Site Centers Corp (SITC) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Developers Diversified Realty first quarter 2005 earnings conference call. My name is Christy, and I'll be your call coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating questions and answers towards the end of today's conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Scott Schroeder, Vice President of Marketing and Communication. Please proceed, sir.

Thank you, operator, and good morning, ladies and gentlemen.

Welcome to the Developers Diversified Realty first quarter earnings conference call. I'm Scott Schroeder, Vice President of Marketing and Corporate Communications for Developers Diversified. With me in Cleveland is morning are Scott Wolstein, Chairman and Chief Executive Officer; David Jacobstein, President and Chief Operating Officer; Daniel 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 assumptions, you should understand that those statements are subject to risks and uncertainties and that actual results may differ materially from forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the management's discussion and analysis portion of our Form 10-K for the year ended December 31, 2004, and filed with the SEC.

At this time, it's my pleasure to introduce Scott Wolstein.

Good morning, everybody.

I am pleased to announce our first quarter 2005 results of $0.90 per share of FFO, which represents a 27% increase over first quarter of 2004. Clearly, a significant contributor to this significant outperformance was the large amount of merchant building gains that we recognized in the quarter. Therefore, I would like to pause here to point out something that I think is often overlooked but is very important. The temptation here is to take these merchant building gains for granted and focus solely on operating cash flow. This is a mistake. These merchant building gains evidence real value creation, recognized real gains from our development capabilities. While all REITs temporarily have benefited from the significant cap rate compression in the market, we have made these benefits permanent by harvesting these gains through asset sales. Asset sales have allowed us to grow the Company by over $4 billion in about a year, while raising less than $800 million in equity. Asset sales have allowed us to recycle capital into higher yielding development opportunities, which will generate merchant building gains in the future.

Moreover, our portfolio continues to demonstrate strong leasing fundamentals which reflect both the growing strength of our asset class and the quality of our portfolio. We continue to structure and execute transactions that support our investment strategy and result in long-term value creation for our shoulders. As previously reported in January, we acquired 15 Puerto Rican shopping centers from Caribbean Property Group for $1.15 billion. We own three of the ten largest retail assets on the island, and 13 of the 50 largest assets. This acquisition positions us as the dominant retail landlord in Puerto Rico and U.S. commonwealths whose economy is fueled by consumerism and whose developable land is highly constrained by physical barriers.

Just recently we hosted a second investor tour of our Puerto Rican assets, which was very well-received as was the first investor tour. Each property choice provided analysts a first-hand opportunity to better understand the dynamics of the local trade area, consumer demand, and the outstanding sales productivity of this portfolio. The transition with these assets has been very smooth. And as David will describe in greater detail, our staffing progress both in Cleveland and in Puerto Rico is proceeding on schedule.

As anticipated and discussed earlier, during the first four months of this year, our MDT joint venture acquired several DDR wholly owned assets aggregating approximately $350 million in value. These included several recently completed development properties, primarily acquired from JDM, that generated merchant building gains of approximately $38 million, $14.5 million of which occurred in the second quarter of 2005. In less than two years, MDT's assets have grown to over $2 billion, which is more than five times the size of Developers Diversified at our IPO in 1993.

At this point I would like to turn the floor over to Bill Schafer, who will discuss highlights from our first quarter results, as well as some recent capital markets activity.

Thanks, Scott.

For the first quarter of 2005, DDR reported FFO of $0.90 per share diluted and basic, as compared to $0.71 per share diluted and $0.72 per share basic in the first quarter of 2004. The Company earned total FFO of nearly 113 million in the first quarter of 2005, which is 54% higher than the 73.4 million earned in the first quarter of 2004. In addition to the merchant building and land sale gains that Scott previously mentioned, the Company sold several other operating assets and recognized over $39 million in gains, which were not reflected in FFO. Of the 39 million gained, nearly 30 million represented an undepreciated economic gain.

Regarding the capital markets, during the first quarter of 2005, we amended and extended all of our resolving credit facilities. We amended our 1 billion senior unsecured credit facility and extended the term of the facility by two years from May 30 of 2006 to May 30 of 2008. The amended facility provides for an accordion feature to expand the size of the facility at the Company's option up to 1.25 billion. The facility also includes a reduction in interest rate from LIBOR plus 80 basis points to LIBOR plus 67.5 basis points, based on the Company's current corporate credit ratings. We also increased, extended and amended our National City revolving credit facilities by combining the two secured facilities, aggregating 55 million into 160 million unsecured facility and reducing the interest rate to LIBOR plus 67.5 basis points and extending the maturity to May of 2008.

We also closed on an amendment to our MDT secured revolving credit facility. The amendment extended the maturity to November 30, 2007 and reduced interest rate from LIBOR plus 137.5 basis points to LIBOR plus 100 basis points. We increased the capacity of this facility from 100 million to 125 million and added an accordion feature to expand it to 200 million. As MDT continues to grow, we will look to continue to expand this facility and also move to an unsecured facility in the future as MDT's evolution permits. We are gratified by the capital market's confidence in our corporate credit and financial performance, and are pleased to announce these improvements to our credit facilities. These changes provide the Company with additional financial strength through improved pricing, greater operating flexibility, and extended maturity and additional banking relationships.

I would also like to take a moment to reaffirm our philosophy toward variable rate debt. Generally speaking, we look to maintain a floating rate debt percentage of total consolidated debt between 15% and 30%. In times when the yield curve is steepening, we may be above the 30% level; and as we see the yield curve flattening, we will look to reduce our exposure to variable rate debt by locking in favorable long-term interest rates. In fact, in early February, following our acquisition of assets from CPG, we entered into 300 million treasury lock when the ten year treasury was approximately 4%. Last week we issued 200 million of ten year fixed rate senior unsecured notes with an interest rate of 5.547%; and 200 million of five year senior unsecured notes with an interest rate of 5.04%. After applying the benefit of the rate locks that we entered into, our effective five year interest rate is approximately 4.95% and our effective ten year interest rate is approximately 5.37%. At year-end our floating rate debt exposure was approximately 20% of total consolidated debt. Following the CPG transaction, that percentage increased to 38%. But following the issuance of the above fixed rate senior unsecured notes, our floating rate debt is approximately 28% of total consolidated debt.

In our internal projections, we have again increased our forecasted rates on floating rate debt to an average LIBOR rate of approximately 3% for the second quarter of 2005, and 3.6% for the second half of the year. A 25 basis point LIBOR rate adjustment will have a quarterly impact of approximately 700,000. Consistent with our comments on many previous conference calls, we remain committed to preserving our strong balance sheet, and our financial ratios as calculated in our supplement continue to clearly reflect this objective. For the three months ended March 31, 2005, fixed charge coverage ratio was approximately 2.4 times. Debt service coverage was approximately 3.12 times, and interest coverage was nearly 3.7 times.

I would now like to turn the call over to Dan Hurwitz to discuss leasing and development.

Thank you, Bill, and good morning.

I'm pleased to report that leasing and development activity continues at a brisk pace throughout the portfolio. Specifically, in regard to leasing, Q1 was extremely active, with 303 leases executed, representing 1.36 million square feet of retail space. The rental spread on new leases was 18.9%, while renewals were 6.2% for a blended increase of 10.2%.

For the DDR core portfolio, which includes the former JDN assets, but excludes the former Benderson and Caribbean Property Group assets, occupancy stood at 94.7% and the leased rate of 95.2%. Overall, with Benderson and CPG included, occupancy stood at 94.9% and the lease rate was 95.5%. Of note of these numbers is the fact at that physical occupancy was in the core portfolio actually rose 10 basis points over Q4 2004, which is a highly unusual event for a first quarter, but a very positive occurrence. The core occupancy also reflects a 30 basis point increase over Q1 2004. I'm also pleased with the progress made to date on the Benderson master lease spaces. Benderson originally master leased 97 spaces, which due to space splitting has evolved to 103 total units. As of Q1, 2005, 78 spaces have executed leases and are open for business, representing approximately 625,000 square feet. 11 spaces have executed leases but are not yet open, which represents another 189,000 square feet; two spaces have pending deals and executed letters of intent, representing 3500 square feet. The remaining 12 spaces representing approximately 245,000 square feet have limited activity at the current time.

In regard to the Puerto Rican portfolio, progress continues on many fronts. Tenant interest continues to be extremely high, while our development activity, which includes expansion of Plaza del Sol and Plaza Rio Hondo continues on time and on budget. The most pleasant surprise, however, has come from the specialty income category. Last month our new business development group conducted a tenant tour for our national group of temporary tenants, potential sponsors and specialty retailers. The results of the tour were truly outstanding, with several retailers expressing immediate interest in our properties for either tenancy or sponsorship opportunities. Based on the tenant interest and the leasing momentum that our ancillary income group has enjoyed to date, we expect to generate in 2005 approximately $6 million of revenue within this category for the Puerto Rican assets exclusively. This compares quite favorably to the 2005 budget prepared by the previous owner of $3.8 million and the underwritten revenue of $3.2 million. In addition, on July 1, we will be instituting a gift card program for all Puerto Rican assets that is anticipated to generate and additional $1 million in revenue by year three and 2.5 million by year five. Prior to our ownership, no such program existed for these assets. Based on the quality of this portfolio overall, we continue to expect additional positive events that result from property integration into our processes and systems.

As I mentioned on previous quarters, due to the fluid nature of the current retail environment, tenant portfolio reviews have been a major priority for the leasing team to stay current on tenant demand and prototypes, while continually introducing tenants to the opportunities within our ever-changing portfolio. Since Jan 1, the DDR leasing team has conducted nearly 50 portfolio reviews with our key retail partners in an effort to stay ahead of emerging trends. Tenants with whom we have met range from JC Penney, Kohl's, Target, Wal-Mart in the big box category, to TJ Maxx, Whole Foods, Best Buy, Wild Oats, Bed Bath & Beyond, Staples and PetsMart in the medium box category, to Justice, William-Sonoma, Pottery Barn, West Elm, Gap, Yankee Candle and Hallmark in the small shop category. The importance of these meetings cannot be minimized as we head toward the Las Vegas convention. Numerous opportunities have been have been advanced during the quieter months of January, February and March, we enables the retailer to avoid the information overload that is inevitable leading up to the convention, and affords the opportunity to actually close deals when we reassemble in May. With the exception of a few new development locations that have arisen since the actual meetings have occurred, no project will be a first impression and we anticipate unparalleled results leaving Vegas.

In regard to our development program, we recently enjoyed another ground-breaking for a substantial development project. On April 21, we broke ground for phases two and three for our Apex, North Carolina project. The more than 650,000 square foot open-air center will include Kohl's, a 12-screen multiplex movie theater by Consolidated, and retailers from every major category, including Dick's Sporting Goods, Circuit City, Old Navy, Petco, Pier 1, Bed Bath & Beyond, specialty retailers and restaurants. Combined with our previously opened Beaver Creek Commons, anchored by Target and Lowes, DDR will have developed more than 1 million square feet of retail in this western Wake County community. Stores at Beaver Creek Crossings are expected to begin opening in the summer of 2006.

In regard to our overall development pipeline, opportunities continue to emerge at a rapid pace. In our current pipe line, we are engaged in either predevelopment or development activities on 24 locations in 15 different states, with multiple locations in Florida, New England, California, and Ohio. Other states represented include Texas, Idaho, New York, North Carolina, Nevada, Kansas, Colorado, Minnesota and Pennsylvania. All told, these projects represent between 9 and 10 million square feet of new development activity, representing approximately 1 to 1.3 billion of total project costs. These opportunities are in addition to the 434.5 million of development projects identified in our supplemental. While it is highly unlikely that all the current pipeline projects will be developed, we continue to pursue additional opportunities to keep the pipeline in the $1 billion range.

While Greenfield Development catches all the headlines, we remain focused on development opportunities within the core portfolio through our redevelopment and expansion pipeline. Understanding the significant opportunity for value enhancement available through expansion and redevelopment projects, Developers Diversified four years ago created an internal division within the development group dedicated to this aspect of asset management. Currently our group has 24 projects either in progress or scheduled to commence construction in 2005, representing $121 million of investment. Returns for these projects range in the low to mid teens.

In addition, we are currently reviewing the redevelopment feasibility of another 55 projects, which will continue to fill this pipeline. It is important to note that these numbers do not include the significant redevelopment activity generated by our Coventry fund,[ph] which total an additional $278 million. Redevelopment and expansion projects continue to be an area of focus that receives the same level of attention as our ground-up new development program.

At this point, I'd like to turn the call over to David.

Thanks, Dan.

As mentioned in our fourth quarter 2004 conference call in February, DDR sold two shopping centers in Aurora, Colorado and Irving, Texas to our MDT joint venture at the beginning of first quarter 2005. For the remainder of the first quarter, we sold seven shopping centers located in Brookfield, Wisconsin; Brentwood, Tennessee; Plainville, Connecticut; Brown Deer, Wisconsin; and Brandon, Florida. The nine shopping centers sold to MDT in the first quarter of 2005 represent an aggregate value of $286 million. The average weighted disposition cap rate of 7.32% for the assets in Aurora, Colorado; Brandon, Florida; Irving, Texas; and Brown Deer, Wisconsin, originally acquired from JDN, compare favorably to our 2003 acquisition cap rate of 10%. In the beginning of the second quarter, DDR sold three shopping centers in McDonough, Georgia; Grandville, Michigan; and Parker, Colorado, to MDT for approximately $63.8 million. These shopping centers were development assets acquired from JDN in 2003 at a cap rate of 10%, and were sold at an average weighted cap rate of 7.22%. Developers Diversified retains a 14.5% ownership interest in the properties acquired by MDT. We remain responsible for all day-to-day operations of the properties, and receive its share of ongoing fees for property management, leasing and construction management, plus certain one-time fees for financing and due diligence. DDR also receives base management fees and incentive fees based on the overall performance of MDT relative to the S&P/ASX200. Including these recent transfers, the MDT joint venture owns 35 community center assets across the United States, totaling over 14 million square feet and representing approximately $2 billion in aggregate value.

In the beginning of the second quarter of 2005, DDR and Coventry Real Estate Partners, on behalf of the RVIP 7 joint venture, sold Richmond City Center located in Richmond, California, for approximately $13 million, and a portion of the Plaza at Puente Hills shopping center in City of Industry, California for $2.04 million. We acquired these assets from Burnham Pacific in 2002 for a cap rate in excess of 10%, which was more than 260 basis points above our weighted average disposition cap rate of 7.4%. These value added projects are generating a leverage to IRR to D -- to DDR of approximately 20%, in addition to the fee income we are receiving. Moreover, we anticipate that our share of future promoted income associated with the remaining RVIP assets will range from $30 million to $40 million on a gross basis, and $20 million to $30 million in FFO recognized income.

Regarding our January 2005 acquisition of 15 Puerto Rican shopping centers from CPG, we have opened a DDR regional office in a suburb of San Juan. In that office we employ a regional general manager, a tenant coordinator, and an administrative assistant. We've also hired four people for our property accounting group in Cleveland to handle the Puerto Rican assets. With the addition of the regional office in Puerto Rico, DDR now has a total of 18 regional offices housing leasing, property management, and/or development personnel.

On the personnel front, we have completed our 2005 hiring for our industry leading management training program. Joining the six program graduates who are now in our leasing development and new business development groups, and the two participants still in our 18-month rotation program, will be four outstanding individuals who will be graduating from Ohio State University, Brown University, Colgate University, and Hamilton College in May of this year. This program has allowed us to develop the future of DDR from within through a combination of formal training in a number of technical competencies; on the job training, learning at the side of our senior executives; in house and external educational programs and other opportunities not generally made available to entry level personnel.

At this time, I would like to turn the floor back to Scott for concluding remarks regarding guidance.

Thank you, David.

We reaffirm our previous guidance of $3.15 to $3.25 per share FFO for 2005. However, we would like to provide some additional clarity on the assumptions underlying our guidance. With respect to acquisitions, at this point we have not included any significant acquisitions in our 2005 guidance. However, we continue to evaluate potential opportunities as they become available in the market. We do anticipate additional land sale gains during the remaining three quarters of 2005, aggregating approximately $7 million. We are reaffirming our guidance, despite certain adverse factors that will effect earnings negatively in 2005. As Bill discussed, since our last conference call, we have substantially increased our budget expectations for interest expense, and our disposition activity which has been very effective in capitalizing on today's favorable pricing, has exceeded our expectations and of course, has a dilutive effect on earnings in the short term. As I indicated previously, we have completed our anticipated merchant building gains in the first and second quarter, which will have the effect of inflating FFO during those quarters. Despite the fact that our results for the first quarter is $0.90, and our second quarter is now projected to be in the low $0.80 per share range, we caution you to follow our guidance and avoid the temptation to extrapolate the first two quarters' results over the entire year.

At this point, I would like to open the lines to receive your questions.

[OPERATOR INSTRUCTIONS]. Mike Bilerman, Smith Barney.

Hi, it's David Carlisle with Michael Bilerman. Question for you on the Miami development. It looks like the cost of that increased sequentially. I was just wondering if the scope of the project had changed, or something in your cost structure changed there?

No. The scope of the project has not changed. And our costs haven't changed either. I think probably what you're seeing is the fact that we are under construction and we spend a significant amount of time on site work there, a lot of which was being funded through our public subsidies, and now that we're coming out of the ground with actual buildings, our investment is increasing. But the project itself, the scope has remained intact. And the -- and has had the returns in the costs.

What is the expected yield you expect there and when will you announce an anchor?

Our anticipated yield is approximately 11%. And we will have anchors announced at the ICSC in Las Vegas.

And then following up on the comments on guidance, is there any expectation you may be selling more assets to the JVs this year? Now that you've met your merchant build gain target.

We're not projecting any further merchant building gains during the balance of the year. If we require additional capital to fund new initiatives, we always have the option to dispose of additional assets as part of our funding strategy, but none of that is budgeted at this point.

And then with -- I believe MDT has about 14 assets still for their right of first offer. Are there -- are they expressing interest in acquiring those this year or -- ?

Well, I think they'd like to acquire them whenever they can. I think that what should be pointed out is that a majority of the assets that are on that right of first offer list are in joint ventures with third party investors, and unless our joint venture partners are interested in disposing of those assets, they can't be offered to MDT. Some of those assets have actually -- they're in a joint venture with DRA. We've recently refinanced and will certainly be held for the next few years at the very least.

Okay. Then my last question is to get a little more detail on the gift card program, and what fees potentially DDR would be receiving from that?

Gift card program. What fees will we receive from that?

Well, we get -- there's a number of fees that goes with the gift card program. But the numbers that I gave you are just our administrative fees that we receive for monitoring the program and managing the accounts. So again, we expect that to be $1 million by year three. And this is just Puerto Rico. This does not include the gift card program elsewhere. $1 million by year three and 2.5 million by year five. And we feel that those numbers, quite frankly, are conservative, based on the fact that gift card program, with the exception of [inaudible] Americas, have not been ruled out in Puerto Rico. We expect an enthusiastic reception.

That's all I have.

Chris Capolongo, Deutsche Bank.

Bill, I was just wondering, could you reconcile the gain on the financial statements to, I guess, what was released in the press release in January, which I think it was 17 million in January. Is there -- was there a change in the calculation there or --?

No, I think there was -- a portion of the sales I think that occurred in March, I don't know that -- there may or -- the fact we didn't disclose what the numbers were, or there was a portion of that that was a merchant bill. This, I believe, may be where the difference is there.

Do you know which assets those related -- that related to?

It was the Plainville -- it was in our taxable REIT subsidiary.

Okay.

Plainville, Connecticut.

Okay, Plainville. And then, just you mentioned the promoted interest that you'd be recognizing. Is that just a disproportionate share of the cash flows on operating properties, or ventures, or is it an actual one-time income item we'll see in 2005?

First of all, I want to clarify. We didn't say we would be recognizing them. What we said was that those promotes exist today in -- if there was a disposition, that's what we would earn today.

Okay. Got you.

The -- in terms of how those promotes are earned, there's really two different promotes. One in the -- in one of the RVIP programs, we earn a current promote, which gives us a disproportionate share of cash flow on a current basis. And in most of the other promotes, they're basically a disposition where we get a disproportionate share of the proceeds of sale above a threshold.

Okay. And then just lastly, Bill, on G&A, were the costs of the Puerto Rican office in G&A in quarter? I guess maybe what the -- the run rate came in a little high from last --

Yes. This is Dave Jacobstein. The costs of the Puerto Rico office are somewhat inconsequential. The reason the number was a bit higher than the run rate that had been indicated previous -- previous calls was we had some payroll taxes that were -- what they were because of incentive compensation that was paid in March per usual. We had some private REIT expenses relating to the MDT transaction where we had to set up some private REITs as part of the structure. We had some additional legal expenses because of the Jobs Creation Act. Some employment fees that were higher than budgeted because of some hires of some executives and other highly placed personnel. So in total it was about 13.5, 13.6 million. We think the run rate for the rest of the year will be around 13 a quarter -- 13 million a quarter. Then the good news on that is that we had budgeted 4.8% as a percentage of revenues this year down from 5.1% last year. And it looks like now even debt run rates of 13 a quarter, we're going to be in at around 4.5% of total revenues, including our share of joint ventures.

Thanks, very much.

Josh Bederman, J.P. Morgan.

Hey, guys. Just a couple things. Bill, you're talking about your variable rate debt targets of 15 to 30%, and it depends on where you see the curve. Looks like after this offering you're about 28%. Can you talk about where you want to go from there, what your plans are, and what you're sort of seeing today?

Yes. I mean, we're comfortable in that range of the 15% to 30%. And as Scott indicated, we'll look to continue to dispose of certain assets at very good cap rates and so forth. So as we dispose of those assets, we'll -- having the floating rate enables you to pay down debt pretty efficiently. But I would say that we're going to be probably around that 25% number anyway.

Okay. All right. And then one more thing. Obviously, you just mentioned you're talking about a little more disposition. Given what you're talking about with the promote a few minutes ago, any of those dispositions going to trigger any promotes this year?

There's nothing budgeted for this year in that regard.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Alexander Goldfarb, Lehman Brothers.

Hi, good morning.

Good morning.

Just want to focus a little bit on the Caribbean acquisition. Just looking through the financials that you guys put out, it seems the margin is sort of similar to the core portfolio. Want to know what your thoughts are now that you've had the properties for a number of months in terms of any efficiencies that you may be able garner from the portfolio, or if we should think of any increase in NOI coming from the items such as the gift card program or increasing -- bringing speciality tenants down, et cetera?

Well, clearly there -- we are seeing efficiencies. The gift card program is a start of a larger program that we will be kicking off in July to brand all of our properties in Puerto Rico under one flag, if you will. And again, we think that the reception to that will be extremely enthusiastic. And the numbers that I gave you, we think are somewhat conservative, but we'd rather be on the conservative side, being that -- given the fact that there's really no like gift card program on the island currently, so we're sort of breaking new ground.

On the ancillary income side, one of the things that struck us when we first look at this portfolio was that the current kiosks, et cetera, were 100% leased at acquisition, and that is not something that is necessary something to be proud of. When you're 100% leased in that category, it usually means that you're not charging enough. So we've increased the rates. We brought in a different group of tenants. We're looking at sponsorship packages like we do throughout our entire portfolio, and like I mentioned, CPG had budgeted $3.8 million in that category. Our underwritten income was $3.2 million, and we think first full year we'll hit about 6. So clearly, there are some positive synergies going on as we roll that portfolio into our national program.

The 6 million, is -- that's an '06 number or that's the rolling 12 months --

12 months, '05.

Okay, 12 months, '05. Okay. But in terms of what you've seen of the operations, insurance, et cetera, on the cost side, everything looks sort of in line from where you budgeted it, or is there any increase where you can save some money?

I think it's in line with what we had anticipated at the time of the underwriting, and at the time of the budgeting for this particular transaction in terms of the cost side.

Okay. Thank you.

Rich Moore, KeyBanc Capital Markets.

Thanks. This is Chris Chapman actually this morning. How are you guys doing?

Good.

I want to ask first about the merchant building gains and how to think about those going forward. I know you mentioned no more in your guidance for '05. Do you have any projections for '06?

No. We don't usually typically budget '06 until the fall of '05. As we start to see where our budgeted numbers come in line on operations, and as we start to get a better understanding of what our capital requirements will be for 2006, we'll be able to forecast with the same kind of precision we did this year, what kind of gains we will harvest in that year. But it's a little early for us to make that determination.

Okay. I mean, I'm looking at your supplemental and it shows of your development properties now, you're expecting to place most of them in service after end of the year. Are any of those maybe earmarked or at least being considered for sales maybe to MDT?

Well, everything is considered for sale. It's just a matter of the circumstances at the time. I mean, it -- we look at the assets as our assets, whether they're owned by DDR or owned by MDT. We're still are invested in them, we still manage them. It's really a question of allocation of capital and whose capital is best positioned to finance those assets going forward. It also largely depends on what our cost of capital is domestically versus what our cost of capital is down under. These decisions just aren't made a year in advance. They're really made much more opportunistically based on the capital market conditions that exist at a given time. Obviously, if the cap rate environment continues, as it is today, we would harvest -- we could harvest significant gains from very few assets sales, because the value creation today is probably 500 basis points against the cost of these properties.

All right. So would you say, then, that -- that perhaps that's your best external growth opportunity is in the merchant building, or is it in development for your own portfolio? I'm assuming it's probably not an acquisition.

Well, I -- the two are really not exclusive. The development activity and the merchant building gains are joined at the hip. One flows from the other and one generates capital in order to pursue more of the same. So it really isn't either/or, it's both. We will continue in this environment to pursue development as aggressively as we can. The only constraints really being our ability to find sites, human capital, and financial constraints. And clearly, our ability to sell assets to fund new development means there really aren't very many financial constraints. So, it really is -- is primarily a function of finding the opportunities, getting them entitled, and having the people in place in order to pursue them to completion. But today, they're -- we would not put a cap on development activity, because the ability to create value there is really unprecedented.

Okay. Great. Do you guys have a target or an estimate for year-end '05 guidance -- or occupancy, I'm sorry?

Our leased rate, we budgeted about 96%, and our occupancy rate was going to be in the low 95, I believe it was 95.2.

Okay.

And just as a side, we're a little ahead of that now, because quite frankly we didn't have is the closures in the first quarter that we normally have. Usually our occupancy level dips in the first quarter and then comes back in the back half. We didn't have the same dip this first quarter as we've had in past years.

Okay. Speaking of closures, what's the bankruptcy environment look like for you guys now? Are you seeing those subside or kind of maintain a current level or what's the deal?

Well. it's clearly subsided from its peak of a couple of years ago. Having said that, I think it's until the bankruptcy laws change dramatically, it's going to be a fact of life. We are gratified by the recent bankruptcy legislation in Washington, which is going to give retailers a little more pause before they continue this spade of chapter 11 filings, because it does give the landlord considerably more rights and it gives us much better opportunity to recover more quickly from the down time that we might anticipate from developments. But I don't think we're going to see as much as we've seen in the past. Having said that, it's just a fact of life. It's just too beneficial to a retailer to be able to file chapter 11, get rid of its unperforming real estate and improve its bottom line that you just have to expect that's going to continue.

All right. One final question. I couldn't help but notice when I ride by every once in a while that the new headquarters building is looking like it's going pretty well. I just wanted to know, I guess where you are in, as far as progress with that goes, when you're going to open it? What's the total estimated cost of the project, and then what kind of G&A savings or other sorts of savings are you going to see once that's in service?

This is Dave. I'll answer that. We intend to have the building opened and occupied in late September. It's on schedule, despite some pretty tough weather in Cleveland during the winter. It's also on budget. The total cost is around $8 million. And we're probably about a third of the way through that so far. The building is progressing nicely. In terms of G&A savings or efficiencies, we'll be a better company because we'll all be together and it will be more efficient. I don't think that there'll be savings in and of itself just because we're in one building rather than three. There may be minor savings in terms of G&A costs, but it's not significant. It's really more for having, one, better space for our employees, which obviously will increase morale and productivity, and two, just having more efficient operation because of the adjacencies of all of our Cleveland based groups.

All right. Thank you very much.

Carey Callaghan, Goldman Sachs.

It's Darren [ph] Kennedy with Carey Callaghan here. My question's a little bit longer term. And -- in this current environment where our retail stocks have really suffered, and investor sentiment towards retailers is pretty negative, and I was wondering what kind of color you could give us on '06 and '07 leasing plans? And kind of the further -- the longer term outlook for some of the expansion plans of some of these retailers and what you think they might be thinking? This is also kind of maybe your preview to what you'd expect to see at ICSC.

My view of a lot of that noise, quite frankly, is that people sometimes overestimate the macro issues and underestimate the shift in market share that really determine the fortunes of retailers. It's interesting to look at market perceptions of overall consumer demand and overall retail sales in the economy, which have consistently grown and I'm sure will continue to consistently grow in the future. But those numbers on the margin are almost insignificant, when you compare that to the massive transfer of market share that has occurred from some retailers to others. And that transfer of market share has benefited our business dramatically, and we think it will continue to. If you look at the plans of the major retailers in all the various formats, the community and power center retailers as a group plans to expand much more rapidly than all the other retailers as a group. Most of our tenants have expansion plans of about 8% per year in terms of new store count. And again, that's not because they think the retail sales in United States are going to grow by 8% a year. It's because they see soft spots out there in the competition where they think they can transfer market share from others to their bottom line.

I'll let Dan expand on that a little further.

Granted, that 24 to 36 months in the life span of our retail cycle is an eternity, right now, I will tell you that one of the reasons why we have had so many portfolio reviews early in the year is A, because we've been putting pressure on our people to do it, but, B, the retailers have been putting pressure on us, because they're very concerned about their ability to meet their open to buy for '06 and quite frankly, there are retailers that still have open to buy for 2005 and sitting down for the first time to discuss that in Vegas, usually it's too late. So we have not seen any pullback at all from our key retail group for either 2005 or 2006. And in fact, we had a recent portfolio review where a tenant was talking about '07 transactions. So the pace is picking up. The concern that the retailers have is quite frankly their ability to fill the slots. So they're -- they are thinking much more in future years, and we have tenants that are locking in on development projects that would be an '07 project and they're just putting it in the win column and leaving it there, because they know come '06 when they're trying to fill '07, they're going to need those numbers in order to make their open to buy.

I might expand on that a little further, too. I mean, one of the things that a lot of people have talked about lately is the supermarket industry and sort of the competition from the super centers. I would tell you that the amount of consolidation of those retail sales into tenants like Wal-Mart are being constrained dramatically by artificial exclusives in tenant leases, that if left to the market place, without those constraints, that transfer of market share to Wal-Mart and Super Target and Costco and so forth, would be accelerated by multiples. In our own portfolio, I would guess we have 15 to 20 Wal-Marts that would like to expand into super centers that can't, because they're in a center that has a supermarket that has a exclusive in the grocery business and they can't get entitled to build a new super center in the market. So there's -- there's a lot of transfer of share to our tenants, and there's a lot more that will happen when some of these exclusivity clauses wind themselves down, either through lease expirations or through bankruptcies.

Okay. And it's definitely encouraging to hear that you're having discussions about '07 already. And that Wal-Marts and Targets with their 8% store growth plans haven't abated yet. There's market share gainers like Best Buy have already reduced their square footage growth plans. And I guess down the road, and luckily for you guys, it's way down the road, I guess when sales productivity starts to let up is when they finally start to cut back on their expansion plans. Have you seen any pressures at the margin on productivity for any of your categories of retailers?

We have not. And again, we don't look at comp store sales as much as we look at plans. I think we've discussed that in the past. Comp store sales can be skewed by variety of different mechanisms at the retailer level. But we really look at where the retailer is on plan, and when they tell us they're at 3% to 5%, they've been coming in at 3% to 5%. Some of those retailers have cut back what their expectations might be for plan. And they've reduced their inventory levels accordingly. But overall we see positive growth in a very healthy range, and clearly, growth that exceeds the inflation level.

Maybe one exception to that would be some of the retailers have learned that they haven't been able to maintain the same productivity gains by expanding existing units that they thought they would. So that we're seeing more of a demand for new stores, rather than taking existing stores and just making them bigger.

I guess the first step is to actually go the other way and come out with smaller footprint stores.

And that's happening, too. I mean, most notably Wal-Mart has shown a new receptivity to accept a store of almost any size, where they can penetrate in a major metro market and expand their market share.

Final question and I'll give back the floor. It's been a long time since you guys have seen same store NOI growth over 2%. But it has been fairly consistent in the 1.5 to 2% range. Is it redevelopment that you think might ever get you -- will ultimately get you back above that level?

Yes. Clearly, that's a big part of it. But I mean it's -- 2% growth in our business is nothing to sneeze at. We are constrained by the fact that we have a lot of long-term leases. There is one way that we could easily increase our same store NOI growth, and that would be to basically dispose a lot of the leases that we have that don't generate a lot of growth. But there's a balancing act there, which is, most of those leases are to AA and AAA or single A credits, that really I think are part of the DDR story in terms of what an investor is getting. And we really have to balance one against the other. If we sold all of our Wal-Mart exposure in the portfolio, we could easily accelerate our same store NOI growth probably by 100 basis points, but is it a better company when we dilute the credit quality of the portfolio by investing in only speciality stores? I think quite frankly, that is a big difference between our business and the mall business, and one that's often overlooked. If we operated our business the same way, we would have similar NOI growth, but we would have much less credit quality.

Understood. Thanks so much.

[OPERATOR INSTRUCTIONS]. Eric Rothman, Wachovia Securities.

Good afternoon. Thank you very much. Kind of following up on the last point. It looked as though there was an acceleration in your small shop annualized base rent almost 9% in the first quarter. Is that indicative of a trend going forward? Is it just a blip? What can you tell us about that?

Well, I think it's just -- it depends how much we have in lease expirations in a given quarter. The releasing spreads that we achieve have been fairly consistent on new leases in the high teens to low to mid 20s. And this quarter actually was under 20, which was really probably one of the lesser performances in terms of releasing spreads. A lot of it depends on the mix of renewals and new leases. But that kind of recrease [ph] in our small store leases shouldn't be extraordinary in terms of what we're able to achieve, because when we do have an opportunity to rewrite leases, we do generate significant spreads.

Sure. And in terms of your anchor bumps that you see coming up in the next year, two years, how do those look? Are they any different than what we've seen in the past? I would imagine maybe a number of your properties are hitting their five and ten year anniversaries at this point.

None of that hits the numbers because we straight line it. So when you're looking at our FFO growth, you're not seeing anything, even though we have very significant bumps in our anchor tenant leases, none of that is reflected in the FFO growth that we're reporting. Because we're compelled to straight line that income.

Sure. Sure. And then I guess just lastly with respect to Puerto Rico changing gears a little bit. How have sales at the Pueblos gone? Is that -- I know it's early to tell. We've been reading some press that that particular grocer, as many of them are, has come under extra pressure of recent. Have you seen that?

We have. Pueblo is clearly under pressure. And quite frankly, we viewed their real estate as an opportunity within this portfolio as other retailers, in particular Wal-Mart, continue to expand their market share on the supermarket side in Puerto Rico, the grocer -- the local grocer which happens to be Pueblo in a lot of cases, struggles. They don't have the capital to redevelop their stores to make them look contemporary and exciting the way a Wal-Mart Supercenter does, and as a result, the've lost market share and continue to lose market share.

With respect to the retailers that you brought down to Puerto Rico, were many of them new retailers that don't have any operations on the island, and you're -- or are these mostly retailers who already have existing operations on the island that have expressed interest?

Well, on the permanent leasing side we've been focusing our attention on retailers at that are not currently on the island, and we're trying to get them interested in the island. On the temporary tenant side, in some cases, there are people that are already there in a limited capacity, or they're people who have a subsidiary, for example, on the sponsorship side. Clearly Coke and Pepsi are already on the island, and they were a part of our tour, and they already have a significant presence, respectively. Yet there are opportunities that haven't been cultivated with them from a sponsorship perspective that we're trying to take to the next level.

Interesting. Thank you very much.

Chris Brown, Banc of America Securities.

Good morning. Just real quick. With the interest costs going up a little bit, it seems like the coverage metrics have slipped slightly. And I know kind of a couple of years ago, you guys had talked about trying to get to a solid mid BBB ratings. Is there any update on where you stand there? Where you see yourselves for the next 12 months?

Well, we have a solid BBB rating at Standard & Poor's with the stable outlook. We think that's the appropriate rating for the Company. We think the Moody's rating of Baa3 is inappropriate. We've expressed that to them on many occasions. And we think that it is an opportune time for them to reflect on the fact we've significantly added equity to the balance sheet, and they've indicated in the past that when they see that happening they would be willing to reconsider the rating. And frankly, I think that -- my own opinion is if you compare the metrics to those of our peer group, it's very difficult to justify the current rating.

Great. That's exactly the color I was looking for. Thank you.

Ladies and gentlemen, there are no further questions at this time. That will conclude our call for today. Thank you for joining us.

Thank you.

Thank you.