Site Centers Corp (SITC) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Developers Diversified Realty third 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, 0 on your touch-tone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Michelle Mahue (ph). Ms. Mahue, You may begin your conference.

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining our Third Quarter Earnings Conference Call. I'm Michelle Mahue, Vice President of Investor Relations for Developers Diversified. With me in Conference are Scott Wolstein, DDR's Chairman and Chief Executive Officer, Dan Hurwitz, Executive Vice President responsible for leasing and development, and Will Schafer, Senior Vice President and Chief Financial Officer. Joining us remotely is David Jacobstein, President and Chief Operating Officer.

Before we begin, I need to review you that certain of our statements today may be forward-looking. For example, statements that are not historical in nature or that concern future earnings, results or estimates, or that reflect expectations or beliefs are forward-looking statements.

Although we believe that such statements are based upon reasonable assumptions, you should understand that those statements are subject to risks and uncertainties, and that actual results may differ materially from the forward-looking statements.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in the management's discussion and analysis portion of our form 10-K for the year ended December 31st, 2002 and filed with the SEC. At this time, I'd like to introduce Scott Wolstein, our Chairman and CEO.

Good morning. We are pleased to announce Developers Diversified's third quarter results. Portfolio fundamentals have remained stable and our company has completed or announced that we will pursue several transactions that represent significant opportunities for long-term growth and capital availability. Concurrently, we continued to maintain our focus on enhanced financial flexibility.

In our last conference call, we discussed our investment strategy for the present operating environment. Our CAPEX are extraordinarily low levels and prices for core assets are extraordinarily high. As you may recall, we declared our intention to pursue core acquisitions primarily in joint venture relationships with institutional capital.

Most notably, within our new relationship with Macquarie Bank, by co-vesting-investing with our newly formed Australian property trust, to pursue value added opportunity through Coventry, our newly formed commingled fund, and finally to pursue Greenfield development opportunities aggressively on a wholly owned basis is where we achieved a greater value creation from each invested dollar.

Therefore, our operating results and balance sheet metrics have started to change slightly in the third quarter to reflect this strategy. As such, I would like to spend a moment this morning highlighting our development program that's important to our long-term earnings growth and its impact on our metrics. Again -- on acquisitions have dropped precipitously.

As this has happened, we have increased our focus on wholly owned Greenfield development, where returns remain high. Our balance sheet including our proportionate share of joint ventures currently reflect approximately $250 million of construction in progress, which is a level we expect the company to maintain for the foreseeable future.

While our balance sheet metrics have demonstrated improvement and are actually quite strong, carrying this amount of construction in progress will always put some pressure on the balance sheet as it subjects the company to additional leverage before the corresponding income starts to flow.

Our development pipeline, however, represents over $450 million in wholly owned and joint venture assets that will come on line starting in the fourth quarter of this year. These developments have an estimated un leveraged yield in excess of 11% based on first-year returns compared to acquisitions currently available in the market with yields closer to 7% to 8%.

The company will capture the NAB spread of approximately 300 to 400 basis points on this extensive pipeline of development properties. And ultimately will realize significant earnings accretions as well. This value accretion does not exist for a company that does not pursue an external growth strategy that relies primarily on the acquisition of fully stabilized assets.

Although the additional value created by the spread between development and acquisition returns is not immediately reflected in FFO, it is important for shareholders to recognize the long-term dating growth as the company's development pipeline represents.

With regard to our leverage, as a active developer, our overall leverage computed as debt undepreciated booked value will always be overstated compared to companies that focus on acquisitions since some depreciated book value does not include the value created by these development activities.

Our coverage ratios are also negatively impacted when analysts include the debt service associated with the construction loans on our developments in the denominator but do not include the prospective income anticipated from the development project in the numerator.

You will note in our financial that there was a significant decline in development fee income this year vis-a-vis last year. In 2002, approximately 36% of our total construction in progress which was held in joint ventures. Since we merged with JDN, that figure has dropped precipitously to approximately 20% to 25%.

Although our total construction progress has increased by about $100 million since last year, development fees have actually declined since more of the developments are wholly owned and we don't recognize development fees on wholly owned projects. This shift, however, will allow DDR to capture a greater proportion of the spread between the development returns and the low disposition cap rates, thereby setting the stage for future creation.

Finally, I would like to provide an update on the company's Australian transaction announced earlier this month. This prospectus has been filed with the Australian - for approximately 75% of the units, and the offering was open to retail investors on Monday, October 27 October 27th, and are expected to comprise the remaining 25%. The retail offer period will close on November 14th.

The expected allotment date of November 20 pairs and 21st and the trading will completes on October 26th.

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

Thank you, Scott. During the third quarter, DDR announced it would be adopting the SEC's staff policy statement that clarified EITF topic number D-42. The effect on the calculation of EPS for the redemption or induced conversion of preferred stock.

In early 2002, we spoke directly with the SEC to receive guidance on the proper treatment of the original issuance class associated with the preferred stock. In the third quarter 2003, however, the SEC changed its position, requiring the cost to be deducted from net income available to common shareholders. They subsequently recommended the charges also be deducted from FFO.

As a result of these accounting changes, DDR restated its year-end 2002 net income available to common shareholders and FFO to reflect $5.5 million in charges associated with the redemption of approximately $150 million of class A and B preferred shares in April 2002. Basic FFO per share for year-end 2002 was reduced from $2.54 to $2.45.

Diluted FFO was reduced from $2.50 to $2.42. Basic EPS for 2002 was reduced from $1.17 to $1.09. Diluted EPS was reduced from $1.16 to $1.07. DDR also restated its FFO for the first six months of 2003 to reflect the $5 million original issuance cost associated with its redemption of $180 million of preferred operating units in March of 2003.

Basic FFO per share for the first six months of 2002 was reduced from $1.37 to $1.30. Diluted FFO was reduced from $1.35 to $1.28. DDR's redemption of $154 million of Class C and class D preferred stock in the third quarter 2003 resulted in non-cash charge to net income available to common shareholders of approximately $5.7 million, which was also deducted from FFO resulting in an additional charge of approximately 7 cents during the third quarter. These figures were also provided in our press release issued on October 10, 2003.

For the third quarter of 2003, DDR reported 59 cents of FFO per share basic and 58 cents per share on a diluted basis. These amounts include the 7-cent charge relating to the original issuance costs associated with the redemption of preferred shares during the third quarter.

Excluding the effects associated with the SEC's staff policy change, DDR's FFO for the third quarter was 66 cents per share basic and 65 cents per share diluted, a 6.5% and 6.6% increase over the same period in 2002. FFO for the third quarter was -- total FFO for the third quarter was $68.8 million, which was 46% higher than FFO in the same period of 2002.

As we mentioned on our second quarter conference call, in July the company issued $300 million of seven-year unsecured notes with a coupon of 4.625%. Proceeds from this transaction were used to repay outstanding balances on the credit facilities and to selectively repay secured mortgage financing.

Although this transaction had a slight negative impact to DDR's fixed charge ratio, and earnings of approximately 2 cents during the quarter, it strengthened the company's balance sheet and financial flexibility over the longer term.

As I previously mentioned during the third quarter, DDR redeemed approximately $204 million of preferred stock with the weighted average coupon rate, of 8.8% and issued $205 million of new preferred with the weighted average coupon rate of seven-3/8th %. Nearly 140 basis point lower.

The new preferred were priced at the end of the second quarter of 2003. Although the redemption of the existing preferred resulted in the restatement described above, the lower coupons on the prefer will partially offset the increase in fixed charges DDR will experience from terming out the company's variable rate debt with higher cost fixed rate senior notes.

Moreover, the company was able to capture the market's demand for the preferred product at historically low coupon rates.

However, since the issuance of the 7-3/8 preferred share closed in July, and the company was not able to call the, $54 million of 8.7% preferred until August, and the $50 million of its 9-3/8th%, bowling preferred until September, the company incurred additional dilution of nearly 1% during the quarter.

The annual dilution from the notes is approximately $7.5 million, and the annual savings from the preferred transactions is over $4 million, resulting in approximately 4 cents of net dilution per share.

Although we will incur this nominal dilution, the company's financial strength and flexibility is significantly improved. In addition, the increase in the company's common stock price also resulted in dilution of approximately 1% per share in the third quarter, relating to stock options exercised and un exercised.

DDR continues to demonstrate improvement in its financial position and ratios. Consistent with the company's plan to term out debt, extend maturities and reduce variable rate exposure, a significant amount of DDR's variable rate debt, has been converted to longer term fixed rate debt.

Following the anticipating closing of the MDT transaction, DDR's variable rate debt exposure will be approximately 25%. For the nine months ended September 30, 2003, fixed charge coverage ratio was approximately 2.5 times compared to 2.2 times for the nine months ended September 30, 2002.

Debt service coverage was 3.9 times compared to 3.4 times for the same period. Interest coverage was four times for the nine months ended September 30 compared to 3.7 times for the same period in 2002. I would now like to turn the call over to Dan Hurwitz to discuss leasing and development.

Thank you, Bill. Consistent with our comments on the last conference call, the retail environment remains a story of feast or famine, which certain retailers continue to demonstrate strong demand for new sites, while others maintain a more cautious outlook.

We are, however, very optimistic about the 2004 open to buy information we are hearing from the market, and are working diligently to capture our share of those scheduled openings. That being said, we continue to emphasize our national tenant account program, as the quintessential bridge between developers diversified in our retail partners.

We regularly meet, with our key retailers within the program, to maximize efficiencies between our two companies. To that end, during the third quarter, we had approximately 100 combined retailer meetings, and 15-restaurant concept meetings to discuss existing and development assets.

While these meetings don't always produce immediate results, they help establish Developers Diversified and the DDR portfolio as the first look for growth opportunities in the open air shopping environment for both traditional community center tenants, peripheral development tenants, and equally as important today, tenants typically found in regional malls.

It's interesting to note that in the last 18 months, Developers Diversified has executed transactions within the community center portfolio excluding the lifestyle portfolio with the may department stores company, J.C. Penney, Sears, the Bombay Company, Casual Corner, Justice, Lane Bryant, August Max, Petitesophisticate, Yankee Candle, Will sons leather, Kirk land's, Motherhood Maternity, EB Game World, Maurices and others.

This expansion of our traditional tenant base is a credit to the quality of the core assets within the DDR portfolio specifically and market dominant community centers in general. This trend coupled with the growth aspirations of our core retailers such as Wal-Mart, Target, Kohl's, Lowe's, Home Depot, Bed Bath and Beyond, T.J. Maxx, Ross, Office Max, Circuit City, Best Buy, Linens and Things, Michaels, bodes very well for the future of our portfolio and development pipeline.

That being said, during the third quarter, leasing momentum increased as tenants executed deals to meet their open to buy requirements for 2004. During this period, the company executed 110 new leases aggregating 633,000 square feet, and 140 renewals totaling 494,000 square feet.

In regard to the DDR core portfolio, excluding JDN assets, the Q3 occupancy and leased rates were 94.6% and 95.2% respectively as compared to 94.3% and 94.9% at the conclusion of Q2. The occupancy rate of 94.6% represents a 40 basis point increase over Q3, 2002. But for the impact of rejected Kmart locations within the DDR core, the portfolio would have been 95.5% occupied and 96% leased. In the DDR core portfolio, again excluding JDN, rents on new leases increased 22.2% over previous rents, and 8.1% on renewals for a quarter average of approximately 12.2%.

At the conclusion of Q3, the former JDN portfolio was 92.2% occupied and 92.6% leased. Again absent the impact of rejected Kmart locations within the JDN core, the portfolio would have been 95% occupied and 95.4% leased.

On a combined basis, the DDR/JDN portfolio at Q3 end was 94% occupied and 94.6% leased. Excluding the impact of rejected Kmart locations, the portfolio would have been 95.4% occupied and 96% leased. On a combined basis, rents on new leases increased 15.2% over previous rents, 7.6% on renewals, and 10.1% on a blended basis.

I am pleased to announce DDR has made significant progress in finding replacement tenants for several large boxes. The company has executed leases or letters of intent with Fresh Market, Hobby Lobby, Dick's Sporting Goods, the Shoe Gallery, PETsMART and Menards (ph) to take over 300,000square feet of vacant space in four locations formerly occupied by Kmart. Rents under these leases are over 30% higher than the former Kmart rents on a weighted average basis, inclusive of an approximately 12% return on capital invested to effectuate the transactions.

The company continues to work with additional tenants to lease the remaining vacant space at similar rent levels. As part of our redevelopment program, DDR will also convert an 80,000 square foot former aims box in Ohio to several inline bays. These small shops will be located next to an existing and very successful top supermarket creating a neighborhood grocery anchored shopping center. The estimated return on cost of this development is approximately 18%.

I would also like to update the status of the service merchandise transaction. Since last quarter, the venture closed on an additional $16 million worth of transactions bringing the aggregate total value of sales and leases at the partnership level to over $306 million, of which DDR's share is $77 million. DDR's proportionate share of fees and revenue received totals over $7 million.

Added together, DDR's $84 million in value exceeded the company's initial investment plus its share of carrying costs and capital expenditures by nearly $14 million. I would like to reiterate that it is not the partnership's goal to dispose of all the Service Merchandise assets. Although many assets were pure re-leasing and disposition plays, there are several -- national high credit tenants that will generate greater returns if the partnership continues to operate them.

The partnership is currently placing permanent financing on several of these stable assets that it intends to hold and operate for a period of time. There are approximately 20 vacant or partially leased assets that our leasing team continues to market, representing about 1.2 million square feet of available space.

The joint venture, which is estimated to generate between $50 million to $75 million in profit at the partnership level, remains on schedule. It is still anticipated that DDR will earn a return on invested capital of approximately 30% to 50%, which is appropriate for a transaction of this magnitude.

I am pleased to announce that during the third quarter, DDR continued to expand its relationship with conventional department stores by executing its fourth department store agreement in 18 months. The May department stores company recently executed a letter of intent to operate a Jones Department store at DDR's lifestyle center at Lea wood, Kansas.

In addition, a 93,000 square foot JC Penny at the DDR's Coon Rapids property will open within days. I'd now like to update DDR's development activity. As we discussed on last quarter's call, leasing volume and rent levels at the company's developments continue on plan.

Also, the company's project level returns remain on budget and on time. As Scott mentioned at the opening of the call, in an virment (Ph) in which cap rates are declining significantly over the last several months, these widening margins on the dominant projects represent significant value creation opportunities for Developers Diversified.

As of September 30th, DDR had 7.2 million square feet under development or in predevelopment with an additional 3.2 million square feet in the company's shadow pipeline. On October 20th, the company celebrated the grand opening of the shops at tech ridge in Austin, Texas. This 500,000 square foot community center is the third joint venture development we have completed with Dave burnt interest.

The other two, Bandera point in San Antonio and La Frontera in round rock were highly successful investments for the company. The property is anchored by a Super Target, Toys 'R Us, Hobby Lobby, Ultimate Electronics, Linens N Things and PETsMART.

Tenants at the pike in rainbow harbor in Long Beach, California have began to open as well. Approximately 150,000 square feet of retail will open in the fourth quarter, including anchors Cinemark and game works. P.F. Change is currently open. Developers Diversified has also commenced construction at an uneven point, located in suburban Pittsburgh, Pennsylvania.

This 340,000 square foot development will be anchored by target, sportsman's warehouse, plus several medium sized boxes and a potential theater. DDR anticipates this $33 million development to be substantially completed in 2005.

Developers Diversified continues to explore redevelopment and expansion projects as a means of creating value. During 2003, the company completed 12 projects with a total project cost of over $36 million. We have five such projects in process and three in predevelopment.

We view this as a proactive ongoing process that is critical to maintaining asset value. I encourage you to review section 3 and 5 of the company's third quarter financial supplement for more detail on our wholly owned and joint venture development and redevelopment projects.

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

Thank you, Dan. I would like to highlight the performance of the JDN portfolio since the merger of approximately six months ago. Property revenues in NOI are in line with the company's under written estimates. We estimate NOI from. Former JDN portfolio to grow by approximately 3% during 2004 compared to in-place leases at the time of the merger.

Through the elimination of executive management and the reduction of redundant personnel functions as well as other means of capturing operating synergies, DDR eliminated approximately $9 million in annual G&A expense associated with the operation of the JDN portfolio.

Asset disposition volume is consistent with expectations. When DDR announced the JDN merger, we noted the company's intent to dispose of approximately $150 million of retail assets. Currently, DDR has sold over $120 million of former JDN properties with a weighted average cap rate of 8.1%, and also sold over $10 million of out parcels and excess land representing 32 acres.

In addition, the company currently has approximately $16 million of pending asset sales. In concert with these outstanding results, the JDN transaction has enabled Developers Diversified to de-leverage in an accretive fashion and has provided a strong development pipeline that will enhance long-term earnings growth.

In addition to the JDN sales mentioned above, in the third quarter, DDR sold two joint venture shopping centers with an aggregate sales price of $34.3 million, which equates to a weighted average cap rate in the high sixes. The two assets that were sold are the Cameron park shopping center, a 103,000 square foot property located in suburban Sacramento, California, and anchored by Safeway, in the la Moncha shopping center, a 1,900 square foot properties located in Fullerton, California anchored by Ralph's.

The pricing on these two transactions reflects the California market's strong demand for grocery-anchored neighborhood shopping centers. The sale of these assets generated an aggregate gain of approximately $12.5 million, of which approximate approximately $2.5 million represented DDR's 20% aggregate ownership interest. These gains were not included in FFO. The company also anticipate it will earn a significant promote through the sale of these joint venture properties.

Yesterday, DDR sold Meridian village, a 208,000 square foot property located in Bellingham, Washington, anchored by Circuit City, Home Depot and pay less drug, for approximately $23.5 million, which equates to a cap rate of 7.6%. This fourth quarter sale generated an aggregate gain of nearly $4 million, of which DDR's proportional share is approximately $780,000.

Again, this gain will not be included in FFO. All three of these properties were acquired from Burnham Pacific properties in early 2001, at cap rates in the low 10's. These property sales are a terrific example of DDR's goal to take advantage of the current cap rate environment through selective dispositions.

At this time, I'll turn it back to Scott to discuss earnings guidance for the remainder of 2003 and 2004.

Thank you, David. With respect to earnings guidance for the fourth quarter of 2003, we are raising our guidance to 76 cents per share, which will result in FFO of $2.63 for the full year 2003. Excluding the impact of the SEC's EITF pronouncement, the company's 2003 projected FFO would have been $2.76 cents per share. This guidance reflects the incremental earnings associated with our recently announced Australian transaction.

In 2004, we anticipate that dilution from that transaction, will be 11 cents per share. However, we are comfortable guiding to a range of $2.85 to $2.90 per share because the dilution from the Australian transaction will be offset by projected NOI growth in the core portfolio, by the full year impact of owning JDN, by the positive NOI contribution from development anticipated to come on line in late 2003 and throughout 2004, and from the incremental income associated with the Australian transaction.

Other than our share of value-added acquisitions to be acquired by the Coventry real estate fund, the foregoing guidance assumes only modest acquisition activity for 2004. 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 you wish to remove yourself from the queue, please press the pound key. One moment. Once again, if you have a question, please press the 1 key on your touch-tone telephone.

Our first question comes from Jim Sullivan of Prudential Equity.

Thank you. Scott, in terms of your guidance for 2004, you mentioned that one of the first items you mentioned was the growth in the existing portfolio. Can you give us a little more specifics in terms of what you're anticipating for same-store NOI growth next year?

Sure, Jim. We're anticipating 3% same-store NOI growth in 2004.

OK. And in that connection, this is a question for Bill, in your supplement this time, you provided in page 21 a table with some total same-store NOI, and I just wanted to clarify, that total same same-store NOI line item on page 21, does that include lease termination fees?

No, it does not.

OK, so they're excluded. Can you clarify also, and I think this was Dan's commentary, in talking with about the development pipeline, you used the distinction that I don't recall you using before but you talked about predevelopment versus the shadow pipeline. What's the triggering event that takes a project from the shadow pipeline to predevelopment?

Well, typically tenant interest, quite frankly. When we get a piece of property that we can get under control, the first thing that we do before we spend any significant capital is go to the tenant community and see what the level of interest is and see what the depth of the market is, and once we've established that, if it was from a shadow pipeline to a property we would consider committing capital to.

So it doesn't necessarily mean that you actually get signed leases at all. Just your judgment as to how strong the interest will be?

What it means, Jim, is that -- once it moves into predevelopment, it means we're committed to build the project.

Let me see. There's one other question I had here, see if I can find it in my notes. No, I think I'm going to have to come back to you on that. OK. Thanks.

Thank you.

Our next question comes from Tony Howard of Hilliard Lyons.

Good morning, guys.

Good morning.

Pica-dilly cafeteria declared chapter 11, I think yesterday or two days ago. I don't see where your exposure is. What's your exposure to them, and can you give your exposure maybe to the whole cafeteria kind of restaurant concept?

I don't think we have any exposure to Pica-dilly. We do have a few hometown buffets in the portfolio. That would probably be the extent of our cafeteria exposure.

OK, good. Also clarification, you were talking about your projects under construction and stuff, and were you talking about not getting credit for -- as far as feature revenue generation. How are you hedging your debt position for your construction projects?

I'm not sure I understand what you mean by "hedging our debt" -

Maybe I can answer it this way. When we said that 25% of our indebtedness was variable rate, that included all of our construction loans or all of our borrowings on our line related to develop development projects, so -

And once they get developed, you fix them?

Well, we either fix them or we refinance with equity or, you know, term out the debt or from operating cash flow.

OK. All right. Thank you.

Our next question comes from Craig Schmidt of Merrill Lynch.

Yes, I was wondering if we could just get a review of Kmart, not so much to beat a dead horse but to kind of get closure on that issue?

With respect to the exposure in our portfolio or with respect to the company in general?

Just how many you have left that closed that have not re-leased, and, you know, in general, what was the rent spreads between the leaving Kmarts and the new people taking the space?

We have 14 Kmarts left, Craig, and I think we had six that were rejected by bankruptcy, and we've done substantial re-leasing on those. I think we noted the lease spreads in the script. Let me just flip back.

I think the short answer to your question is that there's really one Kmart in the DDR portfolio that we don't really have any leasing momentum on, and in the JDN portfolio, there's also one, so I think, you know, by sometime next year, we should have all of the rejected Kmarts fully leased with the possible exemption of those two.

Great. Thank you.

It may not equate to all the square footage, though, Craig, because in some cases, we are going to lease and we are leasing some of those boxes to tenants who aren't taking all the depth.

OK.

Of the space. The financial impact will be minimal, but the total square footage's might not match up to exactly what would have been the square footage of the prior tenant.

OK. Thank you.

Thank you. Our next question comes from Michael Billerman of Goldman Sachs.

Good morning. I'm here with Terry Challaghan as well. Question for Dan can You talked about the departmental stores moving off the mall. Can you elaborate a little bit if they're still testing concept sizes and give us a little more color on that?

Well, sure. They are testing concepts and sizes. I think, you know, some department stores are more flexible than others, and some seem to be much more committed to the program than others. There's no question that Sears has announced a variety of different prototypes, sizes, concepts, and merchandising mixes that they're trying at various locations across the country. They opened one with us in Minnesota, and they just opened a larger version in Salt Lake City, and they're continuing to roll that program out, albeit different prototypes.

Our experience with J.C. Penney is that they're extremely focused on the open air environment and they have between 80 and 93,000 square foot prototypes to accommodate a variety of different formats. All in community centers. Other than that, Federated continues to look at things, and May as well, we've done two deals with the May company, but those boxes are very similar to the boxes you'll see in the mall in size. They'll be at that 140,000 square foot range and look very similar to what you would see in a conventional mall.

But all department stores are looking very aggressively at ways to grow, and really, quite frankly, the asset class of choice right now is the large community centers because of the amount of volume and the co-tenancy that we can offer.

OK. Thank you. On same-store NOI, I think the number equates to 1.9% for the first nine months. I know it's a little over 50% of the portfolio, and I think you had mentioned on the second quarter call that it was up 2.4%. I think that was six months, which would equate for the third quarter, I guess, around 1.6. Am I doing my math right there?

I would have to take a look at the third quarter specific. I mean, our comp base is usually based on assets from the beginning of the year to the end of the year, and I think your math sounds pretty accurate though.

And then, you know, I think we had been expecting a little bit more of a pickup in same-store NOI nearing the second half of the year. Was there any reason potentially this quarter that would have affected the numbers?

Yes, some of the lease terminations, we do not include the lease termination income in the same-store NOI. However, those centers are included so there's not the ongoing base rent that comes from some of that, so that's probably one of the reasons. And again, there might have been a change in some of the mix from asset sales and so forth.

In looking into 2004 on the term loan, where have you progressed there and maybe just generally on the balance sheet sort of how do you think about that for next year in terms of your guidance?

Well, the term loan that we have out there, we do have the extension option available for another year on that, and most likely we will certainly do the -- and that's broken into two six-month extension options, and we'll certainly go ahead with the first extension on that, which is scheduled the first quarter of next year.

And then how are you thinking about your floating rate exposure next year?

Our floating rate exposure will probably continue to operate in the 30% area.

OK. And lastly, on the Pike at rainbow harbor, it looked like the square footage went up 60,000 square feet to about 410,000, but the cost remained the same. Is there anything going on there?

Not really. There's a phase two to that project that changes on a regular basis, depending on tenant interest and building layout, so it's always been in that range. I think the 410,000 includes the total square footage in the original 365 or whatever we had said, really only includes phase one.

OK. Thank you.

Thank you. Ladies and gentlemen, once again if you have a question, please press the 1 key on your touch-tone telephone. Our next question comes from Matt Ostrower from Morgan Stanley.

Good morning. Couple of quick questions here. Just thinking through gains that will be included in FFO, it seems like you're basically keeping your 2003 guidance net of the preferred issues constant. Am I reading that correctly? And if that's the case, then what is your assumption for are there going to be big gains coming from the Macquarie JV and sales of assets into that?

You mean 2004?

I'm sorry -- no, 2003. The fourth quarter, are you expecting large gains from the closing of the Macquarie JV?

No, there aren't any gains reflected in there. There's some promotes that are reflected in incentive fees paid by the joint ventures.

Right.

But there aren't any sales gains. And in 2004, there's really only one gain that's reflected in our budget, if you will. You know, there's certainly the potential for other gains, you know, because several of the right of first offer properties that have been identified are development properties, and if they are sold, there would be a gain that could be included in FFO. But we've only budgeted one property at this point.

I think what Scott is referring to is the gains per FFO purposes. There will be gains actually on the sale of those assets into that venture.

Oh, yes. In terms of net income.

Yes. OK, fine. And then just thinking through the pipeline, I appreciate your comments at the beginning, Scott, but are you viewing -- I guess are you feeling more comfortable with the size of your pipeline? Are you viewing MacQuarrie as more and more of a takeout for your developments?

It's certainly one potential out come, Matt. It really depends on the status of the capital markets at the time.

But is your willingness to sort of undertake new developments at all sort of a product of having that joint venture?

No, no. We would have done it either way. I think -- the reason we pursue the developments is because we think it's the greatest opportunity to earn outright returns on our capital. Whether or not we sell the properties is really irrelevant to that investment decision.

OK.

Obviously there is an opportunity, you know, to add a little bit to your earnings growth from that development pipeline if we do choose to dispose of them into the Macquarie venture, you know, similar to pro lodges and regency. We haven't in our 2004 numbers projected a large volume of that. As I said, we only projected one, which is the phase two of a center that's in the initial portfolio, but there is that potential.

OK. And then it looked like minimum rent looked like they went down somewhat sequentially, but reported occupancy went up?

Yes, I think, Matt, on that, one thing you have to remember is in the second quarter, probably mid-way through the second quarter, we did the joint venture with the great institutional investor, so we had all of those assets reporting base rental income in the first half of that quarter, which were we're not in at all in the third quarter.

OK. And then finally, you talked about sort of a lower level development fees this quarter that you reported. Is that something that we should be thinking about in terms of the -- is that sort of the right magnitude going forward? I know that it can bounce around, but what's your 2004 sort of guidance for that?

Again, we didn't reflect a lot of that in our budget for 2004, but there is a possibility that it could occur. Where it will occur will be primarily in the Coventry venture where we pursued some value-added opportunities, we earned development fees from those opportunities and we'll book the 80% share of those fees that relate to the institutional capital portion of each investment. So there is some of that in the numbers, and that certainly is an opportunity for growth.

OK. Thanks very much.

Thank you. Our next question comes from Alexander Goldfarb of Lehman Brothers.

Good morning. First, can you just go back over your 2003 guidance? I think you said 76 in the fourth quarter, so I just want -- I think I mis-copied your full year.

76 cents for the fourth quarter, which before the EITF adjustments would have resulted in 2.76 for the year, but when we deduct the EITF number, it reduces the full year to $2.63.

Perfect. That makes sense now. OK. I noticed on your G&A for the third quarter previous, it was down a bit, it was off a bit. Can you,--Was there anything going on or is this a new run rate?

The G&A? Yes. That as we discussed in our second quarter call. There are certain incentive compensation arrangements that are driven more so by the stock price, and when the stock price rose significantly, we ended up accruing basically the maximum amount of what those awards could be, so there was a significant catchup in the third quarter to reflect that, and there should be a leveling off going forward.

And the other thing that's probably impacting that number is the fact that there was some transitional cost in the integrating JDN in the second quarter that wouldn't have been repeated in the third quarter with temporary employees, you know, that have now been replaced with permanent employees.

OK. Can you comment on what the promote you expect from the California JV sales in the fourth quarter?

The promote -- there will be promote, I think what David commented, there will be promote on these assets, I think he's referring to the RVIP investment in general, and as those transactions have occurred, it would create significant gains and those distributions go out, it will generate promotes on a going forward basis with the net portfolio.

Can you quantify what you expect in the fourth quarter right now?

There's really nothing on the promote as it relates to those two to three sales.

OK. Perfect. Your variable debt goals of - I think you're saying in the 25% to 30% range, that's inclusive of your pro rata of JV?

That's DDR consolidated. The JV component, I believe, there's probably more on a fixed rate there than there is on the floating rate.

OK. And then can you just comment, you've spoken a lot about the power centers in Simon's release this morning or last night. They commented they're starting on two fairly sizable power center community center-type developments. Do you foresee more competition going forward? I mean, is this suddenly the new retail avenue for development opportunities?

No, not necessarily. You know, Simon has been an effective developer of power centers for many years, and frankly if you segregated their community center portfolio from their mall portfolio, it would be one of the larger community center REIT's, so this isn't really new activity for them.

If anything, I would say that there's less competition than there was before because the projects have gotten bigger, they've gotten more difficult, entitlement periods are longer, the predevelopment dollars required are greater, and the risk profile for a private developer who doesn't have the access to capital that a Developers Diversified or a Simon would have has a real hard time really pursuing these kinds of large projects without a capital partner, and often we serve that role as capital partner to some of these independent developers as do some of our peers.

OK. Thank you.

Thank you. Once again, if you have a question, please press the 1 key. Our next question comes from Richard Moore of McDonald Investments.

Hello, good morning, guys. Just to follow up real quick on that G&A question, third quarter, is that a good run rate going forward?

Yes.

OK. And then Scott, I'm just curious, you know, the way you were talking about acquisitions left me sort of feeling like maybe the whole idea of acquisitions in 2004 is something you're not going to focus on as much, maybe because the opportunities just aren't there?

No, that's not really the case. I said - you know, we'll pursue acquisitions but we'll pursue them with capital partners because we don't want to, you know, dedicate large amounts of capital from our balance sheet into core acquisitions with cap rates at these levels. That's not to say we won't be active. We always are active in the marketplace.

But, you know, what I was trying to -- the point I was trying to make is, given the choice today between investing $100 million in a development project at 11.5% return or buying that project at completion at a 7 cap, I'd rather be the seller than the buyer.

And that's not to say we won't co-invest with people who'd rather be the buyer, and we often will because, you know, it generates additional fee income for us, it increases the critical mass of properties within a portfolio, and I think it makes us a stronger company, but the point was I wouldn't expect us to be doing that in large volume on our own balance sheet.

OK and in the ventures, is it still a focus for somewhat under managed properties, if you will?

Only in the Coventry venture. On the core side, it would be more likely to be pursued with the Australian limited property trust.

OK, and then Dan, I wasn't sure if I understood correctly, that long list of mall-type retailers that you gave us, were those going into, you know, more of your traditional property types or were those confined more to the lifestyle centers that you guys have?

Those particular tenants were exclusive of the lifestyle centers. Those were going into market-dominant community centers that are anchored by the Wal-Marts and Targets, Costco and Borders and PETsMART, et cetera.

OK, wonderful. Great. Thank you very much, guys.

Our next question comes from Michael Mueller of J.P. Morgan.

Hello, guys. A quick question with respect to the same-store growth expectation for next year of 3%. What do have you to do on the occupancy side to get there?

Occupancy is budgeted for 2004 to be about 95% on a weighted average basis.

OK. With respect to fees associated with the assets contributed to MDT, can you quantify what fee income that you're getting from those assets is beforehand and then what you'll be receiving post the consummation of the trust?

We can. I don't know that we have that right at our fingertips. There's a number of the assets that, you know, there's four assets that are wholly owned for which we're not receiving any fee income on right now that will be contributed in, and the other ones are currently in the joint ventures. You know, obviously -- and I believe the fees will be comparable, but in addition will also be receiving some Asset Management fees on top of that.

I think if you want to do the calculations yourself, I think that's a good way to go about it. I think we'll earn a 4% of gross income on the four properties that DDR is selling 100% of its interest, which will be incremental fee income.

On the other properties, it really is not a significant difference. There will be slightly more fee income recognized because our interest in the assets will be slightly lower than it was before, but on a percentage basis, and the Asset Management fee would be the other area where we budgeted additional fees, and there's also performance fees in the transaction that could be a potential addition to the fee income.

OK. Thanks.

Once again, if you have a question, please press the 1 key on your touch-tone telephone. Our next question comes from Jim Sullivan of Prudential Equity Group.

Yes. Back on with a couple of follow-up questions on the lifestyle centers for Dan. Can you give us some indication of how sales are continuing to the best of your knowledge with the specialty tenants there?

Sales have been trending well. You know, our center in leeward, Kansas, for example, which had a Jacobson's department store, which was lost to the bankruptcy over a year ago, we saw almost no decline in sales per square foot in that center when the department store disappeared. Pasadena, California and Littleton, Colorado, which are two relatively new projects, are tracking north of that $350 a foot range, which is where they were planned to be at this stage of their maturity.

So would it be fair to characterize the sales productivity as kind of at or above expectations?

Yes.

And in talking about bringing traditional anchors into those developments, perhaps in pad sites, is your return on those developments comparable to what you were getting otherwise in the portfolio? Or are you having to make some concessions to bring some of the department stores in to some of these projects where they fit?

Well, we're not making concessions, particularly when they come in after the fact, because again, they're not necessarily needed to make the property successful, and they're not in some cases desired by the small shop space, so they realize that these department stores realize that they have to pay their fair share and pay their own way, not just in potential rent or ground lease or on a sale transaction, but in their ancillary charges, which is always an area that they're unaccustomed to paying their fair share, particularly common area maintenance.

OK, very good. Thank you.

Since there are no more questions, this concludes the Developers Diversified Realty third quarter earnings conference call. We thank you for your participation in today's program. You may now disconnect. Everyone have a great day.