Site Centers Corp (SITC) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Developers Diversified fourth-quarter earnings conference call. My name is Gina and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Michelle Dawson. You may proceed.

Good morning and thanks for joining us. On today's call you will you hear from Scott Wolstein, Dan Hurwitz, Bill Shaffer, and David Oakes. Before we begin, I'd like to alert you that certain of our statements today may be forward-looking. Although we believe that such statements are based upon reasonable assumptions, you should understand 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 and in our Form 10-K for the year ended December 31, 2006 and filed with the SEC.

I'd also like to request that callers observe a two-question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue. At this time I will turn the call over to Scott Wolstein.

Good morning, everybody. I'm pleased to report this quarter's operating results and FFO of $0.82 per share. I'd like to note that while this amount is comparable to our fourth quarter 2006 results, this year's results include less transactional income and less nonrecurring items such as lease terminations. After adjusting for transactional items and other income in each comparable quarter, our FFO per share actually increased by 12%, and after adjusting for these items on an annual basis our 2007 FFO per share increased nearly 13% for the full year of 2007 as compared to 2006.

Our activities in 2007 were highlighted by the successful acquisition, financing, and integration of the Inland portfolio. In light of the current dislocation in the capital markets, I think it would be helpful to remind everybody just how quickly, conservatively and efficiently we financed this major transaction. Consistent with our other large acquisitions, JDN, Benderson, and Puerto Rico, our top priority was to secure permanent financing using conservative levels of long-term debt and equity.

Of the 6.2 billion in financing necessary to complete the Inland acquisition, we put 4.4 billion of permanent financing in place immediately at closing and completed the remaining 1.8 billion of permanent financing before the end of the second quarter. These sources included the following -- 1.2 billion in proceeds from the issuance of new shares of common stock including $400 million of common stock at nearly $70 a share issued to the former Inland shareholders, 3 billion in proceeds from the creation of a long-term closed-end fund with TIA, 1.5 billion in proceeds from the creation of long-term closed-end co mingled fund, 625 million in proceeds from the sale of noncore assets, 160 million in proceeds from the creation of a long-term joint venture with dividend capital's Total Realty Trust, and 600 million in proceeds from the issuance of long-term debt. The financing of this transaction was completed swiftly and was done in a very conservative manner, consistent with our preoccupation with maintaining financial flexibility. And in total it actually improved our credit quality and balance sheet metrics.

Before I turn the call over to Bill Schafer I'd like to share a few thoughts about how we are positioned relative to the current disruption in the capital markets and the deceleration in the national economy. The market is clearly skittish in the face of uncertainty and we understand the concerns regarding the lack of liquidity in the credit markets. We are monitoring the situation very closely. We've been through tough liquidity crisis before and in each case we prudently capitalized on the opportunities presented by the dislocation and emerged a stronger, more profitable company.

We consistently operated with the philosophy to maintain broad and diverse financial relationships which in turn have provided us with considerable financial flexibility. And we are similarly well positioned now, well prepared and appropriately financed for this environment. Likewise, as you'll hear from our management team, we've made appropriate adjustments to our investment of capital strategies. We are being far more selective in our investment strategy and we will operate with a view towards conserving capital and positioning ourselves to take care of very special -- to take advantage of very special opportunities as they arise.

To give you a sense of what we're hearing from the retailers, I just returned from an ICSC board meeting where I heard from a number of our core retailers that new store expansion will continue virtually unabated for nearly all major tenants, although some new stores originally targeted for 2008 will be pushed to 2009 as several retailers also try to conserve capital, or as many private developers fail to deliver their projects on time. The only area where tenants have markedly slowed their expansion is in Women's Ready-to-Wear. The impact of which will be felt primarily by regional malls and proposed lifestyle centers. By contrast, the value retailers seem very bullish about their prospects.

In summary, we've seen our portfolio weather difficult economic cycles in the past with stable and consistent cash flows. Fundamentals of our business are strong. Although we're very focused on the current challenges in the capital markets, we have not seen a meaningful loss of jobs in the economy, nor have we seen a meaningful drop in disposable income. While recession is certainly a possibility, early indications suggest that we will not see a precipitous drop in disposable income and retail sales will continue to grow, albeit at a slower rate.

As you will hear throughout the rest of the call, we're actively addressing the risks and challenges presented in the current operating environment. You will also hear how in some cases the market's dislocation can create investment opportunities that are more attractive than any that we have seen in years. With that I will turn the call over to Bill Schafer.

Thanks, Scott. As Scott described, in light of the issues associated with the financial markets and economy, we're focused on identifying any signs of weakness within our operations and tenant base. For example, we noted the operating margin of our consolidated portfolio declined slightly during the quarter. As is consistent with prior-year results our fourth-quarter operating margin was lower due to the increased level of operating expenses as compared to the first three quarters of 2007.

We have also been tracking changes in bad debt expense, particularly with regard to some of the smaller local tenants in our centers. During the second half of 2007, bad debt expense increased to over 1.25% of total revenues compared to our typical rate of less than 1%. While this increased bad debt has a nominal adverse effect on our operating margins, we are not seeing any increase associated with our core tenants. In fact, the credit quality of tenants in our portfolio is second to none. As detailed in our financial supplement, our top ten tenants represent nearly 20% of base rental revenue and 27% of gross leasable area. And a majority of these tenants are investment grade rated.

Wal-Mart is our largest tenant and represents about 4.5% of total base rental revenue and 7% of owned GLA. No other tenant represents more than 2% of base rental revenues. Other top ten tenants include, Lowes Home Improvement, Home Depot, T.J. Maxx, Marshall's, Kohl's, PetSmart, Bed Bath & Beyond, Target, Top's Markets and Kroger, to name a few. Notably, local tenants occupy less than 6% of our gross leasable area and comprise just over 10% of total revenues, including our pro rata share of joint ventures. While these local tenants may lack financial transparency we note that many operate in some of the least cyclical portions of retail.

I would also like to note that during the fourth quarter of 2007, we incurred approximately 2.3 million of other expense on a net basis. This expense included among other items nearly 1.4 million of abandoned development costs and approximately 1 million in professional fees and formation costs associated with the establishment of our joint venture with ECE for shopping center development in Russia and Ukraine.

Offsetting the impact of these expenses was a tax benefit of approximately 2.5 million that was recognized in our joint venture with Sonae Sierra. The 2.5 million represents our share of the benefit. This benefit is related to the determination that certain tax loss carry forwards would be available for use in future periods. This conclusion is the result of recent organizational restructuring in our joint venture and increased profitability of our largest shopping center in Brazil, [Pardon Pedro]. As a result, the joint venture reversed the valuation allowance against the deferred tax assets.

Now I would like to share my thoughts on our balance sheet position, debt maturities and opportunities in the capital markets. As I said many times, we operate with a conservative balance sheet and are focused on maintaining our investment-grade ratings. As Scott described we entered into each of the significant transactions that have occurred over the past several years with a financing plan that was long-term and leverage neutral and more importantly execution that was completed within an extremely short period of time. In uncertain economic times such as these it's extremely important to have access to numerous types of debt and equity capital, and as a result of our long-term capital markets philosophy we've positioned ourselves appropriately to access attractively priced capital.

In addition to establishing solid relationships with institutional equity investors, which you will hear more about from David, the relationships that we have established with many large lending Institutions over the years are also critically important. These relationships enabled us to increase capacity by over 300 million on our term loan and revolving credit facilities at existing terms and fees consistent with historical averages, in what I will refer to as a challenging market.

In December we increased the capacity on our secured term loan by 250 million. The secured term loan is now at 800 million, priced at LIBOR plus 70 basis points, and expires in 2012 after taking into account extension option available on the facility at our option. This term loan is secured by assets that are already encumbered by existing first mortgages at low loan to values.

Also at that time we increased our unsecured revolving credit facilities by 65 million and modified certain covenants to provide greater financial flexibility. Our revolving credit facilities are priced at LIBOR plus 60 basis points and mature in 2011 after taking in account the extension option.

With regard to our 2008 maturities and our refinancing plans in this market we began addressing these maturities last year, and as a result they represent a very manageable amount. In 2008 we have 400 million of consolidated debt maturing and 650 million in joint venture debt maturing of which our share was 110 million. During the first quarter of 2008, we executed a term sheet and entered into an interest rate lock on a portfolio of six assets including three that are currently encumbered with mortgages scheduled to mature during the next few months. Proceeds from this financing will be 350 million, with a fixed interest coupon rate of 5%, a 55% loan to value, and a five-year maturity. This funding will refinance substantially all of our consolidated 2008 maturities.

The weighted average interest expense associated with consolidated debt maturing in 2008 is 5.7%, and the approximate loan to value on the mortgage debt of approximately 300 million is 35%. Based upon the 350 million refinancing in progress, the difference in rate after taking into account all costs will be accretive. In addition, LIBOR averaged around 5.25% during 2007, while current rates are over 200 basis points lower. Although we initially assumed a 50 to 75 basis point LIBOR rate reduction in 2008 versus 2007 we did not budget a 200-basis-point reduction. If LIBOR rates remain where they are, our interest savings as compared to our initial budget would approximate over 7 million, which is expected to more than cover potential increases in bad debt expense.

We're addressing our 2008 joint venture maturities in a similar manner. Our Coventry II joint venture recently extended 117 million loan on a portfolio of former service merchandise properties. This loan was extended to 2009 and has two additional one-year extensions available at our option. Another joint venture with Prudential Real Estate Investors is in process of refinancing 72 million in mortgage debt with the existing lender at LIBOR plus 1.25%. This loan will have a two-year maturity and one-year extension option.

We've consistently co-invested with some of the best capitalized institutions in the world and have carefully structured our joint venture leverage to be generally in line with our own balance sheet. Of the remaining 460 million in 2008 joint venture maturities, of which less than 70 million is our proportionate share, nearly 75% does not occur until December, and the weighted average loan to value in these assets is less than 60%.

Turning to development funding we continue to see opportunities to obtain construction financing at commercially reasonable pricing. During the fourth quarter we obtained a $60 million tax-exempt loan relating to our Gulfport, Mississippi development. The current rate on this floating rate loan is less than 3% and it matures in 2037. Proceeds from this loan are held in an interest-bearing restricted cash account that will be used to fund the development costs. We have also executed a construction loan term sheet on our development project in Homestead, Florida, for 71 million with pricing at LIBOR plus 105 basis points. With the current lower LIBOR rates we will continue to pursue construction financing on several additional projects that are under construction or nearing construction, such as Horse Heads, New York, Seabrook, New Hampshire, and others including our development projects in Canada and Russia.

Moreover, as we discussed on the last call, we expect to be a net seller of assets in 2008, and expect to generate several hundred million of proceeds relating to merchant build assets, land parcels and noncore properties. As a result, aggregate available 2008 proceeds, based on what I just discussed, including 350 million secured financing, 200 to 300 million of construction loan proceeds, approximately 500 million in asset sales, plus over 100 million in net retained capital are expected to exceed 1.2 billion, which is more than sufficient to meet our 2008 debt maturities and development spending requirements. In addition, our revolving credit availability at December 31, 2007, was over 600 million.

Furthermore, we own nearly 300 fully unencumbered operating properties, representing approximately 6 billion of total asset value. As a result, we are comfortable with our financial position and our ability to access attractively priced capital in this market. With that I will turn it over to Dan.

Thank you, Bill, and good morning. Due to the general economic concerns within the retail sector and elsewhere, we were very focused on our fourth-quarter leasing numbers as we were concerned that tenant interest in new space and lease rates could come under pressure during the peak of uncertainty during a fairly mediocre holiday sales season. However, you will note from our earnings release Q4 of 2007 was another solid quarter which continued to demonstrate the health of our portfolio and continued to demonstrate sound fundamentals amongst most of our major retail partners. With an overall lease rate of approximately 96%, nearly 9 million square feet of transactions completed, and leasing spreads continuing to track at near record levels, 2007 in general was a very solid year.

That being said, we continue to monitor the market carefully and philosophically have made some revisions to our leasing strategy in 2008. Most notably, we have aggressively pursued renewals regardless of termination dates to ensure better visibility on our core 2008 base rent. As a result we have completed or have received notice of intent to renew at the appropriate time on 74% of all 2008 renewals. This is substantially ahead of our typical percentage in a typical year.

Moreover, we have accelerated many of our portfolio reviews with tenants, doubled our meeting volume at this past December's New York ICSC, and continued to use our outstanding tenant relationships to achieve commitments for our 2008 budgeted new deals. As a result of the -- as a result of the budgeted proposed leases for 2008 we have excellent visibility on 64% of the budgeted square footage, which again is far ahead of previous years. We are carefully balancing our desire for visibility with our interest in achieving growth consistent with the quality of our centers in our historic averages.

We have said for many years and continue to believe that in a price deflationary environment for most retail sectors, retailers often rely very heavily on external growth to bolster their overall financial health and execute their expansion strategy. While there is clearly a slowdown of new store growth for the less successful merchants, the most successful will use the current environment to their advantage by stealing market share from their struggling competitors. We have seen this happen through many prior cycles and consider most of our tenants well positioned to outperform once again.

Our job as a retail landlord is to ensure that we execute leases with the retailers that are gaining market share, driving sales, and offering the best experience to the consumer. We have a very strong track record of success in these efforts and believe that our top retailers continue to be relatively well positioned, competitively and financially.

Finally, in regard to leasing, while there is enormous attention given to retailers comp store sales, it's important to note in that the short-term there's little direct impact on our revenue stream if those comps decline. With less than 1% of our total revenue tied to sales results our position as a landlord with stable, long-term leases is more similar to that of a creditor or bond holder. As Bill mentioned, in today's environment, there has been a long overdue renewed focus on tenant credits which we think is a very healthy trend and one that we hope will continue.

Like the overall leasing environment, development activity is another area in which we are proceeding in a particularly prudent manner, and I would like to discuss some of the basic fundamentals related to that area. First, I should reiterate that our development pipeline has not materially changed in size, timing, or expected returns. But our disclosure has been adjusted to be more in line with our peers by excluding projects yet to commence. Listing projects yet to commence is a competitive disadvantage as some of our competitors were using that information as a sourcing tool for their own pipelines. We didn't continue to see value in providing opportunities to others, therefore we eliminated that statistic.

Like the overall leasing environment, the projects currently in our pipeline were underwritten at a time when spreads between yields and market pricing were at all-time highs and generated value in the 350 to 400 basis point range. Historically, that range has run between 200 and 250 basis points within our industry. Therefore, even if Cap rates expand and yields compress, these developments still remain an attractive risk adjusted means to create value. While we carefully limit our investment in projects prior to our complete due diligence, this spread also provides an appropriate contingency to carry the weight for projects that after thorough scrutiny no longer meet our required return thresholds. Moreover, and probably most importantly, in regard to our 2008 wholly-owned deliveries, we currently have excellent visibility on 77% of the available space, and 70% of the space in our joint venture deliveries.

In addition, we're also seeing some significant trends that have emerged over the last several months. First and most important to retailers is certainty of execution, which has become absolutely paramount. As capital has become scarce, retailers inherently look for quality sponsorship of projects to ensure that completion dates are met and co tenancy requirements fulfilled. Today, with our track record, access to capital, and retailer relationships, our tenants are counting on our platform to provide them with new store locations in a consistent manner. As a result, we are seeing additional opportunities where the sponsorship is questionable but the retailer believes in the site and the market. On a very selective basis, we are reviewing those opportunities.

Second, we are seeing a rapidly growing group of under capitalized developers looking for a stronger partner to assist in completing projects. There is a considerable and growing amount of true distress among many small developers. The outcome of this trend is that fewer developments will be built, and competition for sites and tenants will continue to decrease. And we will be able to proceed cautiously and as Scott mentioned, more selectively and profitably in our investment decisions.

Interestingly, with respect to our existing international portfolio, and opportunities under consideration, leasing is actually at the low end of the risk spectrum. We are cognizant of the risks associated with emerging markets. However, we have been continually impressed with the number of -- the number and quality of retailers looking to grow within or enter these markets as the underserved nature of the retail environment is fueling increased demand and exceptional rental growth.

In summary, while the retail environment is slowing somewhat, and the economic environment is uncertain at best, we just finished an outstanding year in regard to leasing, have good visibility on core, JV and development deliveries, and overall occupancies for 2008. We continue to see strong interest in emerging markets and have the luxury of being more selective in deploying capital in a much less competitive environment. These are the cycles where relationships and platform really matter, and we look forward to leveraging our internal expertise for the benefit of our shareholders going forward.

Before I turn the call over to David, I want to describe what I think is the most important announcement this company has made with respect to its employee incentive compensation structure. In December our Board of Directors approved the 2007 supplemental Equity Award plan, and this plan was disclosed in an 8-K filed on December 6th. The plan establishes two total shareholder return hurdles, an absolute 90% annual return and a relative outperformance measure judging against the [FTSI] NAREIT Total Return Equity Index. Both performance hurdles must be met over a three to five-year measurement period in order for any participant to receive any compensation from the plan. There is no guaranteed minimum, accrual, or payment allowed with the initial performance period. The significance of this plan is that it represents a [C] change in our approach to incentive comp.

In contrast to previous plans, participation in this plan is broadly shared among all 43 members of our executive committee. This plan is the result of intensive study and review by our Board of Directors to fully align the interests of our employees with those of our shareholders in a manner that focuses on total shareholder return, rewards our performance, and retains key employees, which is obviously critical to our future success. We are very proud of our team, and understand the unparallel value that human capital plays in our business model.

As a result of the plan, we will incur a $0.05 per share noncash expense in 2008. This charge will also be incurred in year two and three of the plan, and reduced to lower amounts in years four and five. Again, our people make the difference, and we are very pleased to align their interests so deeply within the organization. And on that note I would like to turn the call over to David.

Thanks, Dan. Given the relatively uncertain economic and capital market conditions that we are experiencing today, we're very focused on executing our investment strategy in a thoughtful and disciplined fashion. Based upon the opportunities that we are seeing today, we believe the greatest risk adjusted returns are available in development as we capitalize on the distress that many private developers are experiencing in funding and leasing projects. We expect much of this development investment to be funded by asset sales and we continue to expect to be a net seller of assets in 2008.

Given the continued demand for our asset class and the positive benefits that dispositions can have on our overall portfolio performance and operational efficiency, we expect to sell additional noncore assets. Even if pricing changes, we would still expect to complete some sales considering our reinvestment opportunities would still likely be more attractive.

We also continue to sell some very high quality, core, newly developed assets where the highly predictable nature of these assets cash flows work well for our institutional partners. The capital from these sales can be rapidly recycled in new developments with immediately positive NAV implications, though the positive FFO impact is a bit further out. We also continue to review a broad set of potential acquisition opportunities but are not currently under contract to buy any assets right now.

With respect to cap rates, we have received consistent feedback from buyers, sellers, financing sources and brokers and can comfortably say that for higher quality assets, cap rates in the low 6s are still quite achievable. As shopping center cap rates never declined as significantly as other property types, it's reasonable to assume that there is less potential for cap rate expansion. Moreover, the spread between retail cap rates and treasuries is well above its long-term average, indicating that Realty Estate risk is already well reflected in current pricing, at least from a historic perspective.

In general, we're receiving strong, positive interest from a variety of private capital investors, both domestic and international, to own high-quality shopping centers and to maintain or grow their relationships with DDR. Their approach is appropriately more cautious than the last year or two but they continue to focus on their long-term return goals and the basic fundamentals of our business rather than market timing. At this point demand remains strong for value add opportunities including ground-up development. There's also good partner interest in the new stable low-risk centers coming out of our development pipeline that could result in merchant building gains. Given this institutional interest we expect to be raising new capital and investing on behalf of our joint ventures during 2008.

We also expect to be selling assets on behalf of our partners this year, as we continue to actively evaluate all of the assets in our portfolio, subject to our partners' interests, and apply consistent investment rationale. As part of our effort to continue to expand our fund management business for the benefit of both developers diversified and our investors, we continue to spend time evaluating fund structure. Given the number of questions that we've received in the past few months from investors and analysts it's obvious that you're doing the same, so we thought it was worth our time on this call to review the basic terms of our funds and joint ventures.

One, our institutional clients generally prefer relatively conservative leverage, of 40 to 65%, and want to be financed on a long-term basis. As a result, our consolidated financial ratios are quite comparable to those, including our proportion of joint venture debt.

Two, we've carefully selected partners with interest in long-term ownership goals that align well with our own and therefore we are not subject to any significant buy, sell agreements, where assets can be put to us. As most of our larger funds are relatively new, there are also no contractual redemption rights in the next several years.

Three, all of our funds, with the exception of Macquarie DDR Trust, are closed-end, which provide for a contractual liquidation terms at their back-end and limit potential conflicts between DDR sponsored vehicles. Now, I'd like to return the call to Scott for his concluding remarks.

Thank you, David. Before we open the call for your questions I want to reaffirm our 2008 FFO per share guidance of $3.95 to 4.05 per share. With respect to transactional income items I expect these to be recognized late in the year with minimal activity during the first quarter. I suggest that analysts adjust their models for these line items appropriately. With that, I will turn it over to the operator to receive your questions.

(OPERATOR INSTRUCTIONS). Please limit your questions to two questions. If you would like to ask additional questions, you may requeue. Your first question comes from the line of Tony Howard of Hilliard Lyons.

Thanks for the extra comments on the development pipeline. But even if you subtract the ones that are kind of like shadow pipeline, have there been any delays in your development pipeline from 2008 to 2009 or '10?

There have not been delays from -- in 2008 to 2009. We have been approached by some tenants who have asked to delay some of the openings. As Scott mentioned he heard quite a bit of that at the ICSC meeting, but we actually were able to avoid that through conversations with our retail partners. So while there is pressure in the market to delay certain openings for certain tenants, we have not experienced that yet.

Okay. I guess my second question, on G&A up substantially year-over-year and also sequentially, is there any extraordinary items in there and also what would be a good run rate on a quarterly basis for 2008.

No, as Dan spoke about, we did implement a supplemental equity award play in the fourth quarter that added some expense there. Obviously this year with our acquisition of the Inland portfolio, increased our overall G&A year-over-year comparable. But the amount that we reflected, I think, in the fourth quarter again with a little bit of additional increase kind of going forward for the supplemental award plan is probably pretty much on target for a run rate.

Okay. Thank you.

Just to clarify that a little bit, the total G&A excluding the supplemental equity award plan expense was 4.6% of total revenue, including our joint ventures for the year ended December 31, 2007, and it was 4.8% for the year ended December 31, 2006.

Thanks.

Your next question comes from the line of Ambika Goel of Citi.

Hi, this is Ambika with Michael, could we get some color on the dispositions, just the timing and maybe how cap rate expectations have changed in the past six months?

Yes. I mean, as we look it at it today, we would expect the dispositions to be spread through the majority of the year. Obviously, per Scott's comments, less in the first quarter, somewhat just as a function of timing the way that the year works out, and the marketing process for assets works out, but would expect asset sales to begin to hit in the second, third, and fourth quarters. Cap rate expectations, I think, are relatively consistent with 12 to 24 months ago, but probably somewhat higher than six to nine months ago at where somewhat there was a peak in pricing, but very consistent with sort of our long-term expectations of where pricing for these assets have been. Particularly for higher quality assets, we would not expect much change in cap rates based on the IRRs that those cap rates would make available to buyers.

I think the other thing that's important to note is that obviously the leveraged buyer has left the market, and when you're dealing with non institutional quality assets, it's going to be much more difficult to bundle them into large portfolios. There will be -- what you will probably see is a lot more smaller transactions than the type of noncore assets that we completed in 2007, where we were able to bundle $600 million in assets to one buyer who was using leverage aggressively. So on the institutional capital side where, you're dealing with institutional quality assets, that's a different story. But when you're dealing with the noncore stuff, it's going to be a little tougher sledding in terms of being able to do large transactions.

I guess just digging a little deeper, can you give an absolute cap rate number that you expect these sales at? And also, are these assets under contract at this point? And if not, I guess what is getting you comfortable with the fact that these dispositions will occur this year?

We're clearly comfortable, or we wouldn't have guided you to that. No, we're not going to announce cap rates. We're negotiating with buyers, and we're not going to tell them what they're going to pay. I think David has been pretty clear as to where he thinks the cap rate environment is. There's a lot of different assets that price at different cap rates based on quality.

Okay, great, thank you.

Your next question comes from the line of Craig Schmidt of Merrill Lynch. You may proceed.

Thank you. I see that Circuit City is in your top -- one of your top ten tenants, and they're in a couple of development projects. I'm just wondering, would you still look to Circuit City to anchor projects going forward, or have you changed on that?

We still would look at Circuit City to anchor projects going forward. The consumer electronics business in general has been robust, although their sales have not been. They have a very aggressive plan to remerchandise in their stores. In some cases, there's been, as you know, some significant managerial changes. But we are not -- we're not giving up on Circuit City. We think that the new stores that we've been doing for them are performing well. They clearly had problems with their older format stores and getting out of those stores is difficult outside of bankruptcy, and it's been difficult, and that has been a drag on their company, but we've spent a lot of time with them. We've spent a lot of time with their top management people to understand what their business model is. And while we would always proceed cautiously with tenants that we have some credit concerns with, we would not avoid them if they were the appropriate tenant from a merchandise mix for one of our centers.

Although I think I would probably take issue with the term anchor with respect to a tenant of the size of Circuit City. Certainly we would never develop a project where they were the lead tenant or even one of the top two or three tenants in terms of scale. Circuit City is about a 35 to 50,000-foot tenant, and would be one of many, many category killers in that size range. Would never be a tenant that would make the difference on proceeding or not with a new project.

But one of the things that's important, Craig, is that when we do a center and we lack at the merchandise mix, consumer electronics in some cases play a very important role. And like most categories within our universe, there's really only two, and in some cases, Best Buy is already in the market, but Consumer Electronics still plays an important role in the overall regional draw of the center. So even though there are some local players that are in certain markets, Circuit City's credit profile and the transparency of their financial performance far exceeds that of the local tenants.

Okay. And in terms of the national versus the more of the regional players, has that become a more important focus in these tougher credit times, or same as it was let's say a year ago?

There's so few local tenants today, as Bill said, I think it's about 6% within our portfolio; the local tenants in general, or even some of the large regionals, are really scaling down, and the roster of that tenant base has been shrinking rather dramatically. The vast majority of our focus, 90, 95% of our centers, are leased to national tenants. And in general, credit becomes more important in this environment, and like I mentioned, we welcome that analysis. There are some regional tenants that have outstanding credit. Some of them much better than their national brethren. But that's the exception, not the rule. So we really do focus mostly on the main national that we can do multi deals with at a single sitting.

I think the great exception to that is probably in the grocery business. The regionals typically are stronger than the nationals and have more focused business models and are probably outperforming. But in the other categories, I completely agree with Dan.

Thanks. Appreciate the comments.

Sure.

Your next question comes from the line of Jay Habermann with Goldman Sachs.

Going back to development, looking at deliveries, probably 2009, 2010, you mentioned on the last call holding off a bit, pre leasing some of those developments at this point, waiting for better pricing down the road. It sounds like you're much more focused obviously on the 2008 rollovers in terms of the core portfolio. I'm just wondering if you're still willing to hold off in terms of the pre leasing. Number two, back to slippage, is there a pre leasing level at which you need to see, in terms of breaking ground or in which case you'd move some of those developments, push them out further?

We're very focused on the 2008 deliveries. I can tell you for our 2009 deliveries we're tracking exactly where we'd like to be at this point in time. And this point in time is going into ICSC in May, our 2009 deliveries are tracking at about 64% where we have real good visibility on tenant interest or have agreements done with our major tenants. So that's a number that's important to us. That 64, 65% gives us a lot of comfort to move forward with a project, because a lot of the -- a lot of the upside in the deal is in that last 35% and the out parcels, which we do hold off till the very end. So for '08 we were happy with where we are. For '09 we're happy with where we are going into Vegas at about 64%, and that is a number that we internally target on a pretty consistent basis.

Okay. And then maybe second question for Bill, the 1.5 billion that's on the line of credit, I think you mentioned an additional 600 million of capacity. Is that factored into guidance or any sort of terming out of that, out on the line at this point, or is that assumed to be capped on the lines for the full year?

Jay, could you state that again?

I'm looking at the supplemental. You have $1.5 billion on the lines, the secured and unsecured. Is that going to be kept as such for the balance of 2008?

Okay. You're referring to both the line and our term loan, correct?

Yes, I am.

Yes, the term loan will certainly be outstanding. That has a set maturity out there, so that amount will remain. Our line balance actually will go up and down based on development spending. Like I said, we have $350 million of financing that will close probably by the end of the first quarter here, which will then be used to pay down our revolving credit facilities also.

Okay. Thank you.

I mean, Jay, clearly the line will be paid down during the year, and the outstanding balance will be less than it is today, if that's your question, and that is already factored in.

Okay, great, thanks.

Your next question comes from the line of Michael Mueller with JP Morgan. You may proceed.

Going back to the development pipeline one more time, it looks like 115 million of deliveries in 2008. Can you walk us through what the ramp-up looks like as you move into 2009-2010, and then also give us a range of yields, development yields?

Sure. The yields that we're seeing range from a 9 to a 10.5 across the board, depending on when the projects were underwritten, and that's been pretty consistent now for quite some time. When we bring deals to our investment committee to decide whether we approve them or not, we like to see projects that are at a 10, but we don't always get there, or some projects start at a 10, and they drift downwards into that 9, 9.5 area. So that's pretty consistent with what we're seeing. Anything that comes in lower than a 9 we have -- we take issue with and we think our capital is better spent elsewhere. That's how we are looking at the yields. In regard to our deliveries for 2009, we're looking at deliveries that should be almost double what they are in 2008, and that is including the properties that I was mentioning to Jay earlier that's about 64% leased or we have good comfort will be leased in the very near future.

Okay. And if you go out one more year further, is that still trending up in 2010, do you think, at this point?

It's going to be much higher in 2010, because the international projects come on line, and by 2010, the percentage of projects in Brazil, Russia, Ukraine will be almost half of the new development pipeline. Some of that -- obviously we don't own 100% of those, but there's going to be significant deliveries in both of the emerging markets as well as Canada by 2010.

Okay, thanks.

The other thing, Mike, just to keep in mind, as Scott and I both mentioned about the opportunities with distressed private developers currently, depending on the pace, and the availability of product through that vehicle, 2010 could also increase rather dramatically as those projects come on-line that we're currently looking at.

Okay, appreciate it. Thank you.

Your next question from the line of David Toti with Lehman Brothers.

Just a quick question. Are you yet seeing any opportunities in terms of distressed opportunities internationally, and if not, are you seeing any changes in pricing or interest overseas?

I don't think it's a question of distress internationally, but there's certainly a much less crowded playing field. We certainly have a first mover advantage in many of the markets in which we are operating, both in Russia and in Brazil, and far less competition in those markets. So I wouldn't call it distress, but you talk about markets where the occupancy rate is almost 100%. And many of the markets in which we will be developing will really be developing the only modern shopping center to serve a population approaching a million people. So in terms of just the client demand metrics internationally they're far better, frankly, than they are domestically.

Great, thank you. Secondly, are you seeing any change in interest from your joint venture partners in terms of increased appetite for investment or a change in expectations of the terms -- some of the terms that you reviewed today? Is there any shifting going on relative to today's economic situation?

Not meaningfully. I think there's an appropriate level of greater caution due to the somewhat more uncertain conditions that we're all experiencing, the partners we work with are large, and they're smart, and they see what's going on in the markets. And so I think they're obviously aware of what's going on today. On the other hand because they are large and smart, they're also generally focused on long-term goals. The returns that they need to hit to meet their pensioners or whatever the end game is for their capital, and so I think they clearly shy away from any level of market timing, and they've got to focus on their ability to generate IRRs, and uncorrelated IRRs from each portion of their portfolio. And so we continue to see interest from partners in putting capital into real-estate investments.

Great, thank you.

Your next question comes from the line of Louis Taylor with Deutsche Bank. You may proceed.

Yes, thanks. David, staying with you for a second, maybe probing the dispositions a little bit, has the mix of properties you're hoping to sell in '08, has that changed much in the last 90 days as the capital markets have shifted and the mix of potential buyers has changed?

I think there's certainly been some pricing change within the scope of the various sort of projects we could sell, and so on the margin there's probably some change in the basket. But the reality is, the two basic buckets into which the assets we're selling fall still generally remain the same through that period. It's that group of higher quality newly developed centers with an extremely low-risk profile that, again, in this environment of uncertainty, is exactly what we're hearing from market sources as well as what we're seeing in the pricing overall. It's exactly what a large number of people want to be able to be at a lower risk profile.

On the other side, for some of the noncore assets, that's more a function internally of we do think there are better opportunities for us to redeploy some of that capital even where we see pricing for those assets today.

Okay. And then as a follow-up, Scott, you had mentioned earlier on the call that you were -- and I wasn't clear whether you had mentioned the investment opportunities that you saw in '08 were increasing in terms of becoming a lot more interesting. Are you seeing that now, or do you expect to see that later on in the year?

We have actually created a new department within the company to prospect for distressed projects that are being in the pipeline of small private developers who might be encountering some financial distress, and I think we've identified literally dozens of those projects in which we're evaluating, discussing, and negotiating. So, yes, it's something that we've seen in real-time. It's a very, very difficult time for somebody who has traditionally been able to bring projects on without investing equity and being able to finance virtually 100% of costs with debt.

The projects that we're talking about in our business today range from $50 to over 100 million in size. And if a lender is going to limit his construction loan to 60, 70% of cost, you're talking about the private guy having to reach into his pocket for $30 million. There aren't too many people like that in the United States that are willing to do that on any specific project. So, it really does require an institutional capital partner like us or like some of our co-investors. We would pursue many of those investors in tandem with some of our institutional investors.

I expect to see a significant amount of that type of activity and the opportunity clearly exists. And as a result of that, there's two things I want to comment on now, because I've gotten a little bit of tone in terms of the questions that people are concerned about our ability to lease the development projects. First of all, I think that that conclusion is really sort of counterintuitive. It's exactly the opposite. What we said in the script, and I want to reiterate, is that virtually all the tenants, with the exception of Women's Ready-to-Wear, are pretty much sticking to their expansion goals in terms of new store development, yet many of the projects they were working on and counting on to fill those needs are not going to happen because the developers are having difficulty meeting timetables and deliveries because of financing.

So actually, I expect the leasing environment to be very positive for companies that have projects that are real and have capital and have financing because when tenants don't meet their open to buys for a year, they panic. They have merchandise for these stores, and they have to find a place to put it. So I think a lot of the concern that I'm hearing about our ability to lease these projects I think is somewhat misplaced.

And I also want to comment on this disposition issue, because I think there's a little bit of misunderstanding there as well. Because of the precipitous drop in interest rates, everything we sell this year will be dilutive. Our guidance doesn't rely on a significant volume of dispositions. The volume of dispositions that we forecast for the year is really part of a capital recycling strategy where we think we can reinvest that capital at higher returns and set ourselves up for better growth into the future. If the downside scenario was that there wasn't a market on the buy side for some of these assets, it really wouldn't affect us significantly, either in financial flexibility or in terms of our earnings guidance. So I don't think there should be a lot of concern about that, quite frankly.

Thank you.

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

The $0.05 on the compensation expense, I'm trying to understand, did part of that occur in the fourth quarter or do we put it all in the first quarter of '08? Same with '09, or how do we do that exactly?

Well, the plan commenced on December 1, if you will, so there was a portion in the fourth quarter, and on an annual basis, as Dan indicated, it's about $0.05 per share.

Do we put that all in the first quarter then or most of it in the first quarter?

It's evenly throughout the year.

Okay. Great. And then back to the asset sales for just a said, Scott, I saw on Globe Street that you guys put 37 properties up for sale. First of all, is that true? Is that kind of a portfolio thing you're looking to do, number one? And number two, is it something we should put in discontinued ops because it's held for sale at this point?

We don't have a portfolio of 37 assets up for sale currently, so we've outlined the comments about the newly developed assets as well as about some noncore asset sales, but also I think, clearly gotten the signal from the market and incorporated that into our plan that sort of large portfolio transactions that was possible last year on attractive terms, in our opinion, is unlikely to be possible in that same size this year. And so I would expect, much smaller volumes of noncore asset sales. Perhaps a larger number of individual transaction closings, but smaller overall dollar volume and much smaller tranches than last year.

If it's appearing in Globe Street, I haven't seen it, but that sounds like the result of an overzealous broker.

Exactly, not necessarily true, I understand. And the last thing, if I could, bankruptcies, Dan, we've heard a lot of talk about bankruptcies being down but store closings actually continuing to occur but not from tenants going bankrupt, just store closings. I mean, how do you look at that? Where do you see bankruptcies, where do you see store closings?

Bankruptcies are down for a couple reasons. One is that some of the tenants that you would sort of intuitively think would have or should be filing for bankruptcy or headed that way have gone private. So there's less transparency on their performance, although we have a good feel from the market of how they're doing, but they have an infusion of new capital, and I think that capital is more reluctant to file bankruptcy. I think there's also a significant impact we're seeing of the new bankruptcy law which does -- is really much more favorable to landlords or much less favorable to the retail environment, and since that law was put into place, we have not seen any significant bankruptcies, and we've been questioned by a number of people, including ICSC, about what our view is of the new law, and the answer is you're really not sure yet because we haven't seen a lot.

But I do think one of the things the new law has done is it's made it less attractive for tenants to file, and therefore, there is no question we are seeing an increase in tenants that are interested in negotiating the termination of leases. And we view that as very positive for a number of reasons, but probably the most important one is that we are able to negotiate a healthy payment from a tenant, and we have the ability to mark the space to market.

If the space is over market, then, of course, we don't have to do a termination. We can maintain the rent as it currently is. But in most cases when we've been approached by tenants, and that volume of business has increased significantly over the last six months, we can effectuate a termination that is very much to the benefit not only of the property, but financially.

Great. Thank you, guys.

Your next question comes from the line of Jim Sullivan with Green Street Advisors. You may proceed.

Thanks. Good morning.

Good morning.

The structure of your new incentive comp program sounds smart with a meaningful absolute and relative measure. I'm curious for the 43 participants how meaningful it is. As a percentage of total comp what would the incentive comp typically represent? And is there a meaningful difference in that percentage between highly compensated executives and those who are less highly compensated?

Well, it's extremely meaningful. For those -- first of all, for those people who in the 43 category, for those people who had not been in a program before, which really is about 35 or 36 of those people, this could represent three, four, or five times their annual comp, depending on who they are and at what level. It has a scale that goes from vice presidential level up through the CEO, or I guess up to the CEO. You can't really go through the CEO, but up to the CEO. And the percentages vary based on your position. So, for example, if there's a vice president of our organization that gets promoted in the period of time to a senior vice president, their percentage of the pool will then increase.

But it's been extremely well received by our employee base. The numbers are substantial. And keeping in mind that 35 or 36 of the people have not ever been in a plan before, it gives them a great opportunity, if we truly outperform, for tremendous wealth accretion.

That's very helpful. My second question, or the comment earlier that local tenants in your portfolio are in businesses that are less cyclical. Can you just expand on that comment?

I mean, I think the difficulty with some of the local tenants is that there are transparency issues. They're obviously not reporting every three months and providing disclosure to the SEC that allows us to dig quite significantly into their details. But the number of sandwich stores, nail salons, hair salons, liquor stores, it's not the most glamorous list of businesses, but it's also oftentimes family run, appropriately capitalized, long-term businesses that don't just have their booms and busts along with the economic cycle, but in many cases tend to be quite consistent businesses over the course of the cycle.

Okay. Thanks.

You have a follow-up question from the line of Jay Habermann, Goldman Sachs.

Couple follow-ups. On the share repurchase can I get your thoughts there in terms of plans? Obviously with the stock trading nearly 8% implied cap rate at this point, any thoughts on share repurchase given being a net seller this year?

I think share repurchase stands as one very attractive potential use of proceeds from asset sales this year. The arbitrage between the public market and the private markets continues to be relatively significant, and we would look to continue to take advantage of that. However, we will very carefully live within the constraints of our credit rating and our bond holders overall, in addition to just the mind-set that the goal is not to change the risk profile or the leverage profile of this company to make any sort of bet on the direction of the stock, but more to the extent that there is a mispricing between two assets that we can trade between, think that at current pricing levels there would absolutely be a use of proceeds from asset sales to continue share repurchase.

Now is that built into guidance this year? Any assumption for share repurchase?

There is not.

And then just sticking with guidance, getting to the low end of the range, can you just remind us what the occupancy assumption is there? What's the potential downside to occupancy in 2008?

I think we're relatively consistent.

The occupancy assumptions for 2008, there's probably a 25-basis-point swing on the lower end, but it's relatively flat.

You think it's flat this year?

Yes.

Okay. Thank you.

Your next question is a follow-up from Ambika Goel of Citi. Please proceed.

Hi. Just a quick question on the change in disclosure. On the development pipeline it now says estimated initial anchor opening, and before it said estimated substantial completion date. So, for example, at the [Ukai]-- development the substantial completion date was 2009, and now the initial anchor opening is the second half of 2010. That happened with a couple of projects. I'm not sure if that means there's development delay or just the change in the way it's being reported. So if you could give a little color on that.

I think a large portion of that really is a change in the way we've reported it, and candidly, portions of our supplemental have served as an important internal document for this company, indicating both funding issues related to the development as well as from a development department and construction department's perspective, when those projects were going to achieve substantial completion.

On the other hand, from the perspective I believe of quite a few or the majority of the people on the phone, the mind-set was that date represented some level of at least initial stabilization from those projects. So there was somewhat of a disconnect between the dates that we were providing compared to the dates that we thought were then in reality most useful for financial modeling of when the cash flows from a project would actually substantially commence, and so that was the impetus of the change there that has in some cases at least shown later dates, but in reality is comparing apples to oranges from last quarter's disclosure to this quarter's.

Okay. That makes sense. Thanks. And then in 2007, by my estimation there was about 94 million of transactional profits split between merchant build sales, promote income, acquisition fees, from Inland, and could you give some type of guidance on how in 2008 that income will be split between those different buckets, given that from my assumption I think if it's the same as last quarter that transactional income is going to be flat with 2007 levels?

Yes, I mean, I think that's what we've provided thus far, the transactional sort of income would be relatively flat with '07. I think there are portions of that that are -- that probably go down significantly, such as the tax benefit, such as the acquisition fee on a portfolio of that size; but, on the other hand it's not just 2007 for this company that's had a consistent number of transactional opportunities that have been profitable for the company, and so I think the overall guidance is that we expect a consistent level of activity. We do feel comfortable that there will be a reasonably meaningful portion of merchant building gains that are included in that, as well as other items that overall should get us to, as we define it, at least, reasonably comparable levels as '07, and that's where the guidance stands today, and that's absolutely our expectation for 2008.

Okay, great. And just a little bit more on promote income. Are you expecting that to be up or down from 2007?

Right now I would expect it to be down from 2007. We had one very successful joint venture that wound up or, in fact, was rolled into a new joint venture in 2007 that resulted in a larger than normal promote, and so I think right now at least we are not expecting to comp that in 2008.

Okay, thank you for the color.

That concludes the Q&A session. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.