S&P Afrms Developers Diversified Realty Rtgs;Otlk Neg.Business Editors NEW YORK--(BUSINESS WIRE)--Standard & Poor's Oct. 9, 2002-- Standard & Poor's Ratings Services today affirmed its ratings and outlook on Developers Diversified Realty Corp. (DDR (Double Data Rate) Refers to an SDRAM memory chip that increases performance by doubling the effective data rate of the frontside bus. For more details, see SDRAM. DDR - Double Data Rate Random Access Memory ). The affirmation follows the recent announcement that DDR intends to acquire double-'B'-minus rated JDN JDN Joint Data Network JDN Jackson Daily News (Jackson, MS) Realty Corp. (JDN). The rating acknowledges the fact that this favorably priced transaction presents DDR with the opportunity to increase its pool of unsecured assets, de-lever the combined balance sheet using proceeds from the disposition of selected JDN assets, and ultimately improve fixed-charge coverage fixed-charge coverage The number of times that a firm's operating income exceeds its fixed payments. Fixed-charge coverage is a measure of a firm's ability to meet contractually fixed payments, with high coverage indicating significant flexibility for making measures. The ratings outlook, however, remains negative. The transaction's potential benefits are somewhat mitigated by concerns that JDN shareholders may not approve the transaction, as well as by the lease-up risk associated with both DDR and JDN's respective development pipelines. Preliminary indications suggest that this $1.02 billion transaction will be funded with exchange of $388 million of common equity and $50 million of preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. , and the assumption by DDR of $584 million of JDN's debt. JDN's common shareholders will receive 0.518 DDR shares for each JDN share. This represents a 7.6% discount relative to JDN's Oct. 4, 2002 closing price. The offer also represents a 5.7% discount to the depreciated Depreciated may refer to:
contingent on, dependant on, dependant upon, dependent on, dependent upon, depending on, contingent the approval of two-thirds of JDN shareholders and is expected to close on or before May 15, 2003. Cleveland-based DDR owns a nationwide portfolio of 361 shopping centers while JDN owns a portfolio of 99 shopping centers, located primarily in the southeastern U.S. The combination of these two companies would create one of the nation's largest retail REITs with a total of almost 77 million square feet (sq. ft.) and a market capitalization Market Capitalization A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares. It's calculated by multiplying the number of shares times the current market price. This term is often referred to as market cap. of $4.6 billion. Integration should be expected to proceed smoothly as the two portfolios share similar characteristics. Both are relatively new (average age is approximately 10 years) and well occupied (93% and 95%, respectively). Both portfolios tend to be anchored by leading value-oriented retailers such as Wal-Mart Stores Inc. (double-'A'), Lowe's Cos. Inc. (single-'A'), Kohl's Corp. (single-'A'-minus), TJX Cos. Inc. (single-'A'), and Bed Bath and Beyond Inc. (triple-'B'-minus). These anchor tenants are typically signed to long-term leases, with no more than 5% of total anchor base rents in either portfolio expiring in any single year. This combination of credit-quality tenants and long average lease tenor provide both portfolios with a stable income stream. JDN does have a large $210 million development pipeline. However, those projects are presently 86% pre-leased and the cost to complete those projects is less than $100 million. The transaction presents the opportunity for DDR to modestly improve a financial profile, which has historically been weaker than the peer group average. As of June 30, 2002, DDR's leverage was 54% on a book value basis (74% treating preferred stock as debt and 59% fully consolidating all off-balance-sheet joint ventures). Debt service coverage for the same period was 3.0 times (x). Fixed-charge coverage was 2.0x, and the company covered its common dividend payment and portfolio capital expenditures by roughly 1.1x. Approximately 36% of DDR's net operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. (NOI NOI Net Operating Income NOI Notice of Intent NOI Nation of Islam NOI Notice of Inquiry NOI Neuro Orthopaedic Institute NOI New Organizing Institute NOI Notice of Interest NOI No Offense Intended NOI National Olympiad in Informatics ) is derived from encumbered Encumbered A property owned by one party on which a second party reserves the right to make a valid claim, e.g., a bank's holding of a home mortgage encumbers property. properties. DDR's stronger credit rating and lower cost of capital relative to JDN will provide opportunities to increase the combined companies' pool of unencumbered properties as well as lower interest expense on the short-term JDN debt. Presently, 63 of JDN's properties, accounting for approximately 81% of net operating income (NOI), are encumbered. Of that total, 49 properties are secured by the JDN's $150 million line of credit and a $150 million term loan. Both loans mature in December 2002. It is DDR's intention to repay those loans using lower cost unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. , significantly increasing the amount of unsecured NOI available to noteholders of both companies. Additionally, management has stated its intention to use proceeds from the sale of some of JDN's non-income producing assets to reduce the combined companies' overall leverage and ultimately improve the combined companies' fixed-charge coverage ratio Fixed-Charge Coverage Ratio A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated as the following: . OUTLOOK: NEGATIVE The negative outlook continues to reflect DDR's weaker than average financial profile. However, Standard & Poor's acknowledges that this transaction would likely facilitate the company's previously stated debt-reduction efforts. Should this result in a sustainable improvement in the combined company's debt protection measures, the outlook would be revised to stable. However, if these improvements fail to materialize, a modest downgrade would be warranted. Copyright 2002, Standard & Poor's Ratings Services |
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