Site Centers Corp (SITC) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Developers Diversified earnings conference call. My name is Jackie, and I will be your coordinator for today's call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like the turn the presentation over to your host for today's conference, Miss Michelle Dawson. You may proceed, ma'am.

Good morning and thanks for joining us. I'm Michelle Dawson, Vice President of Investor Relations for Developers Diversified. Scott Wolstein , our Chairman and CEO, is participating remotely; and joining me in the office today are David Jacobstein, President and Chief Operating Officer; Dan Hurwitz, Senior Executive Vice President and Chief Investment Officer; and Bill Schafer , Senior Vice President and Chief Financial Officer.

Before we begin I need to alert you that certain of our statements today may be forward-looking. For example, statements that are not historical in nature or that concern future earnings, results or estimates or that reflect expectations or beliefs are forward-looking statements. Although we believe that such statements are based upon reasonable assumptions, you should understand that those statements are subject to risks and uncertainties and that actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the managements discussion and analysis portion of our form 10-K for the year ended December 31, 2005, and filed with the SEC. At this time I'd like to introduce Scott Wolstein, our Chairman and CEO.

Good morning, everybody. I'm pleased to report our first quarter financial results of $0.78 per share in funds from operation which compares to our first quarter 2005 FFO of $0.90. The 2005 figure, however, reflected an inordinately large contribution from merchant building and land sales gains. After eliminating all such gains from both first quarter 2005 and 2006 results, FFO actually increased by approximately 7%.

As these results demonstrate business is strong on all fronts. We see intense tenant -- tenant demand for space driving our operating portfolio metrics and generating internal special growth of 2.3% for quar -- for the quarter which is consistent with our previous guidance for same store NOI growth. Leasing activity within our development portfolio is brisk with tenants primarily focused on achieving their 2007 and 2008 growth objectives. With respect to guidance for 2006, we are reconfirming our FFO range of 3.36 to 3.46 per share.

Most important event during the quarter was our Investor Day where we demonstrated how on you business platform can successfully sustain long-term self funded FFO growth and create annual NAV growth through active capital recycling. It's important to note that we've maintained a consistent investment strategy that's been tailored to our core competencies: leasing, developing, redeveloping and strategically managing market dominant community shopping centers, yet we pro -- yet it provides us flexibility to tap a variety of revenue drivers. In the mid 1990's we are pioneers in the formation of joint venture relationships. At our Investor Day we demonstrated the positive financial contribution to or business model from our various joint ventures. These relationships provide a pipeline of investment opportunities with complementary risk parameters and generate lucrative fee income and valuable promotes. These joint ventures, however, need to be carefully structured and it's important to us that we maintain strategic control of the assets in order to maximize their value potential and whenever possible receive a promoted interest in the future value creation of the asset.

At our Investor Day we also profiled the sources of our internal growth which will accelerate over time as more of our recent investments, such as Puerto Rico, and our new stabilized developments are included in the same store NOI comparison. In addition, we are extremely reluctant to grant tenants options to renew their leases and over time this strategy will increase our opportunities to raise rents as leases expire. We also provided better visibility in our development pipeline which creates substantial shareholder value by capturing the net asset value spread between our 11% plus development yields and the current market pricing of about 6% cap rate for quality assets. And we described how developing and leasing work hand in hand throughout the development process, leveraging our tenant relationships to evaluate potential opportunities and meet our leasing goals.

As Dan Hurwitz will explain later feedback from our tenants relative to their store growth plans continues to be strong, and we continue to work with our expanding tenant base as retailers develop new open air concepts, new store prototype and is new merchandising initiatives. This tremendous incremental demand for space is essentially jet fuel for our developments and we are looking forward to a highly successful convention at the ICSC. I;m very pleased at the feedback we received on our Investor Day was positive. We work hard to make sure we have the best platform in place, and I was very proud to have the opportunity to show off what we really consider our best assets, all our people. With that, I'll turn the call over to Bill Schafer, our Chief Financial Officer.

Thank you, Scott. We continue to exercise proactive balance sheet management to reduce financial risk and improve our liquidity and flexibility. I'll give three examples. First, we swapped 200 million of variable rate debt to fixed rate debt for 4.5 years locking the three-month LIFO rate at less than 5.15%. Second we expanded our term loan with KeyBanc from 220 million to 400 million. We originally set this facility up in 2005 and as I have mentioned before, it's a highly beneficial vehicle for the following reasons: because this facility is secured by our equity interest and assets already encumbered by low leveraged first mortgage debt, we can tap our remaining equity in these properties at favorable interest rates. In addition, this structure eliminates the need to mortgage additional assets thereby enabling us to maintain a greater unincumbered asset pool. As a third example, we refinanced, or are in the process of refinancing, five mortgages on joint venture properties in joint venture properties, in Phoenix Sprectrum, Stone Oak, Deer Park, Macedonia, and Ward Parkway. These refinancings will reduce interest, extend term and in some case increase proceeds.

Having addressed virtually all of our 2006 maturities, we are well under way in evaluating our 2 -- 2007 opportunities. I'm proud of our ability to maintain appropriate ratios and improve our financial position as we have grown. As a bigger Company this balance sheet control is more important to us today than it was just a few years ago. With more financial opportunities available to us than ever, the importance of remaining nimble in order to capture those opportunities has never been more critical. At this point I'd like the turn the call over to Dan.

Thank you, Bill. Before getting into the leasing and development numbers and our expectations for the upcoming convention in Las Vegas, I'd like to take a moment to discuss the lease termination fees contained in our quarterly results. First let me reiterate our position on these termination fees in general. Prudent asset management dictates that we should do everything in our power to maintain and enhance asset value by minimizing the asset level drag of vacant boxes with an aggressive releasing program. We take this charge very seriously, not only because it's in the best interests of the asset but also provides a prime opportunity to secure fees when the tenant is not operating but still solvent. Therefore, we place a high priority on capitalizing on this potential to retenant vacant boxes and to execute those termination fees. Sometimes these fees are difficult to time as they are entirely dependent on two third parties for excuse, namely the replacement tenant for back fill and the primary tenant to agree on fee pricing. To this end we budget annually a termination fee number that is a representative average of prior year termination income and project when those fees may be booked by quarter. Sometimes we hit the quarterly assumptions, and sometimes we do not. At the end of the day, that is not fully in our control.

The exception to the fluid nature of terminations is what occurred in Q1. On a regular basis we meet with Wal-Mart to discuss, among other things, the status of the vacant boxes within our portfolio. Routinely during those conversations we are able to identify opportunities for retenanting that Wal-Mart may not be able to execute for a variety of reasons. As a result of such a meeting towards the end of last year we identified four vacant Wal-Marts within the portfolio that afforded us the opportunity to reenergize the shopping center and book significant lease termination fees. A clear win for the assets and a win for our investors as well. It is also important to note this transaction had been contemplated for many months and was included in our 2006 budget and guidance previously provided. Also noteworthy I that like all our lease termination fees, the proceeds are excluded from same store NOI results as stated in section 2 of our supplement.

The end result was the retenanting of approximately 300,000 square feet of vacant Wal-Marts with tenants such as Office Depot, Bell, Hobby Lobby, Burlington Coat and Goodies. Plus the payment of a $5.3 million termination fee and 15 to 20% rental upside against the terminated rent. In addition, this transaction presents future growth potential with additional square footage and additional out parcels and parking fields previously controlled by Wal-Mart that are now available for marketing. So the bottom line is that the transaction was an outstanding result for everyone involved contemplated in our budgeting and included in previous guidance.

Moving on, I am pleased to report that Q1 2006 was another stellar quarter for our leasing and development programs. Specifically in regard to leasing, we executed 95 new leases representing 684,000 square feet of retail space. New lease rental spreads for the quarter stood at 28.4%. In addition, our leasing group executed 177 renewals representing 676,000 square feet. Renewal rental spreads for the quarter stood at 11.3%. On a combined basis, the department executed 272 transactions representing 1.36 million square feet with a blended rental increase of 16.2%. I am also pleased to report that our 2006 renewals are approximately 60% complete to date and attracting consistent with our budget expectations.

As noted, similar to last quarter our rental spreads continue to grow at a healthy pace specifically bolstered by our portfolio in Puerto Rico that enjoyed new lease spreads of 42.7% and renewal spreads of 25.2%. Moreover, we in the pre -- we are in the preliminary design stages for a mall expansion at our flagship property in Puerto Rico, Plaza del Sol. The plan to expand the upper level of the mall by adding two junior anchors totaling 60,000 square feet and 40,000 square feet of specialty retail space is underway. Preleasing will be a major focus in Las Vegas net -- next month, and we are planning a 2008 grand opening. Rental spreads, completion of our expansion at Rio Hondo, which was discussed last quarter, the plant expansion of Plaza del Sol and our previously discussed ancillary income program continue to propel Puerto Rico to the forefront of our internal growth initiatives.

In regard to the leased rate for our core portfolio the Q1 rate stood at 95.9% representing a 40 basis point increase over the comparable quarter from the prior year. Occupancy for the quarter was 10 basis points over Q1 2005 to 95%.

With the ICSC convention in Las Vegas next month I'd like to take a moment to update on you up our expectations. It is important to note for us the convention gives us the opportunity to continue to progress -- to continue to show progress that was originated by our constant dialog with tenants throughout the year. For example, year-to-date our leasing team has participated in 35 portfolio reviews with a variety of ten -- tenants ranging in size and asset class from Target, Wal-Mart, TJX, Borders, Circuit City, JC Penny, Bed Bath and Beyond, PetSmart and DSW to smaller square footage retailers such as Soforo (ph), Gymboree, Ultra Cosmetics, Luxotica, Brooks Brothers, Limited 2 and Sterling Jewelers. In addition, within the next three weeks leading up to convention we have at least another 10 portfolio reviews scheduled either in Cleveland or the respective retailer headquarters. These personal meetings plus over 700 additional meetings already scheduled for Vegas and over 1,500 property submittals already in tenant's hands in preparation for Vegas lead us to expect unprecedented results from retailers with unparalleled attention to our core, redevelopment and new development assets.

Our development department continued to have a productive first quarter of 2006 in many areas. Please note in the quarterly supplemental that all of the current costs for development projects were those represented at the recent analyst day, therefore yields have not changed since then. That being said, and in an effort to stay ahead of clearly articulated industry trends, we continue to address our organizational and human capital needs to address the demands of the evolving market. To this end, as you may recall in 2005, we established a new position, director of market research, to assist in the analysis of incoming opportunities and to define a targeted approach for our site selection specialists. This has resulted in a more efficient use of our departmental time and effort while providing us a tremendous resource for identifying off-market locations to satisfy tenant demand.

Moreover, in an effort to address the emerging mixed use trend in development and redevelopment we have established a new development manager position staffed by a graduate of our management training program designed specifically to interface with the residential, office, industrial and hotel communities within the broader lease real estate universe. We are confident that with specific attention to this emerging aspect of our business we will enjoy similar successes as we have by dedicating specific resources for ancillary income and peripheral development. Mixed use opportunities commonly found in urban environments are an exciting trend in suburban retail, and we intend to capitalize on our high quality portfolio accordingly.

Most recently at our analyst day we extensively covered our development pipeline and the progress of our leasing regarding each project. Therefore, I'd like to spend today's time highlighting an equally important area within development and some recent accomplishments within the area of expansions and redevelopments. In regard to wholly-owned assets our expansion and redevelopment program is very active in repositioning many of our assets by replacing ventent -- vacant anchors, which we discussed earlier, with new tenancy, or expanding the shopping center to accommodate tenant demand. Our redevelopment and expansion group continues to work on numerous value-added redevelopments as well as remodel existing shopping centers within our wholly-owned portfolio. At any given time our pipeline includes over 70 projects that are active internally and upon completion lead to significant value creation.

Recent examples include the addition of a 20,000 square foot Staples at the Marketplace in Delta Township in northern Michigan, groundbreaking for an 8,000 square foot outparcel building and delivery of a 20,000 square foot Home Goods at Brook Highland Plaza in Birmingham, Alabama, completion of a 28,000 square foot Marshall's at Freedom Plaza in Rome, New York, and the groundbreaking for a 15,000 square foot outparcel building in Shoppers World in Brookfield, Wisconsin.

In our joint venture portfolio we are finalizing the rightsizing of the existing Wal-Mart for a Wal-Mart Super Center at Valley Central in Lancaster, California and we recently closed with Wal-Mart on that transaction April 18th. The relocation of the Harkins Theater for a new state of the art theater and the addition of JC Penney and Target at Phoenix Spectrum Mall in Phoenix, Arizona. In addition, we considered -- we continued to pursue entitlements for a 170 unit residential component for our center in Fairfax, Virginia and our mixed use project in Kirkland, Washington which is comprised of 550,000 square feet of retail, 220 residential units and a theater. The result will be a complete repositioning of each of these assets within their respective trade areas while providing important profitable intra-opportunities to our retail and newly emerging mixed-use partners. Overall, the combined efforts of our leasing development teams coupled with the attractiveness of our core asset class and specialty centers, unprecedented tenant demand, and the overall market desirability of open al -- open air retail in general, lead us to a very enthusiastic view of our future prospects as we head into Las Vegas with great enthusiasm. At this point, we'd like to open the lines to receive your questions.

Your first question is from Michael Bilerman from Citigroup. You may proceed, Michael.

Good morning. John Litt on the phone with me as well.

Good morning.

I was wondering, Dan, maybe you can comment a little about what you have still vacant in terms of Wal-Mart boxes and maybe talk about some of the other big box tenants where you have some vacant boxes that you have to deal with in the future.

In regard to Wal-Mart and we have approximately six boxes that are currently vacant with Wal-Mart. But we do have boxes that we know will be vacant in the near future, near future being the next eighteen months as they pursue Super Center relocations in other markets. We were in Bentonville a couple weeks ago and we went through each and every one of those locations, and the existing vacant boxes and the future vacant boxes will be a prime marketing effort in Las Vegas because typically in Vegas is where Wal-Mart also announces which boxes they will be relocating as well. So the number isn't huge, Michael, the square footage isn't -- isn't really huge in -- in proportion to our total portfolio, but it does create a -- an enormous opportunity for us. In regard to some of our other tenants, we really have very few. There are one or two Lowe's boxes that we have vacant. We just recently did a termination with Toys 'R Us on a box that they had vacant. But overall the vast majority of our dead boxes are Wal-Mart, and we still do have a few Winn-Dixie's floating around.

And when you look at this transaction where you took the lease termination fee on the four boxes you're going to retenant them, where do you think your all-in return is going to be taking into account the money you're going to have to spend to retrofit the boxes and the rents you're going to get including the lease termination fee?

Well, at -- at the -- at the very minimum, some of those transactions aren't complete yet so we do have some vacancy yet to fill. But as it sits today we're going to be in the middle to high teens quite easily.

Okay. And is there any drag at least in the interim from those boxes going vacant?

There -- there are some -- there is some drag as we do tenant construction, but most of that will be completed by fourth quarter.

Michael, I think you should know all of that is already in the budget.

And that's contemplated in the transaction.

And the other thing that I think is important with respect to this particular round of Wal-Mart terminations is what's somewhat unique is that some of these boxes were already released by Wal-Mart and they actually paid us to -- to get off of the lease where there was already income in place just because they were basically in a position as a secondary guarantor of their subtenant. So basically some of the consideration was simply for us to assume the risk of the subtenant in lieu of looking to Wal-Mart for collection of the rent. And in some cases the underlying rent was actually greater than the rent that Wal-Mart was paying us.

Maybe just a question for Bill on guidance. Can you just review for us what you're expecting total for land sales and merchant development as well as lease termination fees and for G&A and maybe you can give a little bit of a comment to the second quarter in terms of the expected gains?

As far as I think the total gain number I think we indicated on our call last -- last quarter we had a $58 million number between merchant build and land sale gains, and I think we're still in that ballpark in the $60 million area. The -- I think the -- the G&A number is probably a number that's going to run in the 14.5 to $15 million on a typical -- quarter by quarter basis. I'm sorry, what was your other question?

In terms of lease termination fees and then comment on the second quarter gains which previously said would be bulky in the second quarter.

Yes, as far as -- yes, we do expect to have gains in the second quarter, and I think what we will end up doing at that point in time is when those gains actually occur we will announce the -- the transaction. I think as we indicated on the last call that we did expect probably more than 50% to be occurring in the first half of the year, and we'll probably reaffirm guidance at that point in time given the timing of the -- the various transactions that exist out there.

And then lease termination fee guidance?

Lease termination fee guidance, I think in our reforecast we're in that 10 million, 10.5 million range for total for the year.

What's holding, Scott, you back from increasing guidance if -- if lease term fees were modeled sorted of at last year at 6 million and they're higher now and it looks like gains are at the same level? What's holding you back from pushing the higher end?

Well, I think some of the drags that you're not mentioning are significant increase in interest expense that offsets some of that -- some of that positive financial gain as well as some of the increase in G&A that comes from strong stock price performance because of some of the stock based incentive plans. I think that it's still early in the year, and we still have a pretty broad range in terms of guidance. I think that the high-end of that range is certainly would be a very strong performance, and we certainly hope to -- to achieve that, but at this point in time it's too early for us to -- to change the range if you will on guidance. In terms of your earlier question, Michael, I think the current consensus for Q2 is $0.91. In terms of our projected gains in the second quarter, we're very comfortable that we will meet or exceed that number.

Good. Thank you.

And your next question comes from Craig Schmidt from Merrill Lynch. You may proceed, sir.

Thank you. I guess this is a Dan question. In looking at the -- your summary of wholly-owned and consolidated development projects, there's a lot of shifting between fourth quarter '05 and first quarter '06. I wondered if this was typical, and I guess I would expect it to be more in the commencing construction areas, not those projects in progress.

Well it -- some of it has to do with entitlements. Some of it has to do with tenant open to buys. Typically in a tenant lease, Craig, they have the opportunity to shift to another season, and in tenant demand as you know has been very, very high, and opportunities out there sometimes tenants over fill their book of business. I wouldn't be surprised by the way if some of those shift back because what happens in Vegas is often developers who can't deliver an '06 deal, for example, will break that bad news to the tenant in -- in Vegas and we'll be looking to move things up. So the answer, the short answer to the question, is yes, it is very common that that happens, and there's a variety of reasons why it happens. But I wouldn't be surprised to see that continue to be fluid based on what the tenants needs are and what happens as we go through the various entitlement processes.

Okay. And then just specifically on -- on Nampa in Idaho.

Yes.

The -- the expansion of 180,000 seems to cost a -- a lot more than the -- the previous part of the project. Is there any reason?

Well the project isn't built yet. We're just working on the site work now, and it's a -- it's a phased project. So, I think it just has to do with the phasing and the cost of the site work versus the cost of the -- of the actual buildings.

Okay. Thanks.

Sure.

And your next question comes from Matt Ostrower from Morgan Stanley. You may proceed, sir.

Morning. Can you just describe in a little more detail some of the gains in the quarter? I guess the -- you talked about transferring some development sites I think was I way you described it into MDT joint venture and you -- you -- you recognized gains into earnings on those and then also the gains that you didn't include in earnings, I was a little bit confused as to why those did not get included. Or into -- I guess into earnings or FFO.

The -- the -- the assets that were sold into the MDT joint venture were basically expansion areas that existed adjacent to existing centers that were previously sold so MDT, and upon completion of the -- the development of those expansion areas, we sold those into MDT and recognized it was $5.5 million merchant building gain. From a total value perspective, we retained a 14.5% ownership interest in -- in those assets through our joint venture interest there, and that gain related to the portion that we continue to own obviously was not recognized. There was another acquisition that we did, and we mentioned this last quarter on the -- on the earnings call with the acquisition of our joint venture partners interest in our Paseo Colorado asset out in Pasadena, California, where we acquired the 75% ownership interest there. And in conjunction with that based on the value that had been created, we earned a $13 million promoted interest from our joint venture partner there which was not included in our earnings number as obviously when you buy something and basically receive a reduced value for it, it goes -- it's reflected in our accounting records as a reduction in our cost base of that particular asset and not included in our earnings.

And -- and the assets just to clarify, the assets transferred into MDT, those were -- or -- yes, into MDT, those -- those were completed assets that were generating NOI?

Just very --

What they were, Matt, they were centers that we sold into MDT before they were finished, and we held back the pads that were still under development with an agreement that on completion they would immediately acquire them on a formula basis.

Okay. And then I guess just last question, a couple of the operating metrics looked like a recovery ratio and -- and overall operating margins at least in -- in -- in -- on a consolidated basis those look like they improved measurably. Was that your observation as well, and if so, was that just a temporary thing or should we be thinking about better margins and recoveries going forward?

Matt, let me speak to that much. This is David. With respect to the operating and maintenance expenses as a percentage of minimum rent there was obviously some significant improvement. Part of the reason was the tremendous difference in the mid Atlantic states, the Northest and the Upper Midwest and snow revenue that was very, very high in the first quarter of '05 , it was abnormally low in the first quarter of '06. There's no way of knowing whether that will continue, so we continue to use for budgeting purposes five-year historical averages.

We also acquired the Mervyn's portfolio which will have ongoing positive effect because they maintain their own real estate. So there's no expensive dollars on -- on -- on their behalf by Developers Diversified. So I think at the margin that will continue to show some improvement but probably not at the level of the first quarter.

With respect to higher recovery ratios, that is something that we have been attempting to achieve for some time now, and I think we're finally start to see it. There's a host of reasons. One of them is the fact that the industrial and office portfolio was substantially disposed of in the third quarter of last year. The recovery rate for that is only about 45% which is much lower than our shopping center recovery rate, so that on a going forward basis will be positive. Mervyn's, no leakage and that will be a positive going forward and also our CPG Puerto Rican portfolio has a higher recovery rate than most of the balance of the portfolio because of the way leases are written and so forth. And so I think our recovery should continue to improve, and I think that you can -- whether they'll be as the same level as they were in the first quarter, I can't tell you, but I do think that there will continue to be improvement in that area.

Okay. Thank you very much.

And your next question comes from Eric Rothman from Wachovia Securities. You may proceed.

Yes, good morning. I was curious the straight-line rent adjustment was down from the fourth quarter. I guess what was driving that and what do you expect for full year?

I don't have that information specifically at my finger tips. I'll see if I can gather that while we're on the call here.

Okay. Then I wanted to talk a bit more about Puerto Rico. You mentioned it's at the forefront of your internal growth initiatives. How much vacancy or even lease roll do you have there to -- to work with or is it -- is it all pretty much going to be expansions?

There is a significant amount of lease roll, Eric, I mean that's -- that's where it comes from because most of these leases are three to five years in term. We have some regional malls in that portfolio and you have centers that have an enormous amount of small shop space as a percentage of the total GLA. That's where most of the internal growth comes from, is from the release where all that is is significantly higher than in our overall portfolio.

Yes. I think you had mentioned I forget what the -- 47% leasing spreads in Puerto Rico. Is that anomalies or do you expect that to continue?

Well we expect that to continue. What -- one of the things that we've seen is sales continue to increase in Puerto Rico, we're able to drive rents. And a lot of these deals that are coming up we're finding tenants are able to afford it just by looking at their operating metrics and -- and their expense ratios. We -- we feel that -- we certainly feel that it's going to be much higher than the core DDR portfolio and we expect to have very significant increases on an ongoing basis.

Sure. Is any of that increase shifting tenants from a percentage right basis into kind of more of a shifting that into their base rent number? Or is that not that big a component?

No, not -- not typically. It's not uncommon when you renew our lease for example we had a tenant in Plaza del Sol who was paying us significant percentage rent and the new re -- release expired. The revised -- the new base rent is a combination of the old base rent plus the percentage rent plus an additional multiple so that's -- that's typically how you would -- would do that. Because the tenant's paying it, they can afford it. And the question is how fast do you anticipate that the sales will increase that they could pay in a multiple above their base plus percentage, and that's how we do the calculation.

Interesting. And the lastly, obviously as you well know Kimco bought a number of assets on the island recently. Do you think that that is going to -- and -- and have said that they want to expand there, do you think that that will make it significantly more competitive for you to do the same?

Well, no. I don't think so. We -- frankly we looked at that portfolio and actually bid on it and -- and -- and basically rejected the opportunity to acquire it at the price at which Kimco paid. The -- the -- generally speaking a lot of those centers are -- have already in markets that compete with ours most of our ours are anchored by Wal-Marts and where most of theirs are anchored by Kmarts. So I think our portfolio is a higher quality of the two portfolios. The fact that they're managing it versus RD Management which had had it previously I don't think its going it make a very big difference. I think it's really a question of the quality assets and I don't think there is any question that we have the higher quality portfolio, and the better center in most of the markets where they compete.

Right. Bill, I'll follow-up with you off line about the straight-line rent. Thank you very much for all your answers.

(OPERATOR INSTRUCTIONS) And your next question is from Michael Mueller from JP Morgan. You may proceed, sir.

Hi, thanks. Just a couple questions. Going back to the lease term one other ti -- one other time, outside of 2006 is a normalized level, and I know it bounces from year to year but something more in the neighborhood of 5 to $8 million, is that a good way to think about it?

Yes.

Okay. And then from just a bottom line growth perspective, clearly '06 has been dinged a little bit because of all the balance sheet refinancing that took place the tail end of last year. As you look out to '07. and I'm not trying to get specific '07 guidance here, but is it your expectation that growth picks up at the margin and if so how dependent upon acquisitions is it for that to happen?

Well, Mike, I think it's a good question. I think it's what we tried to address pretty specifically at our analyst day. We -- we believe that if you basically strip out the effect of interest rates completely and - and keep your transactional income constant, we should be able to deliver that sort of 7, 8% growth without raising capital on a self-funded basis. And again without providing guidance for '07, that's certainly going to be the basis for our budgeting, the -- the same store NOI growth that we achieved in this quarter is something that we consider achievable on an ongoing basis. And so long as we do that and complement that with capital recycling and -- and investment from our -- our increased capacity, of leverage, due to the appreciation of value of the assets from the higher rents we should easily be able to achieve those kinds of results without acquisitions.

Okay. Okay. Thank you.

And your next question comes from David Harris from Lehman Brothers. You may proceed, sir.

Hey, good morning and forgive me if somebody touched upon this. I had to step in and out of the conversation. Scott, in your second sentence in the press release you refer to intense tenant demand for space. I wonder if you would share -- care to share with us if you do -- you feel that use of that sort of quite strong language is this an unusual time in that -- in your -- your career to have -- is there any other time I should say, in your career when you would have felt you would have used similar language to describe the current condition?

Well, that's a good question, David. Tenant demand for space, and Dan can elaborate on this after I'm done, tenant for space has been good in our product -- for a long time. All you have to do is look at our occupancy rates historically, and they've always hovered in the 96% range plus or minus. In terms of strong demand for space, that's not nothing new. What I do think is -- is probably new is that is really two things. Number one, the -- the category killers are -- have consolidated down to a couple strong players in each category, and they're much better capitalized, much stronger retailers and -- and much more focused and they all seem to have extremely robust expansion plans and they're very, very competitive with each other. So we were able to create some very strong competition particularly in our new developments between two players and the same category.

The other thing I think leads us to -- to use strong language in terms of tenant demand is the fact that what is new today and what is unique is that in the --historically we built a lot of product but at the same time our brethren in the mall business were building a lot of product. So the tenant demand was spread over both product types. As you know, there's virtually no new construction of malls. So, all the retailers who historically have looked to the -- to the mall developments for their growth profile have essentially had to turn their attention to our product and look at the lifestyle centers, the hybrid centers and power centers for opportunities for them to satisfy their growth profile. So that's, I think, probably the one circumstance that has intensified tenant demand in our centers more than it would have been historically. Because frankly five years ago the small shop demand was really the always the same cast of characters, the -- the tenants that really whose -- whose growth pro -- plans was always to locate the alongside Wal-Mart or Target, the Fashion Bugs and the Sally Beauty's, and GNC and the Radio Shacks and those types of tenants. What what we see today is -- is a much higher end tenant whose gravitated from the regional mall universe to come up with a prototype where they can grow their store count in open air environments and often with co-tenancy tat may be the similar to what they've had in the past in the mall business and sometimes maybe completely different. But still give them the opportunity to put a store in a -- a densely intensely populated high income area. Dan, do you want to add to that? Or be --

Well, I think that -- that covers most of it. I do think that there is a certain intensity out there today from particularly the real estate departments or the retailers who are under enormous pressure to provide the operating company with the growth that they articulated to the street, and it's very difficult, that's why to Craig's point days shift for openings and things of that -- and -- and developers deliver and some developers don't deliver. It's a very difficult business today. And as a result retailers have gotten extremely serious and intense on who they want to deal with and certainty of execution becomes critical. In those 35 portfolio reviews that I mentioned we have 43 approved LOI's that came out of those 35 meetings, and we're not even at Vegas yet.

Just to -- just tease you out a little bit further, would you -- would you describe investor demand for the -- the product as being intense as well?

Dan?

Investor demand for our product?

Yes.

Investor demand for our product is still intense, and that is what is precipitating the gap between our -- our returns on cost and -- and the cap rates that we can achieve in the market for the product and the value creation.

No slackening -- no slackening of intensity in the very short-term with regard to higher rates?

We have not seen that.

Okay.

We have -- we've heard stories about cap rates softening a bit in some of the product types but in terms of anything that we have looked at, we haven't really noticed that yet.

It's kind of early days, I thinking.

Yes.

Okay. Thanks so much, guys.

Thank you.

And you have a follow-up question with Michael Bilerman with Citigroup. You may proceed.

Scott, maybe just on that point, are you seeing more product come to market even though price expectations may still be high, are you starting to see that either from private developers or private owners or even public companies?

Well, there's -- there's -- there's no secret that there's been a lot of activity among the public companies either looking at potential consolidation or looking at -- go private transactions or some combination of the two. That -- that is going on, and -- and frankly some of the pricing that's bantered about is a little frothy for my taste. In terms of private portfolios, not so much. There is -- there's not as nearly as much activity in that regard. There's a lot of one off assets available for sale, and we get a pretty healthy flow of that type of activity, but in terms of private developers looking for an exit from their properties today, I would say that kind of velocity has slowed down quite a bit because they can get such a strong result from CNBS Refinancing and -- and avoid having a tax event. So I think a lot of the private portfolios will probably stay private for the near term until that changes.

If you sort of have to look out over the next three years, is your sort of own square footage growth and foot development on the side for a second, is it going to match more like what you saw in 2000 to 2002 where you're basically flat to modestly up or are we going to see another ramp like we did from '03 to '05?

Well, I think we're going to significantly grow our square footage, Michael, but it's going to come up more from development than it's going to come from acquisitions. We're -- we're -- I can't tell you how much aggressive we are and how much better organized we are in pursuing development opportunities. It's -- it's very hard for us to get excited about acquisitions in this environment when we can develop better properties at half the price. And if we can add -- if we can get to the point of adding half a billion of assets annually through your development capability and supplement that through some of the joint venture stuff we do through Coventry, that will result in a significant growth in the size of our portfolio, but it will also result in a significant increase in quality and a significant increase in net asset value. In this environment -- in this pricing environment our appetite for acquisitions is -- is almost 100% dependent on two factors. One if we have a private investor who wants to coinvest with us and -- and we're only put putting in a sliver of the equity, then we would pursue large portfolios because we have the infrastructure to be able to bring it on efficiently. And the other would be simply where we have opportunities to recycle capital from asset sales and we don't have -- we can't put it to work in a development quickly enough, but we have an opportunity to buy a higher quality asset a a similar cap rate with a better growth profile.

A good example of that would be the purchase of our partners interest in Paseo Colorado this year. That was a pricey acquisition for us, but in terms of comparing it to the -- to what we sold to generate the capital to buy it, we significantly increased the internal growth opportunities to the Company because we were able to trade out at similar pricing into a much higher quality asset. So that's kind of the -- kind of recycling we'll probably be doing. But in terms of the kinds of acquisitions we did historically, the JDN's and -- and the Benderson's, and -- and the -- the Burnham Pacific's of the world, at this pricing we will only look at that as a very minority partner to a private capital investor who has an appetite to -- to invest capital at the 6, 7 cap rate kind of returns. We -- we think our investors deserve much better returns than that and we think we can deliver them.

Maybe you could give us an update on -- on the Service Merchandise progress.

We should be get -- bringing that to a head. We've been having discussions with our partners recently deba -- debating whether or not we should refinance and hold or sell. And at this point that decision largely depends on them. They are in the market for refinancing and getting very positive reception. We're also in serious discussions about sales and have good opportunities I think to execute the along those lines. I think our --= our position we're somewhat indifferent. Ii -- I don't think we need to report the gains from that transaction to meet our earnings projections for the year. And if we don't sell the portfolio and hold it, it'll be lucrative to our run rate, and if we sell it we'll recognize a pretty significant promote -- pretty significant gain.

My thought was that you -- you had at least baked into that 58 a portion of it was attributed to Service Merchandise. Maybe you can review with us --

Yes, but we -- we basically -- because we -- we knew that that was sort of could go either way, we've replaced that income with other transactions.

And what are -- what are -- what are the gains being derived from -- from? Are they more expansions of centers that you're selling to MDT, is it wholly-owned development that you're selling? Where are those gains being generated to come up with the 58 million?

It's sig -- most of it is sales to MDT of development properties and some of that may be driven by sales of -- of some of the buildings in the portfolio that are flat but where we can achieve very strong gain and a very low cap rate. Like maybe a few Wal-Mart buildings where we have no increases in rents over the next 50 years and we could trade out of that at a very, very aggressive cap rate.

And then in terms of your CapEx budget, it went from 8 million it 12 million in the consolidated and 4 to 8 in the JVs for key I's and recurring CapEx from last quarter. What's driving the ramp -- significant ramp in -- in TIs to FX.

I don't know that it's that significant. As our portfolio continues -- as we go through expansions and -- and some of the redevelopments, those -- those are components in there. It's 8 to $12 million again like when you bring in assets like Paseo Colorado, and some of the leasing opportunities that exist there, along with some of the expansion projects that we have, it's just -- I think it was just more appropriate estimate given what is actually I think even occurred in the -- the first quarter.

Okay. Thank you.

And that does conclude today's q-and-a session. Ladies and gentlemen, we'd love to thank you for participation in today's conference. This does conclude today's presentation. You may now connect and have a wonderful day.

Thank you.