Site Centers Corp (SITC) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Developers Diversified first quarter 2007 earnings conference call. My name is Jackie, and I will be your operator for today's conference, at this time, all participants are if a listen-only mode, we will conduct a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS)

I would like to turn the conference over to Miss Michelle Dawson, you may proceed, ma'am.

Good morning, we are pleased to have you join us.

On this morning's call, you'll hear from Scott Wolstein, Dan Hurwitz, and Bill Schafer. Also joining us in Cleveland are David Jacobstein, and David Oakes.

Before we begin, I would like to alert you to 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 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 flied with the SEC on form 8-K and in our form 10-K for the year ended December 31, 2006, and filed with the SEC.

At this time, I would like to turn the call over to Scott Wolstein.

Thank you, Michelle, good morning, everybody.

This has been a strategically important quarter for Developers Diversified and I'm very pleased to report our financial results and activities.

We were proud to have been added to the S & P 500 index this quarter, and view it as an important recognition of our accomplishments, as a public company.

In this quarter, we reported FFO per share of $0.91, which reflects an increase of nearly 17% over the prior year. As I'm sure you have noticed into results include several non-recurring items. Most notably, $15 million in relief of a tax reserve, $4 million as a one time G&A charge related to David Jacobsteins's severance, and also only $6 million in merchant build and land sale gains, excluding these items for the comparable periods our core FFO per share grew by over 8%

Reflecting the strength of our portfolio and continuing outstanding tenant demand. Before we get into the financial operational details of the quarter, I would like to share a few remarks about our Inland merger and provide an update on our new joint ventures in the sale of our non-core portfolio.

Clearly, our most significant achievement during the quarter was a successful closing of the Inland transaction and TIAA-CREF joint venture. Thanks to the collective efforts of many individuals across all departments over the last several months the integration of this transaction has been virtually seamless.

All accounting, leasing and management functions are now in our hands. As you will hear from Dan this morning, we have substantially completed the hiring and internal organizational changes to run the portfolio, and we are moving quickly to take full advantage of our upcoming meetings with retailers at the ICSC convention in May.

The Inland merger has also afforded us the opportunity to sell assets and reshape our portfolio, making it better, make it better reflect our long term targets for income growth and value appreciation.

We, yesterday announced the formation of a new joint venture with Dividend Capital and are moving forward as expected with the formation of a new commingled fund to joint venture with Developers Diversified on the ownership of a large $1.5 billion neighborhood shopping center portfolio.

We are will go moving forward on the sale of a large portfolio of non-core assets.

As I said, yesterday we announced an important new joint venture relationship with Dividend Capital Realty Trust. The joint venture will initially purchase the portfolio of 3 merchant build assets for $161 million, reflecting a 6.3% cap rate on current NOI.

This sale is expected to generate pretax merchant building gains of approximately $50 million, which will be included in our second quarter funds from operation.

These gains represent virtually all the merchant building gains we currently budget to recognize in 2007.

There will, however, be additional land sales during the remainder of the year, which we expect to aggregate between $4 million and $7 million. The Dividend Capital joint venture is expected to close in May and is expected to be 68% levered. We will earn an asset management fee of 25 basis points on gross asset value along with a 4% property management fee on gross income. We will also receive a promoted interest of 20% above a 9.5% leverage threshold return.

Because Dividend Capital is a well funded and growing annuity with a strong appetite for high quality real estate we expect this relationship to grow substantially over time.

The joint venture has a perpetual life subject to certainly liquidity provisions.

We also anticipate the closing of the $1.5 billion neighborhood shopping center joint venture in the second quarter.

The pricing for this venture generally reflects the pricing paid to the Inland shareholders for the assets acquired from Inland.

The portfolio is predominantly located in major metro areas, and the southeast United States.

As I said, most of these assets came from Inland, at approximately 20% of the portfolio is comprised of assets from the DDR portfolio. This includes seven assets from our first joint venture with the Kuwait Financial Center.

Recapitalization of these assets into the new joint venture will trigger a promoted interest into Developers Diversified, as a result.

we expect to recognize over $12 million of it promote income in our second quarter funds from operation.

The new joint venture will have an initial term of 10 years. We also expect to close the sale of the non-core asset portfolio on the second quarter.

The first round of bids attracted a wide range of interested buyers. We expect proceeds in excess of $650 million, reflecting a cap rate in the low 7's or below.

I'm also particularly pleased with the achievements Bill and his team have made from a balance sheet perspective. Year to date, we've put nearly $5 billion of initial finances in place in highly competitive pricing.

The important result was that we were able to increase an upgrade on portfolio without a major increase in leverage or dilution in funds from operations.

Before I turn the call over to Bill, I want to take the opportunity to welcome David Oakes to our executive manage team. We are delighted to have him join us and are excited to see him immediately contributing to our organization. David knows our company very well and has a deep long-standing relation with our executive team. he brings a unique skill set perspective and personal network. With Dan Hurwitz's expanded responsibilities, we wanted someone we knew well and trusted and respected. This change to our executive management structure has important benefits in several ways: the traditional role of the Chief Financial Officer in our opinion has become too broad to be handled effectively by just one individual.

Accounting and technology issues have grown in complexity, size and scope, and we are intent on maintaining a flawless track record and are providing Bill Schafer the resources to do this.

Transactions, Capital Markets and Investor Relations, all of which David Oakes will oversee, will require significant time and travel to cultivate relationships and source and evaluate opportunities -- As our investment strategy is directly linked to out financial strategy Bill and David will work very closely with Dan and me in evaluating and executing major transactions. Now I'll turn the floor over to Bill.

Thanks Scott. This was an important quarter for us from a capital markets perspective. Shortly after we closed on our Inland acquisition, Standard & Poor's reinstated a stable outlook on our current rating. After closing our $6.2 billion Inland merger our financial ratios are now very close to that existed pre-merger.

These ratios will continue to improve upon the sale of over 2 billion of assets to joint ventures and third parties in the coming quarter giving us added financial flexibility.

Since we've already provided a significant amount of information on major financings we closed during the quarter in the press release, I'll focus my remarks on certain line items on our financials statement, and upcoming transactions.

First I'd like to provide some color on the income tax benefit we recognized and comment on some of the reasons and timing of the release.

The valuation reserves that were released related to deferred tax assets that were established over prior years and that were acquired from JDN.

For which valuation reserves were established to the uncertainty of being utilized at that time.

Generally accepted accounting principles required that we regularly reassess established reserves and make adjustments when facts and circumstances indicate a change in reserves is necessary.

There were several events that occurred in the first quarter of 2007 that contributed to the release of these reserves.

The most significant of which is the anticipated sale of merchants build assets through our TRS and merger of our various TRS entities, which will facilitate the efficient use of the deferred tax assets.

As a result, it was determined that these valuation reserves were no longer required and therefore, the reserve reversal needed to be run through the income statement.

While we recognize the 15 million benefits this quarter, it is important to understand that tax expense 5 million will be recorded in second quarter associated with our merchant build asset sales to the Dividend Capital joint venture. Therefore, a net tax benefit of only 10 million will be recognized in 2007. It should also be noted that we considered the net impact of releasing these reserves when providing guidance on our prior call.

I'd like to highlight a few other items in our income statement on a year over year basis.

First, we recognize the 6.3 million acquisition fee with our Teachers joint venture during. This fee represents just over $0.05 per share.

However, lease terminations in other income this quarter were only $1.4 million or just over $0.01 per share, these items compare to $7.5 million or $0.07 per share of lease terminations in other income in the prior year.

Second, we recognize land sale gains of 6 million or $0.05 per share, this compares to $7.5 million of sales or $0.07 per share in the same period for 2006.

Third, we recorded a $4.1 million cost during the first quarter of 2007, associated with the departure of our president and COO, David Jacobstein. In addition we incurred certain non-recurring G&A costs of approximately 650,000, relating to Inland transition activities.

We expect total G&A in 2007 to range from 77 to 80 million.

With respect to our Inland financing, last quarter, I explained how we had identified certain key components of our financing such at forward equity transaction, preferred operating partnership units, unsecured bridge financing, and increasing capacity on our secured term loan.

But we were also considering a number of different vehicles offered in the market.

For example, convertible debt was one of the financing options available to us, and specific terms available to us in early March appeared relatively attractive so we issued 600 million of 5 year convertible senior unsecured notes at a 3% coupon. Similar to our previous convertible issuance in August, we structured a cap call, which increased the 20% face conversion premium to 40%.

The separate option arrangement had the economic impact of effectively increasing the conversion price to over $87 a share.

Reflecting our recognition of the high cost of common equity. This financing was also contemplated when we last gave guidance.

Consistent with our previous convert issuance, transaction was structured on a net settle basis which means the shares will only be issued to the extent that the value created above the conversion premium and therefore the 600 million of notes will be settled in cash.

In addition, we repurchased the 117 million of our stock simultaneously with the issuance of a convertible securities, so it was also an extremely important component of the overall transaction as protecting our shareholder's interests. Also, as we noted in this quarter's earnings release, we redeemed our 8.6% preferred shares aggregating 150 million. Consequently, we will record a noncash charge of 5.4 million in the second quarter, which was also reflected in our prior guidance.

Before I turn the call over to Dan, I would like to re-emphasize how well the actual result of our finances track with our expectations.

Like we've done several times in the past, we've created a financing plan executed it, and have already substantially returned the balance sheet ratios to our historical levels.

And as mentioned at the beginning of my remarks, our pending joint venture and non-core asset sales will have a delevering official further strengthening our credit position in financial flexibility. On a final note, you may notice some changes to the supplemental of this quarter reflecting our desire to simplify the supplemental but still provide investors with complete disclosure to analyse the company. We have removed the property list and joint venture factsheet from the supplement but have added a pdf version of them to the investor relations portion of our website. In the coming quarters we will look to continue to refine our quarterly reporting and ways that improve functionality without detracting from its content. We have also added a new disclosure regarding our FAS 141 income and debt adjustments, you will find this in the section pertaining to the reconciliation of non-GAAP financial measures.

Now I would like to touch the call over to Dan.

Thank you Bill and good morning.

First quarter was another solid quarter for the leasing and development teams with strong occupancy, rental growth and excellent volume of deal flow all being driven by a quality portfolio and continued strong tenant demand.

As one can see from the quarterly results, despite all the transactional activity going on within our organization, it's business as usual in the leasing and development departments, with the people and system in place that can comfortably deal with the asset growth generated by our company.

Robin Walker-Gibbons, our Executive Vice President of Leasing and Tim Bruce, our Executive Vice President of Development, continue to lead a focused group of professional and enjoy the challenge and growth while keeping a sharp eye on the core business.

As I continue to transition into my new role within the organization, we have structured our company in such a manner that I will continue to oversee these critical aspects of our business, and have additional time to devote to furthering our key tenant relationships.

In regard to the Inland transition, within leasing and development, we are staffed, operational, and very enthusiastic about the myriad of opportunities ahead of us.

We have been pleased in our ability to promote from within, attract talent from outside the organization and integrate all new positions into our systems. Our marketing material on each asset is complete, and our leasing and development professionals are in the market with clear direction and goals.

One of the most rewarding aspects of this process has been our ability to internally promote 11 people from within these departments.

Our growth has provided a great opportunity for excellent performers to achieve career advancement, while validating the significant time and attention that our company spends on the recruitment and development of human capital.

As remove towards the spring ICSC convention, we have decided internally to pursue a different approach as it relates to key tenant meetings and what we expect to achieve.

It seems that each year, tenants become more pressed for time and the quality of the actual Vegas meeting has slipped.

Coupled with the fact that our portfolio and the various opportunities demand more, not less, attention.

We have embarked on a program of significantly increasing the volume of tenant reviews prior to Vegas, when time is not at such a premium.

We identify the key retail clients where our book of business is extensive, and made a concentrated effort to meet with these tenants in an unrushed, unfrenzied atmosphere to diligently discuss the various opportunities within our portfolio.

We felt this especially prudent given the addition of the Inland assets that might otherwise take more time to discuss.

Our hope is that even though we will still meet with numerous tenants at convention, and to date, we have over 900 appointments in the system, we still have about a month to go, but our hope is that the Vegas meetings will be more specific and therefore more meaningful.

To provide you some color on the scope of the tenants included in our pre-Vegas program, we have met recently with Kohl's, JC Penney, Target, Wal-Mart, Bed, Bath and Beyond, Circuit City, Staples, Barnes and Noble, T.J. X.,

Dillards, Federated Department Stores, Crate and Barrel, H & M, Loehmann's, Talbot's, William Sonoma, Limited Brands, Abercrombie and Fitch and Chico's.

Vegas also presents a significant opportunity to not only lease, but to actually grow our development pipeline.

We continue to see strong activity in various regions of the United States as well as Puerto Rico and Brazil, with land recently acquired in Manaus, Brazil and Isabella, Puerto Rico to facilitate new projects.

In addition, we have recently secured site control on new potential projects in Illinois and three in Texas.

With the momentum that we currently enjoy within the development community and our interest in continuing to grow the pipeline we expect to add several more projects to that pipeline by conventions end.

So in addition to the Inland integration, our leasing and development groups executed 427 leases, leased 2.4 million square feet, held over 50 total portfolio reviews with tenants, internally promoted 11 coworkers, acquired 2 new development locations while securing four more potentials and scheduled over 900 meetings for the May convention. A real credit to out people and internal processes. At this point I'd like to turn the call back to Scott.

Thank you Dan. I would like to comment on our 2007 guidance. First I'd like to read up firm our expected FFO range of $3.74 to $3.80 per share. This range reflects an $0.08 net benefit from the release of the net tax reserves as discussed previously. And, the negative effects of the $0.04 preferred redemption charge, which will be recognized in the second quarter, and a $0.04 severance expense in G&A, which we recognized in this quarter. Despite the zero net impact from these three non-recurring items, we concede that the current accounting environment creates a significant amount of noise and volatility in individual earnings line items. Though the quarterly results would capture this volatility, what is more important to recognize is the zero sum net impact on our 2007 bottomline.

Finally, I'd like to reiterate my previous comments highlighting a $50 million merchant building gain and a $12 million promote in the second quarter that should be reflected in quarterly estimates.

Accordingly, most published estimates currently are far too low in the second quarter and too high in the third and fourth quarter and I would recommend that people revisit their estimates accordingly.

Now I'd like to open the lines to receive your questions.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) Your first question will come from the line of Jonathan Litt of Citigroup. You may proceed sir.

This is Ambika Goel with John. Can you talk about how you are thinking about your allocation of capital internally? Between acquisitions and development given that you just completed the Inland retail acquisition and there are other portfolios such as Pyramid that are on the block?

Sure, I think as we've indicated in prior calls, most of our core acquisition activity will be focused in setting up joint ventures where DDR will essentially be a coinvestor and fund manager, and most of the capital from our balance sheet will be deployed to fund our development pipeline where we earn the highest returns and the greatest value creation.

Okay.

Can you give an update on your strategy with MDT and given that PLD decided to take out MPR?

Absolutely.

A lot of people have felt that the ProLogis acquisition of Macquarie ProLogis Trust would indicate similar activity with MDT, at this point, that's highly unlikely.

We are very much committed to using that vehicle that we've set up in Australia, and frankly, in the near term, we expect to use it to fund some value added opportunities with a little higher risk profile, higher return profile than the core acquisitions that MDT has used to fund historically.

As you well know, we fully invested our Coventry II fund, which is is the fund we used previously to fund those value added opportunities, and while we may pursue further transactions with the principals of Coventry in the future, MDT provides a great opportunity for us to use a vehicle that's in place with an infinite life to fund some of those value added opportunities and we had the access to capital to do that.

Okay.

My last question, there's been some reports that big box retailers are slowing down their store opening plans, especially the home improvement retailers. Are you seeing this affect your development pipeline?

Currently, we're not, you know.

As I mentioned in the script, been out to meet with a lot of our tenants and we really don't see much slow-down.

The tenants that we see pulling back a little bit are really the ones that are having more difficulty in the market finding opportunities than really making a conscious decision to open fewer stores.

Entitlement process,particularly for those that self develop like the home improvement retailers and Wal-Mart, for example, entitlement processes become much more difficult and as a result, it has slowed down domestic store expansion as opportunities take just longer to bring online, or you are unable to bring them online.

So but for the other boxes, who rely on developers such as ourselves, it really is full steam ahead.

Thank you.

Thank you very much, your next question will come from the line of Craig Schmidt from Merrill Lynch.

You may proceed.

Good morning. I was wondering where did the Centerton Square property come from? I can find Beaver Creek and Mount Nebo in your appendix, but I cannot find Centerton Square.

That was a project we developed in Mount Laurel, New Jersey, it might be under Mount Laurel.

So when you fund dividend capital's future growth, are they looking for assets that have been recently developed? Or is it wider spectrum?

It's a much wider spectrum, they are looking for high quality core assets.

These were the assets that we elected to offer up to them because it fell in line with our goals to establish merchant building gains during the year.

Okay.

And you had mentioned you met with JC Penney in some of your tenant meetings. Are you getting any of the new, their aggressive growth plans in terms of adding to projects or new ground up developments?

We are. We're as active with JC Penney today as we are with any box tenant.

They have announced a pretty ambitious campaign, we have, we opened the first open air store in Coon Rapids in Minnesota. We have three more on the blocks and we are talking to them about six others. So yes, we are talking to them actively and they are giving us a good alternative to some of the other boxes that were very dominant in our portfolio, prior.

As things slow down maybe for Wal-Mart or Wal-Mart becomes a little more difficult to get entitled , JC Penney has given us another option rather than just Target and Kohl's. And they are effectively taking advantage of our

Thank you.

Sure.

Thank you.

The next question is from David Harris from Lehman Brothers. You may proceed David.

Good morning all. This is a question for Dan. I read that Tesco has secured 76 leases on the West coast for opening its new concept of Fresh and Easy, and I believe that they have substantial expansion plans beyond there.

Have you been involved in any of those transactions or you involved in discussions as to the next round of properties.

We have not. We have met with Tesco, we have talked with them, sort of understand what their plans are and we've seen some of the real estate that they have secured.

It will be interesting to see how it all plays out. Because primarily what they are looking for today and maybe its just a result of availability, is second tier locations, in markets. They are not doing a lot of business with the high cost provider of real estate on those markets.

And, even though they will try to compete, on the specialty grocery side, they are going to do so at a slightly more moderate to lower price point, as opposed to for example, a Trader Joe's.

So, the locations that they are looking for are the economics have to be more attractive than a lot of our assets on the West coast and in the Phoenix market for example, where we have seen some of their potential locations.

The economics that they are looking for are not numbers that we've been able to meet.

What sort of size box are they looking for?

11 to 13,000 sq. ft.

That's pretty small.

Yes, its a real Trader Joe's. It seems to be a Trader Joe competitor. But I do think ultimately they will trade at a slightly lower price point.

They have been phenomenally successful elsewhere. Its quite a challenge to see how they get a toe-hold in this market. But thanks anyway.

Sure.

Next question will come from the line of Christeen Kim from Deutsche Bank.

Good morning guys

Scott or Dan, could you give us an update on where you are at in terms of your non-core asset sales and Scott, did you say you should be completed by the end of the second quarter?

Yes, we expect to close the transaction in May, and you know, we've received the initial bids from, narrowed it down to a group of about four bidders to provide their best and final, I think those bids are probably due this week, and then we'll go to contract with the high bidder soon thereafter.

How has the house interest in pricing been compared to where you expected it to be.

We're very pleased with the pricing, as I indicated during the script , the initial bids have been around 7 and 7.25 cap rate on the in place NOI, which for these assets, I think it's very fair pricing, and what we kind

Great, and just one point of clarification, so that the tax benefit and the $5 million expense in the second quarter, that was in your original guidance?

That's correct.

Okay.

Great. Thank you.

Thank you gentlemen, your next question will come from the line of Dennis Maloney from Goldman Sachs.

You may proceed.

Hi, great, thank you, good morning.

Thanks for the improved disclosure, which actually leads me to my question: I'm curious why you didn't book more 141 income, and does this say anything about the internal growth or the mark to market of the Inland portfolio?

At this point in time, we engaged an outside consultant to work with us through the final, purchase price allocation of the Inland portfolio, so there is not a tremendous amount of any 141 activity that is reflected for the basic one month, if you will of the first quarter.

Will that pace pick up? Are you saying next quarter?

I mean, I don't expect it to be that significant.

Okay. Great.

And then Dan, you mentioned you are looking to grow the development pipeline.

I'm curious, what do you think is an ongoing level of activity there, and how much of that do you think would sell into the merchant building business versus keep for your own portfolio?

I think what we've said all along is that for delivery purposes, we would like to be between that $300 and $400 million a year range and growing the pipeline and keeping delivery stable is exactly what our goal is going to be, if we find that the opportunities present themselves, we go grow beyond that $300 or $400 million of deliveries, annually, that will certainly give direction but we are not at that point now.

As far as delivering into merchant bills and joint ventures, also one of the things we said, we would like to keep our merchant build gains fairly constant on an annual basis, We have done so that past two three years and we would look to do that going forward.

Okay.

And it sounds like the 650 million that you are going to sell, you are going to sell into the market at large, were there any opportunities to put that in one of your funds?

Yes, we absolutely could have.

We elected not to, because frankly, these are assets that for the most part are in tertiary markets that are not as convenient to manage as the other assets in our portfolio and we felt we could do a better job with the assets that we keep.

By not continuing to operate the assets.

Also, you know, there is a, for this type of asset class, you know, the buyers that are going to pay the highest price are buyers who are looking for the management, and for us to put it in a fund while first of all, would have been more difficult to put into a public institutional investors like the other assets that we're joint venturing, but even if we could, I don't think we would generate the same pricing that we will be able to by targeting the private market of operators. And that's basically where we've seen appetite for this portfolio.

And just moving along with the asset management platform here, do you have any mandates from any of your clients right now to go out and buy product, and could you give us a sense of what kind of product is currently out there?

Well, Ambika mentioned one potential product in her question, and there are some portfolios like that kicking around.

There's always, there are always assets available to pursue, to be quite candid, we have haven't really been aggressively looking at one-off transactions because we've been a little busy trying to digest the $6 billion acquisition that we just made, but I don't think a day goes by we that don't see assets available for sale, and to your first question, yes, TIAA-CREF clearly does have an appetite to look at future acquisitions along with us, as Dividends Capital will as well, so I think we have great access to private capital to fund acquisitions going forward

And I think you can look forward to seeing that occur.

It sounds like you are looking at the Pyramid portfolio.

Do you think from an operational standpoint you would be at a disadvantage, vis-a-vis your mall peers? As you don't have the platform they do?

No, I don't think so at all.

In fact, I think we would be at an advantage quite frankly, because mall business today, a lot of it is about repositioning with a lot of the tenants who we operate with every day.

We also have a geographic advantage against the other companies because of our Benderson acquisition, we are basically on the ground in virtually all the markets where Pyramid has assets. It may be, it may go a little bit unnoticed, but I think we own 23 malls in our portfolio, which would make us a significant player in that business already, and frankly, you know, everything we're doing internationally is in the enclosed mall business, so I think it would be a mistake to think that we lack that capability.

Fair enough, and lastly, your [inaudible] this quarter came in light relative to where you've been in recent quarters. Anything notable this quarter, and could you just remind us of your expectations for the year?

Sure, the, I think our staple store NOI was comparable to what it was in the first quarter of a year ago.

And typically, we see some pick-ups that will come through the year.

So I think we are looking in that 2.5% same store NOI area.

Great, thank you very much.

Your next question will come from the line of Mike Mueller from JP Morgan Securities.

Hi, on the JV and asset sales, $1.5 billion JV and assets sale. Is there any debt associated with those properties at this point? Or can you talk about that or what's free and clear?

Most of it is free and clear.

I mean there maybe a couple of mortgages that were assumed in conjunction with the Inland acquisition that is part of that could possibly transfer over, but the majority of it I believe is free and clear.

And in the JV, would you anticipate 10 or 20% ownership, something like that? Or would it be higher?

I think it's 20%.

It's 20% ownership is what we've forecast on that.

Okay.

And I guess last question, you previously talked about selling off some of the Wal-Mart boxes and some of the lower growth bond like properties just to boost internal growth.

Can you talk about where you are on that in terms of the process?

That's kind of taking a back seat to these other transactions at the moment, but that certainly is something that is in our focus for the future and something we will be looking at.

Okay.

On that point, though, Mike, last week, I was at Target, this week actually, I met with Target, and it's very much on their front burner again as well where they would like to talk to us about buying back some of their stores, which are obviously low growth stores for us.

So we are actively engaged in those conversations.

Great. Thank you

Your next question will come from the line of Matt Ostrower from Morgan Stanley. You may proceed Matt.

Good morning. Just about G&A, it sounds like even at the severance charge in the first quarter or the retirement cost, talking about 20% plus growth rate there, could you just talk about, I assume that a lot of this growth is related to the ongoing asset growth in your management business.

But you know, the growth in G&A looks pretty impressive, even compared to the growth you have in fees, so I guess my question, so what degree do you think those margins that you've talked about before on your various fees are already flowing through, and what then would explain the large growth in G&A this quarter, or this year rather, '07?

Well, obviously, we have the Inland transaction which is going to add in that 7 plus million of total G&A costs, and obviously we have a severance charge, you know, that is running through that.

You know, as a percentage of the revenues, the G&A, continues to move downward.

One aspect G&A that goes unnoticed that I might explain to you, which we're probably going to correct in the future, we have performance plans in place for senior management.

Part of that performance plan is based on FFO performance, targets, and that, unlike performance targets based on total return, where you estimate up front the probability of earning that, on the FFO targets, you expense 100% in any quarter where you believe it's going to be earned and at this point are we are painting at a point where we do expect it to be earned so we are expensing a higher percentage of those out performance plans and many of peers are, and frankly our next performance plan will probably not reflect, will probably be much more weighted if not not entirely weighted to total shareholder return versus FFO performance and will

result in a much lower expense on the bottom line even though the cash expense, may be the same.

Just to make sure I understand on the $7 million of Inland increase, I guess I could work this separately, does that increase, is that tied to the sort of robust margins that you've talked about before for the asset management fees and property management fees you get on that business, or are you still in this platform building mode where G&A might be up faster to begin with?

No, that ties to the margins we talked about prior. and if you look at our real wage growth, rages and salary growth year-over-year on a comp basis, it's about 3.8%

When you add in the things that Scott discussed, the Inland transaction, when you add in one time expenses, it does obviously move up, but if you look at our control line, the real wages year over year on a comp basis we are low under 4%.

Okay. And I guess the last thing for me, I didn't hear you address, it looked to me like recoveries, I think your guidance before had been that Inland should have a positive impact on recovery ratio, at least the way you look at it on your numbers. It looked like the recovery ratio came down a little bit. Is that what you observed? Can you talk about that?

I don't think we've said that Inland would have a positive impact on a recovery ratio, What we said was that our recovery ratio on the inland assets will be much higher than Inland's recovery ratio was on the Inland asset.

I see. Okay.

We were forecasting about a 80% recovery rate, which is pretty much in line with our own portfolio.

Great. Thank you.

Your next question will come from the line of Rich Moore from RBC Capital Markets. You may proceed Rich.

Good morning.

When we look at dispositions with these two big disposition portfolios you are doing is that pretty much it for the year? I know Mike kind of hinted at possible other smaller ones, but is this the big disposition chunks for the year?

At this point, yes at this point we have nothing else significant forecast.

Since you have so many moving parts, is there anyway you can give us some sort of guidance on fee income for the year?

Sure. That number will probably approximate about $50 million.

Okay.

But the management development and other fee income?

Yes, exactly. Thanks Bill. Yes. And then since you guys obviously do a great deal of development, maybe you can offer your thoughts on you are seeing with construction costs on a broad basis.

And whether or not tenant rents are making up for some of the construction costs and what kind of yields you might expect going forward.

Sure, construction costs have stabilized a lot over the last four or five months.

They stabilized unfortunately at a high level, but they have, because we've had huge growth over the last two or three years, but they have stabilized and we've seen a few of the commodity pricing items come down and reverse a little bit, but still we've been subject to higher costs.

We are seeing tenants pay more per space, the demand is clearly outstripping the supply, and that's one of the reasons why development has become so popular these days.

I will say though that the pressure that we're seeing on the project is really in the land costs today, because our ability to tie land up for extended periods of time, work the land, really is not available to us any longer, and we've been having to close on lands in 60, 90 days, which gives us, does not give us the ability to go back and work with the landowner if we need to rework the land price in order to meet a specific yield.

So we have, we are being very cautious on, and conservative on our proformas up front, but the land is putting more pressure on our yields today than the construction costs are.

Okay.

Dan, so overall then probably yields are slipping a little bit, is that what you are receiving?

A little bit, but we are still in the double digits, comfortably.

And then turning to tenants for a second, leasing for the year, is that pretty much done? Maybe with the exception of Inland.

No, we are probably 35% to 40% percent of the way to where we wants to be after the first quarter, which is typical, we are about 33% finished with renewals, that will pick up dramatically in the second quarter, but there's quite a bit of leasing left to do for 2006, I mean for 2007.

In the core, and we'll be looking much more towards 2008 on a development pipeline in Vegas as well.

So there's still quite a bit of heavy lifting to do, but we are a little ahead of budget now, and if the market continues to show what we see, we expect that to continue.

And then you had all these meetings with the tenants, so your broad outlook with the tenants? How would you characterize it in general. Even beyond the guys that you met with.

The reaction is getting redundant, but tenants are bullish, they looking for space, they are talking about future year growth, sales are pretty good, margins are stronger in some cases than even sales, which means that tenants have figured out how to merchandise their store, and control their internal expenses, and the big concern in the tenant community right now is external growth, where they are going to find it, and they need these development projects in order to fuel external growth because internal growth is still relatively modest.

Okay. That's a good thing to be redundant on, I think.

Yes, no, we meet with people, and we ask them, how are we doing, how are you doing?

Just sort of the ask the simple questions and the answers have been the same now, and I don't think Vegas will be any different.

Even the tenants that we had some concern because they were brought by private equity and we thought it might potentially slow down their growth rate are still aggressively looking for locations and quality projects, and we seem to be developing right in their sweet spot.

Okay. Very good.

And the last thing on the international front, anything new with new countries or Brazil anything exciting going on?

Well, you know, we did plan an agreement with ECE in Germany to joint venture on the development of shopping centers in Russia and Ukraine, and we expect to start construction on two new developments over there with them in the near future.

Very good.

Thank you guys.

Thanks, Rich.

Next question will come from the line of Jeff Donnelly from Wachovia Securities.

You may proceed.

Scott, just a single question actually to wrap up, I just been hearing increasing feedback in different segments of the business structured products, for example, around a potential resurgence in major retailer LBO transactions like Home Depot and clearly, we have to take in the factor prominently in those deals. Can you share with us your view on those sorts of investments? Is that segment of the market dead or do opportunities remain and to the extent that there are deals. What roles are available for somebody such at a DDR in that situation?

You know, it's a very good question, and you know, this business is really, has really evolved and I think a lot of people get somewhat confused about the tenant business that we used to do with people like service merchandise out of bankruptcies versus these LBOs on real operating retailers, they are very, very different transactions.

We really think there's a great role for companies like ours where we can buy assets out of bankruptcy and we can pick and choose leases to accept or reject and basically value the fee interests and real estate and release it at a profit.

To the extent that those transactions arise in the future we will be aggressively looking at them. With respect to the LBOs on the operating retailers, it's much more complicated because there is an inherent conflict of interest between the private equity investors who is really trying to run the business of operating the retailer and the real estate players objective, which is to really take the best locations where they have an opportunity to close doors and release them at higher rents.

I think that's why, for instance, when Bornado pursued the Toys 'R' Us transaction, they had to invest on all 4's with [takare and bean]. In the operations as well at real estate because it's difficult to really bifurcate those two objective and treat them as separate investments, from a DDR perspective, we would be highly reluctant to make that kind of investment.

We view ourselves to be in the real estate business, not the retail the business, and we would be reluctant to really get involved directly and invest in making investment that would depend on the profitability of the retailer as an operator.

Having said that, you know, out of all these transactions, there does come a point in time where real estate has to be rationalized and sometimes there is a role for people like us to buy stores that are going to close and reposition them.

I think there's a package we are looking at now, for instance, with a couple two, three Federated department stores that closed in the western United States.

I think as these LBOs flush out and they start to really rationalize what stores they wants to operate and not operate, there may be an opportunity for people like us to jump in there and buy a portfolio of closed stores at a price in which we think we can release them at a profit for our shareholders.

Thank you, that's helpful.

The role of the treatment of real estate seems to have evolved before the bankruptcy and assets you have gotten released. And then for sometime, it was the real estate was acquired, and flipped out, maybe to maintain an IRR for the remaining investment, now it seems to be used as another way to increase leverage on the portfolio, and I guess that was one of my questions, is that even an opportunity for you guys, provide some degree of financing to some of these transactions.

At the time a good question, and it can be, and frankly, that's exactly what we did, the deal we do with Mervyn's, the problem with that is in more recent transactions,

Competitors who have been chasing yields are willing to pay what we consider and excess of NAV for the assets. When we look at those opportunities on a sale lease back, we basically have to assume that the tenant is going to be bankrupt and we are going to have to release the stores to somebody else, and unless we are very comfortable that the price we're paying is one in which we can release stores and keep ourselves whole, we would be reluctant to pursuit the investment, no matter what the yield was.

Great example of that is the transaction that Spirit Finance did with ShopKo.

We looked at that prior to them, and while we found the yield to be attractive, we've just couldn't get to the price because we weren't comfortable that if the stores came back to us, we would be able to make it work from a real estate perspective. So if the sale lease back opportunity is there at the right price, yes, we would be all over it, but at this point, it seems like the market for that is a little too frothy for us. At least it was in that transaction.

Thanks, Scott.

Jackie does that conclude the call?

You have one last question from Donald Sheets from Davidson [inaudible] You may proceed Donald.

Hi, one quick follow up on the MDT issue that was discussed previously. There seemed to be a few other stars aligning on the Macquarie front that would point to perhaps a different conclusion that MDT could not be reabsorbed into DDR. Can you comment on the resignation of MDT's CEO and what the process there is?

Related to the, Macquarie ProLogis or anything else going on.

David Dicks resigned to pursue another opportunity, and we've appointed a successor as a trust manager, guy by the name of Nick Ridgewell who is highly competent and we are very comfortable and looking forward to working with him. That is a good observation but without direct conclusion.

I guess a quick follow up to that would be, Macquarie Countrywide, which is their venture with Regency has stated they are looking to dispose of substantial U.S. assets which are all shopping centers as well.

And the wrap up of the ProLogis venture. It seems that Macquarie may have an appetite for US real estate. Can you comment on that.

It seems that Macquarie I'm sorry

May not have as an aggressive appetite for you in real estate as it once had.

Yes I can comment on it. I think what people need to understand is the Australian investor is highly yield driven, and the yield that they earn on their investments is usually a punch in of the gap between cap rates and interest rates.

The reason we had a very strong appetite for U.S. assets when we formed MDT is because interest rates in the United States were low in relationship to cap rates, and when you apply the leverage to the portfolio that were acquired, the leverage return was quite high.

The Australian capital is portable and can to go to any country in the world, and right now, where that gap is widest is in Japan, so a lot of capital is running over there.

I would say though that MDT is not limited to invest in the United States.

We do have the capacity to use that vehicle to pursue investments internationally as well if we see yield opportunities that are attractive to our trust unit holders. But you know, I also think it's important that you can't evaluate these vehicles with a snapshots, you have to use a video camera, and these vehicles are put in place because there are times where they can become extremely valuable, and we basically pursued the MDT transaction initially because we knew there would be times where capital would be priced better over there than here and vice versa.

Right now, we happen to be at a point in time where the capital is cheaper to raise in the United States, but that doesn't mean that's always going to be that way, and we don't think it's wise to throw the baby out with the bath water, because on this particular day, it's not the most efficient capital source to pursue core acquisitions that it never will be.

What we do think is that it's a great vehicle, we have a good investor following over there, and I think that we really enjoy our relationship with Macquarie, and we're going to pursue investment center advantageous to the unit holders in that vehicle as they present themselves, and right now as I indicated, those investments will be more on the value added side than the core side.

But that doesn't mean that will always be the case.

Great, thank you.

Thank you ladies and gentlemen. Ladies and gentlemen, that does conclude today's presentation. Thank you for joining us today. You may now disconnect and have a wonderful day.