UPDATE 2-Developers Diversified FFO rises

*Q3 FFO 83 cents

*Q3 net income 23 cents (Adds chief executive comment, credit rating downgrade and detail on development projects)

NEW YORK, Oct 23 (Reuters) - Developers Diversified Realty Corp (DDR.N) said on Thursday quarterly funds from operations increased slightly as its shopping centers dominated by big-box and discount department stores attracted customers amid the economic downturn.

But the company faces investor concerns related to its debt obligations, and earlier On Thursday Standard & Poor's cut its rating on some of the company's debt.

Third-quarter funds from operations, or FFO, climbed to $100 million, or 83 cents per share, from $99.5 million, or 80 cents per share, in the year-earlier quarter. FFO removes the profit-reducing effect of depreciation, a noncash accounting item.

Analysts on average had expected 95 cents per share, according to Reuters Estimates.

"Our largest tenants have been, and should continue to be, the relative winners," Chief Executive Scott Wolstein said.

Net income to common shareholders was $27.9 million, 23 cents per share, down from $32.7 million, or 26 cents per share, for the same quarter last year.

For property the company has owned at least a year, net operating income rose 1.8 percent over the prior year.

The company leased 2.8 million square feet during the quarter. Rents rose 8.9 percent overall. Its core portfolio was 94.5 percent leased at the end of the quarter.

Developers Diversified had forecast 2008 FFO of $3.95 to $4.05 per share. Analysts see $3.78 per share.

The company said it incurred $447.4 million in costs from 10 wholly owned, joint-venture projects under construction. In the earnings statement, the company said it intends to go ahead with other planned joint-venture projects once construction financing is available and only after substantial amounts of the projects have been leased.

Earlier on Thursday, Standard & Poor's Ratings Services cut its rating on Developers Diversified corporate credit and senior unsecured debt to 'BBB-' one step above junk from 'BBB' and revised the outlook to negative from stable.

As the reasons for the downgrade Standard & Poor's cited the shopping center owner's above-average leverage, low debt service coverage, and its high credit line usage, which it said limits the company's financial flexibility, given the weak and uncertain macroeconomic environment.

Shares of Developers Diversified closed up 7 percent on Thursday at $8.50. Since the start of the year, its shares have lost 77.8 percent and 73 percent since the beginning of October. (Reporting by Elinor Comlay; Editing by Gary Hill)