Site Centers Corp (SITC) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Developers Diversified Realty Corporation's fourth quarter 2008 earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Kate Beck, Investor Relations.

Good afternoon, and thank you for joining us. On today's call you will hear from Scott Wolstein, Dan Hurwitz, Bill Schafer, and David Oakes.

Please be aware 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 our press release issued today and filed with the SEC on Form 8-K and on 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 to the most directly comparable GAAP measures can be found in our earnings press release dated February 23, 2009. This release and our quarterly financial supplement are available on our web site at ddr.com.

I would like to call your attention to an important press release that we released moments ago. The transactions described by this press release will be discussed on the call this afternoon. Lastly, I'd 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 afternoon, everybody. First let me talk about our fourth-quarter results. In the fourth quarter of 2008, we reported FFO before gains on debt repurchases and impairment charges of $0.74 per share versus last year's fourth-quarter FFO results of $0.77 per share. For the 12-month period ending 12-31-08 our FFO before gains, impairments and other charges was $3.29 per share, which compares to $3.09 per share for 2007. Including impairment charges of over $215 million, our FFO was negative $0.95 per share for the quarter and $1.52 positive for the 12-month period ending 12-31-08.

We are very pleased today to announce two significant capital transactions that will occur in 2009. First, we have entered into an agreement for the strategic investment of Alexander Otto and members of the Otto family into our common stock as described in the press release released moments ago. The Otto family is well respected in the international real estate, retail, and finance communities. And their investment provides a huge opportunity to synergize our retail real estate expertise with theirs. Their purchase of 30 million common shares comes at an extremely important time for our company to be able to use this capital from the transaction to reduce indebtedness. The sale of these shares will occur in one or two tranches at the option of the Otto family. If it occurs in two tranches, we anticipate obtaining the initial proceeds from the first closing of 15 million shares in April and the proceeds from the second closing of an additional 15 million shares will be obtained no longer than October.

The first tranche will be purchased at $3.50 per share, and the second tranche will be purchased at the price of $4 per share, premiums of 33% and 52% respectively to Friday's close. In addition, we'll issue warrants to the Otto family for the purchase of up to 10 million additional shares at $6 per share, which represents a 128% premium to Friday's close. Those warrants will be granted in two tranches of 5 million shares each by the two closings I mentioned before. Secondly, the Otto family is funding a five-year, $60 million first mortgage loan to the company which we can use to extend our overall debt duration and repurchase unsecured notes at a discount to par.

Alexander Otto and other members of his family are the owners of ECE Project Management of Germany, Europe's leading firm in developing and managing inner city shopping centers, with over 100 shopping centers in their portfolio. In addition, Alexander Otto is the largest shareholder of the German listed company, Deutsche EuroShop Ag, which owns 16 shopping centers in central Europe. The Otto family owns a large number of businesses with particular focus on real estate, retail, and finance, and controls numerous retailers with hundreds of stores throughout the United States, Europe, and Asia.

The Otto family has been active in the North American real estate and retail industries for decades. With their ownership of the Paramount Group, Alexander Otto and his family control one of the largest privately owned real estate acquisition, redevelopment and management firms on the east coast. The portfolio of the Paramount group includes several high-rise buildings in New York and Washington, DC. Also in the metropolitan area of Toronto, the Otto family owns numerous apartment buildings and industrial parks. In regards to North American retail, the Otto family currently owns Crate and Barrel.

We at DDR are very excited about this transaction and will be filing an 8-K with complete details shortly. The transaction is subject to shareholder approval so we will also be filing a proxy. Upon completion of this transaction, we also look forward to adding two new Board members being nominated by the Otto family which we expect to add further expertise and alignment of interests with our shareholders.

Given the dramatic changes in the capital markets over the past year that have affected most companies, I would like to take a moment to reiterate how we have adapted our business strategies to date, and how we plan to navigate through these difficult times going forward to ensure that we emerge a stronger company. We have implemented significant changes to our business model that will result in us operating with increased liquidity and lower leverage. The steps we are taking to improve our position hold top priority for our senior management team. And we are taking immediate and aggressive action to address those issues, as demonstrated by the transaction that I just discussed.

We are firmly committed to enhancing our liquidity. We have already made progress in strengthening our balance sheet and reducing leverage in recent quarters through several initiatives which I'll touch upon now, and you will hear about in greater detail throughout today's call.

In December, we sold $43 million of common equity. Proceeds were used to repay revolving credit facilities and buy unsecured notes at a discount to par. Although we recognize the high cost of equity capital today, and the new issuance of shares is dilutive to certain metrics, this demonstrates our commitment to enhancing our firm's financial flexibility. We purchased $70 million of unsecured notes at a discount to par. The notes were purchased for approximately $58 million including $48 million of the January 30, 2009, maturity, resulting in a weighted average of about 81% to par.

During the first quarter, we sold $58 million of unencumbered non-core assets at a weighted average cap rate of 7.8%. For 2008 as a whole, we sold $200 million worth of assets aggregating roughly $140 million of net proceeds to DDR after repayment of debt before closing costs. The weighted average cap rate on these sales was approximately 6.9%. In January, 2009, we also sold a $22 million center at a 7.8% cap rate, an $8 million center at an 8.1% cap rate, and five former Mervyns locations to Kohl's. The latter two transactions were from joint ventures.

We also omitted our fourth-quarter '08 common dividend payment that would have been made in January of 2009, which resulted in cash savings in excess of $80 million. This additional retained capital was used to repay indebtedness. We will set the 2009 annual dividend at approximately the minimum distribution required to maintain our REIT status.

A year ago we were paying roughly $330 million of annualized common dividends per year on the then outstanding shares. The reduction of the dividend to the taxable minimum will save our company approximately $200 million per year. Additionally, our Board of Directors has approved that our first-quarter '09 dividend will be paid 90% in stock. If we pay all of our 2009 dividends in stock, this will give us the ability to retain in excess of $100 million of additional capital in 2009. The dividend savings provides significant funds to address pending cash needs and debt maturities.

On January 30, 2009, we repaid the outstanding balance of our matured unsecured notes using asset sale proceeds, free cash flow, and capacity on our revolving debt facility. As of today, we have addressed all of our consolidated debt maturities through February, including all of our unsecured debt maturities for the full year of 2009. And we are working with lenders to extend or refinance maturities on secured indebtedness through the remainder of the year.

We are finding great success in extending three CMBS loans that mature in the first quarter of 2009 beyond their contractual terms, and have been in constant contact with our lenders and loan servicers about our upcoming obligations. With the repayment of the January 30 unsecured notes, we have no other major debt maturities until May of 2010.

We continue to remain in compliance with all of our financial covenants in our bank facilities and our public indebtedness, and we will continue to take steps to provide additional cushion in these companies. We have many initiatives underway in 2009 that will continue to strengthen our balance sheet. In addition to the sale of common stock to the Otto family and the new $60 million mortgage loan, we will continue to purchase unsecured notes at a meaningful discount to par. The focus will be on near-term maturities at the most attractive pricing. We will sell additional assets with an expectation that more than $200 million in sales is achievable in 2009. We are currently well ahead of that pace, and we hope to exceed it.

We will raise capital through new, secured mortgage debt with life insurance companies and our commercial mortgage banking relationships. We will also dramatically slow spending on our development pipeline. Notably, we do not expect to start any new projects in 2009.

Most importantly, based upon our expected free cash flow of approximately $300 million per year, expected asset sale proceeds of $200 million, the proceeds from the Otto transaction of $175 million and modest refinancing assumptions including that only 60% of expiring mortgage debt can be replaced, we are pleased to say that we now have the capacity without any other activities to address all of our debt maturities for at least the next two years. In addition, we have $5.7 billion of unencumbered assets and an ability to add approximately $700 million of net new secured debt to generate additional proceeds within the confines of our debt covenants.

At this point I will turn the floor over to Bill Schafer.

Thanks, Scott. First I would like to give an update on operating results. Our reported FFO for the year ended December 31, 2008, was $1.52 per share. Excluding impairment and other nonrecurring charges, operating FFO was $3.29 per share. This also excludes the gain on repurchase of debt. As reflected in our earnings release, the fourth-quarter operating results include several unique primarily noncash net charges aggregating over $215 million, or $1.78 per share, as follows.

Consolidated noncash impairment charges aggregating $79.9 million. Noncash termination of an equity award plan for $15.8 million. Abandoned projects, transactions costs and other expenses of $20.8 Million. Noncash impairment charges on equity investments aggregating $107 million. Impairment charges and other expense recorded in equity income lost from joint ventures of $8.5 million. Loss on discontinued operations of $3 million. And the effect of above charges allocated to minority interests was an offset of $18.7 million.

The consolidated impairment charges were primarily associated with several units previously occupied by Mervyns and a half dozen other assets that are not expected to recover in value and may be sold in the not-too-distant future. The valuation techniques that we used included discounted cash flow analysis, income capitalization approach, appraisals, analysis of recent comparable sales transactions, actual sale negotiations, and bona fide purchase offers received from third parties. The joint venture impairment charges, defined as other than temporary and FAS 157, and discussed in our earnings release, primarily relate to the DDR TC-COR retail fund, investment in MDT units, DDR SAU retail fund and Coventry II's DDR Bloomfield LLC.

It is important to note that accounting rules require that different and shorter term standards be applied when measuring impairments in joint ventures. The valuation techniques included those just previously discussed, and valuation of publicly traded equity securities based on quoted market prices. In addition, with regard to certain joint venture investments, the fair market value of the joint venture's debt was also considered.

As was previously announced, we terminated a supplemental equity award plan in December and recorded a noncash charge of approximately $15.8 million. We chose to terminate this program as it no longer provided any motivational or retention value to our employees. No employees have received any cash or stock payment from this plan. We are focused on retaining and motivating good employees, but the creation of this plan was creating an annual financial expense to the company without any benefit to our team. So the decision was made to terminate it in the best long-term interests of our shareholders.

The nonrecurring charges and other expenses primarily include abandoned projects, litigation charges, and a loan loss reserve. As we discussed in our third-quarter earnings call, we will significantly limit our development spending to completing select projects underway where we have significant leasing in place. We have abandoned certain development projects and transactions that were in the very early stages, and we will delay other projects until the economic environment improves. As a result, we recorded charges aggregating $11.5 million. It is important to note that none of these noncash charges affect our current liquidity.

Moving on to the company's operating performance, I am happy to report that same-store operating results as defined in our supplement were positive this year at 1.7% for the year and 1.5% for the quarter. Also, ancillary income is up 14% year over year. We are pleased by the hard work of our leasing, property management, and new business development teams that is shown in these results. Also our operating margin after adjusting for bad debt expense as reflected in our earnings release was just over 72% for the fourth quarter results in 2008 and 2007.

Also of note is that our joint venture investment with Sonae Sierra in Brazil continued to produce solid operating results. However, the strengthening of the US dollar versus the real has resulted in a $1.3 million decrease to FFO and net income as compared to the third quarter of 2008.

It has been a challenging few months in capital markets, and I would like to take a moment to provide an update on a few items. As Scott previously stated, we remain in compliance with all corporate financial covenants and we anticipate that our ratios will stay compliant and improve in 2009. The current value of our unencumbered asset pool as defined in our credit agreements is approximately $5.7 billion. Revolver capacity as of December 31, 2008, was approximately $285 million. Although borrowings were relatively high after year end and remain high today, we have relatively little maturing debt in the next year. And we will use this time along with retained cash flow, proceeds from future asset sales, and the previously mentioned capital raise and other initiatives to reduce the balances.

As we announced on the third-quarter earnings call, we expect the 2009 dividend to be near the retaxable minimum. The Board of Directors has approved paying up to 90% of the 2009 dividend in stock to further enhance liquidity and maximize free cash flow. And we will announce a definitive decision on the payout composition in the next few weeks.

I will now turn the call over to Dan.

Thank you, Bill. And good afternoon, everyone. I'd like to start by providing an update on what we're seeing in the leasing environment as retailers continue to navigate through a unique and very difficult economic and retail climate.

As noted in our earnings release, our leasing team delivered another exceptionally strong quarter and year of leasing activity, especially when considering the tremendous headwinds they faced throughout 2008. Specifically, there were 105 new leases signed during the quarter, representing over 500,000 square feet of GLA and an average rental spread of 10%. There were also 204 renewal deals executed during the quarter representing over 1.3 million square feet, at an average spread of 3%. On a blended basis, there were 209 deals signed during the quarter, representing nearly 1.9 million square feet of GLA at an average spread of 4%.

For both new and renewal deals in 2008, the team produced 1,700 deals representing 10 million square feet of GLA and a cash basis rental spread of 8.5%. The 2008 total represents a $775,000 square-foot or 8% increase over 2007's results which, should be noted, was achieved on a smaller average portfolio size and in a more challenging economic environment.

While we're mindful of the fact that some retail companies have struggled and will likely continue to struggle, the reality is that many retailers are using this unprecedented economic environment to reassess their business plans and capture market share from their weaker competitors. During 2008 and into 2009, we had numerous meetings with retailers who were dropping their store count out of necessity, not because of any flaws in their business platforms or an active desire to scale back expansion plans. Quite simply, for many retailers, there are not enough development opportunities in today's market to support their growth initiatives. You've heard me say this before, but it's worth reiterating -- in many cases, if a retailer could open 50 new stores, they would happily do so.

As much as the headlines may imply that reduced store openings are another sign of a weakening retail environment, in many cases the reduced store opening plans are more the result of real estate issues than fundamental weakness within the retailers' operating platforms. And the issue is a lack of viable new supply compared to demand. Even in this environment retailers look well beyond the current year, typically modeling payback over a three to five-year period which will work to our benefit as we continue to re-tenant our vacancies.

Along the same lines, many in our industry equate the health of retailers to their headline sales number metrics such as same-store sales. Like 2008, 2009 is going to be a year where retailers look to solidify their margins as opposed to chasing high sales volumes. It would be imprudent for retailers to aggressively stock their shelves with large quantities of inventory and hope that the headwinds facing the consumer subside, and spending patterns immediately return to the norm. So even though you saw some drops in same-store sales over the holiday season, and will likely see similar figures as we get further into 2009, that doesn't necessarily mean that retailers are not achieving their plans. In many cases, the opposite may be true, and they may be using this opportunity to enhance their profitability and the quality of their credit.

Turning to the headline vacancies that have hit our portfolio, I'd like to provide an update on the progress we have made to date in backfilling the spaces of tenants with which we had a high level of exposure. To start, it should be noted that during the third quarter we [internally formed] the anchor store redevelopment department with the anticipation that we would be getting an unprecedented, large amount of junior anchor and big box space back due to the struggles of many big-name, high-profile retailers. Our anchor store redevelopment team has made considerable progress toward retenanting the major vacancies within our portfolio. It should be noted that we are just now getting control of many of these boxes even though the bankruptcy or liquidation headlines of these tenants are nearly six months old.

Of the 38 Goody's locations in our portfolio, 16 were rejected in the late third and fourth quarter of 2008 with the balance expected back in the first quarter of 2009. The Goody's portfolio is generating interest from those retailers looking to expand their footprint in the South such as Bed, Bath and Beyond with its various concept, Ultra Cosmetics, HH Gregg, Hobby Lobby, Big Lots, Bell's and Bell's Outlets. To date, we have active LOIs on four of the former Goody's boxes totaling 125,000 square feet, one location subject to lease negotiation, and one location with an executed lease.

We own a 50% interest in 37 former Mervyns locations and a 100% interest in one former Mervyns location which account for approximately 2.9 million square feet within our portfolio. Due to the quality of the real estate of the former Mervyns locations, tenant interest in these spaces is strong with tenants such as the TJX Companies with its various concepts, Ross Dress for Less, Forever 21, Nordstrom Rack, Dick's Sporting Goods, Staples, Hobby Lobby, 24-hour Fitness, and LA Fitness all expressing various levels of interest. Considering we did not receive control of most of the former Mervyns locations until the first of the year we are pleased with the high level of interest that's been expressed.

Also, as noted in our press release from February 9, we sold five former Mervyns' locations to Kohl's, the proceeds of which were used to pay down debt. And since have executed one new lease with Forever 21. To date, we have 26 active LOIs on 15 of the former Mervyns spaces totals 1.2 million square feet and an additional location at lease.

Of the 50 Circuit City locations in our portfolio, seven have been rejected and Circuit City still controls the leases for the remaining 43 locations pursuant to their bankruptcy proceedings. Our Circuit City portfolio accounts for 1.6 million square feet of GLA of which 26 are owned in joint ventures. We have already received strong interests from retailers such as Bed, Bath, and Beyond and its various concepts, the TJX companies and its various concepts, Best Buy, HH Gregg, Dick's Sporting Goods, Hobby Lobby, Big Lots, and JoAnn. To date, we have active LOIs on 16 of the former Circuit Cities, totaling approximately 570,000 square feet and have three spaces totaling 73,000 square feet at lease.

All told, within our anchor shore redevelopment group portfolio we have approximately 2.9 million square feet of letters of intent in active negotiations, 285,000 square feet in lease negotiations, and 465,000 square feet of executed leases or sales, which accounts for approximately 38% of our total big box vacancy.

At this point, I'd lake to address co-tenancy provisions and rent release requests. Co-tenancy is very rarely an issue as a result of these retailers' bankruptcies, but does result in violation on an infrequent basis. Shopping center co-tenancy is typically tied to either a large anchor store such as Wal-Mart or Target or a series of junior anchors. For example, a co-tenancy clause may indicate that two of the following four anchors must be open and operating, otherwise a tenant is permitted or it could go into co-tenancy or alternative rent.

If we cure the co-tenancy, the tenant must revert back to minimum rent. If co-tenancy is not cured, typically within the first year, the tenant has the right to terminate the lease and close their store or revert back to minimum rent. In most cases, the tenant will choose to revert back to minimum rent, as the cost of closing a store and opening in a new location is much greater than staying in the current location.

In some instances, however, the tenant will use the leverage generated by their right to close as a tool to renegotiate rental terms. That becomes a judgment call decided on a case-by-case basis.

Regarding the number of rent relief requests received to date, 405 requests have come from various retailers across our portfolio. Portfolio-wide, that represents approximately one in 30 of our tenants who have requested such relief. Of the 405 requests, 207 or 51.1% have come from local tenants, while 198 or 48.9% have come from tenants with a regional or national presence. Regarding regional exposure within the portfolio, 42% of the reductions have come from the southern region, 20% from the western region, 16% from the northern region, 13% from our specialty centers group, and 9% from Puerto Rico. To date, only 19 concessions have been granted for a term of one year. 81 requests have been denied, and the remaining 305 are being reviewed internally.

It is important to note, however, that our joint venture partners have significant influence on our decisions to either grant or deny rent relief requests. Nearly half, or 48%, of tenants seeking rent relief operate at our joint venture properties. While actual concessions have been minimal, we view each request with an eye toward improving the terms of the deal from the landlord's perspective.

For example, there are instances where we would gladly provide concessions in exchange for the elimination of options, exclusives, restrictions, or co-tenancy clauses that may impact a particular property. Overall, most of the requests are being received [by] tenants with healthy balance sheets that are attempting to exploit the current environment. We are investigating each with great detail and are consistently less inclined to grant the requests than one might think based on the retail headlines that we all read to date.

Turning for a moment to our Brazil operations, our partnership with Sonae Sierra Brazil continues to produce exceptional results. There were several highlights during the quarter that I'd like to briefly touch on to give you a flavor of the operating environment as well as the capital markets where conditions have remained relatively robust. A few key metrics reflecting the relative strength of Brazil's economy and retail environment were recently released, which include the following. Brazil's economy grew 5.6% in 2008 and is expected to expand 2% in 2009. Fourth-quarter retail sales growth was 6.3% in 2008. Brazil's Central Bank lowered interest rates by 100 basis points and is expected to reduce rates further in 2009.

Our particular operating portfolio continues to perform at a very high level as evidenced by the strong retail sales figures reported out of our centers as well as the occupancy and rental growth trends we are seeing and have seen on a consistent basis since our initial investment. Sales in our portfolio were up 10.7% for the year. And this flowed through to the rents we've received, which increased 11.8% for the year. Our occupancy rate as of 12-31-08 was 97%. And our NOI increased 13.6% over the fourth quarter of 2007's operating results.

We continue to make significant progress at our nearly completed development project in Manaus. The 466,000 square-feet development is currently 82% leased with commitments which are comprised of signed leases and LOIs totaling 94%. All eight anchors have signed, which include Marisa, Renner, C&A, Riachuelo [Bemo], [High Tech] and Centauro. We anticipate the shopping center to open in April with a leased rate in the mid-90s. We have closed on a 112.3 million reais construction loan for our Manaus development project, at an effective rate of 8.5%.

Brazil aside, however, we continue to see and hear about considerable distress in the US retail market. Some claims are legitimate and some are not. However, even with our current box challenges in regard to re-leasing we continue to make progress, have confidence in our real estate, cater to the value of retailers who are clearly favored by the consumer in this environment, and most importantly, have the leasing platform and individuals to deliver results and mitigate down time to the greatest extent possible.

At this time, I'd like to turn the call over to David.

Thanks, Dan. As you have heard throughout the call, our top priorities are lowering leverage and improving liquidity. First and foremost, our strategy is to address the items that are within our control such as dividend policy, development expenditures, listing assets for sale and purchasing near-term maturities at discount to par. We've repaid our January, 2009 unsecured notes in full. And we do not have major debt maturities until May 2010. We are taking advantage of this window to conserve capital, general proceeds from asset sales, and raise new equity and debt proceeds as shown by the recently announced capital raise and new mortgage debt with the Otto family.

Based upon our reasonable expectations for operating cash flow and proceeds from the Otto transaction, we believe we are in a position to meet all of our maturities through at least the end of 2010 and will be working diligently during that period to generate considerable additional proceeds that can address future maturities.

An important part of our strategy includes the sale of noncore assets. These transactions generate proceeds and allow us to improve portfolio quality. We sold $200 million of assets in 2008, resulting in net proceeds to DDR of $136 million, with a weighted average cap rate of less than 7%. In January, we sold an operating asset providing $22 million of net proceeds to DDR, and in our joint venture with MDT we sold five former Mervyns locations. In February, we sold another asset in a joint venture for $8 million at a cap rate just above 8%. We continue to work on several hundred million dollars of asset sales and remain comfortable with our ability to generate over $200 million in sales for the year.

We expect to achieve average cap rates in the 7.5% to 9% range on the sales. Our recently expanded transactions team is working diligently to complete these asset sales, and this continues to represent a relatively attractive source and cost of capital to help meet our de-leveraging goals. We expect to receive a similar or greater amount of net proceeds in 2009 as we did in 2008.

Yet another strategic initiative includes the transaction with the Otto family that Scott announced earlier. These transactions in aggregate will result in approximately $175 million of new capital which will be used to lower leverage and extend debt duration, including buying near-term unsecured debt at a discount and reducing unsecured revolving credit balances.

I'd like to take a moment to further explain these transactions. We entered into a binding purchase agreement with the Otto family of Germany for the sale of 30 million common shares and for warrants entitling the Otto family to purchase an additional 10 million common shares. The 30 million shares will be sold to the Otto family in one or two tranches at the option of the Otto family. If the transaction closes in two tranches, the first is expected to close in April and will include 15 million shares. The second will close in the following six months and include the remaining 15 million shares. The shares will be priced at $3.50 for the first closing and $4.00 for the second closing, representing premiums of 33% and 52% relative to Friday's closing price of $2.63 per share.

The Otto family will be entitled to any dividends declared from the date of the purchase agreement. We will also issue warrants to the Otto family for the purchase of 10 million additional shares to be granted in two tranches covering 5 million shares each upon each of the two closings I just mentioned. Each warrant gives the holder the right to purchase a share of common stock at $6 any time in the next five years. This price represents a 128% premium to Friday's close.

As proceeds are received from each of these transactions, they will be used to repay debt, some of which we expect will be purchased at a discount to par. The Otto family will have the right to hold two seats on DDR's Board of Directors as long as they retain certain ownership levels. We look forward to the expertise and diversity that they will bring to our company based upon the successes they've achieved as shopping center developers and managers and retailers throughout the world. The new, five-year mortgage loan that the Otto family will fund for one of our large shopping centers is also expected to close in April and will provide additional liquidity in an otherwise constrained lending market.

The current common equity dribble program will remain in place for use as needed. In December we sold 8.6 million shares and received net proceeds of $43 million. The program provides for an additional $157 million of additional equity issuance. Despite deteriorating market conditions, new capital has continued to be available to DDR. In 2008, we raised $1.2 billion of new mortgage capital. Our assumptions and requirements for 2009 are much lower. And our diverse lending relationships will help us uncover new capital through a variety of life insurance companies, regional, national, and international banks, including new international relationships with the Brazilian lenders that were created in 2008. We also believe that our new relationship with the Otto family will likely uncover some new financing sources.

As evidenced by the $1.2 billion of new mortgage capital raised last year, we have the support of our lenders, both large and small, to get through this challenging part of the cycle. We have seen renewed interest in financing opportunities from life companies so far in 2009 and would expect to do more business with this group. Conversations involved spreads in 300 to 500 basis point range, and loan to values in the 50% to 60% range with cap rates of 7% to 8%, depending on property type and tenant profile. We are in the market now with several large loan packages and expect to close new, long-term mortgages beginning in the second quarter of 2009.

Also encouraging are the direct conversations we've had with noteholders on a portion of our CMBS regarding the ability to extend maturities beyond their contractual deadline. We have already successfully extended a loan that was due in February for one year at the existing terms including its prior rate, which would be well below the current market.

I'd also like to take a moment to provide an update on MDT. It was announced in December that MDT is undergoing a strategic review. We have considerable rights in this joint venture but are supportive of their process and look better to either a better capitalized partner or a graceful exit so that their maturity issues no longer overly burden our debt schedule.

We expect that 2009 will be a challenging year but we believe we are prepared and will emerge a stronger company. We will be prudently evaluating all sources and uses to improve liquidity and lower leverage, and have modeled conservative assumptions to ensure that we will be able to address all of our near-term needs even in the event of current financial market dislocation.

With that I'll turn the call back over to Scott.

Thanks, David. As you've all heard during today's call, our operating portfolio is performing relatively well despite the challenging operating environment. We have taken significant steps to enhance our financial flexibility through the various means mentioned on today's call, including the two significant capital transactions with the Otto family. We are pleased to announce that we have the capacity to meet all of our debt maturities for at least the next two years, and we plan to emerge from these challenging times as a stronger company.

Based upon this activity, we expect operating FFO per share for 2009 to be in the range of $2.10 to $2.25 per share, although gains from debt repurchase could result in much higher reported results. The key assumptions that drive this guidance include a decline in same-store NOI of 3% to 4%, and an occupancy level of approximately 90%, as well as significant delevering transactions, as outlined earlier. Reported FFO is likely to once again include various noise from gains and losses, so our guidance and business plan are focused on this more core metric.

At this point we'll open the lines to receive your questions.

(Operator Instructions) Your first question comes from the line of Jay Habermann of Goldman Sachs. Please proceed.

Hey, here with Johannes, as well. Can you specifically walk through the stock sale. The other alternatives you've considered. Obviously the timing at this point, given that you mentioned you have two years in terms of really being able to deal with debt in the near term. But also referencing NAV because, again, the stock sale issuing 30 million shares, it doesn't really seem to put much of a dent into what's going to be coming due in 2011 and 2012.

Which question do you want us to answer first? 2011 and '12 or --

Could you start first with, again, the stock sale and how you arrived at the price, how this came together at this point.

With respect to this transaction, the negotiations are going on since last fall. We've had a relationship with ECE through our joint venture in Russia. Through that relationship we've developed a very cordial relationship with the Otto family. And this transaction's been, like I said, in the works for quite some time. The transaction was executed at a significant premium to market. Had the market been higher, the price would have been higher. But the market is what it is, and we have to deal in the world we live in and not the world we would like it to be.

I think that we have plans to address all of our debt maturities through 2011 and 2012. But at the moment this transaction and the proceeds available to us today take us through 2010. Which we think is the horizon that most companies are looking at, at the moment, and we think it's appropriate to deal with that today on today's call.

We certainly wouldn't have or shouldn't have issued enough equity in this transaction to deal with 2011 and 2012 maturities because that would have been far more dilutive. And I think we were quite fortunate to find an investor who didn't think the world was coming to an end and didn't think that you had to solve for the next four years in order to make an investment today. Frankly, I think that type of investor is very difficult to execute with, and that's why you haven't seen any transactions of that nature. And I don't think you will.

We couldn't be more excited to have a strategic partner like the Otto family. And we are absolutely confident that together we will be able to access whatever capital we need to deal with our debt maturities in 2010, '11, '12, '13, and for the end of time. And we couldn't be more excited to be in that position.

Was the decision really more that you couldn't get the asset sales done? Is that what precipitated the stock sale?

No. It had nothing to do with it. We had negotiations going on on the stock sale long before we -- long before the DRA deal even cratered, to be quite honest with you. This was a strategic investment by the Otto family that we've been discussing for some time. And it has nothing to do with asset sales. We will continue to be successful in completing asset sales, as we have been. And one thing has nothing to do with the other.

Your next question comes from the line of Lou Taylor of Deutsche Bank. Please proceed.

Thanks. Scott, with regards to the stock sale, has there been any consideration at the board level to offer the existing shareholders the right to inject more capital under similar terms?

The Board would certainly consider issuing equity in various ways to various constituencies as they arise. And we have had conversations with other shareholders who have indicated an interest in investing in the company. Frankly, I think that the appetite of those investors has been significantly enhanced by this transaction because they now feel that any investment they would make would be part of a permanent solution. And I'm sure those kinds of conversations will continue. And if the Board feels that they're in the shareholders' best interests, I'm sure that we will pursue them.

Okay. And then as a follow up, in terms of the unencumbered asset pool, you guys have alluded to the size and capacity there. How far along are you in terms of actually accessing that and bringing new capital into the company?

It's obviously a challenging and dislocated environment. But we've got packages out on a number of our larger and what we would deem more financeable assets from within that pool either as part of a pooled transaction for a larger term loan or for individual one-off mortgage debt. So it's something that's in the works right now where we would expect to begin to receive proceeds in the second quarter of 2009.

Okay, thank you.

Your next question comes from the line of Michael Bilerman of Citigroup. Please proceed.

Good afternoon. Quentin Velleley is on the phone with me, as well. Scott, I can appreciate the fact that this transaction was in process for a little while. Sounds like back to last year. And given the fact the market has come down, it sort of forced your hand a little bit in terms of pricing relative to where the stock had been. I'm just curious, the overall level of proceeds, it's not, relative to the entire company as to how you balance maybe holding off and getting some other asset sales done, given the fact it's only up front about $112 million from the equity, to try to do other things rather than selling 20% of the company at this price.

These are all difficult decisions, as you can appreciate. But I do think, first of all, we've been approached by multiple lenders who have said that they would be willing to consider additional secured indebtedness to our company if we could produce additional equity. So I think that the right way to look at this is not just $112 million of equity but at least double that in new proceeds because I'm sure we will be successful in accessing additional debt capital as a result of this transaction. That would have been more difficult without this transaction.

With respect to the either/or between raising equity and selling assets, that's a false choice. We are aggressively pursuing asset sales and will continue to do so. And the Otto family and DDR together are of same mind in that regard. That is certainly a very efficient way for us to raise capital to address liquidity needs into the future. And we will continue to do that.

What this transaction does is it removes some of the leverage from the buyers of those assets in those negotiations to enable us to get better terms. And it gives us more time to do that. So, it isn't one or the other. I have to tell you, I mean, in terms of saying well, should you have waited, my answer to that is hope is not a strategy. I think a lot of companies who think things are going to get better are mistaken. I think that we are in an unprecedented financial crisis. And I think it was absolutely imperative for this company to take a bold step, and I think we were incredibly fortunate that of all the real estate companies in the United States, the Otto family, who could have invested in any company, chose our company as a place to put a stake in the ground for their future United States real estate investments in retail.

So we couldn't be more gratified, we couldn't be more excited. You know, we wish we could have sold stock at $30 a share. I don't want to minimize the humility it takes to issue stock at $3.50 a share when you were trading at $72 a share not long ago. But, again, we have to operate in the world where we live. The world where we life is very different than that world. And we think in this world, when you have the opportunity to put $175 million in new capital to work to go out and delever your balance sheet at a multiple of that amount because of the incredibly attractive discounts that are available on our debt in the marketplace, it would be imprudent not to do so. And even at this price that issuance of equity will be highly accretive in the long run for that reason.

The press release talks about some of the closing conditions for the deal. One of them says including the receipt by the company of additional debt financing. Can you just clarify what the conditions to close are specifically on this one?

Yes. On that point it's exactly what I just mentioned. That, we have to come up with debt financing in equal amount to the equity financing. We've had multiple proposals from lenders to do that.

All of the complete details of the transaction will be filed in an 8-K as well as the proxy where shareholders will have the opportunity to vote on the transaction. The entire details will be out there in the next 24 hours.

Okay. Was there any discussion about maybe just buying the whole company, to taking it private with the Otto family?

No. There wasn't.

Okay. We'll yield the floor and queue back up.

Your next question comes from the line of Carol Campbell of Hilliard Lyons. Please proceed.

Good afternoon. Your 2009 FFO guidance, does that include any dilution from this Otto transaction?

Yes. It includes dilution from the Otto transaction and additional equity issuance.

Okay. And at this point do you have any joint ventures in the pipeline or are there any companies that are coming to you wanting to do joint ventures?

We're always involved in extensive negotiations along those lines.

Okay. Thank you.

Your next question comes from the line of Michael Mueller of JPMorgan. Please proceed.

Hi. In the comments about the stock sale you kept referring to the first tranche and second tranche closing. Is it the expectation that it will close in two tranches? And what happens to pricing if it closes in one tranche? Does it go with the $3.50 price?

No. It's highly likely to close in two tranches. And it has no effect on price if it closes in one tranche.

Okay. Then in terms of additional equity issuance, David, I think you mentioned the dribble program. Is any of that embedded in the guidance, as well, or is that just not in the numbers at this point?

The current guidance includes the equity issuance reflected in the transaction with Alexander Otto and his family as well as a stock dividend throughout the year.

Okay. Thank you.

And your next question is a follow up from the line of Lou Taylor of Deutsche Bank. Please proceed.

Thanks. Just in terms of the topic of the dividend, you guys had alluded to what the minimum tax dividend would be for this year. Just given guidance and your budget for the year, where do you see that minimum tax dividend being on a per-share basis?

We've still got a number of moving parts there. But we expect to formally declare the dividend in the next several weeks based on what exactly that calculation of taxable income is and what minimal buffer we want to make sure we have with the moving pieces, including the operating environment but also the exact timing of when the shares are outstanding based upon the transaction with the Otto family.

Great. Thank you.

Your next question is from the line of Rich Moore of RBC Capital Markets. Please proceed.

Hey, guys, good afternoon. Looking more on the operations front for just a minute, you still have two big development pipelines out there. And I'm curious, could you tell us a little about how you feel about what you have under construction in terms of ongoing tenant interests and whether or not you think all of those developments are still viable and if you may have impairments possibly in some of those remaining.

In the development pipeline, Rich, that is currently under construction, our leased rate is in the high 70 percentile. We still do have tenant interests, a lot from the tenants that we had explained are interested in our vacant boxes, as well. And there are tenants that are still expanding, and there are tenants that are still looking for product. We don't currently envision any additional impairments on that pipeline.

Okay. So is anybody, Dan, especially the anchor-type tenants showing any thought about possibly pulling out of some of those developments, or are they still hanging in there for the most part?

They're hanging in there for those developments. And they're obligated to do so contractually. The areas where we had some anchor tenants that were getting squirrely on some of the deals, or some of the ones Bill mentioned earlier where we dropped the projects and we did take some charges. But the ones that are coming out of the ground have fixed dates. They have delivery dates. They have tenant opening dates and contractual obligations of our tenants to meet those dates.

Okay. And that's on the JV side as well, I take it?

That's correct.

Thanks.

Your next question comes from the line of Michael Bilerman of Citigroup. Please proceed.

In terms of the line of credit and the renewal of that in terms of the extension, was there anything that the equity offering was needed to push you in from a covenant perspective for that to occur?

No. It was not required for any reason. The extension of the line of credit and any other extendible debt is exclusively related to our compliance with the covenants on each piece of debt. And we are compliant today, and based on all of our projections firmly expect to continue to be compliant, which puts our option to extend the line of credit from 2010 to 2011.

Okay. Then, could you talk a little about same store NOI. It was up for the year and I was just having trouble trying to reconcile that with the occupancy decline during the year. It sounds like some currency impact in Brazil, and some of the other things that were going on, how that actually went up during the year.

The currency impact in Brazil was really just a fourth-quarter anomaly, if you will. And actually, Brazil performed very well. I think, as Dan indicated, it was in the mid-teens on a same-store NOI perspective. And that was something that did really bring our overall same-store number up a little bit. I think there's about $50 million to $55 million in rents or something in that ballpark.

I was thinking more so about, as of the nine months in September 30, you had about 1.8% growth and for the full year you had 1.7%, but the fourth quarter saw more dramatic decline in occupancy, both sequentially and year over year. And I was just trying to figure out how all that played together.

Well, again, from an NOI perspective, you've got to understand, a lot of those tenants were in there pretty much through the holiday season. A lot of that came out much later in the fourth quarter. Certainly there was a little bit early, but I mean, from the overall average perspective, the majority of tenants were in there for the fourth quarter.

It's a fair question, Michael. I think if you look at what we gave you in guidance, most of the occupancy lost is reflected in our 2009 guidance. And most of that happened at the very end of 2008.

Okay. And then just in terms of the dividends, so the $1.50 that you had put out maybe a quarter ago, it sounds like that will be revised down to whatever your estimate of taxable net income is. And then 90% of that will be paid in stock.

In terms of what actually came out, the Board indicated an intent to declare a dividend that is around our minimum payout for retaining REIT status. And at that time that equated to roughly $1.50 a share, which we had referenced on the prior call. That was on the share count of about 120 million shares outstanding at that point. And so the single biggest factor that you'll have changing that is simply the shares that were issued towards the end of 2008 as well as the timing of when the Otto transaction closes and when those additional shares are outstanding. So operating results reasonably consistent, but other moving pieces that affect that per-share calculation.

Your next question comes from the line of Jim Sullivan of Greenstreet Advisors. Please proceed.

Thanks. I'm curious what consideration, if any, was given to the option of doing a rights offering which would have allowed your existing shareholders the option to not be diluted as they are through this transaction.

First of all, I don't think our shareholders are diluted by this transaction. At last count our shares were trading at a significant discount to the price of this deal. And any of our shareholders could buy it at cheaper price in the market as far as I can tell. So in terms of giving them an opportunity to invest in the company alongside this investor, we haven't ruled that out. That's a possibility. And as I said before, we have had very constructive discussions with shareholders who are interested in participating in a transaction which would be led by a strong late order which we have delivered.

So I don't think we've diluted anybody. I mean earnings may be diluted by issuing equity, but any time you delever your balance sheet it's dilutive to earnings. And I don't think anybody would suggest that that's not a noble endeavor in this environment. Had we offered shareholders an opportunity to participate in an offering at 50% premium to the share price, I'm not sure there would have been a very enthusiastic response. But now that this transaction has been announced, I think we will have a much more enthusiastic response.

Jim, at both the Board level and senior management level, we considered a very broad range of potential solutions to the problems that we were getting told about and just that we were concerned about, and that were clearly reflected in the market price on a daily basis. We did consider a rights issuance. There was some concern about the potentially coercive nature of a rights issuance, as a forced capital call for existing shareholders. And so we considered a broad range of solutions, and we thought this was a relatively attractive one, both because of the moon of capital coming in from one investor, as well as the extreme synergies between these two organizations and the ability of the Otto group through ECE, Paramount and all of their various organizations to help us to become an even more world-class operator and developer.

And there's a lot of ways to measure dilution, selling 20% of the company at $3.50 and $4 a share, there are a lot of ways you could conclude that that's dilutive, but I won't debate it on the call.

I think I heard you say that there are a bunch of retailers that would be eager to open 50-plus stores if the development activity allowed them to. Did I hear you correctly, and if so, who are some of those retailers?

You did hear me correctly. The TJ Maxx company, Hobby Lobby, Bed, Bath, and Beyond and all their divisions, Best Buy, Dick's Sporting Goods, et cetera. A number of them.

Thank you.

Your next question comes from the line of Michael Mueller of JPMorgan. Please proceed.

Already answered. Thank you.

And your next question is a follow up from the line of Jay Habermann of Goldman Sachs. Please proceed.

You mentioned the two new board members. Are you anticipating changes at the senior management level as part of this transaction?

No.

Okay. And then can you comment, Dan, I guess you mentioned rent reductions. And I know in prior calls you've talked about wanting to maintain occupancy. Can we assume from those comments that obviously you're looking to accept those reductions?

No. We're doing an analysis, Jay, to see how many of those are real. What's happening is a lot of tenants whose balance sheets are just fine are asking for rent reductions because in today's environment you almost feel somewhat foolish if you don't ask for one. And we have a number of tenants that have asked us for rent reductions. And when we say no they sort of go along their merry way. Not leaving the center, but just continuing to pay what their contractual obligations call for. So we're less inclined than you would think to grant rent reductions because the majority of the tenants that are requesting them are not at the level of financial distress that they would want us to believe.

What sort of magnitude are they asking for when they come to you for reduction?

It's all over the board, anywhere from 10% to 20%, is sort of a typical ask. And, for only one-year term because they assume they will come back to us at the end of the one year and if things are still bad, they'll ask again. So the rent reductions that we've been giving so far have been only for a one-year term. But there's only been a few of them out of the 400 that have requested. But again, a lot of our joint venture partners, like I mentioned in the script, a lot of the joint venture partners are extraordinarily concerned about maintaining occupancy. And they may be a little more forgiving on some of these requests than we would in the core.

Okay. Thank you.

(Operator Instructions) And your next question comes from the line of Jeff Donnelly of Wachovia Securities. Please proceed.

Good afternoon, guys. Just a point of clarification. I think you said in your prepared remarks that you could meet your 2009 and 2010 maturities, provided a series of conditions were met. It s that inclusive of all your obligations under joint ventures, as well, like your pro rata share of the debt or under what is potentially recourse to DDR?

That's correct. It included not just what is recourse to DDR but the entire amount of pro rata mortgage maturities at are joint venture partners.

And just to be clear, Michael, as I said in the script, it assumes that we can refinance 60% of all of that consolidated and joint venture debt with new secured financing.

Great. Thank you.

Your next question comes from the line of Michael Mueller. Please proceed.

Dan, does the guidance in terms of the occupancy outlook for 2009, what have you assumed in there beyond what's known at this point?

We've assumed about a 200 basis point decline beyond what we currently know.

Okay. Great. Thanks.

And that concludes the question-and-answer session as well as your conference call for today. Thank you for your participation. You may now disconnect. Have a great day.