Site Centers Corp (SITC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Developers Diversified second quarter earnings conference call. My name is Jeremy and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn you over to your host, Ms. Michelle Dawson. You may proceed.

Thank you, Jeremy. Good Morning. We're pleased to have you join us. On this mornings call, you will hear from, Scott Wolstein, Dan Hurwitz, Bill Schafer, and David Oakes. We're pleased to have you join us. On this morning's call, you will hear from, Scott Wolstein, Dan Hurwitz, Bill Schafer, and David Oakes. Before we begin, I'd like to alert you, that certain of our statements today, maybe forward-looking. Although we believe that such statements are based upon reasonable assumptions, you should understand 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 filed with the SEC on form 8-K in our Form 10-K for the year ended December 31st, 2006 and filed with the SEC.

I would also like to highlight important changes we've made to quarterly financial supplement. In order to make the supplement easier to use, yet preserve content, and maintain the quality of our disclosure, we've reordered some of the sections, and streamlined the presentation. In addition, a complete property list and detailed summaries of our individual joint ventures may be found in our quarterly appendix. You can access all this information in the IR section of our website, at www.DDR.com.

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

Thank you, Michelle, and good morning. I'm very pleased to announce this quarter's record earnings, and discuss our recent activities. We achieved a number of very important objectives this quarter, will that will have a positive long-term impact on our future performance. As you'll hear throughout the call, we have executed transactions, and delivered results, in line with our expectations. Moreover, we continue to leverage our core competencies in development and leasing, to identify new opportunities for further value creation.

First, I would like to highlight our quarterly earnings. We reported FFO per share of $1.26 this quarter, which reflects an increase of 27% over the prior year. Excluding the impact of a $5.4 million non-cash charge, associated with the reduction of preferred shares, our FFO per share would have been $1.30. In addition to this charge, our results included approximately $46 million of merchant build gains, net of tax, and over $14 million of income, from promoted interest. Adjusting for these and certain other miscellaneous transactional type items, for the comparable periods, our FFO per share grew by over 20% which reflects consistent performance of our our core portfolio, and the accretive effect of a major acquisition.

With respect to strategic transactions, we sold $1.5 billion in assets, to our domestic retail real estate fund one, a long-term, core, commingled fund, with a group of high quality, institutional investors. We also sold, a $600 million portfolio of non-core assets, the pricing with which we were pleased, despite challenging market conditions. Approximately $150 million, of the sale portfolio is expected to close in the third quarter, subject to lender approvals and other closing conditions. With the proceeds generated by these two transactions, we repaid the interim debt we put in place at the time we closed the inland transaction, and have returned the balance sheet to a stronger position, and prior to the acquisition.

While our acquisitions tend to make headlines and garner attention, I want to emphasize that our investment strategy clearly includes, when appropriate, the sale of assets, and that in certain environments, shrinking the balance sheet may actually offer a better likelihood of value creation than growing it. In fact, over the last four years alone, we have completed the outright sale of approximately $1.5 billion in assets, and we have placed approximately $6 billion of additional assets in to infinite life, of long-term joint ventures, such as MDT, TIA, CRUF, (inaudible) Capital, domestic retail funds, as well as more traditional joint venture structures with other high quality institutional partners such as Prudential Real Estate Investors and The Kuwaiti Financial Center. As a result of these transactions, we have a higher quality, and better-performing portfolio as well as, a more efficient operating platform.

Our investment strategy, also includes potential share repurchase when appropriate. We pursued share repurchases in 1999, and 2000, at times when we determined that investment in our own shares was the best opportunity available to the company. We purchased more than $170 million of stock at that time, at an average price of under $17 per share.

Recently our share price appeared attractive, relative to the private market pricing we are seeing available on acquisitions, and our Board of Directors responded by approving another share repurchase program. We will continue to evaluate all investment opportunities, including acquisitions, developments or share repurchases on a Ricks-adjusted comparative rate of return analysis. Now, five months after closing the inlet transaction, we have completed all the major objectives, we had previously announced to the market. Which in turn, have accomplished our primary goal, which is to complete the Inland acquisition in a manner, that was accretive to earnings, improved our portfolio quality, and also improved our overall leverage ratios.

I'm very proud of our organization, and the significant accomplishments we've made. Our emphasis to higher the most talented individuals in the industry, challenge them to develop as professionals, and reward their high performance has been highly successful. And I'm gratified by the enthusiasm, and commitment I see throughout all levels of our company.

I'd also like to comment briefly on the state of the capital markets for real estate investments, and how our business is affected. It amazes me, how sanguine investors are about the fact that cap rates in most real estate asset classes, for institutional-quality real estate today, are well below the applicable interest rates for financing investments in those investment classes. This is the first time that has ever occurred in most asset classes, since the advent of the modern rates in 1991. Accordingly, since leverage is negative to returns, in most real estate investments today those investments must be financed primarily with equity, which even in the face of unprecedented liquidity in the private equity markets, still has to put pressure on overall liquidity for most real estate asset classes.

Our business is the one glaring exception. We are still able to invest in acquisitions and developments of institutional-quality retail real estate in returns in excess of the cost of debt, leaving retail as one of the few real estate asset classes where leverage can still positively effect investment return. Overtime, it stands to reason that this dynamic will allow retail real estate companies to earn investment returns well above their peers in say, office, industrial, and multi-family. We expect Developers Diversified to be a major beneficiary of this circumstance in the foreseeable future.

At this time I would like to turn the floor over to Bill Shafer.

Thanks, Scott.

As I mentioned last quarter, I am very pleased with how well the actual results of our financial activity tracked our expectations. All of the temporary financings that were entered into, with respect to our acquisition of Inland, have been repaid. During the quarter, we received 1.6 billion in aggregate proceeds from the formation of two new joint ventures, and the sale of assets to third parties. During the second quarter we repaid nearly $500 million in preferred operating partnership units, $550 million unsecured bridge loan, and approximately $550 million of borrowings, on revolving credit facilities. As a result, at the end of the quarter we had less than $400 million outstanding on our revolving lines of credit, which have aggregate capacity of nearly 1.3 billion. As reflected in our quarterly financial supplement, our financial ratios were actually stronger as compared to those that existed pre-merger.

With respect to the quarter, I would like to provide additional color on four items impacting our income statement.

First we recognized approximately $46 million in merchant-building gains, which is net of over $4 million in tax expense. These gains represent virtually all of our expected merchant-build gains, for the year. For the second quarter of 2006, we reported $33 million in merchant-building gains, net of tax.

Second, we recognize $14.3 million of income from promoted interest, the recapitalization of seven assets formally held in a joint venture with Kuwait Financial Center, have now been placed in to our new domestic retail real estate fund, generated $13.6 million of promotes, the sale of land in two other joint ventures generated the remaining $700,000.

Third, we recognized a 5.4 million non-cash charge associated with the redemption of the 150 million, 8.6% preferred shares, in early April.

And lastly, we incurred approximately 1.7 million in non-recurring integration costs associated with the Inland acquisition, which impacted our general administrative expense during the six-month period. When combined with a $4.1 million charge incurred in relation to David Jacobstein's departure, we have incurred nearly $6 million in one-time G&A expenses over the last two quarters. Not with-standing these additional charges, we still expect total G&A to approximate $80 million, for the year.

While this quarter's results were impacted by a number of transactions, we continue to see the underlying performance of both our core and development portfolios meeting our expectations for the year.

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

Thank you, Bill. As noted in the earnings release, it was very active and productive quarter for the core revenue business within our company. Of particular note is the 30.3% positive leasing spread on a cash basis for 140 new leases, executed within the quarter.

As evidenced in the press release and quarterly supplemental, our leasing CapEx is still very low at $0.21 per square foot of owned GLA, reinforcing that the rental spreads are derived by market conditions and asset quality, and not by buying up rents, moreover at 96% lease, the portfolio remains at, or very close, to full occupancy. These metrics speak clearly to the overall health, within the sector, the quality of our portfolio, and demand for new space, within the core and the development projects.

However, there are signs that the retail market is becoming more competitive for the attention of the consumer, and we are carefully monitoring trends, margins and sales results, to make sure we are properly aligned with those retailers, that are garnering market share.

On that note, there are numerous retailers that continue to aggressively expand their platforms effectively, and we continue to be a primary provider of locations for many. For example, JCPenny and Kohl's continue to improve their merchandising and fashion selections, at the clear expense of the conventional department stores, JCPenny has added the Sephora label to cosmetics, will be rolling out a Ralph Lauren line in the near future, and a Halston line in women's ready to wear. Kohl's has added an Este Lauder cosmetics line, and is initiating a Vera Wang label in women's ready to wear. In addition, Target continues to push the fashion label at a (inaudible) price point. Even H&M, which has an upscale image, but actually trades at a popular price point, carries labels from Roberto Cavalli, Karl Lagerfield, Stella McCartney, and Viktor and Rolf. JCPenny, Target, and Kohl's, are the most active big box tenants today for our development pipeline. They have clearly taken the lead in merchandising innovation and continue to expand market share at the expense of their closest rivals.

Collectively we are currently in active negotiations on 32 potential new deals with these tenants. So, while we are cognizant of market conditions, that may lead to pressure on some components of the retail sector, we continue to seek those retailers who are winning the battle for the consumer dollar, and present them with ample opportunity for external growth to our core portfolio, and our $4 billion development pipeline, where we continue to secure locations and create environments where consumers have expressed a clear preference to shop.

Moreover as a result of a very active Las Vegas convention, our domestic pipeline continues to grow, as we were presented with numerous opportunities, that require our development , financial, and leasing, expertise.

The current dislocation in the CNBS market has created an environment where the risk of going it alone for private developers, is less of an option, and a venture with our company can provide security for the developer and a certainty of execution for the tenant community.

Internationally we also continue to seek development opportunities, and are under construction with our first project in Manaus, Brazil, and we recently closed on the land for a second development in Uberlandia, Brazil. We also expect to close on a third project by year's end.

In regards to Russia and Ukraine, representatives from our company, and ECE our partner, will be conducting site tours, in late August to review the first group of potential locations for consideration. Assuming that these sites meet the location, tenant demand, and project level returns criteria, of the Developers Diversified investment committee, it is possible one or more of the projects may be under construction by year's end, or early 2008.

Again, the second quarter performance was very consistent with the stability, and resilience, that we have seen from past quarters. Our development pipeline is strong, leasing level is high, tenant demand is still very aggressive, and overall corporate operations on track, with our expectations for 2007.

At this point I'll turn the call over to

Thanks, Dan. As part of our capital allocation strategy, we are constantly reviewing investment opportunities, as we look for ways to maximize returns on our investments, and create value for our shareholders. The framework for our investment strategy has evolved as market conditions have changed. The traditional re-paradigm of simply buying assets, and selling new shares has evolved dramatically, and during the quarter that evolution was illustrated through three strategic initiatives, that will help ensure that we remain prudent stewards of shareholder capital.

First, we completed the formation of the $1.5 billion domestic retail fund one. Initiating partnerships with new institutional clients, and expanding relationships with existing co-investors. This transaction significantly expanded our fund's management platform, allowed us to continue strengthening our balance sheet, and maintain day-to-day control of high-quality real estate assets. We will look for more opportunities to create funds and partner with large institutions that share our interest in owning high-quality shopping centers, with a long-term time horizon, but don't share our interests in employing hundreds of leasing and asset management professionals, required to actively manage these assets.

As we continue to expand our funds management business, we believe it is important that we dedicate a greater focus internally, to serving the needs of our institutional clients. To that end we recently appointed Tim Lorden, as Vice President of Fund Management. The ultimate objective of our fund business is to create profitable investment opportunities and deliver strong returns for our clients. Tim's unique skill set, and extensive experience, help ensure that our goals, and the goals of our clients, are mutually aligned, and efficiently achieved.

Second, we sold a $600 million portfolio of non-core assets. As Scott mentioned this sale was consistent with our ongoing strategy to prune our portfolio of assets, which for various reasons, no longer meet our investment criteria. In the case of this non-core asset sale, we pared our portfolio of many smaller, and older shopping centers, in more remote markets, thereby improving the quality and manageability of our remaining portfolio. As a result, we are now in a better position of recognizing increased efficiencies across our existing asset base, particularly in the areas of leasing, and property management.

We will consistently monitor the performance of individual properties within our portfolio. And we will continue, to sell assets when appropriate, we currently have plans in sell more than $100 million of assets, during the next few quarters.

Third, our board approved a $500 million share repurchase program. Providing us another potential investment to consider. We continue to review a broad spectrum of opportunities with a goal of investing shareholder capital, and those that offer the best long-term returns, and this repurchase authorization only enhances our flexibility do so.

With that I'll turn the call over to Scott for some concluding remarks.

Thank you David, at this time I would like to raise our expected FFO range from what was $3.74 to $3.80 per share, to a low end of the range of $3.77 to a high end of the range of $3.81. As I mentioned last quarter, most analysts estimates were too low for the second quarter, and too high in the third and fourth quarter. And I would recommend, that analysts revisit their estimates accordingly. Now I would like to open the lines to receive your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jay Habermann, with Goldman Sachs. You may proceed.

Hey, good morning. Question for Dan, I guess your comments about the more competitive retail environment that you are seeing, can you comment, you know, specifically what segments might be impacted at this point? Are you seeing any potential impact from the housing market, and I guess sort of expand a bit on those comments.

It's interesting, what we're seeing in the retail environment is situations like what we saw last quarter, with Bed Bath & Beyond, where clearly, you know, their sales and their performance, was impacted negatively by the fact they had a weaker competitor in the market, that was struggling for market share, and therefore promoting at a level, that the company had not anticipated, which puts pressure on margin, of course if you don't meet sales. So, I think any time in the retail business-- I don't think this is an issue of the consumer, per say-- I think this is an issue of merchandising. Any time you are in a situation where, one of the two or three competitors, that you are competing within a single market is in some sort of distress, it is going to be put pressure on the leader in that sector, to either match price or lose market share, and if it's an unanticipated pressure, it could have a negative impact on either your sales, if you don't match price, and if you do match price it puts pressure on your margin.

Dan, you mentioned JCPenny, Kohl's, and Target, but how about Sears, Kmart?

Well, you know, Sears Kmart is a tough story to clearly understand, for us. You know, they have a merchandising strategy that is unclear. I think if you really look at what is happening in the market, you see what Penny's is doing, you see what Kohl's is doing, you see what Target is doing, and actually you see what Wal-Mart is doing. Wal-Mart announced 16,000 price reductions on various SKU's for back to school. They brought in a new merchant for ready to wear. They are doing a lot of things to improve areas where they feel they are weak, and it's very hard to get that comfort that Sears and Kmart are doing the same.

I guess, question for Scott-- I guess it was mentioned the cap rates, in terms of what you're seeing, but I guess 7.25 for the asset sales, the $600 million asset sales, are you happy with what you are seeing, in terms of cap rates, and I guess, directionally, are you seeing any move upward for sort of the lower tier assets?

That's a good question, Jay. I would tell you that we were very pleased with the execution of the asset sale, and the cap rate that we earned on that transaction. I would also say that the pull of investors, stand out dramatically during the process, you know, it's became more difficult to leverage the acquisition effectively, and I think for that type of transaction, with -- what I would call B assets, you can expect to see, less liquidity on the buy side and, I would assume that that will dictate a little bit higher cap rate environment going forward.

By contrast, we have not yet seen any effect, on eight quality assets in the marketplace, because for those assets, there still seems to be a deep bid group, that uses almost exclusively equity, and isn't relying on debt to finance the acquisition. Where we have seen high-quality assets trade recently, we have actually seen cap rates in some cases surprise us on the low side, rather than the high side.

I guess to flip it a little bit, I know you are more of a seller at this point, but are you seeing any opportunities to buy attractively?

We're looking at the Pyramid portfolio along with some others, and that will be a real test. I mean, because it has a mixed bag of assets that would probably fall in each of those categories, and, we're-- I think that will be a fist major transaction, in this environment to test where cap rates, will end up.

Okay. And I guess just switching gears, the Ukraine Russia joint venture, it sounds like you're in the process of evaluating sites at this point, do you have a sense, of sort of, what sort of magnitude, in terms of the investment that could have, perhaps for 2008? And perhaps, how you would even mitigate the risks of those investments?

Well, I think that it's not going to be dramatic in 2008. I think that we'll be lucky to have a couple of, construction starts in 2008, and probably the cost of these projects will be funded, probably over 18 months, so I wouldn't think 2008 would be a huge capital requirement in this-- for this investment.

Having said that, I think we're going to look at 8 to 10 sites on this tour at the end of August. So, I think going forward, by all indications we should be able to invest the full amount of capital we allocated to the joint venture over the next few years, and we're excited about that. You know, in terms of mitigating the risk, I think it's really important for people to really understand our strategy, of investing in developments in emerging markets. The returns that we will earn on a development in Russia, or Brazil, may be slightly higher than what we would earn domestically, but that's not really where we see the great opportunity. The great opportunity in these markets is that we're looking at economies that are growing, at many multiples of the growth rate of the U.S. economy, and that's being reflected in sales growth in these markets, which will effectively be translated in to rental growth, in these markets.

We have already seen that happen in Brazil, where sales in our shopping centers from the first year of our ownership, have increased by almost 20%, compared to an increase domestically of more like 3%. What you are really gaining in these emerging markets, is tremendous operating leverage, which is how you mitigate the risk.

You know, there is more risk, but there's also dramatically more opportunity for growth, and I would argue that that opportunity exceeds the opportunity that exists in virtually any asset class right now in the United States, where we have a much more mature economy, or in Western Europe, or Japan, or many other mature markets. So that's how I think more than any other way we mitigate the risks in these investments

Lastly, just a few items, in terms -- I guess maybe, for Bill -- in terms of landfill gains, I think you are 8 million year to date, and then just updates, in terms of lease term fees, expectations for the back half of the year, as well as the promotes, any promoted interests.

Sure. I think from a -- from a land sale perspective we're in the 5 to $6 million, which should, you know, be probably relatively evenly over the balance of the year. Lease termination income is -- we're not expecting significant amounts in there, maybe a couple million dollars for the balance of the year.

Promotes -- any promoted interest sort of to think about in the back half of the year?

No. Nothing of any significance that we are anticipating.

Great. Thank you very much.

I think it's important, Jay, if I can just add in the lease term fees, those are-- are not necessarily scheduled as much as they are opportunistic. And if we do have some opportunities within the Inland portfolio, and we do have some opportunities with our core portfolio, where we are pursuing tenant interest in dark space, as a result of interest indicated in Vegas. So that number, really will just depend on what the opportunity is, and when is the right time, to proceed.

Okay. Great thanks again.

Jay, before we lose you. I also -- there's one thing I forgot to mention with respect to the international investment program, which is, you know, the opportunity for cap rate compression. That's the other aspect of our investment in Brazil, that's been dramatic.

You know, I don't know how closely the analysts, on this call are following, you know, the capital markets activities down there, but there have been multiple ITO's of our competitors in Brazil, and implied cap rates of around 7%. If you recall, we invested in assets in Brazil at a cap rate of about 11%, on pro forma NRI. We have already seen dramatic cap rate compression in the capital markets in Brazil, and frankly some of those ITO's traded up, after they priced at 7% cap rate. That's the only way you mitigate your risk in these investments, and create a pretty remarkable investment opportunity.

Great. Thanks again.

Your next question is from the line of Jonathan Litt, with Citigroup. You may proceed.

Hi, this is Ambika, with John. Could you give some color on development yields? In the supplemental, this quarter you disclosed a 10% development yield, where previously in presentations, I had seen 11%. Can you give some color on what is causing the development yields to compress?

Well there's a couple of things happening. One is that we have made a conscience decision internally that we will pursue development projects where we feel that the spread and the value creation, is appropriate given the market, and where we feel that we can trade or create value at -- on exit at a 6 cap. We feel that pursuing a deal at a 9, is still reasonable. We had not done, that prior to our recent decision, to change our threshold. So really, our projects right now are ranging between 9 and 11.

And before, we really weren't looking at any development projects that were being developed for less than double digit returns, and really what has happened is a lot of the projects that we passed on, quite frankly, did get built. They got built in the high single digits, and people made a lot of money. So we decided, not to exclude ourselves from that competitive process, and as a result it has widened our development pipe line, and lowered the overall yields a little bit.

Okay. And --

In addition to that, there is all the factor of some of the developments that we're doing are developments we have inherited in our acquisitions. And the yields on those developments are dictated by our predecessors. So there are some cases -- we have one project, that was a JDN acquisition where the yield is probably around 7. We wouldn't have done that deal, you know, had we been pursuing it ourselves, but we inherited it, and it still has a nominal value creation even at that, so it was worth doing, rather than abandoning. But it does reduce the overall blended return.

Right. And this quarter, I also saw disclosure on the side of the shadow pipeline of 1 billion. Could you give some color on if you are planning to ramp-up your developments per year, based upon the large size of the shadow development pipeline? And is this a significant increase from previous quarters, or is it in line?

Well, it's pretty much in line with previous quarters. We are planning to ramp-up our development program for part of the reasons that I mentioned earlier. That we came out of Las Vegas, with a wide range of development opportunities, far beyond any prior year that we had seen, and again, one of the questions that we had to ask ourselves was do we want to ramp-up? Do we want to lower our threshold a little bit? And our decision was, to do that. We have tenants that are coming to us with serious concern about some private developer's ability to deliver. We have tenants that need new store growth, external growth, and have recommended to some of their development partners that they should partner with us, and as a result of that, it has created opportunities that we had not -- weren't really present to us, in the past. So, yes, we are going to expand our development pipeline. I think we're up to really-- if you look at all of our projects in total, in our shadow pipeline, our pipeline in process, we're up to about $4 billion, and I would expect that to grow a little bit more.

How should we think about annual development deliveries, longer term?

Well, again, the development business gotten stretched out so long, and the entitlement process has become such a question mark, that we're still comfortable thinking that we can deliver in that $300 million to $400 million, worth of product a year. If it changes because the winds are at our back from an entitlement perspective, we will provide that guidance.

Okay. And could you give guidance for merchant-build gains for the remainder of 2007.

We have nothing in our budget in terms of merchant-build gains for the balance of the year.

Okay. Thank you.

Your next question comes from the line of Christy McElory, with Banc of America. You may proceed.

Hi. Good morning. Just following up quickly on Ambika's question with regard to the $300 million or $400 million of annual deliveries that you are expecting, is that a pro rata number?

That's basically what we think we can deliver in house that could be increased through our forward committment joint venture structures, as well as our international joint ventures.

Okay. And then, can you walk us through the main drivers behind the increase in your '07 guidance. Given all of the moving parts, was there some specific item that came in better than your expectations during Q2?

Actually it really isn't so much any items that we didn't anticipate, as much as it is enhanced visibilities to the numbers we looked at originally. I think that probably more than any other year, I think think of, we really delivered almost exactly on point as to what we budgeted. You know, and the extra penny on the high end of the range is just really a factor of a lot of different things, rather than any one item that would jump out at you. But I think you'll see that-- from us in every year as the year continues, as we book transactional income early in the year, our visibility to the guidance certainly, is enhanced and the risk to the number is diminished as we go forward throughout the year.

Okay. And then there's been a lot of speculation on the retailer side of the world about who is the next leveraged buyout? What is the value of the underlying real estate? Are sale lease backs a viable option? What would you say is the appetite among shopping center landlords, such as yourself, to do a sale leaseback on anchor boxes?

I'm sorry what was the question-- what I would say to what?

What would you say is the appetite among shopping center landlords to do a sale leaseback on anchor boxes? If a retailer were to try to monetize the value of it's real estate?

Oh, that's a very good question. I think that, we have done it, we did with Mervyn's and we did it because we thought that the underlying real estate, was worth at least as much as the leases, that we were getting a return, that was adequate or more than adequate for the credit risk that we were taking, and that we were getting increases, going forward, that gave us a growth rate that was consistent with our overall portfolio. To the extent that there are transactions that meet those criteria, we would pursue them.

Having said that, I don't think retail landlords are the most likely buyer, on the sale-leaseback transactions, because the more recent transactions have really been driven more by appraisals, and high leverage because of high appraisals, than anything else. What happens is, when you have companies like us, and Kimco, and people that really understand the underlying value of the real estate maybe better than the independent appraiser might, we struggle getting to the number that some of the net lease companies, that are much more yield driven would assign to the transactions.

You know, a great example of that, is a transaction we underwrote for Shopko. We were willing to look at that transaction at a certain level, but the level at which it traded, was way in excess of where we felt that real estate could be valued, if Shopko failed, and we had to re-tenant the stores in the open market.

So I guess, you know, long story short, probably in many cases we know too much, to be really effective in that marketplace, but where we see transactions, where we think the real estate-- the underlying real estate value is adequate, we would be eager to pursue those types of sale-leasebacks.

That's very helpful. Thank you so much.

Your next question come the line of Craig Schmidt, with Merrill Lynch.

Good morning.

Morning.

The 30% increases on new leases I assume is through a mixture of anchors, and smaller tenants, was there any different performance, between those two shop retailers?

Was there any what? I'm sorry--

Any different -- in terms of the spread? Were anchors spread similar to the in-line tenants to help get that 30% gain.

They were, but this was predominantly small-shop tenants. There was really very little anchor activity in that number.

Okay. And could -- you talked a little bit about the sales in Brazil. I'm just wondering, what are the operating matrix, leasing and NOI given the period, you have held them?

The portfolio is performing well. I don't have the exact numbers at hand, we don't have a full year of performance, in hand at this point in time, but, the lease-up has been strong, the sales performance has been strong, tenant demand has been strong, and we're actually looking at expansions at a number of projects in the portfolio.

So the strong sales performance you sort of alluded to earlier, you think it's going to impact your numbers immediately?

Well it doesn't impact your numbers until the leases roll, because you don't have an opportunity to reset the rents, until you get expirations, so it will have some impact, but you really have to look at the lease expiration schedule, to kind of term it out to see at what level, that will be reflected in NOI. But over time, obviously, if you maintain a content occupancy cost as a percent of sales, and sales growth, then rents are going to grow accordingly, and the mix in that portfolio, vis-a-vis our domestic portfolio has much shorter lease terms on average, than we have up here, so we have a better opportunity down there to reset rents over time.

Thank you.

Your next question from the line of Christeen Kim, with Deutsche Bank. You may proceed.

Hey, good morning, guys.

Good morning.

Dan, in terms of the development ramp you spoke about earlier, given your current infrastructure, how big could that pipeline get at this point?

That's a great question, and we, as an organization, have really been very centralized in our management structure, and because of the growth of the development pipeline, we actually have pushed some of those responsibilities out in to the field, to put them in strategic locations, where we feel we want to grow the pipeline.

So for example, we have a development office in California. We have a development office in Salt Lake, and we have a development office in Florida, and Atlanta, as well.

So, that does give us some room to grow the pipeline, and we'll continue to monitor that based on-- based on what people's work load is, but we really are in a very fortunate position, where we have a lot of people, as Scott mentioned earlier in the call, a lot of bright, talented, people from the industry that would like to come work for our company. And we want to take advantage of that. And we want to challenge those people, after we bring them in. So hiring new development staff is a very high priority for us. We're in the market now for a number of people. The pipeline could grow probably another 10%, 15%, pretty comfortably once we've staffed up what we're currently in the market for.

I would like to put that in perspective too for all of you because I don't know how many of you really follow the trade journals in our industry.

The chain store age annually, ranks the fastest growing developers in the United States, at this past ITS season, the chain store age issue-- ranked Developers Diversified once again-- I think we have been ranked as the fastest growing developer I think, the last three, or four years in a row. And this particular year, the GLA that we brought on line, was double the second largest company on the list, and over half of their projects were overseas, so, while -- we do have an opportunity to grow it.

I think it's important for you to understand, that our development pipeline is dramatically more, than any other company you cover by really a very, very, wide margin.

The other thing to keep in mind is that where-- three years ago, or two years ago, the private sector in development, really, was in many ways, much more attractive than coming to work for a public company, because the private developers were giving very significant equity to people who could come run their projects. And that's obviously something that we couldn't do. And the public sector in general, was losing development talent to the private sector. And that trend has reversed. And I think people are getting a feel in the private sector just how difficult it can be at times particularly when the capital markets become a little more choppy, and there is security, and comfort, in working for a company like ours, and we're getting a lot of interest from a lot of talented people, from the private side to come back to the public side.

Great. That's very helpful. And on a similar note, as you continue your expansion internationally, how do you look at the international development pipeline, either as a total number or as a percentage of the development pipeline as a whole?

You know, that's a great question. I don't think we really have put a limitation on it, to say that it can never exceed, say, 25% of the total. You know, it really, had to pass the test of risk adjusted returns just like any other investment opportunity. Having said that, I think probably 25% is probably a fair proxy, to the high side of what it might represent. But, we'll have to wait and see, to see where the opportunities present themselves. At the moment, we're only pursuing international projects in Russia, Ukraine, and Brazil. We are spending an awful lot of time looking for opportunities elsewhere. But to the extent of those two markets that we are currently invested -- which I think in the aggregate is about $400 million of incremental investment. So that gives you a good idea. And that will take, you know, probably three to five years, to find projects to invest that capital.

Great. Thanks and my final question is on the share repurchase, you guys -- have you executed anything on that at this point?

We have not due to the timing of when we got the authorization right at the end of the quarter, and then we way back out dates happen regarding quarterly earnings release. We have not executed anything at this point. But now as that window begins to open up again, very actively reviewing the opportunities to purchase our stock versus other ways to allocate capital.

Great. Thanks, guys.

Thank you.

Your next question is from the line Matthew Ostrower, with Morgan Stanley. You may go ahead.

Great. Thanks. My questions have been answered.

(OPERATOR iNSTRUCTIONS). Your next questioner is Michael Mueller with J.P. Morgan.

One quick one on CapEx, I know you talked about 24 million, that's a gross number. I think the slit is (inaudible) that JV number that is a gross number, right, so your effective CapEx is 14 million, 15 million, not the 24; is that the right way to look at that?

Yes, it is a gross number, and obviously it would be dependent on the percentage of ownership we have in each of those assets. But I think your math is probably relatively accurate there.

Okay thanks.

Your next question is from the line of Jeff Donnelly, with Wachovia Securities. Go ahead.

Good morning, guys. Scott, in your opening remarks you spoke about how you felt retail property was among the few areas that there is a positive spread between initial cap rates and debt cost. Can you quantify for us what has changed in the overall financing terms and costs for I guess real estate finance in recent months, and perhaps could you relate this to your interest in the Pyramid transaction, specifically, how willing and confident are bankers out there when it comes to committing to financing large deals right now?

Clearly, there's not going to be a problem in a company like ours accessing debt to finance, a transaction. We can finance unsecured, or secured. A think, that a lot of the dislocation on the BP's and the CNBS market, has sort of resolved itself. The market is pretty efficient. I think it's much more of a pricing issue, than anything else. In terms of what kind of-- I would think that depending on, what the loan to value is, you are still going to be somewhere in the low sixes in terms of your cost of money today, on a secured financing, for the acquisition of real estate.

And as I was-- what I was suggesting was, retail is probably one of the only areas where you could actually buy something, at that cap range. So leverage is still pretty effective, in helping returns. Which means, that it broadens, the potential list of buyers, and it broadens the potential list of partners, who we could team up with in looking at an opportunity that, want to use leverage in the capital structure.

If you had to guess, what would you estimate has been the change, maybe in the overall cost of financing, for say, hypothetically, retail properties in the last six to nine months, and have you seen reduced willingness for people to lend at certain loan to values, have you seen them pull back at all?

Not on the-- not on the investment grade CNBS market, so much. It's -- where you are really seeing a major dislocation is the old 90% to 95%, loan to value leverage transactions, where you had banks that were really, equity investors, closed in debt. That market, I think, is pretty well gone fot the present time.

Frankly, when we put this sale portfolio on the market, a great majority of the people we were negotiating with for that portfolio were using leverage at 90%, or higher. That's the buyer, that I think has gone away, and that's the kind of financing that, I think has gone away. So long as there's still operating in that sort of 65% loan to value. I think the market is still, pretty efficient. And I think that the debt is available, but there's a lot of buyers out there that can't put 35% of the cost of an acquisition in equity. And those are the buyers that are being eliminated.

One last question, someone asked earlier about privatization of retailers, what the trends were out there, just because, like as you said, obtaining debt financing at particularly high levels of leverage has been challenging of late. What appetite do you think there might be, for the equity rates, to maybe provide a form of secured financing, to help finance some of those transactions, in lieu of buying real estate or doing sale-leasebacks? Do you think you would see some of the rates do that?

I can't speak for some of the RIEFs, I can only speak for this one. We wouldn't loan money against real estate that we didn't-- we wouldn't want to own at the price we're loaning the money. So for us, we would -- it would have to pass the same test as I indicated earlier, on a sale-leaseback transaction. There are other RIEF's-- that have, demonstrated a pension for taking risk in the operating business, in addition to the real estate. And that question might be better put to them. But this RIEF wouldn't do that.

Great. Thank you.

Your next question is from the line of Rich Moore, with RBC Capital Markets. Go ahead.

Hello, Good morning, guys. You guys had a pretty active asset sale program. Would you say that's kind of ramped up at this point, and maybe we'll look for one ops from here.

I don't think you should expect another portfolio of the size, that had it's first closing this quarter. But, we're very actively looking through all parts of the portfolio for opportunities to sell assets that don't meet our investment criteria, either because the current price that we can get for them at this point, is so high that it makes a return, over the next several years difficult. Or assets that just don't meet the growth characteristics that we're looking for. And trying to be docile in terms of, looking at the all in profitability, of the various assets that we own. You know, what is the real cost to manage these assets the way that we want to rum them, and the way that they need to be run so that they grow? Growth in terms of a CapEx budget, that we're very careful about, making sure that we're spending appropriately, as well as, the personal resources of this company, to make sure that people are allocating their time to where they can make the most money for this company.

Okay Dave.

Rich, apparently the one exception to that would be, we do have a significant portfolio of single tenant assets, that have growth characteristics, that are not consistent with the overall portfolio. And, I think that represents roughly 3% of that total asset to the company. And that's an area where we might pursue a transaction in the foreseeable future, so that we can redeploy that capital into higher growth opportunities.

Okay, but the big rationalization that you guy's have doing, that's kind of complete?

Except for the single tenant aspect.

Yes, right, I got you, Scott Okay, and then as you look at-- you know you did these joint ventures, as you look at the overall joint venture appetite, institutions looking to do stuff with you guys, has that changed at all? Would you still say that's as significant as it's been?

Yes, I definitely think it's changed. The world continues to be under weight-- real estate, and the demand to-- get more capital invested in the sector, I think it's highlighted, in a huge way every day when you see, best of breed opportunity funds, print-- new funds, dramatically in excess of what any of us would've believed, they could've put together a few years ago.

And so, still see a healthy bid from institutions, you certainly hear a lot more, on the value and opportunistic side. But clearly, with fund one, that we put together over the past few months, found a high quality group of investors, that wanted a lower risk, more stable return, sort of, vehicle, and we continue to see more investors out there, that are not purely risk, or leverage driven. But interested in owning, quality real estate at predictable returns, and growth over a longer period of time.

Okay. Very good, thank you, Dave. And them, now serious are you guys looking at Pyramid? Is that just something you are reviewing? Or is this sort of a departure, into--I realize you have a few malls in your portfolio, but is this sort of a new direction you are taking?

We certainly don't think of it is a new direction, I mean, I think both, if you look at the markets, as well as the largest tenants, they line up very closely with our current portfolio. There are certainly a few more roofs on these assets, than in a majority of our core portfolio, but we don't think that's something that should keep us away from this opportunity, with the absolute goal, and absolute final decision, simply being made on, where this portfolio is priced. I mean, that's the focus if the numbers come out in such a way that we think it's a transaction we think we can make money on. I think there's a real appetite for it here. And a belief, that we can run these assets very, very, well, and fit them into our existing portfolio, very, very, well.

Okay. Very good, thank you. And then, this would be a good sized transaction, obviously. Should we read into this if you guys were to go after something like Pyramid? That the community center opportunities, or the opportunity to do these kinds of transactions, large transactions, on the community center side, or sort of-- getting smaller at this point.

No, I don't think you should read that into it at all. I think you-- if you look each opportunity as they present themselves, and currently, that's the opportunity dejour and it does have a very significant component of power centers, in the portfolio. It's entirely possible that this thing may unwind at, more than one party is involved in the acquisition, and the assets are allocated among different parties, in accordance with their interests.

So, no. I wouldn't draw that conclusion at all. What I would say, however, is that the community center piece of retail if you will, is a rapidly expanding asset base. Unlike the mall sector. So I would expect the acquisition opportunities, on the community center side, to greatly outweigh acquisition opportunities on the mall side. Because, we're manufacturing new product every day, I mean, hundreds of centers are being built. No new malls, are being built. So I would say, quite the opposite, I would say that the opportunities to acquire assets on the community center side, over the next several years, will be far more robust then the dwindling number of opportunities on the mall side, which, this seems to be one of the last ones, if you will.

Okay, very good. So, Scott, help me out with something here then. If you have opportunities to buy, regional malls, and you have obviously got as you're saying, opportunities to buy community center portfolios, you guys got a huge development pipeline, that just keeps getting bigger. Why on Earth would you buy back stock?

Well, it depends on the-- what price we can buy back our stock. The way it's going, we might be ale to earn returns on the stock, commensurate to what we can on developments. I mean, last in-- 1999 we were buying our stock at implied cap rate, north of 11. Unless you guys can get the market to turn around, we may be there again.

But we can't do it without the authorization. So we put ourselves in the position to take advantage of those opportunities.

The other thing, I think that, you should all understand is a transaction like Pyramid, which is a core acquisition, we've been very, very, clear that we pursue these acquisitions with joint venture partners. And, it isn't a competitor for capital, with our development pipeline which we pursue on balance sheet. So, our appetite there, will also largely depend on who wants to co-invest in that portfolio, because what you're not going to see us do, is go out and commit this company to do a $4 billion acquisition, for which we would have to issue equity. We're not going to do that.

Okay. very good, got you. And then last thing I had was, on the income tax expense, Bill, where did-- I would have expected that to be higher. Why does that always stay so low?

Well, where the big tax expense was, it was in the gains, and basically, the gains are shown net of the tax.

Okay, so that, that income tax line, is that always going to be roughly zero?

It's going to be-- It could be a small positive, to a small expense.

Okay, very good. Thank you guys.

Thank you, Rich.

And with no further questions, I'd like to thank everyone for their participation in today's conference. This does conclude the presentation. You may now disconnect. Have a wonderful day.

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