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Having read through Developers Diversified's (NYSE:DDR) earnings release and conference call transcript, as well as reading their supplemental release, I thought it might be interesting to back into the company's bond covenants. While the results may not be exact (due to the varied interpretations of most REITs), they should be pretty close.

Why do this? The answer is simple, should the company be running up against their covenants, they have to approach bondholders (and banks) for consents and waivers. This means the company has to negotiate with the "REIT Mafia". For those not familiar, the REIT Mafia is a group of investors (usually insurance companies with some other asset managers) that utilize their REIT distribution lists to quickly form a group and build a bondholder front. As someone who has been part of these discussions in the past, I can assure you that they can extract more than a pound of flesh. When this occurs, it does not typically accrue to the benefit of investors lower in the capital structure.

Here are my findings:

Balance Sheet Assets

Undepreciated Real Estate Assets:

7,953,584

Total Assets:

8,426,606

Encumbered Assets (est):

4,122,114

Unencumbered Assets (est):

3,831,470

Covenant Total Assets:

9,500,521

Debt Service:

249,189

Capital Structure

Debt

Mortgage Debt:

1,771,479

Secured Bank Debt:

800,000

Unsecured Bank Facilities:

775,028

Unsecured Senior Debt:

1,689,841

5,036,348

Preferred

Series G

180,000

Series H

205,000

Series I

170,000

555,000

Equity:

2,952,336

Covenant Compliance

YE 2009

Q3 2009

Debt/Assets (<65% of undepreciated RE Assets):

63.3%

57.2%

Secured Debt/Assets (<40% of TA):

27.1%

26.0%

Debt Service Coverage (>1.5x):

Unencumbered RE Assets/Unsecured debt (>1.35x):

1.55

1.88

As you can see, the company is running tight against their Debt/Assets covenant while their other measures have weakened sequentially.

NOTE: The numbers for unencumbered assets were derived by using an investor presentation from January and backing into the encumbered asset LTV and applying it to YE secured debt numbers.

You might notice there is no estimate for DSCR. Reading the definition of consolidated income available for debt service:

“Consolidated Income Available for Debt Service” for any period means Consolidated Net Income (as defined below) of Developers Diversified Realty Corporation and its subsidiaries

...plus amounts which have been deducted for:

(a) interest on our and our subsidiaries’ Debt,

(b) provision for our and our subsidiaries’ taxes based on income,

(c) amortization of debt discount,

(d) depreciation and amortization, and

(2) adjusted, as appropriate, for

(a) the effect of any noncash charge resulting from a change in accounting principles in determining Consolidated Net Income for such period, and

(b) the effect of equity in net income or loss of joint ventures in which we own an interest to the extent not providing a source of, or requiring a use of, cash, respectively.

The add-backs are somewhat vague and I have not been able to tie back to prior published figures. This information will be released when the 10-Q is released.

These numbers lead me to believe that the recent equity raise was to help the company stay in compliance with their covenants. If this is the case, if NOI stays weak we should expect more equity to be sold to ensure further compliance. That said, I would rather be dilluted than distressed.

Bottom line: The company still has a difficult row to hoe.

As an aside, if anyone has an estimate of DSCR, I would love to see it (and possibly the add-backs.

Disclosure: Author holds a long position in DDR preferreds

Source: Developers Diversified: Bond Covenants Hold