Site Centers Corp (SITC) 2005 Q3 法說會逐字稿

Good day. My name is Audrey and I will be your coordinator on the call today. At this time all participants are in a listen-only mode. We will be facilitating a question an answer session toward the end of this conference.

If at any time during the call you require assistance, press star followed by zero and an operator will be happy to assist you. As a reminder, ladies and gentlemen, this call is being recorded for replay purposes.

I would now like to turn the call over to Ms. Michelle Dawson. You may proceed.

Thank you, Audrey. Good morning and thanks for joining our third quarter 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 Officer; and Bill Schafer, Executive 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 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 uncertainty that could cause actual results to differ may be found in the management discussion and analysis portion of our form 10k for the year ended December 31st, 2004 and filed with the SEC.

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

Good morning, everybody. I'm very pleased to report this quarter's earnings which reflect total FFO growth of 9.2% over the third quarter of 2004. And continued strong performance from our retail portfolio. On a per share basis we reported $0.74 per share in FFO compared to $0.72 for the same period in 2004. While the $0.74 is in line with our prior guidance, I'd like to point out two items that have impacted our reported FFO.

First, increases in interest rates reduced our FFO in the quarter as compared to the prior year by approximately $0.06 per share. Second, our FFO is adversely impacted by additional $0.2.5 per share due to the complex application and mechanics of FIN 46, it's required us to consolidate our Mervyn's joint venture with MDT.

Although we earned fees, aggregating $2.5 million from this joint venture, these fees have not been reflected in our FFO or net income, therefore these fees have been reflected as a reduction in basis. As Bill will describe more fully, we are in a stronger financial position and have a significantly greater amount of liquidity than prior years. As you will hear throughout the call, I believe that due to the quality of our real estate, the breadth of our joint venture relationships and the focus of our core capita type of leasing and developing retail real estate, we are well positioned to capture future opportunities.

As I have described many times in the past, with the influx of new tenants and the enclosed mall factor, and growth of new store assets from our traditional community centers tenants, demand for space at sites remains very high. Our portfolio continues to perform well and we are moving forward with several outstanding developments in key markets across the United States.

During the quarter we completed two significant transactions. Our 50/50 joint venture with MDT requires real estate underlying 35 operating stores and we expect we will acquire one of the two remaining sites today and will acquire the last site later in the fourth quarter. The aggregate purchase price of the portfolio was $408 million. This acquisition redeployed the proceeds generated from the sale of our office and industrial portfolio that closed out September 30th.

As we described on our conference call announcing these transactions the annual accretions from the Mervyn's transaction will be largely offset by the sale of the office and industrial portfolio. This recycling of capital however, is very important because it improves our long term position, narrows the focus on our core business of owning and managing high quality retail real estate, and underscores our ability execute creative transactions based on our terms which result in long term value for our share holders.

Before we move on to highlights of this quarter's activities, I would like to spend a moment describing our position relative to the current acquisition and disposition market. Although we have seen pricing at historically high levels for several quarters, strong implodes into the sector, primarily from private sources, continued to drive tremendous demand for our retail product. The rise in interest rates and the threat of future increases in interest rates have not has a significant effect on asset pricing. And we continue to market noncore assets aggressively for sale.

From an acquisition standpoint we continue to review opportunities in the market and if an opportunity is compelling we are well positioned to move quickly. Current market, however, not only are assets fully priced, but buyers are accepting purchase agreements with very [inaudible] conditions. As a consequence, we continue to primarily use our balance sheet and our recycled capital to invest entire yield investments such as development and redevelopment.

We continue to our joint venture relationships as a preferred vehicle to pursue investments and stabilize fully priced assets. As Dan will describe later, development remains the investment vehicle in which we earn our greatest return.

While many developers, particularly on the private side, will pursue projects that yield returns in the single digits, we continue to see opportunities to earn returns that meet our financial threshold of 11%. These tend to be larger projects that need more inhouse expertise to successfully navigate the entitlement process and more financial strength to fund the project through the completion, thereby giving us a significant competitive advantage.

As liquidity in our marketplace contracts, developers who have been able to finance involvement with tests, will lose their ability to compete for these projects putting them in an even better position to evaluate even more opportunities.

At this point I would like to introduce Bill Schafer, our CFO.

Thank you Scott. As I described last quarter our efforts toward managing our balance sheet have been very well received. I would like to echo Scott's comments that from a financial viewpoint, we are well-positioned to accommodate both future growth and future change in our operating environment.

As previously reported, in September, Moody's revised its outlook from stable to positive which follows the rating upgrade we received from Fitch during the second quarter. We visited with Moody's and Standard & Poors during the quarter, presented analysis that proved three key points.

First, for several years we have demonstrated our commitment to maintaining a strong balance sheet. After each of our large acquisitions, JDN in 2003, Benderson in 2004, and CPG in 2005, we have consistently shown our ability to access capital efficiently and at favorable rate, enabling us to maintain a solid balance sheet and increase our overall equity base.

Second, as a result of our efforts to access different sources of capital, including private joint venture equity, we have created a substantial amount of equity on our balance sheet. Today we are a $10 billion company with approximately $5 billion of market equity and $5 billion of debt which is a much stronger position than when we originally received our ratings when we were a $1 billion company with 500 million of equity and 500 million of debt. The rating agencies recognize this improvement in our overall profile and our ability to maintain strong coverage ratios.

The third point we raise with the rating agencies was that during 1990s, we were a pioneer in the use of joint ventures and analysts often allocated a, quote, complexity discount to our stock and their valuation mark. Our join ventures, which are financed with non-REIT course debt are not highly leveraged because our major joint venture partners such as MDT and Prudential, are just as sensitive to leverage as we are.

In fact, the overall loan to value for our jvs is approximately 50%, which is generally in line with that of our consolidated assets. As a result of this capital structure, the inclusion of our pro-rata share of jv debt and various debt ratios does not have a material impact. We also continue to provide separate balance sheets and income statements in our financial agreements for each of our joint ventures.

The rating agencies also recognize that with the elimination of 565 million of secured debt, that encumbered 11 of our 15 Puerto Rican assets, that we have also addressed all major debt maturities for the remainder of 2005 and all of 2006. What remains to be refinanced in 2006 is approximately 36 million of secured mortgage debt on six assets. The debt on these assets is amortizing, resulting in loan to value ratio of approximately 30%. When the mortgages are repaid, we will have unencumbered an additional 125 million of property value in our wholly owned portfolio.

In 2006, we will also focus on refinancing 277 million of jv property level debt that encumbered eight assets. Many of these properties were originally financed when they were in the construction phase or shortly after development was completed. Since then the assets have stabilized and have generated strong financial results.

Therefore, we expect these properties will refinance at lower spreads and generate higher proceeds. For example, we are in the process of refinancing a loan on Phoenix Spectrum, one of Coventry's redevelopment projects.

The original $39 million loan, which was entered into by the prior owner, had an interest rate of LIBOR plus 285 basis points. We have signed a term sheet to refinance the loan at LIBOR plus 70 basis points with the ability to take down an additional 14 million in proceeds once certain redevelopment items have been completed.

While this example reflects improved market conditions, it also reflects the value we have created at the asset level through management and redevelopment. During the first week of October, we issued 350 million of seven-year senior unsecured notes. We saw a window in the market when the seven-year treasuries dropped below 4% offering us an opportunity lock in favorable rates, reduce our variable rate exposure, and extend our maturities.

I would like to point out that although the base rate of the debt is at 5.375%, as a result of the hedges we had in place, the effective yield to maturity is 5.1%. Moreover, I am gratified to report that market demand for our paper was so substantial that the size of this issuance was upsized by 40%.

Although some analysts may think our variable rate debt level is too high, I think it is important that our share holders understand that variable rate debt plays a very important role in maintaining our ability to execute quickly and efficiently, capturing opportunities to buy, sell and refinance without restrictions created by other forms of debt.

As I have said on previous calls, in times when the yield curve is steepening, our variable rate debt may exceed 30% of total debt. When 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. Through the capital markets transactions that I described on this call and last that is exactly what we have done.

Moreover, we continue to maintain the lowest weighted average cost of debt currently at approximately 5.6%, regardless of ratings within the retail REIT sector. We have managed our interest rate risk very effectively. As a result of our efforts to strengthen our balance sheet and tap existing equity and underleveraged assets we currently have over 1 billion of untapped capacity on our various corporate revolvers and our new secured term loan providing us with exceptional liquidity for financial flexibility.

With respect to earnings, in addition to the impact of interest rates and mechanics of FIN 46 as Scott mentioned earlier, the same store NOI increase for the quarter was 2.9%, which brings the year-to-date same store NOI increase to 2.1%.

There were also a few transactional items that merit discussion during the quarter. We sold the remaining portion of our Cityplace asset in Long Beach, California and recognized 3.7 million of FFO through our RVIP joint venture in Coventry with this transaction. Additional gains on sales of land and merchant building during the quarter amounted to only 2 million.

One other item that I would like to point out is that as we described on our last conference call, we completed a large refinancing of assets held within certain joint ventures with DRA. As a result, distributions from our joint venture this quarter were nearly 90 million. This figure is significant considering that our total equity investment in all of our join ventures is less than 300 million as of September 30, 2005.

Although the value created by our join ventures is not always reflected in FFO, the cash returns on our equity investments continue to be substantial and provide significant returns and financial flexibility to our share holders.

At this time, I will turn the call over to Dan Hurwitz.

Thank you, Bill. Good morning. I am pleased to report that leasing and development activity through the third quarter continued at a very aggressive pace. Specifically in regard to leasing, Q3 was extremely active, with 335 leases executed, representing 1.5 million square feet.

The rental spread on new leases was 10.3%, while the renewals were 11% for a blended increase of 10.8%. You will note the spread on new leases is below our normal average and the spread on renewals is above our historic average, resulting in a blended increase consistent with our historic averages.

We have analyzed the numbers and determined that there were a few transactions in each category that skewed the numbers to the positive and negative respectively. We feel the variances are primarily due to the timing of transactions within the quarter. At the conclusion of Q3, the overall DDR portfolio was 96% leased and 95% occupied.

The DDR core portfolio, which excludes the Benderson, CPG and Mervyn's assets, was 95.7% leased, a 30 basis point increase over September 30, 2004. Occupancy within the core portfolio also increased 30 basis points to 94.8% compared to the same period in 2004.

I would like to take a moment to discuss the current economic conditions and the potential impact on our leasing efforts. Since last quarter, we have had approximately 15 portfolio reviews including Target, Kohl's, JCPenney, Bed Bath & Beyond, Cinemark, Dillard's and others, and attended ICSC in Orlando, Chicago, Palm Springs, Ohio, Tennessee, West Virginia, Virginia and others. At each of these opportunities we have discussed the impact of the economy on the retail business. And while there is clearly concern over increased energy prices, particularly headed into the winter season, there is no indication of any pull back for 2006 and 2007 open to buys.

In fact, numerous tenants are speaking very robustly about future growth and commenting that prudent inventory control has helped maintain margin even in situations with nominal comp store growth.

It is also important to note that we made extraordinary progress during the quarter in some of our most challenged properties. In Watertown, South Dakota and Houghton, Michigan, where we have enclosed malls serving very small primary trade areas we have back filled the former Kmart stores with Office Max's new advantage concept and a new Steve & Barry's.

Moreover, in Sault St. Marie, Michigan, where we had struggled with some vacancy in the past, we executed a new 23,000 square foot Dunham's Sporting Goods which will reinvigorate the center and raise occupancy to 100%. While it's nice to talk about the incredible tenant demand for our new development projects, some of our best work is done in the assets that need it the most and Watertown, Houghton, and Sault St. Marie are great examples of that.

Now I liked to spend a few minute ons development. Regarding acquisitions we continue to pursue opportunities for the development pipeline. Our site acquisition team is based in Cleveland and in San Jose, California, covering the eastern and western regions of the country respectively.

Our head of market research based in Cleveland actively vets each site that the term determines has merit. We find Florida and California continue to be white hot markets with high land prices, short due diligence periods, and closings typically within 30 days after the expiration of the due diligence period.

Notwithstanding those constraints we continue to focus on securing opportunities in select markets within Florida and California under terms and conditions that are favorable to DDR. In Florida, we are focused on the greater Miami FT. Lauderdale, Tampa/St. Pete, Jacksonville and Sarasota trade areas. In California we are focused on the broader San Francisco and San Jose trade area, as well as greater Los Angeles market including inland empire, San Bernardino and Riverside counties.

Additionally, we are actively pursuing opportunities in the mid-atlantic and New England regions of the United States. In our wholly owned developments we are completing the last phase of construction of our project in Mt. Laurel, New Jersey. This 715,000 square foot development is anchored by Target, Costco, Bed Bath & Beyond, PetSmart, Golf Galaxy, Sports Authority, DSW, TJ Max and numerous other small shops and restaurants.

In addition, Wegmans Grocery is scheduled to open in the first quarter of 2006. We are also currently under construction on several other wholly owned development products including Mt. Nebo in Pittsburgh, Pennsylvania; Freehold Marketplace,Midtown, Miami; Nampa Gateway in Nampa, Idaho.

Additionally, we're also under construction in several of our join venture development programs including Beaver Creek Commons, Merriam Village in Merriam, Kansas; Westover Marketplace in San Antonio, Texas, Stone Oak in San Antonia, Texas and all theses projects and more specifically the supplemental and have been discussed in greater detail on previous calls.

In the area of redevelopments and expansions our team continues to work on numerous value added developments as well as the remodeling of existing shopping centers within DDR's core portfolio. Within our wholly owned portfolio, we completed the expansion of a former vacant store in Rome, New York to accommodate a new Marshall's. Completed the third and final phase of Nassau Park Pavilion in Princeton, New Jersey, to accommodate a new Babies "R" Us and 40,000 feet of small shops which include West Elm, Yankee Candle and other retailers.

We completed the redemise of the former Wal-Mart in Gaylord, Michigan to accommodate a Big Lots and Dunham's Sporting Goods. Completed the expansion of the existing shopping center, Rio Hondo, in Bayamon, Puerto Rico to accommodate the relocation of Marshall's for a Mega-Marshall's. Further we completed the expansion of the parking deck at Plaza Del Sol in Bayamon, Puerto Rico to accommodate a future Best Buy.

Regarding join venture redevelopments and expansions, we are finalizing the rate sizing of the existing Wal-Mart for a new Wal-Mart Supercenter at Valley [ph] Central, Lancaster, California. We are concluding the relocation and expansion of Harkin's Theater to a new state of the art facility in Phoenix Spectrum in Phoenix, Arizona. We are all finishing the relocation of existing tenants to accommodate the addition of JCPenney as well as Target to that center.

Additionally, we are concluding the relocation of several small shop tenants to accommodate PetSmart and Old Navy at Ward Parkway in Kansas City. These are just a few examples of the important work that occurs at numerous assets across the portfolio that dramatically increase asset value and continue to provide growth opportunities to our retail partners.

Finally, I'd like to take a moment to discuss what we're seeing in the market regarding construction pricing and the impact on development yields. Obviously, elevated oil prices coupled with a variety of natural disasters have put pressure on production of industrial chemicals necessary for key construction materials such as asphalt, roofing materials, insulation, membranes, pvc piping. The short-term impact was price increases in the 20 to 50% range as a result of material shortages.

In addition, pricing for dimensional lumber was up 15% from the end of August the end of September. That being said, we are now starting to see some normalization of material costs through mid-october. Lumber pricing has retreated to pre-hurricane levels. Price of steel starts has declined after a 30% increase over the past 18 months. Plywood and other wood sheeting are stabilized after initial panic buying that created the spikes described earlier. Plywood pricing nationally is currently down 13% in October.

I mention this data to illustrate the fluid nature of the current construction pricing market. The question is obviously what does this mean to DDR and our development projects? In an effort the mitigate construction increases our project management and property management groups have established facilitation programs that includes preferred pricing and rebates for bulk buys.

Moreover, we are approving large prepurchases of commodity materials to take advantage of availability and volume pricing. For example, prior to the commencement of the hurricane season, we purchased 6,000 sheets of plywood for our Miami project that eliminated the inevitable supply problems in August and avoided the cost spike experience after the weather events.

The bottom line is that between pro-active project management, prudent budgeting, conservative contingency line items, and strong tenant demand for base which are driving rents beyond pro-forma assumptions, we expect to maintain our development yields for current projects and for those going forward.

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

Thanks, Dan. As Scott mentioned on the transactions front, we are well positioned to take advantage of high demand for all types of retail product. For example, private investors continue to snap up oneoff deals in [inaudible] markets providing us with ample opportunity to call our portfolio low growth and nonstrategic assets thereby improving the overall performance of our portfolio.

On a year-to-date basis we have sold approximately $17 million of these noncore assets. We have approximately $40 million under contract, expected to close by year end. We also continue to sell our assets out of our RVIP joint venture with Coventry real estate partners and Prudential real estate investors. As Bill mentioned earlier in the call, we completed a sale of Cityplace in Long Beach, California for $73.8 million which equates to a 6.1% stabilized cap rate.

The asset that was sold is anchored by Wal-Mart, Nordstrom Rack, and Ross Dress for Less. In a prior transaction we sold the Albertson's Grocery anchored portion of Cityplace for approximately $16.6 million or a 6.2% cap rate. The sale generated an aggregate merchant building and promote gain of approximately $22 million to the join venture.

In addition, we sold two remaining outlets at that time Plaza at Punta Hills in City of Industry, California. By selling it in several phases we were able to top more local investors and maximize the value of the center.

In total, the sales generated approximately $50 million in proceeds an increase in value of 15% over our original anticipated value as a single asset. We will continue to take advantage of current pricing for west coast assets. The RVIP joint venture will likely sell more of these [inaudible] Pacific assets thereby capturing the spread between the initial investment which was made at a cap rated accessed at 10% and current pricing of 6%.

As we announced last quarter, we are also marketing a portfolio of 40 former Service Merchandise locations that have either been redeveloped or retenanted and are now fully stabilized. This marketing effort which is targeted at the prior investment market, particularly 1031 exchange buyers, takes advantage of currently pricing for smaller income producing assets. We expect to complete the sale of these assets either on an overall portfolio basis or through a series of smaller regional portfolios in the first half of 2006.

Changing gears a bit, I would like to comment on hurricanes Katrina, Rita and Wilma. Our hearts go out to those who are affected. I'm extremely proud of the work some of our local and regional employees performed in the days following Katrina, helping to secure our property in Gulfport, Mississippi and working with FEMA and the National Guard to establish our property as one of their control centers. Fortunately, the Gulfport property was the only one of our properties that sustained noticeable damage to Katrina. Although there was significant roof damage, there was no structural damage to the center.

Some tenants opened within ten days after the storm and within two weeks 40% of the tenants were opened and accommodating the needs of local residents. At this time, approximately 70% of the tenants are open and operating. Tenants who have not opened should open in the near future.

We also have two former Service Merchandise properties located in Baton Rouge and Metairie, Louisiana in which we own a 25% interest. The Baton Rouge property had no damage and the Metairie property had only a small amount of damage. Because of widespread power outages, however, the Metairie property, which is occupied by Babies "R" Us, PetSmart and Office Depot was closed for approximately two weeks following the storm.

With respect to hurricane Rita, our damage was limbed to a form Service Merchandise location in Beaumont, Texas. Because this is a lease hold interest, the landlord is responsible for all repairs to the building. Our damage from hurricane Wilma was all limited. Our Naples, Florida property in which we own a 14.5% interest, and our wholly owned property in Boynton Beach, Florida sustained little damage.

Within our portfolio former Service Merchandise properties our Pembroke Pines, Florida assets sustained minimal property damage, however the landscaping was lost. Lastly, minimal damage to a parking structure at our Miami, Florida, development project was sustained and is not anticipated to cause a delay in completion of the project.

We will incur certain expenses relating to property deductibles and uninsured expenses such as landscaping and in some cases we are still working with our insurance providers to estimate damages. Because of our property and business interruption insurance, however, we do not expect our total out of pocket charges to have a significant effect on corporate operations.

I would also like to take moment to highlight a few important organizational changes. In may 2005, as you know, we promoted Dan Hurwitz to Senior Executive Vice President and Chief Investment Officer. Earlier this month, we promoted Robin Walker-Gibbons to Executive Vice President of Leasing, reporting to Dan. The three regional senior vice presidents of leasing along with the director of leasing for our Puerto Rico portfolio will report to Robin.

Robin has been responsible for the southeast region for ten years and had great success in integrating the JDN assets into our portfolio and increasing the occupancy of JDN's southeastern portfolio. Robin's promotion will reduce Dan's direct reports to a much more manageable level. Dan will continue to be responsible for the revenue side of the business with the EVP of Leasing and Development reporting to him.

This reorganization will allow Dan to focus on major tenant relationships, investment opportunities and strategic developments and to work with Scott and me on the overall management of our business. Our success has and will continue to depend on a quality of our physical assets and our people. We will continue the process evaluating our organizational structure and people on a regular basis as we work to margins to enhance share holder value.

I would also like to mention we have hired Nan Zieleniec as Senior Vice President of Human Resources. Nan has more than 20 years of HR experience including 15 in the real estate industry. Although we have already made significant strides in the areas of employee attraction and retention, management development and succession planning, Nan will bring to the table new and innovative ideas about how we can better position ourselves on the human capital side of the business.

Part of Nan's responsibilities will be to work with Dan and me in overseeing our highly successful management training program. As many of you know, we have already cultivated an outstanding group of individuals from this program who are making significant contributions to our development and leasing departments.

To date we have graduated seven participants and currently have five in the program including four individuals who started their 18 month rotation in late summer. With these organizational changes and initiatives, I certainly agree with Scott that we are well positioned from a human capital standpoint to continue to differentiate ourselves from our peers. At this point, I'll turn the call back over to Scott.

Thank you, David. With respect to guidance for year end we are narrowing our guidance to an estimated range of $3.18 to $3.22 per share. Reduction of the high end of our previous guidance of $3.25 per share is primarily due to the fact that last quarter we could not determine the exact timing of the sale of the Service Merchandise portfolio. At this point we anticipate it will close the first half of 2006 and nothing from that transaction is currently forecast in 2005.

In addition, as Bill described, our prior guidance included a $2.5 million fee that was earned and paid in conjunction with our acquisition from Mervyn's. This is also reflected in our earnings due to consolidation under FIN 46.

Looking forward to 2006, we're introducing an FFO estimate of a range between $3.36 a share and $3.46 a share. This estimate reflects merchant building gains and land sales consistent with the amounts earned in 2005. Same store growth of 2.5% an average one-month LIBOR rate of 4.375% and approximately $100 million of incremental investments during the year known as dispositions.

[inaudible] below early consensus estimates by several analysts, we believe this range better reflects the realities of a rising interest rate environment and our internal discipline in maintaining a consistent contribution of transactional income as a percentage of our earnings.

This point, I'd be happy to entertain your questions.

Ladies and gentlemen, if you wish to ask a question, press star followed by 1 on your touch tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by 2. You may begin by pressing star 1 to ask your questions. Your first question comes from the line of Michael Bilerman from Citigroup. You may proceed.

Good morning, guys.

Morning.

Scott, on guidance for next year you said you were expecting flat total gaines into '06?

Yes, that's correct.

Okay. Where is going to be the bulk of those gains? Do you have anything that you've already targeted to sell? It is a big number.

Well, it really isn't a big number, Michael, in terms of the volume of transactions. It is -- the number is roughly $0.30 to $0.40 a share for the year. That amount today can be achieved on a sale of, you know, either one large project of about $40, $50 million in costs or several smaller projects of similar, you know, aggregate size. The spread between the cost of our developments and value on completion, it's almost 100% profit over cost. So it really isn't season very difficult.

In fact we have available to us more than double, almost triple that amount of merchant building gains if we wanted to maximize that number. But, that goes back to my comment that we'd like to maintain some discipline so that we don't set the bar too high for the following year.

And then just a question on retailer real estate and following the Mervyn's transaction and now the Shopco deal. Can you just update us where you are with Shopco. Sun went hard on the transaction. And where you feel that you're going to be in there.

Well, all I can say about that Michael is that sun capital entered into a merger agreement on behalf of the group that does not include us. We are in a conversations with that group. With respect to the purchase of the real estate assets. At this point in time, I wouldn't want to predict whether those conversations will result in a transaction or not.

How do you think about what's changed over the last six months? This deal came out earlier this year, March, April. What's changed in the retailer environment that would make you feel comfortable going after the real estate?

Well, I think I have been fairly outspoken on previous conference calls about our attitude with respect to the transactions. And with respect to purchasing retailers, you know that are not in bankruptcy, we have been unwilling, you know, to play on the operating side of the business as a significant component of the risk of the investment.

The first time we looked at the transaction, that would have been the scenario. We would have been on all sides of the deal. In this particular situation, you know, we've been able to isolate our participate to only the real estate. So if there is a transaction, it will avoid any participation by DDR and operating risk at the retailer level, which we think is the right place to play. We just didn't -- as things transpired that became available as an opportunity. Didn't exist several months ago.

Then just something on the income statement. Lease term fees and bankruptcy settlements of 3.6 million, was that term fees or bankruptcy?

Primarily termination fees.

You expecting any more of that coming in the fourth quarter?

Not of any real significance. There's always opportunity in that area, but at this point in time I don't think there's any real large ones that I anticipate.

It's not part of our guidance, Michael.

Is there any more gains in your guidance for the fourth quarter?

There's probably a nominal amount, probably less than $1 million.

Nothing significant.

Okay great. Thank you, guys.

and your next question comes from the line of Chris Capolongo with Deutsche Bank. You may proceed.

Good morning.

Morning.

I wonder if we can infer anything from the fact that you obtained a five-year loan for the Mervyn's assets? Are the leases ten years?

Leases are 15 years, but five-year fixed rate financing has been consistent with virtually all the MDT transactions.

Okay.

Doesn't imply anything about the holding period. In fact, nearly all of our investments and joint ventures with MDT are really meant to be held almost in perpetuity.

All right. Thanks.

Your next question comes from the line of Alexander Goldfarb with Lehman Brothers. You may proceed.

Morning. Just going back to Michael's question on the gains for next year for '06. You said the total gains would be -- if I understood correctly -- would be flat in '06 versus '05 those gains would include everything from land sales to merch builds to promotes, all that good stuff?

Yes.

Okay. Just wanted to clarify that. Okay. The two -- I realize they're small but the two Mervyn's that were referenced in the press release that you are acquiring for your own account, are those located in malls or are those part of shopping centers?

There's two centers in question, I think one of them is a center -- is in a shopping center we own, and the other one is in a mall that was being really redeveloped into sort of a [inaudible]

Okay. So, in both centers, you'll be owning a box within someone else's center?

That's correct.

Perfect.

No.

One's at ours. Mervyn's that we're acquiring is an accommodation to us as part of this overall transaction. They happen to have a space in a shopping center we own in Salt Lake City that we wanted to recapture. And but for this transaction we might not have had an opportunity. We ask for that space as part of the overall transaction to facilitate a redevelopment of that property.

Okay. Next, either Bill or whoever wants to take this. On financing, obviously you guys seem to be fine in getting financing on unsecured side. Are you seeing any changes in what the banks are willing to lend the private guys? Or are the banks just willing to commit ever more capital to retail development?

I can answer that. I think that banks are still overly aggressive in our opinion. But I think that's going to change pretty quickly.

You're not starring to see a tightening of lending standards?

Not really. There still seems to be pretty aggressive both in the appraised values that they're applying to properties and the funding levels that they're willing to provide.

Okay. My final question is on the joint ventures. Obviously there's a good relationship with the Australians. Do you see any more jv's with the Kuwaitis or pursuing other joint venture partners, or should we look for you guys to primarily focus with MDT?

MDT is our join venture partner of choice because it's an infinite life entity and it avoids having to deal with the exit several years down the road. However, we have several joint venture relationships that have worked very well in the past. Not just with the Kuwaitis but with DRA Advisers, with Prudential, Ohio State Teachers. We have a pretty long list of people we worked with. I think they're all happy to work with us more in the future.

We also have a long list of investors in our Coventry fund who we obviously have relationships with individually. Any one of them is a potentially player on a particular transaction. So I think it really depends on what opportunities present themselves and what capital sources are best positioned to take advantage of those opportunities.

You know, we have a lot of friends out there that have worked with us and know our capabilities and are comfortable with our reporting. When we need to pull one of those levers, I think we can. Having said that, you know, we're not out there looking for new relationships. I think we're pretty full in terms of our dance card at the moment.

Okay. Thank you.

As a reminder, ladies and gentlemen, if you wish to ask your question, press star 1. Your next question will come from the line of Jim Sullivan for Prudential Equity Group. You may proceed.

Thank you. Good morning. Scott, couple questions on the Mervyn's transaction. The lease structure here is unusual. It's kind of a traditional net lease structure. And the description of the transaction was silent on the issue of sublease. In the event that Mervyn's were to decide that it would be profitable to sublease the space, does DDR or does the jv retain the upside in that or permission to approve the sublease and share in the upside or is it all going to be with Mervyn's?

Jim, there are specific requirements that Mervyn's would have to adhere to in order to sublease the space. Without our consent. And those requirements obviously are financial and operational. If they're able to do and meet those requirements, then they are entitled to sublease the space without our consent and if there is upside, they're entitled to keep the upside. If they are not able to meet that threshold, then they need to come to us for our consent and I would imagine we'd get into a discussion if there was upside, exactly how that would be split up.

Having said that, you know, I think it's important to note that the lease, has a 2% bump on an annual basis. So lot of that upside would be available for a sublease in the primelease. Over time, you know, those rents get pretty high and those bumps continue in the option periods. So, you know, Mervyn's would have to get a pretty strong deal from a subtenant to make any significant spread over the long term. There might be -- there may be a spread in the first few years. Long-term I think that it's a very favorable lease towards the landlord in terms of rental growth.

The secondly, on that transaction, the price per foot is fairly attractive, given the location of the assets. And in terms of sometimes other types of terminal valuations that could be achieved on the end of Mervyn's use of the space other than a sublease. Would the value of the real estate revert to the jv in that case or work as a sublease?

That's correct.

On the issue of FIN 46 and the application to the transaction here, was the -- was the determination that it had to be consolidated primarily the result of the ownership interest, or was there some other feature of the management contracts here that caused that to be the determination?

As I understand it, Jim, there were three things. One was a 50/50 joint venture in which we also had management rights on the other side of the transaction to our roll in MDT. Coupled with the fact that we had significant fees in addition to our 50% participation. So, between our control of the venture, coupled with the fact that we had the primary economic benefits from the venture, the auditors determined that proper application of FIN 46 was to consolidate.

Okay. Shifting over. Dan, you talked a little bit about Office Max and their new format in your prepared comments. They remain, of course arch very important tenant for DDR. Is there -- does this new format entail a change in their footprint, number one? And number two, are they going to change all of their stores fairly rapidly? And who will pay the cost for doing that?

Well, the new format really does create an awful lot of flexibility. And one of the things that we like to see is is a reduction in the size of the square footage, which this does. They are much more open the graphics are much more exciting and the merchandising is much stronger. They are going convert their stores.

There is a rollout that I think they will be presenting to the market in short order as to what the schedule will be. They have not come to us and asked us to contribute to the rollout. Nor would we be inclined to do so, quite Frankly, unless there was some other consideration that they were willing to give us to make that kind of investment.

It's probably, if you have an opportunity to see the new store, it's probably the biggest turn around I have seen in a long time just in the internal makeup of a retailer. Store just looks crisp. It's clean. And, you know, the one that we have here in Cleveland that they opened in basically as a model is performing extremely well from what they tell us.

So, we like to see retailers reinvent themselves because they -- retailers do have a tendency to get stale sometimes. Office Max is important to our portfolio. We're very pleased with the steps that they've taken.

Okay. And the final question from me, Dan. Could you just update us on what type of tenant sales trends you're seeing in the lifestyle centers.

Our tenant sales are attracting very positively in our more stable assets, for example, like Leewood, we're seeing sales increases close to double digits. Not quite, but in the 7, 8, 9% range. In centers like La Salle, Colorado, and in Littleton, we really have -- and in Aspen Grove, we've been seeing double digit sales increases pretty consistently.

Interestingly enough, in Aspen Grove is one of the test centers where Gap rolled out their new prototype. Sales increases on a per square foot basis, because of that, have been quite dramatic. The Gap store has been performing extremely well. So that could be pushing that number up. But overall, the lifestyle center, tenant demand is very high and sales productivities ranging between that 9% and probably 15% increases.

Okay. Very good. Thank you.

And your next question comes from the line of Michael Mueller with JP Morgan. You may proceed.

Hi. Few questions. First of all, the moving parts that you've outlined for '06 seems to be keeping the transactional income flat, actually may be more conservative, dispositions more aggressive. You talked about the pending refinancing. If you're looking at those moving parts, do you think the growth relative where it has been is driven more by one of those issues or is it just kind of the whole mix thrown together?

Well, Michael, I think what we've said historically is that, you know, on an internally funded model, you know, combination of internal growth, reinvestment of retained earnings, we should generate about 6 to 8% per year, you know, pretty much organically. Assuming a couple things. Occupancy rates remain constant and interest rates remain constant. This particular budget forecast does not assume that interest rates will be constant.

Okay.

So, you know, frankly, we're going to have to overcome that in other ways. And, the way I think we're going to overcome it, is our forecast on the internal growth side is better than it has been traditionally.

As you pointed out, you know, transactional income is flat, not a hell of a lot of dispositions, acquisitions rather, that are impacting earnings for the year. I guess we're really saying, we start out in a hole because we have an adverse impact from rising interest rates and the way we overcome that isn't by, you know, playing a lot of game, by accelerating transactional income, but rather by, you know, rolling up our sleeves and doing a good job of re-leasing space and increasing occupancy.

That's fair. Do you have an idea near term disposition pipeline you're looking at, is there a way to quantify that what the early REIT could be over the next 12 months?

When you throw the merchant building gain aspect into it, you're probably looking at little over $200 million.

That includes centers that will be sold and generating fees?

And joint venture activity and so forth.

Okay. Last question. The FIN 46 issue that you mentioned impacting '05, is that carrying through to '06 as well?

It does in the future, increases earnings going forward because we reduced the basis and transaction. So the -- you know, we get a better return on investment going forward.

It will not impact the operational side of that transaction because what will happen like management fees that we earn, it won't necessarily show up in the management fee line item but the minority interest expense will be adjusted to reflect those expenses to our minority partner which really increases our return.

Okay. Great. Thanks.

Your next question comes from the line of Jeff Donnelly with Wachovia Securities. You may proceed.

Just a question or two. Most of mine have been answered. I guess this one's for Dan. Landlords have been using their leverage to ramp rent expense a percentage of their revenues for retailers these past few years. I think that's going work to a point as long as retail sales keep increasing.

And now it's like there's been so much talk about consumer expected pressure this winner as part of energy prices, etc., I was wondering if you could tell me what your tenants are thinking. Are they seeing signs of weakness in sales? Are they telling you they expect weakness? And do you expect to hear maybe a different tone from retailers at ICSC in New York this December or even spring .06.

What we're hearing for the most part, Jeff, is that if there's any -- if there's any hesitation it's on the purchase of inventory, not the opening of new stores. What we're hearing from retailers is that they are being very conservative in their retail open-to-buys. And trying to maintain their inventory levels in anticipating what could be a tighter holiday season.

As a result, they will be able to maintain their margin and not be overinventoried and they can reduce taking markdowns. So, I think the gut feeling you have for the retailers is that dealing with the perceived pressure on the consumer on the operational side, not on the real estate side, what that does in fact is it puts a little more pressure on the real estate department to get more stores open. Because the incremental profit that flows from a new store exceeds the existing stores by a significant amount.

So, we are -- I don't expect to see a big pull back or any pull back in New York. In fact, last year in New York was we had a similar conversation. Gas prices last year were just over 2 bucks around New York. Everyone said the consumer was going to pull back. We are really not that far off if you look at where we were at this point last year.

So, we don't expect to see any pull back and you might start to see some expectations for comp store sales increases curtailed. Again, as long as those are in the business plan, margin should be maintained and the retailer should be healthy.

You kind of expect that almost new unit growth restores effectively runs contrary to where soft same store profitability is going?

It can for a well capitalized company, that's correct.

Just one last question. I was curious about Gander [ph] Mountain and your exposure there. I was hearing from our own retailing analysts that that is a company that might not be among the living in the future. I was wondering what your exposure was there. Is there a real is a real estate investment opportunity there as well?

I don't know exactly what our exposure is. It certainly nominal. We have not heard what you heard about Gander Mountain. I wouldn't want to comment on that. I can say they are looking for new locations. We have talked to them about some locations. They have a very specific niche that they like to serve, and in the markets where they serve, they do -- are very productive on a sales per square foot basis.

Great. Thanks.

As a reminder, ladies and gentlemen, if you wish to register your question, press star 1. Your next question comes from the line of Matt Ostrower. Please proceed.

As a follow-up on one of the questions from before. I can't understand -- I know it's consistent with your other Benderson deals but why wouldn't Benderson and you want to match debt maturity with lease maturity on the Mervyn's deal if you're not planning on selling anything?

It's not Benderson, it's MDT.

I'm sorry, I meant to say MDT, I apologize.

Very simple reason is because MDT is very much driven by short-term current returns for their share holders and terming out the debt longer would have put pressure on those returns. And they don't want to do that.

Isn't the yield curve basically flat at this point?

Not really. I mean, spreads are wider and the rates were a little wider when we did the financing. We did the financing a little while ago. It was -- testifyn't steep, but over in Australia, 10 point basis point is very meaningful.

I heard your comments on acquisitions and it sounded to me that your message was look, if rates go up here a bit, we could be faced with a much more attractive acquisitions environment. Is it fair for me to infer from that -- I know you've given conservative acquisition guidance in your '06 numbers. But just in terms of the general meaning here. Are you basically -- it's been a tough acquisition environment for awhile. You seem to keep finding deals. Are you saying you feel like you may be reaching the end of that line given how tige the markets are unless something happens to dislocate prices a little bit?

I don't think that's what I'm saying, Matt. I'm just saying I'm not willing to guide to provide earnings guidance based on the income. I like to provide earnings guidance based on what I know what we can achieve based on what's available to us today and not go out there and tell us we're going to do $3.75 because we're going to go find a billion dollar acquisition that we haven't identified.

Are you saying that -- let me ask it differently. In terms of what you're looking at and the volume of deals that you are assessing at any given point in time, is it sort of lower today than it's been the last six months or sit sort of a similar deal flow?

I think that the level of deal flow is large as it's ever been. In some cases larger. Deals are tougher. We're seeing a lot more deals because obviously, many sellers want to take advantage of the high priced environment on their assets. You know, having said that, in the old days when we used to get packages on individual assets for sale, with pretty pictures we used to really study them. Today we basically don't even entertain them.

Just because of the initial pricing?

We just know the pricing is going to be prohibitive and it isn't really worth our effort to do the diligence, knowing that somebody's going to reach subsix cap rate to buy an asset that we would consider to be a minus.

Right.

So we don't -- we concentrate more on the larger portfolio deals. Ones where there isn't as much competition for. Also the deals where we really have competitive advantage is really in two areas. Deals where there requires a significant amount of development or redevelopment. You know, and deals that require a significant amount of leasing risk in terms of releasing on the retailers like Mervyn's and Shopco and so forth.

Those transactions I think really there's only two or three companies in the entire country that could even consider them. So, we look at those transactions very closely. And we're also starting to look at some international opportunities as many of our peers have.

Right. What other countries are you looking at?

To date most of our activity has been analyzing opportunities in China and Mexico.

Okay. And then I guess finally, could you give us a little bit of guidance, are there any material changes to G&A going forward in '05 or '06 when you look at our assumptions?

No. G&A should continue to run at the 14 million to 14.5 million. Next year it will go up just through normal reasons of increasing staff and inflation and so forth. Nothing significant or dramatic.

As a matter of fact, the percentage of G&A represents total revenues I was just looking at that over the last several years has gone from 5.3 1/2 to 4.9 into the nine month period. So far this year it's 4.56. And next year should be in the 4.5 to 4.6, 4.7 range. Pretty much the same.

Okay. Great. Thank you.

As a reminder, ladies and gentlemen, to register your questions, press star one. And at this time, this does conclude our q&a session. You may all disconnect and have a wonderful day.

Thank you.