Site Centers Corp (SITC) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to Developers Diversified Realty second quarter earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct 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 telephone. And as a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Miss Francine Glandt.

Ma'am, you may begin your conference.

Thank you, operator and good morning, ladies and gentlemen. Thank you for joining our second quarter earnings conference call.

I'm Francine Glandt, Director of Capital Markets and Treasury for Developers Diversified. With me in Cleveland are Scott Wolstein, DDR's Chairman and Chief Executive Officer; David Jacobstein, President and Chief Operating 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 that reflect expectations or beliefs are forward-looking statements.

Although we believe statements are based on reasonable assumptions, you should understand 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, 2002 and filed with the SEC.

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

Good morning, everybody and welcome to our conference call.

On previous conference calls we have indicated that our balance sheet will be a major focus for the company. Our operating results have been rock solid for several quarters and we felt that we needed to focus on the balance sheet ,as that seems to be the area we where we have the most concerns from investors and the opportunity for multiple expansion.

I this (INAUDIBLE) we have made remarkable accomplishments in the second quarter of 2003. We established a game plan to address our balance sheet and a strategy to substantially improve our credit quality and investor perception. First, we met with rating agencies in order to educate them on our achievements in improving all aspects of our credit from leverage levels to fixed charges, to expose our variable rate debt. This resulted in a change in our corporate credit outlooks by both agencies from negative to stable in April.

Next we met with numerous fixed income investors and reintroduced them to our company, our business plan and the quality of our credit. The culmination of these activities was a dramatic tightening of our credit spreads from over 300 basis points to a scenario where we were able to price a large unsecured seven year fixed rate offering at 145 basis point spread. And that bond currently trades at tighter spreads in the secondary market.

Since the beginning of 2003, we have effectively completed approximately $600 million of fixed rate financing and a blended coupon of approximately 4.5%. The recent $300 million bond issue matched dollar for dollar with bridge financing used to complete the JDN merger, and that's effectively refinanced that debt with fixed rate indebtedness.

In addition, we sold $250 million of property year to date ,including the $135 million joint venture with a Kuwaiti financial source. Those cash inflows were used to repay debt and reduce leverage.

The result of all this activity was a reduction in our leverage, including joint venture interests of approximately $70 million and a reduction in (INAUDIBLE) rate debt including joint-venture interests of approximately $121 million between the first and second quarter. With the July bond issue we expect our third quarter variable rate debt level to be significantly lower. The proceeds from two new classes of preferred stock issued in March and July have been and will be used to redeem higher yielding preferred stock.

We expect these moves to partially offset the increase in fixed charges that we will experience from terming out our variable rate debt with higher cost fixed rate high senior notes. The annual dilution from the notes is approximately $7.5 million and the savings from the preferred transactions will be approximately $4 million on an annual basis, resulting in an annual dilution of 4 cents per share. Although we will incur this annual dilution, the companies financial strength and flexibility will be significantly improved which will manifest itself in higher growth rates over time.

In terms of real estate investments, we have slashed pricing on core properties rising to a high level making it very difficult to find accretive core acquisition opportunities. Therefore DDR will not be an active buyer at these price levels unless it is in a joint venture with third party capital.

In fact, in this environment, we are much more likely to be a seller of interest in our properties at these very low Cap rates and we are engaged in active negotiations for other transactions of that nature.

The company is very well positioned in this marketplace, as we will bring on line from our own pipeline, and that acquired from JDN, over $600 million of new development properties over the next 18 months at yields that have not been impacted by the low Cap rate environment. We continue to expect unleveraged yields on our development properties in the 11-12% range first year.

The markets aggressive pricing of these development assets upon completion will significantly enhance the value creation from this activity.

In addition to the development pipeline, we have a well defined investment strategy for redevelopment opportunities with our Coventry 2 fund. Coventry 2 was established when the first property was first purchased on June 30th. Our partnership with (INAUDIBLE) will enable us to invest in property with upside potential through rehabilitation and strong management. DDR will share in the profits of these projects, enter fee income and promote an interest that will further enhance shareholder returns.

Coventry provides DDR with another opportunity to benefit from low Cap rate opportunities upon disposition. These activities in combination give us a chance to bring online over $1 billion of real estate over the next couple years at low double digit yields. In a market where accretion is getting more difficult to achieve of core investments our accretion is spanning from our greater value creation.

At this point I will turn the call over to Bill Schafer.

Thanks, Scott.

For the second quarter of 2003, DDR reported FFO of 68 cents per share basic and 67 cents per share on a diluted basis. A 7.9% and 8.1% increase respectively over the same period in 2002.

For the first half of 2003, basic FFO was $1.37 and diluted FFO was $1.35 per share. 7.9% and 8% higher respectively than the first half of 2002.

Total FFO for the second quarter was $58.6 million which was 42% higher than FFO in the same period of 2002. The financial results for the second quarter include the result of operations associated with the JDN portfolio which contributed approximately 4 cents of FFO per share for this quarter. This increase was offset by approximately 1.5 cents of FFO associated with the asset sales Scott referred to earlier during the second quarter.

The second quarter of 2002, we had $6.6 million or approximately 10 cents per share of nontraditional other income, including lease termination fees, merchant building gains and income from sale of land and development rates. This compared favorably to the $5 million or 6 cents per share of other income recorded during the second quarter of 2003 resulting in a per share FFO reduction of approximately 4 cents

In the second quarter our results were also impacted by the accrual of the non-cash variable incentive plans, primarily performance units. While G&A increased from 4.5% to 5.3% of total revenues in the 6 month comparison, the increase was attributed largely to these incentive plans.

Several years ago we established a structure in which senior executives within the company are rewarded for generating exceptional shareholder returns. The threshold for achieving the maximum award is an annual compounded shareholder return of at least 18% over a five-year period. Because of the significant increase in the company's share price since the end of last year, we are now accruing maximum levels under this program which resulted in a onetime cumulative adjustment of approximately $1.6 million or 2 cents per share based on cumulative years of service pursuant to the plan during the second quarter.

Adjusting for the effect of the increase in accrual for incentive compensation, G&A was approximately 4.7% of total revenue. In addition the increase in the company's common stock price also resulted in additional dilution of nearly 1 cent per share in the second quarter relating to stock options both exercised and unexercised.

During the second quarter the company excluded approximately $24.4 million or 28 cents per share of net gain from depreciable real estate assets. Although not included in FFO, this net gain demonstrates the value DDR creates for it's shareholders through asset appreciation. As Scott indicated, we continue to demonstration improvement in the companies financial position and ratios.

For the six months ended June 30, 2003 the interest coverage ratio was 4.03 times compared to 3.74 times for the six months ending June 30, 2002. Fixed charge coverage was 2.54 times for the six months ended June 30, 2003 compared to 2.16 times for the six month period ended June 30, 2002.

Net service coverage was 3.64 times for the six months ended June 30, 2003 compared to 3.35 times for the prior year.

On June 27th, we priced $205 million of class H cumulative redeemable preferred stock with a coupon of 7.375%. This stock was issued on July 28th, simultaneously with the redemption of our 8.375% class C preferred stock of $100 million.

Remaining proceeds were used to repay balances outstanding on DDR's credit facility in anticipation of redeeming DDR's 8.68% class D preferred shares in the amount of $54 million in August and the 9.375% class V preferred shares in the amount of $50 million in September. The latter shares were issued in connection with the JDN merger.

We are extremely pleased with the origination of the class A preferred shares. This, at the time, represented the fifth largest $25 par repreferred transaction in history. The transaction also boasts the seventh lowest coupon for a $25 par repreferred transaction.

The annual saving from the issuance of the class G preferred in March and class H preferred in July following the redemption of various classes of higher yielding preferred shares is expected to be approximately $4 million.

After the close of the second quarter we issued $300 million of seven year senior unsecured notes with a coupon of 4.625%. This transaction was originally intended to be for $200 million, but because of strong demand, we upsized in order to take fuller advantage of the attractive interest rate environment.

Proceeds from this transaction were used to repay outstanding balances on credit facilities and to selectively prepay secured mortgage financing. As Scott mentioned earlier, although this will have a slight negative impact on our fixed charge ratio and earnings, it will strengthen the company's balance sheet and financial flexibility over the longer term.

As I stated on our first quarter conference call, following the JDN merger, we embarked on a plan to trim out our debt, extend maturities and reduce variable rate exposure.

This transaction does just that. The seven-year term fits nicely into our maturity schedule. It effectively fixes 25% of the company's variable rate debt exposure, and we expect to continue to make further progress in this regard.

In addition, selective prepayment of higher rate and loan to value mortgages will help mitigate the increase in our overall interest rate caused by fixing debt and will increase the unencumbered asset pool. We expect to repay in excess of $50 million of mortgage debt in the third quarter.

Now turn the call over to Dan Hurwitz to discuss leasing and development.

Thanks, Bill.

During the second quarter the retail environment remains sluggish with the gap widening between the haves and have nots within their respective tenant sectors. While certain retailers continue their unbridled expansion pace, others continue with a cautious expansion outlook as the economy and consumer spending is carefully monitored. In spite of this environment the portfolio continued to perform well as the company executed 72 new leases aggregating 291,000 square feet and 112 renewals totaling 586,000 square feet.

In regards to the DDR core portfolio, the second quarter occupancy and leased rates were 94.3% and 94.9% respectively. The occupancy rate of 94.3% represents an 80 basis point increase over Q2 of 2002 and is in line with our 2003 budget goals.

Absent the impact of rejected K-mart locations within the DDR core, the portfolio would have been 95.4% occupied and 95.9% leased.

Q2 of 2003 was also the first full quarter of incorporating the former JDN portfolio into the DDR portfolio. For purposes of benchmarking going forward, the JDN portfolio at conclusion of Q2 was 90.9% occupied and 91.4% leased.

On a combined basis, the DDR/JDN portfolio at Q2 end was 93.8% occupied and 94.2% leased. Again absent the impact of rejected K-mart locations within the DDR and JDN portfolios, the combined portfolio would have been 95.3% occupied and 95.6% leased.

On a combined basis, rents on new leases increased 17.4% over previous rents and 6.7% on renewals for a quarter average of 8%.

In regard to the previously mentioned K-mart rejections, tenant interest remains strong on most locations and we are in the process of redeveloping each of the vacant boxes to accommodate a multi-tenant program or single user. We are in active discussions or lease negotiations with tenants such as Target, Dick Sporting Goods, Pet Smart, JoAnn, ETC, Wild Oats, Burlington Coats, Hobby Lobby, among others. We expect to have clear direction for these units by year end with rent re-commencing within 9-12 months thereafter.

I'd also like to update the status of the Service Merchandise transaction.

In the second quarter debenture closed on an additional $15 million worth of transactions raising the total value at the partnership level to $291 million, of which DDR's share is $73 million. In addition, we have received fees and revenues aggregating $5.8 million. Added together, the approximately $79 million in value generated to DDR exceeds our initial investment plus share of carrying costs and capital expenditures by $9.5 million. Moreover the joint venture has approximately 1.6 million square feet of vacancy left to market.

Now I'd like to turn to our development activity for an update.

Unlike the leasing environment, the development business continued its robust pace with Wal-Mart, Target, Lowe's, Home Depot, Kohl's and numerous medium and small boxes leading the charge. Project level returns have remained stable over the last several months even as cap rates compress, resulting in the overall widening of margins in value creation on development projects.

In Q2 the DDR development teams have substantially completed two projects. Pioneer Hills in Aurora, Colorado has approximately 449,000 square feet of retail space and is anchored by Wal-Mart, Home Depot, Bed, Bath and Beyond, Pet Smart and Office Depot. Frisco Marketplace in Frisco, Texas, a suburb of Dallas, is 131,000 square foot center anchored by Kohl's and Eckerd Drug.

In addition DDR completed several expansion projects in Q2. Brook Highland Plaza in Birmingham, Alabama was a former Wal-Mart that was retenanted with Lowes and expanded by 46,000 square feet to accommodate Ross Dress for Less and PetCo. In Brandon, Florida, we retenanted a former Scotties with a 66,000 square foot two story Kaine's Furniture store.

Cross Pointe Center in Fayetteville, North Carolina experienced redevelopment that included the demolition of a vacant former theater and the addition of Bed, Bath and Beyond plus 20,000 square feet of shop space. The incremental returns on these expansion projects are expected to be approximately 13% on a combined basis.

Moreover in Apex, North Carolina, a suburb of Raleigh, we began construction of a 325,000 square foot center anchored by Target and Lowe's, plus numerous medium boxes, small shops, and out parcels. The net cost of this center is expected to be approximately $25 million.

In addition, section 3 of our supplemental provides more detail on an outstanding development pipeline comprised of (market done on that)location anchored by the nation's most successful retailers. We are extremely excited about these projects and when combined with additional proposals currently in the predevelopment phases, these projects will further enhance DDR's already outstanding core portfolio and tenant relations.

At this point I'd like to introduce David Jacobstein.

Thanks, Dan.

The integration of the JDN assets continues to progress as planned. As mentioned in our last earnings call, we planned to hire 52 employees to handle the additional operating and developments assets acquired in JDN. To date, we have hired 45 people to fill the positions.

We also continue to make progress on the disposition of JDN assets. As of July 17, we have sold $110 million of our $150 million target ,up from $89 million disclosed on our May 1st conference call. We have an additional $5 million under contract for sale. The properties sold at a weighted average Cap rate of 8.5%.

The company made some attractive investments during the second quarter that I will now discuss in some detail.

In April, we acquired our partners 50% equity interest in Leawood Town Center Plaza, a 419,000 square foot shopping center in Leawood, Kansas, a suburb of Kansas City. DDR purchased the additional 50% for approximately $15.3 million net of assumed debt of $53 million. We also purchased our partners 51% interest in Johns Creek, a 306,000 square foot shopping center in Suwanee, Georgia, a suburb of Atlanta that was built in 2001.

DDR purchased the additional 51% for approximately $18 million including the issuance of 145,000 operating partnership units. These are attractive centers and locations with strong demographics and DDR now has control of the leasing and operations which will benefit the centers over time.

In May we contributed seven retail properties to a joint venture limited investor group led by Kuwait Financial Center, a Kuwaiti publicly traded company. The properties have a gross asset value of approximately $169 million and the contribution was made at a Cap rate of 8.9%. DDR will continue to own a 20% in these assets and earn fee income for asset management, property management, leasing, out parcel sales, construction management and disposition of these centers.

In February 1998, we formed Coventry Real Estate Partners, a vehicle by which DDR co-invested in real estate with Prudential Real Estate Investors. That fund has completed investments of approximately $750 million and is projected to generate an internal rate of return at the property level in excess of 40%.

On June 30, we closed the second Coventry fund, which is a commingled fund with a variety of institutional investors, in which our discretion will be significantly enhanced. Coventry 2 will invest up to $300 million of equity capital on behalf of it's institutional investors exclusively in joint-ventures with DDR.

DDR will invest 20% in each joint venture and will earn fee income from property management, leasing and construction management, plus a promoted interest. The fund seeks to acquire retail properties with redevelopment opportunities.

The first such property was purchased by the fund on June 30. Ward Parkway represents a redevelopment opportunity in an in fill location in Kansas City. This center is extremely well located and has generated momentum with the recent openings of Target, TJ Max, 24 hour Fitness and Pier One. The joint venture purchased the property for approximately $48.5 million.

We sold the following assets in the second quarter: In April, a joint venture between DDR and DRA Advisors sold Carmel Mountain Plaza, a San Diego shopping center, for approximately $95 million at a 7% Cap rate. DDR held a 20% interest in the asset. The sale resulted in an aggregate gain of $35.7 million, of which DDR's proportionate share was $7.1 million.

Also in April, the company sold three industrial assets that were originally acquired through the merger with American Industrial Properties for $14 million at an 8.2% Cap rate.

In June, a joint venture between DDR and DRA Advisors sold Clock Tower Place, a St. Louis shopping center, for approximately $22 million. DDR held a 50% interest in the asset. The sale resulted in an aggregate gain of $5.2 million of which DDR's proportionate share was $2.6 million.

In our last conference call we informed you that the bulk of the industrial and office assets that were acquired through the merger with American Industrial Properties were under contract to be sold. Very recently, the purchaser has contacted us in an effort to renegotiate the purchase price. We are currently evaluating the request but there is a significant possibility that we will decide not to pursue the sale with this purchaser.

Year to date, the company including JDN, has sold operating property worth approximately $250 million including the 80% interest in the KFC transaction at a weighted average Cap rate of 8.7%. We have also made progress on the sale of vacant land. As previously reported, the JDN merger resulted in an increase in our portfolio of vacant land and we intend to sell or ground lease that land throughout this year and next.

In the second quarter we sold five out parcels of land for approximately $2.1 million and year to date, we have sold 8 out parcels for $3.9 million. We expect to sell about $6.5 million during the remainder of 2003.

We will continue to take advantage of the Cap rate environment by disposing of assets that do not fit our long-term strategic goals.

Low Cap rates benefited on the sales side but also make the investment side more challenging. If we acquire, it will be very selectively. We will acquire assets where we can add value and lever our strong management and leasing experience to create higher returns for shareholders. This disciplined approach may result in fewer opportunities while Cap rates remain at historically low levels but the investments will be smart and will benefit the company in the long-term.

Now I will turn it back over to Scott to discuss earning guidance for 2003.

Thank you, David.

In the second and in early third quarter of this year, the company completed a variety of capital markets transactions and have had a dramatic and positive effect on our balance sheet. However these transactions collectively will diluted earnings in the third quarter by about 5 cents per share. Accordingly, we are lowering guidance for the third quarter by that amount.

However, we maintain our current guidance for the fourth quarter. These offsetting transactions should keep fourth quarter earnings in line with prior estimates. As a result of the 5 cent reduction in third quarter FFO guidance, our guidance for 2003 is adjusted back to $2.70 per share, which is consistent with our original guidance for the year.

We will provide further guidance for 2004 on our third quarter conference call.

I would now like to open the phone lines to receive questions.

Thank you.

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 wish to remove yourself from the cue, please press the pound key.

If you are using a speaker phone, please lift the hand set before asking your question.

Our first question comes from Mike Bueller from J.P. Morgan.

Hi. Couple of questions here.

First of all, can you just talk a little bit more about the comp programs that you mentioned? Is this something new, was it previously disclosed and just generally, what is it?

Yeah. It's nothing new. It's been previously disclosed and it is a performance unit program that is based exclusively on total shareholder return based on a five year measurement period. The accruals that hit the books in this quarter are not reflective of any cash payments that have been made or will be made for the next three years. Actually, it's not cash payments, it's stock grants.

Okay.

The program, in simple terms, is basically - there's an amount of restricted stock grants that are available to senior executives based on total shareholder return over a five year measurement period. The GAAP accounting requires us to, sort of, project what that five year result will be each quarter along the way, based on the stock price performance for the period of time from the initiation of the program up until that particular earnings release.

When was the initiation of the program?

Well, there's actually different grants out there but the major one was initiated about a year and a half ago.

Okay. Okay. So it's not anything new.

It's three and a half more years before there will actually be any grants. Because of the way GAAP accounting works, Mike. there may be quarters in the future, if our stock price performance, God forbid, does not keep up with the current pace, when we'd actually have to book earnings to reverse the expense that we accrued for the maximum accrual.

Okay. How does this translate into G&A outlook for the balance of the year?

On a going forward basis. Since we had to catch up for, as Scott indicated, about a year and a half worth, I would estimate the quarterly impact to be in the $450,000 range. I mean, we've always had a number in there, historically it's probably closer to $200,000 going back a year ago, and so forth.

Okay.

Mike, this is Dave Jacobstein.

As long as you answered a question about G&A that was geared toward that one center program, the percentage of total revenues we have had as our objective and been able to sustain over a long period of time is in the 4.5, 4.6% range and this quarter obviously was higher although it was about that if you back out this non-cash program that was earned, that was mentioned.

The reason for the slight increase in addition to that was really the phasing in or the integration of JDN. Over time that will be very, very accretive in the sense we will save significant amounts as previously disclosed. There was a lot of hiring done in the quarter. 45 people were hired. Relocation costs. Head Hunters fees and so forth and so on plus maintain on a temporary basis employees in the Atlanta office for a period of approximately 60-90 days.

So when that is coupled with additional travel costs back and forth between Cleveland and Atlanta and through the JDN properties, there was a slight uptick that shouldn't be repeated in future quarters.

Okay.

Last question, on previous calls you were talking about acquisitions being strong particularly with respect to lifestyle centers the back half of the year. Can you kind of quantify what you're looking at now on the acquisition side just because it sounds like I don't want to say guiding down in terms of expectations but can you just give us a flavor of what you expect for the balance of the year here?

Reflects no additional acquisitions for the balance of the year.

Okay. Thanks.

Thank you.

Our next question comes from Tony Howard of Hilliard Lyons.

Good morning. Congratulations on a good quarter.

First, I need a clarification. On the 160 transferred to the joint venture, can you kind of run through how that affected your balance sheet and what was your, going to be your ownership and what was the cap rate?

Starting with the last one.

The cap rate was 8 el 9% cap rate. Our interest in the joint venture, 20% plus a promoted interest to the extent that the venture generated returns in excess of 12%.

And to your other question, proceeds were applied to repaying indebtedness from a balance sheet standpoint, 80% of our interest in those assets, the purchase price on a net reduced indebtedness. What basically happens, all the land and buildings associated with the assets were taken off our books and now on the environmentalist. We now have an equity investment which shows up in our balance sheet line item called investments with JRTs.

Second question as far as how you were able to get down around 17%. Going forward as far as 2003-2004, what's your goal as far as your financing of your debt situation?

Actually debt is higher than that, closer to 30%. We like to maintain it around 25% which gives us flexibility to repay variable rate indebtedness of Capital Market transactions.

Okay.

Follow-up question about the G&A, mention 40 something employees were hired. Were these former JDN employees, and are you going to be adding additional employees?

We'll be adding approximately seven additional employees because we said we needed around 5 to be able to handled the additional properties from an accounting standpoint and so forth. We have another six or seven to hire.

They were not JDN employees, we did hire a couple JDN employees in the field for operations but for the most part the new employees were hired here in Cleveland in areas such as development, accounting and so forth. So the impact of those hires has mostly been felt. Just more to go.

Thank you.

Thank you.

Our next question comes from Jim Sullivan of Prudential Securities.

Thank you, good morning. I had to break off a bit during Dan's prepared comments so I might have missed it.

Dan, did you give the same comparison in the quarter?

No, but Bill will.

Another Schafer question.

Same store NOI was 2.4%.

2.4%. Very good.

Let me ask you in terms of a forecast for the second half and maybe comment on the percentage basis as we were talking about, can you give us some idea whether you expect same store NOI growth to be stronger or weaker in the second half?

Well, typically a little stronger in the second half than the first half and conversation with retailers and what their expectations are we would expect that to sort of follow the trend.

Most of the time, as you know, Jim, retailers plan an increase in the second half even over what was typically their best part of the year the prior year and this year is no different.

And do you expect very much additional leasing activity between I guess now and the end of the third quarter where you might get traditional openings in the end of the year? Openings for the full year?

We will have some because we every year experience right around this time actually and we are this year is no different. Most retailers coming to us who had stores that were planned that fell out of season that they've brought for which creates significant inventory issues for them because they have to take markdowns and looking for quick deals and our program with a lot of these retailers provide us with a place where they can get fast LOI, fast lease documents so every year we get some pleasant surprises in the second half as a result of some missteps from others. I expect that to continue.

In addition to that, we had a lot of fancy redevelopment activities and portfolio that's ongoing right now particularly from the assets that we inherited from the JDN merger. A lot of those leases are done but the place has to be built. The balance of this year and next year, actually be a significant amount of footage in connection with those expansions.

So in terms of JDN, Segue to the next question, do you have a target occupancy over the next year?

Well, we certainly hope that I don't know whether we'll be able to do it in one year or not but hope the occupancy levels for the JDN portfolio will be consistent with the occupancy levels of the DDR portfolio and to the extent assets in the portfolio that can't achieve that kind of performance likely disclose it now. It's easy to do in this environment. I think within a year or two can see the sort of 95 percent higher occupancy so long as the economy goes up.

Can you also remind me, the profile with the JDN asset that you had slated for sale, can you characterize what type of assets you're going?

Well, I think I just did. Really, the smaller noncore assets and the assets that we don't think key and match the growth profile of the portfolio and also going to be a large component of land, land portfolio is much greater and the velocity of land sales and gains on sales of land that will hit the books over the next year will be higher than what we've had in the past because of the assets.

You had given full year target of 6.5 for this year? Did I understand that right?

I think that is correct.

And is the -- can you give us some idea whether that number, you can do the same next year?

Actually, the number for next year is larger than that based on our preliminary review and the status of some of the leasing we are involved in the development projects we have been able to accelerate leasing on the development projects and a portion of that is reflected in the outparcel sales.

Okay and from two other quick questions, on the Aliward acquisition, did you publish a cap rate on that?

We did not publish a cap rate but the cap rate was 9.5 by contract. It was an option that existed at the inception of the JRT -- joint venture where we have an option to buy, the cap rate is determined in advance. It doesn't fluctuate by market conditions.

The only variance to that is immediately prior to the acquisition of our partners interest, Jacobson's filed bankruptcy and we made an arrangement where we gave value to that box because it would have been an unfair result not to. That income is not reflected in earnings yet but by early next year will be, that box will be leased and some of the issues occasioned by Jacobson's bankruptcy will be resolved. We'll see a pickup in NOI in 2004.

When you say lease, you'll sign contracts that will be occupied?

We'll think Cap Ex this year and it will be occupied next year.

Finally on the AIP, the attempt by the group that was advised to be traded, can you give us indication of what kind of incentive reduction they were looking for?

I wish I could but I don't know where it works out. To be quite honest with you, the tone of the dialogue didn't get to the point where we sharpened the pencil on exactly what they wanted.

Can you give us some idea what the issue was?

Some of it was typical deferred maintenance issue, but the more serious issue that we really didn't, we wouldn't really engage in a dialogue about was a feeling with respect to the income on phase and projected income in vacant space. Their perception of market rents in various markets was below the actual rent in the property.

Can you give us confidence levels you might have on selling that?

We'll sell a lot of it without any problem. We have a significant number of assets that were encumbered by fixed rate financing that burned off in September of this year.

Those assets are among the higher quality assets in the portfolio and very difficult to sell because we've had this unhappy combination of low leverage and high interest rates. As that burned off, I think it will have very good success trading out those assets and pricing higher than we could have done.

Very good. Thanks.

Thank you.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone.

Next question comes from Matt Ostrower of Morgan Stanley.

I guess I'm confused on the earnings guidance.

The way I understood this is you were buying JDN which is an accretive transaction and use that accretion to delver and doing what you said you were going to do in terms of refinancing the debt and traded in deferreds here at lower cost. What's unclear is what happened since that made you think it was going to be more dilutive.

Good question, Matt.

A number of things. Number one, the fixed rate financing we did in size competed what our projections were. Projecting to do it later in the year so we did $300 million and did it a quarter early. So the delusion from that financing wasn't reflected in the original reflections of Q3 and didn't expect to do it and we did so we jumped into the market because the market conditions offered us a good result and we're glad we did.

Second thing that happened that we didn't anticipate which was also indicated by market conditions is we originally anticipated prefinancing as we called the paper. But, again the market gave us an opportunity to refinance those earlier than we anticipated so we now have a serious time where we have two preferreds outstanding and a high coupon in lieu of debt and that has a real dilutive impact only in Q3 as we call the outstanding preferred issues as they mature.

Those are a few of the major items that were dilutive and not anticipated. Another thing that will hit the books in the third quarter relates to the dilution from the stock price performance from options outstanding and some of the other programs we discussed.

Okay. And I'm sorry, I'm a little, that's helpful.

On the bond talking about the July bond issue, that's the 300 million you were talking about?

Correct.

Okay.

That wasn't projected to be done until September.

Okay.

On JDN, can you refresh my memory, the occupancies that you reported, how do those compare, what's the trend look like on that? Like what has it been doing?

The absent K-mart trend would have been positive. The drop in occupancy in that portfolio is exclusively related to the K-mart closures in the portfolio.

Okay.

Do you have a sense, Dan, same store NOI is an unfair question. In terms of the expenses associated with JDN, ex K-mart, it sounds like the portfolio is performing in line with expectations?

The core portfolio is performing in line with expectations. The development portfolio is above our expectations.

On JDN you're talking about.

Correct.

And we've been able to effect transactions on developments we have not thought we would do as quickly as we have.

Okay.

And then just to clarify the land sales, Dave, you talked about amounts you said 6.5 million of land sales through the remainder of 2003, that is land sales gains?

Proceeds.

Proceeds, okay.

Can you give me a sense for what the gains, the gains look like through year end?

That's priced in the 1.7 area.

And sounds like that number, that 1.7 million to your end, sounds like that pace is going to pick up in 2004?

Not by a lot, Matt. It might pick up by 10-20% but not by a lot. 2 million is a fair amount.

Okay.

And then finally for me on the lease spreads, seems like they've come down a bit from your previous trend if my numbers are right. Is that indicative of weakening in the market or just some individual deal that is happened this quarter?

It's a little bit of both.

There's been some weakening in the market. The timing of the deals has an impact on us but what happens, the biggest factor in this quarter was that our renewals outpaced our new deals by a 2.1 margin which is typically not how it works. Our renewals have a lower growth rate than our new leases so that in fact drove the spreads down. That was occasioned for two reasons, one is obviously we are concerned about 2002 renewals and we put a push on the quarter and successful as we did almost 600,000 feed of renewals.

The other part of it was quite frankly JDN was not as diligent in executing the renewals. When we acquired the portfolio in March, there were a number of tenants that we were behind. They were on month-to-month and concerned about that so the market on the renewal side and the JDN portfolio and hurt the overall growth profile but that led to the almost 2-1 spread of renewals.

Sounds like the average spread going forward may rebound holding market conditions constant?

I think it will.

And the lease termination fees, can you give us a sense where they came from? Were they above your own expectation as soon as.

Largely one transaction which was a termination of a Wal-Mart that had closed in a shopping center where we have a Lowe's sale to replace them and needed to terminate the Wal-Mart lease to make the deal in Lowe's. Our termination we continue to project 75% of the prior three years' average. Volume in this quarter is consistent with that and there will be other transactions identical to this in the future.

Great. Thanks, very much for your help.

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

Good morning, guys.

Scott, could you clarify for me. I'm confused, too. I want to follow up on a couple of Matt's questions. I don't remember the third quarter guidance. What was it previously or what is it now?

We didn't provide quarterly guidance but the estimate was 69.

So you're thinking 64 for this quarter, and then you're obviously going to have given that you did $1.35 in the first half, a big jump as your expectation in the fourth quarter?

Fourth quarter guidance of 70 and we're comfortable with that.

So this is all really a result of timing, basically, that you have a 6 cent jump in the fourth quarter from the third quarter?

That's correct.

Okay.

And the second thing, on these gain on sales, I mean, you have $28 million, Bill, maybe you could help with this.

2 million in the earnings part of the income statement and only 24.5 reverses and I figured a lot of that would be reverses in the FFO. A gain on land sales but apparently that's not the case. Three components, the 28 million that you're referring to, also netted against that the impairment charge of 2.6 million which relates to primarily one asset that is under sale to be sold, a small asset. That bring that is number down to probably a $25 million number.

Okay. And the discontinued gain on sales as well?

And some of that and some of the sale of real estate there was a gain on sale of residual land.

Okay, so the total is 1.5 or something like that?

Around 2.1 or something.

Okay.

Then, Dan, a question for you. You were talking about it being a quarter of has and have nots, who are the haves, who is expanding in the portfolio?

Certainly our group which is the target, Kohl's, Wal-Mart, Home Depot, Lowe's continue on an expansion pace and appetite for new development opportunities. The moderate sized box is very aggressive for the most part, for example, Bed, Bath & Beyond have had aggressive growth. T.J. Max whether it's Marshalls, all those divisions, Ross is growing at a large pace and seeing The Gap coming back, 50 Old Navy stores and seeing that group of tenants moving at a very aggressive pace. Some of the areas we are watching carefully are the books business.

Seen a slowing down of the book both Barnes & Noble and Borders have had issues for sales and starting to be much more cautious than they were in looking at new products and always watched those units that sell low margin goods whether it be books or CDs or in many cases electronics and appliances.

Okay, good. Thanks.

Then looking at 2004 leasing, how are you guys coming with that?

Well, right now we are, the number of deals we are doing on a quarterly basis, our 2004 deals and pleased with the pace of that. We're in the process now of finishing up our 2004 budgets and we'll have more direction for you in that regard on the next call.

Okay.

Other income going forward, how would you guys look at that as far as modeling?

It's probably if you look at year to date, it's probably kind of consistent using that as an average.

Okay. Good.

And last thing, what's the capacity of the new coventry environmentalist and what kind of leverage there?

Leverage average about 65% and allow us about $1 billion over a 2-3 year period and successful in placing that capital into the market in terms of investments, I'm sure relatively successful in raising additional funds before the first.

Great. Thanks very much.

Thank you.

Our next question comes from William of Prudential Securities.

The NOI number you gave up, was that for the second quarter or the first half?

The first half.

Okay.

And then quickly on same store tenant stores for twelve months, $235 per square foot, it's been in a down trend for a while and not all that surprising by itself, just wondering if there's any indication you're getting from out in the field it's strengthening or at least the decline is decelerating?

I think it's important to note when we give square foot in our portfolio that actually our large boxes don't report sales.

If we were doing it on a macro basis, we have less than 50% of our portfolio to report sales for the Wal-Marts and the targets and Home Depots and Lowe's and people who drive it up don't report. There has been some downward movement and some super market chains within the portfolio but overall the retail has held up well.

Okay.

You mentioned the downward movement in the supermarkets. Is that attributable to the effect of Wal-Mart moving in or the discounters and warehouses. Do you have an identity for that?

All of the above. More composition within the marketplace.

And just refresh my memory, as far as gross goes, how large is that tenant basis for you guys?

I don't have it by percentage. I can look that up.

Don't bother.

Half have a component and bankruptcy component is probably traditional grocery store more than half of the situations and the rest of them would be combinations of Wal-Mart super centers, target of Costco.

Thank you very much.

Thank you.

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 Jim Sullivan of Prudential Security.

Bill and I are at different locations as you can tell.

I have a couple of questions on financing.

Going back to the American industrial property portfolio, you talked about some of the higher coupons, how do you intend to handle this?

We intend to handle the maturity off the line, it's a very small amount. The problem isn't just the interest rate on the debt, the properties are under leverage.

You know the amount isn't so significant but the problem is the buyer can't finance the properties until the debt goes away. If that is close collateralized very low along the ratio. We'll repay it off the line.

Repay it off the line of that joint venture.

Secondly, also financing question, I think, Bill, you said that the plan was to, you had 50 million of maturities in the third quarter?

50 million in secured debt we indicated we'd be paying off. Some of the maturity dates are beyond that. We have the ability to repay those without penalty.

What's the average coupon on that?

About a little over 5%. 5.14, right?

Okay.

And the final question on the Kuwaiti Finance Center joint venture, is there a contemplated term, can you tell us?

Five-year term.

Thank you.

Thank you.

Our next question comes from Lou Taylor of Deutsche Banc.

Good morning. I had a quick question on Q&A, I wanted to revisit that.

Wonder if we could talk about it in context of the $9 million in annual savings projected. Where are we on that? Looks like annual savings of 5.4 million based on current run rate. Wondering if that was still on track?

The G&A savings for the transaction, as I indicated earlier in the call, with respect to JDN should, when all is said and done, be as we originally indicated.

The second quarter of this year did have some lift only because we were doing the transition and the integration in terms of temporary employees, head hunter fees and so forth. Once those go away and the workforce is stabilized, a number of employees were hiring to take on that work, those savings should be intact.

What was that lift in dollar figure as soon as.

The amount attributable to the salaries for the temporary, the permanent hires because I didn't break it down including benefits and so on was $1.6 million but some of that is for the so-called permanent workforce hired and that was feathered in over a period of time from the merger which was March 13 until the end of the quarter. I don't have a number how much that represents but it's a portion of that $1.6 million.

Okay. That was it. Thanks.

Thank you.

Once again if you have a question at this time, press the 1 key. There appear to be no further questions at this time.

Thank you very much.

Ladies and gentlemen. Thank you for participating in today's program. This concludes the call. You may now disconnect.