Site Centers Corp (SITC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2008 Developers Diversified earnings conference call. My name is Erica, 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 this conference. (OPERATOR INSTRUCTIONS) I will now like to turn the presentation over to your host for today's call, Ms. Michelle Dawson. Please proceed.

Thank you, Erica, and good morning. Thanks for joining us. On today's call, you'll 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 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, 2007, 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'll turn the call over to

Thank you, Michelle, and good morning, everybody. I'm pleased to announce this quarter's financial results of $0.83 per share of funds from operations which compares to $0.91 per share in the prior year. After adjusting for certain one-time items as Bill will describe shortly, our results actually show a 15% year-over-year increase. Considering the challenging environment in which we're operating, we're very pleased with our portfolio performance and with our outlook for the remainder of the year. As our assets future long-term leases with high credit quality retailers, and as our tenants appeal to consumer's demand for value and convenience, our portfolio has historically performed very well in times of macroeconomic stress. Our executive team has seen many difficult cycles. We know that whenever there is dislocation in the credit markets, there are also very attractive investment opportunities for those that are well-positioned.

During today's call, you will hear more about how we're advancing our corporate priorities. First, we remain highly-focused on our balance sheet and we continue to find financing at attractive pricing. Bill Schafer will give you a recap of our recent financing activities, our capital plan for the remainder of the year, and you'll hear what he's hearing from his banking relationships.

Second, our portfolio is well-positioned to out-perform in an environment where consumers are more price sensitive than ever, and our largest tenants are offering the most attractive value propositions to consumers. As presented in our quarterly financial supplement, portfolio fundamentals remain strong and consistent with our history.

Rent growth is solid, spreads on new leases are strong at 28 %, and the portfolio lease rate of nearly 96% remains high. While some deceleration in retailer new store growth is expected, it certainly makes sense given the dramatic decline in new retail development starts. Many of our tenants actually do very well in tougher economies and view these challenges as an opportunity to gain market share. In this economy, where we're seeing many consumers change their shopping patterns to save money, retailers that offer price leadership and value will be a clear beneficiary. Moreover, many of our largest tenant relationships have the highest credit ratings in the industry and the best balance sheets in the business.

Third, we are seeing more abundant investment opportunities created by market dislocation. Dan will describe how we're evaluating opportunities to partner with local developers which are experiencing the greatest distress as a result of the current lending environment. And you will hear how international development opportunities are complementing our domestic pipeline. David Oakes will then address our capital allocation strategy and explain how our decisions to take advantage of today's attractive investment opportunities are carefully balanced within the objective of preserving capital. With that, I will turn the call over to Bill Schafer.

Thanks, Scott. With regard to our first quarter operating results, I would like to highlight certain items, primarily those that were included in our prior year results that did not reoccur in 2008. First, the most significant item related to the release of certain tax valuation reserves which resulted in a net $15 million tax benefit in 2007 as compared to $1 million of expense in 2008. Second, a reduction in other income of approximately $4.3 million which was attributable to an acquisition fee of $6.3 million earned in 2007, relating to the Inland transaction. This was partially offset by a $2-million increase in lease terminations in 2008 as compared to 2007.

Third, merchant building, land sale gains and promoted income was $3.5 million higher in the first quarter of '07 as compared to 2008. Fourth, interest income was $3.1 million higher in 2007, primarily due to interest earned on funds placed in escrow for Inland shareholders until the transfer agent finalized distributions. Fifth, included in our 2007 G & A cost was approximately $4.9 million related to the charge associated with the departure of our former president and certain Inland integration costs.

After eliminating the impact of these items from each year's FFO, the increase in FFO per share was over 15% in 2008 as compared to 2007. This increase is primarily attributed to a full-quarter operating result from the Inland acquisition as compared to just over a month in 2007, an increase in same-store net operating income offset to a certain extent by an increase in bad debt expense, and an approximate 40-basis point decrease in the Company's weighted-average interest rate in 2008 as compared to 2007.

As you heard from Scott from a financial perspective, our primary focus in 2008 will be with regard to our balance sheet. As Dan and David will discuss in more detail, given the abundance of opportunities available, we can afford to be much more selective with regard to how much capital is committed to construction in progress. As far as sources of funds are concerned, we are --- as we discussed in February, the majority of our asset sales are expected to curve during the second half of the year. These sales are expected to generate several hundred million of proceeds to DDR and aggregate transactional income comparable to the levels achieved in 2007.

We have also been very active in the debt markets. We just recently announced that we had closed on a $500 million in new financings, including a five-year, $350 million secured financing on a --- [point of sale] of six properties -- a loan to value of approximately 55% and an interest rate of 5%. The effective loan-to-value on these properties has been increased to 70%, as they are also included as collateral for our secured term loan which bears interest at LIBOR plus 70 basis points.

Other loan closings included a $71-million construction loan on our Homestead, Florida development and the refinancing of $72 million of joint venture debt with a partner during the quarter. In addition, our 50% joint venture with Sonae Sierra which owns and develops retail real estate in Brazil, closed on a BRL50 million credit facility in late February.

Year-to-date, 15 properties were unencumbered with an aggregate value of approximately $700 million. In addition, we just closed this week on a three-year $40-million construction loan, relating to the expansion of our corporate headquarters in Beachwood, Ohio. The interest rate on this loan is at LIBOR plus 110 basis points.

We are also actively pursuing additional secured project refinancings, primarily with regard to our joint ventures, and we are confident that these will be successfully completed over the next several months.

Our line of credit availability at March 31, 2008 was nearly $600 million and we continue to maintain a substantial unencumbered asset pool of nearly $6 billion. Since the second quarter of 2007, the debt capital markets have been extremely volatile and challenging. In fact, significant financial institutions have experienced unprecedented write-offs and liquidity issues themselves.

Currently, lender's appetite for new financing is mixed. Rates available from commercial and investment banks are widely divergent. Often the larger banks are interested in offering participations, and there are good opportunities for local and regional banks.

We have also noted that the life companies are becoming more selective and appear to be more interested smaller loans up to around $50 million. The clear message we're receiving from all our lenders is that the quality of sponsorship and the relationship strength are critical factors in their at their decision-making process. Fortunately, we have established excellent relationships with numerous financial institutions over the past 15 years which have enabled us to continue to access the debt markets effectively over the past year.

As we have discussed on almost every conference call, we believe that it is extremely important to maintain a conservative balance sheet and access to all types of capital, which provides maximum financial flexibility and we will continue to operate in this manner. As Scott indicated, we have successfully navigated ourselves through difficult economic times in the past and have emerged as a stronger company due to the opportunities created in this type of environment. We believe this to be true today as well. I will now turn the call over to Dan.

Thank you, Bill, and good morning. I want to echo Scott's remarks that our first quarter results demonstrate a strong start to the year, regarding the true fundamentals of our business. In spite of the uncertainty present in today's economy, we are extremely pleased with the quality of our portfolio, the success of our leasing and development activities, and the internal strength of our infrastructure and resulting platform. Our strategic portfolio management efforts over the last few years, in terms of acquiring high-quality shopping centers, selling non-core assets, redeveloping existing properties, and delivering new developments, have reduced the average age of our assets by over five years, and have reduced the necessary amount of CapEx needed to lease and operate our properties. These improvements and the quality of our portfolio, and the cash efficiency of our operations, have enhanced our ability to produce positive results despite the current challenges facing the economy.

Our first quarter leased rate was a very solid 95.8%. This was obviously a metric we were watching very closely, as the challenges facing the economy in Q3 and Q4 of 2007 and Q1 of 2008, were generally expected to negatively impact occupancy. We are extremely pleased that our properties performed consistent with historical norms in that regard. Equally as pleasing, there continues to be a healthy demand for quality space, as illustrated by our 28% spread on new leases signed during the quarter, which continues to track well above our long-term average. Our continued ability to post robust new rent spreads is indicative of the stellar efforts of our leasing team, the quality and geographic diversity of our portfolio, and the overall demand for prime retail locations.

In addition, we executed over 2 million square feet of renewals, which posted average cash spreads of 7%. Importantly for 2008, our renewals are 80% complete, portfolio wide. Year-to-date, we have proactively completed 30 portfolio reviews with many of our most active retailers. In those meetings, it has become clear that retailers are proceeding with new store expansion cautiously, and are looking at location and sponsorship as the key risk mitigators. As a result, we are seeing continued opportunities, some presented by the retailers themselves, as dislocation in the capital markets continues to eliminate many private developers, and creates heightened uncertainty and much less transparency regarding tenants future openings. These factors combined to result in a greater awareness of sponsorship and focus on certainty of execution, which both work in our favor.

With the Las Vegas RECon Convention on the horizon, it is our goal to further cultivate strong tenant relationships, primarily focusing on 2009 deals, and the continued leasing of our development pipeline which currently stands at 75% executed or committed. We are also talking with several tenants regarding a limited number of 2008 commitments, many of which are a result of instances where other developers have failed to deliver space to tenants.

To date, our leasing team has scheduled over 800 meetings for RECon to facilitate tenant demand in opening new store locations throughout our portfolio. Contrary to the strong operating metrics we are cognizant of the environment, and are very aware of bankruptcy and store closure possibilities. We know who is struggling within our portfolio and continue to engage in dialogue in an effort to mitigate risk and most importantly, limit down time if we do lose certain tenants. RECon gives us a great opportunity to market currently vacant, and even anticipated vacant spaces, even though the ultimate future of that space may not yet be determined by the tenant. Through our national tenant account program, we will continue to monitor, communicate and actively manage the risk that is currently present.

As we've said many times, retail is clearly a game of winners and losers. In a decelerating economic environment, it's natural to see retailers that offer shoppers a compelling value proposition and a strength of balance sheet to greatly expand their market share at the expense of competitors that are less well-positioned. As a retail landlord, we know that this can and will occur, and when it does in our portfolio it is our intent to take advantage of the opportunity to release the space as a means of maximizing revenue potential and limiting downtime. One example of this approach is reflected as our Rio Hondo center in Puerto Rico where a 33-thousand square foot CompUSA store, the largest in our portfolio, was located. We expect a soon-to-be-announced investment grade category leader to assume the former CompUSA space with no interruption in rent, no retrofit cost to us, plus payment of a $1-million signing fee. In total, we had 11 CompUSA locations, eight of which currently have either tenant commitments or executed lease assignments with tenants such as Fresh Market, HomeGoods, and Bye Bye Baby.

Within our development business, we continue to see value-add opportunities created by the current market dislocation. As I mentioned earlier, local developers appear to be the greatest source of distress to date. This trend began over a year ago when a number of smaller local developers began coming to us and offering co-investment opportunities in their projects. We've seen this trend escalate over the last 12 months and today, we're clearly seeing significant pressure on developers that do not have the wherewithal, both in terms of capital and in terms of leasing relationships, to see their projects through to completion. We firmly believe that this trend will accelerate, and deal economics will continually improve as we navigate the current cycle.

Another obvious trend within the development sector that results from less private developer competition, is that land prices and terms in general, are more favorable than a year ago, which should have a positive impact on future yields. We're also seeing entitlement process become slightly less onerous to navigate as municipalities desire for tax revenue becomes more acute.

Overall, the combination of these market trends when coupled with our tenant relationships, will put us in a strong position to maximize risk adjusted returns and achieve even better margins on future projects.

In addition to the opportunities available in the U.S. market, the opportunities we're evaluating in our international markets are very compelling, but for different reasons. For example, the real estate markets in Brazil, Russia, and even Canada are more fragmented and currently, offer relatively less intense competition, creating niches for opportunistic investment.

From a yield comparison standpoint, we are underwriting projects in Brazil to yields in the mid-teens on an unleveraged cash-on-cost basis. Yields in Russia and Canada are lower than Brazil, but their supply constraint characteristics and growth profiles will offer attractive internal rates of return to our shareholders. Although many uncertainties can exist with international projects, the real estate risk of these projects in terms of lease-up is virtually non-existent. For example in Brazil, retail sales rose over 9.5% in 2007, compared to the prior year. Retail sales in Canada grew by nearly 6% in 2007 and by over 15% in Russia. While development deliveries in our domestic portfolio will continue to ramp up over the next 18 months, the contribution from our international portfolio where we expect to see significant value appreciation, will enhance our delivery of volume in 2010 and beyond.

In closing, our success is deeply rooted in our ability to attract and retain high-caliber employees who demonstrate relentless dedication and commitment to achieving our collective corporate goals. To that end, in regard to our annual review process, we recently awarded a record-setting number of internal promotions to various business units, including leasing, development, property management, accounting, information technology, legal, and marketing. Also, four members from our recent class of management trainees advanced to full-time positions, while three members from prior classes were promoted to officers of the Company and now have a position on our executive committee. As we are committed to achieving profitable results for our shareholders and institutional clients, we are also committed to rewarding those employees who excel and whose achievements have a meaningful impact on our overall corporate performance. At this point, I'd like to turn the call to David.

Thanks, Dan. As you've already heard, our capital allocation decisions are regularly being reviewed and executed in a disciplined fashion. This reflects our primary interest in maintaining a strong balance sheet, while still allowing us to capitalize on attractive investment opportunities that are being created by the current market conditions. We are constantly reviewing investments based upon their risk and return attributes, and today's market is offering some interesting opportunities that we have not seen in many years. For example, we continue to view our development platforms and attractive means of creating value. On the domestic front, we continue to see opportunities to partner with local developers who are facing capital constraints and are finding it more difficult to deliver development projects.

We expect to continue to see these opportunities in the coming quarters and as we've mentioned previously, we have a dedicated team in place sourcing these deals and evaluating the projects that best fit our investment profile. Interestingly, despite the current aversion to development investment by public markets, we are seeing considerable private market demand for the caliber of projects and returns that we've consistently been able to deliver, and we will consider working with this private capital in this regard.

We recently announced a 6.5% stake in Macquarie DDR Trust . We view the purchase of MDT units as another attractive investment alternative for DDR. By purchasing the trust units, we were able to increase our ownership in some of the best assets in our portfolio in a manner that provides immediate and outsized returns. Purchasing these units also insures our alignment of interest with those of other unit holders of the trust. Also as we have stated in previous calls, we continue to view the repurchase of our own shares as an attractive vehicle for deploying capital. And we regularly review share repurchase as one of the many investment alternatives available, but always with a careful eye on our balance sheet strength.

Based on numerous meetings we've had with institutional investors, it's apparent that they continue to have interest in commercial real estate and top tier managers, but are now being more cautious given the uncertainty in asset pricing and lending markets. Despite the shift in demand and expectations, we feel that we are well-positioned to continue to expand and strengthen our funds management business. As the commercial real estate environment continues to change, we view institutional joint ventures as an attractive niche and feel we are well-positioned to continue to create meaningful value for both our shareholders and our partners.

Discussions with investors, regarding the sale of certain recently built assets, are also progressing. To date and based on the conversations we've had with investors and brokers, there's not been a meaningful change in pricing and our plans remain the same for closing on the sale of these assets in the second half of 2008.

We are seeing considerable interest from both foreign and domestic institutional entities with strong balance sheets. As is our practice with transactions that are in progress, we will limit our comments on these sales until they are more final, so as to not compromise our negotiating position. At this point, I'll turn the call back over to Scott for his

Thanks, David. As you've heard, we remain focused on our balance sheet while evaluating opportunities created by the distress in the market. We expect property fundamentals in our portfolio to remain stable, as we're well-positioned to benefit from an environment in which consumers are increasingly price-sensitive and are less inclined to buy fully-priced discretionary items. We are seeing this trend play out in the performance of department stores versus discount retailers, and among discount apparel retailers versus specialty retailers. This trend is even more pronounced among grocery retailers where Wal-Mart is clearly gaining market share as food prices rise. There are several other aspects of our portfolio quality that help insulate us from more macro volatility. The most important of those are first, tenant credit quality which is paramount, especially in today's environment.

Second, the relatively low amount of capital expenditures needed to maintain our shopping centers and achieve our same-store NOI growth. These expenditures have a meaningful impact on the cash efficiency of our business which again, is more important today than ever. And third, the long-term consistency of our portfolio metrics is measured by occupancy, rent growth, leasing spreads, particularly when normalized for CapEx, as you look through that --- illustrative of the stability and quality of our portfolio.

From the leasing perspective as well, asset quality is critical. Retailers make location decisions on far more than simple demographics. Asset quality is also reflected by tenancy and by physical location. Demographics do play a part in defining asset quality, but retailers analyze markets based on trade area which is irregularly shaped to reflect the variables such as asset size or critical mass, competition, physical or geographic barriers, transportation, access, et cetera.

Therefore, from both an operating standpoint and a leasing standpoint, we expect our portfolio to continue to post strong results despite the threat of a weakening economy. With respect to our guidance, we are affirming our previous 2008 FFO estimates of $3.95 to $4.05 per share. With respect to individual quarters, there will be some seasonality. Analysts should apply lower weightings to the second and fourth quarter, but should attribute a significantly higher weighting to the third quarter funds from operations, which is when we expect to recognize the largest portion of our transactional income. At this point, I'll open the phone lines to receive your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Christy McElroy from Banc of America. Please proceed.

Hi. Good morning.

Good morning.

All of you talked about under-capitalized developers looking for stronger partners on projects. Have you added any projects to your pipeline recently that were sourced in this way? Can you provide a little bit more color on how you would underwrite and structure a development partnership like that where the original developer is in distress?

Sure. First, we had not added any projects to our pipeline currently under this structure, but we have a number of them that we're evaluating. We've looked at a lot of them, a number of them there's a reason why they're in distress. That's not why we want to get involved in them, but we have a number in the pipeline now that looks very promising. Pending our gauge of tenant interest at ICSC in Vegas, we would probably be adding some in the second quarter. In regard to the structure of the deals, they're all very different.

It really, a lot depends on the capability of the developer and how the developer wants to handle the situation. It also depends on how deep the distress is that the developer is in. What their goal is, if their goal is to stay in the ownership cycle, if they want to perform leasing services or development services, or if they're looking to just recoup some costs and try to get out and survive for another day.

So we've seen everything from a 50/50 Pari Passu proposal to developers that are willing to subordinate all of their interest and all of their fees to 9.5 to 10% return, just to get us enticed to join the project. A lot of it will depend on where the developer is in his cycle and what our level of interest is, but it's going to be --- there's not going to be a real form to any of these deals. It's going to be very, very deal-specific.

I'm sorry, Christy. I want to add something to what Dan said, and I just want to make sure everybody understands our role in this. We really view ourselves as pretty much a bridge for private capital to invest in these projects. It really isn't something we're looking at to expand our obligations for construction of progress. What we offer is good access to capital that those developers don't have, but we also offer the capital provider a partner that can step in and complete the project if the private developer basically sees his economics evaporate. Oftentimes, that's where people get into trouble when they come in, is financial partners with under-capitalized developers without a great book of experience. Then the developers sees his profits evaporate and is basically willing to walk away. The capital provider is left helpless to complete the project. We've done this quite a bit in the past. It's been very successful, and we've made a lot of money for our joint venture partners in that regard. Oftentimes, we have had to step in and complete the projects ourselves.

Okay. Then on your current ground up deals in the pipeline, what kind of stabilized yields are you projecting? What's your estimate of the spread between yield and market cap rates?

We're currently projecting our stabilized yields between 9.5% and about 10.25%. Our exit cap rate is about 6.5%.

Yes. I think we're still experiencing in the market in the 6.5% or lower range for this quality of product we're developing. In terms of underwriting on a go-forward basis, to assure that we've dealt with the uncertainties in the current market, we've under-written even higher exit cap rates than that.

Just to be clear, when we quote you those kinds of yields, I want you to know that they're fully-loaded. That backs out our development fee which shows up elsewhere in our operating results. It also sets forth a contingency for cost overruns and a structural reserve going forward, as well as a vacancy factor going forward. And it doesn't include straight-line rents. Those numbers could go all over the place, depending on how other people treat those items.

And it's loaded with the cost of capital to incorporate the timing, and the legitimate cost of carriers for projects.

Thanks so much.

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

Hey. Good morning, guys. Just a follow-up on the development yields. Has there been any change to your internal expectations on any of your projects in terms of stabilization dates or yields, et cetera?

For the current projects in the pipeline, there have not been any significant changes. For projects going forward, we have changed our underwriting and we are expecting higher yields than we had in the past.

Is that just due to the easing on land costs?

I think it's partly due to the easing on land costs. It's partly due to a lack of competition in the market. We still do see tenant demand for new development projects, so while the demand has decreased, supply has decreased more dramatically than the demand. We have been looking at some projects that are creeping back up into the double-digits from the outset.

The other thing that we're doing in our underwriting that's different is that because of pressure on commodity prices, we've actually built in increases in construction costs for the entitlement period on the project, rather than looking at what the costs would be today. In addition to the contingency that we have, we also have a built-in inflation escalator on the construction cost to insulate us from any risk on commodity prices.

Great. Thanks. And just on the distressed opportunities, what could those actually represent in terms of dollars invested by DDR?

Well again, I don't think it's going to be a significant amount of our dollars invested. I think it's --- at the end of the day, we'll be generating primarily financial and operating promotes on these transactions. We'll probably be providing 10% to 25% at most of cost of the project. But in terms of the volume of those projects, it could over the next few years, it could represent several hundred million dollars.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Michael Bilerman from Citigroup. Please proceed.

Yes. Good morning. Ambika Goel is here with me as well. Can you just talk about how aggressive you'll be I guess in the next couple of quarters prior to selling the $500 million of assets you want to sell? How aggressive are you going to be at putting up new capital prior to getting those sales done?

Well, not very aggressive, Michael. I think that when we talk about taking advantage of opportunities that exist in today's environment, we're really talking about hitting a bunch of singles. We aren't swinging from the fences. There's no big portfolio transactions in our pipeline. If they were offered to us, I don't think we would consider them. The last thing we're going to do is extend ourselves beyond our capital capacity in the near term. What we're really doing is pursuing a strategy of recycling capital where we can pull capital out at the 6%, 7% Cap-rate range and redeploy it into immediate double-digit yields. I mean the MDT share repurchase for instance, is a great example of something that we can turn on and off as we choose in relatively bite-size amounts, but we're putting the money out in serious double-digit returns for our shareholders. Those are the types of things we're really talking about, rather than anything that's going to catch headlines.

And you talk about this $500 million of sales in the back half of the year, what does that encompass? What are you selling? Is that tied in any way to the other income that you expect to occur in the second half?

Yes, it is. A significant portion of that are assets that we generate at the merchant building gains that would replicate the transactional income from 2007. The balance of it is essentially what we've always done which is recycle non-core assets with lower growth rates, so that we can redeploy that capital into higher yields and higher growth opportunities.

What's the development piece? How much and are those assets already delivered in the portfolio? Out of that 500, how much represents merchant build?

In volume of the 500?

Yes.

I think it's slightly more than half.

And those assets are already on the books? They're in the core portfolio?

Well, they're recently completed developments that qualify for merchant building gains where the work has already been done, the returns are in place. Now, it's just a matter of executing the exit.

And again, Ambika had a question as well?

If we think about the breakdown last year of merchant build of approximately $0.55 and then promotes of about $0.15, and the expectation is that transactional income will be even with last year. How should we think about the breakdown for 2008 between those buckets?

I think the promotes will be a bit lower than they were last year. We had a large sale that generated a significant promote last year. I think the merchant build should be relatively comparable. There might be a little bit of an increase in the land-sale-type stuff to offset some of the difference in the promote.

Then on a net basis, what --- how much per share would those two buckets be?

We're going to get to a level on a per share basis very comparable to last year's level.

Okay. Thank you.

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

Thank you. The pick up in transactional volume in the second half of the year, is this something due to when you see a shift in the marketplace? Or is it changes that you DDR made yourself?

Well, first of all, I think it's consistent with what we guided on the last conference call in terms of timing, so nothing has changed over the last quarter. But it's certainly more difficult to execute these transactions than it used to be. Particularly, because the assets [side] among investors for core versus value-add is less than it was in the past. That's something we also discussed on the last call. We think there's certainly ample enough demand to take care of our needs, but it isn't going to be a feeding frenzy by any means.

It really is in your mind more timing, than the shift in people's view of where Cap rates need to go and so forth?

I guess a shift from last year just in that, the relative ease to closed transactions. In the second quarter to this year, where we would expect more of it to be in the second half, marketing process in place now, meetings to take place. In some cases or in many cases in Las Vegas, and then a procedure to close transactions that end up being in the second half of the year. I think it's a change relative to 2007, but not a meaningful change relative to our budget. Perhaps a change in pricing, relative to 12 to 18 months ago, but again I don't think a change relative to where we've expected to sell various assets.

Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Jonathan Habermann from Goldman Sachs. Please proceed.

Hi, it's Jay. Tom is with me as well. Just following up on Craig's last question, just about the capital markets, and perhaps what we need to see improve to get to your third quarter. Obviously, there's big transaction gains there. Do we need to really see an improvement overall in credit market activity? And sort of following on that comment, how far apart today do you think buyer and seller expectations are?

First of all, I don't think that it's any change in the credit markets is required for us to achieve our goals on the asset sales that we're talking about in terms of that volume. There is significant amount of equity capital that is not tied to achieving any sensational leverage on these ventures. Frankly, if you look at our deals in the past, most of our joint ventures are leveraged consistently with our how our company's leveraged, which is in the 50, 55% loan-to-value. Seeing as we just closed a major secured financing in that range at very attractive pricing, I don't think that's going to be the impediment. I think what you're dealing with and why it takes a little longer in this marketplace is because investors are looking at the landscape the same way we are.

There's a great talent of opportunities out there, including a tremendous amount of CMBS paper that's in distress and people think they're going to be able to acquire at very reasonable prices and very high yields. There's a lot of vulture activity going around with birds flying around and seeing what's going to be available. People are taking a little bit longer, but there are enough investors out there that are more interested in secure cash flow. Just as lenders that we worked with are more interested in secured cash flow. And great sponsorship that will enable us to accomplish our goals, but I think that's the greatest changes. There's a little bit of uncertainty in the market and there's a lot of opportunity in the market, so people with capital are going to be a little slower in making decisions on allocating that capital.

Well how far apart, again the second part of the question I guess, how far apart are buyer and seller expectations at this point?

Well, it's very difficult to say because we haven't gotten to the point of really having that kind of give and take on these transactions. We've just put them on the market basically. I will say that transaction volume is way down which indicates that there is greater --- bid-ask gap than there was in the past among a lot of buyers and sellers. But we haven't seen any real change in terms of results for the buyers and sellers that have actually made deals. David?

Okay. Second question, can you just comment on sort of store closings and what you anticipate perhaps for the balance of the year? Obviously, you did to see a pick up in lease termination fee income, but can you comment on what's happening there? Do you expect more to follow?

Well, I think there will be more to follow. I think there clearly are those tenants in our portfolio that are struggling, and I think we all know who they are. One of the things that we're seeing is tenants struggling in a lot of ways how best to achieve store closures. Bankruptcy under the new bankruptcy laws, not quite as attractive as it once was. It gives you a lot less flexibility and unless it's pre- packaged, you run a much greater risk of an unsuccessful execution coming out. A number of these tenants are capitalized by private equity who really isn't interested in seeing their equity disappear so quickly.

I think you're seeing a couple different things. I think we're seeing impact of ownership. I think we're seeing impact of the new bankruptcy law which has really held back the flow of bankruptcies. Of course if a tenant that's not in bankruptcy closes, then of course we have the benefit of a negotiation where we can get ourselves significant terminations and again, release the space if we have an alternate user. When we don't have an alternate user, the tenant is still obligated to stay in place and pay rent. I think it would be imprudent of us not to assume that we will see additional store closures, particularly coming into the summer months when cash positions of retailers is at their annual low, and so are sales.

Okay. Tom has a question as well.

Hi, guys. If I'm not mistaking the breakout between local and national tenants in your portfolio on a revenue basis is about 10% local and 90% national? Could you provide an update as to how the local tenants are faring relative to national tenants?

Well, the local tenants are fairing worse. If you look at our increase in bad debt, the bulk of that is coming from the local or regional tenants that don't have the wherewithal to sustain extended downturns or are having to get squeezed by their vendors and don't have the cash flow to buy the inventory necessary to maintain their volume. Most of the pressure that we're seeing outside of the big headline names that we all read that are national companies, most of the pressure that we're seeing when we look at our bad debts are coming from the local tenants.

Okay. Then just a little bit of color on the dynamics of receiving some sort of lease termination fee from a local tenant when they're in a position of financial distress. How much harder is it to receive something from them versus say a national retailer?

It's much harder. It's much harder because they have, generally they have much less capital. In that particular case if you get something, it's usually not overly meaningful. You would do a transaction with them because if you force them into bankruptcy, you'll get nothing, in many cases. If you have another use, you're better off just getting under-performing tenant out of your center. These are small shop spaces, so they aren't overly impactful on a global basis. You're not going to get the big numbers from them on terminations, but you will be able to typically get something from them to avoid a bankruptcy. In both cases for the landlord and the tenant, for a local tenant in particular, the chances of recovering something on a bankruptcy is very slim, so we look at those situations a little differently than we look at the nationals.

Great. Thank you.

Sometimes just to amplify that, what we'll do with a local tenant is we'll ask for a sign-off letter where they stay in the space, continue to pay rent. And we go out and market the space while they're there, so that we can re-tenant the space without down time and they can avoid a claim against them, their personal guarantee. That's really the common way to insulate yourself from risk with respect to small tenants.

One of the other things just to follow on that we're seeing, is we're seeing more local tenants that have some interest in staying, but are just having a hard time paying their rent, looking to go on a percentage-rent for a period of time at a higher percentage to get them to a period of time where they can start to do sales. June, July are tough months for everybody. If you can get them through that period on a rent abatement of some kind and then collect a higher percentage through the holiday season, very often we'll end up ahead of the game.

Our next question comes from the line of David Toti, Lehman Brothers. Please proceed.

Good morning. Just can you guys provide a little bit of color in terms of where you're seeing pockets of regional strength or weakness?

Sure. Regional strength today is clearly Washington D.C. It is still a very hot market. Very rarely will we meet with a retailer who does not want to have more locations and more geographic distribution than in the DC Metro.

Clearly, we're seeing continued strength in New England. If you have opportunities because of the right-to-build issues are so difficult in New England, we have a lot of tenant demand for our product up through the New England states.

We are seeing some softness in the South. We are seeing a little softness in the Southwest, the Phoenix metros, and southern California, a little bit of softness compared to where they were. But again, where they were, the baseline was probably not a sustainable level. They've become, they've come back to normal a little bit which for them would be softness, but for us it would be a little more normal for the rest of the nation.

Great. And then just one last question on the development pipeline. There seems to be no change in the current line up. Have you pushed back any shadow projects, shelved anything? Are you intending to show a little bit less at ICSC? Any color on that would be useful as well.

We will probably show a little bit less at ICSC in the sense that there are certain projects, not necessarily because of tenant demand, but because of entitlements that might be pushed to a 2010 opening. It's very difficult today to get people focused on 2010. We're certainly going to want to keep people focused on 2009, so we're going to show a lot of our 2009 and early 2010. But it will be a little bit less on the domestic front and we'll have a little bit more on the international front . On a blended basis, it will probably be very similar to what you've seen in

Great. Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Michael Mueller from J.P. Morgan. Please proceed.

Yes. Hi. With respect to the MDT purchase, why was 6.5% the right amount? Over the near term, is it reasonable to expect that that number could go up?

The Australian Stock Exchange requires filings of substantial ownership interest at the 5% level, and then each one percentage point above that, and so the 6.5% or actually, 6.6% level, represents our most recent filing with the ASX. But where the stock trades today, we continue to see it as an attractive investment alternative.

Okay. Switching gears a little bit, in terms of the mix of international versus development, international versus domestic development deliveries, when you move into 2010, how could that mix shift versus what we see in the supplemental say on for 2009?

Well that's going to shift dramatically, because we'll have probably three projects in Brazil and two projects in Russia that will be delivered in 2010. Which would aggregate in dollars probably --- this isn't all our dollars, but in total dollars, close to $400 million, $500 million.

Okay. And of that $400 million or $500 million, what's roughly your stake?

50% in Brazil and 75% in Russia.

Okay, thanks.

Oh, yes, and that doesn't even include Canada. There could be more international, including Canada.

That's more 11.

Right.

Our next question comes from the line of Carol Kemple from Hilliard Lyons. Please proceed.

Good morning. In your supplement packet, it talks about the acquisitions and dispositions done in the first quarter. Do you know what the cap rates were on those?

I'm sorry could you repeat your question? You were breaking up a little bit.

Yes. Sorry. In the press release, it talks about the acquisitions and dispositions in the first quarter. Do you know what the cap rates were on those?

On the small volume of dispositions just the two centers, one of them was a great majority of the $8 million -- that was in the 7% cap-rate range.

Okay. And then on repurchases, how much did you do in the first quarter? And have you done any so far in the second?

Share repurchases?

Yes, please.

There have been no --- we have not repurchased any DDR shares during the first quarter or year-to-date in the second quarter.

Okay. Thank you.

Thank you.

Our next question comes from the line of Jim Sullivan from Green Street Advisors. Please proceed.

Good morning. I was confused by a couple of comments as it relates to the development pipeline. I think you made the comment if I understood what you said correctly, that you really haven't pushed back any of the timing of any of your projects. But when I look at the development funding schedule, the numbers seem to tell a different story. At the beginning of the year, your outlook for '08 was about $130 million of funding. During the first quarter, you spent about $20 million and that would suggest you have about $110 million left, but the number you show in the first quarter supplementals, half of that, $54 million. Can you help me reconcile that? Where did the other $55 million go?

You're comparing fourth quarter supplemental to first quarter supplemental?

On Page 42.

You're really mixing apples and oranges a little bit, Jim. You're asking when expenditures have been made and comparing that to when deliveries will occur. There isn't a direct correlation to those two things. Just because it's expenditures may have slowed down slightly, doesn't necessarily mean that the delivery has been pushed back.

I understand the timing, but the amount of funding you expect in '08 went down by half in a matter of a couple of months. It seems like something either got pushed back or you took it off the table.

Well, there was certainly an increase in our --- I think in this supplement, we're saying what's funded as of March 31, '08 and there was significant - there were fundings during the first quarter of '08.

Yes. I'm looking at the projected funding, the future obligation. We can do it offline if that would --- It just seems like something either got pushed back or taken off.

Okay. But I think if you even just look at our CIP balance between the end of the year and where we are today, it is up a certain amount. Over a hundred million.

Talking about [guess] between now and the end of the year, Bill, not what we did in the past.

Okay.

Yes. I'll circle back with you. Then the other topic as it relates to development that confused me is when you were talking about 9.5% to 10.25%, I think someone said specifically, it excludes straight line rents. But when you historically reported your development yields and even in your press release, you reported GAAP return. Can you just confirm whether you're talking cash or GAAP? Then for your typical project, what might the initial spread between GAAP and cash be?

Again, we're talking about two different things. When we evaluate a project to determine the threshold yield, we look at cash on cash return as stabilization unleveraged. When we have to report it, when it comes online, then of course we have to apply GAAP. Which what I was trying to explain was that the actual yield that will hit our books will be higher than the yields that we're quoting for determining our willingness to make an investment.

What is the typical spread in one of your development projects, your one between GAAP and cash?

The typical spread would be between 75 and 100 basis points for a power center or a community center. It's often twice that for lifestyle center.

Okay. That's helpful. Then with respect to occupancy on your last call, your outlook was flat to down 25 basis points full-year. So far or through Q1, you're down 20. Are you still looking or still projecting flat to down 25 or something south of that?

No, we're staying where we are, because as you look historically at first quarter is usually the weakest quarter because tenants close in the first quarter, but they don't open. Historically, if you go back, we have dropped occupancy in the first quarter compared to fourth quarter. We would expect to --- unless again we have some bankruptcies that aren't currently foreseen or budgeted, we would expect our occupancy to remain flat for the year to down a little bit.

Okay. Thank you.

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

Yes. Good morning, guys. Dan, aren't small shop rents generally more lucrative than the national or the regional tenants on say, a per square foot basis?

Yes.

Well, I mean, I'm struggling a little bit with why you feel --- it sounds like that's where some of the issues are here and yet, you feel still pretty good about what's going on internally. I guess you're not that concerned maybe about what's happening with the small shop guys?

Well, small shops make up a small percentage of the overall portfolio. And of that smaller percentage, only a percentage of that percentage is in the distress that's hitting our books. I think --- and to be honest with you, there's much --- it's much easier to re-lease a 2500-square foot shop than it is a 40,000-square foot store. The overall perspective is that yes, small shops pay higher rents. It's also true that the replacement tenant usually pays higher rent than the small shop that vacated. And a percent to the total from a revenue perspective, it doesn't always add up to a meaningful number.

Okay. That's good; Thank you. But on that, I'm thinking what is demand like? If these small shop guys are hurting or some of them in the portfolio, are there guys behind that that are looking for space? Is that kind of what you're seeing?

There are, and they're also smaller national tenants. For example, in the Inland portfolio, where we're seeing some softness from small shops that are in use, that we would typically have a national tenant in. For example, there's a big difference when a local sub shop goes out of business and you replace it with a Subway. Or a local vitamin store goes out and you replace it with a GNC or someone like that. That's the type of thing we're doing on a regular basis. Overall, tenant demand if you look at the leasing volume, we were pleasantly surprised, Rich. We were --- when you listen to what people were saying in Q3 and Q4 of last year, and Q1 of this year, we're expecting to see a drop in numbers and a drop in demand which would have a negative impact on the leasing spreads. We didn't see that because we were able to produce a high volume of transactions. And as long as the transaction volume stays high, we should be able to maintain our occupancy level.

Okay. That's good. Thank you, thank you. And then on G & A, where does that go from here? Do you guys have any thoughts for maybe the second quarter or perhaps the year in total?

Yes. I read your note this morning and you guys noted that there was a significant increase in G & A. Obviously, that was almost completely related to the fact that we've assimilated the Inland portfolio, and we have to increase G & A accordingly. What we really look at as the appropriate metric, Rich, is what G & A is a percentage of total revenue, which includes the wholly-owned and the joint venture revenue. Because as you know, we get compensated from our joint venture partners to reimburse us for our overhead in managing those assets. Where that exists and where we expect it to be for the year is somewhere in the 4.5 to 4.75 % range which is pretty consistent with historical levels. That does include the out-performance plan that we announced on the last conference call which is not a huge number, but it is a number that registers in that percentage.

Okay, good. Thanks, Scott. Then also, when you look at your guidance for the year, how do you guys think about LIBOR because that's, to be honest that's just bouncing all over the place. How does that factor into what you guys are thinking?

Well, I mean, right now, obviously you have a one month LIBOR. I think today is in the 2.9s. It's been down to sub 2.7 and so fourth. Right now, we're viewing that as basically in the high twos as to where LIBOR is. I think 2.75 to 3% range.

Okay, Bill, so you think that back-half rest of the year is what gets you to your interest expense?

Well, I think right now, we're probably, if you look at everything, we're probably looking at about a 2.75 number.

Okay. And the effect of the hedges, just so I'm correct on this. The effect of the hedges goes through the interest expense line, is that right? Or does it go through OCI?

Well, to the extent that we have, for example, we have fixed a number of some of our floating rate debt in prior years. That fixed rate goes through our income statement. To the extent that there are adjustments in what those contracts are, that would basically go through OCI which --- because in any case, it will be affected through interest going forward. As the rates go down, there could be, to the extent we fixed certain rates, there would be an increase maybe in the obligation there which would go through OCI. But then as you pay that interest expense going forward, it brings it down because it runs through our interest expense line item.

Okay. Very good. Thank you, guys.

(OPERATOR INSTRUCTIONS) We have a follow-up question from the line of Michael Bilerman from Citigroup. Please proceed.

Hi, this is Ambika. What amount of assets are currently on the balance sheet that could generate gains?

I would think most of the assets on the balance sheet --

Merchant build gains. Sorry.

If we were to look at what's stabilized from the development pipeline over the past several years, have gone through the lease up process in the past several years, there would comfortably be several hundred million dollars that is stabilized recently, and that would be eligible this year. In addition to some projects, potentially that still show up in the current development pipeline, as they're going through their final development stage that could also be eligible.

If we think about the $250 million, what years did these projects stabilize in?

I would say those projects stabilized in the past 12 to at most 18 months.

What's your policy in terms of how long you'll hold an asset that you've delivered, where you're going to sell and generate a gain? How is that processed in terms of when you first decide, if you ever bring something back and stop depreciating it. Just help us sort of get a grasp around that.

Well, REIT rules would require that an asset has to be held for four years, posted on initial stabilization to be sold and not generate a significantly negative tax impact. Through our TRX, there are ways to shorten that period that obviously, a very large number of companies engage in. But the reality is for our exact development projects, there is a multi-quarter or even multi-year stabilization process to get to that final stabilized occupancy before we would view an asset as having completed its development value creation.

Is there a specific level of occupancy that DDR considers an asset stabilized?

We typically consider assets stabilized as 95% occupancy, but I think one of the --- what Michael just asked, it's problematic as a criteria to determine merchant building gains vis-a-vis whether you depreciate or not, because some of our projects come online over a long period of time. They're phased over several years. The project is still a development project. Sometimes five years after the first tenant opened, it doesn't stop becoming eligible for merchant building gains accordingly. I can think of a great example of that would be a project in Coon Rapids, Minnesota, probably took six or seven years from the opening of the first store to the last store, to fully stabilize that asset. But we still had a significant amount of that asset on the development pipeline list. We still had land to build out and lease.

Were you --- did you take that asset into the core and depreciate it?

Part of it yes and part of it no. It depends.

But the gain that was booked was on any case, was relative to an undepreciated basis.

You're saying right now, you probably have 6 to $700 million of assets in the core portfolio that could generate gain of what you're going to sell at 250 in the back-half of the year?

Yes. I think we have comfortably several hundred million dollars of assets that have delivered over the past several years that have had initial deliveries, and have stabilized in the past year or so.

Does that include any acquisitions you did?

If the acquisitions were incomplete at the time that they were acquired, then they would. There was a bunch of stuff in JDN that still hasn't been developed. There's a bunch of stuff in Inland that still hasn't been developed. Yes, that does include assets like that.

How do you decide whether something is merchant build versus development hold? Does that determination change from initial to ---

We don't decide that, Michael, until it's been in the portfolio long enough to be an investment asset. We maintain the flexibility to make it a merchant build gain as long as it qualifies. Sometimes, but we also don't maximized our merchant building gains by selling every asset that qualifies for that because that would cause our earnings to be too lumpy. Every year, there's probably hundreds of millions of dollars of assets that could have been harvested that haven't been, that have moved into the investment category that now it's too late.

Right.

That's why when you guys ask the questions, we don't keep a running list of this on a quarterly basis and disclose it. What we're really focused on is when we do our budgets in October, we'll look at everything that's eligible at that time. Then we will choose from among that list, those assets that we target to harvest during the coming year to achieve the gains that we really want to achieve during that year. Then during that year, there will be projects that are added to the list and projects that will come off the list.

Why wouldn't you put that list out? I mean, it seems ---

First of all, I don't think anybody does. It's just something we already, I think provide more disclosure on these items than anybody in the industry. I think it's enough.

It ends up being a function of the lease-up and what ends up in certain specific leases. What ends up in terms of certain tracks that could be sold to retailers versus leased. There are a number of items that economically may end up comparable to the Company, but would impact our interest in selling or holding assets. I think our opportunity sets on the investment side. Also determines our desire to recycle some capital out of of recently-developed projects in some cases or not in other environments.

Right. Just last question, how are you marketing these portfolios? Are you selling the merchant builds, this 250 as one sort of portfolio? Then the non-core stuff is it single assets? Or in terms of your marketing process?

Today, we are for the most part marketing individual assets or very small portfolios, as the way that we see --- the way to capture the largest number of potential bidders or buyers based on where the credit markets stand today. The smaller loans, the 50 to $100-million loans on hundred, $200 million assets, so that 50% loan-to-value is much more available than the $500-million loan on the billion dollar portfolio, despite the exact same coverage ratios and other credit metrics. I think we want to be sensitive to where the markets stand today and end up with a larger volume of smaller transactions.

Okay. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.