Site Centers Corp (SITC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Developers Diversified Realty earnings conference call. (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 conference, Ms. Michelle Dawson. Please proceed.

Good morning and thanks for joining our fourth quarter conference call. I am 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 that such statements are based upon reasonable assumptions, you should understand that those statements are subject to risks and uncertainties, and that actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the Management's Discussion and Analysis portion of our Form 10-K for the year ended December 31, 2004 and filed with the SEC.

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

Good morning everybody. I'm pleased to report this quarter's results. We earned $0.74 per share in FFO compared to $0.69 per share in FFO for the same period in 2004, reflecting growth of 7.2% over the fourth quarter of 2004. This growth was primarily attributable to the continued improvement in our occupancy and rental rates, as well as to our portfolio acquisition in Puerto Rico earlier this year.

I think it is particularly important to recognize that this growth was also achieved despite nearly a 200 basis point increase in short-term interest rates, which reduced comparable earnings for the quarter by more than $0.05, and reduced comparable earnings for the year by more than $0.18 per share.

2005 has been an exceptional year in terms of opportunities for expansion of our operating platform, outstanding tenant demand for space, and strengthening fundamentals. Our primary focus beyond the performance of our core portfolio has been on deepening our portfolio of developments and redevelopments. Remarkably, we have been able to expand our near-term investment opportunities in this area of focus to nearly $1.7 billion of projects, while maintaining our leveraged investment returns in excess of 11% per annum and stabilization.

In light of the phenomenal value creation opportunity that this affords our Company, we will continue to aggressively pursue additional development opportunities. And we will continue to focus on growing our staffing and expanding our capabilities in our development department where we already maintain a leadership position in our industry.

That being said, as this report closes the book on our 2005 results, I think it would be appropriate to discuss the two major portfolio integrations that occurred during the year, the Benderson portfolio and the Puerto Rico portfolio, as those integrations were a major success story for our Company in 2005.

Our portfolio in Puerto Rico has outperformed our expectations. Although the portfolio has remained approximately 98% leased since we acquired it, for those tenants that expired during the year the releasing spreads were outstanding. Excluding seasonal tenants, carts, and kiosks, rents on new leases increased on average by over 30%, which also reflects the rate on renewals, since options are not granted by landlords on the island.

Also, since landlords do not typically contribute to tenant improvements in Puerto Rico, you should note that these rental increases reflect pure market demand for high-quality retail space without incremental capital expenditure. We expect base rents in this portfolio to grow by nearly 3.5% in 2006. And we expect the portfolio to generate $6 million in ancillary income.

In addition, sales at the Puerto Rico portfolio also displayed solid gains, growing by 4.5% as compared -- as comparable in line sales continued to track portfolio-wide over $430 per square foot. With all of this positive momentum, our acquisitions triggered an increased investor interest in the Puerto Rican market, creating additional cap rate compression for the assets that we own.

Our Benderson portfolio is also performing very well. Tenant demand for space in upstate New York is strong. Many of our key tenants including Target, Wal-Mart, Lowe's, Kohl’s, Best Buy, Circuit City, TJX, Old Navy, OfficeMax and Ross Dress for Less are interested in expanding into these markets.

As a result of the concentrated leasing effort and strong tenant interest, since acquiring the portfolio in 2004 we have been able to increase our leased rates in the northern region by over 230 basis points to 96.2%, which is now in line with our core portfolio. Leasing spreads in this region for new leases and renewals have averaged 18%, and base rents are expected to increase by approximately 2.5% in 2006. Both of these metrics are also consistent with our overall portfolio.

Moreover, we have nine redevelopments planned or in progress within the northern region of the Benderson portfolio, generating additional opportunities to maximize revenue growth.

I would also like to provide a few year-end statistics relating to our transaction activity to give you a sense of the overall (indiscernible) in pricing. In total during 2005 we sold nearly $600 million of wholly-owned and joint venture assets, generating significant funds with which to reinvest. Aggregate sales generated over $115 million in gains to Developers Diversified, of which approximately $65 million were not included in FFO. I think it is important to note that including all gains on sales, we generated nearly $200 million in retained earnings in 2005.

As I look forward to 2006, I anticipate continued stability in our portfolio, driven by a growing roster of tenants seeking new locations in open-air shopping centers. I expect that the acquisition environment will remain extremely competitive, and the cap rates will reflect this remarkable demand.

I do anticipate however, that capital will become less available to the real estate sector in 2006, particularly from regional commercial banks who are coming under serious scrutiny by federal bank regulators who have publicly raised concerns over overexposure by these banks to real estate risk and for overly aggressive underwriting standards. We expect that this will ultimately cause a bifurcation in the market between those investors with strong balance sheets and strong access to equity capital and those without. As private real estate companies find themselves to be capital constrained in the future, we expect to see a surge in new investment opportunities.

At this point I would like to turn the call over to Bill Schafer, our CFO.

In addition to Scott's comments regarding our fourth quarter financial results, I would like to add a few comments regarding our transactional income items. In order to provide greater transparency we have provided a new table in our quarterly financial supplement that provides comparable data regarding the sources and amounts of our transactional income, as well as an information map indicating how and where these items flow through our financial statements.

You'll see that during the fourth quarter we recognized a joint venture merchant building gain of approximately $2 million related to the sale of our San Ysidro, California asset, which was a former factory outlet center that we redeveloped. We also recognized approximately $1 million of other merchant building gains relating to the lease up of former master lease space associated with prior asset sales.

I'm also pleased to point out that we have added a new disclosure to our financial supplement by providing a joint venture balance sheet and income statement reflecting our proportionate share of ownership.

Turning to capital markets, as I have said discussed during the last few conference calls, while our acquisition of assets in Puerto Rico and our Mervyns acquisition may have caused short-term fluctuations in our balance sheet, during 2005 we focused inward to improve our capital structure and made significant strides towards improving our financial position. In the public debt arena we took advantage of the favorable pricing environment and issued a total of $350 million of seven-year unsecured debt during the fourth quarter. The proceeds were used to repay balances on our revolver. At year end we had only $150 million outstanding on our $1 billion senior unsecured facility.

With respect to our variable rate debt exposure, you may recall that after our acquisition of the portfolio in Puerto Rico our variable rate debt rose to 37%, and then declined to approximately 28% by the end of the second quarter. I am delighted to report that as of year-end 2005 we reduced our variable rate debt to approximately 20%. This level is consistent with year-end 2004, demonstrating that although large transactions may create short-term changes in our balance sheet, we have continued to demonstrate our ability to make adjustments to our capital structure to return the balance sheet to its original levels.

Mortgage maturities and optional prepayments present an opportunity for us to reduce capital costs. In late 2005 and 2006 approximately $46 million of mortgage debt with a weighted average interest rate of 7.5% has or will be paid off. These loan payoffs will unencumber roughly $182 million of real estate in our wholly-owned portfolio, and reduce our cost of capital by approximately 220 basis points at today's LIBOR rate.

In 2005 we created a $220 million term loan that is secured by our equity interest in assets already encumbered by low leverage first mortgage debt. This term loan provides the Company with low-cost capital without the need to mortgage additional assets. Using loan proceeds to pay down our revolver improves our unencumbered asset ratios, which are important to our corporate bondholders and rating agencies. It also provides us with the additional liquidity in our revolver to take advantage of future business opportunities. We expect to expand this facility to $400 million in 2006.

In addition to our consolidated debt, we are very proactive with the capital in our joint ventures. In 2005 we refinanced several mortgages resulting in meaningful incremental proceeds and lower interest rates. In our Community Centers V joint venture with DRA Advisers we reduced the interest rate by 120 basis points, in addition to raising an additional $131 million of debt proceeds, of which 50% was distributed back to DDR.

Our MDT revolving credit facility was enhanced to provide $25 million of incremental borrowing capacity. We reduced the pricing by 37.5 basis points and improved covenants. We also refinanced our RVIP VIII joint venture debt, reducing pricing by 75 basis points. We will continue to be as proactive with our capital and joint ventures as we are for our consolidated portfolio.

I'm gratified that our ability to successfully deliver on our stated goals was recognized by the rating agencies during 2005, resulting in an upgrade from Fitch and an outlook improvement from Moody's.

At this time I would like to turn the call over to Dan.

I'm pleased report that Q4 2005 was another stellar quarter for our leasing and development programs. Specifically in regard to the quarter from a leasing perspective, we executed 283 leases representing 1.4 million square feet of retail space. New lease spreads for the quarter stood at 29.2%, while renewals were at 9.4% for a blended spread of 14.2%.

For the year our leasing group executed 494 new leases, consisting of over 3 million square feet with an average increase in rental rate of 21.1%. In addition, we executed 716 renewals consisting of another 3 million square feet with an average increase in rental rate of 8.9%. All told 2005 produced 1,210 leasing deals, totaling approximately 6 million square feet, with a blended average rental increase of 12%.

For the DDR core portfolio the Q4 lease rate stood at 96.4% while occupancy rose to 95.1%. These levels represent a 100 basis point increase in lease rate and 50 basis point increase in occupancy over the comparable quarter in the prior year. Moreover, these levels also represent a 70 basis point increase in lease rate and 30 basis point increase in occupancy over last quarter.

The overall portfolio, including non-comp acquisitions stands at 96.4% leased and 95.3% occupied. As you can see from the numbers, and based on Scott’s earlier comments, there's hardly any disparity between the comp and non-comp figures, indicating that we have successfully integrated the former JDN and Benderson portfolios that were below our average leased and occupancy rate at acquisition, into our national leasing platform and raised the metrics to comparable levels with the DDR core.

Of specific interest in regard to 2005 are those assets within our portfolio where broad participation in sales reporting is a strong indicator of overall health. Scott mentioned the extremely positive portfolio metrics from the Puerto Rico assets earlier, and in addition, specifically in regard to our Lifestyle portfolio, average sales per square foot rose 8% in 2005, with Paseo Colorado and Pasadena, California leading the way with a 14.5% increase. Deer Park Town Center in metro Chicago, Town Center Plaza in metro Kansas City, and Aspen Grove in metro Denver all posted solid sales gains ranging from 4 to 12.5%. These results raised the overall sales productivity of the Lifestyle portfolio to approximately $400 per square foot.

Another area of strong performance in 2005 was our ancillary income program, which continues to be the industry leader in the field amongst open-air companies. Ancillary income on a gross basis exceeded $14.6 million in total revenue, and exceeded the budget in Puerto Rico by $1.4 million alone. This area continues to show dramatic growth, and we expect the trend to continue in 2006. To highlight the growth in this area revenue has climbed from $650,000 in 2000 to $14.6 million in 2005.

As you can see, between the core results, our specialty and lifestyle center results, and ancillary income hitting on all cylinders, the fundamental revenue business within the DDR core business model has never been better. When coupled with our development pipeline, which I will discuss in a moment, the prospect for solid fundamentals and future growth remains strong.

Generally, in regard to leasing environment, one area that we're watching very closely is the rush of public to private, or private to private, transactions that have occurred over the last 12 months as a result of available private equity funds to facilitate such transactions for retailers.

For example, Linens ‘n Things, Mervyns, ShopKo, Toys R Us, [Bobscods], Goody's, Burlington Coat, Albertsons, Nieman Marcus, Media Play, Anna's Linens are all tenants that have either recapitalized or announced a recapitalization of their companies through a public-private transaction, or avoiding the public markets altogether and recapitalizing in a private equity transaction. Obviously, there are pluses and minuses for a landlord in such transactions, but a significant issue would be the loss of transparency enjoyed by landlords in regard to tenants that were once public but now private.

Fortunately, for Developers Diversified due to our size, our platform, and overall importance to many of these tenants, we can mitigate that risk via access to information through our national account program. However, as an industry this is a trend we must continue to watch, as many private retailers view privatization as a competitive advantage to their peers in the public sector, the impact of which has yet to be seen.

Regarding development, our acquisitions and site selection teams based in Cleveland and San Jose, respectively, continue to vet opportunities with our internal market research department to determine which locations are deserving of our time and capital. To that end, as Scott mentioned, our pipeline has now grown to over $1.7 billion of projects representing nearly 18 million square feet.

In regard to wholly-owned projects, we completed the last phase of construction on our 715,000 square foot development in Mount Laurel, New Jersey, anchored by Target, Costco and Wegmans. Moreover, we're proceeding with the construction on time and on budget for our projects in Mount Nebo in Pittsburgh, Freehold Marketplace in Freehold, New Jersey, which you'll note was moved into the substantially complete category within our supplemental, the Shops at Fox River in McHenry, Illinois, and Nampa Gateway Center in Nampa, Idaho. We're also in the final stages of public entitlements in Horseheads, New York, Seabrook, New Hampshire, Homestead, Florida and Gilford, Connecticut, all of which we expect to have under construction in 2006.

I'm also pleased to report that we released our first group of tenant names for our Midtown Miami project, which includes Target, Ross Dress for Less, Circuit City, Linens ‘n Things, OfficeMax, PETsMART and West Elm, which will be the first West Elm in southern Florida. In addition, we are currently redesigning the third phase of this project to accommodate strong tenant demand. Phases one and two of Midtown Miami will open in October and November of 2006.

In regard to our joint venture development program, we are now under construction with phase two of Apex, North Carolina representing 595,000 square feet of retail space; Merriam, Kansas at 308,000 square feet; Westover Marketplace in San Antonio, which was also substantially completed in Q4; and Stone Oak in San Antonio at 665,000 square feet.

DDR's wholly-owned expansion and redevelopment program is also very active in repositioning many of DDR's assets by either replacing vacant anchors with new tenancy or expanding the shopping center to accommodate increased tenant demand. Within the wholly-owned portfolio we completed the expansion of a former vacant store in Rome, New York to accommodate a new Marshalls, completed the third and final phase of our 1 million square foot project in Princeton, New Jersey by adding Babies R Us and West Elm's first store in the state of New Jersey, as well as several other small shop tenants such as Yankee Candle.

We completed the demise of the former Wal-Mart in Gaylord, Michigan to accommodate Big Lots and Dunham’s Sports. Completed the expansion of Rio Hondo in Puerto Rico to add Mega Marshalls and several small shops. And completed the expansion of the parking deck at Plaza Del Sol to accommodate a future junior anchor expansion. In addition, we continued to make great strides within our Coventry portfolio, which includes the current repositioning of major projects in Buena Park, California, Kansas City, Phoenix, Lancaster, California and Kirkland, Washington.

It is important to note that none of these projects described would be possible without strong tenant demand, and an effective site selection discipline that is consistent with the needs of our tenant community. Moreover, in spite of increased cost and fluctuations within the supply -- product supply chain of construction materials, we have been able to maintain our 11% cash on cost yield requirements by being prudent in our selection of locations, understanding the markets, and driving tenant transactions to the appropriate economic levels, while staying disciplined within our budgeting and planning, which includes having adequate contingencies to handle unforeseen price breaks.

With that I would like turn the call over to David.

In addition to Scott's comments regarding 2005 transactions, I would also like to highlight two transactions. First, our RVIP joint venture with Coventry Real Estate Partners and Prudential Real Estate Investors sold one asset in San Ysidro, California for $42.5 million. When we acquired San Ysidro Village in 2001 the property, which is located along Interstate 5 just north of the U.S. Mexico border, was tenanted as an outlet mall. However, we thought that the center could perform much better as a traditional community center. Therefore, we raised several in line bays and rebuilt the site with boxes for Marshalls and Ross Dress for Less.

Once the property was retenanted and operations stabilized, we were able to sell the property at a sub 6 cap rate, demonstrating significant value creation through redevelopment.

Second, in January 2006 we purchased our joint venture partner's 75% ownership interest in our Paseo Colorado lifestyle Center in Pasadena. Our purchase price represented a total value of $175 million for the property. As a result of the sale, we earned a net promote of approximately $13 million, which will not be reflected in our income, but will be applied as a reduction to our cost basis in the property. Although the asset's cap rate based on current market pricing was estimated to be below 6%, the impact of the promote effectively resulted in a blended cap rate of 7.2% on the entire asset.

Tenants of Paseo Colorado include Macy's, Gelson’s, Pacific Theaters, Loehmann’s, Equinox Health & Fitness, DSW Shoe Warehouse, and many upscale specialty retailers. Located above the retail development are approximately 400 luxury apartment homes that are separately owned and managed. Lehman, who was looking for a partner who could lease and manage the center, originally offered us a joint venture interest in 2003. Considering that this is a premier asset in an important component of our lifestyle center business, we're pleased to have the opportunity to increase our ownership interest and to continue to lease and manage the center.

With respect to our Coventry II joint venture, we continue to evaluate numerous opportunities for both redevelopments and forward commitments. I would like to highlight some of our pending transactions to give you an idea of the investments that we're pursuing.

For example, the Coventry joint venture entered into an agreement to purchase a community center in Benton Harbor, Michigan that offers strong leasing and expansion opportunities. And in a separate transaction the joint venture signed a purchase agreement for a major super regional mall in Cincinnati, which due to the loss of one of its anchors represents a unique repositioning opportunity. In addition, the Coventry joint venture has a fully executed letter of intent to develop a 1 million square foot mixed-use project in suburban Kansas City.

At this point I will turn the floor back over to Scott.

With respect to guidance for 2006 we are reconfirming our FFO estimate of a range of $3.36 to $3.46 per share, which represents a growth rate range of approximately 5 to 8% off our 2005 results. This guidance reflects approximately $58 million of transactional income, such as merchant building gains and land sales. As you can see on the new transactional income schedule in our quarterly financial supplement, this amount is consistent with our 2005 results.

While I'm comfortable with providing a range for the total 2006 per share FFO, because of the contribution to FFO from various transactional income items it is difficult to pinpoint exactly when during the year these items will be recognized. Therefore at this time I cannot provide specific quarterly guidance, but will do so when we have a better read on when those transactions will close.

At this point, however, our internal projections anticipate that the majority of transactional income will be realized in the second quarter. On that basis we think consensus estimates for the first quarter are probably at least $0.05 per share too high, while consensus estimates for the second quarter are probably at least $0.05 per share too low. And we recommend that analysts adjust their estimates accordingly.

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

(OPERATOR INSTRUCTIONS). Michael Bilerman of Citigroup.

Just going over these gains you said $58 million?

$58 million in 2006, correct.

So that is a $5 million increase from the 53 on a full basis in 2005?

Yes.

When you are saying the majority of them will hit in 2Q, at $58 million that is $0.53 a share. Are you --?

(indiscernible) that would be 100%. The majority is 27 -- $26 million -- $27 million.

$27 million in the second quarter.

No, we're not saying that. All we're saying is at this point we have great visibility on the first half of the year, and there is certainly much more we anticipate to happen in Q2 than Q1.

Can you just give us a little bit of a sense of rough numbers, or at least a range, to how much you expect to fall in the first half of the year of that number?

I would expect about half, or slightly more than half, will fall in the first half of the year. It may be more than that, but right now that would be a reasonable projection.

You talked a little bit in your opening comments about a potential surge in investment activity from dislocation in the market. Can you just elaborate on that a little bit further given that your balance sheet is now back to historical levels? You're in good shape to make an acquisition. What is on the horizon right now?

When I made that comment I wasn't really referring to any imminent transaction. What I was doing was sort of observing what I see happening in the market, which is eerily reminiscent of 1992 when the Fed started cracking down on the banks for their real estate lending.

Where that has its greatest impact is on the high leveraged private buyers and the high leveraged private developers. And as you can recall, that led to really the explosion of the REIT industry. And it really led to a lot more equity coming out to balance sheets from real estate, but not evenly across the board.

So I absolutely expect that we're going to start to see a little bit of stress from these developers who are highly leveraged and where the banks start to crack down on them a little bit in terms of their extension of credit. I expect that we will be the beneficiary of that both in terms of acquisitions, but more so in terms of development opportunities.

But there's no larger transaction that you're working on today?

No, nothing that we're prepared to discuss.

In terms of China, can you just give us an update on where you are there in terms of timing and a potential investment opportunity?

Yes, we're very close to signing an agreement with respect to the first transaction in China, which is a large multiyear development in a city called Chengdu. The importance of that is that we expect this to be the first of many. And the first deal is the one that establishes the construct between the parties. And I think we have a construct set up that involves a local Chinese partner. It involves Macquarie Bank and DDR in a manner that we think appropriately apportions risk and return. And one that gives us a really nice entry into the market without putting our shareholders at undue risk.

So we're very excited about it. The first deal in terms of magnitude of investment by DDR is only in the $40 million range, but we think that it will lead to several more opportunities in the near future.

40 is just your share of the equity or it includes the --?

That is our investment.

The deal would be -- have a fair amount of debt on it?

That is correct.

So your total net capital is much greater than that, probably somewhere around $100 million in terms of your share of the debt?

I would rather you wait until we announce the deal. It is a very complicated structure, and it is not exactly the way it will come together. It is not a pure pro rata equity investment. A lot of our capital comes in the form of a loan with an equity kicker. When we -- you won't have to wait very long, I hope. We will be able to announce the deal in much more detail.

Chris Capolongo of Deutsche Bank.

Just a quick question on the Puerto Rican assets. Given that they have been such strong performers, what do you see in terms of your ownership stake there? Are these items that you would offer up to JV partners or is the upside too good there?

At this point we're very happy to keep 100% ownership of that portfolio. In fact, we're actively looking for additional opportunities to invest in other assets on the island.

Just in terms of the transactional income from next year, anyway you can break that out, maybe in terms of land sale gains or merchant building gains?

The great majority of it is merchant building gains.

These are projects that are on the pipeline schedule right now or stuff that has been, call it, inventoried on balance sheet?

It is a combination of the two. Most of them are projects that are either recently completed or soon-to-be completed.

(OPERATOR INSTRUCTIONS). Thomas Young of Green Street Advisors.

It is Greg Andrews with Thomas Yeung. Dan, you talked about the ancillary income of $14.6 million in '05. I guess not all of that shows up directly on the income statement under ancillary income. Are there any other line items where that shows up?

I think Dan was probably referring to the ancillary and other property related income.

So some of it is under other and some of it is probably --.

Yes, you'll see right under the ancillary income there's other property related income.

Thanks. And then --.

And not all of that income flows directly to DDR, because some of that is in joint venture.

Yes, there's another component in --.

Another component in joint ventures.

Okay. Obviously the growth over five years has been pretty impressive. What is your outlook for the next year or two in terms of growing that part of your business? Is there in a lot of room left there?

There is a lot of room left because really the open-air center business for the ancillary income community is still relatively new. We sort of kicked it off five, six years ago. And as a result there are a whole cadre of tenants and sponsorship opportunities that are just now starting to look at open-air centers as a viable venue to promote their goods. So we're still expecting that we'll be able to grow that business in the mid teens on an annual basis going forward.

I also would like to point out that there is many more opportunities for that type of income in our lifestyle centers, which is an area where we have been significantly increasing our investment activity and look to be doing so in the future, both in terms of acquisitions and developments. Even some of our very large power centers, if you will, in the development pipeline have a very significant lifestyle component, which offers itself up very well to that type of ancillary income. So as the character of the portfolio changes, you'll be seeing more that type of income as well.

Great. Thank you.

You know one of the other things just to keep on the radar screen, it is sort of a funny business because the higher your leased rate goes, the less income you have from temporary tenants. So you have to make it up somewhere else in order to grow. And our leased rates and our occupancy rates are approaching historic levels, and as a result there is less vacancy for us to lease.

But there's a lot more interest from vending machine distributors -- and MasterCard we just did a large transaction with, and carts and kiosks where we are creating space within our public common areas. So we have to be a little bit more creative, but we still feel that the growth prospects are very exciting.

Alexander Goldfarb of Lehman Brothers.

Just -- and forgive me if I missed this in your comments -- the $6 million of ancillary income in Puerto Rico, is that something that is already in your run rate, or is that something incremental we can expect?

That is already in our run rate.

Perfect. The next question is just going back to fleshing out more of the comments regarding the Fed cracking down on lending. Given the number of REIT privatization deals that we have seen, do you see the amount of equity that is coming into real estate as changing, or your comments are just specifically to developing in terms of bank lending and therefore we could see some of that credit be replaced by private equity as opposed to going to the local bank to borrow?

I think my comment was that those who have access to equity will find new opportunities. That can be public equity, it can be private equity. But the number of people who have strong access to private equity is just as small as those who have strong access to public equity. It is a limited universe of people who have that infrastructure in place and have that access.

Having said that, I'm not sure that the private equity is as well positioned to deal with the early-stage development projects as we might be and some of our peers in the REIT sector. In this day and age to really take advantage of development opportunities, you have to be willing to enter the deal pretty early in the predevelopment phase. That is an amount of risk that is not terribly comfortable for a lot of private capital sources.

(OPERATOR INSTRUCTIONS). [Hedi Habal] of Millenium Partners.

One question on the 11% cash on cash deals. I assume those are at the -- are those at the portfolio level or at the project level?

They are at the project level.

And then the follow-up to that is, are you seeing markets where just in light of what is happening to construction costs some of those yields are being compromised? Can you comment a little bit on that based on what we have been hearing from some of the other companies in the sector?

Sure. We have been very fortunate. Where we have seen rising construction costs we've also seen the appropriate rise in rent levels. And in fact in some markets, I was just down in Florida last week and a big topic of conversation was the decrease in construction costs from this point last year.

So construction costs have stabilized and we are using our contingencies, I think appropriately, to handle price breaks. And we are also reevaluating our income stream for each project to make sure that we're pushing the market to the appropriate level, because demand is very, very high.

Something else that I would like to point out, because I know this is a very common topic for discussion. I can't really speak so much to our peers in the shopping center business, but when you start listening to our peers in multifamily and office and so forth, who are involved in much more vertical product, I think you need to understand that the commodity prices on things like steel and concrete are much less significant as a component of overall project cost when you build a horizontal shopping center than they are when you build a vertical skyscraper.

A typical project that we build, I would say virtually half of the cost of the project is either in site cost or in land cost, or soft costs. None of which are really impacted a great deal by commodity prices. So it is just not as severe in terms of its relationship with the overall project costs.

And the land component is a fungible number. So long as the developers who have the capability to do these large projects maintain discipline, land prices will adjust to protect the yields. That is what we have seen more than anything else.

I also think it is fair to say that while the yields have remained fairly constant, it would be fair to say that the risk-adjusted returns have probably come down. Because the gestation period for a project today and the entitlement risk on a project today is much longer, much greater than it used to be. So even if the returns are the same, I think it is fair to say the risk-adjusted returns have probably come down a bit to adjust for the fact that we are taking more risk earlier in these projects to protect those yields.

Taina Rosa from Caribbean Business.

I wanted to ask you about your investment opportunities in Puerto Rico. You said that you would consider expanding here in Puerto Rico. I was wondering, are you looking at anything specific?

We have looked at specific opportunities. We have made offers, but we haven't been successful as yet in making any deals. So yes, we have, but we have nothing further to report at this time.

My other question is, I just want to make sure if I heard -- well, I want to make sure I heard right. You said that your rent and leases in the Puerto Rican malls are up 30%?

Yes. The releasing rates, that's correct.

I would like to know what percent of your retailers here in Puerto Rico had to renew leases this year?

It was about 240,000 square feet of space that released in Puerto -- that re-let in Puerto Rico this year.

You also said that in ancillary income in Puerto Rico alone you made $6 million?

That's correct.

So this is exactly in line with what you had forecasted previously, isn't it?

That is. And it is about 1.4 million ahead of what we had budgeted for '05.

Matt Ostrower of Morgan Stanley.

Just a couple questions. On overage rent seems like those, at least as a percentage of minimum rents, that that ratio has been rising a lot and particularly in the fourth quarter. Is that becoming more seasonal, either because of Puerto Rico or something else?

No, I think you are -- that is pretty accurate. There is a number that is from Puerto Rico.

Would you expect the run rate to be higher going forward, or is some of the releasing that you just referred to in Puerto Rico, is that sort of bringing your base rent up so we should see the percentage of rents come back down again?

I think it is pretty -- I would expect it to be consistent.

On the operating margin that also seemed like -- expense margin anyway has gone up pretty significantly. Is that another appropriate run rate or is there something itinerant there?

If you are referring to the fourth quarter, our operations group has a tendency to try to get a lot of the expenditures in, in the fourth quarter.

It was high for the whole year though. I guess that could be just because of the fourth quarter but --.

Again, it is -- we have the Benderson assets for a full year in here. And then obviously the Puerto Rican assets also, which contributed to that. But I think otherwise they are pretty much in line.

But the property level, 2005 was an extraordinary year for snow removal in the Northeast. And some of those expenses were probably higher than you'll see in other years.

Great. Finally, Scott, could you comment on whether you looked at Albertson’s at all, and what you think that transaction means for the grocery industry?

We really didn't spend much time looking at Albertson's. Most of those boxes are in products that don't really fit our core investment strategy. As far as what it means for the industry, it is completely consistent with what we have been predicting for quite some time.

And I think you'll see more of the same. There is going to be a continued transfer of market share away from traditional grocers, both to super centers and to specialty grocers and some of the strong regionals. A lot of that supermarket space is going to have to find a new home in terms of other retail opportunities.

I think that the transfer of market share is a story that has really gone very much untold. But it has really been pretty phenomenal. I think traditional grocers have gone from I think over 90% market share to somewhere in the 40s. I think that that transfer it is going to accelerate in the near future.

Does the transfer you're talking about cause you any concern about rents, just given the amount of space we're talking about that could come back, I guess, effectively in the form of vacancy or some other form?

A lot of it just doesn't really compete with the space we're talking about. Our investment strategy focuses on regional locations and most grocery stores are in neighborhood locations. So we are really comparing apples and oranges, if you will.

But I guess -- I mean I hear that comment, but I also wonder, you referred a lot to the rising development constraints out there. And wouldn't retailers just for the sake of getting more stores open, be willing to consider somewhat different locations than they would before?

No, they wouldn't. Particularly the retailers that we do business with, who insist on a very consistent and definable co-tenancy, which you're not able to accomplish in most of the neighborhood anchored grocery centers. Grocery and the neighborhood centers.

That is why you see so many vacant grocers end up with second and third generation retailers in them, as opposed to when we lose a Kmart or a Wal-Mart or something, you could end up with many of the first generation retailers. The regional nature of our product type attracts a certain tenant, and the local nature of the grocery anchored center attracts a different type of tenant. And unless you can provide the co-tenancy, it is not going to attract our tenants.

I think we are much more impacted by some of the privatizations in the mall side, to be quite honest with you. The department store space, the Mervyns type deals, the May-Federated merger and the closings that those result in. Those really have a much more direct impact -- competitive impact on our portfolio than the neighborhood grocery anchored stuff.

In fact, most of our centers are either directly across the street or right down the street from the super regional mall in the market. So that is where we're really competing in terms of providing space. And there are situations where the space in the strip center is going to be much more attractive, and there are times where it is not.

The other thing to keep in mind is that it is extremely expensive to retrofit a grocery store, even if you can provide them with co-tenancy. So it is very difficult to make the economics work. Typically you are not able to keep any of the HVAC because they only have partial systems. You have to tear all the plumbing out of the floors. The storefronts aren't appropriate. You can go -- the list goes on and on. So it is very hard to make money on the retrofit of a grocery store with tenants that we typically do business with, because they need to build their prototypes.

But those tenants that will take space as is, who are sort of the second and third or fourth generation tenants in the market, you can do okay. But it is very hard to do first generation tenants in vacant grocery stores.

(OPERATOR INSTRUCTIONS). Michael Bilerman.

I just had a follow-up question on the promoted income I guess on the JV proportionate share income statement, which was listed at $10 million for the year. And, Bill, it looked like you backed out $4.7 million to get the FFO. Does that mean then there is $5 million your share of promote income being recognized in 2005?

Yes; and again, some of that is what is reflected at the joint venture level. Let me just kind of flip through the schedule here. Yes, actually what we back out is really probably closer to the $4.8 million number. The 4.7 was the non FFO gains.

Yes, it is a number of things. There is our Coventry investment which we own 75% of. There is 25% of promotes that goes to other owners. So that comes out of there. Also to the extent in some of the joint ventures we would end up capitalizing interest and so forth prior to having construction loans on our own balance sheet, so it doesn't get capitalized at the JV level, but it is part of our basis in the asset, so that is what also gets adjusted out of that.

So that effectively it comes down to a net $5 million numbers -- a $5 million number that flows into your FFO.

Yes.

Has that changed materially from '04, or does that materially change going into '06?

I don't know. I don't think it materially changes. Some of it is a function of assets that have been sold. There is also those promotes that are ongoing promotes. So in some -- like in the RVIP VII I think we will have probably more ongoing promotes because a lot of assets were sold to reduce the [extra] space going forward. And other ones, like for example the City Place is no longer there, which we recognized significant merchant building gains on. It is just a combination of all the various transactions.

Again, I will remind you that we do put a detailed summary of each of the joint ventures in our supplement that talks about how promotes and so forth are calculated.

I think the other thing I want to make sure everybody understands is that many times when we have a significant promote, which was the case in Paseo Colorado, where we buy out our partner we earn the promote, but we don't book it into income. We use it to reduce our basis. Because we can't realize a promoted interest when we are -- when that promote is being derived from our investment.

There has been a significant amount of that activity in years past, and probably will be continuing in the future. Wherever there is an asset we really like and we want to increase our position in that asset, we will earn the promote but we won't recognize it in FFO.

This stuff that -- this $5 million that goes into FFO, that is separate from the new schedule you have on the gain, correct?

Yes.

Maybe just for Dan, is there an update on ShopKo at all?

No, we don't have an update on ShopKo.

Is that something you are still pursuing and doing due diligence on and pursuing?

It is something that we're looking at. We have done due diligence on it, but it is moving along at a slow pace.

I assume that there’s other alternatives that they're looking at, other than just doing a sale lease back or selling some of the assets?

That's correct.

Scott, I know you said you weren't prepared to discuss any particular transaction. Maybe you can just give us a sense of what the current environment is today for portfolio type deals. You have been able to uncover some others in the past, whether it be Benderson or Caribbean Property Group that weren't on people's radar screens. So maybe you will just give us a little sense of what the market looks like today.

I don't think there is a tremendous amount of opportunity out there in terms of large portfolio acquisitions today. There clearly are public to public deals that are out there that we have looked at, other people have looked at. Pricing has held pretty firm. And I think the bid ask has been such that it really hasn't made sense for the buyers. That is why you haven't seen a lot of these things happen.

I don't know that that is really going to change. But there clearly are -- I guess the difference in the market is a lot of the [social] issues and a lot of the entrenchment I think has gone away. Now we're just talking price.

Right. Then just lastly in terms of Paseo, how much capital was it? Did you relever the asset at all?

At Paseo, we delevered the asset.

So how much capital (inaudible) come out of pocket for?

(multiple speakers) It wasn't that high, Scott. The debt was $85 million, and I'm trying to recall what the -- it was I think in about the $115 million range.

Now, do you expect maybe to do more dispositions? Scott, you talked a little bit about that last quarter. It looks like your investing activity is a little bit ahead of pace so far this year.

Yes, when I said that we're going to have a lot of merchant build gain in Q2, all of that is dispositions. In addition to that -- some of those are dispositions into joint ventures, but they are clearly laying off equity.

In addition to that we are continuing to aggressively off-load noncore assets that individually don't amount to a significant amount of money, but in the aggregate they can add up to a fair amount. And they really do help to increase our run rate in terms of NOI growth and enhance the demographics of the portfolio that we continue to hold.

What is your dollar volume then out of maybe call it noncore assets versus sales of developments?

We typically maintain about a $200 million inventory of assets for sale. In terms of assets to be sold to generate merchant building gains, it would be probably less than that, more like $150 million ballpark.

On then top of that another $200 million of noncore?

Noncore, correct.

Eric Rothman of Wachovia.

Most of our questions have been answered, but I just wanted to ask about G&A. What type of a run rate should we expect?

Between 14 and $14.5 million per quarter.

14 to $14.5 million per quarter. Thank you very much.

Rich Moore with KeyBanc Capital Markets.

Dan, on bankruptcies how do you view the environment right now?

The environment now is as strong as it has been in a long time. We're not really expecting any significant bankruptcies in 2006. 2005 was a record low year for bankruptcies. And we don't think that the pace will accelerate much in 2006.

Help me real quick, if the rate of your portfolio in terms of leasing is 96.4%, and you don't have a lot of store closings, does that mean occupancy goes to 96.4% in the short term?

The gap will close clearly between the leased rate and the occupancy rate, but we still would like to raise the occupancy rate -- the lease rate another 50 or 60 basis points. And in so doing you're always going to raise the occupancy rate accordingly. But you're going to have a gap -- historically our gap has been between 100 and 120 basis points.

But in a light store closing environment that gap kind of narrows probably?

It does narrow, yes.

And then the master lease on Benderson, where do you stand with that?

Currently there is about nine locations that we don't have a lot of activity. And everything else is either spoken for -- either leased or opened by now, so it is pretty well gone.

Okay, and when does that end? I realize it is just a small amount, but when does their obligation end?

2009.

And then last thing, Scott, you talked a little bit about China, but is there anything in North America outside of the U.S. that interests you?

Anything in North America outside of the U.S.?

Yes, I had to exclude the U.S. because I know you're interested there. (multiple speakers).

Mexico is North America.

Yes. There’s a whole lot of countries in North America outside the U.S.

There's about two.

Everything interests us, although we're not really working on anything at the moment.

Do you see yourself looking south in particular at all down into Mexico?

Yes, we have looked in Mexico and we will continue to do so. We're also starting to look in Europe. There's opportunities there that we will look at. But right now in terms of offshore our focus is primarily on China.

Mike Mueller of JP Morgan.

Most things have been answered. Just a couple quick things though. First, are you still planning on disposing of the Service Merchandise locations during the first part of the year?

We're not really sure. At the present time we're in discussions with our partners as to what their aspirations are in that regard. As I sit here I can't tell you whether we are or we aren't. I think it largely depends on the pricing expectations of our partners.

Going back to Bill, I am following up on a prior question. Just to clarify, the $5 million of promote income that we saw in '05, that is a level that you're comfortable with for '06 based on what you know at this point?

Yes, I think it is.

And then finally, the $1.7 billion development pipeline, is that the total pipeline including what is in process? Is that a shadow pipeline? And then lastly relating to that, how big of a portion of that pertains to what you're expecting to see in China over the next few years?

First of all, it includes the existing projects under construction as well as the pipeline and entitlements and what you have you. It is -- the pipeline and the shadow pipeline is in that number.

There's also a shadow pipeline where the shadow is little less pronounced, if you will, behind that $1.7 billion, and we are continually replenishing that pipeline. But $1.7 billion takes us out probably for the next three or four years to get those projects completed. How much of that represents China, not very much at all at this point, probably 5% at most in that number.

At this time, gentlemen, I'm showing no further questions. I would like to say thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.