Site Centers Corp (SITC) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Developers Diversified quarterly earning's conference call. My name is Christie and I'll be your call coordinator. At this time, all participants are in a listen-only mode. We'll be facilitating a question and answer session 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. Miss. Michelle Dawson. Please proceed Ma'am

Good morning, and thanks for joining our second-quarter earning's conference call. I'm Michelle Dawson, Vice President of Investor Relations for Developers Diversified.

With me in Cleveland are Scott Wolstein, Chairman and Chief Executive Officer, David Jacobstein, President, and Chief Operating Officer, Dan Hurwitz, Senior Executive Vice President, and Chief Investment Office 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 concerns future earnings, results or estimates or that reflect expectations or beliefs are forward-looking statements.

Although, we believe that such statements are based upon reasonable assumptions, you should understand that those statements are subject to risks and uncertainties and that actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the management discussion analysis portion of our Form 10-K year ended December 31st, 2004 and filed with the SEC.

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

Good morning. I'm pleased to announce our second-quarter 2005, FFO results of $.84 cents per share. Results from operation grew by 10.7% over second quarter of 2004, after excluding the impact of transactional income items, such as fee, merchant building gains, and land gain sales, and deducting additional interest expense caused by a interest in rated average interest rate of 30-basis point versus last year. Our portfolio continues to produce consistently strong results, and as I think about the various aspects of our business, I'm particularly struck by the number of opportunities still available to us.

As I have said many times before, our assets are well-positioned in the sweet spot of retailers growth. At ITS we see a number of new opener concepts from established retailers, representing both the traditional community world, and in post-mall universe impress me. This tenant demand will not only guarantee future growth in our corporate portfolio but will also provide opportunities for new leasing at our new developments ensuring that they will continue to maintain attractive recharge and create long-term shareholder value.

On a further note regarding development, the current capital in America has compressed Cap Ridge making it much more difficult to pursue a core acquisition strategy. Therefore, companies such as Developers Diversified that have strong development and redevelopment competencies are uniquely positioned to create value to development rather than through acquisitions and financial engineering.

To this end, we have assembled over a billion dollars in development projects, aggregating over 10 million square feet, with the weighted average pro forma return of approximately 11.5%. Assuming a 6% valuation upon completion -- a 6% cap rate valuation upon completion, these projects represent nearly $1 billion of potential value creation over the next few years as they come in line.

In addition to development, we have captured opportunities to create shareholder value by structuring value added joint venture through our country club and executing the disposition of troubled retailers real estate holdings. For example, in 1998, our Country joint venture purchased in excess of 30 former Best product stores, earning a leverage returnable of 20% plus fees in that investment. Then in 2002, we announced our joint venture acquisition of 227 former service merchandise locations. As David will discuss later in the call, we have begun wide spread marketing of 42 former service merchandise assets and based preliminary indications of interest from the market, we anticipate bidding to be highly aggressive.

At this point, I'll turn the floor over to Bill Schafer, who will discuss our capital market strategy and highlights from our first-quarter financial results.

Thanks, Scott. We regularly look for opportunities to reduce our cost of capital and achieve our goals of increasing liquidity, maintaining a conservative fix charge coverage ratio, and holding variable rate debt to a comfortable level. This pro-active approach includes frequent discussions with our investment bankers regarding market conditions and reviews of our loan portfolios for opportunities to refinance.

For example, we recently took advantage of price opportunities in the market to refinance some of our maturing debt and unencumbered assets. As a result of these transactions our liquidity is exceptionally good and our financial ratios are strong.

In April, we prepaid $365 million of mortgage debt that encumbered 6 Puerto Rican assets. This debt was floating at a rate LIBOR plus 270 points. We temporarily used our revolver to repay the mortgages, and within a week tapped the market for five and ten-year unsecured notes at a weighted average fixed rate of 5.25%.

Although the interest savings was nominal, these steps were important because we effectively extended the term, unencumbered the assets, and removed the interest risk on this CPG debt. Similarly, in early July we paid off another $200 million variable-rate mortgage debt secured by 5 Puerto Rican properties and priced at LIBOR plus 270 basis points. Using the proceeds from a new $220 million secured term loan at LIBOR plus 85-basis points. The term loan which adds accordion feature to $400 million matures in 2008 and has two one-year extensions. There are several important benefits of this refinancing, in addition, to the anticipated $3.7 million savings in annual interest. While the pay-off of the Puerto Rican debt unencumbered 5 more properties, the new term loan is secured by assets that were already encumbered by first mortgages, but at very low leverage, which allow us to officially tap our existing equity in these assets. The refinancing improved our financial position by increasing our unencumbered asset pool and reducing our unsecured debt balance.

Moreover this facility will enable us to raise additional capital through our accordion feature, an attractive cost, without encumbering additional assets in our portfolio. without. And is a highly flexible financing tool with provisions to add and remove collateral, as we deem probate.

We also replaced approximately $100 million of debt on service merchandise portfolio, which was comprised of approximately 33 million of variable-rate secured debt and approximately 64 million of member loans.

With an 8% secured loan from DDR to the joing venture, this financing, again, allowed us to unencumber assets in order to market the stabilized properties for sale, and also provided us with a short-term favorable earnings spread. We anticipate this loan to the joint venture will be repaid by the end of the year.

During the second quarter, we also made significant changes to our MDT revolver. We increased the size of the facility by $25 million to $125 million, and increased the accordion feature to 200 million. Improved the pricing by 37.5 basis points to LIBOR plus 100, and extended the term by two years. This amendment was important because it reflects MDT's improved credit and, consequently, a positive step towards ultimately obtaining taking a credit rating for the MDT entity.

Lastly, in early July, we refinanced $167 million of debt on our Community Center 5 and Community Center 7 joint ventures with DRA. These loans are priced with the weighted average interest rate of approximately 6.5% and have fourth quarter 2005 maturities. We entered into a new secured loans aggregating 298 million, of which 280 million is fixed at approximately 5.3% for five years and the remaining 18 million is floating at LIBOR or plus 200-basis points for two years. This refinancing represented the opportunity to extend our maturities and generate over 130 million in new proceeds at a weighted average interest rate savings at approximately 120-basis points.

I would also like to highlight our progress towards strengthening our balance sheet and reducing our exposure to variable rate debt. By taking advantage of the opportunities I just described and after applying the 130 million of proceeds received from the early July refinancing of the DRA joint venture debt, our floating rate debt approximates 28%, which is 25% lower than last quarter.

Although our ratios may fluctuate somewhat, we make acquisitions such as JDN, Benderson, and CPG. In each instance, we have demonstrated our ability to integrate these portfolios and effectively maintain our ratios at a comfortable level. I appreciate the fact that the rating agencies are recognizing our ability to successfully deliver on our stated goals and are gratified that improvements to our balance sheet and financial strength were obviously recognized by Fitch when they upgraded our senior unsecured corporate debt rating from triple b minus to triple b. I'm looking forward to the opportunity to sit down with the other rating agencies in the fall to discuss our progress to improving our credit profile. On the earnings front, as we reported on our last call in early April, we sold three assets to MDT that we had acquired through our merger with JDN Reality when they were still under development.

This sale generating merchant building gains totally approximately 14.6 million, which was included in our second quarter FFO and anticipated in our prior earnings guidance. Also, included in this quarter's FFO was approximately 900,000 of financing fees earned from joint venture and approximately 2.7 million of land sale gains. I would now like to turn the call Dan Hurwitz.

Thank you Bill. Good morning. I am pleased to report that leasing and development activity continues at a very aggressive place. Specifically in regard to leasing, Q2 was extremely active with 288 leases executed representing 1.7 million square feet of retail space. The rental spread on new leases was 26.7%, while renewals were 8.5% for a blended increase of 12.7%. For the DDR porfolio, which excludes the former Benderson and Puerto Rico assets, occupancy stood at 95% and the lease rate reached 95.5%. Our interest in these statistics is the increase of 60-basis points in occupancy and 50-basis points in lease rates, compared to Q2 of 2004 and an increase of 30-basis points in leased and occupancy rate over the first quarter of 2005.

In regard to our portfolio in Puerto Rico, progress continues on many fronts. Last quarter, I discussed the potential represented in our new business developments, sponsorship and income categories. On this category, on the heels of the Las Vegas Convention, I would like to provide some color on conventional leasing.

During the course of the convention in a continued diologue with national retailers, the vast majority of tenants that currently trade in Puerto Rico expressed continued excitement in the market and strong desire to find new opportunities. Some of these tenants include Radio Shack, Zales Jewelery, Advanced Audio, Borders Books and Music, Holstrom Creamery, Claire's Accessories, Walgreens Drug, Marshalls, American Eagle, Childrens Place, Pacific Sunwear, and Hot Topic, just to give you a flavor.

In addition, anchors such as Wal-Mart, JC Penney, Kmart, and Sears continue to express optimism towards the market. Moreover, several of the U.S. retailers are working to open their first stores in Puerto Rico and have selected Developers Diversified centers to launch their concepts. Each center includes Best Buy, Comp USA and Spencers Gifts. Overall, the excitement retailers expressed towards the Puerto Rico portfolio at the convection was only masked by the unbridled enthusiasm we received toward our development pipeline. Upon review of our quarterly supplemental, you will notice we have added three new projects to our pipeline this quarter. Each project aggregate approximately 1.5 million square feet and will average about 11% return on approximately $120 million in net project costs. The first project identified is Southern Tier Crossings in Horseheads, New York, which is located in the Elmira Corning metro area.

This site is a quarter a mile if our Big Flat Consumer Square, which is anchored by Wal-Mart, Sam's Club, Dick's Sporting Goods, Old Navy, Michaels, Staples, Barns and Noble and TJ Max. Wal-Mart will relocate in Big Flats to a supercenter on the near site, and we will backfill the current Wal-Mart-Mart box with mid-size boxes that are anxious to enjoy the outstanding on remaining co-tenancy. Joining Wal-Mart will be another mainly anchor, an additional retail, that cannot be accommodated at the current location. Southern Tier Crossings is expected to open in 2007.

The next project added this quarter is McHenry Square. McHenry Lake Zurich trade in Illinois, just northeast of Chicago. Because of the strength of I-90, this trade area is experiencing a surge of new housing development and is one of the fastest growing bedroom communities serving the Chicago Metropolitan area. Noticeable voids in the regional market range from department stores, sporting goods, ready-to-wear, electronics, domestic linens and home goods, home improvements, theaters, and a variety of causal-theme dining restaurants concepts. Again, tenant interest has been exceptional and we expect to open McHenry's Square in late 2006.

The third addition this quarter is Seabrook Town Center in Seabrook, New Hampshire. Finding a well located site with a cooperative municipal in New England is no easy task. However, our team has met the challenge. Seabrook Town Center will be a 420,000 square foot community center. Located off I-95 just north of the New Hampshire-Massachusetts border. Interestingly, New Hampshire doesn't apply a state sales tax, which has proven to be a strong draw from residents from Massachusetts, eager to avoid the Massachusetts sales tax.

Overall, tenant interest throughout New England is robust, and we're very pleased with response to this project, which is expected to open in late 2007. In addition to those wholly owned project, we also entered into a new joint venture development opportunity in Merriam Kansas through our Coventry fund. This 300,000 square-foot development is immediately adjacent to and will complement our existing center, Merriam Town Center, which was expanded earlier this year, and is anchored by Home Depot, Office Max, Cinemart, PetsMart, Old Navy, Marshalls, and Dick's Sporting Goods.

Once the new joint venture development is complete, our assets will dominate the sub-region of the Kansas City trade area with 800,000 square feet of retail space, unparalleled highway visibility access, and merchandise mix. These projects, when combined with our previous described projects in Apex, North Carolina, Miami, Florida, our two projects in San Antonio, Texas, Freehold, New Jersey, Pittsburgh, Pennsylvania, Mount Royal, New Jersey, and others, represent a geographically diverse, high-quality portfolio anchored by the nation's leading retailers, such as Wal-Mart, Target, Kohl's, JC Penneys, TJ Max, Bed Bath & Beyond, Costco, PetsMart, Borders, Ross, Circuit City, Linens, Office Max, Stapes, and numerous other small shops and casuality in dining restaurant concepts. In addition to the projects described, our development pipeline and shadow pipeline represent another $1 billion in potential investment, and we continue to evaluate additional outstanding opportunities on a daily basis.

Operationally, to bolster our development efforts and continue our desire to identify the best opportunities for future development and value creation, we recently expanded our development acquisition team in order to match the volume of activity we're seeing in the markets. We're now secured with two development directors fully devoted to site acquisition. One in Cleveland and one in our San Jose, California office. Moreover, to assist in market analysis of incoming opportunities and to provide more targeted direction in our focus market searches, we have created the position of Director of Market Research within the development department to provide tactical support to the development team by performing high-level site analysis and technical feasibility studies for each site under consideration. We are confident this position will help refine our searches, clarify opportunities and overall make us more efficient while mitigating the current risk that exists within the development business. At this point, I would like to turn the call over to David.

Thanks Dan. As Scott highlighted at the beginning of the call, we've engaged Holiday Fenoglio to mass market a portfolio of 42 former service merchandise locations that have either been redeveloped or retenanted and are now fully stabilized. This marketing effort which is primarily targeted at the private investment market, particularly, 1031 exchange-buyers, takes advantage of currently aggressive pricing for small income-producing assets.

The portfolio totals nearly 2.3 million square feet. Most of the assets are fully leased and generally range in size from 50 to 60,000 square feet. When we originally announced the transaction back in 2002, we described it as a natural fit for our core business providing us with an opportunity to enhance our relationships with our national tenants. Today, the tenant roster is dominated by names you could commonly find in our core portfolio.

Best Buy, Circuit City, PetsMart, Michaels, Joann stores, Staples, Office Depot. Bed Bath, Dollar Tree, Davids Bridal, Marshalls and many more .The successful repositioning of such a large number of assets clearly demonstrates our ability to execute and illustrate the strength and depth of our leasing and development teams. Bids are due in mid-August and will be accepted on a one OP or sub-portfolio basis. Closings are expected to occur in the fourth quarter.

Based on initial indications, we expect a very strong response from the market with pricing to be highly competitive. In fact, we have already sold one of the assets closing at a record 24 hours. This property, which was subleased to Ashley's Furniture, was located in Arlington, Texas and was sold to an adjacent property owner for $2.2 million, which represents a cap rate on a lease hold interest. 12 former service merchandise assets are not being marketed through Holiday Fenoglio. These assets are vacant and still pose significant opportunities for us create value.

On a similar note, we continue to take advantage of a variety of opportunities to sell assets and recycle capital into higher yielding investments. As I mentioned in our first quarter 2005 conference call, we sold 3 shopping centers to MDT for approximately $64 million. As an illustration as of our ability to add valve to development, these shopping centers were acquired from JDM in 2003, as developments in process and priced at a cap rate of 10%, nearly 300-basis points higher than their weighted average disposition cap rate of 7.2%.

We also continue to harvest assets of our RBIP joint venture with Covingtry Real Estate partners and Prudential real estate investors. During the first quarter and to date, the joint venture sold in Richmond City Center located in Richmond, California for approximately $14 million, and 3 restaurant outparcels at Puenta Hill Shopping Center in the City of Industry, California for $8.7 million. We acquired these assets from Berma 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%.

With respect to the remainder of the former Berma Pacific assets, we expect to sell the two remaining outlets at Puenta Hill Shopping Center during the third quarter of this year and are currently marketing San Dacedro Village located in San Diego. Downtown Pleasant Hill, in Pleasant Hill, California., Valley Central Shopping Center in Lancaster, California, and Puget Park Shopping Center in Everett, Washington are not currently being marketed because there are further opportunities to for us to maximize revenues at these centers. We also expect to close the sale of City Place in Long Beach California within the next few days. This eight-block urban retail development represents a remarkable case study.

We developed this open-air community center in phases between 2002 and 2004, after demolishing the original enclosed regional mall. The 57 million -- excuse me -- the $57 million development generated an unleveraged return of nearly 12%, which reflected $30 million in local subsidiary and proceeds for the sale of land parcels. We sold the grocery anchor component of this project in 2004 for nearly $17 million at 6.2% cap rate, and our under contract to sell the remainder of the project, which is anchored by Wal-Mart, Nordstrom Rack, Ross, Just for Us, and Anna's Linens for approximately $75 million or a 6.1% cap rate.

We're also marketing several non core assets with the potential sale value of approximately $235 million. Year-to-date, we have sold four assets in Ohio for approximately $6 million and have another $75 million worth of assets under contract. Several of these shopping centers are anchored by Tops Markets. After the disposition of these assets, we expect that our rental exposure to Royal Ahold, Tops parent, will decrease by approximately $3.5 million. The neighborhood grocery anchored centers will compromise less than 3% of our total portfolio based on both rent and GLA.

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

Thank you, David. Given the fact that we are halfway through the year and consistent with the guidance we've provided on our last several conference calls, I am pleased to tighten our FOO guidance to $3.18 to $3.25 per share for 2005, with the greater weight placed on the fourth quarter rather than the third.

With respect to 2006, we will continue to capitalize on the financial, leasing and development opportunities we just described, and I'm looking forward to another outstanding and exciting year. Our 2006 project process is underway. We will discuss our expectations for 2006 and provide FFO guidance for the year on our third quarter, 2005 conference call. At this point, I would like to open the line to receive your questions.

[Operator Instructions] Your first question comes from Michael Bellerman from Smith Barney. Please proceed.

Good morning.

Good morning.

I was wondering if you could elaborate a little bit on the service merchandise portfolio and whether, if you do sell the portfolio in the fourth quarter, whether you'll recognize promoted income from that or what flow into your income statement.

Yes, we do expect to recognize promoted income from that sale, and we can't predict at this time exactly when it would close. It's actually very likely to close in a series of regional portfolios, which could close at different times.When they do close, we anticipate recognizing them.

One of the reasons why we have still somewhat of a large range in our guidance of $.07 is because it is difficult to predict, at this time, exactly when those promoted dollars will fall with the different quarters.

Scott, can you give us a sense of the range. I mean range of sales privacy and what the range of the promote would be and what is actually included in your guidance?

I think that the range in terms of the promote is probably in the $.04 to $.06 per share, range and some of that is in our guidance, and some of it isn't. That's why we've given you a wide range in guidance.

That was always contemplated in '05 guidance? Having $.04 to $.06 of gain?

As I said before, we never included all of it in guidance, and we're not including all of it in guidance right now. We're trying to give you a mid-point to allow for the fact that it might straddle 2005, 2006.

Could you go a little bit in depth on the refi that you did in the DRA ventures. I think, it is my recollection that a lot of those assets were on the very first offer list for NBT. I didn't know if that was refinancing instead of maybe selling them?

Yeah it was refinancing instead of selling them. At least at this time. From an earnings prospective, it's really a non-event. Because we wouldn't have recognized FFO from the sale of assets anyway. We would have had net income from capital gains but not FFO because these weren't development property.

You know, essentially DRA expressed the desire to stay our partner in those assets, and we were able to dramatically renegotiate our fee arrangement to improve the returns that we will receive from that joint venture going forward. So whether there were assets were to be held in MDT or DRA joint ventures, really isn't that significant to us. Although, we do own a larger share in the DRA joint venture than we would have if we would have sold them to MDT.

Was the appetite in Australia -- does that factor into it? Was there less appetite or do you think that is still robust?

No, the appetite in Australia is still robust. They would have been highly desirable of acquiring these assets. It really was much more driven by DRA's desire to remain our partner in these properties.

Is there something else that maybe you're looking at in terms of size that would fill that appetite that Australia has?

Well, you know, the appetite will be filled either through third-party acquisitions or through sales from our development pipeline to harvest merchant building gains in 2006.

Depending on what opportunities present themselves, will determine the mix. But there certainly is an appetite, and I don't anticipate continued strong deal flow into that MDT joint venture.

My last question is for Dan on the development pipeline. Appreciate all of the color that you added. Could you give us a little bit of sense on the $1 billion shadow pipeline? What you think the timing of those deals occurring over the next few years?.

I think they're going to be pretty well evenly spread out over the next three years, really. Some of those, for example, I think we'll have pretty well lined up and ready to get into the ground by early of next year for the late '07 or early '08 openings. There's actually one of them that might come along sooner, depending on our entitlement process. We're really evaluating each one of those individually. But they all seem to run about in the same time frame..

I think you're going to see momentum building on that development pipeline and deliveries building between '06, '07, and '08 and beyond. It seems like we're building up the pipeline dramatically and we are. But we turned down more opportunities than we accept. Because we're looking to, obviously, maintain that margin, and bring discipline to the process. Some of the private leverage builders don't bring to the process.

If I might add to that, Michael.

The typically Greenfield development where we acquire a site that's not entitled will take at least three years to bring on line in today's environment. But there's a second class of development opportunities that are offered to us from time to time, which are deals that are very far long in that process where our developers run out of capital or run out of GAPP. And it brought us the deal, pretty much (indiscernible) and looking for us to take it over and bring it home. Obviously, the gestation period on a deal like that could be half of that of the typical Greenfield development. That's why the deliveries will spread out over time.

Great, thanks so much.

Your next question comes from Carey Callaghan of Goldman Sachs. Please proceed.

Good morning. Just to follow up. The 11.5% returns that you outlined in your development pipeline seems very strong, given what has gone on with land prices, material construction costs, et cetera. Does that imply that you're seeing a pretty ready acceptance to pay up in terms of rents your new developments?

We are -- I mean, one of the things we talked about extensively in past quarters is that tenant demand is really at an all time high. And also, with the addition of tenants migrating from the mall business into the open-air sector, our roster of potential tenants is also expanding. So that combination of events is really giving us pricing power that we have not enjoyed in past years. It is true that in some cases land cost are going up and material costs are going up. Although, we're starting to see those come down a little bit, particularly steel, for example. But that aside, I think we are enjoying a robust tenant growth period, and because of the quality of the pipeline, we're able to take advantage of that and maintain our returns.

And Dan, I just -- the leasing spreads were very good this quarter. They were up from where they were in the first quarter. Do you see that kind of blended 13% increase sustainable in the back half of the year?

Yes, we do. We seem to be in that 12 to 14 or 12 to 16% range on a fairly consistent basis. We think that will continue for a lot of the same reasons I just articulated on the development pipeline.

Okay. And then question for David. On the development activity, it looks like you had not very much of a spend during the quarter. You went from 170 to $172 million spent on those seven projects. Was there -- any delays going on? Anything holding up the activity? How should we think about that?

Actually I think there were a lot of reimbursements from tenants who owned their own parcel and contributed to the site work that had occurred in prior quarters. I think, we had a significant amount of reimbursements coming through as a net reduction in some of those costs.

Okay. Terrific. And just lastly, on the focus on development given where prices are, should we expect you really to be very inactive on the acquisition front given your comments on where assets are trading?

You should expect us to be inactive in terms of using our own balance sheet to a larger extent on core acquisitions. We've been pretty consistent about that. That's not to say that we will not have opportunities using either MDT or some of our other private joint venture partners to pursue joint ventures where we would invest somewhere in the 15 to 25% of the deal, and generate higher returns through fees, asset management fees, and management fees, and leasing fees.

We still look at opportunities, we're still in the flow. But you shouldn't expect us to go out and do a multi-billion acquisition using DDR common shares as the currency -- to the majority currency -- to pursue those opportunities.

Thanks, Scott.

Your welcome.

Your next question comes from Matt Ostrower of Morgan Stanley. Please proceed.

Good morning. I didn't hear you address the actual magnitude of the gains that you booked into FFO this quarter. I thought from last quarter, the guidance was something more like 14 or so million dollars of gain and it ended up being quite a bit higher than that. Could you explain the difference there?

I think there's two different numbers, Matt. The number you're speaking to was the merchant building gains that we talked about on the last call.

Supplemented with land sale gains, which we discussed, in terms of -- I think, we said it would be $7 million over the balance of the year. If you take the second quarter share of those land sale gains and couple them with the merchant building gains, you get right to where we guided.

There were additional gains not included in FFO.

Those land sale gains, I had only about 500,000 or so in my model for land sale gain. I thought that was an assumption that you guys might have sold out. Is it safe to say the pace remains the same in terms of the total volume of land sale gains for '05 but it happened a little faster?

We had about $2.7 million in the second quarter of land sale gains, and it's probably running somewhere around the $2 million number per quarter. Again, plus or minus.

Okay, was the uptake in interest income attributable to this loan you made to service merchandise?

There were really two loans in conjunction with the refinancing with the DRA venture partners, we made a 90-day, $65 million bridge loan to the DRA partners, that we earned interest on, and that's already been repaid in early July. And then, yes we did make $100 million advance to the service merchandise secured by the assets there and we're at 8% on that.

Okay, and then just two more questions. One, I didn't hear you say specifically, if you expected to be transferring more existing properties short-term to MDT? And then also, could you give us some kind of update on Coventry?

Again, on the MDT thing, I don't think there is anything imminent at the present time, but there is certainly a lot of fields in the flow of third-part acquisitions, and there may be development activity from DDR transferred into 2006. I don't think there's any of that in the balance of this year that you should contemplate. As far as Coventry goes. The Country two fund has an aggregate of about $1.1 billion to invest, and we're about one-third the way home, which leaves roughly about $700 million to invest over the next two years. We have a very healthy deal flow, which is largely dominated by redevelopments of projects and joint venture developments. And I would expect that that money will get invested over that period of time. And on a level basis and hopefully, we'll be out marketing the next one, as that occurs.

Okay, thanks.

[Operator Instructions] Your next questions is from Chris Capolongo of Georgia Bank. Please proceed.

Good morning.

Good morning.

I just -- quick question on the Puerto Rican assets. How are they tracking relative to your initial expectations? And if you have seen any other revenue enhancements there?

They're tracking a little better than our expectations overall. I think I mentioned last quarter, we had some nice pleasant surprises in our income and sponsorship side of the business, and our conventional leasing is going extremely well.

One of the things that we tried to implement in Puerto Rico and that we're implementing with some success is annual increases in rental rates to give us a better growth profile than we had elsewhere in the portfolio. We've been successful with a number of tenants doing that in both renewals and new store leases.

Overall, we think we're putting some mechanisms in place that will help overall sales, overall rental rates, and the overall growth in the portfolio.

The annual rent increases like CPIs in not necessarily straight lined.

It's not CPI because tenants, most tenants are afraid of CPI for a variety of reasons. Usually a negotiated percentage that's fixed.

Okay. And then justice quickly on the service merchandise. I just wanted to make sure I understand the magnitude.

So 50,000 square foot locations, 42 about $2 million square feet. Are these $100 square foot assets -- or are they -- because when I am talking about math, they are like $10 rents and 7 cap rates is like 150. That's like $300 million and then you earned disposition fees for that too, right?

That's correct.

Off the total gross proceeds?

Yes. We share that with another operating partner so that doesn't all flow well.

That sounds about the range, I mean are these $10 rent type?

Yes, some of them are higher than that, quite frankly. I think on a blended basis, probably about $12, actually.

Great, thank you.

You are next question comes from Eric Roth of Wachovia.

With respect to those service merchandise leases, what is the average remaining lease term?

Well, they're new leases. These are all leases that we negotiated over the last 2 to 3 years. So, typically they're going to be anywhere from 10 to 20 years in base with options.

Great. And then in general, are they guaranteed by the corporate entity?

The retailer corporate entity, yes.

Right. Then moving on, with respect to your guidance, you'd mentioned you thought Q4 would be a little stronger. Could you give us a break out between what Q3, Q4 might look like?

We really can't do that specific, because, again, like I said earlier on the call, a lot of it depends where the transactional income will fall during the balance of the year. I think from my comments, you could assume, if I leased the fourth quarter out, it would be at least a penny or two more than third quarter but I can't get much more specific than that.

During the quarter, did you receive any K-Mart stock from the last little bit part of that settlement or not?.

There was some of it, I don't know. It wasn't a huge number by any means but there was a little bit that came through.

Were there -- did you sell that stock and was that included in results anywhere?

Yes, that would have probably been, I believe, that's included in the lease termination income.

We're just talking a few hundred thousand dollars.

Yes.

Your next question comes from Alexander Goldfarb of Lehman Brothers. Please proceed.

Hi, good morning.

Good morning.

Just going back to the Coventry funds. It looks like some of the initial stuff with a lot of redevelopment stuff. Then lately there was the -- Burnt project down in Westover, Texas and then most recently there was the Merriam project. Which I think is something you guys already had underway.

Should we take this as a sign that just things are obviously more competitive these days and it's harder to find sort of the spectrum or lakes projects? And then is the, I guess there was a new guy hired in to do Coventry. Was he brought in to help get those value-add projects?

I don't think you can really read too much into the different deal flow that has transpired.

I think there continues to be a healthy number of opportunities in both categories, but there certainly is more people who believe they're capable of executing on the acquisition properties than the Greenfield Development Properties. There has been situations where we have been outbid quite dramatically. Largely, in our opinion, because the buyers really don't understand the asset as well as they think they do, but that is going to happen anytime you have a frothy market, as we have now.

Certainly, there's less competition in terms of joint venture Greenfield opportunities. I think that generally speaking, third-party developers have really embrace the country fund. It is opportunity to both access capital and act as DDR's development expertise in tenant relationships.

I think that is probably, what you contribute these new joint venture developments coming on line, more than anything else is recognition of a development community that -- while everybody else can offer them capital, and all of our money is the same color. We're one of the few capital partners out there that also offers support in the development effort through our competencies. So,I think, that's giving ride to a lot of deal flow in that category.

But for example, on Merriam, how is Coventry playing a part in that?

Merriam is an interesting situation, because it was something that was in our pipeline. When we got in the position to execute on the acquisition, the yields were coming in at around the low to mid-9 range. When low to mid-9 range for DDR is great for development, but is little below our threshold. But in terms of value creation opportunity for Coventry, the bill to that yield turns to flip it in a 6.5% cap rate. It fits like a glove right into the return expectations of that fund.

That's really the reason why we took that project and executed it through that joint venture rather than doing it on balance sheet.

Okay. So if I understand correctly then. Where there are projects that are coming in below your normal threshold, there's an ability for Coventry to step in, play a part and flip it on the back end when it is stabilized?

That's correct.

Okay. And continuing along that same seam. Giving the recent Kilo-New London case, do you think the way that decision was decided, do you think that really affects things at end of the day? Or it's really a non-issue as far as you guys see in field developments?

Well, I think it effects things in terms of preserving the status quo, because I think everybody was really pursuing almost the decision part of the land decision. Technically the Kilo decision eliminated the need to do a blank study on an urban redevelopment. I think, most of those projects we will do a blank study anyway, because it's usually necessary for the state -- state legislation.

It doesn't change things very much, although, while the case was pending, it had a chilling effect on communities willingness to exercise the power of eminent domain, pending the outcome of the Supreme Court case.

I think this has certainly removed some of the uncertainty. And our returns are pretty close to what the status quo was.

Okay. Thank you.

Your next question comes from Joseph from J.P. Morgan Securities.

Good morning. Most of my questions were answered. I just have two quick ones. Can you comment on lease term income expectation for the remainder of the year?

You know, we budget certainly amounts of lease terms every year, somewhere around 4 to $5 million a year in the aggregate. So we probably have about half of that in our guidance for the balance of the year.

Okay. And then lastly, looking at towards '06, do you think you guys can comment on -- do you think land fill gains merchandising will be flat, down or up, sort of year-over-year compared to this year.

Are you talking about in '06.

'06. Relative to '05.

A lot of that will depend on our budgeting process in terms of what we expect from the core during 2006. We have the ability to increase or decrease the contribution from transactional income during the year based on what we think we need in order to achieve our on growth expectations.

It's a little premature for us to predict how that is going to come out, but certainly on our next call, we'll be able to give you much more clarity.

Okay, thank you.

And your next question is a follow-up question from Michael Bellerman of Smith Barney. Please proceed.

I just had a follow-up on sort of business opportunities and you talk about how there's a lot of opportunity in the various aspects of the business, and you've talked about service merchandise.

How do you feel about the retailer business in terms of maybe buying a defunct retailer or healthy retailer and trying to go for the real estate and is that something today you're actively pursuing?

We're very much in that flow, Michael. I think that investors should understand that there is a dramatic difference in terms of the risk parameters from buying real estate from a bankrupt retailer, where you have the opportunity in the bankruptcy to reject leaseholds that are unprofitable, as opposed to buying a solid retailer in a strategic process, you know, run by an investment banker, where you do have the rights of a bankrupt debtor to restructure the portfolio.

The latter requires you to operate a business, as well as liquidate real estate, and the operating risk of operating a retailer is significant. So, we look at those opportunities, as we would look at opportunities to buy real estate from -- out a bankruptcy but we certainly look at them differently.

We would want to be joint venturing with a strong operator. At least sort of a co-development, if you will, with a strong operator would be our preference. We really do not want -- and we don't think that the DDR shareholders are investing for us to take a significant amount of operating risk in running our retail business.

I don't think you'll see us doing that to any great degree. A lot of deals out there recently has really been that type of deal. It has really been solvent operating retailers who have been trying to sell their business for a lot of money and use the value of the real estate as a component to hike the price. Those deals for us are much harder to rationalize how you really make a lot of money.

Couldn't you do it in Coventry?

We certainly could do it in Coventry. This isn't a capacity issue it's a discretionary issue.

I'm just saying that the risk reward profile of running an operating business, versus liquidating real estate, is just very very different. The return expectations that we would want to achieve for taking that risk would be much greater than they would be in a Best products bankruptcy or a service merchandise bankruptcy.

Understood. Just a question on the --

-- by the way, not only are our risk expectations higher, and our risk reward expectations higher, but unfortunately, the competitive capital's expectations are lower. That's what makes it very difficult. There's so much money in the private equity firms that they're trying to put out, their buying these deals and taking extraordinary amounts of risks, looking at returns lower than what we would have looked at on a straight real estate deal.

That's why they're hard to do. The KKRs and the Baines and the services of the world are willing to look at these deals much more aggressively than we would.

Yes, understood. Just a question on February debt. Your 28% I think a little higher because of the development pipeline. What is the plans in the second half the year? Do you want to stick at 28 or do you want to bring it down?

We'll probably bring it down slightly. Either a through some more long-term debt placement, or through some medium term swaps, but I wouldn't expect it to be in the teens, by any means.

And the 235 of asset sales, that include City Place and then $70 million of the Top centers and other non-core? Or City Place not included in that number?

City place is not included in the $235 million of potential non-core asset sales that are being marketed. Although, they won't all hit or close in 2005 by any means.

Does that include the flex industrial office space? The business centers?

No.

Are you thinking about putting that on the market or?

We've had a lot of unsolicited inquiries on it. We haven't had to do that, but as we've said on many, many calls before today. At some point in time, we'll sell that portfolio.

Okay, thanks.

And your next question comes from Rich Moore of KeyBanc Capital Markets. Please proceed.

Hi, good morning. Just to go back for a second to the question on merchant building for next year. I realize, Scott, that you are not giving guidance for next year. Do you have enough actually completing in terms of merchant building type properties to generate the sort of gains you had this year?

Really, Rich, it only takes one deal. Today we're building to 11.5 and we're selling at 6 or sub-6. One project that's $50 million, that's $50 million of merchant building gain, which is more than we booked this year. So it doesn't an effort to do that. So, yes, we do have enough in our pipeline.

Okay, and then on the billion dollars of development, is most of that centers that you could sell for merchant building gains?

Eventually, yes.

So it almost sort of qualifies?

Yes.

And City Place does not, right?

City Place does qualify.

City place does qualify, you're right. And Dan, a question for you on the tenant environment is clearly very strong. Others of your callings out there in the shopping center business are saying the same. You guys turned in very good spreads for the quarter.

Do you have any thoughts on the same store in line number? It seems to me maybe a little below what I might expect for this kind of environment and maybe what you anticipate for the rest of the year in terms of same-store in-line growth?

Before Dan answers that question, I would like to pipe in a little bit on that. This metric is one that really causes us a great deal of disdain.

You know, comparing our same-store NOI number, apples to apples with other companies, which I'm sure is what you are doing. I think, you have to do it in connection with our CapEx number in relation to other companies. A great deal of the same-store NOI that companies report is basically a return on capital investment.

We make almost no capital investment in our core portfolio. So the same-store NOI number is really a real bottom line number without any investment. If we were to do what many other companies do, which is invest 200 to $300 million in tenant improvements for new leasing, and get our return on that would drive our same-store NOI numbers two or three times as high as they are today. But at the end of the day, it wouldn't make a great impact on our FFO growth.

It's always remarkable to me how we consistently outperform every company on FFO growth, while they outperform us consistently same-store NOI growth. I think, it's incumbent on you guys to understand how that could happen. It doesn't make sense to me how companies report 4 or 5% same-store growth and 3% FFO growth. Same-store growth NOI growth with a 50% leverages balance sheet should translate to almost 10% FFO growth, right off the top if they didn't do anything else.

So there has to be something else going on with respect to those numbers. Otherwise, they just don't make any sense. Every time, the analysts do a CapEx analysis of us against our peer group, they scratch their heads and they say how come DDR is only spending 4 million in CapEx when these guys are spending 100 million. What is going on here? Well, that's what is going on. It's just we -- we do the business differently and we don't buy our NOI growth.

You would be a good analyst, Scott, that's good. Actually you can come and write my piece for me this afternoon?

I want a by line.

Absolutely. Dan going forward for the rest of the year, do you see kind of the more of the same of your same-store NOI growth?

We do, Rich, yes.

Thanks guys.

We've been using around that 2% number for quite some time now.

Thanks a lot guys.

Once again, ladies and gentlemen. [Operator Instructions] And your next question comes from Alexander Goldfarb of Lehman Brothers. Please proceed?

Hi, thank you. Just a follow-up on the gains. On the merchant build gains and on the land sales. The numbers that you guys quote are those pre or post-tax?

They're net.

They're net of tax?

Yes.

Okay. Perfect, thank you.

This concludes today's question and answer session. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.