dividends declared-common shares

 

 

 

 

 

 

 

 

 

 

(70,304

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(70,304

)

Dividends declared-preferred shares

 

 

 

 

 

 

 

 

 

 

(8,383

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,383

)

Comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

(54,153

)

 

 

 

 

 

(205

)

 

 

 

 

 

182

 

 

 

(54,176

)

Balance, March 31, 2018

$

525,000

 

 

$

36,934

 

 

$

5,522,874

 

 

$

(3,315,974

)

 

$

7,668

 

 

$

(1,311

)

 

$

(7,774

)

 

$

4,906

 

 

$

2,772,323

 

 

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

 

5


DDR Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

 

 

Three Months

 

 

Ended March 31,

 

 

2018

 

 

2017

 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net loss

$

(53,897

)

 

$

(54,028

)

Adjustments to reconcile net loss to net cash flow provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

74,424

 

 

 

90,884

 

Stock-based compensation

 

1,728

 

 

 

5,243

 

Amortization and write-off of debt issuance costs and fair market value of debt adjustments

 

10,103

 

 

 

906

 

Loss on extinguishment of debt

 

48,606

 

 

 

 

Equity in net (income) loss of joint ventures

 

(8,786

)

 

 

1,665

 

Reserve of preferred equity interests, net

 

3,961

 

 

 

76,000

 

Operating cash distributions from joint ventures

 

1,786

 

 

 

1,806

 

Gain on disposition of real estate, net

 

(10,011

)

 

 

(38,127

)

Impairment charges

 

30,444

 

 

 

21,973

 

Interest rate hedging activities

 

(4,833

)

 

 

 

Change in notes receivable accrued interest

 

818

 

 

 

(2,479

)

Net change in accounts receivable

 

5,183

 

 

 

2,694

 

Net change in accounts payable and accrued expenses

 

(21,929

)

 

 

(8,521

)

Net change in other operating assets and liabilities

 

(19,836

)

 

 

(6,109

)

Total adjustments

 

111,658

 

 

 

145,935

 

Net cash flow provided by operating activities

 

57,761

 

 

 

91,907

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Real estate acquired, net of liabilities and cash assumed

 

 

 

 

(86,028

)

Real estate developed and improvements to operating real estate

 

(34,702

)

 

 

(28,138

)

Proceeds from disposition of real estate

 

135,464

 

 

 

113,170

 

Equity contributions to joint ventures

 

(59

)

 

 

(21,506

)

Distributions from unconsolidated joint ventures

 

16,759

 

 

 

2,900

 

Repayment of joint venture advances

 

36,072

 

 

 

 

Repayment of notes receivable

 

 

 

 

167

 

Net cash flow provided by (used for) investing activities

 

153,534

 

 

 

(19,435

)

Cash flow from financing activities:

 

 

 

 

 

 

 

Proceeds from revolving credit facilities, net

 

120,000

 

 

 

90,000

 

Repayment of senior notes

 

(924,751

)

 

 

 

Repayment of term loan and mortgage debt

 

(678,721

)

 

 

(63,302

)

Payment of debt issuance costs

 

(32,379

)

 

 

(132

)

Proceeds from mortgages payable

 

1,350,000

 

 

 

 

Issuance of common shares in conjunction with equity award plans and dividend reinvestment plan

 

5,149

 

 

 

3,500

 

Redemption of operating partnership units

 

(736

)

 

 

 

Distributions to non-controlling interests and redeemable operating partnership units

 

(214

)

 

 

(209

)

Dividends paid

 

(78,549

)

 

 

(75,253

)

Net cash flow used for financing activities

 

(240,201

)

 

 

(45,396

)

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

(1

)

 

 

1

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(28,906

)

 

 

27,076

 

Cash, cash equivalents and restricted cash, beginning of period

 

94,724

 

 

 

39,225

 

Cash, cash equivalents and restricted cash, end of period

$

65,817

 

 

$

66,302

 

 

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

 


6


Notes to Condensed Consolidated Financial Statements

1.

Summary of Significant Accounting Policies

Nature of Business

DDR Corp. and its related consolidated real estate subsidiaries (collectively, the “Company” or “DDR”) and unconsolidated joint ventures are primarily engaged in the business of acquiring, owning, developing, redeveloping, expanding, leasing, financing and managing shopping centers.  Unless otherwise provided, references herein to the Company or DDR include DDR Corp. and its wholly-owned subsidiaries and consolidated joint ventures.  The Company’s tenant base primarily includes national and regional retail chains and local retailers.  Consequently, the Company’s credit risk is concentrated in the retail industry.  

On December 14, 2017, the Company announced its intention to spin off 50 shopping centers in 2018, representing $2.8 billion of gross book asset value, as of March 31, 2018, composed of 38 continental U.S. assets and all 12 of DDR’s shopping centers in Puerto Rico, into a separate, publicly-traded real estate investment trust (“REIT”), Retail Value Inc. (“RVI”).  At March 31, 2018, RVI was a wholly-owned subsidiary of DDR Corp.

Use of Estimates in Preparation of Financial Statements

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

Unaudited Interim Financial Statements

These financial statements have been prepared by the Company in accordance with GAAP for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements.  However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the periods presented.  The results of operations for the three months ended March 31, 2018 and 2017, 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, 2017.

Principles of Consolidation

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

The Company has two unconsolidated joint ventures included in the Company’s joint venture investments that are considered VIEs for which the Company is not the primary beneficiary.  The Company’s maximum exposure to losses associated with these VIEs is limited to its aggregate investment, which was $240.1 million and $284.1 million as of March 31, 2018 and December 31, 2017, respectively.  

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

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

 

Three Months

 

 

Ended March 31,

 

 

2018

 

 

2017

 

Accounts payable related to construction in progress

$

16.6

 

 

$

12.5

 

Receivable and reduction of real estate assets, net - related to hurricane casualty

 

5.7

 

 

 

 

Dividends declared

 

78.7

 

 

 

75.4

 

Conversion of Operating Partnership Units

 

0.9

 

 

 

7


Common Shares

The Company declared common share dividends of $0.19 per share for each of the three months ended March 31, 2018 and 2017.

New Accounting Standards Adopted

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.  The objective of ASU No. 2014-09 is to establish a single, comprehensive, five-step model for entities to use in accounting for revenue arising from contracts with customers that will supersede most of the existing revenue recognition guidance, including industry-specific guidance.  The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU No. 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification (“ASC”).  The new guidance was effective for public companies for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017.  The Company has adopted the new accounting guidance for revenue from contracts with customers (“Topic 606”) on January 1, 2018 using the modified retrospective approach and therefore, the comparative information has not been adjusted.  The guidance has been applied to contracts that are not completed as of the date of initial application and the impact of the adoption was not material (Note 2).

Real Estate Sales

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from Derecognition of Nonfinancial Assets (Subtopic 610-20):  Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“Topic 610”) for gains and losses from the sale and/or transfer of real estate property. Topic 610 eliminates guidance specific to real estate sales in ASC 360-20.  As such, sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial assets.  The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.  The effective date of this guidance coincides with revenue recognition guidance discussed in Note 2.  On January 1, 2018, the Company adopted Topic 610 using the modified retrospective approach for contracts that are not completed as of the date of initial application.  The Company has determined that the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards to Be Adopted

Accounting for Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases.  Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet.  Other significant provisions of this standard include (i) defining the “lease term” to include the non-cancelable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease; (ii) defining the initial lease liability to be recorded on the balance sheet to contemplate only those variable lease payments that depend on an index or that are in substance “fixed,” (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset’s economic benefits and (iv) a requirement to bifurcate certain lease and non-lease components.  The lease standard is effective for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years), with early adoption permitted.  The Company will adopt the standard using the modified retrospective approach for financial statements issued after January 1, 2019.  

The Company is in the process of evaluating the impact that the adoption of ASU No. 2016-02 will have on its consolidated financial statements and disclosures.  The Company has currently identified several areas within its accounting policies it believes could be impacted by the new standard, including where the Company is a lessor under its tenant lease agreements and a lessee under its ground leases.  The Company may have a change in presentation on its consolidated statements of operations with regards to Recoveries from Tenants, which includes reimbursements from tenants for certain operating expenses, real estate taxes and insurance.  The Company also has certain lease arrangements with its tenants for space at its shopping centers in which the contractual amounts due under the lease by the lessee are not allocated between the rental and expense reimbursement components (“Gross Leases”).  The aggregate revenue earned under Gross Leases is presented as Minimum Rents in the consolidated statements of operations.  On March 28, 2018, the FASB tentatively approved targeted improvements to the Leases standard that provides lessors with a practical expedient by class of underlying assets to not separate non-lease components from the lease component.  Such practical expedient is limited to

8


circumstances in which (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the stand alone lease component would be classified as an operating lease if accounted for separately.  The Company will elect the practical expedient which would allow the Company the ability to account for the combined component based on its predominate characteristics if the underlying asset meets the two criteria defined above.  

In addition, the Company has ground lease agreements in which the Company is the lessee for land underneath all or a portion of the buildings at five shopping centers.  Currently, the Company accounts for these arrangements as operating leases.  Under the new standard, the Company will record its rights and obligations under these leases as a right of use asset and lease liability on its consolidated balance sheets.  The Company is currently in the process of evaluating the inputs required to calculate the amount that will be recorded on its balance sheet for each ground lease.  Lastly, this standard impacts the lessor’s ability to capitalize initial direct costs related to the leasing of vacant space.  However, the Company does not believe this change regarding capitalization will have a material impact on its consolidated financial statements.  

2.

Revenue Recognition

The Company has adopted the new accounting guidance for revenue from contracts with customers (“Topic 606”) on January 1, 2018 using the modified retrospective approach and therefore, the comparative information has not been adjusted.  The guidance has been applied to contracts that are not completed as of the date of initial application.  Most significantly for the real estate industry, leasing transactions are not within the scope of the new standard.  A majority of the Company’s tenant-related revenue is recognized pursuant to lease agreements and will be governed by the leasing guidance discussed in Note 1.

Historically, the majority of the Company’s lease commission revenue has been recognized 50% upon lease execution and 50% upon tenant rent commencement.  Upon adoption of Topic 606, lease commission revenue will generally be recognized in its entirety upon lease execution. The impact of adopting Topic 606 on the Company’s consolidated financial statements with respect to the change in revenue recognition as related to lease commissions revenue at January 1, 2018 and for the three months ended March 31, 2018 was not material.

The following is disclosure of the Company’s revenue recognition policies:

Rental Revenue

Minimum rents from tenants in shopping centers generally range from one month to 30 years and are recognized on a straight-line basis over the noncancelable term of the lease, which include the effects of applicable rent steps and abatements.  Percentage and overage rents are recognized after a tenant’s reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease.  

Recoveries from tenants

Revenues associated with expense reimbursements from tenants for common area maintenance, taxes, insurance and other property operating expenses, based upon the tenant’s lease provisions, are recognized in the period the related expenses are incurred.

Lease Termination Fees

Lease termination fees are recognized upon the effective termination of a tenant’s lease when the Company has no further obligations under the lease.

Ancillary income and other property income

Ancillary and other property-related income, primarily composed of leasing vacant space to temporary tenants, kiosk income, parking and theatre income, is recognized in the period earned.

Business Interruption Income

The Company will record revenue for covered business interruption in the period it determines that it is probable it will be compensated.  This income recognition criteria will likely result in business interruption insurance recoveries being recorded in a period subsequent to the period the Company experiences lost revenue from the damaged properties.

Disposition of Real Estate

Sales of nonfinancial assets, such as real estate, are to be recognized when control of the asset transfers to the buyer, which will occur when the buyer has the ability to direct the use of, or obtain substantially all of the remaining benefits from, the asset.  This generally occurs when the transaction closes and consideration is exchanged for control of the asset.    

9


Revenues from Contracts with Customers

The Company’s revenues from contracts with customers generally relate to asset and property management fees, leasing commission, and development fees.  These revenues are derived from the Company’s management agreements with unconsolidated joint ventures and is recognized to the extent attributable to the unaffiliated ownership in the unconsolidated joint venture to which it relates.  These contracts are generally five years in duration with ongoing one-year extension options by the Company.

Asset and Property Management Fees

Asset and Property management services include property maintenance, tenant coordination, accounting and financial services.  Asset and Property management services represent a series of distinct daily services.  Accordingly, the Company satisfies the performance obligation as services are rendered over time.  

The Company is compensated for property management services through a monthly management fee earned based on a specified percentage of the monthly rental receipts generated from the property under management.  The Company is compensated for asset management services through a fee that is billed to the customer quarterly in arrears and recognized as revenue monthly as the services are rendered, based on a percentage of aggregate capital contributions for assets under management at the end of the quarter.

Property Leasing

The Company provides strategic advice and execution to its unconsolidated joint ventures in connection with the leasing of retail space.  The Company is compensated for services in the form of a commission.  The commission is paid upon the occurrence of certain contractual events which may be contingent.  For example, a portion of the commission may be paid upon execution of the lease by the tenant, with the remaining paid upon occurrence of another future contingent event (e.g. payment of first month’s rent or tenant move-in). The Company typically satisfies its performance obligation at a point in time when control is transferred; generally, at the time of the first contractual event where there is a present right to payment.  The Company looks to history, experience with a customer, and deal specific considerations, to support its judgement that the second contingency will be met.  Therefore, the Company typically accelerates the recognition of revenue associated with the second contingent event (if any) to the point in time when control of its service is transferred.

Development Services

Development services consist of construction management oversight services such as hiring general contractors, reviewing plans and specification, performing inspections, reviewing documentation and accounting services.  These services represent a series of distinct services and are recognized over time as services are rendered.   The Company is compensated monthly for services based on percentage of aggregate amount spent on the construction during the month.

Contract Assets

Contract assets represent assets for revenue that has been recognized in advance of billing the customer and for which the right to bill is contingent upon something other than the passage of time. This is common for contingent portions of commissions.  The portion of payments retained by the customer until the second contingent event is not considered a significant financing component because the right to payment is expected to become unconditional within one year or less.  Contract assets are transferred to receivables when the right to payment becomes unconditional.

Revenue from contracts with customers is included in Fee and Other Income on the consolidated statement of operations and was composed of the following (in thousands):

 

Three Months

 

 

Ended March 31,

 

 

2018

 

 

2017

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

Asset and property management fees

$

5,596

 

 

$

6,173

 

Leasing commissions

 

1,622

 

 

 

1,867

 

Development fees

 

325

 

 

 

584

 

Total revenue from contracts with customers

 

7,543

 

 

 

8,624

 

Other fee income:

 

 

 

 

 

 

 

Ancillary and other property income

 

4,343

 

 

 

4,332

 

Lease termination fees

 

521

 

 

 

178

 

Other

 

612

 

 

 

883

 

Total fee and other income

$

13,019

 

 

$

14,017

 

10


The aggregate amount of receivables from contracts with customers was $1.7 million and $1.9 million as of March 31, 2018 and December 31, 2017, respectively.

The significant changes in the contract asset balances during the quarter are as follows (in thousands):

Balance as of January 1, 2018

$

1,371

 

Contract assets recognized

 

661

 

Contract assets billed

 

(672

)

Balance as of March 31, 2018

$

1,360

 

All revenue from contracts with customers meets the exemption criteria for variable consideration directly allocable to wholly unsatisfied performance obligations or unsatisfied promise within a series and; therefore, the Company does not disclose the value of transaction price allocated to unsatisfied performance obligations.  There is no fixed consideration included in the transaction price for any of these revenues.  

3.

Investments in and Advances to Joint Ventures

 

At March 31, 2018 and December 31, 2017, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 125 and 136 shopping center properties, respectively.  Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):

 

 

March 31, 2018

 

 

December 31, 2017

 

Condensed Combined Balance Sheets

 

 

 

 

 

 

 

Land

$

1,066,607

 

 

$

1,126,703

 

Buildings

 

2,923,406

 

 

 

3,057,072

 

Fixtures and tenant improvements

 

211,327

 

 

 

213,989

 

 

 

4,201,340

 

 

 

4,397,764

 

Less: Accumulated depreciation

 

(949,879

)

 

 

(962,038

)

 

 

3,251,461

 

 

 

3,435,726

 

Construction in progress and land

 

52,417

 

 

 

53,928

 

Real estate, net

 

3,303,878

 

 

 

3,489,654

 

Cash and restricted cash

 

73,828

 

 

 

155,894

 

Receivables, net

 

43,289

 

 

 

51,396

 

Other assets, net

 

164,029

 

 

 

174,832

 

 

$

3,585,024

 

 

$

3,871,776

 

 

 

 

 

 

 

 

 

Mortgage debt

$

2,357,965

 

 

$

2,501,163

 

Notes and accrued interest payable to the Company

 

2,526

 

 

 

1,365

 

Other liabilities

 

145,259

 

 

 

156,076

 

 

 

2,505,750

 

 

 

2,658,604

 

Redeemable preferred equity DDR

 

309,744

 

 

 

345,149

 

Accumulated equity

 

769,530

 

 

 

868,023

 

 

$

3,585,024

 

 

$

3,871,776

 

 

 

 

 

 

 

 

 

Company's share of accumulated equity

$

122,593

 

 

$

132,710

 

Redeemable preferred equity, net(A)

 

236,925

 

 

 

277,776

 

Basis differentials

 

(25,422

)

 

 

(24,973

)

Deferred development fees, net of portion related to the Company's interest

 

(2,963

)

 

 

(3,065

)

Amounts payable to the Company

 

2,526

 

 

 

1,365

 

Investments in and Advances to Joint Ventures, net

$

333,659

 

 

$

383,813

 

 

(A)

Includes PIK of $7.9 million and $6.3 million, which was fully reserved at March 31, 2018 and December 31, 2017, respectively.  

11


 

Three Months

 

 

Ended March 31,

 

 

2018

 

 

2017

 

Condensed Combined Statements of Operations

 

 

 

 

 

 

 

Revenues from operations(A)

$

114,525

 

 

$

127,048

 

Expenses from operations:

 

 

 

 

 

 

 

Operating expenses

 

34,381

 

 

 

36,668

 

Impairment charges

 

16,910

 

 

 

52,657

 

Depreciation and amortization

 

39,677

 

 

 

45,096

 

Interest expense

 

24,243

 

 

 

30,130

 

Preferred share expense

 

6,508

 

 

 

8,128

 

Other (income) expense, net

 

7,421

 

 

 

6,573

 

 

 

129,140

 

 

 

179,252

 

Loss from continuing operations

 

(14,615

)

 

 

(52,204

)

Gain (loss) on disposition of real estate, net

 

38,020

 

 

 

(173

)

Net income (loss) attributable to unconsolidated joint ventures

$

23,405

 

 

$

(52,377

)

Company's share of equity in net income (loss) of joint ventures

$

8,473

 

 

$

(5,293

)

Basis differential adjustments(B)

 

313

 

 

 

3,628

 

Equity in net income (loss) of joint ventures

$

8,786

 

 

$

(1,665

)

(A)

Revenue from operations is subject to leasing or other standards.

(B)

The difference between the Company’s share of net income (loss), as reported above, and the amounts included in the Company’s consolidated statements of operations is attributable to the amortization of basis differentials, unrecognized preferred PIK, the recognition of deferred gains, differences in gain (loss) on sale of certain assets recognized due to the basis differentials and other than temporary impairment charges.

Service fees and income earned by the Company through management, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures and interest income on its preferred interests in the BRE DDR Retail Holdings joint ventures are as follows (in millions):

 

 

Three Months

 

 

Ended March 31,

 

 

2018

 

 

2017

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

Asset and property management fees

$

5.6

 

 

$

6.2

 

Development fees and leasing commissions

 

1.9

 

 

 

2.4

 

Total revenue from contracts with customers

 

7.5

 

 

 

8.6

 

Other:

 

 

 

 

 

 

 

Interest income

 

5.0

 

 

 

7.5

 

Other

 

0.5

 

 

 

0.7

 

Total fee and other income

$

13.0

 

 

$

16.8

 

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

BRE DDR Retail Holdings Joint Ventures

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

 

 

 

 

Common

Equity

 

 

Preferred Investment (Principal)

 

 

Properties Owned

 

 

Formation

 

Initial

 

 

Initial

 

 

March 31, 2018

 

 

Net of Reserve

 

 

Inception

 

 

March 31, 2018

 

BRE DDR III

Oct 2014

 

$

19.6

 

 

$

300.0

 

 

$

230.2

 

 

$

181.6

 

 

 

70

 

 

 

35

 

BRE DDR IV

Dec 2015

 

 

12.9

 

 

 

82.6

 

 

 

66.7

 

 

 

50.4

 

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

$

382.6

 

 

$

296.9

 

 

$

232.0

 

 

 

 

 

 

 

 

 

 

12


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

 

The Company reassessed the aggregate valuation allowance at March 31, 2018, with respect to its preferred investments in BRE DDR III and BRE DDR IV.  Based upon actual timing and values of recent property sales as well as current market assumptions, the Company adjusted the aggregate valuation allowance by $4.0 million, resulting in a net valuation allowance of $65.0 million.  The valuation allowance is recorded as Reserve of Preferred Equity Interests on the Company’s consolidated statements of operations.  The Company will continue to monitor the investments and related valuation allowance which could be increased or decreased in future periods, as appropriate.

The Company’s preferred interests are entitled to certain preferential cumulative distributions payable out of operating cash flows and certain capital proceeds pursuant to the terms and conditions of the preferred investments.  The preferred distributions are recognized as Interest Income within the Company’s consolidated statements of operations and are classified as a note receivable in Investments in and Advances to Joint Ventures on the Company’s consolidated balance sheets.  The preferred investments have an annual distribution rate of 8.5% including any deferred and unpaid preferred distributions.  Blackstone has the right to defer up to 2.0% of the 8.5% preferred fixed distributions as a payment in kind distribution or “PIK.”  Blackstone has made this PIK deferral election since the formation of both joint ventures.  The cash portion of the preferred fixed distributions is generally payable first out of operating cash flows and is current for both BRE DDR Joint Ventures.  The Company has no expectation that the cash portion of the preferred fixed distribution will become impaired.  As a result of the valuation allowances recorded, the Company no longer recognizes as interest income the 2.0% PIK.  Although Blackstone has the right to change its payment election, the Company expects future preferred distributions to continue to include the PIK component.  The recognition of the PIK interest income will be reevaluated based upon any future adjustments to the aggregate valuation allowance, as appropriate.

Disposition of Shopping Centers

From January 1, 2018 to March 31, 2018, the DDRM Properties joint venture sold nine assets for $150.0 million and the BRE DDR III joint venture sold two assets for $39.2 million. The Company’s pro rata share of the aggregate gain from these sales was $7.4 million.

4.

Other Assets, Net

Other assets consist of the following (in thousands):  

 

 

March 31, 2018

 

 

December 31, 2017

 

Intangible assets:

 

 

 

 

 

 

 

In-place leases, net

$

64,869

 

 

$

71,809

 

Above-market leases, net

 

13,250

 

 

 

14,391

 

Lease origination costs

 

9,155

 

 

 

10,029

 

Tenant relations, net

 

80,560

 

 

 

86,178

 

Total intangible assets, net(A)

 

167,834

 

 

 

182,407

 

Other assets:

 

 

 

 

 

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