Site Centers Corp (SITC) 2008 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the third quarter 2008 Developers Diversified Realty earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to your host for today's call, Ms. Michelle Dawson, Vice President of Investor Relations. Ma'am, you may proceed.

Good morning. And 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 would like to alert you that certain of our statements today may be forward-looking. Although we believe 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 8K and in our form 10-K for the year ended December 31, 2007, and filed with the SEC. In addition, we will be discussing non-GAAP financial measures on today's call including FFO. Reconciliations of these non-GAAP financial measures for the most directly comparable GAAP measures can be found in our press release dated October 23, 2008.

This release and our quarterly financial supplement are available on our web site at www.ddr.com. Lastly, I would 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 Scott Wolstein.

Good morning, everybody. I am pleased to announce this quarter's financial results of $0.83 per share, which compares to last year's third quarter results of $0.80 per share. Before I begin, I would like to reiterate the statements I expressed in the press release that we issued earlier this week. My own experiences over the past several weeks have illuminated the risks associated with leverage in a capital constrained environment. In my day-to-day activities as Chairman and CEO, I am committed to fostering a more conservative approach across all business lines and throughout our national and international pursuits.

The absolute top priority on my agenda and that of each of us on this call is to ensure that we are positioned to comfortably navigate this challenging environment and emerge from it even stronger. We will take proactive steps to reduce our leverage, utilizing any and all necessary financial measures to protect our long-term financial strengths. Throughout today's call, will you hear how we're adjusting our strategy and proactively adapting to the current environment.

That being said, as we review our third quarter results, we continue to see the stability of our product types becoming increasingly evident, which contributes to the consistency of our core operations. For example, retail sales results reflect consumers continued shift to value-oriented retailers, and as a result, our centers and our largest tenants have been and should continue to be the relative winners in the retail market place. We can see this trend reflected in our leasing volume, which set an all-time company record in terms of the number of new leases executed in a quarter and in our leasing spreads, which are comparable to historic averages of roughly 10% growth on an overall blended basis.

Moreover, the same store long-term leases and renewal options that dampen our return growth in bull markets now serve as important downside protection in a bare market. As evidenced by our recent press release, we continue to close on asset sales and are actively addressing upcoming debt maturities. In response to unprecedented events that have taken place in the capital markets, we have adapted our strategies and continue to do so in order to mitigate risks and focus on our core operating results.

While you will hear much detail on those results later in the call, I would like to focus on the big picture. Our priority continues to be enhancing liquidity, protecting the quality of our balance sheet, and maximizing our access to a broad set of capital sources. Potential new investment opportunities will be pursued, but only with significant equity and debt financings in place, and only where carefully underwritten expected returns sufficiently exceed our current cost of capital. I want to reiterate our focus on selling assets to third parties and into joint ventures.

If we look across our maturities in 2009, 2010, and beyond and take a (inaudible) approach, as many of you have done in recent weeks, we know that these asset sales represent one of the least expensive sources of capital available, probably only surpassed by our internally generated retained cash flow. We have flows and are continuing to progress on numerous individual or small portfolio asset sales that should generate over $200 million for 2008.

In addition, as we announced this morning, we have signed a letter of intent for the sale of approximately $900 million of assets into an 80/20 joint venture with an institutional partner that we know that will generate several hundred million of net proceeds. I will let David Oakes give you details later, as well as the progress update on a number of smaller asset sales. Second, we continue to work very hard to conserve capital to make all capital allocations decisions more prudently than ever. To that end, we continue to scrutinize any and all capital expenditures in our development pipeline.

We will mitigate risks by phasing projects and carrying land, which we already own to lease and financed. We will not pursue any projects that do not meet our pre-leasing thresholds or whatever percentage is necessary to secure third party construction financing, or our return thresholds withstand an excess of 10% return on costs. Fortunately, our asset class does not require a significant amount of regular leasing or maintenance capital expenditures. We can operate our portfolio in a highly cash efficient manner and still generate consistent cash flows. Our free cash flow after all expenses and interest and including Cap Ex and preferred dividends exceed $300 million per year.

Before we discuss capital markets, I will briefly review our third quarter results. I'm sorry. With respect to international development, we have suspended all spending in Russia until we have greater clarity on the economic and business environment in that country, and until debt financing is available on commercially reasonable terms. In Brazil, we are finishing our project in Manaus, which is almost fully leased and expected to come online in April.

We are not commencing any new development projects at this time. We continue to believe in these development projects in Brazil and their returns, but we are carefully rationing capital for the near term. With respect to our operating portfolio in Brazil, which continues to generate extraordinary NOI growth, we are pursuing capital recycling opportunities and are in discussions with several large institutional investors regarding joint venture investment.

We have seen many very difficult cycles before and we know that the best strategy is to focus and commit to the basic blocking and tackling of running a high-quality retail real estate portfolio, which generates the vast majority of our revenues, drives value creation, and generates more capital available for distribution. At this point, I will turn the call over to Bill Schafer for his comments on the quarter.

Thanks, Scott. Before we discuss capital markets, I will briefly review our third quarter results. Our FFO for the quarter continues to reflect consistent results driven by our core portfolio performance. We earned FFO of $0.83 per share, which compares to $0.80 per share in the prior year, or an increase of 3.75%. Although our operating margin dropped somewhat reflecting higher vacancy and bad debt levels, same store operating results were positive for this quarter. In light of all of the volatility in the economy and the financial markets, I was pleased with our portfolio results, which reflected $0.03 increase over the prior year results. I would also like to discuss a few specific items that were included in our numbers, but had no net impact on the overall results.

First, during the quarter, we recognized $16 million tax benefit, similar to the valuation reserve that was released in the first quarter of 2007. The majority of this amount related to the release of additional valuation reserves associated with deferred tax assets that were established over past years and were acquired from JDN. These valuation reserves were established due to the uncertainty that deferred tax assets would be utilizable. Based on -- upon the increase and fee and miscellaneous other non-real estate related income opportunities and the recent transfer of various management contracts from the read into the TRS, which will result in future taxable income, it was necessary to eliminate the reserve based on the current facts and circumstances, which now indicate that a reserve is no longer necessary.

Second, we recognized approximately $3.5 million of mark to mark hedging losses, which were generated by our additional equity ownership in MDT joint venture. These mark to market losses offset the mark to market income of over $3 million that was recognized in last quarter. There was no cash impact to our operations, however, as a result of these accounting-related adjustments. There was also approximately one million of transactional related charges incurred relating to our joint venture in Brazil. Both of these charges reduced our equity and net income from joint ventures.

Third, we recognize $5.8 million accounting loss on the sale of our 55% consolidated joint venture interest in a office building in Massachusetts that was formerly occupied by Cisco. Our partner triggered the buy/sell provisions and we determined that selling our interest in the building was much more economically and strategically attractive than buying their, interest despite the negative FFO implications for the quarter.

Finally, as is common in our business, we are involved in certain litigation matters. In one case, the jury came back with a verdict in favor of the plaintiff. Although we disagree with the jury's decision and are appealing the verdict, we have increased our reserves relating to this matter. This accrual significantly contributed to the increase in our other expense line item of $6.6 million over last year's third quarter amount. We do not believe there are any other potential material legal rulings that will impact our operations. Again, the net impact of these four items on our quarterly results was essentially zero.

Turning to capital markets. As we disclosed in our recent press releases, our financing activities on behalf DDR and our joint venture partners, aggregated $525 million during the third quarter. Aggregate financings totaled $1.2 billion for the year, $1.1 billion of which represented new capital. Although the credit environment has become much more difficult in the last few weeks, we continue to pursue opportunities with the largest U.S. banks, select life insurance companies, certain local banks, and some international lenders.

Across the board, approval process has slowed while pricing and loan-to-value ratios remain dependent on the specific deal terms, but in general, spreads are higher and loan-to-values are lower. The financial crisis is not unique to DDR or the REIT industry in general. Various governments throughout the world have announced numerous initiatives that are intended to strengthen and solidify the world's financial systems and restore confidence in the global economy. This process, however, will take some time.

Although the ultimate impact to the national and global economy is uncertain today, we believe it should become much clear over the next several months as opposed to years. Quarterly, we have always focused on the company's long-term growth and the primary focus on the current environment and navigating through the upcoming year and through 2010, as well. Early in the year, I provided you a capital plan for upcoming quarters. I would like to give you an update on that plan, having put 2008 largely behind us.

We'll outline our cash needs followed by our funding strategy. Excluding loans for which we have options to extend, we have approximately $400 million of consolidated debt maturing in 2009. We have approximately $350 million of joint venture debt maturing in 2009, of which our share is approximately $60 million. Of the aggregate $750 million to be refinanced in 2009, approximately $275 million of indebtedness is unsecured and less than $15 million of mortgage debt has recoursed to DDR. Of the $400 million consolidated 2009 maturities, we expect to repay approximately $50 million using a combination of equity raised from expected sales, retain capital, additional secured financings and our line of credit.

These obligations are comprised primarily of mortgages originated several years ago and assumed in various acquisitions. The loans are small, well amortizing and thereby have low leverage of approximately 50% loan to value. We expect to refinance roughly $70 million of mortgage debt on two assets. These loans were originated in 1999 and are also well amortized and have an estimated loan-to-value ratio of approximately 44%. The most significant maturity relates to the $275 million of unsecured notes maturing at the end of January, 2009. Although this maturity has been addressed and retained capital line of credit availability, additional sources of capital potentially include proceeds from sales initiatives mentioned earlier and which David will discuss in more detail.

Proceeds from new secured financing along with other initiatives currently under way. As Scott mentioned, our strategy includes looking ahead not just to 2009, but to the following years as well. Over the years, we have been very careful to balance the amount and timing of our debt maturities. We have no major maturities between February of 2009 and April of 2010, providing us with adequate time to ensure that the larger maturities, including our credit facilities which occur in 2010 through 2012, are addressed well in advance. The weighted average interest rate on the consolidate debt expired without extension options in 2010 is approximately 5% using current LIBOR rates. This includes $500 million of unsecured senior notes and $428 million of secured debt.

The estimated loan-to-value ratio on the consolidated secure debt maturing in 2010 is approximately 40%. Even in dislocated markets, this low loan-to-value should allow a very high likelihood that refinancing, even at increased proceed levels will be achievable. Potential sources, however, clearly also include capital recycling and retain capital. which has consistently been a cornerstone of our financing strategy. With respect to capital markets, we consider this type of spending -- I'm sorry, with respect to capital expenditures, we consider this type of spending to be completely discretionary.

Within our development and redevelopment portfolios, we have dramatically reduced expected spending and, as Scott described, are able to do so by phasing construction until sufficient preleasing is reached and financing is in place. Funding for these expenditures will provide -- be provided by capital recycling and asset sale activities, including potential joint venture and sale of certain developments, operating cash flow and existing perspective construction loans, a market we continue to tap for new financing.

Moreover, we have a significant unencumbered asset pool of approximately $5.5 billion, which continues to be available for potential financing. And we have the ability to replace over $500 million of unsecured debt with secured debt and still satisfy our covenants. Furthermore, one of the great benefits of our asset glass is the relatively low level of capital necessary to lease and maintain the portfolio.

We expect we will need approximately $26 million or $0.38 per square foot during 2009 for leasing and maintenance CapEx, including our proportionate share of joint ventures, which is in line with actual amounts expended in previous years. As David will discuss in more detail, we will continue to increase our flexibility as a result of pending joint ventures, third party asset sales and financing activities that are already underway. We will be extremely diligent to improve our balance sheet and this objective is at the top of each of our priority lists today.

These are difficult times, but once this period of macro-volatility is behind us, we will emerge a stronger company as a result of our ability to act quickly and opportunistically, as we have done in other challenging cycles. Moreover, we have the support of our large lenders and equity partners to get through this period of market uncertainty. I will turn the call over to Dan now.

Thank you, Bill, and good morning. Considering the enormous disruption occurring in the capital markets and the internal operating disruption that can result, we are pleased with the portfolio's performance this quarter and the focus of our employees. As Scott mentioned, leasing activity this quarter established a new record for aggregate new square feet leased. We signed new leases with Kohl's, Publix, Bye Bye Baby, Fresh Market, Bell's Outlet, and HH Gregg.

Not only did we produce 1.84 million square feet of leased space, but the highest production region was our southern region, which produced 182 leases and 940,000 square feet. Given our exposure to Georgia and Florida, it is important to note the outstanding deal velocity in that market compared to the negative headlines in each market, particularly Florida, continues to generate today. These results reflect certain changes in our leasing strategy, some of which have been in place for several months already. Our top priority is to maintain occupancy.

We're staying in front of tenants by conducting full portfolio reviews and travelling to their headquarters in record numbers. We're renewing tenants early and currently have 67% of our 2009 renewals either complete or in documentation. We continue to accelerate the time it takes for leases to be processed by our attorneys and revisiting deals that had previously been declined. Simply put, it takes more hustle and creativity to close deals and our leasing team continues to deliver.

Moreover, it is important to note that our capital contribution to these leasing transactions is minimal by nature of the community center business compared to other property types. We typically re-lease space on an as-is basis with minimal costs associated with new leases and essentially no capital expenditures on lease renewals. We also see clear trends across the broad retail industry. And in an environment such as this, there is a flight to value.

Consumers become increasingly price sensitive, cutting discretionary spending in favor of necessities, groceries, and discounted apparel and general merchandise. Retailers that can offer this price leadership and value proposition are outperforming those that cannot. We see that manifest itself every month in sales and margin results. The market share shift to tenants that offer value of convenience is accelerating dramatically.

Moreover, while retail bankruptcies and store closings are frequently in the news today, the reality is that most of our tenants are very healthy with larger and more diversified operations and much stronger balance sheets than in the past. Credit quality matters now more than ever. With respect to those handful of tenants that have recently announced bankruptcies, I would like to bring you up to speed with recent announcements.

With respect to Mervyns, we have eight locations aggregating 600,000 square feet and $3.7 million in pro rata annual rental revenues, which were on the initial closing list. Mervyns, however, has not rejected any leases and as a requirement of the bankruptcy law, is required to remain current in their rental payments. Mervyns announced last week that it intends to liquidate. They have not yet announced a definitive auction date for all its real estate and as a member of the creditor's committee, we are monitoring the proceedings very closely.

We are currently receiving positive tenant interest for many of these boxes and are prepared to respond quickly to opportunities to re-lease or sell if we are able to recapture some stores after the auction process. In the event that a competing retailer, adjacent property owner, or another interested party acquires a Mervyns lease, that buyer of the lease would assume all terms and obligations of that lease and we would not incur any cost or experience any interruption in rental payments.

As discussed in the press release we issued earlier in the week, our original underwriting on this investment was based on the value of the underlying real estate, reflecting the possibility that Mervyns would default or declare bankruptcy. We were the first buyer to acquire locations for Mervyns and as such, focused on interest on those assets we believe represented the best long-term real estate value. In addition, the acquisition was intentionally structured to protect our interests by providing a $25 million purchase price adjustment secured by a letter of credit provided by the seller. In addition, we have an $8 million letter of credit provided by Mervyns as security deposits on specific leases.

All of our Mervyns locations currently contribute less than $10 million per year, or approximately $0.08 per share after the debt service secured by these assets. Based on the current level of tenant interest in these locations and the funds available to us to cover the cost of retenanting the space, we do not expect these results to be materially impacted as a result of the Mervyns bankruptcy. It is worthwhile to note that these Mervyns are the exclusive collateral for a $259 million of mortgage financing, which is nonrecourse to DDR and MBT and matures in October of 2010.

We own the Mervyns assets in a 50% consolidated joint venture with Macquarie DDR Trust, in which we both invested roughly $75 million of equity in 2005, and we have received approximately $25 million in net cash flow after debt service since we acquired the portfolio three years ago.

Linens-N-Things has announced that they are liquidating. Their real estate will be sold at auction, which we expect to be held in early 2009. We currently expect to have ten closed locations that represent 325,000 square feet and $2.3 million in pro rata revenues. We have another 28 leases, which, depending on the outcome of that auction, could be assigned or rejected. These leases aggregate 940,000 square feet and $4.7 million in pro rata rents. In anticipation of a worst-case scenario, we have been actively marketing our Linens boxes under the assumption that we receive all of them back. And to date, we have received positive feedback on many from potential tenants.

Steve & Barry's which filed in July, has been purchased and will emerge from bankruptcy. Of our ten locations, three leases were assumed and assigned. The two locations that were rejected and the other five locations that are holding going out of business sales, aggregate 380,000 square feet and $1.9 million of pro rata annual revenue, or approximately $5 in annualized base revenue per square foot.

Similarly, Goody's which filed in June, emerged from bankruptcy earlier this week with new equity and debt capital in place. We had 16 leases rejected and expect to receive one more in early 2009. These rejections represent 550,000 square feet and $1.8 million in pro rata revenues. Our remaining 21 leases will continue to operate without interruption.

As a result of the new bankruptcy laws, we are seeing important differences in the manner in which retailers proceed through the bankruptcy process, compared to previous years. Retailers must now be much more prepared prior to filing bankruptcy because the window of time they're allowed to come up with a plan of reorganization or liquidation has been shortened dramatically. While it used to be common practice to lengthen the delayed decisions on leases, we are seeing tenants make decision much quicker, thereby giving us better visibility than we have had in the past.

We have also significantly adjusted our leasing strategy to meet our challenging environment. In response to recent tenant bankruptcies and likely space recapture, we have created a dedicated division within our leasing department to focus on marketing and retenanting of those boxes. As part of this initiative, we have a Vice President of Leasing and staff members actively monitoring and involved in the day-to-day events of the bankruptcy. This process increases our ability to pursue package deals or portfolio transactions.

We are dedicating considerable resources and putting significant focus on the retenanting process to make ensure it is (inaudible) and as profitable as possible. We are already evaluating a number of potential transactions with retailers who are obviously viewing this opportunity as their means to enter new markets and win market share.

Tenants that are actively making new deals that could potentially backfill these boxes include Bed, Bath and Beyond and their Christmas tree shops and Bye Bye Baby concepts, TJ Maxx, Marshall's, AJ Wright, Kohl's, JCPenney, Ross Dress For Less, JoAnn's, Dick's, Sports Authority, Pet Smart, Petco, HHGregg, Staples, Fresh Market, Best Buy, and several others. We expect more bankruptcies to occur and are positioning ourselves appropriately. That being said, we do expect a short-term hit to our portfolio lease rate because of downtime regarding the re-leasing efforts of the bankrupt tenants previously discussed.

Occupancy should trough midway through 2009 and then start to regain ground during the second half of the year. Turning to development, we have significantly reduced our anticipated spending for the remainder of 2008 and through 2009. One of the important benefits of our asset class is that we have the ability to phase development projects over time until comfortable leasing levels can be achieved. To further ensure judicious capital spending, earlier this year, we put new, more stringent investment criteria in place. The new underwriting criteria include a higher cash on cost project return threshold, a longer lease up period and a higher stabilized occupancy rate.

It is also important to note that among our development joint ventures, we, as a development director have the control over capital expenditures. With respect to our international developments, we will host a grand opening for our project in Manaus, Brazil where over 90% of the space has been leased in April of 2009. Funding for this development has been provided by a combination of retained capital from the operating portfolio in Brazil and our (indiscernible) revolver.

In light of the volatility of the Russian markets and the current unavailability of local debt, however, we will suspend development there until we see a debt market emerge that can finance our investments more efficiently. Our joint venture currently owns two sites there aggregating 69 acres. Operationally, this past quarter was very rewarding considering the environment in which we operate.

We have every expectation that 2009 will be equally as challenging. We are responding in a conservative manner by concentrating on our core operations and limiting spending. More importantly, this realistic approach has been carefully reflected in our 2009 budget. On that note, I would like to turn the call over to David.

Thanks, Dan. There have been two major themes you have been hearing about throughout the call. First, that we have been and continue to evaluate all sources of funds to ensure that we are liquid and well capitalized in the near term and long-term and prepared for threats and opportunities that may arise. We have sold assets in the past and we will continue to do so as these transactions representing one of our least expensive forms and capital and can have a very positive impact on our performance.

Second, we continue to be very prudent and selective in evaluating all expenditures on a risk-adjusted basis. We are viewing investments through a very different prism than used in the past. While this is an opportunistic time for many investments, or focus is only on pursuing those in a fashion that does not cause any stress to our balance sheet. I would like to give you a brief update on how we have implemented those strategies, an idea of what we expect to occur over the next few months.

As described in last week's press release, we closed on $73 million of asset sales during the third quarter, bringing the total to over $100 million of asset sales year-to-date. Pricing on these asset sales reflect reasonable cap rates given current environment, with an average cap rate below 6% for the third quarter. Pricing on these asset sales reflected some vacancy, but generally reflected cap rates of roughly 7% for smaller assets in non-core locations on a fully leased basis.

The sale of our Massachusetts office building is a good case study on how assets dispositions may incur a short-term loss, but are economically appropriate under a long-term scenario. We had acquired this asset as part of our acquisition of American Industrial Properties and held our 55% interest in a consolidated joint venture with an insurance company. The in-place cap rate on the sale is 3.4% and reflected in the property's 70% occupancy rate.

This assets sale made sense in terms of our overall business strategy and generated $20 million of liquidity, in addition to the amount of capital that would have been required to retenant the currently vacant space. These aspects of the sale significantly outweighed the near term costs of the $0.05 loss that we included in FFO due to this sale. Other dispositions completed during the third quarter include the sale of Brownfield Jersey City assets, which was fully occupied by two tenants with long-term relatively flat leases.

A private individual with local financing purchased this asset at a cap rate in the upper 6s. Also, during the quarter, we sold four Singleton in assets, leased to Pet Smart and JoAnn's at cap rates in the low to mid 7%. Although these sales may reflect negotiations that began in a stronger economic climate, transactions continue to move forward and investors continue to have an interest in quality real estate with predictable cash flows at their pricing. As evidence of this continued activity, last week we put $23 million of assets under contract.

This week, we put another $35 million of assets under contract (inaudible) and an additional $27 million of asset sales. Plus, as Scott mentioned, we signed a term sheet with an institutional investor that we have worked with before on approximately $900 million of asset sales at a cap rate near 8%. The transaction is expected to generate over $270 million of net proceeds to DDR more than $170 million of which will be available immediately upon closing, which is expected in mid-December. These proceeds, in turn, will be used to deleverage our balance sheet. We will provide further details on this transaction once the sale is closed.

We are also having advanced discussions with other large institutional capital sources regarding potential joint ventures. In addition, we're in the process of offering a portfolio of stores to the largest and best capitalized retailers in our portfolio. The potential sales of these relatively flat cash flow streams could generate in excess of $200 million of net cash proceeds. Currently, we have a total of $71 million in asset sales under contract with the weighted average cap rate around 8% and another $92 million subject to LOI with weighted average cap rate in the low 8s. Perspective buyers range from local individuals to larger, more regional private investors, to large reads.

We continue to receive bids on assets we have listed and will push forward to close the sales. We're working to tee up additional sales for 2009 closings, including a mix of quality assets likely to be placed in joint ventures, as well as non-core assets and singleton in assets with flat, but highly predictable cash flows. We still see good opportunities to monetize our investments in these assets and reduce leverage to recycle the capital in the new investments.

Similar to Dan's comments, with respect to our leasing team, our transaction team is working harder, faster, and more creatively to find buyers and close deals. We're also moving forward on the formation of an institutional venture to invest in the stressed development projects and other high value add opportunities. We are currently in advanced stages of documentation with select lead institutional investors with the collective objective of executing a first closing before year end, given the pipeline of very attractive opportunities that we're tracking today.

Thereafter, we expect to have subsequent closings with additional institutional investors during the first half of 2009. We would use this venture to selectively acquire projects that become available as a result of the considerable market dislocation. This is an opportunistic time for many investments, but we continue to be very prudent in choosing investments with the highest risk adjusted returns. We see a significant number of projects with some level of distress and, increasingly, projects offered considerably below another investor's cost basis in an effort to avoid personal bankruptcy.

We are underwriting those using a very conservative assumptions, which quickly eliminate the vast majority of those projects. That being said, there are some very compelling opportunities that are becoming available at highly favorable terms and pricing. At this point, I would like to turn the call back to Scott for his concluding remarks.

Thanks, David. In our remarks today, you have heard how we are making proactive adjustments to our operations and long-term strategies and how our balance sheet strength is our top priority. We intend to generate capital from expected asset sales, including sales to JVs, retain capital, and existing and perspective financing to fund our debt maturities and to the extent we deem appropriate, any further capital expenditures. With respect to the remainder of 2008, the primary uncertainties are the timing, volume, and pricing of merchant billing sales. Due to the significant volatility in the market, we may not hit our previously announced target.

Obviously, current pricing for larger, high quality assets is not fully reflecting the positive attributes, so we may well choose not to sell all of our potential merchant billing assets this year. Our goal is to generate proceeds that can be profitably reinvested, not just to look at booking near term merchant billing gains to achieve earning starts. The risks associated with the recognition of these gains, in fact, have largely clouded our stores, which as you've heard this morning, is quite simple and consistent. To improve the transparency of our business and to encourage investors to focus on our recurring, reliable, operating revenues, we have made two important changes.

First, at the request of several analysts, we added disclosure to our quarterly supplement, which lists all developments and redevelopments that comprise assets that could be sold to generate and gain recognition. Second, with respect to the remainder of this year and beyond, based upon extensive feedback from numerous investors and analysts, we will be providing guidance based only on operating FFOs, exclusive of gains, losses and other items relating to the sale of assets. We believe this change in guidance and reporting will improve the transparency of our business, highlight the visibility and consistency of our earnings, and return the focus of our business to where the vast majority of our cash flows are earned.

That being said, excluding the gains and losses, we expect 2008 FFO to be in a range of $3.22 to $3.28 per share. Even at the low end of this guidance, at the current share price, we trade at 2.6 times FFO. This multiple reflects more than a 60% discount to our peers and to the industry. While this guidance is a more appropriate reflection of our core operations, we still do believe that there may be significant transactional income that would be added to this number that may be recognized before the end of the year.

With respect to 2009 guidance, however, given the extreme uncertainty in the markets, there are too many significant variables that are too fluid for us to provide the same level of formal guidance that we had traditionally provided on our third quarter conference call. That being said, our best estimation at this time, based upon our outlook regarding leasing, development and financing activity is that 2009 FFO should be approximately $3 per share. This expectation includes net deleveraging of more than $500 million, increases in interest rates, and also includes the non-cash impact of the change in accounting treatment for the convertible securities, which amounts to approximately $0.12 per share.

As referenced above, this figure excludes any gains and losses from asset sales. Based upon these expectations, management has recommended and the board of directors has approved a 2009 dividend policy that will maximize our free cash flow while still adhering to REIT payout requirements. This policy amounts to an annual 2009 dividend per share of approximately $1.50 to be paid quarterly. To further enhance our liquidity and to apply this updated mindset regarding payout policy, we will omit our fourth quarter 2008 dividend. This will generate more than $80 million of additional capital to further increase our liquidity. As a result, our 2008 common share dividends will aggregate $2.07 per share.

In total, the change to our 2008 and 2009 dividend policy should result in additional free cash flow of at least $230 million, which will be applied primarily to reduce leverage. In summary, we have a great company and an outstanding portfolio and we are hopeful that the dramatic improvement in our balance sheet and the significant change in our policy as to earnings guidance will eliminate distractions and enable investors to focus on the exceptional company we are and the quality of our operating cash flow. At this point, I will return the line to the operator and receive your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question will come from the line of Christy McElroy with Banc of America. Please proceed.

Hey, good morning, guys. Can you provide some more color on what types of assets were included in the sale announced today? Would you say they're a good representation of your overall portfolio or are these more non-core assets?

These were -- the 13 assets as a whole represent a pretty broad spectrum of our assets by geography and even product types, and would say they are reasonably representative of the portfolio as a whole. It's not the best, but wouldn't consider them non-core. They're good shopping centers.

Frankly, Christy, the best way to look at that is that if we put assets in a JV, those assets that we want to continue to be invested in, and in this particular joint venture we have a promote structure that enables us to benefit from value creation in those assets over time. When we're dealing with non-core assets, we typically don't keep them in joint ventures because we consider our joint venture partners just like our shareholders, and we don't want to put in assets that we wouldn't want to own ourselves. So, you can always assume that when we announce a joint venture, those are closer to core than non-core.

Thanks helpful. Thanks. And then you mentioned that asset sales are your least expensive option for raising capital today. Can you walk through how you think about the cost of raising other types of equity capital as you look to de-lever next year?

Well, I think we specifically said the retain cash flow and now with the revised dividend policy that we generate is the lowest cost of capital and the most certain capital in this environment and asset sales then behind that, based on where other alternatives are today. As we look at an extremely depressed stock price that implies a cap rate that is well above where we continue to execute on asset sales, it seems clear that generating equity from asset sales is the more attractive option.

So, where you're getting the $500 million is basically the asset sales and the dividend cuts?

That is accurate.

Thank you.

And our next question will come from the line of Steve Sakwa, representing Merrill Lynch. Please proceed.

Thank you. David, when you're talking to these institutions about these JVs, I guess, how have their return expectations changed? What are they looking for? What kind of hurdles do they want to hit in these kind of arrangements?

Well, this -- it depends on the institution, Steve, whether they're a leveraged investor, an unleveraged investor. But typically, the leveraged investors that are willing to tolerate a little more risk are looking for a current cash flow of roughly 12% leveraged. And something north of that in IRR over a long-term hold.

I think it's part of managing the gap in expectations today. We are finding a number of investments -- investors with interest in downsign protection or minimizing the risks there and I think our assets in the long-term cash flow serve that very well versus some of the investors a few years ago looking for the extreme upside. So, for us, especially in a joint venture with promoted structure, we still believe we can capture that upside and our assets naturally deliver the stability that many of the investors that are still in the market are looking for today.

Ok. And then, Scott, I just want to make sure I understand. When you were talking about this whole deleveraging process, kind of put in perspective, how much exact capital would you like to raise or how much debt are you looking to effectively pay down over the course of the next, say 15 months?

I think that $500 million target that David mentioned is a good ballpark of what we would like to achieve in 2009, as far as deleveraging. But I think what is equally important, Steve, is that we have a clear visibility on addressing all our debt maturities far in advance. So, it isn't purely a matter of deleveraging, but it is also a matter of terming out a lot of our debt and finding other sources of capital that are more reliable long-term and basically terming out our debt maturities.

Ok. But I guess between the dividend cut and the large joint venture that you've just raised, that effectively is the $500 million, so --

Well, actually, I was talking about $500 million before the dividend cut. In terms of transactions.

Ok. Thank you.

And our next question will come from the line of Louis Taylor, representing Deutsche Bank. Please proceed.

Thanks. Good morning. Scott, can you talk a little bit about the rationale in the dividend cut in terms of maybe other options you thought about, maybe doing a dividend suspension for a couple of quarters or maybe taking some of the money and actually buying your stock a little bit as well. So, can you just go through the thought process there?

Well, I mean, in terms of -- I mean, the dividend cut, Louis, is it starts with capital, whether we use some of that capital to repurchase our securities, whether they be debt or equity is a completely different decision and I wouldn't rule that out. We just felt that based on where the shares were trading and where the investors seem to be concerned about our company's balance sheet and liquidity, it was really inappropriate to maintain the dividend at such a high level. And we thought that the capital could be better deployed in doing some of the things you're suggesting.

We have debt securities. Outstanding trading is huge discounts and we have abilities to take this retained capital and go out and buy back that debt and eliminate any risk going forward and on a very highly accretive basis. So, the interesting aspect of the de-leveraging strategy today isn't just to de-lever but it is also to de-lever and take advantage of investment opportunities that give us historic yields on our investment and at the same time, give us an opportunity to increase the quality of the balance sheet. I think we would be remiss if we didn't take advantage of that opportunity.

Ok. Then just in terms of maybe David, on the large JV announced this morning, what's just the status of that and is it just at the LOI stage or are you at a signed contract stage? Just where is it in the process?

Well, we have executed a letter of intent that agrees on all of the economic terms and the partner has been engaged in due diligence for a few months now. We expect to be under contract shortly and we expect the transaction to close in mid-December.

Thank you.

And our next question comes from the line of [Quinton Zalaley], representing Citigroup. Please proceed.

Good morning. Michael Bilerman here with Quinton. Just speaking with the joint venture for a second, can you walk through the cap structure, you have $890 million total assets. How much debt is going along side that? How much seller financing would you be providing to the venture and just to try and understand the proceeds that you're taking out and the timing, I mean, the $260 million and then and then total, but only $170 million up front.

Now basically, Michael, the transaction is structured with overall leverage of about 70% loan to the value, as addressed in the transaction. Approximately 50% loan-to-value is in the form of third party financing and approximately 20% is in seller financed mezzanine paper.

The reason there's a difference between the immediate proceeds and the ultimate proceeds on the transaction to us is because half of the assets, roughly half of the assets are already have financing in place, and the other half of the assets are unencumbered and we're in negotiations with lenders on a loan secured by those assets and we basically structured the transaction with the turns we anticipate that loan to provide.

So, there's about $220 million of existing debt that's going with it? You're going to go out and get another $220 million and then --

There's more than that. But at this point, our historic policy has been that we haven't announced the transaction until we were further along. At this point, we saw a signed LOI on a deal of this size in a market like this was a material event to provide some details on, but would not look to provide complete details on this transaction until we're closer to closing.

How is the seller -- how did you think about the $180 million of seller financing and what sort of term is that being provided? What sort of rate is that being provided?

Michael, we're not going to get into those details on this call. I'm not sure we ever will get into that level of detail because we're in negotiations with other institutions and similar joint ventures and we don't want them to use the terms of this joint venture against us in other negotiations.

But I mean if you're providing capital to a joint venture, I would assume that's going to be an important piece of your capital raising strategy, but also it will impact how your numbers are going to be.

Yes, but the capital that we announced is net of that. It is all net new capital. Net of any seller financing that we're providing.

The 100 -- if it is 70% levered with your seller financing, that only leaves at least $260 million total. Why is there a difference -- and that's for total. You only have 80% of that. I'm just trying to understand how you're --

Yes, 100% of the proceeds from the joint venture. We're selling the assets of the joint venture. We continue to own 20% on a go-forward basis. I don't understand your point.

Okay. Can you talk a little bit more -- have you thought about it from a metric standpoint in terms of de-leveraging where you say okay, today I'm at this leverage ratio and this fixed charge. I want to get to X and Y by the end of next year and A and B by the year after.

Yes, you know. We look at it both from a covenant standpoint, as well as from the standpoint of where we would calculate our leverage today based on our metrics, and I think the top priorities as we look at this strategy, are one in a market where the investor feedback we've gotten is an extreme concern about the liquidity situation of every real estate company to, at minimum, make sure that we have addressed our maturities over the next several years with a clear plan and with as much of that plan as possible being events that are completely under our control, as opposed to dependent on a third party, and along with that strategy, to lower our leverage by any metrics, whether it is ours or the banks by several hundred basis points. So, say lowering a leverage metric by 2% to 5% points.

Okay. And just one last one. Scott, do you have any other -- what's your stock holdings today and any other margin that you may have? Where does it stand?

I have about $500,000 and change in remaining shares in the company and their pledges collateral to a line of credit that is not that is not a traditional margin low.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Nick Vedder, representing Green Street Advisors. Please proceed. Mr. Vedder, your line is open.

Thank you. Good morning. In your prepared remarks, you mentioned that you have roughly $500 million of secured debt that you could place on encumbered assets. I'm just curious, is that as of Q3 or is that including some of these potential asset sales?

That is as of September 30th.

Ok.

Sales reflected in the third quarter, what we close would be reflected in those metrics, what is post-September 30 closing is not.

Great. Thank you. In terms of your total and your debt covenant and your line of credit, with respect to your total debt, over your total assets, you're boxed in at 60%. Where did you stand as of Q3?

Well, actually, we had the ability to go to 65%, too, for a few quarters there. We're under the 60% threshold as of September 30.

Ok. Great. Thank you. How much room do you have to increase debt under that covenant? Are you close to 60 or do you have some more wiggle room there?

Well, with the transaction we announced today and with the dividend policy we have announced, we have a significant cushion under there.

Ok. Thanks.

I mean, several hundred million dollars.

One last question. With respect to the assets sales that you have under contract, can you provide some comments in terms of the characteristics of those properties and are they core, non-core, are they unencumbered properties or is there assumable debt? I'm trying to get a feel for what those properties are like.

Are you talking about the asset sales versus the JV?

Yes.

It is a broad array of properties that are all considered non-core. There's one large package of single tenant CVS drugstores, for instance. Pretty flat leases. There's properties that have fairly low occupancy where buyers are paying for the pro forma income where we don't share the buyers' optimism as to the future of those assets. None of those assets would be considered assets that we would want to maintain in the core portfolio.

Ok. Great. Thank you.

Our next question comes from the line of Jay Habermann, representing Goldman Sachs. Please proceed.

Hey, good morning. I guess I want to start with Dan first. You mentioned occupancy dropping sometime mid next year. Can you give us a sense of where you anticipate occupancy going over this time and you mentioned more bankruptcies, anymore specifics there?

Well, as far as I can -- for our 2009 budget, we see it across the board dropping between 150 and perhaps another 200 basis points from where we are today. And then over the course of the third and fourth quarters, we see ourselves battling our way back up to maybe a little better than where we actually are today.

A lot of that, Jay, is really going to depend on what happens with the final disposition of these bankrupt tenants because we are assuming that we have all of the Linens-N-Things back and vacant, and we're assuming that we have all of the Mervyns stores back and vacant. And It is unlikely that some of those stores will not be purchased in auction.

But exactly how many is pretty hard to predict based on the bids that have been received to date and the negotiations that are ongoing. But 150 to 200 basis points seems to be where we're headed. And by the end of next year, we should be back a little above where we are today.

You mentioned in the release as well, there's been pretty strong interest for the Mervyns spaces. Can you give us a sense of perhaps how much of that space, there's been interest already indicated for on the part of retailers?

Sure. Right now, probably a little less than half of the Mervyns spaces have, I would consider very, very strong interest where actual economics have -- discussions have commenced. The other half is going to -- it may take a different type of occupant.

We may have to split the boxes, for example, as opposed to someone taking the entire box. We know that there's currently transactions being discussed amongst the debtor and tennants directly. So, we're going to have to see. But, we're very comfortable that the downside on approximately half of the Mervyns boxes should be -- we should be able to minimize that. As far as your second question which was future bankruptcies, it's a very difficult question to answer. There are tenants, quite frankly, that are operating out there today, not in bankruptcy that many people thought would already be in bankruptcy.

Certainly, it's no secret that we have a large exposure to Circuit City and Circuit City has had its share of issues. There are others out there, as well. It remains to be seen what happens with the vendor community, because what's happening with the retailers as we've gotten very involved with the Goody's process, the Linens process, the Mervyns process is that it's the vendor community that's putting these tenants out of business. It's not the landlords and it's actually not even the banks. It is the vendor community and if the vendor gives up on the retailer, then it's sort of lights out for that retailer.

So, the tenants that continue to receive vendor support will be able to limp their way through and the tenants that don't won't make it and it's going to be very interesting to see. Right now, it seems like the vendor community is not incentivized to put anyone out of business. And that's what we're seeing, because if you go into some stores that are really undercapitalized today, they still have a lot of inventory and a lot of merchandise. So, vendor support is still there for some. The ones that have disappeared, though, and particularly in the Linens-N-Things situation, if you shop their stores, you can tell that the vendor community had quit on that retailer very early in the process.

You know -- excuse me, Jay, one other thing I think all of you should keep in mind as you look into the Christmas season and so forth. A lot of people try to equate the health of retailers to their sales volumes and this is going to be a year where retailers are going to be looking for margins and not looking for high volume. Retailers are not going to go out on a limb this year and buy a lot of inventory and put it on the shelves and hoping that the customer shows up.

So, even though you may see some drops in same store sales over the holiday season, that doesn't necessarily mean that retailers are not achieving their plans and in many cases, it may actually enhance their profitability and the quality of their credit. So, it is going to be an interesting season and oftentimes people watch CNBC and they just look at the sales number. One tenant in our portfolio, for instance, that's a good example of that is Old Navy. We've seen their sales drop dramatically across the portfolio, but they're doing better on their margins than they were doing before at higher volume.

And Scott, you talked about de-leveraging and obviously, given the weakness in the stock price of late, it certainly puts more emphasis on probably selling more assets here in the near term. Given that 2010 seems to be the number that everyone is focusing on these days, can you sort of respond to that in terms of, again, sort of the $5.5 billion of unencumbered assets? You're talking about selling some boxes back to some big retailers.

Yes, we have -- we're in discussions with Wal-Mart, Target, Lowe's, and others to sell them back flat leases in the portfolio that improves our growth rate. And it also enables us to access capital at a fairly good price. Typically, I don't want to --

Sub 8%?

I would expect it would come in at sub 8%. You basically kind of have to look at what their cost of capital is for the various retailers. Obviously, Wal-Mart has the lowest cost capital of the group. But, that can generate upwards of $200 million in proceeds to the Company. It is highly efficient transaction and we can deploy that very accretively into investments.

We will be aggressively applying these proceeds to repay some of those maturities in advance. We'll be in the market trying to buy those bonds at a discount. Because again, as I said before, it is truly an historic opportunity. We have converts out there trading right now at yield to maturity north of 20. So, the ability to sell a box to Wal-Mart at a -- anything south of an 8 cap and take that money and put it to work at a 20% yield to mature is a pretty remarkable opportunity, which we're going to aggressively pursue.

Ok, great. Thank you.

Our next question will come from the line of Carroll Campbell with Hilliard Lyons. Please proceed.

Good morning. I just had a question. Have you all taken care of refinancing any of your 2009 maturities at this point?

Well, I think we addressed that in the script. The only major maturity is at the end of January and that will be free financed from retained capital and our credit line availability.

Ok. Thank you.

Our next question will come from the line of Michael Mueller with JPMorgan. Please proceed.

Yes, hi. I think you may have touched on this at various points, but Scott, you talked about cap rates for -- you talked about assets you would want to hold and then you talked about assets you wouldn't want to hold. Can you talk about where you see the cap rates for this -- where institutions will pay for the stuff that you would want to hold, the core stuff versus the non-core, which looks like it's trading at around 8%?

8% cap is kinds of a ballpark. There's some, there will be deals that get done a little south of that, a little north of that. But that's the ballpark, Mike.

Ok. That's the ballpark for pretty much for everything?

For the institutional quality stuff today. The irony is that noninstitutional quality stuff, the non-core stuff, it actually trades at cap rates typically lower on income and place because the buyers are buying pro forma income. So, from a standpoint of taking income off of our income statements and putting it to work in new capital, a lot of those transactions are actually getting done at ridiculously low cap rates.

For instance, that office building in Boston that we're selling is like a 3.4% cap rate because there's a fair amount of vacancy. So, we're only taking a small amount of income off of the income statement and generating a lot of capital that we can put to work immediately at much higher returns.

Ok. And then, David, I think you were talking, you talked about assets under contract, assets under letter of intent. Outside of the joint venture that's going to -- that you close in December, can you just quantify what do you think will hit in the balance of '08 in terms of asset sales and really just a magnitude, like a ballpark range for what you think could be the assets sale number in 2009?

Yes. So, the assets we mentioned either under contract or subject to letter of intent. We would expect the great majority of that to close during 2008, so looking at the next, really six weeks for the closing there. Due diligence has been done in many cases. In other cases, it is just extremely simple assets based upon their single tenant, highly stable cash flow. At this point, the outlook for 2009 asset sales includes the transactions with large, well capitalized retailers that Scott mentioned where they could be repurchasing some boxes where they currently have long-term flat leases with us. It also includes roughly $100 million of additional non-core sales.

We've been, as Scott mentioned, continuing to find buyers for these assets, somewhat because the individual assets are smaller, somewhat because you've got individuals that simply have a more bullish outlook on an individual local property than we might. So, the target on that number, the expectation for non-core sales is $100 million for 2009 and then the other less-tangible initiatives we mentioned in terms of discussions regarding other joint ventures are not included in those figures, but could easily amount to several hundred million dollars.

Ok. And the retailer-related transactions, that was a couple hundred million dollars?

Could be as much as $200 million is what we outlined based on packages that are out there. But safe range would probably be $100 million to $200 million.

Ok. Thank you.

Our next question will come from the line of Jeff Donnelly with Wachovia Securities.

Thanks. Actually, David, I put a finer point on that. Are you able to bracket for us the prospects for realized gains and losses on asset sales across the Organization in 2008 and 2009? Maybe like a sensitivity at different cap rates?

Maybe you didn't hear that statement about not providing guidance on gains from asset sales?

I did. I thought I'd ask. [ LAUGHTER ]

Well, we're not going to do that. But we probably -- as we do our formal guidance later in the quarter, we'll probably have to look at that more closely because it may affect dividends during the year.

Understand. I guess part of the reason I was asking, Scott, is that I guess I'm wondering, do you think there is a greater chance that you recognize losses instead of gains on these? I'm just curious that your basis isn't --

No, I don't believe that's going to happen.

Okay. And then concerning your 2009 guidance, what are you anticipating for things such as bad debt, expense recapture efficiency, and maybe even rent concessions with existing tenants, because we're facing a difficult holiday season on top of this already tough environment. I think they would want to know you've baked in a fair degree of conservatism to arrive at your $3 guidance.

With regard to the bad debt, it's relatively consistent. I think for a big chunk of the expense that we've been recognizing this year, probably has taken into account the tenants that are of the lesser quality, if you will. And so we've already recorded, I would say, a significant bad debt expense this year and when you look at the quality, the credit quality of our asset base kind of on a moving forward basis, we expect, I think really, bad debt per se to be a little bit lower. They have indicated there's going to be some actual occupancy -- our occupancy right now is a little bit lower and that will be increasing throughout the year.

Jeff, in regard to rent concessions, we've had surprisingly a low amount of rent concessions in the actual core portfolio, which is one of the reasons why it is holding up so well and performing well. Interestingly though, we have had a number of tennants try to retrade us on development projects that have not yet commenced. And as a result, since that spending, as we've talked about completely discretionary, if the tenants want to retrade the deal that reduces the return below the level that we've prior approved, we just won't build the project.

And what that's going to do is it's going to make it very difficult for the tenants to hit their open to buy for the given year, and actually will give us more pricing power going forward. We are under no pressure to build projects unless they hit our threshold returns, and most of the retrading that we're seeing is on those projects where tenants feel that they have the leverage in the current environment. Of course, the response to that leverage is not to build the project.

Where are those development thresholds going?

Excuse me?

Where are those development thresholds going in this environment?

Well, for us, they're going up because we're requiring them to go up or we're not building the project. Overall, for some of the projects that are in the process, they have cracked down. We have projects in the low 9s that are coming out of the ground, some in the high 8s.

The exciting opportunity in the development business is going to be in taking on projects that are already in tough shape with private developers who are capital constrained and unable to deliver, and working with banks to capture those projects and use the bank's capital to get them finished. And I expect returns on those projects to be, frankly, well north of our 10% threshold.

I think one of the reasons that, contrary to some other companies who are dismantling their development operations, we're keeping ours intact because we think our competency is going to be a very rare resource that banks are going to really want to tap into in the coming year or two because they're going to be forced by regulators to take back a lot of the projects that are in process that are already entitled, already leased, but just can't get financed. And they're going to turn to people like us to work it out for them and to get those projects finished. So, we're pretty excited about that opportunity. And that's why we've created this value fund with institutional capital to take advantage of that.

Jeff, I think another important part of it is sometimes we just talk about these headline return numbers. But I assure you there's also been extreme focus from the senior most members of our development department up to the senior members of management to make sure that the underwriting of these developments is extremely cautious and extremely realistic reflecting the current market environment, whether that's a timing issue on lease ups, whether it is more clearly quantifying risk in an environment that clearly has more risks.

So, it is not only the headline number going up, it is that we are much more carefully underwriting this and believe we've got an exceptional development team that can do that, even in an environment with this many challenges and an exceptional leasing team that can do that in terms of their relationship and knowledge of what retailers will actually pay to be on a site.

Thanks, guys.

Our next question will come from the line of [Anar Ismilo] with Jim Realty. Please proceed. It looks like he's removed himself from the queue. Our next question will come from David Harris with Royal Capital. Please proceed.

Good morning, everybody.

Good morning.

I have two questions. One big picture question, and then a point of detail. Scott, if I could ask you the big picture question. You've been through a number of years with experience in the businesses.

We lost you.

Can you hear me?

Now we can. We lost you from the beginning.

Scott, if I could ask you a big picture question, does this feel worse than the early '90s from an operational sense forgetting the capital markets?

I would say that that was pretty bad, but yes, I think this is worse.

It is worse now. Or you expect it to get worse?

No. I think it's worse now. I mean, I think that it was difficult to get a loan in 1991 on a real estate project. One of the problems with that question, David, that's a good question, is we're a very different company today than we were then, so we have access to the very few loans that are out there where we may not have back before we became a public company and had this size and scale that we have today.

But back in the early '90s, there were certain aspects of capital markets that were closed. It wasn't all of them. And the dislocation and the corporate bond market today is really unbelievable. And much worse than it was back then, I believe. There was a lack of liquidity back then because of -- there was really occasioned by the tax reform act of '86 and the S & L crisis and taking that liquidity from the syndication market out of the real estate industry.

But this particular liquidity crisis goes well beyond the real estate industry. It goes throughout the entire economy. That really wasn't the issue back in the early '90s.

I was thinking more of your comments and comparisons that you drew on the operational side.

I'm sorry?

Can you comment as to comparisons between now and back in the early '90s on the operational side, the property side? I think most of us have a fair handle as to how terrible it is on the capital markets.

I think that operationally, maybe Dan can speak to that even better than I can. But other than these few tenant bankruptcies, operations side right now is pretty good. We're not feeling a lot of distress out there. I mean, we just went through our portfolio reviews and went through virtually all of our properties with our leasing agents and I was frankly amazed at the level of activity that's out there and the level of interest from retailers and boxes.

The problem with the retail business is that it is highly competitive and there are times where retailers will take market share from each other and people come and go, and we're just in one of those places because of the lack of capital in the system where we've got some of the weaker retailers are disappearing and being replaced by others. And when I look at that operationally, in '09 is more of an issue of downtime. Until you put a stronger retailer in the box, I really don't think we're looking at a severe dislocation in the retail market, particularly at the value retail level where you're dealing with everyday necessities.

David, the biggest difference operationally from the tenant community is that today our tenants are better capitalized, they're stronger, they have more market share, and they have, most importantly in this environment, much better control over their inventory. And tenants are able to gauge their inventory needs to a point of profitability, much better today than they did in the early '90s, which is where we had significant fallout.

That being said, there are far fewer tenants today than there were in the '90s, so it is nice that our tenant community is healthy because we need them. And in the early '90s, you, in some cases, had three, four, and even five players in every category. But today, because of consolidation, we're really down to two. So, the options on re-leasing space and operating in this environment, the operative tenant roster is shorter, much shorter than it was in the early '90s, but at the same time, the tenants are healthier.

Okay, thanks. A point of detail. If I could go to you, Bill, on the operational guidance that you have given. I'm right in thinking that that would exclude any transactional income that might have been generated through the joint ventures?

Yes.

Ok. Good. Thank you.

Our next question will come from the line of Jeff Spector with UBS. Please proceed.

Good morning.

Good morning, Jeff.

I just want to make sure the new guidance, is this a permanent change, Scott?

Yes.

Ok. And then just a quick question on the credit markets. Obviously, they're still frozen. We're hearing that a lot of banks have stopped lending, even in the past week because companies continue to draw down their lines of credit. Can you just talk about some of the conversations you had this week, even just in the past couple of days?

Sure. I'll take that.

I'm going to have Francine Glandt answer that because she talks to these banks almost every minute.

Yes, hi. We are talking to banks daily, and actually we're in the market right now with some financings and have received quotes, last week we received a few and we've got some this week as well. There are still key relationships that are lending to us. I will say the loan-to-values are lower. What would be quoted as a 60% loan-to-value, in our eyes is probably a low 50s to mid-50s when you factor in the calculations and cap rates and various reserves that the lenders use.

The hold levels are lower. A bank typically would have held $50 million to $60 million in some cases. They're now asking for $25 million to $30 million. And the pricing, of course, as Bill mentioned, is a bit higher. They do take longer to close, but they are do-able.

I would say one benefit that we have is that we can take financings and break them up into smaller portfolios. We can put properties individually into loans of $30 million or $35 million, as opposed to having to put together a consortium of banks for $200 million, say. So, that is an advantage in this market where smaller does tend to finance better.

There's one other thing that I would like to mention, which hasn't been talked about much by anybody. Necessity is the mother of invention and there are a number of people out raising funds right now to go out and fill the void that's left behind by the banks in providing debt. I had dinner last night with somebody who runs one of those funds who's just raised $3 billion in institutional capital, and there are several of these out in the market place.

So, while it may be pretty tough right now for a lot of people, there is going to be lenders out there that are non-traditional, that are going to start to fill that void. And they may even provide capital to people like us to go out and buy some of our debt in the market place. There is some good news on the horizon, too. It's not all bleak.

Okay. Can you mention what cap rate the banks are talking about over the last week, I guess, in their quotes?

Sure. The typical cap rate that I'm seeing these days is in the 7% to 7.5% range. Of course, it depends on the deal that you're shopping, but that's what I've seen.

Thanks. And then Dan, just on the leasing front, can you talk a little bit more about the progress you've made in '09? I believe you said you're about 67%, I think, is that in contract stage?

That is correct. That's either executed or in contract and that's on renewals. As we look at our '09 budget, we've made the conscious decision to advance discussions with tenants on renewals because we want to have obviously clear visibility on what those tenants intend to do. Historically, we have not done that. That is a change in policy for us. Because we like the idea of tenants missing their renewals because we get to mark that lease to market which is usually substantially higher than the actual renewal price.

So, we've been actively out there. We have a staff of specialists that just handle renewals, because it was something that we are extremely focused on and we're very comfortable with where we are. I think if -- at the time of -- the weekly volume of transactions, as you can see from our numbers, is so high, much higher than we thought it would be, that 67% number is probably by the end of this week, by today, will be closer to 70% for '09.

Can you let us know what type of spread you're seeing?

Yes, well, it is very consistent with what we've seen with the past. Our spread, when we do a new lease is down a little. We had some quarters in the mid to high 20s and on new leases, we're seeing in the mid to high teens for the most part. On renewals, we're seeing in the 8% to 10% range and the blend is going to -- is really in that sort of 10% to 12% range. One of the things that could skew that number, though, that we're very sensitive to is what happens with the vacant boxes.

Because there will be boxes, no question, that we do deals with tenants at a lower rent than Linens-N-Things was paying or Mervyns was paying. And that could have a negative impact on that number. But absent those extreme situations, we're trading a little lower in the new leases and we're trading within our norms on the renewals.

Ok. Just last question, Dan. I don't know if you can answer this, but clearly, one of the pressures the vendors are -- one of the pressure points is from the factors. Do you have any color on, I guess, what's happening on that side of the equation?

Well, it is not pretty. There's no question about it. The factors are scrutinizing the retailers in a way that they've never done before. Terms for retailers are continuing to shrink, for the most part. And that is adding to some of the stress that is on members of the retail community.

Now, some of the vendors are making up for that. There are certain vendors out there that fear the day when there's only one retailer that is actually a distribution channel for them. So, they're keeping other retailers afloat themselves, where they're actually almost factoring themselves. But the pressure currently in the vendor community and the factor community is as extreme as you would imagine in a market like this.

Ok. Thank you.

Sure.

We have a follow-up from the line of Quinton Zalaley from Citigroup. Please proceed.

This is Michael Bilerman. Can you just expand on the litigation and the legal verdict and the $6 million of cost and what that sort of related to and what the status is?

Sure, Michael. We had a tenant at one of our shopping centers who claimed a loss of business by an improper operation of a valet parking service, sued us for loss of business over a period of years. Won a jury verdict that we are appealing.

And the $6 million is the reserve that you've taken for that?

No, the $6 million is not the full reserve. And we have been advised by counsel not to -- it is not the full amount of the judgment. The judgment was $7.8 million, the reserve was $6 million.

And that does not indicate the full reserve we had for that particular item. By the way, we also have the opportunity to pursue a cross-claim against the city because the reason the valet service wasn't what the tenant had hoped for was because the city didn't allow us to provide it, so it's a very complicated situation, but that's about what we're looking at in terms of the numbers.

Just to further clarify, on that matter, the increase in the other expense line item was about $6.6 million. It includes various -- it includes -- probably a normal recurring abandon project type stuff, but it also includes the litigation-related cost in addition to potential reserves associated with ultimate settlement.

Ok. And the list of assets that are eligible for merchant billed is very helpful to have so I appreciate you putting that in. And I'm not trying to ask for more, but what would be helpful is just to have the undepreciated book values of those assets so we can understand what the totality from a development cost is of those assets, to be able to understand what could occur.

We should be able to provide that. It is available in our public filings and we can certainly include that.

Thank you.

See, we do listen, Mike.

I know. [ LAUGHTER ]

And we have a follow-up question from the line of Jay Habermann with Goldman Sachs. Please proceed.

Hey guys. Good morning again. Just a follow-up on the senior debt, basically on the credit facilities, can you just remind us if you have the ability to extend the unsecured credit as well as the secured?

Yes, we do have the ability to extend each of those for a one-year term.

Ok. Have you already begun that process?

They don't mature until several years out.

Okay. That's it for me. Thanks.

Thanks, Jay.

Our next question will come from the line of Craig Schmidt representing Merrill Lynch. Please proceed.

Thanks. This is probably for Dan. I'm just wondering, given the real estate business is a lagging indicator, at what point do you think your operating metrics will be the worst during 2009? Is it going to be right after holiday or later in the year?

It's usually right after holiday. What happens is -- we'll know and retailers will know right after holiday. When I say right after holiday, holiday today includes January, so we're really talking about February-ish. The retailers' cash position is the best, obviously, in the first quarter and we'll know at that point in time if they have the resources necessary to get to the fourth quarter to re-energize and replenish that cash supply.

If you look at the cash position of most retailers, June, July is the lull because they're placing orders for the holiday and their sales are always the lowest. So, if they don't get enough cash reserves generated out of the first and second quarter, we'll know that and we'll start to see some fallout. If we get through midway point of the year, and as we -- we've seen that this year as well, Craig, most retailers survive through the holiday because there's really no benefit for them to close before they have the opportunity to benefit from holiday sales.

Great. And is there a potential for like negative same store sales during '09 in any of the quarters?

Yes. I think there is real potential for negative NOI for same store sales depending on what happens with these bankruptcies and I think you'll start to see that in first and second quarter if it's going to happen.

Ok. Thanks a lot.

Sure.

Our next question will come from the line of Anar Ismilo with Jim Realty. Please proceed.

Hi. Sorry, I had a technical little difficult earlier. You mentioned non-recourse on your mortgages. What is your ability to really walk away from those properties, not that you have to, but if you were, without triggering anything under the credit facility?

Well, we have contractual right under the terms of the mortgage to deliver the property. It's not anything that we've done or take lightly in any way, nor is it our expectation that it is something that we will do. But you pay a certain price for non-recourse financing for that level of flexibility in those situations. But I reiterate again, that is not anything that we have plans or historically have done.

No, I understand. I was trying to understand if the credit facility limits them on -- walking away you can do from the assets.

We would expect if that were the case, which again we do not at all expect, that there would be a negotiation to be had with the unsecured creditors where, at that point, they would have to view what's in their best interests and we would deal with that if we came to it again. Again, we don't expect to get there.

Got it. I understand. And do you still have an option to expand your credit facility to $1.4 billion?

Yes.

And are there any conditions that you have to satisfy before you extend it?

Well, the conditions are -- there's not any obligation for any existing lender to increase their commitment levels. So, it is just a matter of going out and finding the additional commitments to take it up to that level.

Got it. Thank you.

Thank you.

And our final question will come from the line of Jeff Donnelly with Wachovia Securities. Please proceed.

Yes, just a question or two actually for Dan. I was curious, Dan, maybe more big picture about how we should be thinking about the evolution of big box tenant leasing demand. Obviously, you've seen announcements and actions taken around 2008 closings this year. I think conventional wisdom is we should see more of the closing going into 2009. How long do you think it takes before we move from what I'll call a net closing market to maybe a net absorbing market? Is it late '09 that we begin to see retailers begin to look to sign leases for openings in 2010, or does it come sooner than that?

I think it really depends on the retailer you're talking about. Most of the retailers that we're dealing with, forgetting the ones that are in bankruptcy, aren't net closing at all. In fact, they're net opening. There are certain stores out there that we have a tendency -- that are net closing, but they're the vast minority. In fact, what people sometimes don't realize, but you do pick up when you talk to the retailers directly, is that even though their new store count is down, it is more down because of the absence of supply, as opposed to the absence of demand. And most of our tenants are adjusting their new store openings to the lack of development activity and the lack of new product and going back into the inner core.

So, I think in general, it will take us probably 18 to 24 months to absorb the boxes that are going to hit the market or have already hit the market due to bankruptcy. But overall, if you look at the big box retailers, the health and the growth profiles are quite strong and the demand for space obviously still exists, as you can see from the leasing results.

I guess related to that, are there regions around the country where you're seeing a disproportionate impact on the closings you mentioned and conversely, are retailers, the ones you mentioned, to the extent they do have limited opportunities to open the stores, are there regions they're avoiding? Is it Florida? Is it markets such as that?

We've said many times that retail is really are a very local business. While Florida certainly has a bad name as does, of course, Phoenix or Vegas, there are opportunities to do leasing in those markets and that's why even we were surprised by the volume of deals that we did in Florida over the last quarter. I think in general though, if you talk to most retailers, they do have their hot markets that they're looking to go into and most would say that, given an opportunity that makes sense just from their global perspective, they would do it in any market.

We're seeing New England, for example, is extremely hot right now, as is Washington, D.C., which has been hot for about ten years now from a retail perspective. If we're going to take a look at a market, though, that has the bulk of the closings in our portfolio, it is going to be the southern California market and the Phoenix area where you're going to have a whole slew of Mervyns and you're going to have a whole slew of Linens-N-Things.

Jeff, just in terms of the portfolio reviews that we recently completed, the only reason it had negative growth budgeted for 2009 was the southeast. We had pretty good numbers in the other regions, frankly, in our portfolio. And that actually includes Puerto Rico, which as many people have read recently, has come under some pressure economically as well. No different than we are here, yet our same store sales continue to grow in Puerto Rico, and our NOI continues to grow there as well.

Thanks, guys.

Thanks, Jeff.

And we have a follow-up question from Quinton Zalaley from Citigroup. Please proceed, sir.

Hi, guys. Just a quick question. I know you've had $140 million of asset sales under negotiation in the MDT joint venture. I'm just wondering if you can give us an update on those sales.

Yes. We continue to work on sales ,not only for our own consolidated balance sheet, as well as for our important partners. And that includes MBT. We've made considerable progress on one transaction that we expect to have more news on in the very near term. And continue to advance and have assets listed and make progress on other asset sales on behalf of Macquarie DDR Trust.

Ok. That's it. Thanks, guys.

Thank you.

Ladies and gentlemen, at this time, we thank you for participating in today's conference. (OPERATOR INSTRUCTIONS) Enjoy the rest of your day.

Thank you.