Site Centers Corp (SITC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Developers Diversified Realty Corporation earnings conference call. My name is Tawanda, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this 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, Mr. Tom Morabito, Senior Director of Investor Relations. You may proceed, sir.

Thanks, Operator. Good morning, everyone, and thank you for joining us.

With me on today's call are Chairman and CEO, Scott Wolstein; President and Chief Operating Officer, Dan Hurwitz; Chief Financial Officer, Bill Schafer; and Chief Investment Officer, David Oakes. Following our prepared remarks, we will then conduct the Q&A session. Before we get started, I need to remind everyone that some of our statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that 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 earnings release and in our filings with the SEC. Finally, please note that on today's call, we will be discussing non-GAAP financial measures, including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can also be found in the earnings release. The release and our quarterly financial supplement are available on our website at ddr.com.

With that, I would now like to turn the call over to Scott.

Good morning, everybody, and thank you for joining us today.

To start things off, I would like to thank everybody who attended our Investor Day on July 1st or listened to the webcast. We appreciate your interest in our Company and value your feedback on our disclosure. We hope you came away with some new and helpful information that shows how diligently we have worked and will continue to work to lower leverage, improve liquidity, release recently recaptured space and ensure that we come out of this recession as a stronger Company. We have already made good progress on our deleveraging initiatives and we plan to continue to aggressively raise capital in order to achieve our goals. We ended 2008 with roughly $5.9 billion in total consolidated debt. As of June 30th, that balance has been reduced to $5.6 billion by retiring near term maturities with retained capital, common equity and asset sale proceeds. Our current plan calls for consolidated debt to decrease to $4.8 billion by the end of 2009 and to $4.5 billion by the end of 2010. On a consolidated debt to EBITDA basis, we forecast that we can lower this multiple to 8.3 times at year end 2009, 7.5 times at year end 2010, from 8.7 times at the year end of 2008. We are accessing a wide variety of capital sources including retaining free cash flow, asset sales, new debt proceeds and new equity. We have also continued to buy back our debt at significant discounts. We have addressed all of our consolidated debt maturities for 2009. With the capital that we are accessing, we are well positioned to address all of our maturities for 2010, 2011, and 2012.

I would also like to give you an update on the new debt financing that we are pursuing as part of the government's health program. David Oakes will go into more detail later on the call, but overall the transactions are proceeding well according to schedule and our underwriters are seeing very strong interest from investors. Importantly, the expected proceeds should address all of our remaining 2010, 2011, and 2010 mortgage maturities and the new five year term will fit nicely into our maturity schedule. Next, I would like to briefly discuss our second quarter operating results, which similar to last quarter, were solid despite the challenging macro environment. While there was considerable noise from gains and noncash charges during the quarter, some of which were occasioned by what can only be characterized as bizarre accounting rules, FFO on an operating basis for the second quarter of 2009 was $0.51 per share. Our business continues to perform relatively well and in line with expectations and once again, we had a very strong quarter in terms of leasing with over 3 million square feet leased. Given the challenges of the current environment, we were pleased with the performance of our portfolio and our team.

Now, I'll turn it over to Bill, who will go into more detail on our second quarter operating results.

Thanks, Scott.

As mentioned, our second quarter 2009 operating FFO was $0.51 per share and was in line with our internal projections. After adjusting to include several non-recurring and nonoperational items, FFO was a loss of $1.15 per share. Now, I'll walk through some of the details regarding the specific nonoperational items, most of which are non-recurring and substantially all of which are non-cash. First, we incurred a non-cash change in control charge of $10.5 million associated with the Otto transaction as it relates to certain equity award plans that immediately vested upon shareholder approval. Approximately 175 employees were impacted by this vesting. It is important to note that this vesting was required by certain provisions in the equity award plans previously approved by the shareholders resulting from the potential 20% change in control of the Company's ownership interest. It is also important to note that the charge is calculated based on historical value at the time of award grant and not current market value, which would be a small fraction of this charge. At this time, we are projecting another $5 million non-cash charge to be incurred at the closing of the second equity traunch, which is expected to occur in late third or early fourth quarter. We also had an $80 million non-cash charge related to the share price appreciation relative to the price at which the Otto Family committed to make their investment.

The accounting standards require us to treat this equity sale commitment as a derivative that requires mark-to-market accounting. This has the ironic impact of generating greater non-cash charges as our share price appreciates. These so called derivatives will continue to impact quarterly results until the second traunch of the equity closes and the warrants are exercised. So, they have no economic impact on DDR. This treatment also impacts our balance sheet and at June 30, a $41 million non-cash liability included in other liabilities will be reclassified to equity upon ultimate exercise of the instruments. We added a schedule to our financial supplement to provide greater transparency on these charges. Second, consolidated impairment charges for the quarter amounted to approximately $107 million. Included in this number is approximately $61 million associated with former Mervyn's stores. This charge was based upon adjustments to current projected rental rates and cap rates. Our allocated share of this charge is approximately $31 million. The remaining impairment charge relates to assets that we expect to sell in the coming months for less than book value. Third, we had actual losses on completed sales and impairments on assets held for sale aggregating $61 million, which are reflected in discontinued operations. Fourth, we incurred additional impairment charges of $40 million associated with our share of various investments with coventry, partially related to our partner's inability to fund cash requirement that is for certain actions at an inopportune time.

Offsetting these negative non-recurring items are the net gains on debt repurchased of approximately $46 million. In total, the impact of non-recurring gains and losses in the second quarter was approximately negative $240 million or $1.66 per share. Even after all these non-cash charges, our book value was still approximately $14 per common share, or nearly three times the recent share price. Turning now to operating results for the second quarter. Same store NOI was down 5% for the quarter, which is consistent with our expectations. Our Brazil portfolio continues to perform particularly well with the same store NOI increase of over 12.5% for the quarter. Substantially, all of the decrease in consolidated base rental income in the second quarter and year-to-date is directly related to the bankruptcies of Circuit City, Goody's, Linens 'n Things, Mervyn's, and Steve and Barry's. Bad debt expense for the quarter was approximately 1.5% of total revenues as compared to 1.4% in the second quarter of 2008. G&A expenses are down approximately 16% from last year, excluding the $10.5 million non-cash charge I discussed earlier. The reduction in G&A is attributed to compensation changes, a lower headcount and a reduction in general corporate expenses. Our ratio of G&A to revenues, exclusive of the change in control charge, has decreased only slightly to 4.2%. This is partially related to our policy of expensing our leasing staff salaries rather than capitalizing them and clearly, we are committing more resources to leasing today to address the bankruptcy driven vacancy that has resulted in lower revenue.

Turning now to our debt covenants. Key takeaways include the following: We are fully compliant with both bank facility and unsecured note covenants. Our tightest ratio is the unencumbered asset coverage ratio in our bank facility covenants. The value of unencumbered assets must be greater than or equal to 1.6 times consolidated unsecured indebtedness. Our calculations indicate we are approximately 1.63 times on this ratio as of June 30. As illustrated in our recent Investor Day presentation, we are comfortable that this ratio will trend upward each quarter going forward and we intend to operate north of 1.8 times within a year. Factors that will improve the ratio in the second half of 2009 include $60 million of common equity that will be issued on or before October 9th from the second traunch of the Otto transaction, additional asset sale proceeds, and retained capital that will be used to repay debt. Our unencumbered asset pool was approximately $5 billion as of June 30th and our consolidated indebtedness ratio in our bank facilities continues to improve and approximates 50% as of June 30th. Leverage and liquidity continue to be a primary focus for everyone at DDR. As we raise capital from a variety of sources, you will see us continue to buy back our near term maturing notes at a discount and reduce our revolver balances. Our cash on hand and revolver capacity was over [$150] million at quarter end.

We have intentionally and temporarily chosen to keep revolver balances high in favor of using funds to deal with near term maturities at discounts to par. As we move toward the end of 2009, we will deploy more capital to lower revolver borrowings. Finally, last week we announced the results of the second quarter 2009 dividend election. We paid approximately $3.1 million in cash and $27.4 million in common shares, which resulted in $6.1 million additional shares outstanding at an effective price of $4.49 per share.

I will now turn the call over to Dan.

Thank you, Bill, and good morning everyone.

I would like to start by providing a brief update on what we are seeing in the leasing environment as we continue to navigate ongoing economic and consumer challenges. While we are keenly aware of the fact that many retailers are facing sales declines, the reality is that there continues to be a strong segment of retailers looking to expand their store count and capture market share from their current and former competitors. The short-term macroeconomic headlines may suggest otherwise, but the current retail real estate environment presents a unique opportunity for retailers to aggressively seek external growth at significantly lower cost. Over the course of the second quarter, our leasing team held many key meetings with retailers to understand the revolving platforms and as a result, we leased an historic amount of GLA. Specifically, we signed 147 new leases during the quarter, representing over 900,000 square feet of GLA at an average rental rate spread of negative 16.6%. Additionally, there were 259 renewal deals executed during the quarter, representing over 2.1 million square feet of GLA at an average spread of positive 1%. On a blended basis, there were 406 deals executed during the second quarter, representing nearly 3.1 million square feet of GLA at an average spread of negative 4.72%. Compared to the previous quarter, we executed 58 more leases and leased 1.2 million more square feet of GLA.

I'd like to point out that of the 900,000 plus square feet of new deals signed during the second quarter, 45% represents space that was recently vacated by bankrupt retailers. The spread on new deals signed to backfill space formally occupied by bankrupt retailers was negative 24.2%, which is consistent with our expectations in past guidance. While the average rental rate spread on new deals excluding those signs to back filled bankrupt retailers was negative 9.8%. Despite the challenges of back filling space formally occupied by bankrupt retailers, we have seen solid improvement in the rental rates from the first quarter to the second quarter. In the second quarter, we leased 466,000 square feet of space that was previously occupied by bankrupt retailers versus the 233,000 square feet leased in the first quarter, and the average rent per square foot increased 63% from the -- for that space from the first quarter to the second quarter, resulting in an overall positive impact on our average base rent space per square foot portfolio wide. Overall, we are very encouraged by the leasing activity that we achieved during the second quarter. On a square foot basis, these leasing results represent the greatest level of production in the history of the Company. While the resulting rent spreads are much less favorable than what we have historically achieved, it should be no surprise that rents are under enormous pressure as vacancy continues to increase across the retail sector.

From a capital expenditure perspective, the cost of executing deals has decreased 10% on a per square foot basis from the same period one year ago as we continue to develop creative ways to utilize existing fixtures and improvements and focus on making the most efficient deal with retailers. However, given the large volume of leasing we achieved this quarter, total CapEx will be higher than we have experienced in recent periods despite our aggressive control of capital expenditures on a per square foot basis. As evidenced by our leasing results and contrary to common perception, select retailers are in fact growing store count and increasing market share. It should be noted that year-to-date we have leased over 5 million of space when many were predicting the lowest velocity in decades. Many of the same retailers we closed deals with in the first half of the year are retailers that we continue to do business with. The most active retailers include Bed Bath & Beyond and its various concepts, Best Buy, HHGregg, Hobby Lobby, Jo-Ann Stores Nordstrom Rack, Dollar Tree, A.C. Moore and regional grocers, such as Sprouts. Also very active are Staples, Michaels and the TJX Companies, the parent for T.J. Maxx, Marshalls, A.J. Wright and HomeGoods. We have multiple executed leases or are in active lease or LOI negotiations with each of the retailers that I just mentioned. I would also like to highlight the fact that two of our largest tenants, Wal-Mart and TJX, recently announced significant long term debt financing transactions. The low cost of capital of many of our largest tenants is likely to encourage and fund their future growth.

As I discussed on our previous call and at our Investor Day, we have been very active in the tenant community with formal face to face meetings to discuss the temporary shifts in operating platforms for many of our tenants. The feedback we are receiving from the tenant community suggests that retailers are consistently re-evaluating who they do business with and DDR remains prominent as a trusted and desired business partner who will deliver high quality space with certainty of execution. Despite strong leasing results and tenant feedback, we are still experiencing the effects of the retail bankruptcies that occurred in late 2008 and early 2009, as well as the general retail fallout that continues to trickle through the system. Our portfolio leased rate as of the end of the second quarter was 90.7%. Historically within our portfolio, the leased rate has trended down from first quarter to second quarter. However, we were able to hold our leased rate flat as a result of strong leasing results from prior quarters. As such, and similar to what we have discussed on previous calls, we view this as further evidence that we are operating at trough occupancy, barring any significant additional downturn in the economy and anticipate modest occupancy improvement in Q3 and Q4. Addressing the big box vacancies, our anchor store re-development team continues to diligently back fill the approximately 7 million square feet of junior and anchor space that has been recently returned to us through the bankruptcy process. As mentioned at our Investor Day conference, we have made significant progress and currently have half of the units either sold, leased, at lease or under LOI.

We continue to work creatively to re-tenant these spaces with strong credit tenants and maximize the reuse of existing improvements to maximize -- to minimize capital outlays for tenant allowance. Moreover, we are pleased with the deal flow that consistently replenishes the LOT category as the previous LOI's move to lease and then execution. To give you some perspective on velocity, since the first quarter our anchor store re-development team has leased an additional 16 units, which includes five executed leases even since Investor Day. In addition to the inherent upside potential of permanent leasing within our anchor store re-development portfolio, it should be noted that our new business development team continues to generate significant revenue through temporary and seasonal leasing of vacant big boxes. Our new business development initiative has provided -- has proved to be a vital aspect of our overall operating platform and an effective hedge against lost rental revenues as a result of increased vacancy. To date, our new business development department has generated $3 million of revenue committed from temporary tenants within our anchor store redevelopment portfolio and total revenues within that department have increased 20% from the same time period in 2008.

Turning for a moment to our overall portfolio. Our management team has actively discussed our corporate strategy from a portfolio perspective over the past several months. As we navigate through the current economic cycle and our portfolio continues to face headwinds, there is an underlying opportunity to restructure our portfolio and retenant our assets. Through active asset management, we have begun to build a best-in-class portfolio that is diversified by asset type, geography and tenant base. The opportunity to retenant our portfolio comes from the recent fallout of weaker retailers and provides us with the unprecedented opportunity to focus on today's best-in-class retailers that will add value to our centers and lower the overall risk profile. As you can see from this quarter's leasing results, this transformation is occurring daily. As we consider various asset sales, we must determine which assets we want to keep in the franchise and which assets we are willing to even dispose of if motivated. Given the underlying opportunities that the current environment creates, we have thoroughly reviewed the existing portfolio to create a list of prime assets. Our prime assets are those which we will not sell to third parties, but rather will be held as long term franchise properties.

The excluded assets in single tenant properties are those which we will continue to consider for outright sale with a goal towards enhancing our liquidity, strengthening the balance sheet and increasing the long term growth profile. It should be noted the prime portfolio occupancy rate currently stands at 93%. I would now like to take a brief moment to address rent relief and co-tenancy as these continue to be issues and topics of discussion, both among retailers and investors. In terms of rent relief, we continue to receive requests, albeit at a much slower rate from tenants seeking concessions, abatements, and deferrals. We do not perceive those requests going away anytime soon. We do, however, expect the impact from rent concessions to be far less than the market may perceive and our statistics indicate just that. To date, we have granted less than 4% of the requests we have received. The average concession granted is a 23% reduction in rent, usually in the form of a deferral, for one year, after which the tenant reverts back to paying the base rent agreed to in their executed lease agreement and generally, repays any deferred amount in future years. Turning to co-tenancy, I would like to clarify the impact it has had on our portfolio. At Investor Day, we indicated that only 1% of our tenants are paying rent subject to our co-tenancy provision and this is still the case.

While many of the tenants in our portfolio have lease language that includes co-tenancy relief, alternative rent driven by a co-tenancy violation must be triggered by an event and therefore the impact is currently very limited. The risk of additional triggers occurring in the future is not imminent, but certainly possible, and we continue to monitor this situation diligently. Regarding our investments in Brazil, I would now take a brief moment to discuss the macroeconomic climate and provide an update on portfolio operations. Brazil retail sales rose more than expected in May, indicating that consumer demand is driving a rebound in Latin America's largest economy. Sales rose 7.1% in April and 4% in May over the same period one year earlier. The Brazil Central Bank recently reduced the current short-term interest rate from 9.25% to 8.75%, which is a record low. The (inaudible) exchange is up 31.8% year to date, and the Brazil Central Bank projects 2009 GDP to grow by 1%. The forecast for inflation remains modest at 4.1%. As of May 31st, our Brazilian portfolio remained 97.1% occupied and same store NOI growth for the second quarter was 12.5%. In April, we opened a new shopping center in (inaudible), well over 90% leased, as retailers continue to look for expansion opportunities. In addition to solid operating fundamentals, we, together with our partner, closed on significant financing transactions that will enhance liquidity for our partnership.

We closed on two loans totaling BLR95 million riage and so the limited interest in one of our shopping center's to raise additional capital. We continue to be very pleased with our investments in Brazil and foresee the portfolio to be an imperative driver of our growth over the next several years. In summary, we have made significant leasing progress and continue to creatively retenant our portfolio. However, we do not discount the environment we are currently operating in. Deals are tough. Retailers and landlords alike are under enormous pressure and the consumer continues to lack confidence causing them to trade down, which ultimately provides a benefit for many of our discount tenants. As we make our way through the remaining summer months, when retail sales are at their seasonal trough, and cash outlie is at its peak, we will continue to monitor our watch list, meet with key retailers and stay apprised of industry-wide issues that may potentially cause systemic risks and disrupt retail operations. That being said, we are pleased that June and July thus far have not seen any additional material bankruptcies for our portfolio. Overall, based on what we've seen over the past 12 months, and even though we have taken a clear and early occupancy hit to our portfolio, our tenant base is rebounding and our operating platform continues to perform at a very high level.

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

Thanks, Dan.

First, I would also like to thank all of our investors and analysts who attended our Investor Day or listened to the webcast. We hope you found it useful and we value your feedback on the presentation and our disclosure. At our Investor Day, we laid out what we had accomplished thus far regarding our leverage and liquidity goals and what we expected to accomplish in the near term. I am pleased to report that we have made progress on various deleveraging initiatives during the three weeks since then, which I will take a moment to update you on. We have sold four assets since July 1st, bringing our total asset sales for 2009 to over $225 million of which our share is $179 million. We fully expect to continue to execute on asset sales throughout 2009 and currently have an additional $320 million of assets under contract for sale or subject to letter of intent over half of which have nonrefundable deposits. Several of these sales are generating accounting losses, but we firmly believe that selling these nonprime assets is the appropriate strategy, especially considering the attractive returns associated with reinvesting that capital. We also firmly believe that our historic accounting cost basis should not be a driver or deterrent to transactional activity. We continue to make progress on several new debt capital transactions. This week, we closed $17 million of new loan term capital. This eight-and-a-half-year, 6% loan with a life insurance company brings our total new debt capital raised to over $200 million year-to-date. We continue to work through due diligence with a lender for $125 million, five-year mortgage on an asset in Puerto Rico and anticipate closing in the late third quarter or early in the fourth quarter.

We are also making good progress on our (inaudible) eligible CMBS financing and due diligence is progressing as expected. We anticipate the first closing to occur in the fall and the expected proceeds will be used to continue to address our near term maturities. In some cases, we will be repaying existing mortgages with near term maturities and replacing them with longer duration debt. And in other cases, the new proceeds will be used to repay unsecured debt, potentially at a discount to par. We repurchased a very modest amount of our senior unsecured notes since our July 1st Investor Day due to the earnings blackout period, but we expect to continue to do so as a means to delever once this period expires. Total repurchases are now over $380 million of face value debt year-to-date at a weighted average 65% of par and a 26% average yield to maturity. Our focus will continue to be retiring near term maturities that are trading at attractive levels using cash flow from operations, proceeds from asset sales, and new debt and equity capital. Next, I'd like to update you on our 2009 debt maturity schedule. Of the $360 million of consolidated debt on January 1st, 2009 that was set to mature this year, we have paid off $287 million and have addressed either by extension or refinancing, $73 million. We are now focused on 2010 maturities and beyond. Today, the Company share of unconsolidated debt maturing in 2009 is $47 million. Of that amount, all is in the process of being extended or refinanced.

In addition to our immediate maturities since January 1st, 2009, we have also repaid over $80 million of consolidated 2010 maturities and over $150 million of consolidated 2011 maturities. While our revolver balance has increased roughly $150 million between January 1st and June 30th of this year, we have retired approximately $675 million of debt that was scheduled to mature by mid 2012. Lastly I'd like to clarify a few things regarding the MBT joint venture. We announced two weeks ago that we had entered into a binding commitment with MBT to redeem our interest in the DDR Macquarie fund. I want to point out that we are redeeming 14.5% of the equity value, not the asset value. The goal of this transaction was to simplify the structure and improve flexibility for both parties, as well as to lower our leverage, which is why we agreed to receive just three assets with relatively low loan-to-values. We expect closing on the redemption in the Fall of this year and we will continue to receive fees for actively leasing and managing all of the MBT assets.

I will turn the call back over to Scott.

Thanks, David.

As you've heard, we have certainly come a long way in a very short period of time. A great deal of work remains and we are committed to executing on the plan that we have outlined for you. As we continue to focus on our prime portfolio of properties and to align ourselves with the best strategic partners in the industry, to operate with lover leverage, I firmly believe that we will continue to enhance our leadership position in the sector. Proudly speaking, the business continues to perform well and in line with our expectations and certainly better than what is generally perceived by the market. We continue to project that (inaudible) will improve throughout the year following its trough last quarter and we project that same store NOI for the year will decline approximately 4%. In terms of guidance, we are lowering our 2009 operating FFO per share expectations to a range of $2 to $2.15 per share from $2.10 to $2.25 largely based on the following factors: Number one, lost NOI due to higher asset sales volume. Two, lower projected land sale gains. Three, higher interest expense due to wider spreads primarily related to rating agency credit downgrades. Four, lower share prices than projected on the issuance of shares relating to our stock dividends. Five, and finally, modestly more conservative assumptions regarding development leasing and consolidated NOI for the balance of the year. While our new guidance provides a lower range than (inaudible) provided on our fourth quarter call, it does reflect a much more conservative assumptions and a far less leveraged capital structure.

With that, we will open up the line and take your questions.

Thank you. (Operator Instructions) Your first question comes from the line of Jay Habermann with Goldman Sachs. Please proceed, sir.

Hey, good morning. Here with Jehan, as well. I guess, Scott, just to start, could you comment a bit just broadly on what you think implications of CIT might be for the industry and have you made any sort of factoring in there in terms of guidance and as well can you comment specifically where you expect same store to trend in the latter half of the year?

Yes, I'll comment very briefly on CIT, but I think Dan Hurwitz is probably closer to that situation. Clearly, CIT is a major lender to the retail industry, but not a major lender to the big box national tenants that comprise the majority of our revenue. I would expect that if CIT ceased to be a factor in the industry, it would have an effect on retail generally, but I would expect the impact would be probably greater in the malls and neighborhood centers than it would be in the large community centers. But I will turn the Dan to elaborate on that.

Well, Jay, the CIT issue is one we follow pretty carefully because it concerns us. It's another negative headline for retail for sure. There's 300,000 retailers that currently have some financing relationship with CIT. Some of our bankrupt tenants, particularly Circuit City, had a long relationship with CIT. Our biggest concern obviously would be if the lack of funding from CIT interfered with inventory that would be coming in within the next two months for the holiday season, it could have systemic effect to retail, and we've been working with ICSC. We have been working with NRF and we've been talking to a number of retailers to try to get the risk that we perceive across to not just government officials, but others within the sector who could have an impact on the outcome on this. There's nothing positive that can happen for our sector from CIT going away and we are watching it pretty closely. They are a huge supplier of capital for not just retailers, but also for vendors, and if the supply chain of inventory gets interrupted at the holiday season, that could have a material negative impact on the sector.

Okay. And then, just switching gears for a moment, just -- could you walk through the bid-ask spreads on asset sales? I mean, it seems as cap rates seem to be moving above 9%, are you seeing a lot more interest on the part of buyers?

Yes. There's been a little bit of increase in cap rates in terms of our pipeline. Most of it has been related to the quality of assets that we are selling. Obviously, the lower the quality, the higher the cap rate and we've been highly focused on selling the assets that we don't want to own. But the assets have reasonably good quality that may not make the cut for our prime portfolio that are under contract and we are negotiating. They are still trading in the mid 8's to the low 9's kind of cap rate range. So, I think that there hasn't been a really significant change. And I also think, obviously, there was a big trend on the trade for Macquarie countrywide to (inaudible) and First Washington. I think it's a little dangerous for people to extrapolate from a transaction of nearly a billion dollars in size as to what it means for cap rates on individual asset sales. A transaction of that magnitude is, as you can imagine, is very limited competition. It's a much more difficult negotiation. On the one off deals, it's a very, very different landscape in terms of leverage, and you shouldn't expect to see any significant difference in terms of future asset sales here on a cap rate basis from what we've been able to achieve earlier this year.

And can you give us a sense, you mentioned obviously the deleveraging, you mentioned year end in your target. Can you give us some specifics, I guess, on timing and is that going to be much more focused toward year end and I guess a big part of that is the equity that you are targeting. So, I guess, just help us think about timing as you delever over the next 12 to 24 months.

Well, the delevering is going to come really from two sources, Jay. I mean, the immediate source of delevering is going to come from continued discounts on the repurchase of indebtedness and that we've been out of the market during a blackout period. We'll probably be back in the market soon, and that delevering will continue unabated from that source. And then the balance, as you correctly pointed out, would be from equity issuance and asset sales, and those I would expect would occur late third quarter, early fourth quarter.

Question for Bill. Term fees seem to be trending below the prior year. Is that really just due to the higher level of bankruptcies this year? I'm just wondering why term fees aren't trending higher given the amount of store closings.

Termination fees are dependent upon each individual situation. To be honest with you, this quarter's number is pretty much in line with our expectations.

A lot of the termination fees we've generated in the past have been termination fees paid by Wal-Mart in connection with their transitioning out of discount stores into supercenters. We have done large packages of terminations with Wal-Mart in the past, and our stable of Wal-Mart centers hasn't grown, yet the conversions have progressed pretty dramatically so there is less of those types of those situations in the portfolio, and you may see a decline in termination fees from that particular source, which has really been probably half of the termination fees we've generated in the past.

And Jehan has a question as well.

Just wondering if you could remind us if there are (inaudible) to NOI outputs for the year and then maybe just how you see that trending specifically over the next two quarters.

The original guidance on same store NOI was that it would be down 3% to 4% for the year at this point. Obviously through half the year and with good visibility on the second half of the year, I think we are now circling the lower end of that range and looking at a down 4% same store NOI. On a quarterly basis, it will vary. This quarter, it was a very tough comp as you think about second quarter of last year before the most meaningful changes in the economic and retailer environment and bankruptcy environment. And so it was a lower number than that range this quarter, but for the year our guidance is for around 4% decline in same store NOI.

Thanks, everyone.

Your next question comes from the line of Jeff Donnelly with Wells Fargo Securities. Please proceed.

Good morning, guys. Switch gears a little bit. Scott, at the conclusion of the analyst day, you stated that this is the management team that you were looking to work with moving forward, but I think you kind of hinted there might be some changes in the future. Any sense what those changes might be that you can highlight for us?

I think that is something we'll be happy to talk about if and when it happens.

And I guess, maybe, how is the board thinking about I guess leadership in more of (inaudible) alignment because whether or not you have near term success on your restructuring plan, it is difficult I think for some investors to get comfortable with allocating capital to DDR when the management team that got us here as you said is still at the helm and the equity held by insiders is now relatively small. I guess I'm wondering, how does the board try and realign interest here? Do you think they grant out of the money options to board members or can the Otto Family members take a more active role without triggering different tax treatments?

I'm not sure I understand the question, although I'll try to answer it anyway. With respect to the Otto Family, they are very active investors in terms of their participation in the board room, and it's something that I think is welcomed both by management and by the balance of the board. They are obviously very significantly invested both in terms of capital and reputation into the future performance of the Company. And the Otto Family's investment in our Company was made because of their knowledge and confidence in the existing management team, and they are highly interested in making sure that that team stays in place and that compensation plans are put in place that provide the motivations that align their interest with their interest as an investor. With respect to the balance of the board, I think -- again, I think the board, like every board of a company that has seen their companies punished by radical changes in the environment and the capital markets, is disappointed by that, but I think they recognize largely these decisions that were made on the capital side were made collectively by management and the board under the circumstances, and they are confident that we have the team in place that can operate effectively in the new world. I do think that there will be efforts made to more properly align management with the shareholders in terms of compensation schemes, and I think that is something that probably is going on in every board room in the country and DDR is no exception.

That's really the heart of my question, I guess I was asking. I think on the one hand, there are some shareholders who are disgruntled that there hasn't been some sort of change either at the management or board level, frankly, but at the other hand, you want to be sure that the team that is in place is properly aligned. Do you have a sense of whether or not that alignment comes in the form of shares or is it out of the money options or is that all to be determined?

If, again Jeff, I don't want to be short here, but I think that's the kind of stuff that will be disclosed when it's done, and there are discussions that are very active at the board level to put that in place. I don't think you will have to wait very long to learn the conclusions of those discussions, and I think when you do, you'll be very pleased that it was a very thoughtful effort to make sure that some of the traditional metrics that were put in place before are replaced with those that properly align management and shareholders interest.

Great. Thank you.

Your next question comes from the line of Quentin Velleley with Citi. Please proceed.

Morning, everyone. I'm here with Michael Bilerman. The first question is -- I mean, thank you for giving us the upsided guidance number. It sounds like the likelihood of further impairments brought down the impact of the Otto derivative, I guess you could call it, will be high for at least the remainder of this year. Can you give us some kind of indication on what you are expecting for impairments and such for the rest of this year?

Quentin, that's a question that is impossible to answer because if we expected any further impairments we would have taken them. You can't -- to do it right and I'm not sure every company does it right, you have to look at this situation every quarter and if there is any impairment that you expect, you need to take it in that quarter. You don't have the option of deferring things into the future. So, as we sit here, the only answer to that question is we expect no further impairments because if we expect them, we would have taken them. The only thing we can say is that if the share price continues to rise, the impairment on the Otto equity will continue to rise. I think it is somewhat ridiculous accounting treatment of that transaction since the equity was actually issued at a significant premium at the time, but the fact that there's a delayed settlement causes the accountants to treat it as a derivative trade, which wasn't the way either of us looked at it.

The warrants obviously have a five year term and to the extent that the share price appreciates, the warrants will also occasion impairments on that transaction. But with respect to other things, in terms of assets held for sale, in terms of joint ventures, in terms of all of those things, if we expected further impairments, we would take them, and I think that we've been fairly aggressive in that regard, and I think probably with a view towards being completely compliant with the most conservative accounting rules.

Yes, as Scott indicated, that as we enter into potential sale transactions and items along those lines, we have to evaluate the assets that would be considered for sale, and we have done that with regard to everything to date, so --

Okay. And on the junior anchor releasing its (inaudible), I keen to hear your thoughts and views on what is happening with some of the in line or the shops spaced around the junior anchors that are remaining vacant. How are the tenants traveling? Are you seeing a decrease in occupancy in that space, tenants asking for additional rent relief and so forth?

Generally speaking, within the portfolio, if you take out the bankruptcies our occupancy is consistent with prior years. It's around 95%. So the nonbankrupt portfolio is actually operating pretty well. What I think we could say as that generalization is because we do have exposure to virtually every type of retail within our portfolio, the greatest distress, if you will, among small shops is in the grocery anchored neighborhood shopping center portfolio, which is primarily a joint venture with a co-mingled fund. That portfolio is where we see the most delinquencies and the most distress among small shops. In the large community centers, power centers and certainly in our Puerto Rico and Brazil malls, we are seeing far less of that, and most of the small shops in our large community centers are national tenants. You see many more local tenants in the neighborhood grocery anchored centers and if we were to generalize anything with respect to our portfolio, by far that's where we see the greatest amount of distress and delinquencies.

Just one more. I'm keen for an update on the (inaudible) acres of land that you have in Russia, are you trying to divest that land at the moment? Just remind us whether or not the Otto Family had any involvement in that JV.

Yes. We have partners with ECE, which is a development company owned by the Otto Family and we are 75%/25% partnership in the Russia venture and it's managed by ECE, they're the operating partner. Where that venture stands currently is that we own two fully entitled, fully permitted development sites in two cities in Russia. We've mothballed both projects until we either find a third party investor or a lender that wants to fund the development of those projects or until we find somebody that wants to buy the land. We are not going to export any further capital at this point from the United States over to Russia. The situation over there is not one that is receptive to new development at the present time. But the investment we've made there we think is a sound investment and in the long term, and we think we will recover whatever investment we've made to date and then some.

Was there any changes to your joint venture with the Ottos or with ECE in relation to anything outside the US? Did anything -- was there any buyouts or capital or anything that may have changed along with them investing in the US?

No. No changes at all.

And then just getting back to compensation, as you look forward and I think you talked about the incentives in the prior programs sort of leading to where you are today and clearly compensation for the Company was at the upper end of the REIT universe, and I'm trying to figure out if the incentives now are going to be aligned towards what would probably be deleveraging. Isn't that sort of getting comp on the way up for getting the Company to highly leveraged and then getting comp on the way down for fixing up what happened before?

First of all, I don't agree with your premise that the Company was one of the highest compensated in the group. I think the schedules that we've seen are flawed in that they only look at the consolidated income of the Company in terms of valuing how a comp relates to overall revenues. Almost half or even over half of the Company that we run is run on behalf of third party investors who pay fees to the Company for those services, and if you take the EBITDA from the joint ventures, combine it with the EBITDA from the wholly-owned portfolio, I think we are actually one of the lower compensated companies as a percentage of EBITDA. Having said that, we think that the compensation scheme that is rewards employees for FFO growth without regards to the balance sheet metrics is inappropriate and has led many companies into positions that they don't want to be in, and we are no exception from that, and the new compensation schemes that are being discussed would not do that. There would be a variety of metrics that would be tied to the immediate objectives of the Company in terms of deleveraging, terming out debt maturities and generating income at the top line, but not at the bottom line so we would be much more focused on EBITDA than we would on FFO, if you will. Also, I would expect that any new compensation schemes here would be highly tied to shareholder performance, and if shareholders do well, I expect management will participate in that. I think those are the philosophies that the board has espoused in their discussions and I think that's what will find its way into any future schemes.

In terms of performance, that would be both an absolute and a relative or just the absolute measure in terms of shareholder performance?

Absolute and relative.

And then, Scott, I think at Investor Day, you did mention that your role could potentially change, that you clearly are going to be in the Company, but that potentially your role or your title at some point. I just didn't know if that was near term or that is something that you are thinking about down the road.

Well, first of all, I didn't say that. I said that the team that is in place will continue to be the team that is in place and some roles and titles may change. I didn't make any specific reference to mine and I really don't want to discuss this anymore. I think if and when something is done in that regard, we'll be happy to discuss it with you. I really don't think this is an appropriate line of questioning.

Okay. Thank you

(Operator Instructions) Your next question comes from the line of [David Harris] with (inaudible). Please proceed.

Yes, good morning, everybody. I've got two quick questions for Dan, if I may. With regard to rents down, I believe you used the word tremendous pressure. Could you give us an idea of where you think how much pressure onto the downside we are going to see across the board on rents and give us a time frame around that too?

Well, I think right now David what we are seeing is even in the nonbankrupt portfolio where we are executing new leases on vacant space, where we had a prior tenant, we are seeing pressure around the 10% range on the rental rates and that is a significant number. Anytime we hit the double digits, we are concerned with that. As I mentioned in the script, the rental pressure on backfilling bankrupt boxes is about 24%. So, the bankrupt boxes are putting on even more extreme pressure but overall if you just look at the non-bankrupt portfolio, we are still feeling about 10% and we don't think that is going to end anytime soon. I think right now what you are seeing is tenants that are using this opportunity in this environment to expand market share at a good price. I think if you think of ourselves as a consumer and you look at what's happening, no one is buying anything at full price today. You shouldn't if you don't have to, and right now tenants are the same.

And really they are looking at it like space is for sale to some extent, no different than you and I as consumers aren't paying full price for anything that we are buying, and I think that will continue until number one, sales go up to the point where they can fund their growth expectations through and they need to fund their growth expectations with external acquisitions or in fact we have more competition for space. Because right now that is what drives rent is competition for space, and that is somewhat limited. There are tenants that want space, but we don't have two and three people bidding for that space and that puts us at a lower leverage position.

I think it's important to note just that the credibility that Dan and we have with answering that because this is not a situation where we are speculating where rents are. This leasing team generated a record level of leasing transactions this quarter. So this is not our best guess as to where this market is. This is nearly a million square feet of new leases executed, three million square feet of total leasing executed, so I really do think we are speaking to not what we think might happen or where this will fall out. I mean, we are doing a huge volume of leasing today, and so this is realtime in terms of where deals are actually getting done, not where we hope to get them done.

So, let me just clarify that. The 10% reference, is that 10% down from here, the leases that you were most recently signing or is that 10% reflective of what you just signed?

No. That is 10% over the prior rent on leases we are just signing.

Okay. So, would you have a guess as to how much further we have to go from here?

I think that is a good number, to be honest with you. As David said, the sample is huge right now. If you look at where we are from January, we are over about 5.2 million feet of transactions. So we have a good feel for where we are on renewals. We have a good feel on where we are in new deals and I think we have a good feel for where we are on the bankrupt space. The one thing I would mention, however though, where we saw a sharp increase in rental rate is in the bankrupt space where we were 63% above the rate that we had in the first quarter in the second quarter, and some of that had to do with the nature of the tenants that we were doing business with and the structure of the deals, but most of it has to do I think with the quality of the real estate. So I think -- our guess is that we are going to be and our strong feeling is that we are going to be in that 20% to 30% range to back fill the bankrupt tenants and I think the portfolio will be probably in the high single digits to low double digits, overall.

There's one other thing, David, that I would like to point out that often gets overlooked. The tenants are really not concerned about the rent number. They are concerned about their overall occupancy cost number. And we are working very, very hard to reduce the non-rent component of occupancy cost within the portfolio and our operations team has done a phenomenal job of reducing CAM, appealing taxes. The real estate taxes are going to come down across the country as we see property values decline. That's going to reduce tenant's occupancy cost on the tax side and whatever we can do on the expense side in terms of other occupancy cost, ultimately will be reflected in higher based rent. So, it's not just a -- it's a much more complicated equation than just looking at is rent going to be $8 or $10. It really is what's rent as a percentage of occupancy. What's occupancy cost as a percentage of sales and what can we do to reduce other occupancy costs to enable us to get more rent, and that takes a little bit of time to resonate, but in times like this people look for every opportunity to save money within the operations of these projects in terms of energy conservation, in terms of our bumbling initiative, in terms of buying better and buying more efficiently and again in terms of tax appeal. So, while this is a near-term deflation if you will in terms of rent because of the bankruptcies, I think some of the initiatives we have instituted during this recession are going to bear fruit in terms of higher rents in the future because we will have reduced other occupancy cost.

Okay. And just very quickly. On Brazil, you mentioned two loans. Are those -- is that secure debt bank financed? Could you just give a little elaboration on the nature of the lending market in Brazil, Dan?

Yes, it's two new small loans secured by our portfolio down there that have just helped to generate additional near term liquidity down there where we have very little debt down there today, and so just as that market continues to evolve, showing that we can generate some additional liquidity at the local level.

And any idea on pricing, David?

I'm sorry?

Could you give an idea of pricing?

Pricing on those loans is high relative to US standards because the risk free rate, (inaudible) rate, is so much higher. So, all in you end up in the low to mid-teens.

Keep in mind, we're borrowing in riage, so --

Yes. Okay. Great. Thank you.

Your next question comes from the line of Shubhomoy Mukherjee with Barclays Capital. Please proceed.

Hi. Is this the call --

Shubhomoy, your line is open. Your next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed.

Hi. Good morning. It's Nick Vedder here. Just a broader question on financing. As you and some of your peers start to look at for (inaudible) as a means of financing, can you comment on the availability of secured debt from traditional sources today and has that changed over the past few months?

Jim, a lot of the secured debt availability relates to the calendar. Insurance companies get their allocations every year, so you have most capacity in the beginning of the year and then it starts to decline as you get later in the year, then it picks up again as you get closer to the next year. So, I'd say right now there's probably less dialogue with life companies than there was six months ago and there will be more dialogue as we get into later in the year. Having said that, what we have seen is a lot more activity from commercial banks who felt like they were being crowded out of the market by the life companies and a lot of the activity that we are having is actually not from life companies but from banks and particularly in the Puerto Rico portfolio we've had a significant amount of interest from commercial banks to do secured lending. So, I think again there's not a deep market out there to tap into. Although we do see that there's a tremendous appetite on this TALF financing because it's a different investor that is IRR driven and they are talking about really double digit IRR returns and there's very significant appetite from that investment community and there are funds being raised every day to really tap into those opportunities.

Great. Thanks. And then specifically with TALF, does DDR have the ability to put (inaudible) financing on top of the first mortgages on the TALF properties?

Well, we do, but we probably won't do it because we have a facility in place with a consortium of banks that enables us to pledge second lien on low leveraged assets, and we'll probably use the low leveraged assets that are financed by the TALF to further collateralize that facility. But yes, there's an opportunity in that TALF structure to basically take your loan-to-value up as high as formally traditional levels of 60%, 65% but again it comes at a fairly high price because the IRR that the investor is looking to achieve will not go down as they go higher on the loan-to-value, but now they are getting their IRR, they have to get it on their money, not on the Fed's money. So the blended rate would go up from something in the high 4's to low 5's to something in the 7's or even 8% range, and we don't really need to tap into that kind of marginal 12% to 15% IRR money because we do have this facility in place with a consortium of banks that gives us essentially the same benefit without the incremental cost.

It's really a distinction between liquidity and leverage and I think you've seen us make progress thus far though the year and with the plans we've outlined for the rest of the year, considerably on the liquidity front and still making some progress on the leverage front. The notion of adding additional debt to reasonably levered assets whether they are existing or newly levered assets certainly helps liquidity, but at this point we believe our plans have outlined more than enough liquidity for the near term, the focus longer term is the reduction in leverage and so the marginal benefit from adding incremental leverage to assets just isn't as great as we look forward as it has been over the past year so as we've been focused very much on ensuring a strong liquidity position.

Okay. Great. Thank you. In terms of the operating front, Dan, you mentioned that 45% of the new leasing activity was for space that was previously occupied by bankrupt retailers. I am just curious how much space the new retailers are taking in those relative to the total size of the dark space and the TI's associated with the releasing.

The vast majority of them are taking the full box, and we have a few situations where you may have some square footage on the back of the box or you may have a carve out in the front for a smaller store where you reduce frontage. But the vast majority of the deals we've done thus far in that portfolio has either been for the entire box for the single user or split for two users.

Okay. Great. Thank you.

Sure.

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

Good morning, guys. It's Joe Dazio here. A question on the guidance. One of the things you mentioned driving the decline was lower assumed line sale gains. Can you just remind us what or how much lend sale gains were embedded in both the old and the new range?

Each one of the factors we outlined in the $0.10 change represented $0.01 to $0.02 of the change and so you are talking about roughly $2 million difference in prior budgeted land sale versus currently budgeted land sale gains.

Did you guys previously give any indication what the prior budgeted land sale gain was?

We didn't break that out, no.

And then just a question for Dan. Wondering if you can give an early read on how Q3 leasing volumes so far are shaping up relative to the I guess it was really strong in the second quarter.

I'm sorry, Mike, I didn't catch it all.

How third quarter leasing's going compared to the second quarter.

Third quarter leasing is going well. The bulk of the activity that we are seeing again is in our anchor store group. Obviously that's where we have the bulk of our vacancy, so that's where the bulk of our activity should be, but what our concern was, to be honest, was the -- as we brought a lot of deals to closure in the second quarter, that the queue would have dropped off significantly in the third quarter and that's something that we've been looking at and watching very carefully. That's not been the case. We've been pleased with the fact that as we have rolled deals from LOI to executed lease, the queue in the LOI category has continued to stay robust and ultimately we'll convert the vast majority of those LOIs to leases. So originally we had projected that we would do about 8 million feet of leasing for the entire year, and right now we are on a path to do a little better than that.

Great. Thank you very much.

Sure.

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

Good morning. Where do you all expect to see occupancy at December 31st?

We think that occupancy will go up, as I mentioned, nominally in the second quarter and again -- I mean, in the third quarter and again in the fourth quarter. So, at the very high end we think we can get -- end the year with about a 50 basis point plus in occupancy from where we are today and on the low end, somewhere in the 20 to 30 basis points movement.

Okay. And have you all issued any stock for your continuous equity program so far this year?

We have not.

Okay. And do you expect any further changes to the dividend 2009?

That's something we discussed at the board level and it will be discussed at the next meeting, which is September 9th. So at this point it's really not our call, and we don't know yet.

Okay. Thank you.

The policy has been articulated, represents paying the minimum amount required to maintain REIT status for our recent dividend declarations.

Okay. Thanks.

Your next question comes from the line of Rich Moore with RBC. Please proceed.

Hi. Good morning, guys. How leased are the new developments and the re-developments that you are working on?

The new developments are currently 82.4% leased, and our re-development projects are in the 70s, about 74% to 76% leased, depending on which project we are talking about.

And how is that going, Dan? Is that improving over the first quarter?

It's slow. There's not a lot of great enthusiasm out there right now for some of these projects, but it's going to be hard to get them from 84% to 90%, for example. That's going to be the tough battle, but we are seeing progress, but it's slow progress, and we'll have to just keep banging away.

Okay. Great. Thank you. And then, on the TALF program, is that sort of out of your guys hands at the moment or it's moving along with the government or investors or is that something that you can actively push from your end?

Well, there's a process that you have to go through, Rich, and we are going through the steps of the process. The initial step is you meet with the Fed. That's been done. Second step is you start to do the third party reports, which are being done. Third step is you meet with the rating agencies, which is being done, or has been done, and then once you get your proceeds level at AAA from the rating agencies, you go back to the Fed, and get them to sign off, then you go and market to investors. We have a lot to say about the process and we are very actively engaged in it with the underwriters, but those steps must be taken and they get taken at their own pace with each step along the way.

Because our particular TALF financing has been so widely discussed in the public, we've kind of skipped ahead a step and the investors are aware of it, and the investors have been calling the underwriters expressing interest in investing in the paper before we've actually been able to expose the rated of securities to the marketplace. So, we probably have a little better feel for the ultimate outcome because we've actually had -- we and our underwriters have actually had discussions with the investors, but you can't shortcut the deal by going directly to the investors because they are relying on the Fed piece and the Fed piece has to get through the rating agencies and the Fed first.

Okay. That's very helpful, Scott, thank you. And then did you guys talk about a cap rate on the assets that you are putting in there, an overall cap rate, or some way to think about how you arrived at the total valuation?

Yes. We do know what the cap rate is, but the cap rate is probably not as important as the NOI because the rating agencies and the Fed will probably give pretty significant haircuts to NOI when they are trying to really create a AAA paper. In terms of big picture, using around a 9% cap, we've got about $1.6 billion worth of assets in the two pools combined, and we are being guided to $600 million to $700 million of proceeds.

Okay. Very good. Excellent. Thank you, Scott. Real quick on the (inaudible) investments that you guys have, I think you have about $120 million or you did, I think that was a year end number, what does that pool look like? How comfortable are you with what you have in there?

I think we are comfortable with what we have in there today. There's been a small impairment recognized thus far, but the remainder of it, we continue to hold at par.

So you don't think Dave there's any real reason to expect a write-down in there as well?

It's not our expectation.

Okay. And then the big jump in interest expense in the JVs, when the assets, the amount of assets and the amount of revenue actually fell in the overall JV portfolio, I'm curious what drove that, I think it went from $71 million to $84 million of interest expense.

That is really related to certain derivative activity, primarily the MBT joint venture. That was probably over -- between $8 million and $9 million of that activity, and there have been a couple of other loans that have higher rates, but the biggest pieces, the classification of the derivative activity is the MBT venture.

Yes, and that's certainly not new derivative activity. It's simply the mark-to-market on existing interest rate swaps where the goal was to lock rates in place and limit the variability there, but accounting forces us to pull some of that through mark-to-market process into the income statement.

Okay. So, the vast majority of that goes away I take it in the next quarter?

It's non-cash and it could be -- it could go in either direction, depending on --

Exactly. Okay. Very good. Thank you, guys.

(Operator Instructions) Your next question comes from the line of Alex Barron with Agency Trading Group. Please proceed.

Yes, thank you. Good morning. I wanted to ask you in terms of I guess the difference between the lease occupancy you guys report and physical occupancy, how much difference in basis points would you say there is perhaps attributed to tenants that have signed a lease but haven't moved in yet or perhaps arc tenants that are still paying rent?

The leased rate is 90.7% and the physically occupied rate is 89.2%.

Okay. My other question was given that the occupancy kind of remained flat quarter-over-quarter, is that fair to say that you guys had basically the same, roughly the same number of tenants that signed new leases versus people who moved out?

Actually, that's very close. Just to give you a little insight into how the market is moving and how tough it is, in the 3.1 million square feet that we executed in this quarter, our net increase of occupied GLA was 81,000 feet. So, that gives you a feel for how much activity has to occur just to tread water and obviously that won't -- that will change over time because we've lost the bulk of our bankrupt tenant. The other thing to keep in mind is that the asset sales, the assets that we sold were all over 90% leased. So, that had an impact on the overall rate as well. But the net gain of square footage occupied in the quarter was 81,000 square feet, and it was between 1 million square feet leased.

What would you say is at the margin for those, just focusing on that space that went out and the new space that came in, what would be the equivalent change in the rent that these guys are paying?

Well, it's hard to say because a lot of the tenants that left were of older leases that were dramatically below market. So, I think that overall I would say probably 10% range is where we would find it.

Well, actually I think somewhere in the script it says what the average rent in the portfolio is today versus what it was before.

We went up 26%.

And it actually went up.

Yes, the average rent overall in the portfolio went up and that was primarily driven by the fact that we had a 63% increase in the bankrupt releasing in the second quarter than we had in the first quarter. So that did move the needle.

Okay. Great. That's helpful. Thanks.

Sure.

At this time, we have no additional questions in the queue. I will now turn the call back over to Mr. Scott Wolstein for any closing remarks.

Thank you. Once again, thank you everybody for joining us today and for your continued interest in our Company. We believe that our second quarter 2009 operating results were solid despite a lot of accounting noise and a difficult operating environment and we continue to make significant progress on our various deleveraging initiatives. We look forward to updating you on our progress again next quarter. All the best. Have a great weekend.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a wonderful day.