One REIT’s Trash, Not Another REIT’s Treasure

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Summary

  • DDR is creating a new vehicle named Retail Value Trust (RVT), and it will contain 38 U.S. assets and all 12 of DDR’s Puerto Rico assets.
  • We believe there are better options today, and we recommend selling out of DDR until Retail Value Trust is liquidated.
  • Therefore, we are downgrading from Speculative BUY to HOLD.

A few weeks ago I wrote an article on DDR Corp. (DDRexplaining,

“Given the enhanced risks associated with the damage in Puerto Rico I am not inclined to modify my recommendation (speculative BUY); however, I consider DDR a highly attractive BUY right now for a higher risk investor.

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As you can see, DDR shares are up over $1.00 per share and the news last weektriggered the spike:

DDR is creating a new vehicle named Retail Value Trust (RVT), and it will contain 38 U.S. assets and all 12 of DDR’s Puerto Rico assets. The plan would be for RVT to liquidate its portfolio over a two-three year time period.

RVT will be capitalized with $1.35B in mortgage financing, with DDR using the proceeds to pay down debt – bringing the company to its goal of 6x net debt/adjusted EBITDA in 2018. Left for DDR is a portfolio with maximized exposure to growth and redevelopment potential.

To be clear, my last recommendation was a “Speculative BUY” and this simply means that DDR is a far cry from being a STRONG BUY. I’m not capitalizing on investor sentiment for the sake of a quick buck.

However, I am now faced with a crucial decision, that is, whether or not to continue holding shares in DDR and the newly crafted spin-co called  Retail Value Trust.

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Photo Credit

The Basics

In my previous article, I explored the basics for DDR s there’s no reason to do it again. Let’s examine the two distinct companies with two distinct strategies:

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New DDR’s portfolio is specifically curated asset-by-asset to provide exposure to high-quality, high-growth assets most appropriate for the public markets. The smaller pool of remaining durable assets have top-tier convenience and demographics:

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The New DDR portfolio will offer improved relative and absolute positioning:
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You can see the portfolio for metrics for both portfolios. The transaction separates highest growth Continental U.S. assets from a pool of highly saleable properties currently being discounted by the public markets:

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Now consider the dividend characteristics of the New DDR and Retail Value Trust:

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Now consider the estimated timeline for completion (complete July 2018):

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New DDR: Significant Portfolio Repositioning

New DDR’s portfolio is specifically curated asset-by-asset to provide exposure to high-quality, high-growth assets most appropriate for the public markets. The smaller pool of remaining durable assets have top-tier convenience and demographics:
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High-quality discounters and grocers anchor the majority of New DDR Centers. Assets with traditional / specialty grocers account for 40% of New DDR’s portfolio with average reported sales of $641/ft. Including mass merchants with a grocery component, 70% of New DDR’s portfolio is anchored by a food component.

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New DDR will be comprised of the Top 12 markets that account for 70% of consolidated adjusted 2018E NOI:

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New DDR will have substantially improved operating metrics:

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Example of New DDR development property:

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Example of New DDR development property:

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New DDR’s further balance sheet improvements:

  • Debt / Adjusted EBITDA (excluding preferred stock) of ~6.0x in 2H2018
  • Weighted average maturity of 10.2 years including preferred stock (5.5 years excluding)
  • No unsecured maturities until 2021
  • Full availability under the company’s $1.0BN Line of Credit
  • Capacity to fund 5 years of maturities

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DDR is commitment to its Investment-Grade Credit Rating. The company has a larger and higher quality unencumbered pool with minimal secured debt. Improvement to all public bond covenants. Closing of mortgage not expected to impact DDR covenant compliance.

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The Ugly Duckling REIT?

Operating metrics for Retail Value Trust:

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DDR has sold over $3BN of assets since 2015, including $992MM through October 2017 at a 7.8% cap rate, highlighting liquidity in the shopping center sector and demand for well-leased assets. The RVT Continental U.S. asset pool is measurably superior to DDR assets sold to date with better demographics, leased rates and rent PSF.

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The Retail Value Portfolio is of higher quality and more liquid than assets sold to date:

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Snapshot of Retail Value Portfolio:

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Snapshot of Financing Details for Retail Value Trust:

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Here’s My Take

DDR had telegraphed its intent for spinning the non-core assets, in reference to the Puerto Rico assets, DDR’s CEO said (on the Q3-17 earnings call):

“I think what we’ve said even in the last few quarters is that this management team is willing to consider anything that would create or protect shareholder value. And there are a lot of types of ideas that could be considered but should always be considered at any quarter. So nothing is off the table and you can rest assure that we’re certainly focused like a laser on making decisive actions when something seems credible.”

Spinning lower quality properties is nothing new in the REIT sector: Simon Properties (SPG) spun Washington Prime (WPG). Ventas, Inc. (VTR) spun Care Capital Properties, now owned by Sabra (SBRA). HCP, Inc. (HCP) spun Quality Care (QCP). More recently, Spirit Realty (SRC) plans to spin $2.7 Billion of gross investments, highly concentrated with Shopko stores.

To date, there is nothing impressive about Washington Prime, Care Capital (now owned by SBRA), and Quality Care.

Likewise, I am not overwhelmed with the liquidating REIT plan proposed by Spirit and DDR.

While DDR’s spin proposal provides simplicity, it also provides complexity as RVT will be externally managed by DDR. In addition the DDR investor will obtain shares in the new RVT entity that are essentially place holders.

RVT will be capitalized with committed mortgage financing of $1.35 billion expected to fund in early 2018.  Proceeds are expected to be used to repay debt at DDR, positioning New DDR to achieve the previously stated goal of 6.0x Net Debt/Adjusted EBITDA in 2018.

Here’s DDR’s dividend history since 2012:

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Here’s DDR’s FFO/share history since 2012:

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Given the latest spin-co news, we believe that DDR will right size the dividend (around 20% cut), maintaining a Payout Ratio of approximately 60-65%.

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In summary, we believe there are better options today, and we recommend selling out of DDR until Retail Value Trust is liquidated. Therefore, we are downgrading from Speculative BUY to HOLD. Our top Shopping Center picks include Kimco Realty (KIM) and Brixmor (BRX). See latest Kimco article HERE.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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