SOURCE: Developers Diversified

October 20, 2008 08:00 ET

Developers Diversified Realty Provides Updates on Mervyns and Additional Disclosures Regarding Balance Sheet Strength

CLEVELAND, OH--(Marketwire - October 20, 2008) - Developers Diversified Realty (NYSE: DDR) ("Company"), the nation's leading owner, developer and manager of market-dominant shopping centers, today provided updates regarding the status of its joint venture investment in stores occupied by Mervyns and additional disclosures with regard to the strength of its balance sheet. Recent speculation regarding both topics has prompted the Company's desire to ensure that the facts are readily available.

Scott A. Wolstein, Developers Diversified's Chairman and Chief Executive Officer, stated, "I have learned first-hand through an unfortunate series of margin calls relating to my significant investment in the shares of Developers Diversified that there are potentially severe consequences to an over-leveraged balance sheet in a capital constrained environment. I am committed to applying those lessons to ensure that Developers Diversified meaningfully reduces its financial leverage to enable it to succeed in spite of the challenges of today's capital markets. While I believe we are positioned to meet all of our financial obligations over the next several years, I am extremely committed to taking additional proactive steps, making use of all necessary financial measures, to meaningfully reduce leverage and, in so doing, enhance our financial flexibility and provide additional comfort to both our equity and our fixed income investors."

Mervyns Investment Updates

Developers Diversified also today provided updated information regarding its investment in stores occupied by Mervyns, a privately-owned retailer with 38 locations within the Company's 730-property portfolio. Developers Diversified does not expect its financial results to be materially impacted by the retailer's recent announcement that it would liquidate, due to the protections provided to the Company by letters of credit aggregating over $32 million and significant tenant interest already expressed for the locations currently occupied by Mervyns by numerous higher credit quality retailers.

Investment Summary

Developers Diversified owns 37 real estate locations leased to Mervyns in a consolidated 50% joint venture with Macquarie DDR Trust ("MDT"). These assets were acquired for $407 million and subsequently leased to Mervyns for 15 years at an annual initial triple-net rental rate of $30.5 million, increasing at 2% annually. The transaction was purposefully structured to provide the joint venture with sufficient credit enhancements in the event Mervyns defaulted or declared bankruptcy. The structure also offered a stable income stream with limited operating risk, no financial impact to the Company's corporate overhead, and no additional required capital investment. The specific stores acquired represented less than 20% of Mervyns' entire portfolio at the time of acquisition, and were specifically selected for their locations, quality and potential attractiveness to other retailers.

The acquisition was financed with cross-collateralized mortgage financing, which was exclusively secured by these Mervyns assets and which is non-recourse to Developers Diversified and MDT. Pursuant to the terms of the financing, the variable rate portion of the loan, which has a principal balance of approximately $46 million, was recently extended through October 2009, and has a subsequent extension available at the borrower's option through October 2010. The fixed rate portion of the loan, which is also non-recourse, and which has a principal balance of approximately $213 million, has a concurrent maturity in October 2010.

The equity contribution of the acquisition was funded on a 50% basis each by Developers Diversified and MDT, of which the Company's portion was approximately $75 million. Developers Diversified has already received approximately $25 million in net cash flow after debt service since the Company acquired the portfolio approximately three years ago.

Developers Diversified's investment is protected by two letters of credit available for the benefit of the Company and the joint venture. First, the terms of the acquisition contained a contingent purchase price adjustment secured by a $25 million letter of credit from the seller of the portfolio. This letter of credit has been drawn in full and funds are available for re-tenanting expenses. Second, another approximately $7.5 million letter of credit was provided by Mervyns as security deposits on the Mervyns leases. The Company's aggregate financial exposure, including one wholly-owned asset, is $17.6 million in pro rata annual base revenues, or less than $10 million ($0.08 per share) in net cash flows after debt service. The Company confirms that Mervyns is current on all rental payments through the end of October 2008.

Retenanting Outlook

Since Mervyns' bankruptcy filing was announced in July, Developers Diversified has received strong interest from many retailers interested in leasing or buying space currently occupied by Mervyns. However, Mervyns has not yet rejected any leases, nor has it announced a definitive auction date for many of its locations. Therefore, it is possible that retailers or other interested parties, including owners of adjacent retail assets, may still acquire the Mervyns lease locations through the bankruptcy proceedings, in which case the buyer of such locations will be obligated to perform under the current Mervyns lease and neither the joint venture nor Developers Diversified would be obligated to spend any funds to retenant such space or would experience any interruption in rental payments.

At the time of acquisition, Developers Diversified and its partner recognized the potential risk associated with Mervyns' credit and underwrote the investment based upon the long-term value of the underlying real estate. The majority of these assets are located in high-quality, market-dominant community centers and enclosed regional malls. Twenty-seven of the Mervyns assets are located in California, with nearly 1.0 million square feet in the Los Angeles metropolitan area and over 500,000 square feet in the San Francisco area. The remaining assets are located in Arizona (5), Nevada (5) and Texas (1). Due to the infill nature of most of these markets where retail sites are extremely difficult to entitle and develop, or costly to acquire, the Company is confident of its ability to retenant the stores that it is able to recapture and aware of several retailers that view the portfolio as an important opportunity to gain market share in markets that are difficult to penetrate.

Balance Sheet Strength

Developers Diversified today provided additional details with respect to its upcoming debt maturities and potential sources of capital that are expected to satisfy its cash needs in 2009 and beyond. In addition, the Company confirms that it is compliant with its debt covenants as of the end of the third quarter and anticipates that it will continue to satisfy these requirements going forward, as it has in its 14 years since receiving its investment grade credit rating. The Company is currently rated BBB with a stable outlook and Baa2 with a stable outlook from Standard & Poor's and Moody's, respectively.

Cash Flow Generation

Developers Diversified's core business of leasing space to well-capitalized retailers continues to perform well, as the Company's primarily discount-oriented tenants gain market share from retailers offering higher price points and offering more discretionary goods. These long-term leases generate consistent and predictable cash flow after expenses, interest payments, and preferred stock dividends of more than $300 million per year. This capital is available for use at the Company's discretion for investment, debt repayment, and the payment of dividends on our common stock.

In addition to this operating cash flow, and notwithstanding the current dislocation in the financial markets, Developers Diversified continues to raise capital from asset sales. The Company is currently in negotiations regarding outright sale of assets to third parties, as well as advanced negotiations regarding the creation of joint ventures with institutional investors through which we extract significant equity from a group of our existing assets. The Company has sold over $100 million of assets year-to-date, including $73 million within the third quarter. The Company has another $69 million of assets under contract for sale and $94 million subject to letters of intent on behalf of itself and its joint ventures. Recent and prospective buyers include local individuals, regional private investors, insurance companies, and large REITs. Despite the challenges in the financial markets, the Company believes that asset sales will continue to generate considerable proceeds.

Developers Diversified also continues to receive proceeds from secured debt financings. Year-to-date, the Company has originated or extended approximately $1.2 billion of mortgage capital, of which approximately $1.1 billion represents new financings. Based on negotiations with lenders currently underway, the Company continues to receive quotes on refinancing and new debt, and anticipates successful financings to continue to occur during the remainder 2008 and throughout 2009, despite the current disruption in the financial markets. Further, some transactional activity continues to occur generally within the broad unsecured corporate debt market, although currently at considerably wider spreads than other forms of financing. The Company has historically actively accessed this market on a regular basis, and will continue to monitor it as the Federal Reserve, U.S. Treasury, and FDIC seek to restore normalcy.

Developers Diversified has $1.325 billion in aggregate capacity on its unsecured corporate credit facilities and, as of September 30, 2008, had $364 million in availability. The credit facilities are funded by more than 30 participating lenders, none of which represents more than 10% of total capacity. The Company also maintains a portfolio of unencumbered, wholly-owned real estate assets, with an estimated value of approximately $5.5 billion, which could provide a future borrowing base or could be sold in order to repay unsecured indebtedness.

Use of Funds

Excluding loans that Developers Diversified has the option to extend, the Company has approximately $400 million of consolidated debt and approximately $350 million of joint venture debt, of which its share is less than $60 million, maturing in 2009. Unsecured indebtedness comprises approximately $275 million of the 2009 aggregate amount. Total consolidated and joint venture debt maturing in 2010 without extension options aggregate approximately $2.0 billion, of which the Company's share is approximately $1.2 billion. Approximately $500 million of the 2010 aggregate amount is comprised of unsecured indebtedness. The great majority of the secured debt is non-recourse to the Company. Notably, no significant maturities occur from February 2009 through April 2010, thereby providing considerable time to ensure that all future maturities can be appropriately addressed.

With respect to capital expenditures, Developers Diversified has significantly reduced expected spending related to its development and redevelopment portfolios. Further, the Company views this form of expenditure to be completely discretionary. The Company is able to control capital expenditures by phasing construction until a sufficient level of pre-leasing is achieved and financing is in place.

Development spending on projects in Russia is expected to be suspended for 2009 and potentially beyond. No additional spending will occur unless and until locally-funded construction loans become available on commercially acceptable terms. Development spending in Brazil is also expected to be curtailed and further expenditures will only be funded from recycling internally generated joint venture capital. The Company's highly leased shopping center in Manaus will open in April 2009 and additional development projects are not expected to commence in the immediate future.

The Company intends to utilize a combination of equity raised from expected asset sales, including sales to joint ventures, retained capital, and existing and prospective financings to fund its debt maturities and, to the extent the Company determines appropriate, any incremental capital expenditures. While the Company reviews numerous investment opportunities at highly favorable pricing and terms, it does not expect to invest significant capital in these projects until debt maturities are appropriately addressed. Moreover, in the unlikely event that the capital markets remain indefinitely closed, the Company believes that it can rely on its free cash flow, asset sales, and unencumbered asset pool as sources of funding.

Developers Diversified Realty owns and manages approximately 730 retail operating and development properties in 45 states, plus Puerto Rico, Brazil, Russia, and Canada, totaling approximately 157 million square feet. The Company is a self-administered and self-managed real estate investment trust (REIT) operating as a fully integrated real estate company which acquires, develops and leases shopping centers. Additional information about Developers Diversified Realty is available on the Internet at http://www.ddr.com.

Macquarie DDR Trust (ASX: MDT) ("MDT") is an Australian Real Estate Investment Trust which is managed by an affiliate of Macquarie Group Limited (ASX: MQR), an international investment bank, advisor and manager of specialized real estate funds, and Developers Diversified.

Developers Diversified Realty Corporation 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 expectation for future periods. Although the Company believes that the expectations reflected in such 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 historical fact may be deemed to be forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including, among other factors, local conditions such as oversupply of space or a reduction in demand for real estate in the area; competition from other available space; dependence on rental income from real property; the loss of a major tenant; constructing properties or expansions that produce a desired yield on investment; our ability to sell assets on commercially acceptable terms; our ability to secure equity or debt financing on commercially acceptable terms; our ability to enter into definitive agreements with regard to our financing and joint venture arrangements or our failure to satisfy conditions to the completion of these arrangements. For additional factors that could cause the results of the Company to differ materially from these indicated in the forward-looking statements, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2007. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Contact Information

  • Contact:
    Michelle M. Dawson
    Vice President of Investor Relations
    Developers Diversified Realty
    Email: Email Contact
    Phone: (216) 755-5500