Site Centers Corp (SITC) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Developers Diversified reality conference call. At this time, all participants are in listen-only mode. Later, we will have a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch tone phone. As a reminder, the conference call is being recorded. I would now like to introduce your host for today's conference. Mr. David Jacobstein, President and Chief Operating Officer.

Thank you operator, and Good Morning, ladies and gentlemen. Thank you for joining our first quarter earnings conference call. As the operator indicated, I am David Jacobstein, President and COO of Developers Diversified. With me here 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 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 reflect results, expectations or beliefs are forward-looking statement. Although we believe that such statements are based upon reasonable assumptions, you should understand that those statements are subject 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 discussion and analysis portion our form 10k for the year ended December 31, 2002, and filed with the SEC.

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

Good morning everybody, and thank you for joining our conference call.

We are very pleased to report solid growth and earnings for this quarter while, at the same time, reducing the contribution to FFO, of leased termination fees, merchant building gains, other non-traditional income sources by proximately six cents per share. After excluding the impact of these other income sources on a per share basis for both 2002 and 2003, FFO increased approximately 17% year over year.

Consistent with our comments in the last conference call, we continue to see prices for our retail assets rising as cap rates drop while institutional capital for core investment in our property type business is readily available. We are actively pursuing these market trends by taking advantage of the strong pricing environment to deliver our balance sheet on a creative basis. We have recently finalized agreements with the Kuwaiti Financial Center to form a $170 million joint venture to be owned 80% by the Kuwaiti Financial Center and 20% by DDR. This joint venture will purchase 7 operating properties from DDR at a significant gain of approximately $30 million. The proceeds will be applied to reduce in-indebtedness. The summary of the joint venture is included in this quarter's financial supplement.

We are currently in negotiation to sell virtually all of the remaining industrial assets that we acquired through our merger with American Industrial Property at a price that will exceed our basis in these assets. We expect to go to contract on these transactions within the next couple of weeks. Including these pending transactions, our company has created substantial values through capital recycling and positive spread reinvestments.

Approximately $520 million of sales have closed this year from our portfolio with an average cap rate of proximately 8.5. At the same time, we completed $120 million of acquisitions on a year-to-date basis at an average cap rate of 9.3%. We are gratified that both Moody's and Standard and Poors recognize the improvements we have made to our position to the repayment of debt, asset disposition, and capitol recycling by revising their respective outlook to our credit from negative to stable. As we mentioned in our last conference call, we continue to make our balance sheet a very high priority. In our recent merger with JDN provides us additional opportunities to deliver.

The JDN merger was completed approximately 45 days ago and we are very pleased with the high degree of visibility we now have regarding the prospect of increased growth for leasing through exciting development properties that we acquired through the merger. We are now seeing tangible evidence from discussions with tenants that our tenant relationships will provide additional opportunities to enhance the portfolio's occupancy and cash flow beyond our initial projection.

At this point, I would like to turn the floor over to our CFO Bill Schafer.

Thanks, Scott.

For the first quarter of 2003, Developers Diversified reported FFO of 68 cents per share on a diluted basis. A 6.3% increase over the same period in 2002. Total FFO for the first quarter was 49.3 million which was nearly 22.9% higher than FFO earned during the same period during the previous year. The financial results for the first quarter include the results operations associated with the JDN portfolio from the merger date of March 13, 2003.

The impact of the operational result associated with the J.D. N portfolio contributed proximately 1 cent of FFO per share for this quarter. As Scott mentioned, in the first quarter of 2002, we had proximately 6.5 million or 10.3 cents per share of non-traditional other income including lease termination fees, merchant billing gains and income from sales of development rights. This compares to the 3.3 million or 4.6 cents per share of other income recorded during the first quarter of 2003 resulting in a per share FFO reduction of nearly 6 cents.

The largest items reported during the first quarter of 2003 was a $2.4 million gain relating to the settlement, the call obligation associated with JDN 75 million mandatory par foot marketable securities. What we refer to as the mopers debt. Throughout 2002 and during the first quarter of 2003, the company's financial ratios continue to demonstrate significant and consistent improvement. By strengthening the company's balance sheet, DDR has substantially greater financial flexibility which benefits both debt and equity investors. For the first quarter of 2003, DDR's fixed charge ratio was 2.56 times, a 21% increase over the prior year. DDR's debt service coverage ratio was 3.67 times, a 12.9% increase from last year and the coverage ratio was 4.609 times, a 9.1% increase.

In addition to those improvements, the company has consistently increased its retained cash flow from approximately 40 million in 2001 over 50 million in 2002. And DDR's retained cash flow in 2003 is anticipated to exceed 80 million. From a capitol market's perspective, DDR took advantage of several opportunities available in this low-interest rate environment. Immediately following JDN shareholder approval of the merger, Developers Diversified refinanced JDN's secured credit facility with a new $300 million unsecure term loan. The new term loan has a one year term and an option to extend for up to an additional year at DDR's option. This new loan uncovered nearly $500 million on JDN assets. Moreover, DDR is paying a Libor spread of 100 basis points as compared to JDN's Libor spread of 212.5 basis points. This spread differential represents annual interest savings of approximately 3.4 million. DDR also used the new credit facility to repay the mopers debt at an annual interest saving of approximately 2.5 million.

In addition, we closed 150 million of five five years CMBS financing at a coupon interest rate of approximately 4.4%. The company has also entered into a five-year fixed rate financing for 110 million at a coupon rate of proximately 4.1% associated with the Kuwaiti Financial Center joint ventures that Scott mentioned at the beginning the call. This financing is scheduled to close next week.

Under the joint venture agreement, DDR will contribute seven assets with a value of approximately 170 million in exchange for cash of approximately 157 million and a 20% equity ownership interest. The cash will be use today repay DDR's floating rate debt.

Also, in late March, DDR issued 180 million of class G preferred shares with an annual dividend rate of 8%. Proceeds from this issuance were use today purchase DDR's preferred operating partnership payment with coupon of approximately 9%. This resulted in dividends of approximately 1.5 million during this quarter. This differential in dividend rate will result in annual savings of approximately 1 .6 million or 2 cents per share net of issuance cost. The company has similar opportunities later this year to reduce its preferred dividends on three other issues, it has coupons in ex-excess of current market pricing.

We recognize that, following the JDN merger, the company's proportion of variable rate debt increased. DDR has embarked on a plan to term out this debt, extend our debt maturities and reduce our variable rate debt exposure. We have already begun accomplishing this through the two CMBS Financing and targeting the unsecured corporate debt market.

Furthermore, we anticipate potential de-leveraging through additional asset sales scheduled throughout the balance of the year. In association with our presentation to the rating agencies, we prepared an exhaustive study of comparable REITS. This study illustrated the DDR's coverage in overall leverage ratios compared favorably. Considering the results of this analysis, we believe DDR's credit story is misunderstood by the market.

Now, on the heels of the rating agency's recent outlook changes, we will be meeting with fixed income investors with a view towards narrowing credit spread and preparation for the issuance of unsecured debt.

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

Thanks, Bill.

Once again in the face of cautious retail environment, we were very pleased with our results of our first quarter leasing numbers. During that period, the company executed 58 new leases aggregate 305,000 square feet and 99 renewals totaling 432,000 square feet. These statistics result in a Q1 lease rate of 95.4% in occupancy rate of 94.7%. The percentage leased rate is comparable to the same quarter last year and the percentage occupied for years 20 basis point above last year's figure.

For the first quarter, rents on new leases increased 26.6% over previous rents and rental rates on renewals increased 8 .7% for a quarter average of approximately 11.6% It's important to note in this environment that our 2003 renewals are on plan through the first quarter. In regard to K-Mart, last quarter, we identified the three DDR locations scheduled for closure or for K-Mart and engaged in going out of business sales. We indicated that tenant interest was strong for each, and we did not expect more that perhaps one location rejected. As a result of the recent K-Mart auction, two of the three locations were purchased and one was not.

The Orman Beach Florida had multiple interested parties and was acquired by Bells Department Store. The St. Paul , Minnesota location was acquired by Walmart. The Plainville, Connecticut location was not acquired although multiple tenant interest remains brisk. The difference between Plainville and the other assets related to potential users not desiress of the entire square footage, or single users unable to accommodate their format in the existing box. We have been engaged in dialogue with each of these retailers and expect the locations to be tenanted in short order.

In the former JDN portfolios, there were three locations not acquired at auction and we are aggressively engaged in re-tenanting dialogue with multiple retailers for those locations as well. We expect direction on those locations shortly and obviously the will be heavily marketed at the upcoming convention in Las Vegas if not spoken for prior.

I would also like to update the status of the service merchandise transaction. The value of the joint ventures transaction to date, which include close sale agreement, executed leases or letters of intent represent proximately 276 million dollars in value of which DDR shares is 69 million dollars. In addition, we have received fees and revenues generating $4.3 million. Added together, the 73.3 million in value generated to DDR in this transaction exceed our initial investment and capital share cost by $6 million. Moreover, the joint venture has approximately 2.3 million square feet of space left to lease with significant potential value and interest remains solid.

I would also like to highlight some of the activities within our department portfolio. Two development projects that were acquired through the JDN merger were completed. Parker Pavilion located in suburban Denver, Colorado, has approximately 400,000 square fee anchored by a Wal-Mart SuperCenter, Home Depot, PetSmart, Office Depot. Steele Crossing is 250,000 square foot shopping center anchored by Kohl's, Target and Pet Smart located in Fayetteville, Arkansas. This property is adjacent to and share cross access with DDR's Spring Creek Center which is anchored by WalMart Super Center, Home Depot, TJ Max, Best Buy, and Bed Bath and Beyond.

With the completion of Steele Crossing and combined with Spring Creek, DDR owns one of the largest shopping centers in the state of Arkansas totaling approximately 840,000 square feet. On a combined basis, the two development project completed this quarter earned a weighted average unleveraged cash return of approximately 11% on a total cost of just over $24 million. I would like to highlight a large development project also acquired from JDN.

Hamilton Marketplace in Hamilton, New Jersey is a 900,000 square foot regional center located at the intersection of State Road 130 and I-195 outside of Trenton. This project outstanding regional access been the linchpin to its successful leasing. Hamilton Marketplace is more than 90% leased and is expected to be substantially completed during the second half of 2003. Lowes Home Improvement and BJ's Wholesale opened in mid 2002, while Kohl's and Model Sporting Good opened in the fourth quarter of 2002.

WalMart, Michael's, Linen and Things, and Ross Dress for Less opened during 2003. The project is anticipated to be substantially completed in late 2003 following the opening of Pet Smart, Staples, Party City, and Shop Right Grocery Store.

We have also begun preliminary site work at our Mt. Laurel, New Jersey development project called Centerton Square. This development is located at intersection of State Road 38 and I-295 in suburban Philadelphia. Similar to Hamilton, Mt. Laurel's outstanding region access has been the cadalist to successful leasing. This 740,000 square foot project will be anchored in phase 1 by a 140,000 square foot Target, 130,000 foot Wegeman and a 32,000 square foot Bed, Bath and Beyond. Tenants will commence opening at this center beginning in May 2004 and continuing through 2005.

As an update to the Rainbow Harbor in Long Beach, California, we are currently under construction with phase one of project with a preliminary opening scheduled for the fourth quarter of 2003 and grand opening scheduled for Spring 2004. The 80,000 foot stadium seat theater, game works and several restaurant vendors will open this year, and the primary retail component in additional entertainment components scheduled to open next year. Currently, phase 1 of this project is 67% leased with another 6% of the square footage out for signature.

We are also pleased to report the execution of a lease with the J. C. Penney company for our central quadrant phase of our Minnesota development project. Not only does the Penny deal conclude the big leasing box within the center , it continues DDR's efforts to successfully attract conventional mall anchor to the open air format. Penny will join Costco, Sears, Best Buy, Kohls, Linen and Things, Pet Smart, Alta, and Sportsman's Warehouse in the single most dominate open air shopping complex in the Minneapolis metropolitan area representing approximately 1 million square feet of diverse retail.

DDR completed one expansion project during the first quarter which was located in suburban Cleveland, Ohio this 65,000 square foot project was formerly the site of the best product store and was acquired in 1998 to DDR's acquisition of the retailers real estate. This project was formerly the site after best product store. DDR has since re-tenanted with a Babies R Us a and expanded the site by approximately 17,000 square feet to include a Dollar Tree Store, additional small shops and a 4500 square foot out bar occupied by Vitamin Shop.

In addition, construction has commenced on the redevelopment of San Isidro Village in the San Diego metropolitan area. San Isidro Village was acquired through the Vernon Pacific transaction and formerly merchandised as an outlet center. Due to competitive pressure within the market and overall weakness in the outlet tenant base globally, we felt it appropriate to change the direction of this asset. As result, we relocated or terminated numerous tenants to accommodate Marshalls, Ross Dress for Less, Anna's Linen, and Just for Feet who are either currently open or under construction. This conversion from the outlet format to a more conventional community center enhances asset value by not only returning 12% on the cost of construction but also dramatically improving the credit quality of the asset resulting in significant cap recompression..

At this point, I would like to turn it back to David. Thanks, Dan.

I would like to spend a moment discussing the integration of JDN in DDR's operating platform. In our conference call in October 7, 2002, announcing the JDN merger. Scott noted that we anticipated saving approximately $9 million in annualizes G&A expenses. Through the elimination of redundant executive positions, in the economy of scale offered by a company of DDR's size. At the time of the announced merger, JDN was operating its business with 133 employees.

As a result of acquiring additional 102 retail assets aggregating 23 million square feet including 16 development project with nearly 6 million square feet, we projected that we would need to hire 52 additional employee in leasing, development, operations, legal, accounting and information technology. To date, we have hired 37 employee, 8 of whom are former JDN employees and are in the process of hiring 15 additional individuals. In some, we are on target and possibly slightly ahead of target with reject to the G&A savings announced last October.

With respect to integration of the JDN operating and development assets into DDR's portfolio, our seasoned team of upper and middle management are working diligently in planning for such integration. Our result are favorable from data conversion to supervision of development projects, the transition has been relatively seamless.

On previous conference calls, we have discussed our intent to dispose of approximately $150 million dollars in JDN assets. At this point, 11 assets totaling $89 million have been sold at a weighted average cap rate of 8 .6%. Another 3 assets totaling 22 million dollars are currently under contract at a weighted average cap rate of 8.8%.

During the first quarter, Developers Diversified also announced the sale of Carmel Plaza located in San Diego, California for $95 million which equates to a cap rate of approximately 7%. The sale generated a gain of $35.7 million of which our proportion share was $7.1 million. This gain was not reflected in FFO.

DDR held a 20% ownership interest in the assets from a joint venture with DRA advisors. This sale is notable for its low cap rate and its continuing evidence of the extremely profitable nature of our joint venture with DRA which began in 1995. The San Diego property disposition is the fourth sale by this joint venture. The other three assets were sold in 2002. In total, the four sales generated an aggregate gain of $65.1 million to the joint venture of which DDR's share was $29.1 million including the company's gain under 2000 sales of 60% of our original 50% interest in the joint venture. Consistent with accounting treatment, no gain from the sale of these assets were included notice FFO.

These joint ventures still own 6 property located in Marietta, Georgia, Schaumberg, Illinois, Fairfax, Virginia, Naples, Florida, Atlanta Georgia, and Framinigham, Massachusetts. Based on sales today an estimated 8.25% cap rate on the sales price of the remaining properties to be owned by Developers Diversified through its joint venture with DRA Advisors would be $7.3 million and the total gain for the ten properties will be in excess of 350 million dollars off which DDR's share will be over 70 million dollars. In addition, Developers Diversified sold three industrial assets that were acquired by company as part of its merger with American Industrial Properties. The three northeast Ohio properties sold to a private investor for approximately $14 million which equates to a cap rate of 8.2%. The sale of the assets generated an aggregate gain of $1.1 million which was excluded from FFO. Developers Diversified has now sold five assets from that portfolio for a total of approximately $23 million. In addition, we are currently in discussion with an institutional buyer for 33 of the remaining offices of the industrial properties acquired through the merger with American Industrial Properties where approximate $230 million which equates to a cap rate of 8.5% on 2002 and OI. At this price, the transaction would generate approximately $12 million that would be excluded from FFO.

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

Thank you David. With respect to earnings guidance for the balance of 2003, the results of our out performance in the first quarter we would like to revise our previous guidance of $2.70 per share upward to $2.75 per share. At this time I would be please to open the phone lines to receive your questions.

Ladies and Gentlemen, if you have a question at this time, please press the one key on you touch tone telephone. If your question has been answered, or you wish to remove yourself from the queue press the pound key. Our first question comes from Tony Howard of Hilliard Lyons.

Yes. Good Morning, and congratulations on a good quarter. Up until recently though, you were reducing guidance till last month, is there something that happened more recently that made you more optimistic?

We are very comfortable with our guidance for the year of 270, I think the reason we have increase guidance because of our out performance this quarter. Some of that out performance related to the refinancing of our preferred stock which was something that we had not counted on when we did our original budget and that is why we had a significant out performance in the quarter. I think our budget process is pretty solid and I think we are very comfortable with the original estimates for the balance of the year, and the upgrade in performance really represents out performance in the quarter.

Second question is for one of the attractions, it appears to me with the JDN merger is the development pipeline. Now that you have had the chance to look at that, are there any other projects, of the 17 project that you have outlined, are there any that you would not had owned if you had the opportunity, and are any of them included in the 115 million that I think you mentioned in the potential sale?

The answer to the second question is no.

The answer to the first question is, you need to bifurcate the JDN management properties two two categories, those under construction at the time of merger and those in the shallow pipeline. The pricing for those projects in our merger was adjust the for the value of each project that we attributed to them based on the income projections and the risks involved. So those projects will come on, you know, exactly as we expected and many of 'em were purchased below book. The shallow pipeline of properties which are properties that have not yet commenced construction, I think there were about 19 in the original portfolio. We probably locked into about half of those as realistic opportunities that we will pursue. Some of those, we will not pursue. We are engaged in discussions to sell to other developers whose return thresholds are lower that ours and some of the projects will be abandon.

Final question, I need a clarification in regards to comments regarding half price preferred that may be redeemed. Can you clarify that for me?

Yes, we have actually three issues of preferred that we have call actions on this Fall. One is a preferred issue that we inherited in the JDN merger with the coupon about 9 and 3/8. On the other two of DDR's preferred that were issued five years ago with coupons in the mid to high 80s. All of those coupon rates are significantly above what we feel we would be able to issue at preferred of today. We will, in all likelihood, call all of those issues in the Fall and either relace them with new preferred or simply repay them with asset disposition or common equity issuance.

Thank you and, again, congratulations.

Our next question comes from Craig Schmidt of Merrill Lynch. Your question, please.

Good morning. My questions are on service merchandise. Did you say there's 2 .3 million square feet remaining?

Yes.

And could you compare that square footage that remains to the stuff that you have already leased?

Well, the square footage of what what remains is fairly consistent with what we already leased or sold from a quality standpoint. I mean, they -- the velocity of the deals had more to do with tenants who have interest in specific markets than it had to do with the specific quality of the real estate. There are, for example, locations that are still of strong interest. The tenants that we did deals with last year but were not of high priority with those tenants to get open in 2002. We'll execute those transactions in 2003. So, interest remains strong. The tenant base remains fairly constant and we are starting to see some alternate uses as well with very aggressive pricing.

How much of the 2.3 do you think you can actually lease lets say in the next couple of years time?

All of it.

It would be safe to assume that's 60 to 70 stores?

Well, we have 88 locations. There's 20 stores right now that are completely vacant. And we have about 80 locations that have more vacancy available and that ranges from 5 to, say, 25,000 square feet. So, you know, the locations right now, you are in a different universe of tenants with the locations that have 5,000 square feet than the ones that have 50,000 square feet.

I would assume that the smaller space lease for higher per square foot?

Yes, significantly.

The next question comes from Jim Sullivan of Prudential Securities. Your question, please.

Thank you, good morning. Question for Scott. I just want today understand your comments regarding the guidance. You mentioned the refinancing of the preferred. In the footnote, it refers to this 2.4 million and other income from the mopers call option. That was part of what you were talking about, right?

Those were really the two unanticipated items this quarter.

Secondly, you had talked about the promote, potential promote using the cap rate on the D R E, the assets remaining on the D R E. Could you indicate to us what type of timing, on the sale of those assets is possible?

The markets are not on the market. Actually, what's most likely to happen there is that our partner will sell his interest and will continue as a joints venture partner on those properties and there are some informal discussions in that regard but the assets are not on the market for sale.

You would then earn your full promote upon the sale of their portion?

Of there interest, right.

Regarding service merchandise, there was kind of a transaction to date summary of returns and -- versus investment, but the question I have, in the first quarter, how much of any contribution did the service merchandise transaction provide to the FFO results?

During the first quarter, Jim -- and I think we detailed this out in our press release also, when you look at all of our fees and the operating results of the service merchandise, we had a couple $100,000 of total income.

There was a loss on the transaction, I think, right, that was cited?

I'm sorry?

I think there was a loss on one of the transactions?

Yes. So the contribution notice quarter was very small, in other words?

Correct.

And the comment on the preferred rate on the refinancing, the current preferred rate, you would estimate at about 8%? I know there was a March issue at 8. Is that still where you think the rate is, or has it come in more, Scott?

I think worst that's the worst case today, Jim.. In light of the upgrade and outlook from both agencies, credit rating on the new paper is stronger than it was when we did the last issue. So if anything, we might be able to push that coupon a little bit inside.

Finally, same store NOI in the quarter. I know it was in the prepared comment, there is a summary of the leasing activity and the impact, the net impact on the leasing. Is there a same store NOI metric that was summarized or included in the supplemental?

Unfortunately, Jim, the company considers this non-GAAP measure in accordance with regulation G. We are not prepared to do a full-blown detailed reconciliation of all that to be present the. That's something that's not been presented here.

Is there -- would there be -- does that mean, going forward, you are not going to provide that metric?

We will have to evaluate that in conjunction with the regulation G in our supplemental disclosures going forward.

Can, very good.

That's a highly, highly complicated calculation that we have to do to reconcile that for net income and to GAAP measures. It is so complicated I don't think it would really serve much purpose.

Once again, ladies and gentlemen, if you have a question, once again press the key on your telephone. The next question comes from Chris Brown from Bank of America Securities.

Your comments about increased focus on the debt market, have you developed specific goals with respect to leverage and coverage. And my second questions would be the same tack on ratings.

Answering your second question first, our -- you know, our announced intention notice past which continues to shall to operate the triple B credit and we are comfortable at that rating. That's where we are at Standard and Poors. We would like to see Moodies rate the credit in line with the Standard and Poors rating. There is certainly a whole variety of metrics that we are look at from fixed charge coverage to total debt and so on. The ratio is in good good shape. The focus is going to be reducing the overall level of indebtedness in the company by a couple of hundred basis point.

Perfect. Thank you.

Our next question comes from David Kostin from Goldman Sachs.

When you discussed the promote, would you explain, is that to marked to market, what your profit would be, your participation? When when you talk about the DDR-J V.

That was me, David. Basically, I think -- I guess it was David but I'll answer it. What we said was that, taking into account the transactions that have closed to date, and then applying what we think is a market value of the remaining assets, when the limited partners in this partnership sell their interest, our promote would be $7.3 million combining all of this transaction and then running it through the return of capital and then our share of any distributions in excess of the profit.

Again in response to Jim's question, those assets are not currently on the market, but would you anticipate another pension fund or another institutional investor coming in to replace them?

Well, let me just say this. You know, our desire is to remain a partner in these assets going forward and we have had discussions with our partners asking them, rather than putting the assets on the market, we would like them to consider selling their interest in a discrete transaction which they are having informal discussions about. That may or may not occur in the near term. But, you know, it's our goal and our intention to stay in the assets and we have rights in these assets that would preclude a sale.

Could you force a sale to yourself if you wanted to assume 100% interest?

There are liquidated actions in the partnership but that's not something that we need to pursue right now because we are all working cooperatively together.

Looking on the portfolio, you talked about the lease expiration and the anchors and the small shops and you listed them on the NOI . What is overall percentage of revenue in your company would you characterize comes from anchor tenants?

It's historically been roughly half.

50-50?

yes. The proportion of GLA is more like 65% with the contribution to income is closer to 50%.

And in terms of the renewal, what was the renewal percentage of leases that expired in the small shop space?

I'm not sure we have that metric readily available. I think historically, it's been about 25%.

you mean the success rate or total volume.

The leases that expired, what percentage of tenants choose to renew their leases?

ranges between the high 80s to low 90%.

Thank you. Okay. I guess --.

Just so you know, historically, the JDN portfolio has been a little lower than that. They have been around the 70 to 75% mark.

And with respect to the I CS S convention coming up, how would you characterize the activity relative to a year or two ago?

I think this year's activity is aggressive. It's the earliest that I can remember appointments being made and it's the earliest that I remember dance cards being filled up. Retailers are very focused on what they are looking for and they are making earlier appointments and they are for longer periods of time. We have retailers for the first time saying, let's pend spends a couple of hours together instead of a half hour or 45 minute and that will make for a much more productive meeting.

I will echo the previous comment about same store and margins. That would be helpful. Other companies do provide.

That I understand but most of them don't have the joint ventures and it's the joint ventures that could make it more difficult.

You can always do the same store.

that's something we can consider. That's a good suggestion.

Our next question comes from Richard Moore from McDonald Investment.

Congratulations on a terrific quarter. Looking at JDN, when JDN was JDN, they did a lot of land sales every quarter. Have you guys broken out what your expectations or can you break out what your expectations are for land sale in the old JDN portfolio?

In the numbers that we provided you in terms of sales close to date and sales under contract, those include both sales of land and sales of operating properties. I don't have -- as I sit here -- specific projections of what the balance of lands sales is for this year. But we are aggressively marketing all of the undeveloped land in the portfolio and I with expect that, you know, certainly over the next 18 months, we'll have significant success in moving a great majority of it.

Okay, great. Thanks. And in looking at service merchandising, in the last quarter, I'm trying to think of a way to look forward at what might be left and the value of what might be left. And in the last quarter, Scott, you gave us numbers of 66 .7 million totals with fees and this quarter was 73.3 million or about 7 million bucks difference. You had 3.3 million square feet left last quarter and now 2.3. So about a third of it has been done. Would it be reasonable to take the remaining 2/3 and apply the 7 million and say there's 15 million worth of value left? For you guys, for your share?

Actually, it's a little more than that. I mean, you know, we have given you specific guidance in the past which I will reiterate today. We think that the overall partnership, at the partnership level with generate a profit after all costs of about 50 to 75 million dollars, you know, combining the gains on sale and the capitalized value of the lease hold that are leased.

Okay.

Now, our share of that will be 25% at the partner level, plus another 10% in terms of our promote and then in addition to that, we are also reporting FFO that's been generated by the piece associated with leasing commissions and management fees on the existing portfolio and on future sales. They are also disposition fees. So I think that's the best guidance I can give you. On an operating basis, I think we are generating about a penny a quarter from the operations and another penny a quarter from the fees. But then on top of that, there is the gains on -- gains and losses on sale that will occur quarter to quarter based on what transactions are completed in that quarter. And in the aggregate, you know, what we have told you is that, you know, we generated about $6 million of profits to date and we would expect, you know, that's about 25% obviously of $24 million. So, you know, we should be able to triple that in future quarters in addition to our promote and in addition to our fees.

Okay, good, thanks. And looking at the industrial portfolio, can you give us some idea of who the pir is, what kind of buyer it is, not necessarily obviously the name?

Yes. It is a foreign entity that's in the process of combining this portfolio with an existing portfolio that they have.

And on -- did you give us any thoughts on your targets for variable rate debt reduction, how much variable rate debt you would end up with, at the end of the year, at the end of the point where you feel you want to be?

We have not given you any target for that. I think you can assume from our comments that, you know, we'll probably reduce the existing variable rate debt on the balance sheet at least by half.

This year?

At the balance of the year, yes.

Can you give us a little update on your lifestyle venture, you know, maybe talk a little bit about the sale and where you guys are with, you know, the whole Lifestyle center concept?

Well, essentially, in addition we own in joint venture with Lehman Brothers, we have two other Lifestyle centers that's owned, one in Kansas and another one that we would apply in Littleton, Colorado and along with Prudential, we will buy out our partner in Deertown Park Center in Chicago. We have two more properties that I can't disclose at this time. But that is sort of the sum total of our current portfolio which we consider to be a very, very high quality portfolio that's very well leased and generating very high sales per square foot.

Okay, great, thanks. And the last question I have is, on the old lawsuits that JDN had against some of the principles, is there an update on that?

There is nothing new, you know. We are -- the major remaining action is one in which we are the plaintiff against the law firm at a malpractice claim. And it's just going through the court system.

Okay, great, thanks.

Our next question comes from Matt Ostrower from Morgan Stanley. Your question, please.

Good morning. On service merchandise, to make sure I understand what happened this quarter, it sounds like one of the leases that was on the books for X amount of money -- I can't remember what's in the press release -- was rejected ultimately and so that amount was written down and your share of that writedown went through the equity and income line item, is that correct?

Correct and also through FFO.

And also through FFO. And, Dan, many I understanding correctly that you anticipate that to be a one-time event in the whole process?

Right. We throughout the process had to apply basis to each of these individual assets. In some cases, you know, we were we were too low and in some cases, we were too high. We had very few situations where we had a negative event like that and going down the road, it's hard to invision where we would have another one rook looking at the portfolio that remains.

So net, we should continue to expect a positive contribution?

yes.

You guys bought JDN and you had other transactions. The smt F A as 141 and 142, any impact there for your income statement?

Yes, there will always be impact from that. As I understand it, that's sort after new I am pack, is that correct? We have not had much on the valuation of leases or things along those lines, because, basically, most of the centers that we have acquired with the rents that were in place were pretty much at market.

You would say that adding that in, I guess it would have been, I'm guessing, last quarter, first quarter that that would have really impacted if it had really impacted if it had an impact it would have been a penny a share.

It would have been nothing, yes.

Finally on this preferred that you paid down, there was this five million dollars, I guess, writedown of original issuance cost on that that went through net income but not through FFO.

It didn't go through net income.

Oh, okay.

It was an allocation of income available to common shareholders. You know, our other preferred securities, the preferred operating partnership unit were actual I -- actually issued to comply with exchange funds requirements for holding so much in non-public related entities. Our policy is to typically record the preferred at the face value, you know, in our equity section and when we redeem it at par, there is no impact. And again that's why we disclose the fees. There was a non cash charge and it wasn't applied to net income and it's consistent with our policy on the historical redemption.

Great. I think that's it. 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 comes from Lou Taylor of Deutsche Bank Securities..

Our question has been answered, thanks.

Our next question comes from Jim Sullivan from Prudential Securities. Your question, please.

I have a follow-up to make sure I understand the projected or indicated sale in the industrial assets. In your prepared comments, Scott, I think you said that you expect to go to contract within the next few weeks and that the sale would be at a gain to book, I think was the wording. Just wanted to clarify. Could you indicate whether you anticipate a gain to be versus the original undepreciated cost of knows assets?

Yes, I think we do. I think every transaction that we've completed to date has been at a gain against unappreciated book. And I think this transaction would also be a slight gain.

It would be a slight gain?

Yes. Overall, we would anticipate a gain if we complete this transaction.

Very good. Thank you.

We are a long way from completing this transaction, however.

You are a long way. Well, I thought the indication was that it would be notice next few weeks.

No. The indication was we hope to go to contract in the next few weeks. That's step 1, you know. I don't want to be overly optimistic. I mean, you know, a transaction of this nature, there are lots of things that can cause things to unravel but we are very pleased that, you know, we -- we got due diligence to form and we'll keep you posted as we go along. It is at a price that would make us happy and we created a nice round trip on the investment and I think that will enable us to sharpen our product focus dramatically.

Okay, very good, thank you.

Once again, ladies and gentlemen, if you have a question, please press the 1 key on your touch tone telephone. Gentlemen, at this time, I show no further questions.

Thank you very much.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.