DDR on a Portfolio Enhancement Spree

Zacks

Carrying on with its aggressive portfolio transformation initiatives, DDR Corp. (DDR) disclosed the divestiture of 14 non-prime assets in the first quarter of 2014. This retail real estate investment trust (:REIT) generated $198 million from the sale, of which its share was $142 million.

Additionally, DDR stated that it has $36 million of non-income producing and $97 million of non-prime operating assets under contract for sale. Upon completion, the company’s share of proceeds from this sale will be $103 million.

Notably, this disposition spree signifies DDR’s motive of offloading the small format or single tenant centers and investing the proceeds in large format prime power centers in top Metropolitan Statistical Area (MSA) of the U.S. Consequently, of the abovementioned sold or under-contract assets, 22 are small format neighborhood centers or single tenant properties. These assets have average base rents of below $9.50 per square foot – about 35% lower than the prime average rent.

Moreover, at par with its strategy of reinvesting the sales proceeds in premium assets buyout, DDR inked a deal to purchase 3 prime power centers for an aggregate price of about $235 million. The properties are situated in downtown Chicago, Colorado and Northern California. The assets operate in a strong demographic area, with an average of 585,000 people who have household incomes of $88,000. DDR expects the acquisitions to complete in second or third quarter of 2014. Notably, the buyout will be funded from the dispositions of the U.S. assets and previously disclosed Brazilian assets.

As a matter of fact, last month, DDR penned a letter of intent with Mr. Alexander Otto and his affiliates to sell its stake in the Luxembourg-based firm – Sonae Sierra Brazil BV Sarl, marking the company’s complete exit from the Brazilian market.

We remain encouraged with DDR’s strategic portfolio repositioning efforts. Successfully leveraging the initiative, the company has sold over 300 non-prime assets in the past five years. Going forward, the addition of upscale assets to its high-end asset portfolio along with strengthening of the tenant base promises strong growth prospects for DDR.

DDR is scheduled to report its first-quarter 2014 results on May 6, after the closing bell. The Zacks Consensus Estimate for core funds from operations (:FFO) per share for the quarter is pegged at 28 cents per share, depicting a year-over-year increase of 5.13%.

Currently, DDR has a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail REIT industry include Simon Property Group Inc. (SPG), General Growth Properties, Inc (GGP) and National Retail Properties, Inc. (NNN). All stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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