Than the Sum of Our Parts
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Developers Diversified Realty 2007 Annual Report MORE THAN THE SUM OF OUR PARTS Developers Diversified Realty 2007 Annual Report Birkdale Village in Charlotte, NC Aspen Grove in Denver, CO Uptown Solon in Cleveland, OH Centerton Square in Mt. Laurel, NJ Hamilton Marketplace in Trenton, NJ Town Center Plaza in Kansas City, KS Valley Central Shopping Center in Los Angeles, CA Campo Limpo in Sao Paulo, Brazil FlatIron Marketplace in Denver, CO Developers Diversified owns and manages over 740 retail and development properties in 45 states, plus Puerto Rico, Brazil, Russia and Canada totaling over 163 million square feet. Developers Diversified is a self-administered and self-managed real estate investment trust (REIT) operating as a fully integrated real estate company which acquires, develops, leases and manages shopping centers. FINANCIAL HIGHLIGHTS (in thousands, except per share data) 2007 2006 2005 2004 2003 Revenues $ 944,851 $ 775,324 $ 678,109 $ 532,383 $ 417,481 Funds from operations: (1) Net income applicable to common shareholders $ 225,113 $ 198,095 $ 227,474 $ 219,056 $ 189,056 Depreciation and amortization of real estate investments 214,396 185,449 169,117 130,536 93,174 Equity in net income of joint ventures (43,229) (30,337) (34,873) (40,895) (44,967) Gain on sale of joint venture interests – – – – (7,950) Joint ventures' funds from operations 84,423 44,473 49,302 46,209 47,942 Minority equity interests (OP Units) 2,275 2,116 2,916 2,607 1,769 Gain on disposition of depreciable real estate investments net (17,956) (21,987) (58,834) (68,179) (67,352) Cumulative effect of adoption of a new accounting standard – – – 3,001 – Funds from operations applicable to common shareholders 465,022 377,809 355,102 292,335 211,672 50,934 55,169 55,169 50,706 51,205 Funds from operations $ 515,956 $ 432,978 $ 410,271 $ 343,041 $ 262,877 Net operating income (2) $ 621,296 $ 517,542 $ 452,801 $ 355,621 $ 273,930 Real estate (at cost) (3) $ 8,984,671 $7,447,459 $7,029,337 $5,603,424 $ 3,884,911 Per share (diluted): Net income $ 1.85 $ 1.81 $ 2.08 $ 2.24 $ 2.27 Funds from operations(1) $ 3.79 $ 3.41 $ 3.21 $ 2.95 $ 2.51 Dividends declared (per share) $ 2.64 $ 2.36 $ 2.16 $ 1.94 $ 1.69 Weighted average shares (diluted) 121,497 109,613 109,142 99,024 84,188 Weighted average shares and OP Units (diluted) 122,716 110,826 110,700 99,147 84,319 (1) The Company believes that Funds From Operations (“FFO”), which is not a generally accepted accounting principle (“GAAP”) financial measure, provides an additional and useful means to assess the financial performance of real estate investment trusts (“REITs”). It is frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs, most of which present FFO along with net income as calculated in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flows as a measure of liquidity. (2) Net operating income equals income before depreciation, amortization, interest income and expense, equity in net income of joint ventures, minority equity interests, taxes and gain/loss on disposition of real estate. (3) Does not include property owned through joint ventures. MORE THAN A LIFESTYLE CENTER MORE THAN A MIXED-USE CENTER Town Center Plaza in Kansas City, KS Paseo Colorado in Los Angeles, CA It’s a neighborhood center in Atlanta, hybrid center in San Antonio and a lifestyle center in Denver. It’s enclosed in Puerto Rico, urban in Miami and multi-level in Brazil. Adapted to MORE THAN ASSET QUALITY each market, Developers Diversified properties are characterized by low average age, consistent internal growth, market dominance and active asset management. When it comes to the value of our wide-ranging portfolio, clearly, we are more than the sum of our parts. The Shops at Midtown Miami in Miami, FL Our close relationships with our tenants provide precious opportunities to stay on top of retail trends, track changes in shopping preferences and habits, migrate into new formats MORE THAN A GREAT TENANT together…grow together. By identifying optimally positioned properties, leasing to top-flight retailers and generating traffic for those retailers, we create synergy and success. When it comes to the value of our dynamic partnerships with our tenants, clearly, we are more than the sum of our parts. Deer Park Town Center in Chicago, IL Developers Diversified has helped pioneer joint venture arrangements in the REIT industry and, in general, pointed the way in conceiving innovative ways to engage institutional partners. MORE THAN ACCESS TO CAPITAL Now we are committing resources to a more active and more comprehensive funds management platform that will secure long-term relationships and promote profitability on our combined investments. When it comes to the value of our investment partners, clearly, we are more than the sum of our parts. Gross Asset Name Partner Value(M) DDRTC Core Retail Fund TIAA–CREF $ 3,020 Macquarie DDR Trust Macquarie Bank 2,810 Coventry II Various 1,807 DDR Domestic Retail Fund I Various 1,500 Retail Value Investment Program Prudential Real Estate Investors 405 DDRA Community Centers DRA Advisors 375 Inland–SAU Retail Fund State of Utah 324 DDR Markaz II Kuwait Financial Centre 311 TRT DDR Venture Total Realty Trust 162 Other Various + 601 Total $ 11,315 Birkdale Village in Charlotte, NC By maximizing common area income opportunities, cultivating relationships with potential advertisers and event sponsors, and welcoming special retailer formats such as kiosks and seasonal MORE THAN TRADITIONAL LEASING stores, our new business development team continues to invent imaginative pathways to non-traditional sources of revenue. When it comes to the value of the interior and external space of our properties, clearly, we are more than the sum of our parts. Plaza del Sol in San Juan, Puerto Rico Paseo Colorado in Los Angeles, CA A robust pipeline and recognition by many industry sources as the nation’s leading developer of shopping centers are two distinctions that only begin to foretell tomorrow’s development MORE THAN DEVELOPMENT CAPACITY possibilities. The opportunity to be highly selective in weighing development options, proven prowess in adapting shopping center formats to communities’ individual needs, expertise in containing construction costs and other advantages give Developers Diversified uncommon flexibility for growth. When it comes to the value of our development pipeline and infrastructure, clearly, we are more than the sum of our parts. The Shops at Midtown Miami in Miami, FL MORE THAN MEETS THE EYE What a difference a year makes! As I wrote this letter to shareholders last year In the ‘90s, dim prospects from our traditional financing sources led us With that evolutionary context as a foundation for analyzing Developers at this time, we at Developers Diversified were celebrating the successful to find new capital sources, through public market equity in 1993 and Diversified’s current position and performance, let’s turn to a number of acquisition and financing of a $6 billion portfolio. We were awash in capital through joint venture partnerships in 1995. Clearly, both of those initiatives other perspectives. from a plethora of sources. Real estate prices were at historic highs. Share have turned out exceedingly well, with stockholders’ investments and Retail realities prices for REITs, including Developers Diversified, were at lofty levels. Retailers innovative financial partnerships helping to fuel exceptional growth and were expanding aggressively. The U.S. economy appeared to be strong. profitability for Developers Diversified and for our partners. The papers I read, both from Main Street and Wall Street, seem to make It was “the best of times.” At the time of our IPO we were a $400 million company – highly focused some faulty assumptions about the retail sector. The casual follower of Now, a year later, on the heels of the sub-prime mortgage crisis, we are on a specific retail format and a much smaller circle of tenants, with higher economic oscillations might reason, for example, that one of the first facing a historic liquidity crisis. REIT share prices, including ours, have concentrations of credit, far fewer assets, rather limited geographic diversity punches thrown by a troubled economy is at retail stores…or that retail is plummeted. The U.S. economy is teetering on the verge of a serious and no international exposure. We surely did not have the credit rating we particularly susceptible to declines when home price appreciation and recession. Retailers are more cautious. In short, these are decidedly more enjoy today or today’s abundance of capital sources. In 1993, when we mortgage equity sag. The historic reality, however, has been that U.S. retail turbulent times. became one of the first real estate companies to put public equity on its sales have shown very little volatility in the last half century, showing Sounds pretty bleak, doesn’t it? In fact, if you read the papers and balance sheet, we did not have many other options for growth. consistent growth during most periods and stability through several watch the news, you might be pretty concerned about the near-term Although only a few years passed until we encountered the next period recessions and several declines in housing values. prospects for a leader in the retail real estate business. Our share price of economic pressure, by then we had progressed far past our 1993 size Long Term Retail Sales reflects this concern, and it is quite discouraging to us, as I’m sure it is to and diversity.