DDR To Spin-Off Sellable Properties Into A New Company

In the final leg of its disposition program, DDR Corp. (NYSE:DDR) announced the decision of the company’s board of directors to spin-off a portfolio of 50 sellable assets into a separate public-traded real estate investment trust (REIT) — Retail Value Trust (“RVT”).

The split-up is seen as a business strategy to create two separate companies with distinct strategies. Post spin-off, DDR will own 236 properties exhibiting top-tier demographics and offering maximum scope for growth and redevelopment. On the other hand, RVT is expected to liquidate its entire portfolio within two to three years in order to realize the private market values for the company’s properties that are currently discounted by the public markets.

The spin-off is likely to close in mid 2018, after which RVT will hold a portfolio of 38 continental U.S. assets and the entire Puerto Rico portfolio of 12 assets, valued at $3 billion as of Sep 30, 2017. These continental U.S. properties have a strong liquidity as compared to the assets worth $1 billion sold by DDR in the year so far.

The Spin Co will be tied to a committed mortgage loan of $1.35 billion, the proceeds of which will be used to repay DDR’s debt. This will help DDR achieve its goal of Net Debt/Adjusted EBITDA of 6x for 2018 and strengthen the company’s balance sheet as well.

The spin-off will transform DDR’s portfolio and contain significant re-leasing opportunities that will accelerate growth in net operating income (NOI). Its trimmed portfolio will no longer have exposure to Puerto Rico. This will enable DDR to maintain scale of operations and focus on core assets in the United States.

RVT will be externally managed by DDR to capitalize on maximum cost efficiencies. DDR shareholders will receive shares of RVT through a taxable pro rata stock distribution. Further, no changes will be made to the company’s quarterly dividend prior to the RVT spinoff.

Such significant measures by the company demonstrate its priority to enhance portfolio mix and are accretive for long-term growth. However, growth of e-retailers at the expense of brick-and-mortar sales is a serious concern for this retail REIT. In fact, many retail landlords, including The Macerich Company (NYSE:MAC) , Kimco Realty Corporation (NYSE:KIM) and Taubman Centers (NYSE:TCO) , have been adversely affected due to consumers’ preferences increasingly shifting toward online retail. This has also resulted in widespread store closures and bankruptcy filing by the retailers.

Amid the lackluster retail environment, this Zacks Rank #3 (Hold) company has underperformed its industry year to date. Shares of DDR have plunged 47.9%, as compared to the industry’s gain of 12%.

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