Site Centers Corp (SITC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Developers Diversified Realty fourth quarter company earnings conference call. [OPERATOR INSTRUCTIONS] I would now like the turn the presentation over to your host for today's call, Ms. Michelle Dawson. Please proceed, ma'am.

Good afternoon. We're pleased to have you join us. I am Michelle Dawson, Vice President of Investor Relations for Developers Diversified. This morning you'll -- this afternoon you will hear from Scott Wolstein, Chairman and Chief Executive Officer; David Jacobstein, President and Chief Operating Officer; Daniel 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 would like to introduce Scott Wolstein our Chairman and CEO.

Good afternoon, everybody. I would like to begin today's call by extending my personal thanks to David Jacobstein who will be stepping down from his role as President and Chief Operating Officer effective May 8, the same day as our Board's annual election of officers. David's vision and contribution towards building the infrastructure and processes that have supported our growth over the last several years will continue to serve us for many years to come. When I think about where we are today compared to 1999 when David joined us, he should be very proud of his role in the Company's evolution. After this change David will continue to represent Developers Diversified on MDTs Board of Directors and he will provide advisory services on projects that leverage his knowledge of our organization and his leadership skills.

On behalf of our Board of Directors I am pleased to announce that Dan Hurwitz will be elected to the position of President and Chief Operating Officer of the Company to concur with David's departure. Dan has demonstrated his leadership and acumen through his leadership role in day-to-day operations of the Company and through his participation on our Board and as a director of MDT. Over the years Dan's responsibilities have expanded beyond managing our key tenant relationships in the revenue side of our business. He is now a familiar figure to many of you in the investment community as well as to many others in all aspects of our industry. Please join me in congratulating both of these exceptional individuals as they welcome the next phase of their careers. Now let us turn to our financial results.

I am pleased to report this quarter's financial results of $0.82 in FFO per share which reflects 10.8% growth over the fourth quarter 2005 FFO per share of $0.74. Our operating and development portfolios continued to reflect solid performance driven by tenant demand for new store locations in the open air format. Property fundamentals remain strong as they have over the last several years and same store NOI growth is improving as we implement new asset management strategies to push rents and improve profitability.

I would like to highlight a few examples of how we leveraged our internal capabilities during the year to create shareholder value. With respect to our investment strategy we've achieved some exciting results which have important long-term implications to shareholders. First, with our new relationship with TIAA-CREF and our existing relationship with MDT we have the core business well primed. These two ultimate life vehicles provide us with alternative sources of private equity and a fee stream that is both highly profitable and easily scalable given our operating platform.

Second, we continue to grow our pipeline of developments and redevelopments which now represent $3.5 billion in gross project costs. With average leverage investment returns holding in the low double digits, development represents a phenomenal value creation opportunity. Companies such as our have a strong development competency -- such as ours that have a strong development competency and can manufacture new product and yield significantly above cap rates currently available in the market on acquisitions are uniquely positioned to create value through development. We've proven our inhouse capability creates a competitive advantage particularly with larger projects that need more expertise to successfully navigate the entitlement process and more financial strength to fund the project through to completion.

Third, we acquired nearly $1 billion in value-added projects and forward commitments through our Coventry II joint venture during 2006. Although Coventry has now deployed all of its remaining capital from fund 2 we will still leverage our internal expertise by pursuing value-add opportunities and placing such opportunities both with Coventry or with other capital sources as appropriate. The bottom line is we continue to see ample opportunities to create value, and we will exercise greater flexibility with which to run that line of business.

Lastly, we have added a new avenue for external growth by creating an international investment division to evaluate new opportunities and manage existing foreign joint venture relationships. In our first investment we expanded our footprint into Brazil with a $150 million initial investment. We expect to double the size of this joint venture over the next three years through additional acquisitions and ground up development. Investors have expressed strong interest in Brazil recently and for good reason. Our pricing for the portfolio in Brazil was based on third party appraisals reflecting June 30, 2006, valuations. We have just received the year end appraisal updates. On a weighted average basis the overall cap rate on the portfolio dropped by 84 basis over the last six months. As a result, the current value of our portfolio is 11.5% higher other $56 million higher than our original purchase price.

As this report closes the book on 2006, I would also like to give you an update with respect to the significant progress we have made toward financing our Inland acquisition. First, we raised 1.15 billion of common equity. As you recall when we initially announced our Inland transaction we identified the amount of equity necessary to fund our acquisition and stay in compliance with our debt covenants. We have now accomplished that goal. We issued 750 million in December through a forward equity sale and will issue 400 million directly to the Inland shareholders. It is important to note that we had the option to issue up to $4 per share to the Inland shareholders, but after reviewing our financial position we determined that $1.50 per share provided the appropriate level of proceeds necessary to keep us in compliance with our debt covenants. To the extent we follow-up this equity issuance with additional joint venture and asset sales, the delevering impact will have a positive effect on our financial flexibility. Moreover, a significant portion of the proceeds generated by these transactions may then be redeployed into higher yielding investments.

Second, with respect to the joint venture and asset sales I just mentioned, we've scrubbed the combined portfolios to identify those assets that we'll sell into a joint venture and those we'll sell outright. As described last quarter, we performed a strategic asset management initiative in which we gathered detailed input from our leasing, development, and property management teams. We identified a pool of assets that were of high quality which we wanted to maintain day-to-day leasing and management responsibility, and we also identified a second group of assets that due to their smaller size and market position did not fit our long-term strategic objectives.

As a result of this exercise we are currently negotiating potential joint ventures with private capital sources with respect to $1.5 billion of assets represented by 65 shopping centers. These assets are strong centers predominantly located in major metro areas in the southeast United States. The portfolio is predominantly comprised of public anchor centers we will be acquiring from Inland and several other neighborhood centers anchored by Giant Eagle, Kohl's, Kroeger, Office Max PetSmart, Michaels, T.J. Max and Bell.

With respect to the asset sales I previously mentioned we will place another portfolio on the market by the end of the month. This will be a pool of 60 to 70 non-core assets drawn from our existing portfolio and the Inland portfolio. We expect to generate between 700 and $800 million from the sale of this portfolio. The portfolio will be marketed aggressively based on size diversification and platform value of this asset pool. We expect both of these transactions to close in the second or third quarter. The end result of this critical review of our portfolio is that with respect to the disposition portfolio we have identified a critical mass of assets that do not fit our long-term investment objectives, and we will be taking a significant step toward enhancing the overall quality of our portfolio and significantly strengthening our balance sheet. As a result, a greater proportion of our portfolio will comprise dominant centers with the best sites in markets where population density, income growth and buying power will substantially increase over time.

The third front where we made significant progress toward our merger closing is with our lending relationships. We have already arranged for nearly $3 billion in new financings that will be in place at closing. With the achievements we have made in these areas we have effectively eliminated the financial risks associated with acquiring the Inland portfolio and identified achievable goals that will have important long-term benefits relative to the strength of our financial position and the quality and performance of our portfolio. At this point I would like the turn the call over to Bill Schafer who will give us more details on our new financing arrangements and our fourth quarter financial results.

Thank you, Scott. I am very pleased with how closely our financing plan is tracking to our expectations. As Scott mentioned and as illustrated in our earnings release, I would like to give you a quick overview of the new financing vehicles we'll have in place when the Inland merger closes. With these arrangements in place and the number of options available to us we have largely eliminated the financing risk associated with the transaction.

In summary, the aggregate purchase pice of 6.2 billion will initially be funded as follows--approximately 3 billion of assets will be acquired by the Teachers joint venture in which our 15% equity contribution will approximate 180 million. The remaining 3.2 billion that we are acquiring combined with the 180 million of equity that will be contributed to the joint venture, results in total funding needs of approximately 3.4 billion. With respect to the Teachers joint venture which will be 60% levered, we will have nearly 1.3 billion in ten and five-year debt with an expected weighted average interest rate of approximately 5.5 to 5.75%. We have also arranged a 250 million secured revolving credit facility priced at LIBOR plus 65 basis points. This leaves approximately 290 million of debt we'll assume at approximately 5.75%.

For the remainder of the portfolio, in addition to the 1.15 billion of common equity and 500 million of assumed debt, also with an estimated 5.75% weighted average interest weight, we have a number of options available to us. These alternatives include a 1.65 billion bridge financing commitment, 850 million of aggregate available capacity from our unsecured credit lines, and other financing vehicles. All of these financings are offered at very favorable pricing which is generally consistent with that of our all-in line of credit pricing. The ultimate determination of which vehicles we will use depend on a number of variables including market pricing, debt maturities, and ultimate structure and timing of our asset sales and joint ventures.

We're comfortable that the multiple financing options available to us, combined with the equity raised through our forward transaction and our issuance to Inland shareholders provides a significant cushion and flexibility with respect to our debt covenants. Over the last few years we've consistently proven our ability to finance large portfolio acquisitions while maintaining our ratios at relatively consistent levels, and we will continue to operate in this fashion.

Now I would like to briefly provide some additional color on a few specific items in this quarter's financial results. First, as Dan will discuss in more detail, we recognized approximately 5.6 million in lease terminations which was higher than anticipated at the time of our third quarter call. Second, during the quarter we entered into two interest rate swaptions in connection with our Teachers joint venture. A swaption is a derivative that grants the owner a maximum cap on the swap rate while also allowing the owner to receive a benefit if rates are lower. The Swaptions do not qualify for hedge accounting and therefore changes in fair value will be mark-to-market. Although we have deferred the actual payment of the premiums to purchase the swaptions we recorded 100% of the 1.1 million market loss as interest expense during the fourth quarter. Upon closing the Inland merger, Teachers will be obligated to fund its proportionate share or 85% of the costs and will share in the economic costs or benefits of the swaptions until they defer on May 1, unless terminated earlier.

Third, with respect to gains recognized in FFO during the quarter aggregating 8.7 million, the most significant was at Freehold, New Jersey. We sold the land underlying Wal-Marts and Sam's for approximately 18 million generating a land sale gain of approximately 6 million. While we liked the credit quality of Wal-Mart and Sam's represented, the long-term nature of those ground leases offered little upside, and we have a number of opportunities available that offer much more attractive yields. It is important to note that during 2006 we generated merchant building and land sales of approximately 61 million. This figure is slightly below our previous guidance of 63 million for these two line items.

One last item I would like to discuss which will impact next quarter's results is the 4.1 million charge we will incur in connection with David's departure. This charge represents the present value of all salary, benefits, performance units, restricted shares, and stock options due to David under the terms of his employment agreement.

As an additional note, we continue to keep our floating rate debted at moderate levels through the opportunistic use of interest rate hedges. As of December 31, 2006, our variable rate debt as a percentage of total debt outstanding was only 10.6% which is less than the current amount of construction in progress as reflected on our balance sheet. Looking forward, I am very pleased with our financial outlook for 2007 and the opportunities created by the Inland acquisition. I would now like the turn the call over to Dan.

Thank you, Bill. Before moving onto the quarter results, like Scott mentioned, I too would like to extend my personal thanks to David Jacobstein for his years of service to DDR generally and specifically for being an outstanding partner to Scott and me over the past eight years. We all know of David's professional accomplishments, but most importantly he is a man of high integrity who conducts himself in a first class manner. It has been a privilege to work with him. I also want to thank Scott and the Board of Directors for the new opportunity ahead for me. It is a true honor to be asked to lead our incredibly talented management team, and I look forward to the challenge.

Now, in regard to the quarter, I would like to briefly recap some of the key core metrics and then spend a bit of time talking about 2006 in review and what we see for 2007 based on our numerous meetings and conversations with tenants. Q4 2006 was another successful quarter within the core business. 238 leases and renewals were executed representing 1.35 million square feet of space. The rental spread on new leases was 20% while renewals were 10% for a blended increase of 12.3%. In total, 2006 produced 434 new leases for 3 million square feet with a rental spread of 25.4%. Renewals totaled 710 leases for 3.1 million square feet with a rental spread of 11%. This pace of activity enabled us to conclude 2006 with a 96.1% leased rate. On a blended basis for both new leases and renewals, rents increased 14.4% overall. It is important to note that this figure which is 240 basis points higher than 2005 helped to increase our same store NOI levels to the highest in several years.

During the quarter we had several termination fees that had an impact on the numbers as Bill mentioned. As I have stated repeatedly on these calls, we view termination fees as an opportunity to enhance the overall asset value by controlling dark or unproductive real estate for the benefit of a mark-to-market or redevelopment opportunity. This quarter was no different. For example, in Howe, Michigan we terminated a dark Kroeger and replaced that tenant with T.J. Max and Office Max at a blended 22.8% rental increase. When coupled with the expense necessary to retenant the space, the redevelopment shows over an 11% return. In Taylorsville, Utah we terminated a dark Circuit City to make room for a property wide redevelopment that will include the addition of a major anchor that will completely reposition this asset in the marketplace. At Paseo, Colorado our life center in Pasadena, California we received three years rent from Nordic track as the termination fee and Kay Jewelers will be opened in eight months. Plus there was a $6 positive rent spread in year one between the two deals.

Therefore for the reasons discussed we will continue to pursue these opportunities within the DDR portfolio and also the Inland portfolio which has 29 dark boxes available for such transactions if the market permits. The exact timing of non-packaged determinations is often difficult to predict but it is not uncommon in this environment for activity to increase toward year's end when tenants have better visibility on next year's deliveries and more importantly on next year's missed deliveries. This often creates the need for extra locations in order for the retailer to hit their annual open to buy which presents opportunities like those I just described for our company.

During 2006 within our development department we substantially completed two wholly owned developments, the first project Mt. Nebo Point is a 370,000 square foot community center anchored by Target and Sam's located in Pittsburgh. The second completion is Beaver Creek crossings Phase I in Raleigh, North Carolina. Beaver Creek Crossings which we featured on a Morgan Stanley property tour last month is a 350,000 square foot community center. We celebrated the center's grand opening in November and the anchors at the Crossings include Consolidated Theaters, Dick's Sporting Goods, Circuit City, Borders, T.J. Max, Home Goods, Justice, and Old Navy. We have an additional 35,000 square feet of small shop tenants with an executed lease or a binding tenant commitment. Combined with the Target, Lowe's, Linens 'N Things and PetSmart anchored center located adjacent to Beaver Creek Crossings which we developed in 2005 we control over 1 million square feet in this growing market with a population growth over the next five years is expected to be 15% within five miles of our projects and 20% within three.

We also completed the first phase of our mid-town Miami project which we futured on a Merrill Lynch property tour in January. Target, Linens 'N Things, and Circuit City are open with West Elm, Marshalls, Ross, PetSmart, and Lohmans expected to open over the next few months. In N 2007 we expect to complete the second phase in Miami as well as our projects in McHenry, Illinois and San Antonio, Texas. The shops at Fox River and McHenry has tenant commitment on 73% of available space. Office Max and Bed, Bath, and Beyond opened last quarter. Dick's, Best Buy, PetSmart, and Wick's Furniture are expected to open in the first half of this year, and JCPenney will open late in 2007. At our Stone project in San Antonio, Target is expected to open in the second quarter, and a host of community center tenants including Cost Plus, Office Max, DSW, T.J. Max, Hobby Lobby, and PayLess Shoe will begin opening in the third quarter. Tenants in the lifestyle component of the project will begin opening in the fourth quarter. These include Chicos, White House Black Market, Joseph Banks, Cold Water Creek, Talbots, Talbots Womens, Victoria's Secret, Ann Taylor Loft, and Francesca's.

In addition to these projects we're now under construction in Napa, Idaho representing 860,000 square feet anchored by JC Penney and Horse's New York at 713,000 square feet anchored by Wal-Mart Supercenter and Kohl's. We're also in the final stages of public entitlements in Seabrook New Hampshire, Homestead, Florida, Ukiah, California, and Gilford, Connecticut.

In regard to our joint venture development program, we have 1.3 million square feet under construction including two lifestyle centers, one in suburban Dallas, and the other in Bloomfield Hills, Michigan. These two projects will certainly enhance our existing lifestyle portfolio which in 2006 I am pleased to report grew comp store sales to $472 per square foot.

Our expansion and redevelopment program also remains very active in repositioning many of our assets through retenanting vacant boxes or constructing additional retail space to accommodate increased tenant demand. During the year we completed seven redevelopments and we currently have projects in progress at 15 centers and have 11 more projected to begin construction this year.

Beyond the highlights I have provided today, we continue to pursue numerous development opportunities across the U.S. We continue to strengthen our in-house development team particularly with respect to individuals experienced on the construction side of the business. In addition to the Vice President of Construction we hired last May, we have created a new estimator position to provide us with greater clarity on pricing which is essential as landowners continue to compress due diligence periods.

Given the scale of our development portfolio, we can now recognize numerous efficiencies in scheduling, procurement, and vendor coordination. This effort will help us refine our planning process, sharpen our ability to evaluate vendor quotes, and timeliness, and ultimately leading to more control over development costs. There is obvious pressure on yields, and we are taking every necessary step to leverage our size and strength to generate appropriate project level returns.

Finally, in a recap of 2006, we had an extremely successful year in other areas of note. As a company we brought numerous tenant to say the lifestyle portfolio that were not previously represented. To name a few, Crate and Barrel, Arrow Pastel, New York and Company, Finish Line, Optique, Vera Bradley and Picture People. In addition, we completed deals with numerous tenants who had -- who we had in the portfolio through acquisition but had not self leased prior to this year. Some of those tenants include Saphora, Brighton Collectibles, Acorn, Cold Water Creek and J. Jill. These tenants, in addition to outstanding property management and thoughtful merchandising by our leasing group enabled our comp store sales per square foot within the lifestyle portfolio as previously mentioned to rise above $470 per square foot.

Within our new business development group ancillary income totals for 2006 exceeded $18 million which was a 12.7% increase over our 2006 budget and a 24.7% increase over the 2005 total. We are confident that the income stream in this area will continue to grow during the current year comfortably exceeding $20 million. This area has been dramatically impacted by the addition of our properties in Puerto Rico which as a portfolio produced an impressive 7% same store NOI performance for 2006. In addition, for base rent the portfolio in Puerto Rico was up 5.29% quarter over quarter and up 3.4% year-over-year.

During Q4 we spent a great deal of time meeting with our tenants and preparing for another successful year in 2007. Throughout 2006 we held over 1500 meetings at ICSE events and conducted over 100 portfolio reviews within our national account program members. As a direct result of these events we currently have received over 1200 positive responses pertaining to site submittals, have 300 letters of intent out for negotiation, over 75 leases in process and 45 fully executed leases to date. 2007 is off to a great start, and we will continue to drive the business to maintain the positive momentum.

Finally, no conversation regarding 2000 would be complete without an update on the Inland transaction in our key revenue areas. Consistent with our culture, we will be making internal promotions from within leasing, development, and property management to staff key managerial positions that have resulted from the merger. Moreover, we are fortunate that the market has provided us with talented individuals who are enthusiastic about working for Developers Diversified. As a result, I am very confident that we will be up and running on the merger date and enthusiastically attacking those areas within the Inland portfolio already identified where we have the opportunity to enhance value. At this point I would like to turn the call over to David.

Thanks, Dan. As a follow-up to Scott's discussion of 2006 transactions, I would like to add during the fourth quarter and to date this year we have been successful in paring our portfolio by twelve non-core assets through our project Pathfinder initiative. All told these assets sold for approximately $125 million which represents a weighted average cap rate of 7.7%. We continue to see solid market demand for these smaller assets. In today's market there is a scarcity of assets and an abundance of private equity eager to put capital to work.

As we go to market with a 7.5 million square foot portfolio of non-core assets as Scott described earlier, we expect to tap this demand and expect pricing to be competitive. I would also like to provide an update on the progress we have made thus far with respect to the integration of the Inland assets into our operating platform. Once a merger agreement was reached we formed an internal transition committee to oversee the integration process. This committee has been meeting weekly for several months to proactively control and manage the process. This team's focus ensures that our preparation is comprehensive and that the process is seamless. Post closing the committee will continue to meet ensuring that all aspects of the transaction proceed as expected.

From a human resources standpoint, we have hired 27 employees to date. This breaks town to 10 employees at our corporate headquarters in Cleveland, and 17 employees at various locations throughout the country. During the next two months we will be hiring another 80 to 90 employees for our corporate headquarters and for field openings. In addition, we have hired 33 temporary employees primarily in property accounting, all of these temporary employees are existing employees of Inland retail real estate trust who agreed to remain at the Oak Brook, Illinois headquarters for a period of six to sixteen weeks following closing.

I am also extremely pleased with the progress that has been made with our information technology initiatives. We were successful in converting to our new financial and property management database software, Oracle's JD Edwards Enterprise 1. We went live on our new system on February 5, 2007. It should also be noted that Inland was in the process of converting to JD Edwards as well, so the electronic assimilation of property related data has been extremely efficient up to this point. The initiatives as a whole were extremely well planned and have been carried out very smoothly.

Due to our experience with large integrations through our acquisitions of JDN in 2003, Benderson in 2004, and the Caribbean Property Group in 2005, the merging of people, information, and processes has become one of our core competencies. This has been especially evident through the Inland acquisition. On a personal note I cannot say enough positive things about my tenure at Developers Diversified. Come May I will have been President and COO of DDR for eight years. By almost any measurement Developers Diversified has outperformed its retail peer group, the REIT industry, and the broad market indices. This could not have been accomplished without Scott's visionary and dynamic leadership, the outstanding execution of our strategic plan by one of the finest group of executives in the industry and the hard work of our dedicated employees in Cleveland and in the field.

Our success has been a team effort and will continue and flourish when I pass day-to-day operational responsibilities to Dan in early May. Scott, Dan, and I have worked hand-in-hand since 1999 and particularly during the past year when we actively participated in the development and implementation of our succession plan. I look toward to my continued relationship with Developers Diversified and to providing whatever assistance I can to Scott and Dan and their management group. With that I will turn the call back to Scott for his concluding remarks regarding guidance.

Thank you, David. With respect to our 2007 guidance, we are happy to narrow the range of our previous 2007 FFO guidance from 3.70 to 3.80 per share to $3.74 to $3.80 per share effectively raising the lower end of that range by $0.04 per share. Even net of the $4.1 million severance charge that bill described earlier, we're comfortable raising the low end of the range due to the efficiency of our Inland financing and the positive trends we see within the portfolio.

While we're mindful that analysts desire great detail regarding our quarterly guidance, it is difficult to predict as our results will depend on the timing of certain capital transactions many of which we have already described and some of which are too preliminary to fully disclose. We expect the majority of these transactions to be completed in late March through June 30. At this time it is our expectation that the majority of these transactions particularly the sale of merchant build assets will occur in the second quarter. As a result, we believe that analysts estimates for the second quarter are probably too low while estimates for the other quarters particularly the third and fourth quarter are probably too high. We are aware that analysts assumptions regarding such major items as the timing of the Inland closing, the amount and timing of joint ventures and asset sales and the timing of merchant build gains may differ significantly than the information we provided in this call. Analysts should therefore revisit these material assumptions and make the appropriate adjustments to their models. At this point, I would like to open the lines to receive your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Dennis Maloney with Goldman Sachs. Please proceed.

Dennis, are you there?

Hi. Sorry. I didn't hear you. I just wonder if you can talk a little bit about your anticipated CapEx spend in the Inland portfolio in '07?

A lot of that, Dennis, depends on what we find when we get in there, it would be a little premature to give you a number specifically on that now. I will say, however, though, that based on what we view as some of the opportunities within the portfolio and what our leasing people are telling us they've seen at the asset level and what we're hearing from tenants, it should be consistent with what we see in the overall Developers Diversified portfolio.

I might add that it is a relatively young portfolio. I think the average age of the centers is seven years, so I don't think we'll experience much, if any CapEx with respect to deferred maintenance. The CapEx that we would incur would be primarily related to revenue generating redevelopments and expansions.

For example, Dennis, we've identified approximately 40 potential opportunities where there could be a redevelopment on opportunity either through tenants or through our own evaluation of the individual assets. Obviously not all of those will get done, and not all of those -- certainly none of those -- some of those won't get done in the first year or the first six months, so it is a little hard to tell until we get our arms around the portfolio, but there will be opportunities as Scott mentioned in the redevelopment and revenue generation areas.

Great. Thanks. Then just with all the planned asset sales coming up, do you guys anticipate any impairment charges in Q2 or Q3?

No, we don't.

Okay. And then if you could just comment--?

We actually anticipate significant gains, much of which will not be included in FFO but it will show up in net income.

And if you could comment a little bit on pricing in the market since you first announced the Inland deals versus now? How much more do you think cap rates will come down?

I don't think there has been a significant change in cap rates since we announced the Inland deal. I think our joint ventures will probably be made at or about the same price that we paid for the assets, but we do have pretty positive indications with respect to the cap rates we anticipate with respect to the disposition portfolio, and we're highly encouraged by that.

And then if you could just comment on the performance of your -- of the Brazilian portfolio in the fourth quarter.

It actually performed a little bit low expectations, but we're still trying to get our arms around where those issues are. Part of that relates to the tax that was incurred on the income in Brazil, and we've got our guys studying that pretty closely to make sure there aren't some opportunities for savings. There also is probably some one-time expenses on the G&A side relating to the implementation of the transaction that we won't see in the future. From the standpoint of property operations, the largest asset Parked on Pedro was pretty much right on budget. A couple of the assets, the lease-up might be a little bit behind schedule, but I think that we expect once we get a full year of operations in it will be pretty close to what was projected. We have had some positive change in terms of the exchange rate which is going to help us as well in terms of the performance of that portfolio.

Great. And then just lastly, as you look to '07, and I apologize if you commented on this, but just your outlook for occupancy and then G&A expense for the year?

I will take G&A, Dennis. G&A during 2006 ran at a run rate of about $15 million which represented about 4.8% of total revenues. This year if you include Inland as we anticipate as well as a severance which was mentioned by Bill, we're going to be a run rate about 19 million which is about 4.5% of total revenues, so the run rate is obviously up. The percentage of total revenues which we track carefully is down. If you backed out the severance and only included Inland because the severance is obviously a one-time event, the run rate would be about 18 million which would be about 4.3% of total revenues.

In regard to the occupancy, Dennis, you know, we ended the year about 96.1% leased, and we've been saying for a few quarters now that that is really pushes against full occupancy of the portfolio. We are budgeting a little movement upward but nothing significant.

Great. Thank you very much.

Your next question comes from the line of Alexander Goldfarb with UBS. Please proceed.

Good afternoon. Just filling in here for some colleagues. First question is--.

Can't stay away, can you?

We were wondering.

I can't. Apartments are fun, but retail is still a good business as you guys well know. Then obviously, David, all the best to you going forward.

Thank you.

Want to go specifically on MDT. I think previously you guys had talked about possibly reworking the parameters for its investments. Can you just give us an update what progress may have been made to make that vehicle work in the current pricing environment?

Yes, I can take a shot at that. First of all since the last conference call the share price of MDT has increased dramatically. I think today we're at about $1.36 a share, probably the last time we were on this call we were probably around $1.14 or something like that, so the market itself has gone and made great strides in making that vehicle much closer to where it needs to be to fund accretive acquisitions. We need a little bit more inflation in the share price to get there, and in the near term we're exploring reappraisals of the properties that might generate additional leverage or what they call gearing if you're in Australia which may be able to fund some share repurchases to the extent that the share price may be below net asset value at any given time. We're also exploring certain value-added opportunities using that vehicle. That has become an alternative, frankly, to Coventry as a potential investment partner in some of our value add opportunities. There also may be opportunities for us to fund certain development projects through that vehicle where the yields might be acceptable to MDT, but a little bit lower than the thresholds that we would anticipate on our balance sheet.

Okay. So it sounds like you would make the vehicle work more in this lower rate negative leverage world.

That's correct.

Second question is, Scott, I think you were doing a little bit of traveling overseas. Just wanted to follow-up and see if you found anything of interest in Europe and if we should expect any announcements in the coming twelve months?

Yes, and yes.

Can you give a little more color?

We have a letter of intent signed with a major developer on some development in Eastern Europe, but until we go to contract, we won't be disclosing that transaction, but that's why the second yes. I would expect we will disclose something in the coming months, but it will be a development joint venture of new projects and certain nations in Eastern Europe.

Thanks a lot.

You're welcome.

Your next question comes from the line of Jonathan Litt with Citigroup. Please proceed.

Hi. This is [Amby Piccolo with John. Just reviewing 2007 guidance can you go over the NOI from the Inland retail transaction that's included in guidance?

I am sorry, could you speak up a little bit? I couldn't hear that.

Just looking at 2007 guidance, can you review the amount of NOI from the Inland retail transaction?

Do you have that? I don't think I have got that budget in front of me. But it would be consistent with what we announced in terms of the underwriting of the portfolio. It is just doing the arithmetic about a $6.2 billion portfolio and a blended cap rate in the mid-6's, so if you do that math, you can get to the approximate NOI. There is no reason right now for us to expect it is going to be significantly different than that.

Okay.

Of course we're going to have joint ventures so not all of that is going to hit our books, but the -- but that's about where -- if you do that arithmetic that's about where the NOI will be in our budget currently.

And what is the amount of merchant build gains that is assumed in 2007 guidance?

About 50 million.

Okay. And then on the two portfolios, the first is the 1.5 billion portfolio that you're looking to JV, and then the asset sales of 700 to 800 million, what kind of pricing are you looking on those transactions?

Well, as I said before, with respect to the JV, the pricing will be on top of the pricing that we paid to the Inland shareholders which is somewhere, depending on which assets end up in that pool, is going to be somewhere in the 6.25 to 6.5 cap rate range. With respect to the other, I am reluctant to give you the cap rate we anticipate achieving while we're in the market, but the range that I gave you there in terms of the high and low would be a cap rate somewhere between the high 6's and the high 7's.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Michael Mueller with JPMorgan securities. Please proceed.

Hey, guys, it is actually Joe Dazio here. Question on the guidance. I believe you said the 3.74 to 3.80 was net of the 4.1 million severance.

Right.

Then are you implicitly raising the lower end $0.08 and the top end $0.04, is that right?

You could say that although there is also some one-time positive items that might occur during the year as well that we've uncovered, but, yes, that would be correct.

Basically some other promotes are in the '07 guidance, then? Is that correct or?

Well, it may not be promotes, but there may be -- there is one item that we think may occur in the first quarter that is a releasing some tax reserves that occurred last year in one of our quarters that is probably a one-time number to the upside.

Okay. And then in terms of the $1.5 billion of Inland assets for the joint venture, I guess you're going to sell is it 80% stake? Is that kind of a fair estimate at this point?

Yes, either 85 or 80% most likely.

Okay. And then in terms of that portfolio and also the other assets you're marketing, what is the core growth and sort of the market cap rates for those look like compared to I guess the assets that you're keeping on your balance sheet?

Assets that we're selling in particular are about half. The same store NOI growth of the assets that we're keeping on our balance sheet.

Okay. Thank you.

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

Yes. Hello. Farewell, David. It's been good fun working with you over the last few years.

Thank you. Likewise, David.

Scott, when you you're looking at the overseas markets and seems like you're stepping up the pace there, and you didn't rent reference anything in Asia or I know when you answered a question earlier on this, but is that sending a signal about your sense of valuations here in the U.S.?

No. It really -- it really doesn't. I think that because we're not really buying completed projects overseas as much as we are looking to invest in development opportunities, and essentially we fund whatever development opportunities we can find in the U.S. This is basically reflective of the fact that we would like to pursue even more and the returns overseas are even higher in developments than they are domestically albeit with significantly different risk profile. The other thing that I think is sort of interesting is that in Europe most of the companies even though a lot of the nations are passing REIT legislation, most of the major development companies are private firms, many of them finance with family money, so you have an opportunity to co-invest with some of the best developers overseas where you wouldn't necessarily have that opportunity domestically, and it gives us an opportunity to essentially capitalize on somebody else's infrastructure, and achieve outsized yields vis-a-vis what we could do domestically.

With regard to opportunities in Asia, it sounds like you're finding Europe rather more exciting than Asia at the moment?

At this point we do. I guess we have spent a fair amount of time in China, and by the time we walked on the transaction we're working on, I would say that development yields were well below what we could achieve domestically, and it is a long way to go to achieve a lower return.

Okay. What do you think -- sorry.

I mean, the projects we were looking at were really very large significant multi-use projects with components of retail office and residential, and the development yields were really in the 8's by the time you got done making your deal with the government. Obviously we do much better here, so we've been less, -- there may be opportunities that crop up there that are better than that, but at least at this point that's been our experience. We are actually going to spend a fair amount of time in India, though, and Wal-Mart is well poised to make an entry into India, and we think we could potentially play a major role in their expansion there.

There's some quite significant regulatory issues, I think, in making progress there, but back on Europe, is it rather more Eastern and Southern Europe as opposed to Northwestern Europe that you're targeting?

Yes. Absolutely.

This is for Bill or Dan. How much can you finesse any tax liabilities around the sales? Is there a 1031 element to some of the proposed portfolio sales that you can pull off?

In conjunction with what we've just been discussing or?

Yes. Can you marry that to Inland acquisitions essentially?

Yes, and again with a lot of the assets being sold that are coming from the Inland there is not really going to be much of a gain on those per se. There is no real need to do any 1031 transactions there.

What about culling from your existing portfolio?

There is a few, and certainly that is something that we'll look at. I don't know that there is a specific need to do that. This year we've had gains outside of that. We've done it in the past, and we haven't done it in the past. It is -- to deal with the 1031s, you have to take the proceeds, set them aside. Sometimes you don't get as effective use of those during that time period. Something we kind of consider in each case, but it is not something that we're really anticipating doing a lot of this coming year.

Okay. I don't know if this is to you, Scott, or it's back to Bill on this. You guys have got an extraordinary narrow range on your guidance, and in fact you chose to narrow it today. Is that -- is there a specific measure comment and message that you're wanting to send to the market about your confidence in your abilities to forecast or what message should we pick out from that?

I think from where we're sitting today, I think we're just comfortable in that range. I mean I think about a year ago we probably started with about a $0.10 range for guidance, and we've narrowed it when we felt comfortable that it was appropriate to narrow. Based on what we're looking at right now, that's kind of where the comfort is.

Okay. Thank you.

Your next question comes from the line of Christeen Kim with Deutsche Bank. Please proceed.

Good afternoon, guys. Could you elaborate on how much you're including in terms of integration and severance costs associated with the Inland portfolio in your '07 guidance?

Well, not the severance costs with respect to the Inland employees. That's a transaction cost, but in terms of increased G&A, it is going to be around a $7 million number incremental because of the Inland transaction.

It is all captioned in your G&A guidance?

Yes.

And, Dan, do I hear you correctly that you expected ancillary income to add upwards of 20 million in '07?

We want to add 20 million. We'll exceed 20 million.

Exceed 20 million.

Yes. We'll exceed 20 million. We're about at 18 million, a little over 18 million now, and we're budgeting to go over 20 million in '07.

And my last question, Scott, in term of the cap rate compression you've seen in Brazil, is that primarily driven by higher demand or were there other factors affecting that?

I think it is completely due to higher demand. There is a lot of foreign capital flowing into Brazil, and it is going to -- we think it is going to continue to compress cap rates.

Great. Thank you.

Thank you.

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

Hello, guys. Best of luck, David going forward. It has certainly been great working with you, and I was noticing guys that your operating margin was a bit lower this quarter both rents were lower and operating expenses higher. Any thoughts on that?

Well, historically if you look in the fourth quarter the operating expenses have been at a much higher level. I mean, it is -- I think our operations group gets everything in that they can in the fourth quarter to fill out the budget and move forward, but it is something that's been relatively consistent from year-over-year that the fourth quarter -- the cam expenses if you will are a much higher number. So other than -- and obviously there has been ongoing changes in the mix of assets and so forth, but I think that's pretty much the largest reason.

Okay, Bill, so you don't see anything unusual about the third quarter drop in base rents?

No. Again, we had assets that were sold during the fourth quarters, and then so you'll see in some discontinued ops there were rents now that were previously reflected in the numbers that are now in discontinued operations, and to the extent that those assets were sold prior to the end of the year, there obviously were no rents from those assets.

You also have any quarter where you have a high number of lease terminations you have pressure on the base rent line because obviously you're terminating those rents.

Yes. That's a good point, Dan. And then, you kind of alluded to it, Dan, but as far as tenant demand goes, your overall characteristic I guess of retailer demand at this point for space?

Well, tenant demand is still as high as it's been. It's been really consistent for the last couple years, and just this past quarter is a great example because some of those deals that necessitated a termination at the asset level were a result of tenants coming back to assets where they needed space for 2007 because they've been unable to satisfy their open to buy for 2007 or other developers may have missed in a delivery, so we're still seeing tremendous tenant demand. We don't expect it to change in '06, '07, and in fact we've had a number of portfolio reviews in the first quarter where people already talking about '08 open to buys, so we're looking forward to '07.

Okay. Very good. Thank you, guys.

At this time, there are no further questions. I would like to thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.