Site Centers Corp (SITC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Developers Diversified third quarter 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 Ms. Michelle Dawson. Please proceed.

Good morning. We're pleased to have you join us. I'm Michelle Dawson, Vice President of Investor Relations for Developers Diversified. This morning you'll hear from 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, let me alert you that certain of our statements today may be forward-looking. 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 press release issued yesterday and filed with the SEC on form 8-K and in 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 and welcome. I'm pleased to report results for another strong quarter. FFO per share grew by over 12%, leasing activity and our operating and development portfolio is robust, reflecting the underlying strength of the retail industry. And particularly the strength of our core tenants. Occupancy gains, leasing spreads, and same store NOI growth also reflected the quality of our portfolio. In addition, we further strengthened our balance sheet through strategic and innovative capital markets activity that Bill will explain later on this call.

Within the last week, we announced two very significant and exciting transactions. First, we completed our first international investment by acquiring a 50% ownership interest in Sonae Sierra Brazil. The second largest retail developer and landlord in the country of Brazil. Our portfolio includes Parktown Pedro the largest mall under one roof in South America. Our joint venture represents a fully integrated operating company with 90 employees in Brazil and is well positioned to exploit further opportunities for development, acquisition, and third party property management. While this transaction was somewhat overshadowed by our second blockbuster announcement, its significance should not be minimized. This transaction represents a very exciting first step in what we hope and expect will be a very significant international expansion for our company. And you can expect other similar announcements in the future wherever we see an opportunity to earn outsized investment returns for our shareholders.

Second, we announced our pending acquisition of Inland's Retail Real Estate Trust. I would like to take this opportunity to speak further on this very important transaction. First and most importantly, we are gratified with the enthusiastic response of the investment community to this strategic and exciting merger. While we're certainly thrilled that the capital markets have reacted so positively to the strategic implications of this transaction, the most telling reaction has been from our tenants. Later in the call, Dan will comment on the terrific feedback that we've received from many of our core tenants about the quality of the properties and the potential for future value creation. I'd like to highlight a few reasons why we think investors and retailers share our enthusiasm.

First and foremost, this is a high quality real estate portfolio. This was verified by the expedited $3 billion joint venture commitment from a major U.S. institution. This transaction represents an acquisition of new dominant properties in compelling growth markets in the southeastern United States. It represents strategic benefits unique to our core competencies. The community center focus of this portfolio solidifies our position as the nation's leading owner and operator of market dominant community shopping centers and the landlord of choice with tenants with an open air format. It also further strengthened our key tenant relationships nationally and in the Southeast with the nation's best retailers such as Wal-Mart, Target, Lowes, Publics, Home Depot, TJX, and many others. You'll hear more from Dan on how the scale of our tenant relationships is absolutely critical to our -- the retail real estate business.

Our operating platform can realize embedded value added opportunities in this portfolio from increasing occupancy, pushing rents, improving tenant recoveries, growing ancillary income, and retenanting underperforming tenants. Based on feedback from some of our major tenants, we believe there are significant opportunities to improve the growth profile and profitability of the shopping centers in this portfolio. Importantly, this acquisition also allows us to prune our existing portfolio through the sale of nonstrategic assets. It also gives us an opportunity to form additional joint ventures with the high quality assets in this portfolio that are extremely liquid and desirable in today's market. In any transaction of this size, regardless of its strategic importance we recognize that the financing execution is absolutely critical.

I'd like to walk you through how we've handled it to date and share an update on our current plan. First and foremost it was absolutely critical that we secure our private equity partner for a sizable portion of this transaction. Given its size we felt it was imperative to get institutional partner to commit to the transaction alongside us for a significant portion of inland's assets. As you know, we have a very significant U.S. institution co-investing 85% of the equity and over $3 billion of assets. In summary, we have already mitigated the financing risks for approximately 50% of this transaction.

The joint venture will be leveraged 60% and we are entering into interest rate caps with our partner for the benefit of the rend adventure. Furthermore, our actions for private capital and our ability to get a major partner to commit unusually quickly was a significant competitive advantage for us in securing this deal. Secondly, it was very important to us to maintain the strength of our balance sheet and our investment grade rating. We have already been reaffirmed as a BBB credit by Moody's and Fitch. And although Standard & Poor's put us on credit watch, they have publicly stated that they will remove the credit watch and restore our rating so long as we do what we say we're going to do with respect to the financing of the transaction. And of course, that's exactly what will happen.

Now, an update on our intentions with respect to asset sales. One of the strategic benefits of this transaction is the opportunity to selectively evaluate and prune our combined portfolio of underperforming assets and to potentially capitalize on the strong capital markets for joint ventures on subportfolios of neighborhood shopping centers and our single tenant Ludley retail product. We have been very encouraged by the widespread enthusiastic interest in these assets both before our final bid submission and subsequent to the announcement of the success of our bids. There will absolutely be a series of asset sales and joint ventures involving some of these assets as well as other sales and joint ventures involving other properties from our existing portfolio. And there have already been advanced negotiations in this regard. From this process, we are highly confident that the new combined will be an outstanding collection of assets with an enhanced growth profile when compared to our existing portfolio. Translating into higher net operating income growth in the future.

With respect to the potential issuance of equity to financial portion of this transaction. It was very important from a standpoint of our financial flexibility that we secured an option to issue up to $1.1 billion of equity to the Inland shareholders as partial payment of the merger consideration. Over time, however, we expect this transaction to be neutral to the strength of our balance sheet. And this will be achieved both from the issuance of equity and from our asset sales and joint ventures. With respect to the equity issuance component, we are actively reviewing all of our alternatives to mitigate pricing risk and we will undoubtedly execute on a thoughtful strategy to eliminate or mitigate this risk through forward equity issuance and will make an announcement in this regard in the near future. With respect to the debt component of the transaction for the wholly owned assets, we are in the enviable position of having approximately $1 billion of capacity on our credit line and we will have the flexibility of tapping the unsecured debt markets in what we consider to be the most opportunistic time.

As with the equity, we are mindful of interest rate risks and we will take the appropriate action to mitigate that risk. While we understand that many investors and analysts would like to see these issues resolved yesterday, as a practical matter, price protection on the equity within the four corners of our merger proposal would have devalued our bid and jeopardized its success. And absent that it would have been risky and imprudent to execute these strategies until the merger agreement had been signed. Now that that is behind us, we can focus on the optimal strategies to mitigate equity pricing and interest rate risks and we shall do so expeditiously.

We as an organization posess a specialized skillset that provides us with an ability to successfully execute transactions like this. The successful financing execution and integration of large portfolio acquisitions is a core competency of our company. We have transactional expertise as a buyer and a seller of real estate, in addition we have extensive capital markets expertise. We have a proven track record of integrating large new portfolios, then increasing value of the portfolio through agressive asset management. We have access to multiple capital sources with multiple joint venture opportunity, and we have a proven ability to deliver enhanced returns and promote through these joint venture partnerships with accompanying outstanding fee streams.

On a final note, I'd like to emphasize that this transaction represents growth for the right reasons, to increase long-term shareholder value. It is my view that over time the market will increasingly value the dominant world class rates at a premium. It is my vision that we will continue to lead this industry and continue to command a premium multiple. With that, I'll turn the call over to Bill Schafer for his comments on our financial performance and capital markets activity.

Thanks, Scott. This was a strong quarter for us in many ways. Before I comment on the quarter, however, I'd like to add my perspective on the Inland acquisition. The successful acquisition and integration of large portfolios into our operating platform is a core competency of this company. Not just on a property level in terms of leasing, management, and accounting, but at corporate finance level, as well. We've demonstrated our ability to manage our balance sheet after several significant transactions. We've used these events to reevaluate our debt portfolio, draw on our banking relationships and establish new financing vehicles that efficiently enable us to maintain our balance sheet at its BBB rating. We're already in the midst of evaluating the opportunities within the portfolio from a debt perspective and expect us to be in a position to provide more specifics on our next call.

Now I'd like to talk about the quarter and give you a brief overview of three important accomplishments from a corporate finance perspective. First, we reduced our variable rate debt to approximately 6.6% of total debt. This amount approximates the construction in progress reflected on our balance sheet. Second, we issued 250 million of convertible unsecured notes at 3.5%. In conjunction with this issuance, we repurchased nearly 50 million of our own stock. This transaction is expected to improve our annual bottom line by over $0.03 per share on an annual basis. Third, we generated approximately 11 million in land and merchant building gains and 6 million in promotes during the third quarter. This compares to approximately 7 million in the aggregate gains in third quarter '05.

With respect to the first item, variable rate debt, you know from my comments over the last several quarters that we have consistently reduced our exposure. This quarter was no different. In September and early October, we executed a total of 300 million of interest rate swaps, which have fixed the LIBOR rate at 4.94 for 3 to 4 years. We have effectively eliminated all variable rate debt exposure excluding that related to our construction in progress.

I'd also like to add some color on the second item, the convertible unsecured notes we issued in August. Converts have attracted a lot of attention lately and it's important you understand why we pursued this opportunity and how our structure differs from other REIT issuances. Our primary motivation was to access low-priced, fixed rate debt financing. Due to convert structure we issued debt approximately 200 basis points below pricing on our unsecured line and for a 5-year standard bond issuance. Although we like the interest expense savings, we observe that many of our peers were issuing convertibles with a 20 to 25% conversion premium. Because of our confidence in our ability to deliver growth, we were extremely concerned about the potential dilution this issuance could have on our shareholders. We were reluctant to offer convertible security with what we considered a low conversion premium of 20 to 25%. To that end, we enhanced the 22.5% conversion premium over current market pricing to 40% through a separate option arrangement with an investment bank that has the economic impact of effectively increasing the conversion price to nearly $74.50 a share.

It's also important to understand that the transaction was structured on a net settled basis, which means that the shares will only be issued to the extent that the value created above the conversion premium and therefore the 250 million of notes will be settled in cash. In addition, we repurchased nearly 50 million of our stock simultaneously with the issuance of the convertible securities. This was also extremely important component of the overall transaction, it protected existing shareholders interest to maintain a higher conversion premium, it also provided us a hedge from the potential issuance of shares above the 40% premium as we purchased our shares at $53.15 per share and will essentially resell at nearly $74.50 per share.

Third item was the is 11 million in gains and 6 million in promotes earned during the quarter. The largest component was 5.5 million promote we recognized on the sale of our Killdeer, Illinois property. Also during the quarter we recognized promote and gain as a result of the recapitalization of our service merchandise joint venture. First, our purchase of our original partner 75 interest triggered a promote. As a result our basis in the assets acquired was reduced by approximately 1.1 million. Second, when we sold an 80% interest to Coventry II, or 5% of our original 25% interest, we recognized the 3.6 FFO gain. We also recognized approximately 3.1 million in merchant building gains in conjunction the sale of two small assets in McDonough, Georgia and Queen Rapids, Minnesota to NBT. These assets were stabilized expansion projects at properties already in the joint venture. And we recognized approximately 4.5 million in aggregate land sale gains. Considering the variety of sources available to us to generate transactional income, the depth of our potential merchant build pipeline and robust interest from institutional equity partners, we're confident in our ability to sustain our current level of transaction activity should we choose to do so. Also as noted our earnings release, our same store NOI increased by 3.2% or $0.04 per share for the quarter. This increase was significantly offset by a higher weighted average interest expense of nearly 40 basis points as compared to the prior year.

Before I turn the call over to Dan, I would like to make a quick comment on our income statement. You may note some increased variances across several line items. This variance primarily reflects the impact of holding and operating the service merchandise portfolio on our consolidated -- on a consolidated basis for nearly two months. Prior to the sale, to the Coventry II joint venture. Also you will note an increase in our management and other fee line item. This is due to the reclassification of insurance costs billed to our joint ventures. In prior years this amount was reflected as a reduction of our operating and maintenance expenses. In addition, insurance revenues from joint ventures were approximately 2 million higher for the 9 month period ended 2006 compared to 2005 because of higher insurance costs. At this point, I'd like to introduce Dan for his comments on the revenue side of the business.

Thank you, Bill. And good morning. Before I discuss our quarterly activities, I'd like to share some additional thoughts in regard to Inland. As Scott mentioned, since our announcement, we've received a number of calls from tenants applauding the transaction. To the one, each tenant we talked with has emphasized the high quality of the assets. Many have identified potential value creation opportunities for our consideration. And all have emphasized how the additional assets enhance our position as their landlord of choice within the open air format.

Our unique core competencies will enable us to realize the embedded value in these properties, ultimately earning a superior rate of return on the investment. For example, the strength of our relationships with leading retailers will clearly increase, enabling us to identify, assess, and execute on value enhancing opportunities that exist now and in the future. Our ongoing dialogue with tenants and active relationship management plus the quality and scale of the combined portfolio increases our relevance to the retailer, particularly regarding their desired growth initiatives. When a retailer needs to fill their open to buys, they will call Developers Diversified.

Once we bring assets in house, we can implement a number of core competencies designed to increase profitability and I'd like to expand on a few of those specifically. In any acquisition that involves assets with a high occupancy rate, the question of occupancy expansion is always at the forefront of our analysis. And while we view that opportunity with the appropriate conservative review, history has told us that regardless of the occupancy level at acquisition, our platform and leasing professionals have been able to raise occupancy within the acquired portfolio by 100 to 150 basis points within the first year. That has occurred with Burnham Pacific, JDN, Benderson, and we expect nothing less for the Inland portfolio.

In addition, in the loan circumstance, Puerto Rico, where occupancy was not raised to that extent, we were able to create unprecedented value from ancillary income, another core competency to levels nearly double the prior owner's levels while adding over $3 million in NOI in year one alone and still growing. In regard to Inland specifically, ancillary income was not a primary focus of management. And therefore, we feel our ancillary income competency will present another opportunity to enhance value and grow beyond current levels. More specifically, in 2006, we are fast approaching $20 million of revenue within this division. Starting at $650,000 in 1999. With the addition of the inland assets, we would expect our 2000 number to increase from 10 to 15% above the already budgeted 14% increase over the 2006 projected final number.

Another area where we are confident that synergies will further enhance value is in property management. With our ability to exploit greater asset densities in larger markets, our overall staffing allocations will reduce on a per asset basis. In addition, our ability to bundle property management services, our enhanced national purchasing power, and implementation of a unified contractor bidding procedures for capital expenditures will over time reduce property level expenses. These initiatives coupled with the revenue focus just discussed give us great confidence in our ability to grow asset level NOIs above current levels and even above current projections.

Finally, in discussion of core competencies and adding value, we cannot minimize the importance of our internal development and redevelopment capabilities charged with the responsibility to look at the assets with a creative edge and squeeze every ounce of hidden value from a core asset that looks tapped out to the untrained eye. This expertise includes reducing parking ratios where possible to add outparcels or multi-tenant buildings within the existing parking fields. Mothballing, undesirable space, or structural vacancy space and exporting that square footage elsewhere on the site should create a revenue-producing location. Acquiring adjacent property to enable the construction of additional critical mass and marketing the assets to our mix use program to determine if a potential asset intensification opportunity exists or just the basic blocking and tackling that comprise the every day asset management responsibility of a company with development as a core competency.

For a company like ours who is first and foremost in the real estate business, the opportunity to acquire excellent high-quality assets in scale and build shareholder value at the time -- at the same time is extremely energizing. We view the Inland portfolio as the perfect opportunity to leverage our internal competencies o meet that challenge and we are very excited to get started. Now let's take a look at the quarter.

Leasing activity continues at a very aggressive pace. During the quarter we leased over 1.6 million square feet. This figure includes new leases with Bed, Bath & Beyond, Borders, Office Depot, Hancock Fabrics, Kay Jewelers, and obviously numerous others. In our lifestyle center portfolio we added Pottery Barn Kids, William Sonoma, New York & Company, and Stride Right. And in Puerto Rico where we continue to see phenomenal interest from U.S.-based retailers, we signed new leases with Zales, Cold Stone Creamery, Verizon, and Starbucks. Our core portfolio leased rate increased 30 basis points over third quarter of '05 to 96.1%. Rents on new leases increased 29.5%. And on a blended basis, rents on new leases and renewals increased 15.5%.

These positive results reflect the ongoing strength of the retail industry. Based on the feedback we've received from tenants, demand for new store locations show no signs of weakening with the lone exception of the 50 basis point decrease to 7.5% annual square footage growth ratio announced by Wal-Mart earlier this week. Since last quarter, we've hosted 12 portfolio reviews with tenants such as Khol's, Office Max, Zales, Picture People, HH Greg, Dollar Tree, DSW, and others. We've also met with many other tenants at the ICSC events in Orlando, Chicago, and Palm Springs. At each of these opportunities we've discussed the retailers' future expectations and I'd like to share the three most important messages that we've heard.

First, retailers overall have a positive expectation for the holiday season. As I discussed last quarter, it's important to recognize that any expanding economy creates strong momentum for the retail industry and clearly the current economic trends are not lost on the retail community. A positive view of retailers is critical for a successful holiday as expectations and inventory levels are directly linked. Second, open air retailers continued to increase market share through new merchandising initiatives such as proprietary brands and new product offerings. Target, Wal-Mart, J.C. Penney and Khol's, have most notably in recent months announced innovative merchandising strategies and strategic alliances with key vendors to enhance the in store brand identity while expanding primarily in open air formats. And third these economic and retailing trends clearly support our tenants bullish outlook with respect to 2007 and 2008 store growth expectations and we are in the sweet spot of their growth requirements.

We can also see these positive industry trends reflected within our development portfolio. We've provided additional disclosure in our financial supplement that gives you a better understanding of the size of our development pipeline and the variety of projects we're developing. All told our development and redevelopment pipeline of active and shadow projects totals 3.5 billion in gross project costs. In addition our site selection team has another 20 to 25 projects under preliminary pursuit representing another 1 to $1.5 billion in project costs. You can also see from the new disclosure that we are developing a growing number of lifestyle hybrid and mixed use centers which reflects the continued evolution of the open air retail format.

During the quarter we substantially completed our project in Pittsburgh, Mount Nebo point, a 370,000 square foot community center anchored by Target and Sam's. The first phase of our Midtown Miami project also opened, Target opened earlier this month, and additional tenant openings will continue through the fourth quarter. At Beaver Creek Crossings in suburban Raleigh, Dicks, Old Navy, Justice, Circuit City, and Marshalls have opened. We anticipate the first phase of this center will be substantially completed during the fourth quarter as Borders books comes online.

We completed a pad sale to Khol's and Horseheads New York and have signed ground leases -- a ground lease with J.C. Penney and Nampa, Idaho. Beyond these highlights we've finalized negotiations with several other major anchors and medium boxes for additional locations at our development projects.

I'd also like to describe two new projects we've added to our development portfolio. Mendocino Crossing, and Bloomfield Park. Mendocino Crossings is a 665,000 square foot community center located in Northern California. We have a terrific site right off of highway 101 and tenant interest in this market is extremely strong. We're developing the project through a 50/50 joint venture with Dave [Birn]. This is our 6th project with Dave Birn, and our relationship has proved to be highly successful.

The second project Bloomfield Park is a 600,000 square foot lifestyle center that will be located within a larger mixed use development. Tenant interest in the suburban Detroit development is strong. With tenant commitments on nearly 200,000 square feet of space including BCBG and BCBG Girls one of the few nationally, PacSun, Coldwater Creek, Barnes & Noble, J-Joe, Chico's, Antero Loft, Lucky Brand, and numerous other tenants and restaurants. As Scott said, business is good and given the signals we've received from tenants, we're optimistic that strong demand for our asset class will continue through 2007 and 2008. Now I'd like to turn the call over to David for his overview of transactions and operations.

Thank you, Dan. In addition to our acquisition in Brazil, we were successful in executing other strategic transactions during the third quarter within our wholly owned portfolio and through our Coventry II joint venture. We disposed of one joint venture asset and two noncore assets during the quarter totaling approximately $65 million. These properties were located in Killdeer, Illinois, Fort [Ogelfield], Georgia, and Cartersville, Georgia. By selling these properties when we did, we were able to capitalize on strong investor demand for one-off assets. We also have approximately $95 million in similar assets under contract and expected to close by the end of the year. By calling these assets from our portfolio, we will be in a better position to focus our attention and resources on opportunities that better fit our investment strategy.

In addition to Coventry's acquisition of a new lifestyle center development in Bloomfield Hills, Michigan, which Dan just mentioned, Coventry completed its acquisition of an 80% interest in the service merchandise portfolio in so doing, we effectively reduced our ownership percentage in the properties from 25 to 20%. There were several compelling reasons to drive this deal.

First, we are now afforded more control over the properties, which will create greater opportunities to add value in the existing portfolio through additional lease up and redevelopment. Second, with Coventry, we are able to continue working with a JV partner with whom we've had a proven track record. Finally, we are able to effectively recycle capital by reducing our ownership interest while still maintaining a healthy ownership percentage in a highly successful portfolio.

The service merchandise portfolio valued at approximately $185 million presently contains 41 leased and stabilized assets of which 27 are ground lease or fee interest and 14 are leaseholds. Of the 9 partially leased or vacant assets, one was sold last week, one is expected to be sold shortly, and two have tenant commitments. This leaves approximately 300,000 square feet to be leased. From an organizational standpoint, I'm pleased to announce two key changes that were made during the third quarter and one that will become effective in mid-November.

First, as mentioned in last week's press release announcing our acquisition of a 50% joint venture interest in Sonae Sierra Brazil, we have appointed Richard Brown to lead our initiative in expanding our global platform. In his new role as Executive Vice President of International, Richard will work closely with Scott and Dan in various departments within Developers Diversified which are already involved in international investments and operations. Richard will be responsible for managing the ongoing relationship with Sonae Sierra Brazil as well as identifying and analyzing other international investments. Richard has been with Developers Diversified since early 2000 and most recently served as the Executive Vice President of Real Estate Operations. As Scott described earlier, the emerging markets present a wealth of opportunities. In order to properly evaluate the risks involved, we need highly experienced dedicated real estate professionals to manage this new avenue of external growth.

Second, we hired Eric Christopher as Vice President of Development Leasing in August. Eric will be a critical liaison between our development and leasing departments working to increase the efficiency with which the two departments interact. He will work closely with our leasing and development managers to coordinate leasing efforts on all new development projects. He will also further strengthen our relationships with Khol's and Target through our national tenant program. Eric brings with him 14 years of experience in real estate and retail, most recently with Pennsylvania Real Estate Investment Trust and the Gap.

Third, we are pleased to announce that Christa Vesy will be joining Developers Diversified on November 13, as Chief Accounting Officer reporting to Bill Schafer, our CFO. For many years up to 2004, Christa worked on our account for PricewaterhouseCoopers, including responsibility for managing our audit engagement. From 2004 to the present, Christa has been employed at [Lubrazar] Corporation in Cleveland. First as manager of external financial reporting, and more recently as controller of one of Lubrazar's] major business segments. Christa's accounting experience and expertise will be important to our organization as we continue to grow. Now more than ever we are well positioned from a human capital standpoint to continue to grow our core competencies and further differentiate ourselves from our peers.

On a final note, I want to emphasize that we are fully prepared to deliver yet another seamless transition as we move toward closing the Inland acquisition and integrating its portfolio into ours. In the past several years, we have successfully integrated JDN, Vernderson, and CPG into Developers Diversified. In each instance increasing occupancy, increasing ancillary income, and improving operations without any disruption to our core business or working relationships among our own people. In other words, acquisitions of significant scale have become one of our core competencies for which we are justifiably proud. With that, I will turn the call back over to Scott for his comments on year-end guidance and outlook for 2007.

Thank you, David. With respect to guidance for year-end 2006, we are narrowing our estimated FFO range from what was 3.38 to 3.44 per share, to 3.38 to 3.42 per share. A few analysts will need to revisit their assumptions for fourth quarter to properly reflect the acceleration of certain transactional items that were recognized in the third quarter.

Looking forward to 2007. Given my earlier comments regarding Inland and the opportunities it presents to reevaluate the combined portfolio for potential sales to joint ventures or outright dispositions and to potentially reduce the FFO contribution from transactional income items. Our 2007 guidance will be broader than we typically provide. We, today are introducing a range of $3.70 per share to $3.80 per share. With that, we'll be very happy to open the line to receive your questions. Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jonathan Litt with CitiGroup. Please proceed.

Hi, this is with [Inaudible] with Jon. Given the size of your development pipeline, do you plan on increasing your development starts up from 400 million a year?

Well, we -- the development starts might increase, I think we really more focused on the deliveries per year. I think that, the number right now for the near term because the pipeline, really has about a 3-year life between the time we start a project and finish it. Those numbers are pretty well baked in. So I think the $300 million a year in development deliveries for the immediate future is probably a good place to start. Going forward, we do have some ambitious goals to accelerate starts in the future. And that will translate into probably larger development deliveries, but not for a few years.

Okay, and then do you have any update on deals in your development?

Really nothing has changed since we've guided earlier. We're still in the low double digits. 10, 11% is fairly typical in terms of our development project. That's a first-year yield on cost. Fully loaded for the underwriting adjustments for management fee, vacancy factor, et cetera.

Okay, my last question. Can you give some color on how leases are written in Brazil given Brazil's historical inflation?

Yes, that's a very good question. Actually, the leases are just like ours with the additional protection that they automatically increase in rent for whatever the inflation rate is in Brazil in addition to the contractual bumps that exist in the leases. That is a way that we really sort of mitigate the risk of currency between the dollar and the Brazilian Real. However, as we all know, you can do whatever you want in the lease, but the tenant still has to be able to pay the rent. We still understand that there's still risk that's greater than what we have with respect to our domestic, as such which is reflected in the cap rates on those properties. But that's how landlord in Brazil protect themselves. A typical lease might have 3% bumps, but in addition to the 3% bumps, it will also have an inflation protection.

And then, are you planning on going to any other countries with your current partner in Brazil given that they have a global platform?

We've discussed that, yes.

Okay, thank you.

Your next question comes from the line of Dennis Maloney with Goldman Sachs. Please proceed.

Hi, good morning. Just to follow-up on international expansion. What factors do you consider in assessing risk in these international markets and how do you price these risks into your required rate of returns?

That's a good question and I think, unfortunately it's a little more art than science. But I think there's a few characteristics that you can look for in any international transaction that we pursue. Number one, we try to mitigate our risks by associating with the strongest local partner available. Number two, we try to find markets where we think the cap rate compression is a real possibility. Brazil is a great example of that. We think of Brazil as where Mexico would have been 5 years ago. And there are other markets predominantly in Eastern Europe where we think similar opportunities exist.

We also mitigate our risks by limiting our investment. I don't think you're going to see us investing billions of dollars in any singe market. We will make initially small bets in various markets, at very high returns on cost, very high IRRs in relationship to what we see here. And we will do the best we can to evaluate where we think the risks are, overstated by the investment community. Another thing that we look for is markets where other investors are flocking. I think it really bodes well for future cap rate compression when we see other people investing large sums of money in emerging markets. Brazil is a great example of that. We've seen Cadillac Fairview, Ivanhoe, and General growth all make major investments in Brazil alongside of ours and we think that's a positive indicator that we're probably going to see some cap rate compression in the future.

And then for Brazil, what made the 10% -- or the 11% cap rate the right return when you noted in the press release that financing for commercial real estate is currently not available at favorable rates? Suggesting local lenders see notable risk in commercial real estate in Brazil?

Well, I mean, it's virtually double the rate, the cap rate that we would be paying in the United States. Reasonable minds can differ whether that's enough. But in this particular case, it was supported by independent appraisal and that's basically where the properties are valued by investors similarly situated to us. Parktown Pedro, the largest asset in this portfolio probably would trade at a 4.5 cap rate if we bought it in the United States. Buying an asset of that caliber at 11% cap rate is truly remarkable and it discounts dramatically, potential risk in the marketplace.

Then you noted that you're going to use asset sales to enhance your internal growth profile. What do you think those asset sales could mean to the enhancement of your same store NOI growth as well as your long-term FFO growth?

I would be reluctant right now to try to quantify that with any precision. But suffice it to say, we're going to -- the decisions we make on asset sales will be largely driven by choosing assets that we think have a growth rate that is lower than the average growth rate of our portfolio. And some of the assets we will sell and frankly we will probably conclude they have zero growth rate, that we're spending an enormous amount of internal human capital just trying to maintain the income that's in place. Inevitably if we can effectively dispose of those assets it obviously will have a positive impact on our growth rate. Along with other things we're doing in the investment portfolio. Our development properties have a larger component of small shops with short-term leases.

So we're increasing our lease role on an annual basis and our lifestyle centers have a far larger component of short-term leases that give us an opportunity to increase same store NOI at a rapid rate and we're certainly increasing the percentage of our capital invested in those types of assets. Again, Puerto Rico, is a great example where our internal growth rate significantly exceeds that of the overall portfolio. So the asset sales along with some of these other initiatives, we are confident we'll enhance our same store NOI. And while I can't predict that with precision today, it's certainly something quarter to quarter we'll be sharing with you and you can watch the progress along with us.

And then just lastly, the 10 to 11% yield on costs that you quoted for your development pipeline, is that a GAAP yield?

No, that's actually a cash on cash yield. It's slightly enhanced if you add straight line rev.

Okay, thank you very much.

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

Scott, actually just a follow-up on an earlier question. How much of your desire for international expansion, whether it's Brazil or other future markets is motivated either by your tenant clients desire for a real estate partner to ake them across borders as opposed to just say asset accumulation for PDR?

Jeff, it's -- frankly it's almost the opposite. I think what we're really going to see from our international expansion is generating new tenant relationships with European retailers that are looking at initiatives of expanding in the United States. There may be some of the -- we may be able to export some of our tenants overseas, certainly we're going to do that to Puerto Rico. But I think what is even more exciting is in terms of our investigation down in Brazil and in Europe, we've uncovered tenants like [Xarra], tenants like Tesco who are embarking on pretty ambitious expansion programs in the United States. And these are tenants we had no relationship with before. Now all of a sudden, we're their landlord in a number of properties and will be in the future. And I think it's going to actually make us stronger domestically as a result of that.

And just a point of clarification concerning a comment you made on the conference call the other day concerning the Inland portfolio. I think you indicated that the $4 a share component of the purchase price that was payable in stock was the amount necessary to avoid creating a default under existing loan covenants. Did that determination of the threshold envision the $3 billion JV you announced? And have you contacted your lenders to take their temperature on getting waivers?

We did contemplate. And our lenders are very comfortable. We didn't ask for waivers because we knew within the four quarters of transaction that we would comply with our loan covenants. I look at it a little more positively. I don't look at it, it's what we had to do to avoid a default. I look at it as what we had to do to ensure compliance. There's also other things we can do to ensure compliance. This was just a fail safe measure that if all else fails we knew we would remain in compliance of our covenants.

Just one last question. Can you repeat your revised '06 FFO guidance for me?

The '06?

Yes.

3.38 to 3.42.

Thank you.

Your next question comes from the line of Michael Mueller with JP Morgan, please proceed.

Hi, a couple of questions here. First of all, in terms of the '07 guidance, can you give us anything in terms of the magnitude of where you expect the transactional profits to come in, just a rough range and the same on the disposition side or the JV contribution side? Just a few numbers behind it.

Mike, because of the magnitude of the Inland transaction, for internal purposes we've had to really work on wide ranges with those types of items. And I'd really be reluctant to give you guidance, those specific items at this early stage.

Okay.

It's something we can certainly talk about on future calls. But at this point we've got so many moving parts in these numbers that I'd really be reluctant to hone in on any specific items.

Okay. One question on Brazil then. How quickly do you think that country as a whole will begin to consolidate on the retail side? And is the opportunity you see more on the development side or the acquisition side at this point?

It's a very good question. Both. There are very few shopping centers -- very little shopping center square footage per capita in Brazil. A very small fraction of what we have in this country, yet it's a very large economy and a growing economy. So we certainly see a number of development opportunities. And I think we're already honed in on a couple that could be under construction within a year. But there are also interesting acquisition opportunities that are largely driven by an edict from the Brazilian government that requires pension funds to lower their investment and real estate. And most of the shopping centers in Brazil are owned in commingled funds with a variety of pension funds. And we're seeing a number of pension funds offering their interest in those properties for sale to reduce their real estate exposure. That gives operating companies like ours an opportunity to gain a foothold in properties by acquiring an interest in the shopping center and gaining the property management contract along with that. And I think there's a really strong opportunity for that with lots of very high-quality properties.

Okay. Thank you.

Sure.

Your next question comes from the line of Craig Schmidt with Merrill Lynch. Please proceed.

Thank you. It seems like the scope of some of your development projects has grown from second to third quarter. I wondered if you could comment on three. That's Freehold, Miami, and Horsehead?

Well, sure. Miami, I think as we've described it as about a 650,000 square foot project. The numbers Miami have remained relatively constant with the one exception of the south block because quite frankly, originally we had that as a ground lease and now we're looking to do some build to suits. So there's been some shifting in the numbers as a result of the leasing momentum, but nothing that is jeopardizing our returns expectations. Horsehead is a very interesting project. It's very typical of what we're seeing now in the marketplace which is reusing land that was really misused or had outlived its useful life under its current condition. And Horseheads was a manufacturing and canning plant, distribution plant. It was closed down for many years. It was a real eye sore and a scar to the community. And they were very happy that we came along and were willing to work with us. We had to take down the plant. We had to mitigate some minor environmental issues and now we have a terrific site and again it's going to be extremely well leased.

Freehold?

Freehold was a property that we acquired through the JDN acquisition, it's Sam's and Wal-Mart on a ground lease and about 30,000 square feet of additional retail and some outparcels. So that is -- and again for those of you who are familiar with the Freehold New Jersey market, an extremely difficult market to get into. It was a site that was tied up in litigation within JDN for numerous years and we were able to come in and work things out with the town, build the project, and now we have a -- again a 20-year ground lease with Sam's and a 20-year ground lease with Wal-Mart, 30,000 square feet of additional space and a number of outparcels.

Where is that in relation to the Raceway Mall?

It's right across the street.

Thank you very much.

You can see it. You can see both projects from standing in each other's parking lot.

Thank you.

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

Morning. I guess I just had a question about hurdle rates. Thinking back to Benderson which I think was closer to an 8 yield and I know it was a different portfolio. But also involved a big JV component with the fees that benefited you from that. And now we're doing deals that are albeit maybe somewhat different quality but now you're talking things in the low 6s. I guess my question is how are you looking at that? Especially compared to your own cost of capital and, I know the JVs make things more profitable, but is there a limit here in terms of large deals and how much you're willing to pay to sort of ramp-up the asset management business and increase the size of the portfolio?

Well, it's a very good question, Matt. And I think the answer is it really is determined not by what we're willing to pay, but what the institutions are willing to pay. And we obviously are in discussions with a large number of institutions on a daily basis and we obviously have a very good feel for where that appetite is. I think the fact that the institutional partner in this transaction is investing $1 billion, applied 6.2 cap rate, even less than that when you back out the asset management fees gives you a pretty good insight into where institutional appetite and cap rates are. This investor is one of the most sophisticated in the country and they wouldn't be making this type of investment if they had any question about whether they were getting value in return.

Obviously there's been cap rate compression across the board in all real estate asset classes. There's been more cap rate compression frankly, in our asset class, and I think that's largely because the asset class was mispriced. And we went through an era where people were very concerned about the risk of power centers, big box tenants, and so forth. I think all of that turned out to be nonsense and it has resulted in outsized cap rate compression within our asset class. Some of that occurred since the Benderson transaction. I'm quite confident we wouldn't be able to execute Benderson today at anywhere near the cap rate that we did when we did that transaction just a short time ago.

Right. And just a follow-up. I agree. I think you guys have had a lot of foresight about the value of more community center, power center type assets. But, I guess, the comment you made about sort of the institutional demand at this kind of a pricing level. I guess I'll pose it to you this way. If market pricing comes down another 150 or 100 basis points and the institutions still have appetite at that level, does that mean you probably have appetite at that level, as well?

Well, it depends what you're talking about, Matt. We have certainly appetite to develop assets and sell them into joint ventures at that pricing. Would we be investing on balance sheet in core assets without -- if that's your question without joint ventures?

No, with JV capital, Scott, these kind of deals, the Benderson and this I would sort of use somewhat similarly. Would you continue to do deals like this, I know the JV capital makes them viable especially from an FFO perspective and I know they also enhance your ROE. I guess my question is from an ROA perspective, how are you looking at that and where do you start to cut things off if the market continues to go down cap rate wise?

That's a very interesting question, but I think that we're not going to try to outsmart the market. If we have -- if the market is willing to pay a 5 cap for community center assets and hire us to manage them and we can make a very significant return by putting in a small investment piece and earn the fees, I'm not going to take the position that I'm smarter than they are. And I'm not going to take advantage of that opportunity.

Great. Thank you.

Your next question comes from the line of Scott Crowe with UBS. Please proceed.

Good morning. I was just wondering, could you give us any color at all on how much of the 3.70 to 3.80 guidance that you just gave relates to the Inland transaction?

Well, yes, I think it's consistent with what we said on the Inland conference call. You know, about $0.20 to $0.30 of accretion.

Okay. Even though the consensus was at 3.67 before you announced the deal?

Yes, I think consensus was a little high before we announced the deal. We obviously didn't provide any guidance. And I think the reason the consensus was a bit high for 2007 is because a lot of our development deliveries in 2007 occur towards the end of the year and don't have the impact on the numbers that I think analysts might have expected based on past years and that's a pretty significant number.

Okay. Thank you.

Your next question comes from the line of [Christine Hughes] with Deutsche Bank, please proceed.

Just another follow-up question on the '07 guidance. Could you elaborate a little bit on what you're including in that in terms of land sale gains and term fees and promotes and all that stuff?

Yes, like I said before to the last person who asked me to do that. We're just not prepared to do that this early in the game. We'll be happy to give you more visibility on those items as time goes on. There's too many moving parts right now in these numbers to be that specific.

Are you including the acquisition fees from the Inland transaction in your guidance?

Absolutely.

All right. Thank you.

Your next question comes from the line of Jonathan Litt with CitiGroup. Please proceed, sir.

Hi, sorry to ask another question about '07 guidance. But after backing out the $0.20 to $0.30 implied in your guidance from Inland, that gives us the midpoint of 3.50 verses this year's midpoint of 3.40, which implies 3% growth. That seems slightly low compared to your general historical FFO growth rate. Is there anything specific that's going to be pulling that down?

Well, yes, specific that pulls that down is we're talking about doing a massive amount of asset sales to asset manage the portfolio.

Okay.

We wouldn't have done that without the Inland transaction.

So that's a clarification, the $0.20 to $0.30 of accretion does not include the 1 billion of asset disposition.

Well, no, I guess that's right. It does not. That's a fair comment.

Okay. Thank you.

Your next question comes from the line of David Harris with Lehman Brothers, please proceed.

Yes, good morning. Scott, a couple of questions for you if I may. Just elaborating a little bit more on the line of questioning, that Matt Ostrower put to you. Isn't your ability to generate a promote become somewhat more questionable as you go down in terms of your willingness to accept lower and lower cap rates?

It depends what the hurdle rate is for the promote, David. And we're seeing hurdle rates on promotes go down on some of the new core funds as low as 8%.

Are hurdle rates going down faster or in line with the compression in cap rates?

I think it's pretty much in line. I think the opportunities to earn those promotes are pretty consistent based on where the pricing ends up.

Do you ever see a time when those deadlines will disconnect. Obviously there could be a time when those deadlines disconnect. Is there anything within your sight range at the moment?

Well, they absolutely will disconnect and there's going to be a time when private capital is probably not going to be the cheapest form of capital to acquire assets. Right now, the private capital has a voracious appetite. As everybody knows there's an incredible amount of liquidity in the system. And that has caused investors to be extremely aggressive, both from a cap rate perspective and from their -- what their willingness is to -- in terms of hurdle rates, on promotes, and so forth. I don't think that's going to last, I think when we start to see back up in terms of that liquidity, that may not be the optimal way to finance core acquisitions going forward.

Okay.

I think there will be that disconnect.

With regard to your overseas, do you have sort of a target in mind as a percentage of your business that you might achieve over the next 3 to 5 years?

That's a very good question and it's something we're going to discuss at the next Board meeting now that we've made our first investment and I don't have a percentage to give you today. Obviously the fact that the size of our company looks like it's growing pretty significantly has probably moved the absolute number significantly if we kept the percentage constant. I guess if I was to just throw out a number, that would probably be -- you know I'd be comfortable with, probably something to the tune of 20% to 25% of our total assets.

That's a 3 to 5 year time frame, would that be fair to think?

Well, I don't know if we'll be able to execute it that quickly. But we'll do it when the opportunities present themselves.

Assuming you can partner up with good local partners, how much is the limitation on your senior management's capacity to oversee a global company, a limitation in your expansion?

That largely depends on how the joint ventures are constructed. In this particular case in Brazil, it's really not terribly difficult because we have a fully integrated operating company that we co-own in Brazil. So to keep tabs on that, it's a little bit longer flight, but other than that it's really not different than overseeing our operations throughout the United States. There may be situations, David, where we co-invest overseas where we're not even the property manager. In which case we become more of a passive investor and it requires a tremendous amount of oversight on the development process, but once the project is stabilized, it won't require very much at all. It'll be incumbent upon our partner to do the reporting back to us. So I really think it largely depends on how these relationships evolve and how they're structured.

A lot of language classes, Scott.

The good news is that all of the people we talk to speak English because God knows we don't speak any other languages.

But they play football in the rest of the world, remember, not soccer.

You got it.

Thank you.

Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Hi, good morning, guys. Congratulations on a very busy quarter. I'm looking forward to seeing what you have in store for us next quarter. Maybe the first manned mission to Mars or something. Yes, I want to follow-up a little bit on what David was asking in kind of a different light. Is it possible to have too many of these institutional joint ventures? As you bring in new partners, is that a difficult process to manage?

It is, it can become cumbersome. And I think if the relationships become small, we try to exit them and incorporate them into larger, more strategic relationships, absolutely. As you -- obviously as you grow, there was a time when a $200 million joint venture on some assets was a big deal. Now, it almost does become a bit of a nuisance. So yes, I think over time we'll try to -- I think you'll see us evolve to more commingled funds which are larger, have the capacity to grow rather than having a large number of smaller discrete joint ventures.

If you add somebody else for the Inland stuff, that's something you can handle. It's not an organizational issue to bring another big joint venture partner for more of that portfolio possibly?

No, Rich. This is Dave, I think that we are well positioned. We have a joint venture group which has grown over the years, it's managed very well. And the international organization, which is just commencing under Richard's leadership working with Scott and Dan we'll play off of that and at some point we'll have to determine whether or not that needs a larger organization in and of itself in addition to being able to take advantage of our other competencies and skill sets within the business. We're monitoring that very closely, but right now we have the capacity with our joint venture group simply by adding an analyst here and an analyst there. It's usually -- when we're the operating partner it's a matter of producing reports for our joint venture partner. As Scott indicated in the international, sometimes it can be the reverse, which is less labor intensive, if you will. So I feel very comfortable at this point.

Thanks, Dave. And then on the development front, is it getting more difficult to find good large pads, good large sites for the developments you guys like to do?

Well, it's a great question. It really depends on the type of project and where it's located. It is getting more difficult to find sites that are a greenfield at the intersection of two major highways and then go and get that entitled. The entitlement process is becoming more difficult. The land is available but the entitlement process, the risks associated with that and the patience of the landowner in going through that process with you has certainly increased the risk profile of those projects. That being said, on more of the infill locations, there are numerous opportunities that have presented themselves and where you get lots of local cooperation. Because the town needs help. The town has an eyesore. Seabrook is a good example in our development pipeline. I don't think anyone would ever consider New Hampshire infill. It has a -- it was a site that had -- that was really not being used properly and had an abandoned factory on it. And we went to the town and they were happy to have us. So I think that in suburbia, if you will, it is becoming more difficult. Where you're reusing and recycling land that has already been developed, it is becoming actually a little less difficult.

So continuing the pipeline, Dan, at sort of the current rate of growth is probably reasonable? You would say?

Yes, in fact as you see from the supplemental we've actually increased the pipeline and we continue to look at all viable opportunities. There are fewer and fewer developers out there today that could handle some of the projects of the size and scope that we're doing. So as a result, we -- we are seeing opportunities, some cases almost exclusively.

Okay. Very good, thank you. And then looking out to the end of the year, year-end '06 occupancy, does it go up much from here?

Not too much. We are, as you probably have noted, our occupancy number has been hovering around that 96% range for quite some time now. We'll have a little pop towards the end of the year because tenants like to open before the holidays. But it won't be anything significant and it certainly -- the nice thing about this year because we've been able to avoid any massive bankruptcies, or anything of that nature, we're trending right where our budget indicated we would in '06.

Okay. Good, thank you. And then Bill, I have a question for you on the gains. It looked to me like there were about $8 million of gains that weren't backed out of FFO and I assume that's 3.6 million from McDonough and Coon Rapids. 3.6 million roughly from service merchandise and then about another 900,000 from land parcel sales, is that about right?

Actually, I think we show that in our supplement, Rich.

Okay.

Let me just flip to it. It's in the section 2.5, I believe in the back of that section. And we show that from DDR's perspective, we included in FFO an aggregate of about 11.3 million of gains, which are about 4.5 million in land sales and 3.8 million in the merchant build. And then also on the next page we showed from the joint venture, which largely is the promote on the Killdeer sale.

Okay. Very good, thank you. You're right. And then can you remind me again in 3Q '05 why the back out of gain on sale was so high versus what it was on the income statement so high in the FFO statement versus the income statement?

Trying to recall the assets that were--.

Seems the negative, it's a negative merchant building or negative land sale gain type situation. It seemed awkward to me. I was looking, I couldn't remember if you explained it last time. I took a look, I didn't see anything.

Let me get to the page -- I'm not sure I--.

Well, it was 2 million I think it was of gains on the income statement and then you backed out, something like 11 million of gains on the FFO statement.

Well, yes, those -- generally those gains that we're backing out on the FFO are not necessarily merchant build.

Those are regular gains, right?

Yes.

But those were so much higher than the 2 million that you had on the income statement.

It's probably out of the discontinued ops piece. There's a large gain in discontinued ops.

Okay. Okay. I got you. You're right. Thank you very much, guys.

There are no additional questions in the queue. At this time, this concludes the question and answer session of today's call. We would like to thank you for your participation in today's conference, this concludes the presentation. You may now disconnect. Good day.