Fitch Affirms Developers Diversified's IDR at 'BB'; Outlook Stable

The affirmation of DDR's IDR reflects Fitch's view that the company's credit profile remains consistent with the 'BB' rating. DDR's retail property portfolio continues to demonstrate solid fundamentals, as occupancy increases and rental income from formerly vacant space have resulted in consistent fixed charge coverage. The company's credit strengths also include a well-laddered lease expiration schedule, a granular tenant roster, a broad geographical footprint, strong access to capital, and limited development risk. Credit concerns include a net debt to recurring operating EBITDA ratio that, absent significant deleveraging transactions, is expected to remain appropriate for a 'BB' rating and unencumbered asset coverage of unsecured debt that provides limited downside protection to bondholders. DDR also has a liquidity coverage ratio of below 1.0 times (x), driven by sizeable debt maturities in 2012. The Stable Outlook centers on the expected consistency of DDR's credit ratios over the near term and the stable environment for retailers that underpins demand for retail space.

DDR's leasing activity across the portfolio remains solid, as the company continues to renew space and fill properties vacated by bankrupt tenants. The core portfolio leased rate increased to 92% as of Sept. 30, 2010 from 91.6% as of June 30, 2010 and 90.9% as of Sept. 30, 2009, and the third quarter of 2010 (3Q'10) marked the fifth consecutive quarter of sequential increases in occupancy as demand remains good. Moreover, lease spreads on new leases and renewals were 5% in 3Q'10, while 75% of space formerly occupied by bankrupt tenants has been leased, sold or is under letter of intent for divestiture. These trends have contributed towards good same-store NOI growth of 2% in 3Q'10 after growth of 1.5% in 2Q'10 and declines of 2.6% and 3% in 1Q'10 and full year 2009, respectively.

The company's fixed charge coverage ratio (defined as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from joint ventures less recurring capital expenditures less straight line rent adjustments divided by total interest incurred and preferred stock dividends) was 1.4x for the trailing 12 months ended Sept. 30, 2010, compared with 1.6x in 2009 and 1.6x in 2008. Fitch anticipates that over the next 12-24 months, low single digit same-store NOI growth coupled with incremental cash flow from newly leased space previously vacated by bankrupt tenants and less capital utilized to fund tenant improvements will result in fixed charge coverage of approximately 1.5x, absent significant deleveraging transactions.

DDR has a well-laddered lease expiration schedule with 0.4%, 3.1%, and 4.8% of anchor base rents expiring in 4Q'10, full year 2011 and full year 2012, respectively. 2.4%, 8.6%, and 8.1% of shop space rents expire in 4Q'10, full year 2011 and full year 2012, respectively, providing incremental opportunities to continue pushing rents to higher market levels. Generally, DDR has a granular tenant roster; Wal-Mart Stores, Inc. (Fitch IDR 'AA' with a Stable Outlook) is the largest tenant representing 4.3% of rental revenues, and no other tenant contributes more than 2% of rental revenues. The portfolio also spans geographical regions with the largest states being Georgia (10.2% of gross leasable area), Florida (9.4%), Ohio (7.1%), New York (6.8%) and North Carolina (6.5%).

The company has demonstrated strong access to capital, having issuing 10-year unsecured bonds, common equity, and convertible notes in 2010, accessing the secured debt market, and recently renewing its unsecured credit facilities. The previous facilities totaled $1.325 billion at a coupon rate of LIBOR plus 75 basis points, while the new facilities mature in February 2014 and total $1.015 billion at a coupon rate of LIBOR plus 275 basis points. Under the new facilities, certain terms have changed, including an increase in the capitalization rate used to calculate the market value of assets to 8% from 7.5% under the previous facilities. In addition, an unencumbered debt yield test (unencumbered NOI to unsecured debt) has been added, which must exceed 10% through 4Q'10, 11% through 2Q'12 and 11.5% thereafter.

The company's development risk remains limited as the company is actively involved in only two development projects and one redevelopment project. However, DDR has a large land portfolio, which along with construction in progress totaled $817.7 million as of Sept. 30, 2010 (10.4% of total assets), compared with $858.9 million (10.2% of total assets) as of Dec. 31, 2009 and $882.5 million (9.8% of total assets) as of Dec. 31, 2008.

DDR's leverage, measured as net debt to recurring operating EBITDA including Fitch's estimate of recurring cash distributions from joint ventures, remains at a level that is appropriate for a 'BB' rating at 9.5x as of Sept. 30, 2010, compared with 10.9x as of Dec. 31, 2009 and Dec. 31, 2008. Fitch projects that leverage may fall slightly to approximately 9.0x by year-end 2011 principally due to retained cash from operations used to pay down borrowings as the company is currently paying a limited quarterly common stock cash dividend.

DDR has a large unencumbered property pool that generated approximately $259.1 million of NOI for the 12 months ended Sept. 30, 2010. However, unencumbered assets (calculated as unencumbered NOI divided by a capitalization rate of 8%) divided by unsecured debt was 1.5x as of Sept. 30, 2010 and 1.4x pro forma for a $200 million paydown of secured term debt with the company's unsecured revolving credit facilities and recent asset sales. Unencumbered asset coverage currently provides limited downside protection to unsecured bondholders.

The company's sources of liquidity (unrestricted cash, availability under revolving credit facilities pro forma for the new commitment size, partial paydown of secured term debt, recent convertible bond issuance and recent asset sales, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and projected recurring capital expenditures) result in a liquidity coverage ratio of 0.5x for Oct. 1, 2010 through Dec. 31, 2012. This liquidity coverage ratio is driven by sizeable debt maturities in 2012, when 28.1% of the company's pro rata debt matures pro forma for the convertible bond offering and partial paydown of secured term debt in October 2010. However, the company's liquidity coverage ratio would be 1.2x if the company refinances 85% of maturing secured debt, consistent with recent consolidated secured debt refinancings.

The Stable Outlook centers on the Fitch's expectation that the company's credit ratios will remain steady over the near term, but that DDR will continue to de-lever modestly via retained capital. The Stable Outlook further reflects that retailers will experience modest growth in same-store sales and new store expansions, driving demand of retail space.

The two-notch difference between DDR's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB'. Based on the criteria report, 'Equity Credit for Hybrids & Other Capital Securities,' DDR's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but has a cumulative deferral option. Net debt plus 25% of preferred stock to recurring operating EBITDA was 9.8x at Sept. 30, 2010, down from 11.2x at Dec. 31, 2009 and Dec. 31, 2008.

The following factors may have a positive impact on DDR's ratings and/or Outlook:

--Fixed charge coverage sustaining above 1.6x (fixed charge coverage ratio was 1.4x for the trailing 12 months ended Sept. 30, 2010);

--Net debt to recurring operating EBITDA sustaining below 9.0x (leverage was 9.5x as of Sept. 30, 2010);

--Improvements in liquidity coverage.

The following factors may have a negative impact on DDR's ratings and/or Outlook:

--Fixed charge coverage sustaining below 1.4x;

--Net debt to recurring operating EBITDA sustaining above 10.0x;

--Further reductions in liquidity coverage.

DDR is a real estate investment trust (REIT) based in Cleveland, Ohio in the business of acquiring, developing, redeveloping, leasing, and managing shopping centers and other retail properties. As of Sept. 30, 2010, the company had $9.3 billion in undepreciated book assets, a common equity market capitalization of $2.9 billion, and a total market capitalization of $7.8 billion. As of Sept. 30, 2010, DDR's portfolio included 586 shopping centers and interests in retail properties.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology, Aug. 16, 2010;

--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;

--Rating Hybrid Securities, Dec. 29, 2009;

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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Contributing Sources

Market Wire

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Fitch Affirms Developers Diversified's IDR at 'BB'; Outlook Stable