Fitch Discusses Rating Rationale Behind DDR Downgrade

NEW YORK--(Business Wire)--
Late yesterday, Fitch Ratings downgraded Developers Diversified Realty
Corporation's (NYSE: DDR) Issuer Default Rating (IDR) to 'BB' with a Negative
Rating Outlook. Additional information is available in Fitch's press release
published yesterday ('Fitch Downgrades DDR to 'BB'; Full Analysis To Follow'),
which is available at www.fitchratings.com.

The rating actions centered on Fitch's view that DDR's borrowing capacity under
its unsecured revolving credit facilities, unencumbered asset covenant
compliance levels, and dependence upon asset sales and secured debt refinancings
are more consistent with a 'BB' rating.

Fitch stated in its rating action in March that DDR's ratings could come under
further pressure if the company's revolver availability remained limited. While
DDR had approximately $1.027 billion in borrowings outstanding under its $1.325
billion unsecured credit facilities as of Dec. 31, 2008, it had $1.251 billion
in borrowings outstanding under these facilities as of March 31, 2009. Moreover,
while Fitch's rating action in March took into account the fact that DDR used
borrowings under its unsecured credit facilities to repay unsecured notes that
matured in January 2009, Fitch also believed that asset sales and the reduction
in DDR's common stock dividend would improve the company's liquidity.

However, Fitch calculates that DDR's sources of liquidity (cash, availability
under the company's $1.325 billion unsecured credit facilities, retained cash
flows from operations, capital raised through transactions with the Otto family,
and other secured debt refinancings that have been executed subsequent to March
31, 2009) less uses of liquidity (prorata consolidated and unconsolidated debt
maturities and recurring capital expenditures) result in a liquidity shortfall
of nearly $400 million from March 31, 2009 through Dec. 31, 2010. This
shortfall, which is largely unchanged from Fitch's most recent review of DDR in
March, does not take into account prospective asset sales or secured debt
refinancings. However, revolver capacity has weakened to the point where the
company is now primarily dependent upon retained cash flow, asset sales and
secured debt refinancings for liquidity.

Fitch acknowledges that Developers Diversified is focused on improving its
liquidity position, as evidenced by the company's intention to distribute the
majority of the dividend through the issuance of new shares. DDR also sold over
$67 million of assets during first-quarter 2009 (1Q'09) at a weighted average
cap rate of 8% and currently has over $175 million of asset sales under contract
or subject to letter of intent, the majority of which is under contract. In
addition, DDR has successfully refinanced certain secured debt maturities in
recent months. DDR also recently announced that the strategic review of
Macquarie DDR Trust (MDT) may result in an asset swap with DDR and MDT that may
reduce a portion DDR's 2009-2010 debt maturities. While the timing of a swap may
be some time within the next few months, Fitch anticipates that such a swap may
improve DDR's liquidity position. DDR also has certain restricted cash in its
joint ventures that may be utilized for contingent liquidity.

Fitch's rating action also takes into account DDR's credit strengths, including
the fact that the company's leverage has improved during 1Q'09. During the first
quarter, DDR repurchased unsecured bonds at a discount, generating $72.6 million
of gains. DDR's debt-to-annualized recurring EBITDA ratio improved from 12.7x
for 4Q'08 to 10.7x for 1Q2009. For the trailing twelve months ended Mar. 31,
2009, debt-to-recurring EBITDA was 10.3x, which is solid for a 'BB' rating.

One of DDR's other major credit strengths is that the company continues to
maintain a large pool of high-quality unencumbered assets, including $5.6
billion in gross book value of unencumbered properties as of March 31, 2009 as
defined in DDR's unsecured credit facilities agreements. Although DDR maintains
a large unencumbered pool, its unencumbered asset coverage ratio as defined in
these credit agreements was 1.67x (slightly exceeding its 1.6x covenant
requirement), compared with 1.63x as of Dec. 31, 2008. Fitch is concerned that
in the event of weakening property fundamentals, compliance levels may further
deteriorate, weakening financial flexibility.

In addition, DDR's fixed charge coverage ratio (defined as recurring EBITDA less
capital expenditures less straight-line rents divided by interest expense,
capitalized interest and preferred dividends) was 1.7x for the trailing twelve
months ended March 31, 2009, which is solid for a 'BB' rating. Adjusted fixed
charge coverage (when adjusted for non-cash straight-line rent adjustments,
general and administrative expenses and convertible debt-related interest
expense, as well as operating cash received from joint ventures) was 1.9x for
the trailing twelve months ended March 31, 2009. DDR's geographically
diversified portfolio as of March 31, 2009 included 701 high-quality shopping
centers and other retail assets, thus providing downside protection to unsecured
bondholders. Developers Diversified also has a strong management team and
granular tenant roster.

The two notch differential between DDR's IDR and its preferred stock is
consistent with Fitch's criteria for corporate entities with an IDR of 'BB'. The
differential further reflects the fact that DDR's preferred stock does not
contain covenant protections comparable to those within indentures governing
DDR's unsecured debt. In addition, based on Fitch's criteria report concerning
'Equity Credit for Hybrids & Other Capital Securities,' DDR's preferred stock is
75% equity-like and 25% debt-like since DDR's preferred stock is perpetual and
has no covenants, but has a cumulative deferral option. Debt plus 25% of
preferred stock-to-recurring EBITDA and debt plus 25% of preferred
stock-to-undepreciated book capital were 10.5x and 59.3%, respectively, as of
March 31, 2009, compared with 10.3x and 57.9% excluding preferred stock.

The Negative Outlook takes into account DDR's liquidity shortfall and ongoing
efforts to re-lease space recently vacated by retailers that have filed for
bankruptcy. The Negative Outlook also reflects anticipated same-store net
operating income to the lower end of the 3% to 4% range in 2009, along with
occupancy declines to approximately 90%.

The following factors may have a positive impact on the ratings:

--If DDR improves its liquidity position by having a greater borrowing capacity
under its unsecured credit facilities in the coming quarters;

--If DDR's risk-adjusted capital ratio at a 'BB' rating category stress level
returns to 1.0x (as of Mar. 31, 2009, DDR had a risk-adjusted capital ratio of
0.9x).

Conversely, the following factors may place further pressure on DDR's ratings:

--If DDR's liquidity deficit worsens;

--If unencumbered asset coverage of unsecured debt as defined under DDR's credit
agreements declines;

--If DDR's fixed-charge coverage ratio were to sustain below 1.5x (for the
trailing twelve months ended Mar. 31, 2009, fixed charge coverage was 1.7x).

Developers Diversified is a real estate investment trust (REIT) based in
Beachwood, OH in the business of acquiring, developing, redeveloping, leasing
and managing shopping centers and other retail assets. As of March 31, 2009,
DDR's 701-property portfolio was situated across 45 states as well as Puerto
Rico, Brazil, Russia, and Canada. As of March 31, 2009, DDR had $10.2 billion in
undepreciated book assets and a total market capitalization of approximately
$6.6 billion.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, New York
Sean Pattap, +1-212-908-0642
Steven Marks, +1-212-908-9161
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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