Site Centers Corp (SITC) 2002 Q4 法說會逐字稿

Good day. Welcome to the Developers Diversified realty fourth quarter call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference please press star zero on the touch-tone phone. As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. David Jacobstein, President and COO.

Thank you for joining us fourth quarter earnings conference call.

As the operator indicated, I'm President and Chief Operating Officer of Developers Diversified. With me in Cleveland are Scott Wolstein, DDR's Chairman and Chief Executive Officer; Dan Hurwitz, Executive Vice President, responsible for leasing and development; and Bill Schafer, Senior Vice President and Chief Financial Officer. Before we begin, I need 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 or beliefs are forward-looking statements. Although we believe that such statement 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 the management's discussion and analysis portion of our Form 10-K for the year ended December 31, 2001 which has been filed with the SEC.

At this time, I'd like to introduce Scott Wolstein our Chairman and CEO.

Good morning.

We are very pleased could announce that Developers Diversified recently celebrated our ten-year anniversary as a public company. I am very grateful for all the hard work of our employees over those 10 years and would like to highlight several metrics achieved by our company. Over the last 10 years, Developers Diversified has grown to 10 times its original size and has outperformed all major indices including every REIT index in total performance. The company's share price has more than doubled over 10 years, and from the FFO projections in our IPO prospectus, our estimates for 2003 will be over three times our initial performance in FFO per share. That equates to a compound annualized growth rate of approximately 12 percent per annum.

From 1993 to 2003, dividends have more than doubled. We have consistently increased dividends each year and for 2003, we increased the annual dividend by nearly 8 percent. In 2003, we expect to maintain a dividend payout ratio of approximately 60 percent and generate in excess of $50 million in retained earnings. Our total return for 2002 was 23.4 percent. From 1993 to 2002, the compounded annualized total return to our shareholders was nearly 16 percent. We were also grateful for the confidence and support of our investors over the years. We continue our efforts to be focused and disciplined, acting as prudent stewards of investors' capital.

As we move into 2003, our investment strategy will reflect the following factors and objectives. Interest rates are at the lowest levels of our lifetime. And property fundamentals in our portfolio and in our asset class are very strong. We will capture this unparalleled opportunity by locking into favorable long-term fixed-rate financing, which is currently available to us in the cmbs market and through forward interest rate swaps and a portion of our variable rate indebtedness. We will continue to make our balance sheet a priority and address our balance sheet metrics with a view towards improving our credit ratings and reducing our spreads on unsecured debt financing.

Cap rates for DDR's core properties are also at the lowest levels in recent memory. By my estimate, cap rates on Developers Diversified's assets have compressed by almost 100 basis points in recent months, which has probably enhanced our net asset value by well more than $5 per share. Private capital both domestic and foreign is actively pursuing investment or co-investment in assets owned by our company due to their secure yield characteristics. We will pursue joint venture acquisitions of core properties where DDR will fund a small portion of the assets purchase price, thereby leveraging our capital to generate significant management fee income and wherever possible also generating investment, which distributes to DDR a disproportionately greater share of the increase in value at the asset level. We will also pursue the sale of joint venture interests in selective core assets under a similar format, thereby taking advantage of a frothy acquisition environment. In fact, we are very close to finalizing a major transaction of this nature with a foreign capital source. As always we will continue to pursue the sale of our non-core assets selectively pruning the portfolio at favorable cap rates.

While we have no present intention to issue common equity, the public equity markets are readily available to us to issue equity at pricing that makes such issuance roughly equivalent alternative to asset sales to de-lever our balance sheet. While there is intense competition for the significance of institutional quality core assets in our business, there is very little competition for deals with hair such as the mall opportunities and properties in need of repositioning and lease-ups. We consider this a core competency of DDR and we will continue to actively pursue value-added investment opportunities where they present themselves and in many cases fund these opportunities in joint ventures with private capital.

As Wal-Mart, Target, Kohl's, Lowe's, Home Depot, Costco, and many of our other major tenants continue to expand, there are also many profitable development opportunities available to us where we can apply our capabilities to yield exceptional returns on capital. We will continue to pursue ground up development deploying our own capital since these investment yield the highest value creation and project cash-on-cash yield in excess of 11 percent based on first year stabilized NOI which is about 300 basis points in excess of the probable cap rates for these assets at completion.

The lifestyle format represents an opportunity to diversify our asset base and enhance the internal growth rate of the company by virtue of the shorter average lease term and the dramatic sales growth presented by these investment opportunities. We will continue to increase our investment in this asset class. Based on additional acquisitions that will be discussed later in this call, in the aggregate, we expect that lifestyles under management by Developers Diversified will represent over $500 million in asset value during 2003, or approximately 10 percent of Developers Diversified's total capitalization by year end.

At this time, I would like to turn the floor over to Bill Schafer, who will speak more specifically about our financial results.

Thanks, Scott.

For the fourth quarter of 2002, Developers Diversified reported FFO of 64 cents per share on a diluted basis, a 3.2 percent increase over the same period in 2001. Year end 2002 FFO diluted was 2.50 per share, 5 percent higher than the comparable 2001 annual figure. Total FFO for the fourth quarter was 43.1 million, which was nearly 21 percent higher than FFO earned in the previous year. The year ended 2002 total FFO was 165 million, which is nearly 22 percent higher than total FFO for the year ended 2001.

During 2002, the company's financial ratios demonstrated significant and consistent improvement over the year. By strengthening the company's balance sheet, DDR has substantially greater financial flexibility which benefits both debt and equity investors. I am pleased to announce for the 12 months ended December 31, 2002, DDR's fixed charge ratio was 2.22 times, a 14 percent over the prior year. DDR's debt service coverage ratio was 3.43 times and our interest coverage ratio was 3.72 times, both of which are 15.5 percent higher than last year's figures. For the three-month period ended December 31, 2002, these ratios were even stronger. Our fixed charge ratio was 2.33 times, debt service coverage was 3.51 times, and interest coverage was 3.82 times. In addition to these improvements the company has consistently increased its retained cash flow from approximately 40 million in 2001 to approximately 50 million in 2002. DDR's retained cash flow for 2003 is anticipated to significantly exceed the 50 million in 2002.

With respect to capital markets activities, I would like to mention that the company has also entered into two $50 million interest rate swaps which converted variable rate line debt to an all in fixed rate of approximately 2.875 percent. We are also in the process of closing 150 million of five-year CMBS financing which is locked in an all in rate of approximately 4.55 percent. These transactions will convert variable rate debt to fixed rate debt at highly attractive interest rates.

Lastly, as Scott alluded, to I would like to add that we were in the final negotiations to sell an interest in a portfolio of properties to a foreign capital source for approximately $170 million. By freeing up this capital at today's highly favorable pricing, this transaction will allow for additional corporate deleveraging.

Next, Stan Hurwitz will give us an update on leasing and development.

Thanks, Bill.

Although 2002 was a period of economic uncertainty overall, and deflationary pressure within the retail sector specifically, Developers Diversified's portfolio performed consistently well, underscoring the quality of the company's asset and tenant base. During the fourth quarter the company executed 98 new leases aggregating 574,000 square feet and 84 renewals totaling 330,000 square feet. For 2002, the company leased a grand total of 3.8 million square feet raising the occupancy to a year end level of 95.1 percent up 90 basis points from the end of last quarter. In addition, the year end lease rate for the portfolio was 95.9 percent, which represents a 54 basis point increase over the fourth quarter of 2001. For the fourth quarter, rents on new leases increased 16 percent over previous rents, and rents on renewals increased 8 percent. On a blended basis, for all leases signed in the fourth quarter, rents increased 10.2 percent and on a blended basis, for the full year of 2002, rents increased 12 percent.

I'd like to spend a moment reviewing our relationship with Kmart. In early January, Kmart announced its intent to close 326 locations, three of which are under by Developers Diversified. The three stores which are located in Plainville, Connecticut; Long Beach, California; and St. Paul, Minnesota, represent aggregate annual rental revenues of 2.36 million dollars. Developers Diversified has receives numerous inquiries on each of these locations from retailers interested in all or part of the current Kmart box. As a result, we do not expect to receive possession of these locations. If by chance one or more of the locations is added to the rejection list, we will be positioned to move quickly.

The Kmart closure list also included 3 locations owned by JDN Realty. These stores which are located in Richmond, Kentucky; Suwanee, Georgia; and Chattanooga, Tennessee, represent aggregate annual rental revenues of approximately 1.59 million to JDN. Although the Developers Diversified has not been involved in the remarketing of these locations, JDN has informed us that they have received strong interest from tenants on each of them. Notably, DDR and JDN Realty have not entered into any rent relief departments with Kmart in any of the 14 remaining locations in the DDR portfolio or the one remaining location in the JDN portfolio. Moreover, any potential interruption in revenue associated with these closures has been reflected in our earnings guidance for 2003.

I would also like to update the status of the Service Merchandise transaction. In addition to the leasing volume previously mentioned, for 2002, we have either executed leases, closed sale agreements or have binding Letters of Intent on the 130 of the original 227 Service Merchandise locations. In addition, 76 leases have either expired naturally or have been rejected through the Bankruptcy Court. The above transactions represent approximately $257 million in value of which our share is $64 million. In addition, we have received fees aggregating 2.7 million. Added together the 66.7 million in value generated to DDRs in transaction -- in this transaction exceeds our initial investment plus our share of all carry costs and capital expenditures. Moreover, the joint venture has approximately 3.2 million square feet of space left to lease and interest remains solid.

I would also like to highlight some of the activities within our development portfolio. During the fourth quarter DDR through its RVIP joint venture completed the first phase of its City Place development in Long Beach, California. The property is anchored by Wal-Mart, Nordstrom Rack, Ross Dress for Less, Old Navy, Albertson's, and Sav-On Drug, all of which were open and operating during the holiday season. Currently the first phase is 91 percent leased. The second phase of the development which is primarily comprised of retail located under the residential units is expected to be completed in late 2003.

Also, during the fourth quarter, DDR and its joint venture partner Lubert-Adler completed the outer ring of its Coon Rapids, Minnesota, development. This phase of the development is anchored by Costco, Kohl's, Sears, Best Buy, Joanne's, Linens and Things, Old Navy, and Sportsman's Warehouse. Tenants in the second phase of the development which is wholly owned and referred to as the central quadrant have already begun to open. These tenants include Borders, Lane Bryant, Men's Warehouse, Claire's, Maurice's, ULTA Cosmetics, Sprint, Chipolte, Krispy Kreme, and Ihop. In addition, we recently executed a Letter of Intent with JC Penney to occupy the last big box location with a new 93,000 square foot prototype designed for open air centers. We are very excited about consummating the deal with JC Penney as tenants that have historically located in enclosed malls continue to migrate to our asset class in search of growth opportunities. Upon completion, Coon Rapids will represent approximately 1 million square feet of diverse retail space.

Developers Diversified also completed three expansions and redevelopment projects during the fourth quarter. Which were located in Schaumburg, Illinois; San Antonio, Texas; and at our lifestyle center in Leeward, Kansas, where we added 26,000 square feet of additional in-line retailers. More over we have dimensioned construction on 4 new expansion and redevelopment projects including a property repositioning with the addition of a Ross dress for less and Marshall's at our San Ysidro, California, property, a 16,000 square foot expansion of Bell's department store at -- at our Bayonet Point Florida property, and the retenanting of former Kmart with Marquee Theater and 15,000 feet of additional retail space at our Tiffin, Ohio, property.

At this point, I'd like to turn it back it to David Jacobstein.

Thanks, Dan.

I would like to highlight three acquisitions that occurred since the company last reported earnings. Although the current acquisition environment is very pricey, DDR has remained highly selective and has been able to execute certain niche deals that meet our investment strategy and from a quality perspective are consistent with our existing portfolio.

First, the company acquired a 67 percent interest in Paradise Village in Phoenix, Arizona, from Macerich in early January for $29.4 million at a 9.0 cap rate. After deducting Developers Diversified proportionate share of assumed debt which is approximately $12 million, the company's equity investment in the property was $17.4 million. The property will be held in a joint venture owned 33 percent by Macerich's original JV partner which is a private investor. Developers Diversified will earn fees for leasing and management of the property. The 296,000 square foot open air shopping center is anchored by Albertson's, Bed, Bath & Beyond, Petsmart, Ross dress for less, and Staples. This transaction was highly compelling to DDR given the company's existing infrastructure in the Phoenix area. Including the acquisition of Paradise Village, DDR will own and operate four shopping centers in Phoenix totaling approximately 1 1/2 million square feet.

Secondly, the company acquired Paseo Colorado, a 560,000 square foot retail center located in the heart of Pasadena, California, from try sack properties for approximately $113.5 million, of which $85 million was funded through a mortgage. This pricing equates to a 10 percent cap rate on leases in place. DDR's equity contribution for the property which will be held in a joint venture owned 25 percent by Developers Diversified and 75 percent by Lehman Brothers Real Estate Partners was $7.1 million. Developers Diversified will also earn fees for leasing and management of the property.

The sale Colorado was approximately 97 percent leased anchored by macy'ss Gell son's market, equinox health and fitness and Pacific theaters plus several other in line tenants such as ann Taylor Loft, Brookstone, J Jill, Mac Cosmetics, Safora, Tommy Bahama, White House black market, coach, Eddie Bauer, Bath and Body, and DSW Shoe Warehouse. This acquisition was particularly compelling based on its prime location within a highly affluent sub market, its highly favorable cap rate and the opportunity to increase the property's yield through a releasing of stabilization. We are taking the opportunities presented by the lifestyle center format very seriously. In this regard we have hired a full-time leasing manager with a mall releasing and retail background with companies such as General Growth, the Jacobs Group, Borders and most recently Talbot's. He will concentrate solely on leasing this asset class. The company intends to prudently grow its investment in this asset type as it generates strong internal gross through lease rollover and releasing. Lifestyle center has expanded diversification of our tenant base.

Lastly we are seeing and developing more and more hybrid properties which contain components of traditional community centers, lifestyle centers, and regional malls. Paseo Colorado represents the fourth lifestyle center in DDR's portfolio. Pursuant to the terms of the agreement with our joint venture partner Toby McCuine, we anticipate purchasing their interest in these properties during 2003. The company is also currently considering the acquisition of another high-profile lifestyle center in a suburb of a major metro market. In aggregate, these acquisitions will increase the company's investment in this asset type to approximately $500 million which represents roughly 10 percent of DDR's post JDN merger total capitalization.

Thirdly, DDR acquired a 540,000 square foot shopping center in Gulfport, Mississippi from a private investor for $45.5 million. The initial cap rate on leases in place is approximately 9.5 percent, and is anticipated to increase to 11.4 percent after the development of three parcels and a the,000 square foot freestanding restaurant building as well additional lease-up at the property. The property is wholly owned by Developers Diversified and was financed through DDR's unsecured line of credit. Crossroads Center is the dominant shopping center in its market area, drawing shoppers from as far as lower Alabama and the panhandle of Florida. It is anchored by Bellk Department stores which will open this summer, a 16 screen stadium style Cinemark Theater, Circuit City, TJ Max, Office Depot, Barnes & Noble, Academy Sports, Petsmart, Bed Bath & Beyond, and Goodies. This property is an example of the hybrid property I mentioned a moment ago. The property features a conventional department store located in an open-air environment together with multiple midsized boxes and several specialty stores. Not only was this an attractive acquisition from a yield perspective, but also the quality of the center based on its location and tenant mix is very high.

I would also like to mention that Developers Diversified completed the disposition of five retail assets and one industrial asset during the fourth quarter resulting in aggregate proceeds of $142 million of which the company's proportionate share was approximately $50 million. The retail assets which were located in Denver, Colorado; Jacksonville, North Carolina; Columbia, South Carolina; Orlando, Florida; and Austin, Texas, sold at a weighted average cap rate of 8.5 percent. The industrial asset which was a 20,650 square foot vacant single tenant building located in Dallas, Texas sold for approximately $1.7 million.

On our last conference call, we indicated our intent to sell or place under contract $150 million in JDN assets during 2003. At this point, five assets totaling $42 million have been sold and another nine assets totaling $71 million are under contract. DDR will continue to take advantage of today's pricing environment through the disposition of small non-core properties as well as the selective disposition of larger core assets. Any potential dispositions are thoroughly analyzed based on current and anticipated yield and income contributions relative to opportunities to reinvest in more productive assets.

With respect to the company's pending merger with JDN, DDR's shareholders overwhelmingly approved the merger. Although JDN came very close to the requisite two-thirds vote necessary to appropriate merger there remained a number of shareholders that could not be located. As a result, JDN reset the record date used to identify shareholders who are entitled to vote on the proposed merger from December 2, 2002, to February 12, 2003. A substantial amount of trading occurred subsequent to this December record date and based on the current ownership, we are highly confident that JDN shareholders will approve the merger. In the meantime, we continue to monitor JDN's operations consistent with the merger agreement, and they made progress in the transition that will take place in all functional areas of JDN's business when the merger is consummated.

At this time, I would like to return the floor to Scott Wolstein for his closing remarks.

Thank you, David. With respect to earnings guidance for 2003, we would like to reaffirm our previous FFO guidance of $2.70 per share. This guidance is based on an estimated closing date for the JDN merger in mid-March of this year. With respect to the first quarter, there are currently only two analysts' estimates in place. One of 61 cents per share and one of 64 cents per share. We would guide investors to a mid-point of that range in terms of our earnings for the first quarter of this year.

At this point we would like to open the phone lines to receive your questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key and if you are using a speaker phone please lift the handset to ask a question. Once again, if you have a press, police 1 on the touch-tone phone. Our first question comes from Abe Lee of Bear Stearns; your question, please? Mr. Lee, your line is open. We'll come back to him. Our next question is from James Sullivan of Prudential Securities. Your question, please?

Good morning. Thank you. First of all, Scott, in your prepared comments, and I think some of the other speakers also alluded to this in talking about the lifestyle centers and your expansion into that business, one of the benefits that you perceive is it should enhance the -- your same store NOI growth for the portfolio. Can you give us some expectation as you look out to 2003 and maybe beyond? What kind of a -- an enhancement you are talking about. For this year you had I guess same store NOI growth just below two percent. You projecting that number to be materially higher than that as you go forward?

Well, Jim, it won't have a significant impact in 2003 simply because the acquisition of the interest from [INAUDIBLE] will take place throughout the year some of which won't take place until year end. The impact will be felt properly much greater in 2004. But I would say, you know, just to earmark a number for you, you know, based on performance to date I'd say the internal growth of those assets is probably been doubled in total growth of our core portfolio overall. [ poor audio ]

You know, keep in mind, we're only talking about, you know, 10 percent of our asset class so you can do the arithmetic, you know --

So another 20, 30 basis points?

10 percent buy think it's more significant over time as we continue to increase the number of short term leases.

You have also referred to some personnel changes, additions, as you prepare to ramp up to increase your investment in this business. Should we be expecting that -- and particularly given the company's policy of not capitalizing second generation leasing costs, should we be expecting a sizable increase in G&A cost as a percent average revenues initially in '03?

We don't capitalize a lot of our leasing costs, a lot of that is actually expensed.

That's my point.

That's actually reflected in our G&A.

Right. I mean, that's my point as you ramp up costs and as you given that this probably -- this is probably a more active leasing profile for the lifestyle centers, should we be expecting, you know, G&A costs to begin to increase as a percent average revenues?

No. No. You shouldn't. I think that the overall G&A as a percentage of revenue should actually remain couldn't Stan or actually even decline. As we increase the scope of the company. So while the allocation on the G&A leasing side would obviously change, in the aggregate I wouldn't expect it to increase G&A as a percent average income.

Okay. And then I guess the final question from me and this is probably one that -- this is probably a Schafer question. But as we look at the accounting for the joint ventures in Footnote D in the release, the deduction in going from net income to FFO -- the deduction for gain/loss on sale of real statement investment including discontinued operations. Just to make sure I understand, Bill, the -- there is a distinction between that obviously and the combination of gain/loss on sale above as well as gain on sale of discontinued operations, and if you could just clarify what is being deducted in the add-back and what is is it not.

Sure. Basically, what is being deducted -- we had significant gains on the sale of the Denver asset which was part of the community center portfolio. We have not included that gain in our FFO computation, and that was probably around the $14 million number. The other gains that are reflected in there are comprised of -- a large part is Service Merchandise and there was a significant merchant building gain in the RVIP development program relating to the Round Rock asset -- Round Rock, Texas.

Okay. Very good. Thank you.

Our next question is from Tony Howard of Hilliard Lyons. Your question, please?

Yes. Good morning. And congratulations on a good quarter and also appreciate the increased dividend.

Our pleasure.

Couple clarifications talking about the Service Merchandise agreement, you mentioned that you have already covered your initial development and the costs associated with doing it. I'm not clear that I got what you're expected or -- expected returns on this is to be.

Uhm... That's because we didn't say. (Laughter) But, uhm, you know, we can give you a ballpark, you know, as we -- what we did say was that there are 3.2 million square feet currently owned by the partnership from which we can generate profit. We have been -- in the past we've guided to, uhm, sort of a broad range between 50 and $100 million as the profit at the partnership level from that incremental 3.2 million square feet. And I think that that range is still valid probably closer to the midpoint of that range.

Okay.

And our share of that is 25 percent plus a 10 percent promote after the partners get back their investment plus a 10 percent profit, I think. So we'll get roughly 35 percent of any gain associated with that 33.2 million square feet.

Okay. Also, if you can add more color to the -- your recent thing as far as getting a potential foreign investor. You kind of emphasized the face of it being foreign. I wonder if you can add more color to the fact that, uhm, the purpose of this is to increase your availability of people who would be interested, or was it necessarily to go overseas in order to get the kind of returns that you need?

No. It really, uhm, wasn't either. I think that, you know, there's been significant interest in co-investing with us that's been unsolicited, and this is -- this would fall in that category. We just basically wade through all the different proposals and select the ones that do have the, you know, best return to DDR in terms of, you know, our earnings. This was the most attractive opportunity. That's not to say that that will always be the case. I mean, there's lots of domestic investors who are very aggressively investing in our asset class, as well. And we continue to co-invest, you know, with domestic investors such as DRA Advisors, Prudential and so forth. But we do, you know, we have felt historically and we continue to feel that to maximize financial flexibility is very help to feel have ready access to institutional private capital in addition to our access to public equity capital in the form of common stock.

Okay. Last question a general question, since the short time that I have been following your company, obviously you have been very aggressive as far as acquisitions and dispositions. I wondered if there is some kind of a research being done as far as net effect of all your acquisitions and dispositions, what you've actually benefited from doing both?

Yeah, we don't have any numbers ready to share with you today but we have actually recently discussed internally here adding into our future slide show presentations including the slide that will show the cap rates dispositions as well as the cap rates or the yields on acquisitions and developments. And because it does tell a very compelling story. I think the -- just on the acquisitions alone, the spread between our disposition cap rate and our acquisition cap rate have been well over 100 basis points. And I think the important thing is that I think we've done that while at the same time enhancing the quality of the portfolio. It's obviously very easy to increase yield by purchasing inferior assets, but I think we've accomplished both goals and we have increased our return on our capital and we've also increased the quality of the portfolio.

Okay, good. Thank you. And again, congratulations.

Our next question is from Lou Taylor of Deutsche Banc. Your question, please?

Yeah, hi. Thanks. I think it was Bill had mentioned on the sale of the jv assets 170 million is that the gross proceeds or was their share of the proceeds?

That is the gross amount, uhm, we will probably in conjunction with that pull out cash in the upper $150 million range. Our overall investment would probably be somewhere around, you know, 30, $35 million.

Okay. Great.

Lou, the -- it's actually a program. It isn't a discreet number of properties. And the investor has indicated a desire to enhance the pool by at least three more assets. So that $170 million number could very easily grow about 250 million.

Okay. Also, just staying with you for a serving, Bill, you mentioned on the Service Merchandise Bill I was unclear in terms of that $64 million is that how much you have pulled out so far or is that how much unfortunate invested in the venture.

$64 million represents our aggregate investment in the venture including debt and equity plus our share of the carry costs and capital expenditures and assets that have been redeveloped.

Okay. All right. That's what I thought. Uhm, just regards with the lifestyle centers, just, you know, I've seen the phrase used in a variety of different contexts. How do you define what's a lifestyle center and what is not?

Well, a lifestyle center, you're right, Lou, it's a phrase that's sort of been abused in our industry for the last couple of years. Really, the tenant definition of what constitutes a lifestyle center is typically a demographic threshold, and most of the tenants who are -- who populate these properties have the same threshold, which is approximately no less than 150,000 people that primary trade area with an average household income of about $75,000. And those tenants all seem to travel together which makes a lifestyle center a lifestyle center and they co-tenant with each other so without them there will be 10 or 15 of them that will travel together to these locations. The proximity to a regional mall has been an issue in the past. But we're starting to see a number of tenants come off that, depending on how that mall is leased. You know, there's many regional malls that are leased today, the moderate to budget range. And the lifestyle tenants tend it trade in the moderate to better range.

Okay. Great. Now, with regards to the JC penney prototype that's going to open in Coon Rapids, what are the difference that you can tell in this prototype other than it not being part of an enclosed mall that's different than a penny's that's part of a mall?

Well, the primary difference is going to be that their four wall expenses are going to be greatly reduced by having central checkout, for example, instead of departmental checkout. They will not have as many entrances to the store as they do and are required to have in a regional mall where many times they have up to five entrances plus an employee entrance. Is he they are going to limit the number of doors. They are going to limit the four-wall expenses by eliminating the number of employees departmentally and they are going to institute a central checkout system. They will also have subtle differences to the layout of the merchandising as a result of the things I just mentioned.

All right. So the differences are subtle rather than really dramatic, it sounds like.

The differences will be subtle from a merchandising standpoint. But they will be dramatic from an economic standpoint. For them.

Okay. Last question is pertains to the JDN deal. Have you been or has the JDN management time asked to you help in terms of their solicitation effort to, you know, sell the deal to the shareholders? Have you been involved in that process?

Not really, Lou. We really have kind of stayed out of it at least to date.

All right. Great. Thank you.

Our next question is from Craig Schmidt of Merrill Lynch, your question, please?

Good morning. I was wondering, uhm, it that your appetite for the lifestyle centers has increased. Has your view of it changed from a macro perspective or do you just want a bigger share of that pie?

I think we've always had a positive view of it from a macro perspective, you know. I think that, uhm, you know, that it's just something that if you melt over time and, you know, the opportunities to expand our presence have expanded over time. But I don't think we -- I think we were -- I think we were pretty much on the cutting edge of this you know, business early on with our development of the center in deer park, Chicago, which started about three years ago. And you know, we've always felt it was a valid format in that it dramatically decreases the occupancy costs of the tenants who have a choice recently to locate in these types of environments versus a super regional mall where historically they have had to subsidize the department stores. You know, we felt that as the department stores have become less significant as a draw for these tenants to do business, the desire of those tenants to continue to pay that subsidy has waned and the lifestyle format has become more attractive as a way for them to do business at a lower occupancy cost as a percentage of sales.

Have -- are you seeing retailers get more enthusiastic about this let's say in the last year? Or --

Yeah. Actually, you know, part of the problem in this format is that there's been a lot of projects developed that have been retailer-driven by a small number of retailers and some of the projects that have come on line, I don't think have the critical mass to be successful. But there have been a core group of retailers that have been very aggressively recruiting developers and pushing for the development of these types of projects.

Great. And one last question. It's on Service Merchandise. Of the remaining square footage, how long will it take for to you get the lion's share of that released?

Well, right now, Craig, we're anticipating it will take us about a year to get the lion's share of that taken care of. Yeah so will most of the benefit --

So will most of the benefit of that hit DDR in '03 or '04?

Yes. (Laughter) You know, one of the -- the thing that's sort of difficult to predict in this is that these are large spaces. And unlike, you know, small stores, where you can do a lease today and have them open 30 days from now, these tenants have very, very specific opening Windows. And very, very, uhm, specific blackout dates. So, for example, if you miss the Spring season or back to school or the holiday, you are not going to get tenants opening in the middle of the summer, you are not going to get tenants opening in January and February, typically. So even though deals may be consummated towards the latter half of this year, they won't be opening until the beginning of '04 so it will be spread throughout both years.

Okay, great. Thanks a lot.

Our next question is from Chris Brown of Banc of America Securities. Your question, please?

Yeah, good morning. I'm not sure if I caught it in your remarks before about your debt and balance sheet. It seems like you're trending a little bit more towards security financing. And I was just kind of wondering if you had any general comments on your commitment to the unsecured market and what you see going forward.

That's a very good question. I think that you know, we actually much prefer to issue in the unsecured market than the secured market. Unfortunately, you know, during the past year, the spreads for us between what's available in the CMBS market and our asset class versus the spreads of our unsecured debt have been far too wide in our opinion growth to make that concession in issuing paper. Part of that is I think largely due to the fact that we have a negative outlook at both Moody's and S&P which is associated with the fact that we have a pending merger the you know on the books. I think as the merger is completed and the integration proceeds, we fully expect those outlooks to both return to stable and with the stable outlook I think we also anticipate that our spreads are going to compress dramatically. And when that occurs, we would most likely issue in the unsecured market rather than the CMBS market.

I would agree with Scott there. And also, in conjunction with the anticipated merger the majority of the debt that will be coming online from JDN, we have arranged unsecured financing for a significant portion of that, which will significantly unencumber their asset base. There will probably just be a little bit over a hundred million dollars of security financing that will remain on that portfolio.

That's fair. Given all the moving parts right now. Thank you very much, guys.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our next question is from Rich Moore of McDonald Investments. Your question, please?

Hi, guys. How are you? Good morning. Are you -- would Scott, would you say you're effectively running JDN at this point given that you sold five assets and you have others under contract?

No, no. We haven't sold the assets. They have.

Okay. So really -- is that something that you are do in conjunction with them or -- or --

With respect to -- I'll let David speak to the integration, but I'll just speak to that specific point. What we did on the asset side is we identified a number of assets that we would sell if we owned the company today. And since the company needed to raise cash in its operating business anyway, what we did was we gave them sort of re-lease prices on that group of assets and said, if you -- notwithstanding the fact that under the merger agreement, they couldn't sell assets without our consent, we said we will preconsent to any sales of assets on this list so long as they can be sold at prices that are equal or greater to the price on this list.

Okay, I gotcha.

And they have been operating within those parameters and they have been effective in selling assets at or above the release prices that we provided for them. So that they wouldn't have to come to us for deal-by-deal consent as the merger agreement would provide. But I'll let David speak to the overall transition and integration.

Rich, when we negotiated the merger agreement there are a number of provisions which give us certain rights to monitor activities. We call them control provisions. But obviously, JDN is managing and operating their own business. But given the nature of the transaction, we do need to have those rights and what we did is we set up a transition committee chaired by myself and DDR's end and Craig McNabb the CEO at JDN's end and we have telephone conference calls on a weekly basis to review a whole host of issues and then within each department, we have set up an arrangement whereby certain approvals or monitoring activities take place and it's gone quite smoothly in that regard.

Okay. Okay. Great, thanks. Dave. Uhm, looking at G&A just for a second post JDN and looking at of course the bump that occurred in the fourth quarter in G&A, we've been modeling about a 10 percent increase for 2003 in total G&A. Do you still think that's reasonable post-JDN?

Well, I'll let Bill speak to the actual percentage. With respect to the percentage of G&A as against total revenues, it's going to be the same very, very close. It's in the mid 4s and we anticipate that that will not change in any significant way. Just with respect to JDN, as we indicated from the time we announced the merger transaction, we anticipate a substantial savings which will be accretive with respect to our and the to -- ability to operate JDN's business versus the cost that it is costing them it operate their business currently. There is a significant difference. And we have been managing that, you know, pre-merger as best we can. And we anticipate that that will be successful.

Okay. Okay. That's fine. That sounds great. Uhm, and looking forward to acquisitions, I mean, you guys obviously have to digest JDN here and the cap rate environment has come down. I mean, what are you thinking in terms of acquisitions? And what is what does the market look like for you in 2003?

Well, as I said in my earlier comments, Rich, I think you have to divide the acquisitions into two categories. There is the, you know, fully stabilized core institutional quality assets, and then there's the assets that have some kind of distress or some kind of opportunity to enhance value. The former category is very pricey today. It's a very crowded market. We've seen spectacular results when we've offered assets for sale. So you know, we've really determined that unless we find certain unusual opportunities that don't fit that criteria, which we think is unlikely, that our acquisition appetite on the core side will probably be limited to the situations where we make a small co-investment in a joint venture with private capital where we earn fees and promotes, and thereby are able to leverage our capital to get better returns -- leverage our capital to get better returns than we would by just using our balance sheet to buy an asset a cap rate if you will. On the other side of the coin, in terms of the value-added opportunities, its really a very open playing field. We find very little -- it's really a very open playing field. We find very little competition for those opportunities and, you know, as I said before, we think that our ability to add value in those situations is a core competency of DDR. So we are aggressively pursuing those types of acquisitions and we would do those on balance sheet or we would do those in joint venture because the returns that we can generate from those investments are significant. You know, we recently made an acquisition for instance of five properties from Lehman Brothers that they had taken back in foreclosure. And I would guess that our cash-on-cash return on investment on that portfolio for the coming year will be well into the low double digits on an unleveraged basis. So where we find those opportunities -- now, you know, those were not assets where we competed with a lot of institutional buyers because they required a lot of leasing and repositioning and so forth. And in those situations, we think we can be very effective in deploying capital at good returns.

Okay. Okay. Great. Thanks, Scott. And the last thing I have, maybe this is for Dan, we had a chance to go see Paseo a few weeks ago and the macy's situation there seems kind of curious with, you know, clearly higher end center with a macy's that is really maybe doesn't fit that center, as well. What are you guys thinking about that?

Well, the Macy's, that was actually a Broadway originally and in the Broadway acquisition, Macy's actually tried to get out of operating that store. But they have a long-term operating covenant and they couldn't do it so they operated it up until really this past year as an outlet store. They converted the store and they actually put some capital into it, it may not look like it, Rich, but they did put some capital into that store and converted it to a full-line Macy's store and it was the only store for a good part of the year that had any comp increase in Macy's west chain. It's done -- it's done quite well. When it was an outlet store it was running in the $11 million change. It's up to 20. And the store's smaller than their typical prototype there. But we've had -- before we did the acquisition we had extensive conversations in meetings with Federated on their future plans there and they do merchandise it a little bit different than they do the Lake Avenue store elsewhere in pasadena. But they have -- they are fully committed to continuing to remerchandise and retenant that store to the customer at that shopping center.

Okay. Terrific. Thank you very much.

Our next question is from Matt Ostrower of Morgan Stanley. Your question, please?

Yes, this is Alan Calderon for Matt Ostrower. First question, it looks like in the joint venture FFO reconciliation like the first question that's that someone asked the $5.3 million difference between what's on the income statement and what's taken back. Of that 5.3 million how much would you say is Service Merchandise versus the merchant building?

Well, it's really all the merchant building that's in there. The Service Merchandise number is included in the 5.2 million number which is above that in the joint venture income statement.

And that 5.2 is primarily Service Merchandise?

Primarily Service Merchandise, correct.

Okay. Second question, of the JDN assets that have been sold or under contract, am I correct in thinking that that will not be recognized by DDR but will be recognized by JDN?

Yes, but it probably won't be recognized by JDN, either. You know, except in gains on sale, it won't be shown in FFO.

It will be on the gains on sale, right.

Right.

It won't be on your gains on sale.

That's correct.

Okay. And, uhm, my final question, uhm, can you guys discuss a little bit about the incentives payment that went to Scott, the $2 million inisn'ttive payment, and, uhm, was this known back when you guys did your third quarter conference call.

Well, yeah. I can address that. Uhm, no, it wasn't specifically known at the third quarter conference call and, uhm, basically pur soon the to Scott's arrangement with DDR in the retail value fund investment program, Scott is entitled up to 25 percent of the distributions resulting from promoted income generated from these investments. As long as DDR's performance in relation to FFO and shareholder -- total shareholder return are achieved. A significant portion of the distributions that came out of this investment related to the sale of the asset in the fourth quarter being Round Rock. And total distribution that is were determined at the end of the year out of the program were approximately $11 million of which DDR's share was roughly 9 million.

Okay. So this was not in your full year 250 guidance for the year? This $2 million payment?

No. No, but nor was the anticipated gains, either.

Right. Okay. Uhm... is it expected to have any other situations like that in 2003? -- incentive payments?

Hopefully.

Okay.

(Laughter) it would mean that that program is performing very well.

And, uhm, final question. I was kicked off the call for a minute so I don't know if this is commented on. But the 170 million to be sold to a foreign investor, is there any guidance on the timing of something like that?

We're forecasting a closing probably in April.

April. Okay. Thank you very much for your time.

Once again, ladies and gentlemen, if you have a question at this time please press the 1 key on your touch-tone telephone. Our next question is from Jay Habermann of Credit Suisse First Boston. Your question, please?

Just questions on lifestyle centers specifically. Where does occupancy cost run as a percentage of sales? You mentioned that being more favorable versus the malls?

Yeah, well, the total occupancy costs for the tenant is typically half of what they find in the mall. And often their volume -- their sales exceed -- are very close to or exceed the mall volume.

So the six to zen percent range?

In fact, their cam charge is cam, taxes, insurance, et cetera, et cetera, run about half of what they would in a regional mall of comparable quality.

Okay. And second question relates is what is the age lease term you're fining you? Mentioned the shorter terms.

They're 10 years.

10 years?

Yes and there's no options which gives us the ability to mark-to-market and they have more frequent bumps through the period, as well. So at the end of that -- so usually have a bump, usually have a period of three and four years and three years, and then at the end you have the right to either remove the tenant if they're not at market or bring them to market. And that's an opportunity -- we typically don't have in the community center portfolio.

Right. And just moving on a bit, looking at the leasing, in the release you said leasing continues to be strong. Just wondering, are you seeing tenants in any way pull back from deals or just deals taking longer to get completed, you know, within the economy as is?

It really depends on the asset. There is no question that in the bulk of our core portfolio which is now, you know, bumping up if you take out Kmart, bumping up that 96-plus range, those are sets are still very highly saw the after and -- sought after and we're able to consummate deals there on a regular basis. There are clearly those assets that are on the fringe that is taking longer to get Dole's approved. Retailers are looking at them much harder if they get approved at all, that are, uhm, really -- are really not within the parameters that the retailer is looking for. It takes much longer to get that deal done.

Okay. Thank you.

I think that you know, one thing you should keep in mind, though, is that among the major anchored tenants in our asset class, the appetite is probably not only not decreased, it's probably increased a little bit because of the exit of some of the competitors. And, you know, in these situations with Kmart, Caldor, Bradley's Montgomery Ward, what have you, I think that the Wal-Mart, target, Kohl's, Costcos, so forth of the world probably will increase their appetite to try to gain that market share for their own behalf. So there's probably even an increase in the short term in their appetite for the stores. We're also seeing in terms of some of the anchors a movement towards decreasing the spacing between units in some of the major metro markets which is opening up new opportunities.

Good. Thank you very much.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. Our next question is from Jim Sullivan of Prudential Securities. Your question, please?

Just a follow-up a little bit, Scott, on the incentive income disclosure in Footnote C. That relates to the -- I think only the RVIP joint ventures, right?

That's correct.

And the other joint venture arrangements, I believe, do not have the incentive piece in this format?

No. That's correct.

And so in the fourth quarter of 2002, did -- was entire two million put through that line item that quarter, or was there -- line item in that quarter or was there some in that earlier quarter.

It was in that quarter.

It was all in that quarter. Good. Couple of other questions on the lifestyle centers, too. And you know, it sort of back to the tour you guys gave back outside of Chicago I guess couple of years ago, many last year. But, uhm, one of the things we talked about at the time was that there was a significant co-tenancy requirement at inception at development in order to get these things leased properly. And the question I have is, given the success of the centers so far and the apparent retailer appetite for more locations, are the co-tenancy requirements easing here at development?

No. They're really not. The reason for the co-tenancy requirement is is to give the retailer comfort that there will be a critical mass of like quality or like customer base, and that is a critical component and it's a requirement that tenants that tenants become very inflexible on.

So you're saying if that development you really haven't gone through a round of re-leasing to see if you can take that clause out of rollovers or renewals, is that fair to say?

That's correct.

And the second point, you talked -- you referred a little bit in your -- in the release to sales comparisons for those tenants who have to report. What percentage of your lifestyle centers' tenants are reporting and what can you tell us about sales trends?

They report 100 percent. All the tenants are required in the lifestyle centers to report. And the sales trends have actually been very positive. I think that has more to do with those specific locations -- I mean, there are clearly tenants, you know, the GAAP is an -- Gap is an example that are in location and centers that are open-air centers that are not, you know, reporting positive trends. But our locations have held up extremely well at a time when specialty retail stores have been under considerable pressure.

And --

And just to give you some metrics to that, Jim.

Sure.

You know, the average decision decision is blended over all the centers probably in the $400 to $500 range compared to our overall sales of 240, $250. So, you know, it's almost double on a sales per-square-foot basis.

Just one point, just one suggestion for future disclosure, is it -- is that given the importance of lifestyle centers to the company's investment strategy, I think it really would be helpful to break out things like same store NOI and sales comps for that property type. It would be very helpful in terms of projecting the same store NOI growth going forward as -- for the company overall.

Good suggestion.

Okay. Thank you.

Ladies and gentlemen, this concludes the question an answer portion of the program. Thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.