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Rating Upgrade at DDR

Zacks Equity Research

Retail real estate investment trust (:REIT) - DDR Corp. (DDR) - received a rating upgrade from Moody’s Investors Service, the rating unit of Moody's Corporation (MCO). The company now enjoys senior unsecured and preferred equity ratings of Baa2 and Baa3, which were raised from Baa3 and Ba1, respectively. Further, the rating outlook was revised to stable from positive.

The uptick in the rating is an acknowledgement of DDR’s high quality property portfolio and its efforts towards enhancing its value. The company aims for open air community retail shopping centers, majority of which boasts big box and supercenter tenants.

Moreover, the company shares a long-standing anchor tenant relationship, enjoy high occupancy levels and positive same-store net operating income growth. DDR is also focused on strengthening its balance sheet, increasing its unencumbered asset pool and enhancing its quality and value, as well as lowering its secured debt levels.

Yet, DDR faces credit challenges. While its fixed charge coverage is improving, it is yet to reach the levels of other REITs with mid-Baa ratings. Also, leverage improvement has moderated and rise in Internet sales continue to pose a challenge for storefront retail.

The rating upgrade of DDR is encouraging. In fact, this plays a major role in preserving investor confidence in the stock and helps boost its creditworthiness in the market.

Earlier this month, DDR reported third-quarter 2013 operating FFO (funds from operations) per share of 28 cents, in line with the Zacks Consensus Estimate and up nearly 4% from 27 cents reported in the year-ago quarter. The year-over-year increase was mainly aided by organic growth and investments in shopping center acquisitions, but was partly dwarfed by asset sales.

Going forward, we believe that for DDR, which boasts a cluster of industry leading retailers such as Wal-Mart Stores Inc. (WMT), Lowe’s and Target Corp. (TGT), the addition of upscale assets to its high-end asset portfolio along with strengthening of balance sheet promises strong growth prospects. However, stiff competition from other players in the market and an elevation in Internet sales that adversely affect the demand for retail space remain our concerns.

DDR currently has a Zacks Rank #3 (Hold).

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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