Site Centers Corp (SITC) 2002 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to Developers Diversified Realty call. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the call please press star, then zero on your too much touch-tone telephone. This conference is being record. I'd like to introduce your host for today's conference. Miss Michelle Mayhew.

Thank you for joining our third-quarter conference call. I'm Director of Investor Relations for DDR. With me are Scott Wilstein Wolstein, David Jacobstein, Dan Hurwitz Executive Vice-President responsible for leasing and development and Bill Schafer.

I need to alert you that certain of our statements today may be forward-looking. For example, statements that are not historical in nature or that concern future earnings results or estimates or that reflect expectations are forward-looking statements. Although we believe that such statements are based upon reasonable assumptions, you should understand that those statements are subject to risks and uncertainties and that actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in a management discussion and analysis portions of our Form 10-K for the year ended December 31st, 2001 and filed with the SEC. At this time I'd like to introduce you Scott Wolstein our Chairman and CEO.

Good afternoon, everybody. We are pleased to announce this quarter's earnings which exceed consensus estimates and reflect nearly a 6% increase for the first nine months of 2002 versus last year. This growth was accomplished despite the fact that that there was a significant reduction in other income predominantly lease termination fees in 2002 over 2000 during the quarter. This earnings growth is generated by the solid and consistent performance of our high quality portfolio. Developers diversified is the leading landlord to the nation's most successful retailers.

Our pending merger with JDN enhances and solidifies that role particularly broadening our relationship Wal-Mart, Kohl's and TJ Max. We're also pleased to announced our projections for 2003 today which looks to be a very strong year. We expect nearly 3% same store NOI growth within our core portfolio during 2003 which will be driven primarily by increases in rent and increases in occupancy.

Lastly we would like to reiterate our commitment to improving our balance sheet and enhancing our financial flexibility. Our ratios show dramatic improvement over the same period a year ago. [INAUDIBLE] 3.7 times improved by over 16% from last year's level of 3.18 times. Debt service coverage of 3.4 times improved 15 percent over last year's level 2.96. Fixed charge coverage of 2.2% improved by 13% over last year's level of 1.94 and debt to total market capital of 43% improved by over 9% over last year's level 47.5%. As we have stated in the past we are focused on the improvement of our fixed charge cover ratio which we anticipate will further improve during 2003. More over, our merger with JDN which is leveraged neutral on a pro forma basis will offer us the opportunity to further deleverage the balance sheets in 2003 through the sale and non-core assets.

We continue to work very closely with the JDN on the acquisitions pursuant to the agreement we announced earlier this month. We are encouraged by the impact that this transaction will have on our results in 2003 and beyond. At this time I'd like to turn the floor over to Bill Schafer who will speak more specifically about our financial results.

For the third quarter of 2002, DDR reported FFO of 61 cents per share and total FFO of $40.6 million. On a year to date basis FFO per share increased by nearly 6% from $1.76 in 2002 to 1.86% per share in 2002. The increase in per share FFO for the third quarter is attributed to the following components.

First there was an increase in NOI from core portfolio properties of approximately $1.2 million or two cents per share. For the purposes of this NOI calculation core portfolio excludes the impact of lease termination revenues, bad debt expense and assets under redevelopment. Second, the acquisition and development of shopping centers contributed approximately 4.3 million of FFO or six cents per share. Third income from the company's investment in joint venture that acquired the designation rights from service merchandise contributed 500,000 or one cent per share to the increase of FFO. Fourth another three cents per share of FFO is related to reduction in interest rates.

These increases were offset by a decrease of approximately $2.1 million in lease termination income or three cents per share, more over the dilution impact associated with the common equity issuances before reinvestment aggregating approximately $170 million since December of 2001 was approximately 8 cents per share for the quarter. For the nine months ended September 30, 2002, the company's debt to market capitalization ratio was 43% which compares favorably to the 47.5% at September 30, 2001. In addition, the company's common share dividend pay out ratio improved to 61% for the nine months ended September 30, 2002 compared to 63% in September 30, 2001. DDR continues to remain one of the lowest dividend pay out ratios in the industry. Next Dan Hurwitz will give us an update on leasing and development.

Thanks, Bill. Leasing activity during the third quarter was relatively slow in July and August but gained substantial momentum in September. During the third quarter the company executed 79 new leases aggregating 274,000 square feet and 104 renewals totaling 70,000 square feet. On the year to date basis, the leasing team has leased 2.85 million square feet, which is ten percent more square footage than was released during the first three quarters of 2001. Rents on new leases increased by nearly 23% over previous rents and rents on renewals increased by 6%. On a blended basis for all these assigned in the third quarter rents increased by 13.4% which is consistent with our historical leasing spreads over the last two years.

As a result of the efforts previously mentioned I'm pleased to report that as of September 30, 2002, the portfolio was 95.9% leased which is up sequentially from the prior quarter by approximately 75 basis points and also up 75 basis points from the prior year. Excluding the impact of the K-Mart locations, the portfolio would have been 96.5% leased indicating the overall strength of the core portfolio. Based on tenants in place and paying rent occupancy for the core portfolio was up 54 basis points to 94.2% from the third quarter of 2001 and up 74 basis points from the second quarter of 2002. Excluding the impact of the vacant K-Mart locations the portfolio would have been 95% occupied.

I would also like to provide additional guidance regarding potential K-Mart closings in the future. We have heard a series of rumors that indicate a substantial number of store locations have been identified for closure throughout the K-Mart portfolio. If those reports are correct and are proceed organization at impact is similar to the first round of closings, it is possible that we believe see an additional four or five store locations. Under this scenario these closures would equate to a loss on a per share basis of approximately one cent. That being said, there are a number of locations with strong tenant demand and some without.

We continue to market the locations that we feel may be at immediate risk and explore merchandising alternatives for the entire DDR portfolio. Overall we believe our occupancy risk is limited by the desirability of numerous locations and our economic risk is mitigated by the low average base rent offset by the opportunity to mark certain assets to market. I would also like to update the status of the service merchandise transaction. Of the original 227 locations, 68 leases have either expired naturally or been rejected by the bankruptcy court. Releasing and disposition of the remaining portfolio continues to proceed well both in terms of the number of sites released or sold and in terms of the aggregate valuations achieved.

Currently we have either executed or closed leases or sale agreements or binding letters of intent on 122 locations representing approximately $225 million in sale proceeds and lease revenue valuations using a 10% cap rate on income associated with fee properties and a 11% cap rate on lease holds. In addition the partnership controls an additional 85 assets that are either partially leased or fully vacant representing approximately 3.4 million square feet of vacancy that continues to be marketed for retenanting. Moving on to development, DDR development projects are progressing on target with no material changes to funding requirements, leasing commitments or completion dates. At our suburban St. Louis development Sams Club opened during the third quarter.

We substantially completed the outer ring of our Minnesota development during the third quarter, tenant openings included Halmark, Dress Barn, Wilson's Leather and a 133,000 square foot full Sears Store which has been performing extraordinarily well, a 48,000 Sportsman Warehouse the final box location will be opened by the holiday season. Tenants also continue open in the central quadrants portion of the crew rapids development. Over 20,000 feet of new retail space opened during the third quarter including several outparcel tenants. In addition 70,000 square feet of space is scheduled to open in November and December plus additional small shops. Tenants have also begun opening at our city place development in Long Beach, over 200,000 square feet will be open for the grand opening next week including Wal-Mart, Nordstrom Rack. Nearly 100,000 square feet of additional retail space will open in the fourth quarter. Currently phase one of this project is 92% committed by either an executed lease or a letter of intent.

We've also commenced site work for a new joint venture development. The shop created a 480,000 square community center located at north side of Austin Texas. Major tenants include a Super Target, Linen and Things, Pet Smart, Toys are Us and Ultimate Electronics. Over 80% of the total GRA is either underwrited intent or at an executed lease. The total project cost is estimated to be $43 million and the yield is approximately 12%. Day burn interest with whom we've worked on our highly successful Round Rock in San Antonio, Texas is our joint venture partner on this project. Upon completion the development will be structured under our retail value investment program with DDR, Prudential Real Estate Investors, covenant real-time partners and Dave Burn.

In addition to these projects DDR development department is pursuing additional activities that satisfy our requirements in the metropolitan areas of Pittsburg, Philly, Denver and Jupiter, Florida. We will provide updates of these projects as they progress. With respect to our expansion of redevelopment projects, developers diversified will commence construction on a new redevelopment project in Tiffon, Ohio. We're retenanting a K-Mart store with retail space. At our lifestyle center in Leeward, Kansas we're in the process of completing a 26,000 square foot expansion, nearly 20,000 square feet of small retail specialty shops opened during the third quarter. The remainder of our redevelopment and expansion targets remain on track with respect to funding, timing and leasing commitments. At this point I'd like to introduce David Jacobstein.

Since we last reported earnings we've completed several acquisitions and dispositions. Under our project path finder program which identifies smaller, low growth, non-core assets for disposition the company sold wholly owned property in St. Louis, Missouri, Jacksonville, North Carolina and Columbia, South Carolina. Total sales proceeds aggregated $14.3 million with a weighted average cap rate of 9 1/2%.

In addition to these sales earlier this week we sold a 390,000 square foot property Denver which was held in a joint venture with DRA advisors, the total sale price was $43 million with a cap rate of approximately 9%. As we reported last quarter, in July the company also purchased its partner's interest in shopping centers located in Plainville, Connecticut and San Antonio, Texas. These properties had been developed under retail value investment program and based on favorable pricing and long term investment value DDR chose to add these centers to the operating portfolio.

We also reported last quarter the July acquisition of the portfolio of five assets for $81.7 million. Two properties are located in the Dallas area and one each in Wichita, Kansas, Columbia, South Carolina and Birmingham Alabama. Each of these assets had historically been the dominant shopping center in its respective sell market. However, in recent years they have been severely under managed causing their financial performance to decline.

Under proper management and utilizing our relationships with the nation's leading retailers we believe these assets will regain their eminence increasing dramatically our cap rate on leases in place of approximately 10%. For example, since July our leasing team has executed leases or letters of intents for 90,000 square feet of previously vacant space within this portfolio and our 2003 leasing budget is equally aggressive.

As Scott alluded to we have been working with JDN Management and formulating plans for transferring management leasing and development responsibilities to the JDN operating portfolio. Following consummation of the merger. The transition planning has gone extremely well thanks to the full cooperation of JDN CEO Craig McNabb and his able group of senior managers. The joint proxy registration statement was filed if the SEC on October 31, and we are hopeful that the shareholders of both companies will have the opportunity to approve the merger transaction as early as possible in the first quarter of 2003. At this point I'd like to turn the call over to Scott.

Thank you, David. In conclusion, we would like to give some guidance with respect to earnings for the balance of this year and 2003. With respect to 2002, we are reaffirming guidance of 2.50 per share in line with consensus estimates. With respect to guidance for 2003, we are comfortable with an anual FFO estimate of $2.70 per share this estimate reflects the following. Number one closing of the JDN merger at the conclusion of the first quarter. Number two, the dilutive effect of approximately $150 million of assets sales throughout 2003 following the closure of the JDN merger, and three, no further acquisition activity in 2003 beyond certain transactions currently under contract that will close during the first quarter of this year. At this point we would like to open the phone lines to receive your questions.

Thank you. Ladies and gentlemen, if you have a question, at this time, please press the one key on your touch-tone telephone. If your question has been answered or wish to remove yourself from the queue please press the pound key. If you are using your speaker phone please lift the handset. Our first question comes from Ann Melnick from JD Edwards.

One quick question does your guidance for 2003 incorporate any type of additional loss from K-Mart closures?

Ann, as we said, during the script, I think we take the maximum exposure is probably you know one or two cents per share from k mart closures which is likely to be offset from bankruptcy recoveries under K-Mart closures for the first round of closing so I think the guidance reflects that.

Okay. Thank you.

Thank you. Our next question is from Matthew Osberger of Morgan Stanley.

Good afternoon. Just if you can go back to the service merchandise transaction for a second and forgive me I'm not sure I know how to look at this but you talked about the $225 million worst of sales and cap rates associated with them. Can you sort of help us understand, what net proceeds to DDR would have been on the transaction versus what it looks like the $220 million in the transaction, is that the right way of looking at it I guess?

I think, at this point there hasn't been any distribution made to any partners. Any of the proceeds has been applied to repay indebtedness on the acquisition. But, you know, in terms of the big picture I think the question you're really asking, you know, the transaction purchase price for the partnership was about $235 million, we probably invested about $9 million in TI on the various transactions which has been offset on the cash flow that we've received on subleases, so take that number up to $240 million. What Dan had disclosed in the script was if you capitalize the lease income in place today and hypothetical cap rates of 10% cap on the fees and 11 cap on the lease holds and add that to the actual sales that have occurred, you come up with a value of $225 million which is within about fifteen million of the original investment which means you have $15 million left to recover and 3.4 million square feet of vacancies from which to recover that and to generate profits.

And what is your outlook on that last component at this point? Am I correct in thinking that this transaction should basically be complete by the end of the year, is that right?

No, not -- not by the end of this year, no.

First quarter.

By the end of next year is how we budgeted it.

Oh, okay. Okay.

And you know, we have certainly conservative and optimistic budgets forecast for the overall portfolio but I think internally here we think probably somewhere in the 50 to $100 million profit on the partnership level would be a good result on this porfolio.

And you'll get your pro rata share of that.

Well, we get than that because we've promote 10% over a 12% leverage in addition to our 25% and we also get management fees disposition fees, leasing fees and development fees.

Okay. And then just a few details here on JDN. Am I correct in assuming that there's no more to tell here in terms of the tax tax issue?

That's correct.

And just on some of the developments Long Beach 92% leased and committed. Do you know what the number is just leased?

The number of leased, about 78%.

Okay. And then the Austin, Texas one because it's a rvrp you're going to own is it typically a 20% ownership is there is that right?

25% with our proportionate share of the promote which would be the promote would be 33 over 10 and we would have about 80% of that.

Okay.

So what that works out to mathematically is about 48% of the ups.

Right.

About 25% of the investment.

And that's pretty standard for that joint venture, right?

That's correct.

Finally in 03 can you talk about what you are sort of same store NOI and occupancy assumptions are for guidance is.

Our same store NOI projections are 3%.

And you're going to increase occupancy, you thought you would increase occupancy next year. Do you have -- do you have do you want to quantify that.

Dan already did in this report because most most of the occupancy that's going to have effect effect on numbers is already occurring this year so if you extrapolate that over next year any additional occupancy gains above that 96 1/2% would be minimal.

Great, thanks very much.

Thank you. Our next question comes from Lou Taylor of Deutsche Bank.

My questions have been answered.

Operator: Thank you. Our next question comes from Tony Howard of Hilliard lines.

Good afternoon, and congratulations on the solid quarter. Can you give us what the implied cap rate for the whole acquisition of JDN?

Yeah, I think we've disclosed that in the past. Depends on how you handle the land in the transaction. But I think we figured it was north of 10 when you back out the land and a little bit south of 10 when you include the dilutive effect of the land that's on the books.

Okay. Given the difficulty market, can you talk a little bit about what you see as the outlook as far as the upcoming Christmas season and what kind of projections you're using as far as potential vacancies and bankruptcies after the Christmas season is over with?

As far as what we're hearing from the retail community about the Christmas season, obviously many of the retailers are taking a conservative view of what their expectations are and in most cases in retail that becomes a self-fulfilling prophecy because we've said before that retail has a ceiling but no floor. Your ceiling is the amount of inventory you buy for the season and your floor is obviously whether the customer comes in or not. And in most cases retailers that are talking about three to 5% increases over their count number are buying for three to five and it's very hard to get a seven to nine when you're only buying for a three to five. So we're seeing numbers pretty consistently around that 3% mark that most retailers are looking at.

I mean, very few retailers have comping flat to negative. It's not in their nature to do that. And I think they're looking pretty similar to what it was at this time last year: as far as bankruptcies and occupancy, we feel pretty bullish about K-Mart aside we feel bullish about the quality of our portfolio and state of of our tenants. Many of the tenants that we had that were weaker tenants have been flushed out of the portfolio over the last 24 months and the group, the core group that we have left, even the ones that seem to have been struggling in past months have stabilized and actually certain sectors such as sporting goods, for example, has come back very strong this year. So, except for K-Mart which is obviously a wild card, we feel very good about our tenant base in the sectors that are represented in our assets.

Okay. Final question. You mentioned close to a $150 million in asset sales and projection sales. What kind of cap rate are you expecting from that and can you talk about as far as the debt situation for next year?

In terms of the cap rate projected on asset sales, we've used about a nine and quarter blended cap rate for that purpose. What was your second question about debt levels?

Given the JDN acquisition is completed by the first quarter where do you expect debt levels?

By what measure? As a percentage of --

Market cap.

You know, I guess the best way to answer your question is that the deleveraging that we've forecast through asset sales would reduce our overall debt levels by about 200 basis points.

Okay. Thank you.

Thank you. Once again, ladies and gentlemen, if you have a question at this time please press the one key on your touch-tone telephone. Our next question comes from Craig Schmidt of Merrill Lynch.

Most of my questions have been answered but of the $150 million dispositions for 03 that is that going to be evenly distributed or back ended?

We don't forecast any in the first quarter so it would be evenly distributed through the balance of the year.

Great. And in terms of disposition for fourth quarter, should we factor any of that in?

I'm sorry dispositions.

Dispositions beyond what you were trying to do. Any dispositions this fourth quarter?

There is a possibility of one significant disposition of a joint venture property in this quarter.

Great. Thank you.

Thank you. Our next question comes from Rich Moore of McDonald Investments.

Hi, guys. As far as JDN goes and the integration goes are you able to do anything at this point? Are you helping with the leasing of the property or looking at that or just more or less monitoring until you have the final okay from shareholders?

Under the merger agreement, Rich, there are certain controls that we have regarding development, development pipeline leasing, operations and so forth that we're very carefully negotiated and constructed. And we've been working very closely with JDN. We have weekly transition committee conference telephone calls and as I indicated in my remarks the cooperation has been from the highest level down has been excellent. So we have what we consider to be appropriate controls to be able to make sure that the business is managed in a way consistent with our agreement and expectations while at the same time allowing JDN to manage their business since they're still an independent company.

Great, thanks, Dave. And looking at a couple metrics, guys, as far as other income goes, obviously, you know, you had the lease termination last year and not this year. What happens for the rest of the year and maybe looking forward? Are we getting into a better situation where we should expect fewer lease termination fees in general?

That's a very good question, rich. I think the important thing from our perspective is we'd like to rely less on lease termination income to achieve our financial goals and in that regard, you know, we're gratified that we're able to do that in this quarter. We've forecast very little lease termination income in the fourth quarter of this year. And it's been our practice to continue to reduce the projections for lease termination income by at least 25% from the prior year in each succeeding year. So from an operating standpoint it's our goal to continue to diminish our income particularly lease termination income as a percentage of our numbers, and we're very pleased how that worked out this quarter.

Okay. Great. Thanks, Scott. I was looking at the debt that is on the line. There's another $160 million this quarter over the second quarter. Where did that come from exactly? I kind of lost track a little bit.

As David had mentioned, we had actually acquired a portfolio of properties in the Dallas, Kansas City, and so forth and we also acquired a couple of properties out of the retail value entity.

Okay, Bill. So do you trim some of that out or do you have any plans for that is in a.

Yeah, we're in the process of refinancing approximately $60 million worth of bad debt into longer term financing.

Great. And last thing is development fees were up for the quarter. Is that-will they continue I guess at this kind of level?

I really haven't look at that number specifically, Rich. But there will continue to be development fees on joint ventures in 2003.

Okay. Wonderful. Thanks, guys. Nice quarter.

Operator: Thank you. Our next question comes from Hal Jones of AEW capital management.

Hi, good afternoon. One quick question. In your recent filing you had mentioned a transaction for a minority interest in Colorado. I don't know if you could touch on that a little bit?

Yeah, that transaction hasn't closed yet, and that's why, you know, we haven't issued a press release on the transaction yet but I think we had connection with the SEC filing we had to do a filing on that. It's a transaction we're very excited about. We'll be the operating partner with Lehman Brothers opportunity fund in the purchase of that property from triesecon. It's a lifestyle center, it's anchored by supermarket, a Pacific theater, a lot of small shops, and it's right in downtown Pasadena and we will operate it, manage it, and there to promote.

As well it's management fees, leasing fees and the promote?

That's correct.

Okay. Thanks.

Thank you. Once again, ladies and gentlemen, if you have a question at this time press your one key on the touch-tone telephone. Once again if you have a question, please press the one key. There appear to be no further questions at this time. Laidies and gentlemen thank you for participating in today's program. This concludes the call. You may now disconnect.