Site Centers Corp (SITC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2004 Developers Diversified Realty Company earnings call. My name is Carlo and I will be your coordinator for today's presentation. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. If at any time during this call you require assistance, feel free to press star, 0 and a coordinator will be happy to assist you. It is now my pleasure to turn the presentation over to your host for today's call Ms.Michelle Mahue. Please proceed, ma'am.

Thank you, Carlo. Good morning, ladies and gentlemen, and thank you for joining our third quarter conference call. I'm Michelle Mahue, Vice President of Investor Relations for DDR. Joining us on the call are Scott Wolstein, DDR's Chairman and Chief Executive Officer, David Jacobstein, President and Chief Operating Officer, Dan Hurwitz, Executive Vice President, 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 that such statements are based upon reasonable assumption, 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, 2003 and filed with the SEC. At this time, I'd like to introduce Scott Wolstein, our Chairman and CEO.

Good morning, everybody. I am pleased to announce our third quarter results which exceeded consensus estimates by 1 cent. Our portfolio demonstrated strong leasing activity and occupancy gain, which reflect the health and growth of our tenant base. Moreover, we continue to execute transactions that support our investment strategy and capitalize on our outstanding financial flexibility as illustrated by our sale of neighborhood grocery anchored centers through joint venture with Prudential Real Estate investors and our pending sale of grocery assets through joint venture with Kuwait Finance Center, which we expect to close within the next 2 weeks. These transactions represent approximately $300 million sharpen our focus on our core asset types, the market dominant community shopping center, there by better aligning the properties acquired from Benderson and JDN with their long-term strategic objectives.

In addition, there were 3 other significant events that occurred during the quarter. First, we were added to the S&P MidCap 400 Index. Second, our senior unsecured line capacity was expanded from 650 million to $1 billion, providing additional balance sheet flexibility and underscoring the market's confidence in our investment strategy. Lastly, we have substantially completed the acquisition of the Benderson assets and with all new field offices fully operational and virtually all new hires on board, all major aspects of this transaction are now complete. With that, I would like to turn the floor over to Bill Schafer for a review of our financial results.

Thanks, Scott. For the third quarter of 2004, DDR reported FFO of 72 cents per share on a diluted basis. These figures reflect a per share increase of 24.1% over the third quarter 2003 results. The Company earned total FFO of 88.7 million in the third quarter of 2004, which is nearly 29% higher than the 68.8 million earned in the third quarter of 2003. In addition to the increase in same-store NOI of 1.8%, or over 1.5 million, the Benderson portfolio contributed about 6 cents of FFO during the quarter and outparcel sales contributed an additional 3 cents of FFO as compared to the first quarter of 2003. These increases were offset by a decrease of approximately 2 cents in lease termination fees and another 2 cents in impairment charges and abandoned acquisition and development costs. As a reminder, the third quarter 2003 FFO also reflected a 6.5 cent per share charge associated with the write-off of original preferred share issuance costs.

Although our divestment from the neighborhood grocery anchored shopping centers allow us to focus on our core community centers, these transactions will result in approximately 4 cents of dilution per quarter until reinvested. During the third quarter, we acquired 4 additional properties from Benderson, totaling approximately 70 million. We expect to acquire up to 4 additional Benderson assets during the fourth quarter at an aggregated cost of approximately 38 million. At September 30, 2004, the Company's floating rate debt was approximately 33% of total debt; however, after adjusting for the completion of the Prudential and KFC joint venture sales in the fourth quarter of 2004 the Pro Forma floating rate debt is expected to be approximately 26% of total debt.

As referenced in our quarterly financial supplement for the 9-month period ended September 30, our financial ratios remain strong with interest coverage of 3.76 times, debt service coverage at 3.23 times, and fixed charge coverage at over 2.4 times. This time our balance sheet is undergoing a series of temporary adjustments that reflect our acquisition and joint venture activity. We have historically achieved the goals we established for our capital structure and remain committed to preserving the prudent balance sheet structure. I would now like to turn the call over to Dan Hurwitz.

Thank you, Bill and good morning. I am very pleased to report that leasing and development activity continues at a brisk pace throughout the portfolio. Specifically, in regard to Q3, the portfolio was extremely active with 360 leases executed, representing almost 2 million square feet of retail space. Lease spreads on new leases representing approximately 680,000 square feet or 17.9% up, and lease spreads on renewals representing 1.3 million square feet, were 8.9% for a blended total of 10.4%. For the DDR core portfolio, which includes the former JDN assets and excludes the former Benderson assets, occupancy rose to 94.5% and our lease rate rose to 95.4%. A 50-basis point increase in occupancy and 80-basis point increase in lease rate over the same-period last year is consistent with our budgeted expectations for 2004.

It is important to note that while occupancy and leased rates move in a very narrow band in a high quality portfolio that has consistently operated near full capacity, the volume of transactions necessary to maintain that level is substantial. Year-to-date total leasing portfolio wide is 858 leases, representing nearly 5 million square feet of space, which is 2 million square feet ahead of our pace from last year. Obviously, there are many reasons why a company like ours is able to maintain high leased rates and generate high transactional volume on an annual basis. An asset quality and exceptional people in the trenches cannot be overlooked. However, we have just concluded numerous portfolio reviews with our key retail partners and their appetite for our core product continues to grow unabated. Based on '05 growth expectations, Wal-Mart, Lowe's, Home Depot, Target and Kohl's each anticipate between 8 and 15% net square footage growth through domestic expansion, and have indicated a desire for that pace to continue well beyond 2005. In the medium box category, Best Buy, Circuit City, Bed Bath & Beyond, Dick's Sporting Goods, Ross, T.J. Maxx, Linens 'n Things, Borders, OfficeMax, Staples, PetsMart, and Petco have also articulated annual expansion goals in the 40 to 150 store range. More importantly, the big box discounters and medium box tenants mentioned have all clearly stated that their preferred venue for new store growth is the market dominated community center.

In addition, we continue to see non-traditional retailers establishing concepts for our asset class and we are aggressively working with traditional retailers with new concepts to provide uniqueness to our own tenant mix. As I mentioned in the past, JC Penney and Sears opened their first and newest open-air formats at that time at DDR shopping centers. We continue to work diligently with these tenants on new opportunities within our existing portfolio and development pipeline for their newest formats. As I'm sure most of you know The Gap has announced a new ready-to-wear concept for the 35-ish year old woman to trade at a price point between Gap and Banana Republic. Developers diversified was one of a select few companies brought into the fold by The Gap almost a year ago to help identify quality locations for potential rollout. As a result, the first such concept is scheduled to open in our portfolio next year. When Limited 2 announced the rollout of the "Justice" brand, once again we were a first look developer for the retailer and we continue assist in the expansion of that chain today. We have been working for months with Williams-Sonoma and Pottery Barn Group on their West Elm concept and just signed an LOI and received committee approval for this new concept and expansion area of our Princeton, New Jersey assets.

Similar discussions are ongoing with Liz Claiborne, [Airpostle], Bombay, Yankee Candle, Zales, Pacific Sunwear, Sephora, Ann Taylor, and Sterling Jewelry, just to name a few. The importance of this trend is not that we will close every deal and discussion because obviously we will not. But the mere fact that retailers are partnering with Developers Diversified executing confidentiality agreements and providing us a first look inside the box that contains their development and expansion ideas, allows us to participate in innovative retail growth that in evidently leads to stronger relationships with retailers and a merchandising uniqueness that will continue to expand the market share of our assets.

Q3 was also an excellent quarter for our development group. Our previously described projects in Apex, North Carolina and Mount Laurel, New Jersey continue on schedule with tenant openings, such as Target at both locations, Lowe's, OfficeMax, Linens 'n Things, PetsMart, and Bed Bath & Beyond already having occurred at respective locations. Costco, Golf Galaxy, DSW, Jo-Ann, T.J. Maxx, and a host of small shop retailers are scheduled to open later this year and into next. Both initial phases of Apex and Mount Laurel are 100% leased. At Mt. Nebo Pointe, suburban Pittsburgh, construction on leasing continue on pace. Recently we received a real estate committee approved deal from Wal-Mart for a 135,000-square foot Sam's Club to join Target and Sportsman's Warehouse at this 350,000-square foot project which is scheduled to open in 2006.

Work continues at the shops at Midtown Miami with exceptional tenant interest to date. We have signed letters-of-intent with Target, Linens 'n Things, PetsMart, Circuit City, OfficeMax, and are in active discussions on the bulk of the remaining space. Due to the unprecedented tenant interest, we are entertaining a number of different scenarios on the leasing of the remaining square footage. This project is anticipated to open in fall 2006. Also during Q3, Kohl's commenced construction in Johnson City, Tennessee on a vacant site that we acquired in the JDN transaction. This location had no tenant activity for many years. JDN had executed a ground lease for the location, but was unable to locate a tenant in a timely manner. Leveraging our national tenant account program, we successfully executed a sublease with Kohl's at more than twice the ground lease obligation and we are currently marketing an additional 28,000 square feet of retail that resulted from the Kohl's transaction. Moreover, in Q3, we broke ground on 2 new development projects.Freehold Marketplace in Freehold, New Jersey is a 500,000-square foot development with signed leases for both Wal-Mart and Sam's Club. In addition, the center will have approximately 30,000 square feet of additional retail that will be either a single or multi-tenant building, depending on tenant mix and economics. Freehold will be our tenth property in New Jersey bringing our total square footage to approximately 4.8 million square feet with an asset quality in the open-air venue second to none.

In addition, we have broken ground in San Antonio, Texas on Westover Market. This 600,000-square foot development is our fourth joint venture with Dave Berndt Interests and is structured as a forward commitment through Coventry II fund. Westover is anchored by Target, Lowe's, Ross, Sportsman's Warehouse, PetsMart, and Office Depot. We expect tenant openings to begin late next year. As you can see, it was a very active quarter with positive momentum continuing on numerous fronts. I'd now like to turn the call over to David Jacobstein.

Thanks, Dan. As Bill described earlier, our acquisition activity during the quarter was limited to 4 Benderson assets. With respect to dispositions, we were very active in the sale of smaller non-core assets. During the quarter we sold the Albertson's and Save-on Drug portion of our Long Beach City Place property, which we developed through our RVIP joint venture. Because the RVIP program is designed to add value to an asset, then sell when the market pricing is best, we were able to capture very favorable pricing for grocery anchored real estate by selling this property at a 6.2% cap rate. We are also marketing another $70 million of California assets held by RVIP. Our Puente Hills Shopping Center in the City of Industry is currently under contract to sell for $37 million, which represents a 5.8% cap rate on leases in place. We are also in contract negotiations with prospective buyers on 2 other assets, Richmond City Center and Olympia Parkway Plaza, which should close in the first quarter of 2005.

Under our project Pathfinder Disposition Program, we continue to take advantage of strong demands from private investors for small stabilized assets in tertiary locations. During the third quarter we sold 6 assets totaling nearly $27 million. The sales of Pathfinder assets represented a weighted average cap rate of 7% on in-place income. We also have over $18 million in other small non-core assets that are expected to close within the next several days and another $14 million that are under contractor of our letter-of-intent. We also have an additional $58 million of assets that we are marketing for sale and we are evaluating certain assets acquired from Benderson for sale through our project Pathfinder Program.

Lastly, in mid October, we sold a vacant 54,000-square foot single-tenant office building in San Diego to a user for $7.5 million. As we have discussed on prior calls, we continue to market these office and industrial assets, which represent less than 3% of our asset base, on both a portfolio and individual basis, but are committed to maximizing the value of that portfolio. On a file note, our total out-of-pocket expenses net of insurance recoveries for hurricane damage sustained during the third quarter at our our Florida properties are not material. Some of the repair work has already been completed and the balance will be completed by late November of this year. I would now like to return the floor to Scott for concluding remarks regarding guidance.

Thank you, David. With respect to guidance for year-end we are reaffirming our estimate of $2.95, which is consistent with the guidance provided on our previous call, and it still describes reflected of the dilution caused by the sale of the grocery anchored shopping centers. Looking forward to 2005 we're introducing an FFO estimate range of $3.15 to $3.25. While I am aware that some analysts carry estimates in excess of $3.30 for 2005, we believe this range is more appropriate in light of the fact that this range reflects growth of 7 to 10%, despite a projected dilution of 10 cents per share from forecasted interest rate increases, and also is achieved despite replacing 32 cents of non-recurring income from 2004. At this point, I'd like to open the floor to answer questions.

Thank you, sir. Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Chris Capolongo, Deutsche Bank.

Actually it's Lou Taylor. Congrats on the quarter. Dan, can you expand a little bit on your comments regarding Penney and Sears and what's your expectation, whether they will take existing locations that is being reconfigured, or are they more interested in new locations?

Well, at the present time, the bulk of their expansion is going to be new locations in the open-air format. And you may have seen the recent announcement that Mike Olman was just hired to replace Allen Questrom as a CEO of the company, which would certainly be consistent philosophically with what Allen Questrom has started at Penney. But the Penney -- the thrust right now is to open new stores in the open-air format and they are evaluating existing stores. But they have not indicated to us that there would be any significant store closures of existing stores unless they are troubled stores, which would be a candidate foreclosure anyway and there is an alternative location in an open-air format.

Okay. Second question, just maybe for Scott, just on the development starts for next year. What percent do you think will be on your balance sheet versus in a JV?

At this point, the only development that is projected to be in a JV would be the Dave Berndt joint venture in San Antonio. There are some other development opportunities we're looking at that could end up being JV's as well, but the development center included in guidance currently that we're, as discussed by Dan, really the only one that's in JV is the Coventry joint venture.

Okay. Then lastly, is there any interest in looking at, or have you been looking at the Toys R Us situation and any of their locations?

We really would prefer not to comment on that deal that's so public at this time.

Matt Ostrower, Morgan Stanley.

Couple questions on your income statement. You had talked about an increase in G&A costs resulting from Benderson, I believe on your last conference call. Am I misunderstanding that or is it just not flowing through yet, how's that going to work going forward?

No, it started to flow through, Matt. Originally we were going hire well in excess of 70 people and we had calculated what that would cost based on salaries and overhead and what our expectations were. As it turns out, we have currently hired about 62 people. We probably will hire considerably under 70 when all is said and done. And we're coming in lower on the salaries that we had expected. So all in all, there has been a G&A savings, but we're just about done with our hiring. I think the run rate going forward is about 12 million a quarter.

Okay. Great. And then on the Management fee line item I guess, I was a little confused because I thought last quarter you had some significant acquisition fees. Maybe those were not-- I think they were in the Management line item. And my sense is that those would not have recurred this quarter because the closing of those JV's occurred after quarter end. Can you sort of explain why Management fees seem to sort of stay flat versus coming down a little bit and what's the decent run rate for that going forward? Is there going to be a big bump in the fourth quarter as a result of the JV's closing?

Well, first of all, I think your acquisition and fees and so forth were included in "other" income. They were not included in the management fee line item. That may answer your question.

But there would be a bump in other income then all else being equal, there would be a bump in other income in the quarter as you book fees from the current closings, right?

There are not significant acquisition-related fees in those joint ventures.

The fees we said that were reflecting in other income that were predominantly the fees paid to us from MDT, so it isn't really us acquiring or transferring to joint ventures in general. It's very specific to the MDT relationship where we get a 1% fee on any acquisitions that we source from third-parties. We're not projecting any of those at this point in our numbers for the fourth quarter this year.

Ongoing Management fees would benefit though, right?

That's correct. Yes.

And I think you've gone over that disclosure before. Then I guess finally on '05, can you just be a little bit more specific about what assumptions you're making there, either in terms of same-store NOI growth, and I think of particular use to us would be some kind of sense forte, you talked about the non-recurring -- 32 cents of non-recurring income in '04. I interpret your statements to suggest that you're going to be able to reproduce that in '05. Can you give us some guidance as to how you're going to reproduce that?

Yes. First of all, with respect to the same-store NOI growth, our guidance reflects at 2.5% number for next year, which is a little higher than this year largely because of the inclusion of the Benderson assets into the same-store pull of assets where we think we can have an impact. As far as the non-recurring income, we do believe it will be replaced, although the character of the income will likely change. A large part of the non-recurring income in 2004 were land sales that came predominantly from the JDN portfolio where we recognized significant gains on land sales, whereas in '05, we expect to receive some significant merchant building gains on transfers of development properties on our [repo] list to MDT.

Jim Sullivan, Prudential Equity Group.

Scott, one of the things that's been something of an anomaly, I think with retail, the retail REITs over this period of declining cap rates is that development returns have continued to be fairly robust. We've been using in our model an 11% return on your development and do you expect that you're going to be able to continue to maintain that in 2005?

Yes, I do, Jim. It is an interesting question, one that we're considering internally since some of the development we do is built for sale and we could conceivably pursue projects that, not projects that we've announced at this point, but other projects that we come across. We can realize significant gains in line with those in the past at kinds of unleveraged returns, more in the high 9s and low 10s range. And we haven't really made a decision to compromise our yield expectations on the unleveraged returns, but we're certainly mindful that that opportunity exists.

And in connection with the abandonment cost number this quarter, was any of that attributable to situations where the returns on development were being pressured, either by competitive developers or the general low cap rate environment that we're experiencing?

No, there is a very nominal amount of that in our numbers.

Would that also be the impairment number?

Yes, just sold.

The line item you're speaking of, Jim, the 2 major items in there. One was a write-off of over $1 million in connection with our negotiations with Price Legacy, which is a transaction we came very close to going to contract under and then we abandoned it. And there was another impairment of about $600,000 in relationship to one of the industrial assets held for sale, which we just thought that the basis on the books was excessive in light of the fact that it's been vacant for 4 years. Although, we have had some offers recently and it looks like we'll be able to sell it. So it will be a great result in terms of impact on our numbers, but from a standpoint of GAAP accounting, there is clearly impairment that we recognize there.

And another question regarding retailer interest in space, I mean you had talked last time about the fact that you were having discussions with some of your tenants or there was some interest in the part of tenants in actually buying back locations that they have leased. I wonder to what extent you have explored the possibility of doing kind of build-to-suits or merchant building activity for those tenants?

We really haven't explored that. It's not a very lucrative business. When you get into that kind of built-to-suit for the tenants you basically do it on an open book and they make sure that you don't really make very much money. We're much better off developing stores within the context of a larger shopping center where their returns on the specific tenants within the shopping center are not well-known and disclosed. And then selling off pieces within the shopping center where we can achieve significant gain. It's that type of business, while it is a business, I think it's a more appropriate business for an independent private developer who is trying to make a half million bucks on a deal and can make a nice living. For us, the impact of those types of transactions in connection with the work involved is just not enough to move the needle.

Okay, and shifting focus, and this is really in response to I guess Dan's comments about the expanding tenant interest in your portfolio. Many of the tenants that you mentioned, Dan, particularly those who we associate with being in malls, we assume would have an interest in life-style type centers and I just wonder to what extent you're seeing kind of a blurring of the categories. Are some of these tenants now beginning to talk openly about going into centers that we might think of as historically more of the power center format and to what extent does that open up the, your portfolio to maybe some incremental expansion opportunities serving that type of tenant base?

That's a great question. Clearly we are seeing the lines of distinction blurring dramatically. In some cases, tenants are putting existing units into what historically have only been life-style mall tenants into community centers, but in others they are coming out with new formats, similar to what you're seeing with [West Allen] that's a great example or Airpostle you probably saw recently made the announcement that they are coming out with a community center unit that they want to roll out. So either you have the traditional mall tenants coming up with concepts that are capable of operating efficiently and profitably in community centers, or you have mall and life-style tenants keeping the same format and now experimenting a little bit in community centers. What it does for us, as it really from an expansion standpoint it, has a dramatic impact on how we look at our outparcel and peripheral development program. Because in past years, you had a roster of tenants that were available to go on outpartials, whether they be casual and dining restaurants or gas stations, car washes, people of that nature. Now what we're looking at is doing many more multi-tenant buildings where you can take a group of these tenants and put them together on that outparcel. So we're doing, we're really looking at doing more build-to-suits as providing us with opportunity to expand our tenant base and quite frankly, increase our rollover rate. Because these tenants pay very good rents, they typically have shorter term leases, and it gives us the opportunity for a little bit more same-store NOI growth.

And final question also in that respect, I know you have, you have had some value-added -- joint venture structures in the past. Does that expanding tenant base lead you to look at doing more kind of scrape and rebuild projects in more densely populated locations?

It does, indeed. There is no question that the easiest way to do deals with tenants that are non-traditional is to put them in markets where they currently exist and need the backfill. So it does lead to us looking at projects that are in-fill locations or backfill locations for some of these retailers in markets where they already trade, where they already have infrastructure so their margins will be wider and operating their operating costs with be lower. So it definitely does lead to opportunities and it leads to us viewing projects differently than we have in past years.

[OPERATOR INSTRUCTIONS]. Tony Howard, Hilliard Lyons.

Good morning and congratulations on a good quarter. Regarding your outlook as far as some of the retailers that you have talked to yourself. What do you see that their prospects are for the upcoming important Christmas season? And in line with that also, typically after the Christmas season you usually see more bankruptcies or store closings and is there any segments or sectors that you are concerned about as far as post-Christmas season?

Well, to the first question, Tony, the question on sales for the holiday season, most of the tenants that we've talked to seem to be buying for a 3 to 6% increase range. So it really depends on who they are and what their plan, is but that's the number we keep hearing. It sounds a bit like a broken record because it seems to be the same number every year. But that is the number. And people seem to be saying, well, you know, if we get some momentum, the election, which people are obviously watching very carefully, et cetera, we might be at the 6% range. If things don't go well abroad, we could be at the 3% range. So there seems to be most of our core tenant base are in that 3 to 6% range. In regard to tenant failures, obviously there are sectors that we continue to watch and those sectors are those companies that are pretty widely known as having difficulty in good and bad times. So anyone today who just trades commodity goods at low margins is having -- is feeling pressure in a low inflation economy and as a result, we watch those retailers very carefully.

Steve Brown, Neuberger Berman.

Scott in your guidance for 2005, you mentioned some concern about rising interest rates. What level of rates do you have for, say, either the 10-year or LIBOR in your guidance for 3.15 to 3.25?

Well, we didn't make-- we didn't revise any estimates on a 10-year because we weren't projecting any refinancing in that maturity range during 2005. Bill, what did we --?

LIBOR was up a full point, I believe.

An average for the year?

Yes.

Okay. So you basically felt LIBOR would be 100-basis points higher next year than this year in terms of coming up with the 3.15 to 3.25?

I believe that's correct. Yes.

Alexander Goldfarb, Lehman Brothers.

First, just looking at the revenue, the sequential from Q2 to Q3, revenue is the minimum rents were up about 16%, yet operating expenses were only up about 6%. If you can just walk us through this?

That's what we try to achieve.

Well, I appreciate it.

Well, obviously --.

Some of that is transactional income that isn't related to operating expense.

Yes. That reflects a lot of --.

When you have a large component of non-recurring income in the year from transactions, you're not going have expense increase commensurate with that.

And also what was reflective in all the revenues is, I'll say a full quarter impact associated with the Benderson acquisition, which obviously there is a bottom line operating income that falls, which is offset obviously to certain extent with interest expense and the dilution of issuing the common equity that we incurred.

But the other aspect of it, quite frankly is that one of the reasons we pursue transactions like JDN and Benderson is because we do expect to realize operating synergies. So it would be entirely consistent with our investment strategy that you would start to see a bit of a gap in terms of the 2 numbers.

Right, but, Scott, when you say that there was sort of some one-time line items, minimum rent, isn't that straight contractual stuff? Are there one time items in minimum rent?

Yes, I thought I heard you say revenues.

No, I was referring specifically to minimum rent.

Yes. Well, if we're just talking about rents, then really my comments are even more appropriate. It really is a reflexion of operating synergies.

Okay. The next question is in your '05 guidance, is the Deer Park promote in there? The Coventry I project?

No, it isn't in there because the promote wouldn't be earned until there is a sell of Deer Park. There might be some nominal promote from operating income if we, based on how the calculations work. But the significant promote on Deer Park will occur when there is a disposition. And at this point, we're not projecting that to occur in 2005.

Okay. So that's not on track for 2005?

No.

Okay. That's a bit different then I think was previously stated. On the grocery JV's, I think originally on the Q2 call you guys had mentioned aggregate of about 367 going about 210 for the Kuwaities and about 157 million to Prudential. Why is it down to 300 million? Is there some additional stuff that's going to go next year or were there properties that just didn't make the cut?

Well, there's 2 different -- there's 2 reasons. One is because I think one of the numbers is the value of the amount we're selling and the other number was the value of the projects going into the joint venture and the other reason is there was also 1 or 2 assets that were dropped out as well.

Okay. Those would be out of the Prudential deal?

There was I think one out of each deal.

Okay. And if we can flip to MDT, are you expecting to do another equity raise down there and the flip to that is how much do you internally generate from the trip program to that, sort of organically creates capital with which you can go out and do more takedowns?

Well, with respect to the first question, I really can't comment. We're in a global world here and whatever I say on this call is being listened to over there, and we wouldn't want to announce any equity raise unless we were announcing it to the market in Australia, concurrent with our intentions. With respect to the drip there is about 60% participation in the drip, so you basically need to calculate how much dividend income is being distributed over there. I think the last time I did that calculation, I came up with about $40 million of reinvestment available to reinvest in new acquisitions from, just from the drip.

40 million quarterly or annually?

Annually. But there was-- there is also another aspect over there that should be considered if you're looking at those kinds of things, which is that from time to time we revalue assets over there, which may change our leverage calculation and there may be also additional capacity generated by the fact that the assets in MDT have significantly appreciated in value due to cap rate compression. So in addition to the $40-some million of acquisition activity that could be generated without an equity raise per se, there is also significant additional acquisition activity that could be pursued simply because we could lever up 10s of millions of dollars to reflect the fact that our assets are worth much more than on the last valuation.

And so that's the result of fair value accounting?

That's-- well, it's, I don't know if it's fair value accounting or,-- but it is the way the market works over there in terms of determining what the appropriate leverage levels are for the listed property trusts.

Craig Smith, Merrill Lynch.

My question's on Wal-Mart. Of your 93 units, do you know how many are Sam's, supercenters or discount stores?

Craig, I have that list at my desk. I don't have it with me right now. But we'll see if we can get the answer for you before the end of the call.

And is there any preference of those 3 types in terms of anchoring potential properties you're interested in acquiring?

Yes, our preference would be supercenter because the supercenter volumes are so outstanding that the amount of traffic they drive to your center is not only positive to lease off of, but helps create the dominant feel that you want from a market share perspective. No one comes close to the volumes on a per square footage basis that a Wal-Mart supercenter does and when you have a supercenter that does $100 million, for example, it changes the whole flavor of your site.

The other thing with respect to that, Craig, is that Sam's Club is -- the whole demographic analysis that Wal-Mart does for their Sam's Clubs is based on business counts and not population demographics. So the customer that they are targeting is the small business person, not necessarily the consumer. So it isn't necessarily the same customer that the co-tenants that we typically deal with would be looking for. Somebody coming into Sam's could buy 5, $10,000 to put large ketchup jars in a small restaurant that they operate isn't necessarily the same person who would be coming to buy a pair of shoes or other ready-to-wear. Also, I'd like to take the opportunity, on that last question with respect to the drip, just to clarify, the $40 million was what I estimated would be reinvested in equity from the dividends. That would trigger double that in terms of acquisition capacity because we're operating at approximately 50% leverage over there.

Okay, and I know that Wal-Mart gets a lot of its supercenters from converting their discount stores. Have you been involved in that with your discount stores?

Yes, we've done about 20 conversions in the portfolio to date and we look at basically every Wal-Mart in our portfolio that is a conventional discount store as a potential supercenter conversion. One of the -- the rule of thumb, however, is that if the Wal-Mart -- the existing Wal-Mart isn't at least 100,000 feet, it usually doesn't work. It's a difficult thing to do, but the more recent Wal-Mart discount stores that have been developed in major markets that are 140,000 feet, most of them were developed with a supercenter expansion opportunity in mind, so it's a very easy conversion to do. Some of the older tertiary markets where you have maybe a 65,000-foot Wal-Mart or 80,000-foot Wal-Mart, those are almost impossible to convert to supercenters if anything, what we try to do in those situations is acquire a site adjacent to our existing center, build a new supercenter adjacent to the existing center, and then re-tenant the old Wal-Mart with some kind of a junior department store, which we've done that a number of times as well.

Great. I guess my last question might be for Dan. Do you know of any performance difference on the big boxes from freestanding stores from those that choose to be in large community centers?

Well, a lot of those tenants, obviously they don't report sales to us, but there clearly is a critical-mass issue where retailers would prefer to be with other co-tenants. For example, Target would be much more concerned about co-tenantry than Wal-Mart would. Wal-Mart is much more focused on driving their own business. Target is much more interested in being in a, having a sense of place and being in co-tenants that are consistent with their customer. So the answer is they would all prefer to be with strong co-tenants because it's a larger draw under any circumstances and it does expand market share, but there are those that will proceed without the community center if there is no viable alternative.

Having said that, I think one of the things in our industry worth watching is the future of exclusives in our shopping centers because in the mall business the theory has always been the more critical-mass, the more business everybody does and people in the same business like to be in the same center, so that every department store is operating in a center with every other department store. Our business has been the opposite. Everybody in our business has liked to be with other tenants in other businesses that create a draw, but they have been very, very guarded about locating in shopping centers where they have competitors. We have worked very hard to break those barriers, as have others in our industry and I think over time it's worth watching to see whether the retailers will soften that exclusivity demand once they learn that the situations where they have been forced into co-tenantry situations with competitors have resulted in equal or greater profitability. And I think that's going to be a major trend in our business. So when we develop centers today in excess of 1 million square feet, it's really, in my opinion, ridiculous to assume that you can only accommodate one general merchandise retailer in an environment that size.

Craig, I do have answers to your questions. We have over 40 supercenters in the portfolio and approximately 8 Sam's stores.

So 48 and so that must mean about another 40 discount as well?

Correct.

Rich Moore, Keybanc Capital Markets.

Just to go back to Alexander's question for a minute. I had Scott last time -- last quarter that you were going to do 13 properties with KFC for 210 million is that 12 properties for something lighter than that, I take it?

We're trying to get to the exact numbers on that.

We had 12 properties that went into the Prudential portfolio and we'll have 14 properties that go into KFC, but the mix of that from when we originally announced it may have changed.

Okay, so it's something less than 210, Michelle?

For KFC?

Yes.

Yes.

Okay. Second thing, did you guys disclose same-store sales? You probably did and I just didn't see it.

No, I don't think we --.

Not on the call, but in the Press Release, Rich.

Do you remember what it was? I couldn't find it.

Oh, I'm sorry. Same-store sales. I'm sorry. Same-store sales, what we have for the quarter ended was 232, which is 1.1% higher. If you take -- if you include the sales for the Top-20 tenants, the anchor tenants that are not required to report sales, use a proxy, that sales number would have been approximately $260.

And then on the master leasing coming from the Benderson transaction, how much of that is in '05, or how much do you think that goes into your '05 guidance?

Well, when you say master lease income, we do not recognize the master lease income in our '05 numbers until it's actually leased to a third-party tenant.

That's what I'm thinking. I know some of that comes off-line or comes off the master lease bill and into regular rents. What do you guys expect for that?

I'd have to-- we would have to do a specific rollup of that. I don't have that at my fingertips.

Okay. So you just treat it more as an increase in occupancy or are you thinking when you do your --?

We don't break that out for -- by master lease and per se. What we do in terms of the budget is we do a property-by-property, unit-by-unit evaluation and to the extent that there are leases within these properties that are subject to master lease it will increase the NOI at those properties. But we really haven't broken it out and segregated to determine that number that you're asking for. We can, but it's just not something that we have done.

Okay. For next year, also, acquisitions, do you have acquisitions figured into your guidance?

Yes, we do have some acquisition activity in our guidance, which only makes sense in light of the fact that we would have significant dilution for the year based on the dispositions that we've -- will be completing this quarter and next quarter. If we didn't replace that with some acquisition activity, it would be very difficult for us to achieve the guidance.

Okay. So for your guidance then, you're just thinking in terms of reinvesting dollars that you have sold as posed to additional acquisitions beyond that?

Well, there may be some of that and might also be some joint venture acquisitions, particularly with MDT.

Okay. And then, Dan, what are you thinking for year end '04 occupancy?

Well, we're about -- we're still on pace. At the end of the day, Rich, our occupancy fluctuates between 50 and 100-basis points during the course of the year. Like I mentioned in the script, we trade at a very, very tight band. Exact number for end of '04 is what, Bill ?

It's mid 94, approaching that.

94.5 to 95.

Okay, go. That's good. And then last thing is it strikes me, Scott, with all the enormous number of stores that all of these retailers who are -- most of whom you're the major landlord for, want to open next year, that there would be just a huge amount of development that you would be adding to the pipeline. Why wouldn't that be the case?

Well, there is a huge amount of development that we will pursue, but you need to understand that in our business today, the gestation of a new development is as much as 3 years before we can bring it online. So what is relevant to you in looking at 2005 is very different from what our development department is looking at. Projects they are looking at today to accommodate development, expansion needs of tenants, some of those aren't going to come online until 2007, 2008. Even though we're working very diligently on those opportunities.

But that's one of the reasons, Rich, why we are so aggressively looking at existing value-add opportunities because the gestation period for a project of that nature is much shorter than a ground-up Greenfield development project and it also provides a retailer with immediate entry into a market, many of which they are already trading in. So that provides a -- it's a zone, it's built, it's there. It needs to be reconfigured, but at the same time it, provides sort after unique opportunity for the retailers to satisfy their open to buy.

Okay. Great. Thanks, Dan. And then-- so I mean when you guys think about it, if you have a retail that wants to open 150 stores next year, are most of those going to go into existing centers, you think?

Well, I think there is a mix. There is a certain amount of new construction that's going to occur throughout the country where all those tenants will participate. There is also the Mervyn's stores that are going to be available. The Toys R Us stores that are going to be available. KMarts that might become available. There is a lot of square footage in our product that comes on the market that isn't existing vacancies, per se and isn't new construction. It's just a lot of tenants "in" tenants "out" kind of activity that occurs because of the competitive nature of the retail business. So it's clearly a mix. I mean in order to fill their store needs tenants are going have to look at all of those opportunities, existing -- retailer store closings, new developments, vacancies in existing centers, and free-standing opportunities as well. I mean there really is -- it's not-- this is not a slam dunk for the retailers to find these opportunities and many of them won't be able to fill their needs on an annual basis and that's it probably a good thing. We would like to have, in some sense, we would like to have more vacancy in our projects to be able to accommodate them. The biggest problem we have is that 95% occupancy, our better properties are really 100% leased. While we might have a waiting list of tenants that would love to be there, there is not much we can do about it until we can get rid of somebody. So it's a very dynamic, fluid process that we undergo and very often what we do is we take note of tenant interest in a property and we look for opportunities to push out weak performers so that we can accommodate them. Or we try to work with the existing tenants and the municipality to maybe reduce the parking fields and increase the density or do whatever we can to create opportunities within the portfolio. But it isn't easy. It used to be a lot easier when the governmental agencies and entities were much more receptive. Today it just takes time. Everything is a push.

[OPERATOR INSTRUCTIONS]. Carey Callaghan, Goldman Sachs.

Scott, on the occupancy levels embedded in your 2005 forecast, can you get much higher than the 94.5 kind of level you outlined at the end of '04?

I think we can get a little higher, yes, but not a lot. I think if you basically -- we got about 12 years of really keeping track of this stuff very carefully and probably another 10 years of keeping track of it less carefully before we were public. And I think that you'll see that once you get to about 96% it's very, very, very difficult to move the needle. So we're not far off of that number. Obviously, when you acquire things like Benderson, JDN and we can bring our [impromptor] on those portfolios. We can raise the occupancy levels on those portfolios to be commensurate with our own, And we can also enhance our occupancy levels by getting rid of underperforming assets where we have a lot of vacancies that we don't think can be leased, which we've done a lot of that as well. Once you get to that 96% kind of range you're really talking about structural vacancy, which there really isn't vacant space per se. It's just down time and space that's moving in and out throughout the year and there is always going to be downtime. Because even if we have a tenant in hand, when a tenant leaves, most cases there is 6 months of the year that the space will be vacant.

Okay, and then how about your rent spread expectations for next year?

Our rent expectations are consistent with what they have been the last few years. We feel that in the high teens and there will be occasional quarters where we can bump it up higher on new leases, is a sort of a good run rate for that. And on the renewals, we struggle with the renewals because of the options and what we do is to get that number up, obviously, as we fight constantly to limit the number of options that the tenants are granted. And when we do our -- when we have the ability to write a lease obviously we have some control over that when we acquire significant number of leases, we don't have control over that. So that is a focus of our leasing group to make sure that we can get some, a higher level of internal growth out of our renewals and close the gap between the new leases and the renewals, but realistically, looking at our portfolio today, the numbers should stay about the same within a reasonable range.

Okay. Thanks. And, Dan, can you remind us and maybe I missed it, what's going on with the Jupiter development project?

Well, right now we're going through a -- we've had a series of meetings and we continue to meet with the various governmental entities that have authority over this site. We're working on some site planning aspects. We're receiving feedback and we're preparing to go back into the city of Jupiter with a plan that we feel is leasable and marketable and we will be seeking their cooperation, as well as that from the county and the state.

And have you had to cut back the GLA?

We're looking at a number of different options. One is, cutting back the GLA on the retail side and making it more of a mixed use development project. Others, it's just changing the uses around and bringing in much more of a life-style concept so. We have a number of different options that we're working on with the city to come up with a palatable plan.

And can you give us a sense, just lastly of what sort of costs you've incurred to date on that site?

Well, we acquired the land during, I think it was the second quarter of this year. We have in the $20 million range, including the land acquisition.

Josh Bederman, J.P. Morgan.

It's actually Scott Mueller. Scott, you mentioned that you were pretty confident about replacing the 30, 32 cents of non-recurring income in '05, "non-recurring income in '05." Just wondering, and a lot of that is going in, sounds like it's going to be in the form of merchant building gains going to MDT. Should we be thinking about that is contributing wholly-owned assets for essentially swapping out JV assets, where the JV partners -- where the assets are held in JVs and you are just monetizing the gain?

No, it won't be JV assets because we don't have any JV assets where we have merchant building gains built in and our list of right-of-first-offer assets to MDT. There are assets on that list that might find their way to MDT along those lines, particularly some of the assets that we joint venture with DRA, and there may be significant gains that will be reflected in that income, but those assets would not reflect gains that we would show in FFO.

Jeff Donnelly, Wachovia Securities.

Actually most of my questions on the Company have been answered. I would love to ask you just a couple -- get your thoughts on a couple of points in the industry. First off, I was curious what kind of activity you're seeing in sort of public/public and public/private consolidation trends? I'm not looking for you to name names, but rather just get a sense of maybe what you're expecting to see over the next 1 to 2 years versus the recent past? Or the number of deals or dollar volume of deals rising or are we at a plateau or is it past peak?

Well, I think that the -- there's probably a different expectation retained public-to-public versus private-to-public. I think that there is a growing incentive for private owners of properties to basically cash in and realize the kinds of gains on their investments that are available to them today. And I think that you will see most of the remaining private portfolios find their way into the public markets within the next year or so. There aren't, however, -- it is a diminishing universe. A lot of that product has already found its way into the public markets, but there will be more. It's much more problematic when you're talking public-to-public because the market doesn't seem to differentiate in pricing between companies. So that it's very difficult on a public-to-public deal to do something that's highly accretive unless you're willing to lever up your balance sheet and significantly -- to reduce your cost of capital. If you're really doing a leverage neutral deal and reducing equity to replace equity, you can do the math. There aren't a lot of combinations you could come up with that would make a significant impact to the acquiring company. So I think you'll see some of that, but I think you'll see much more in the private-to-public environment in the next year or so.

And kind of continuing in that vein, liquidations of retailer-owned or leased portfolios is increasing or at least the attention paid to it is increasing. But I do suspect competition is up as well. Can you give us an update of where you think we're at in the lifecycle of business? Should we expect to see more transaction volume, is that sort of flat to rising? I know it's always been a recurring part of the retail business. But as that niche becomes so competitive that maybe it's just not as attractive for DDRs as it once was?

Are you talking about the retailers like the Mervyn's-type transaction?

Exactly, a Mervyn's a service merchandise, those types of events.

You have to kind of look at that business 2 ways. On the one hand, you have the acquisitions of assets out of the bankruptcies, which are much more easy to effect because you can get rid of all the underperforming stores and the unfavorable leases by rejecting them under the agents of the bankruptcy court. To the extent that there are bankruptcies that's the good news, that they are easier to do. The bad news is that I think that the education learning curve among the bankruptcy courts and the potential Chapter 11 contenders is such now that they understand that by creating an asset-by-asset auction within the bankruptcies, they can probably realize more than they can by selling somebody like us a big bulk portfolio and at a discount. There's some of them, the real estate might just not be enough in the total context of the bankruptcy to make it worth their while to do that. But to the extent that it is a significant number, I would expect that they have learned that they can probably get the best result by doing it themselves in a bankruptcy proceeding. The second kind of business that's available is the Mervyn's/Toys R Us business, which is where have you an operating company that is not filing bankruptcy, therefore, there is no opportunity to reject bad leases or underperforming stores. That is a more difficult business and one in which probably none of us in the REIT world can pursue on our own. All of us would have to align ourselves with some kind of LVL firm that is really much more experienced in operating retail business per se because where you have stores that you don't necessarily offer a great real estate execution, you've got to operate those stores or you're going lose money, particularly if they are lease stores. So you got to figure out a way in those situations, how you can operate the business to prevent yourself from offsetting your real estate gains with operating losses. So those deals will get done. They can get done. They are more complicated and they are only going to be done I think by alliances between people like us and our peers in the REIT world, aligning themselves with the people in the LBO venture capital world that can understand the operating business.

Do you think you'll see more of those types of deals in the latter category in the next 12 to 24 months?

Well, I think it really depends on what's happening in the retailer universe. I think is what's happening that's giving rise to the Mervyn's transaction and Toys transaction, you have companies that have profitable business lines and unprofitable business lines and they are unloading the unprofitable line. You would have to go over the retailer universe and see how many of those situations really exist to determine whether there is an opportunity for a lot more of these types of situations. I think more often than not, if you really look through the universe, mostly retailers are really concentrating on one core operation. Bed Bath & Beyond is Bed Bath & Beyond. There isn't a business that they are going to get rid of. Same thing with Best Buy. Maybe Best Buy's a little different with media play, but most of the business -- yes, they already got rid of. But most of the retailers are much more focused. So to the extent that your retailer universe is dwindled down to people that are focused on their core business, then you'll see less and less of that divesting of an unprofitable line of business.

And just the last question, really just pertains to development yields. I was curious what you guys are underwriting for unleveraged development yields on those projects you mentioned that maybe actually opened in say a 2006 or 2007 period versus those you achieved on -- recently opened or soon to be open projects? And maybe how that, how the spreads have changed between development deals and acquisitions, maybe over the last year or so?

The development yields we continue to produce the 11 to 12% unleveraged returns first year without straight line rent and I think that most of the developments we'll be bringing online will come in around that range. Obviously ,since cap rates on acquisitions have compressed to almost 30%, the value creation from those developments is far greater than it used to be. We used to basically develop to a 12 and sell it at 9.5 to 250-basis points. Today say you develop to an 11.5 and sell at a 6, you're now saying 550-basis points. So the value creation has almost doubled and I think that some of the merchant building gains that we talked about achieving in transfers to MDT will reflect that. I mean they will be-- you have to do a lot less transactions to generate the same amount of FFO because the spreads are much wider than we projected them to be.

How are you guys holding on to those high yields? Just because we've been hearing from other companies that developing yields continue to compress like maybe into the low 9 and admittedly everyone has a unique way of approaching development. But I'm just thinking in the face of compressing yields and acquisition, what are you guys doing to sustain that?

Well, there's 2 pressure points that determine your yields on developments. One is the land owner and the other are the retailers. And basically if developers are willing to pay enough money for land to compress their returns down into the 9s then the returns will compress. We haven't seen that in terms of our competitors. Most of our competitors have been pretty well disciplined and the land prices have stayed pretty well in line with those kinds of returns. I'm not sure that the people who are forecasting 9-ish kinds of returns are developing the same kind of product we are. Clearly the private developers that are developing product in our business are not pursuing deals that yields that low. In the mall business that may be a more appropriate return on costs. but it clearly hasn't been sort of the rule of thumb for people that we interface with in our industry.

Ladies and gentlemen, we have no further questions. And I would like to wrap-up today's conference call. We do thank you for your participation and ask that you disconnect at this time.