Developers Diversified Realty Corporation (DDR), a real estate investment trust (REIT), has recently pledged its commitment to risk management strategy with the formalization of its Enterprise Risk Management (ERM) Program. The ERM Program within the framework of the company identifies, prioritizes and manages critical risks for the fulfillment of its objectives and goals.
ERM includes the methods and processes used by organizations to manage risks and capitalize on potential opportunities for accomplishing their overall objectives. By identifying and proactively addressing probable risks and opportunities, business enterprises protect and create stakeholder value.
A typical ERM framework is designed to achieve an entity’s objectives, which can be classified into 4 categories:
- Strategic – high-level goals, aligned with its mission
- Operations – effective and efficient use of available resources
- Reporting – consistency of reporting
- Compliance – conformity with applicable laws and regulations.
An ERM Program also consists of 8 interrelated components that are integrated within the management process. Developers Diversified is likely to adopt a similar flowchart of components for designing its own ERM program, which includes:
- Internal Environment – The internal environment symbolizes the work culture of an organization, and sets the basis for how risk is viewed and addressed by its employees.
- Objective Setting – The set objectives should support and align with the entity’s mission and should be consistent with its risk appetite.
- Event Identification – Both internal and external events that can affect the success of an entity’s objectives are identified and distinguished between risks and opportunities.
- Risk Assessment – Risks are analyzed and a basis is set to determine how they should be managed.
- Risk Response – Management selects a response mechanism to risks, developing a set of actions to align risks with the entity’s risk tolerances and risk appetite.
- Control Activities – A list of policies and procedures are established to ensure that the responses to risks are accurate.
- Information and Communication – Relevant information is identified and communicated to enable people to effectively implement their responsibilities.
- Monitoring – The entire program is monitored and modifications are made for the overall success of the initiative.
A direct relationship coexists between objectives, which are what an entity strives to achieve; and ERM components, which represent what is needed to achieve them. The relationship can be depicted in a three-dimensional matrix, in the form of a cube as displayed below.
The objectives are represented by the vertical columns, while the components are represented by horizontal rows. An entity’s units can also be represented by the third dimension of the cube.
The ERM Program in Developers Diversified is managed by a risk committee that is comprised of senior executives representing all major departments. By embracing the ERM Program, the company aims to assess and manage the strategic, operational, compliance and financial risks of the organization to fully achieve its business objectives.
Headquartered in Beachwood, Ohio, Developers Diversified acquires, owns, develops, leases and manages shopping centers and business centers across 41 states in the U.S., along with Puerto Rico, Brazil, Russia, and Canada. At the end of fourth quarter 2010, Developers Diversified owned and managed 570 retail operating (including joint ventures) and development properties spanning approximately 132 million square feet.
We maintain our ‘Neutral’ recommendation on Developers Diversified for the long term. The company presently has a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also have a ‘Neutral’ recommendation and Zacks #3 Rank for Kimco Realty Corporation (KIM), one of the competitors of Developers Diversified.
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