Site Centers Corp (SITC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the 2010 Developers Diversified Realty Corporation earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of this conference. (Operator Instructions). I would like to turn the presentation over to your host for today's call, Miss Kate Deck, Investor Relations Director. Please proceed, ma'am.

Good morning and thank you for joining us. On today's call, you will hear from President and CEO Dan Hurwitz, Senior Executive Vice President and Chief Financial Officer David Oakes, and Senior Executive Vice President of Leasing and Development, Paul Freddo.

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 the 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 a press released issued yesterday and filed with the SEC on form 8-K and in our Form 10-K for year-ended December 31st, 2009 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 released dated August 2nd 2010. This release and our quarterly financial supplement are available on our website at ddr.com.

Lastly, we will be observing a two-question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue. At this time I will turn the call over to Dan Hurwitz.

Thank you, Kate. Good morning and welcome to the second quarter earnings conference call. To begin the call, I would like to address a few items of note and then turn the call over to Paul and David.

Over the past several months, we have noticed a significant shift in our conversations with analysts, investors, lenders and retailers -- a shift away from capital markets and balance sheet concerns to portfolio operations and growth prospects such as leasing velocity, acquisition opportunities, redevelopment projects, new business development initiatives, tenant growth plans and many other operational issues we live with every day.

While our view on the underlying risks inherent in the capital markets has not changed materially and our articulated strategy remains officially in place, our operating results have been consistent with our positive expectations as discussed on prior conference calls and are increasingly promising as evidenced by this quarter's numbers. Most notably, this quarter featured the first evidence of positive leasing spreads and positive same-store NOI growth since the beginning of the financial crisis.

Paul will discuss the leasing results in a moment, but the highlights tell the story. We increased the lease rate of our portfolio by 30 basis points over last quarter. We executed 477 lease transactions for over 3.2 million square feet. This activity translates into a portfolio leased rate 90 basis points higher than the comparable quarter last year and a 17% growth in total lease transactions over the same period. Leasing spreads turned positive this quarter with a blended rate of 3.9%. Same-store NOI grew by 1.5% during the second quarter compared to a decrease of 2.6% last quarter and a 5% decline for the second quarter of 2009.

On the asset sales front, we have sold $100 million of nonprime assets since March 31, 2010 as we continue to focus on pruning the portfolio of underperforming properties and enhancing the overall quality of our prime portfolio. David will share more color on this important initiative momentarily. Additionally we unencumbered eight shopping centers, seven of which are designated as prime assets. These assets are now lien-free which significantly improves the ratio of unencumbered assets to the unsecured indebtedness for the benefit of our unsecured lenders and supportive of our strategy articulated to the rating agencies, our line banks, and unsecured bond holders.

With a continued focus on improving balance sheet flexibility and achieving our deleveraging goals, we reduce consolidated outstanding indebtedness to $4.6 billion during the second quarter. With a year-end leverage target of $4.4 billion, we are well on our way to achieving our goal to continued nonprime asset sales in the use of retained cash flow to pay down debt. While we are very pleased with the results of the quarter, we continue to watch the key macro elements of the economy as they may relate to our business model -- the most important of which are jobs and wage growth which I will address in a minute.

I would like to highlight that one of the least important metrics, but often mentioned, however, is consumer confidence. Consumer confidence has had a limited impact on our business results over the past several quarters. As consumer confidence has continued to drop, most of our key retailers are posting positive comps and significant profits regardless. Our retailers continue to prove that no one knows the sentiments of their customer better than they do, and they have adjusted their strategies to successfully adapt to whatever accurately reflects the pulse of the consumer. It is very difficult for our industry to successfully overcome job and wage reductions or even seizures in the capital markets, but our retailers have proven that operating in a low consumer confidence environment is not only possible, but can actually be extremely profitable.

So for us the key metrics are still job and wage growth on the macro level and inventory control for retailers on the micro level. Jobs will tell us if there will be more or less available market share or fuel growth for retailers, and inventory levels are directly linked to the success and profit ability of the folks who pay our rents. And while consumer confidence may be generally low and has been for many quarters, balance sheets are strong and major bankruptcies have been nonexistent for over a year. While rents in certain cases are still below long-term averages and bad debt remains a concern, property level momentum is real.

And Paul will now provide more details.

Thanks, Dan.

As Dan mentioned, leasing momentum and deal velocity remained strong during the second quarter. In the quarter we completed 206 new leases for 1.3 million square feet and 271 renewals for 1.9 million square feet. This record amount of leasing resulted in a leased rate of 91.6% and we remain on track to meet or exceed our goal by 92% by year-end. Leasing spreads improved dramatically, with a positive spread of 7% for new leases and a positive spread of 3.2% for renewals, resulting in a combined spread of 3.9%. While future spreads may not be as high, the trend is clearly positive and we are seeing better economics in our new deals. Of particular note is the improvement is renewal spreads. We are seeing more tenants exercise their renewal options at their contractual rent, and while there are some exceptions, we are seeing far fewer situations where the tenant has a viable or economically reasonable opportunity to relocate.

As we shared with many of you at NAREIT, and at other meetings, the tone at the annual ICSC Recon in Las Vegas was optimistic and encouraging. Many retailers had open to buys for 2010, which afforded us the opportunity to either land new deals or expedite active negotiations and accelerate rent start dates. I am pleased to report that we signed 62 deals since Recon with retailers that had 2010 open to buys and will be open for the holiday season. This translates into roughly 600,000 square feet of retail space and $6.5 million of annual base represent with DDR's pro rata share being $4.4 million. While this doesn't result in a significant impact in 2010, all of this annual rent will be recognized in 2011.

Retailers' continued demand for new stores in the value and off price sectors is also a reflection of outlook by the consumer, who is responding to the broader economic uncertainty by demanding more value for their dollars. The June retail sales numbers were slightly below expectations, but still positive. The back to school and back to college selling season which is the second largest volume period of the year after Christmas, should be a catalyst for the event-driven consumer.

We continue to make good progress in the retenanting of our vacant boxes with a record quarter in the number of deals and square footage. We signed 17 leases for 718,000 square feet and sold three former Mervyn's. To date we have activity on 77% of the space vacated by bankrupt dealers excluding Mervyn's which includes 41% that haven't sold or leased and another 36% that are currently in lease or LOI negotiations.

On previous calls there were some concern that the best boxes would be leased first, resulting in a significant dropoff in leasing volume. While this concern is understandable, leasing in the junior anchor space has remained strong and an even accelerated in the second quarter. This acceleration can be attributed in part to retailers' continued focus on achieving sales and profit growth through new store openings. Retailers we spoke with at the convention and since continue to have strong new store opening plans for 2011 and 2012. In addition, the lack of new supply is forcing retailers to reconsider opportunities to open new stores and quality locations in well-positioned existing shopping centers.

Retailers are continuing to show flexibility with their prototypes and have also introduced new concepts in an effort to grow revenue. We continue to see strong demand from a broad range of retailers including Wal-Mart, TGX with their various concepts, the Fresh Market, Michael's, Joanne's Hobby Lobby, Bed Bath and Beyond with their various concepts, Kohl's and hhgregg. While we have been providing results for the leasing of our vacant boxes for several quarters, many of you have asked when the tenants would commence paying rent and what that means for timing and magnitude of revenue growth. We currently have executed leases for 940,000 square feet of junior anchor space that has not yet taken occupancy and therefore is not yet paying rent. The positive impact to NOI from these units alone will be approximately $10.3 million in 2011 with DDR's pro rata share being $7.6 million. Most of the junior anchor deals that will be signed in the third and fourth quarters of 2010 will not impact revenue until late 2011 or early 2012.

Next I would like to call your attention to our new disclosure of net effective rents in the supplement. While most of our peers report leasing spreads with the prior and new rental rates, we have taken our disclosure one step further by providing a clearer picture of the true economics of the deal including tenant allowances, landlord work and leasing commissions. As we have reported on numerous occasions, we have made it a priority to maintain our discipline with regard to the capital associated with the leasing activity by not buying up rents. And an important driver of this is our attention to total deal economics rather than GAAP counting metrics. Our internal focus has been on the net effective rents associated with new deals, and we have made the decision to start publicly exposing the active specifics.

Turning now to Brazil, our portfolio continues to well, with a lease rate 97.8% and same store NOI growth of 18.9% which has been favorably impacted by several new business development and ancillary income initiatives. Retail sales in Brazil remain strong, resulting in many US-based retailers such as Wal-Mart and Cinemark seeking to expand their store base. Our new development in Uberlandia is progressing as planned and expected to open in late 2011. The project is anchored by Wal-Mart and Cinemark and is on schedule to open at 90% leased. The expansion of Parque Dom Pedro, which will open in November 2010 is progressing on schedule and on budget and is currently 93% leased. We have also started a renovation and expansion of shopping Metropoli in Sao Paulo, which will be completed in late 2011.

Upon completion, the stabilized unleveraged cash on cost returns of the development projects are expected to be in the range of 14 to 17%, of the stabilized returns of the redevelopment projects are expected to be between 17 and 30%. Additionally, as briefly mentioned earlier, our new business development teams continue to implement ancillary income initiatives in Brazil with the most recent example being paid parking at nine of our centers. The most encouraging aspect of the ancillary income program in Brazil is while we are encouraging significant income, over $13 million annually, this program is still very much in its infancy in this portfolio.

Ground-up domestic development in the U.S. is still primarily on hold and the limited capital we are spending in this area is devoted to the lease up of the few projects that were started several years ago. With regard to our domestic redevelopment initiative we are in the process of viable projects with attractive returns and provide strategy on future calls.

I will now turn the call over to David.

Thanks, Paul. I would like to begin by pointing out some changes that we have made to our earnings release and supplemental this quarter.

As Paul mentioned we had a net effective rent calculation. We have also added our unsecured note covenants and more detailed information regarding our portfolio in Brazil and Puerto Rico, to name a few improvements. This is the second consecutive quarter we made improvements to further enhance our transparency and accuracy of our disclosure and hope you find the changes useful. As always we welcome your feedback.

Turning now to our financial results -- Operating FFO was $0.25 for the second quarter. Including certain non-operating and primarily noncash net charges, FFO was a loss of $0.13 for the quarter. The two largest charges this quarter relate to impairments taken on the Mervyn's joint venture asset and the development land we own in the joint venture in Russia. We halted the Russian development over a year ago, and do not expect to export additional capital to Russia. We will only reconsider these projects if and when returns are appropriate on a risk adjusted basis, and they can be financed without the need for additional equity.

Our second quarter results were also impacted by lease termination income. As fundamentals have improved and the prospects for re-tenanting spaces has become much better, we have actively looked to execute terminations for dark space. Two larger terminations were completed in the second quarter leading to an increase in other revenue and a 16 basis point lower leased rate than would have otherwise been reported for the quarter. This decision was tenant-driven as we have significant interest in the two spaces -- one of which has been dark for over two years and the other has been dark for over one year.

Bad debt continues to trend above normal levels. While we have seen fundamentals for most major tenants improve, we are still seeing heightened levels of bad debt among smaller tenants, though this has moderated somewhat.

Moving on to capital markets activity -- in May we exercised our option to extend the term of our revolving credit facilities by one year. We have been working with our banks for several months now in the refinancing and are encouraged by the increasingly positive tone from our bank group due to both macro and DDR-specific improvements. Banks are encouraged by our continued progress on the deleveraging goals we outlined and on the extension of debt duration we achieved. We have recently agreed on terms of our lead banks and began presenting it to other large participating banks. Initial feedback has been positive and subscriptions are likely to exceed our appetite for the size of the new revolver. We continue to expect the refinancing will close in the fourth quarter and we will provide you with specific details on the new facilities in the coming months.

At quarter end, the balance on our current revolver was less than half of our aggregated committed capital, which supports our strategy to voluntarily refinance a smaller revolver than the one we have today. Ongoing asset sales, increasing EBITDA and our conservative dividend policy will continue to lower that revolver balance over time. A smaller revolver will provide sufficient access to liquidity without requiring us to incur fees on excess capacity we do not intend to use. The smaller capacity is also consistent with our plan to continue to implement a long-term financing strategy and shift away from reliance on short-term debt.

As Dan mentioned, we reduced total consolidated debt this quarter from $4.7 billion to $4.6 billion, and we expect to meet our stated goal of $4.4 billion of total consolidated debt by year-end. We reduced our debt to EBITDA slightly from 9.12 times the first quarter to 9.10 times the second quarter of 2010 and continue to expect this ratio will be in mid-eight times range by year-end, driven primarily by continued asset sales and retained capital which will lower debt and a strong leasing activity that will increase EBITDA.

It is important to note this ratio, when calculated quarterly, suffers from the seasonally weakest results in the second and third quarters, so we are pleased to see any progress when compared to the first quarter. This quarter's deleveraging included purchasing $101 million of 2010, 2011, 2012 unsecured notes in the open market at a total discount to par of nearly $2 million. In addition, as Dan mentioned, we continue to increase the size and quality of our unencumbered asset pool. We unencumbered eight assets this quarter, seven of which were part of the prime portfolio and the other is under contract for sale.

Since March 31 of this year, we generated $108 million of proceeds from asset sales of which DDR's share is $55 million. This includes $27 million of assets sold since the end of the second quarter. These were all nonprime assets including a dark K-Mart, former Mervyn's and Service Merchandise boxes, a portfolio of freestanding Rite Aids, and various small strips and out-lots. Proceeds to DDR from asset sales for the year total nearly $150 million, putting us well on our way to exceeding our guidance of $150 million for the entire year. We currently have $100 million of additional assets under contract with potential net proceeds to DDR of $76 million. We continue to be very focused on selling those assets that are not part of our prime portfolio as well as non-income producing or negative-income producing assets. Year to date we sold approximately $50 million of non-income producing assets over which $30 million is DDR shared.

As previously announced, these important efforts will now fall under the leadership of Mark Bratt, our new Executive Vice President and Chief Investment Officer. Mark brings an abundance of real estate transactional experience and will be an important addition to our senior management team as we continue to execute on our strategy of increasing the focus on our prime portfolio through select acquisitions and continued nonprime and non-income producing asset sales.

Turning now to upcoming debt maturities, after repaying approximately $150 million of unsecured notes that matured this week, we have approximately $10 million of wholly owned debt maturing in the remainder of 2010. Our share of unconsolidated mortgage maturities in 2010 totals $117 million today. These loans are in the process of being refinanced, extended or in some cases the assets are being sold.

We have also made progress producing our 2010 wholly unmortgaged and unsecured note maturities by over $70 million in the quarter. Excluding revolver balances, we have approximately $330 million of wholly owned debt maturing in 2011. We expect to fund these maturities through free cash flow, asset sale proceeds, and additional new long-term debt.

During the second quarter we received our first positive ratings action in years when Fitch upgraded our outlook from negative to stable. We are in continued discussions with all three rating agencies to keep them updated with both our operational and balance sheet progress.

Finally, EDT Retail Trust, which was formerly known as Macquarie DDR Trust, completed its recapitalization in June, raising AUD208 million through a rights of offering. Unit holder response to the offering resulted in EPN owning a 48% stake in EDT in addition to being our 50/50 partner in the trust manager. There has been no material change to our property management, leasing, or asset contracts, and we have been working very closely with our new partners to improve the trust assets and balance sheets and create value for all unit holders. We are please to see the venture merge from the recapitalization as a stronger company that still owns many very high quality shopping centers.

I will now turn the call over to Dan foreclosing remarks.

Thank you, David. I would like to conclude by providing you with an update on some of our goals for year-end.

As mentioned in my opening remarks, we have been able to successfully the lease-up of our portfolio with another record quarter of leasing activity and made considerable progress on the disposition of nonprime assets. Based upon the leasing progress made to date and the momentum headed into the third quarter, we are very comfortable with hitting our year ends stated goal of 92%, and expect to exceed that number if trends continue.

If terms of asset sales we believe the current environment provides a unique opportunity to sell into the market at more favorable terms, and therefore we will continue to accelerate nonprime asset sales where prudent, even though dilutive to near-term FFO, and therefore also expect to exceed our year-end budget of $150 million of dispositions.

Regarding same-story NOI for the remainder of the year, barring any unforeseen bankruptcies, we are confident we will achieve our original projection of flat to slightly positive, overcoming negative NOI in the first quarter with positive NOI for the balance of the year. In terms of our leverage targets, as David mentioned earlier, we expect to meet our stated goal of $4.4 billion of total consolidated debt by year-end and expect debt to EBITDA to be in the mid-eight times range on a pro rata basis and mid to high seven times on consolidated basis. Overall we are reaffirming our 2010 operating FFO per diluted share to be approximately $1 to $1.05, even with the projected dilution of additional nonprime asset sales.

While we are pleased with our results for the quarter and look forward to the continued momentum we experienced operationally, we are astutely aware of fragile state, volatility and unevenness of the economic recovery. However, we believe that our long-term strategy will prove to be prudent and will prepare us for whatever challenges and opportunities the economic environment presents, and we are quite certain there will be plenty of both ahead.

At this time we would be happy to take your questions.

(Operator Instructions). Your first question comes from the line of Michael Bilerman representing Citigroup. Please proceed.

It is Quinton here with Michael. Just the first question -- it looks like with the Russian land you were quite prudent in electing to impair the land rather than put additional equity to work at this stage. I am curious on the remaining $500 million of land in the US and Canada. How are you thinking about the potential development profits from that land or potential asset -- final proceeds if you would like to sell that land? And what the potential value impact on that land could be?

If we have to run these impairment tests every quarter, it is an objective process where we go through our expectations for the land, both what management's intention is in terms of potentially moving forward or potentially liquidating that land which is a process we go through every quarter waiting those potential outcomes and come out with something. If it either indicates an impairment or doesn't indicate an impairment, it is important to note that it is not, a two-way test if we believe land is worth more, we obviously don't mark anything up. It is just the potential to mark land down. At this point based on our intentions with the Russian land as we indicated, we took the impairment this quarter, but were not -- nothing else was triggered in terms of the US or Canadian land.

And can you just give us an update on where you are at with selling some of the US land? I know you spoke about selling some of it to retailers and potentially to developers as well.

Yes, we've got a couple things that we are looking at, but as we have mentioned on previous calls and some of our meetings, there really is not much of a market for that land. We are listing it. We are pursuing retailers and developers and then we think you will see some deals coming forward in the next couple quarters. But it is not going to be a lot of sales.

That's part of the negative producing, income producing asset sale bucket that was mentioned in my comments earlier. So total $50 million for the year, $30 million of that is DDR's share, and included in that is some of the land sales including another parcel which closed recently for about $8 million. So it is a slow process, but there is progress being made there, and the impact on our financial results can be somewhat significant more so than operating asset sales because you are not seeing the accompanying EBITDA drop -- in some cases you may see EBITDA increases along with those sales.

And just lastly, in terms of FFO guidance, I know you said you were going to exceed your budget on disposals of assets and the dilution impact there. I'm just curious the line balancing increased quite a lot, and you are paying off high yielding debt basically to do that which would help your earnings out. Are you still factoring in some sort of capital raising in the second half, unsecured note issuance into that guidance number?

We are. We have talked about the goal of continuing to extend our duration. It is extremely important to us. We completely acknowledge that it is more FFO accretive to ride with a greater balance on the line. But it is important to our strategy that we are very committed to extend that duration, so looking at completing non-secured note issuance in the second half of this year.

And what kind of size would that be?

We don't want to go into exactly what we're planning, but we have had over the past three months, two notes mature. They total about $300 million, and so I think that's a reasonable starting point. You know, we are not looking to raise too much capital for future years noting the exact dilutive impact you are talking about, but with the access we have gained in the unsecured market looking to refinance whatever is maturing with new long-term debt.

Okay, thank you.

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

Thank you. Good morning, everyone.

Going to page 21 of the supplemental where you guys look at the combined NOI, you are looking at the most recent period versus a year ago. And you did talk about the leasing activity in the most recent quarter and the pick up of roughly $4.4 million, but I'm just curious of how much of that $25 million GAAP versus a year ago you are expecting to pick up say over the next 12 to 18 months? Looking at the 237 success the 262?

I think in Paul's comment he went through some of the specifics -- big box leasing activities that will impact that, and that will come back in 2011. Some of that will obviously hit in future years. But per Paul's comments, something in the $10 million range that was forecast for 2011 just from the big boxes, then some incremental impact on the small shops, that's a lot of little leases that add up to something there. And so continued progress with building it back, but would not expect to get back to where we were at peak occupancies and peak rents in 2011.

We are in the process for budgeting for 2011. As soon as we get through that process, like we did in January of 2010, we will provide complete and detailed guidance on what our expectations are in regard to that issue specifically.

Okay. And I guess the question was asked in the context of you talked about debt to EBITDA and the goals. But fixed charges running about 1.8. I'm curious when you see that metric moving over say two times and getting back to a healthier level?

I mean, we would still say that both relative to covenants and relative to our thoughts regarding coverage levels that the 1.8 times is a comfortable level today as we model going forward. We are very cognizant of the fact that fixed charges are going to increase, and it will be a case of does EBITDA increase rapidly enough to make up for that? And it is our expectation right now with a 1.5 times fixed charge covenant that we remain comfortably compliant, but that will be a ratio we will be very, very closely focused on given just how low inflation rates are today and our firm expectations and budgeting that those rates are going higher over time.

Great, and lastly, can you comment on where you see leasing spreads trending in the second half of the year? Do you see the blended rate of 3.9% sustaining?

Yes, it ought to be right in there, Jay. We may not see, as we mentioned in the prepared remarks, but the 7% positive, we had a handful of very strong deals in the second quarter, but the trend is clearly positive. The thing that will carry keeping that number in the positive territory, the renewal spreads, and as we talked about in the past, that's really a true indicator of where we are seeing deal economics. We reported a negative 1.8 I think lease renewal spread in the first quarter, and to get that up to 3.2 and to see tenants taking their renewal options at contractual increases is significant. And we will continue to see that positive. We will see the new deal spreads move around a little bit, but they will continue to be positive and I want to say 3.9 is the run rate going forward, it should be in that vicinity.

Thank you.

And your next question comes from the line of David Wiggington representing Macquarie. Please proceed.

Hi, guys. You have been pretty active looking to the issues you have had with your joint ventures. Can you maybe just give us an update right now on how your joint venture partners are viewing the world, and what they are thinking and how it affects you? And maybe more specifically talk about the DRA JV where your debt continues to exceed the gross asset value, and what DRA's perspective is on that, and if they are content where they are right now to let it ride out.

Sure. I think in general what we are hearing from our institutional capital partners is consistent with what you are hearing broadly in terms of institutions recognizing that they are fairly or even somewhat under allocated to real estate. They are focused on finding quality cash flow streams in an environment -- a broad investment environment where that is very challenging to do. Many of our partners are also pursuing the strategy that we are pursuing at selling nonprime assets. They along with us grew over the years, and now some assets we don't believe have the best prospects going forward.

So there are sales that are still in the works on behalf of partners. In some cases it is a partner looking for some sort of liquidity. In other cases it is our and their belief that the current in pricing environment offers opportunities to make attractive sales and potentially redeploy capital elsewhere. And in other cases, it simply is just the desire to improve the portfolio quality over time where there is no need to get that capital back.

So that's what we are seeing broadly with our existing partners as well as several new groups that we continue to talk about opportunities with. We're obviously not moving forward on anything unless we see an attractive opportunity there. We won't be driven by the capital availability. We will be driven by the opportunity. And without wanting to say anything too specific regarding any joint venture, the situation with the DRA joint venture and how it shows up in our disclosure with a negative equity value is really a function of an attractive historic basis in those assets. As I mentioned earlier, the impairment test forces you to move down. They don't force you to move up. So it is certainly not our belief that those assets are under water, but a historic accounting cost perspective, you see exactly what is shown in our supplement where the asset are less than the debt, but that is certainly not what we would believe to be a fair mark to market.

Can you maybe talk about some of the opportunities you are seeing with the new joint venture partners you referred to?

You know, I don't think we want to talk about anything before it is something we have executed upon, but we are certainly seeing institutional capital interest in real estate, in retail real estate and the stable cash flows that it can provide, especially in an environment where it is easy to underwrite cashflow stability or even growth relative to a year ago. So certainly seeing good interest out there. As we have talked about though, we will be extremely cautious in terms of who we are working with and the specific opportunities that are pursued.

Overall, Dave, one of the things we are seeing is the asset class is becoming -- is being viewed much more favorably than in the last several quarters. As we have mentioned, once we got through that initial surge of bankruptcies which was very steep and very early, the asset class has been incredibly resilient and actually performed quite well. If you look at who the winners are in the retail world are today, it is exactly those folks that populate our assets. So we have seen institutional capital come back to our asset class recognizing the strength that our centers have shown in a pretty steep recessionary period.

So, some of your peers have been able to pick up assets from existing joint venture partners and needed to liquidate. I know you may not be aggressively looking to acquire assets, but do you anticipate there being any asset that would be attractive to you that you could acquire out of existing joint ventures at this point?

Well, it is certainly possible. We have a number of assets in joint ventures that are prime assets that we would like to hold on a long-term basis. But we are not under any immediate pressure because those assets are not under any immediate pressure to be liquidated.

Okay. And this is my last question, actually on Brazil and Puerto Rico, how are you thinking about those markets? Meaning your operations are clearly doing well there. Are you exploring opportunities to expand in those markets and take advantage of the growth and -- that is taking place there?

Well, particularly in Puerto Rico, for example, continues to trend stronger than the domestic portfolio, and we are looking at areas continually to expand our presence on the island either through expansions of existing assets. There is very little new development going on in the island, and that's not something we are actively pursuing. We are pursuing a number of new initiatives that are growing NOI on the island. We are bullish on Puerto Rico. Recession has hit the island, obviously, and has had an impact. But again, the impact has been less than it has been in our domestic portfolio.

Brazil is a little different. Brazil there is much more opportunity for growth from the standpoint of new business development initiatives, as Paul mentioned, that are relatively new to this portfolio and will generate really in the first full year about $13 million of income. And again that program is still absolutely in its infancy. So we are looking for good growth out of business development. There are opportunities we are pursuing, but we will pursue them very cautiously and obviously on a risk adjusted basis like we have done historically. We have opened a very successful center in Manaus last year. We will open a very successful center in Uberlandia next year, and there will be one or two others that come along in the following years.

We are looking at a consistent growth strategy in Brazil, but again it is an emerging market that needs to be viewed with caution, and I think we are looking at all those opportunities very prudently. With that being said, we are very excited about Brazil. And every time you feel bad about what is happening elsewhere in the portfolio, or you start to see about same store NOI or lease spreads struggling to get to be positive, you always look at the Brazil numbers and you feel a lot better about life. So when you look at high teens same store NOI growth, you do question whether it is sustainable. But you certainly want to take advantage of it as long as you can.

Okay. Thanks, guys.

(Operator Instructions). Your next question comes from the line of Alexander Goldfarb representing Sandler O'Neill. Please proceed.

Yes, hi, good morning.

Good morning.

Just want to go back to the ICSC comments and sort of what's going on now. One, you know, just any shift in the sentiment between the meetings at ICSC and what retailers are talking now? And two, at ICSC there seemed to be a lot of focus on tenants rolling out new, smaller concepts and just want to see if that trend is continuing or if tenants are feeling more comfortable with their businesses to go back and start expanding some of their larger format brands.

The mood hasn't changed at all, Alex. If anything there really has been an excel ration or at least an execution of the ideas we heard out in Vegas. There is still a mind set primarily among the junior anchors and the larger anchors that there is a limited opportunity, a window that is closing, if you will , on space, on available space. We haven't seen minds change to the negative at all, in fact it has gotten more positive.

In terms of the prototypes, you know, we talked a little about Wal-Mart and their desire to do smaller units. That still is progressing. There is a confidence level amongst the retailers. They still are looking at the smaller prototype as a way to grow the business. It may be the only way to grow. Dick's Sporting Goods is a good example of downsizing their requirements because that puts them in play with what is available. There is still a move to downsizing space. And that's as much about availability. Obviously retailers' desire would be at their larger prototype, but that's not practical. Some of the larger anchors look at dramatically reduced requirements again to take advantage of what's available

Okay, and then my second question is just on the capital front, just given the compression that we have seen out there, want to know from your perspective if there are any maturities, durations, or types of securities that have compressed more than others that you think are particularly attractive, or has anything come in together?

We've seen everything come in, you know, partially a function of the environment overall and partially a function of investor and lender increasing comfort. With DDR and our risk profile and our prospective risk profile, it's always been encouraging across the board. But in terms of what we're looking at most going forward, I think it is consistent with the strategy we have talked about of longer duration being our goal. And so that's why you will see a line of credit that will be refinanced in the near term, but will be somewhat smaller because it is short-term debt. It is on better terms than it would have been a year ago, but it is still, you know, less than a four-year term versus the market that exists for a more expensive, but much longer term tenure debt, that I think that has a greater interest for us. We have done the two seven-year deals over the past nine months because we didn't have any existing maturities in the two years in which we staged those maturities. But as we look out now, I think we would like to continue to push that duration profile further out as we don't have additional gaps that we would be interested in filling in right now in the maturity schedule.

You haven't seen increased investor demand in one part of your capital stat and another sounds pretty uniform.

It has been pretty consistent across the board in terms of investor and lender comfort and decline in spreads across the board.

Thank you.

Your next question comes from the line of Christy McElroy representing UBS. Please proceed.

Hi, good morning, guys. I'm just following up on an earlier question regarding $100 million of assets under contract data that you were referring to you before. What is the timing of the asset sales? And can you provide a little more color on what that's comprised of as far as income producing versus land?

Most of that is income producing. There would be a few small to midsized, nonincome producing assets in there. But it is going to be pretty consistent with the sort of stuff you have seen us sell over the past two years. Nonprime asset, primarily tertiary markets, some freestanding boxes, others are smaller format centers, and in some cases it is just some land or a select few empty boxes, but a comparable mix to what you have seen us selling, but with an overall cap rate that continues to decline somewhat over time.

I think one of the things also, Christy that is of interest of what we have on the contract is that four of our B/C malls that we have had historically at the company are under contract of sale. We have mentioned many times that's a business that we don't want to stay in long-term. We do have a few of those assets still floating around. And four of those assets are currently under contract to be disposed of. We will be reducing our overall mall portfolio by year-end.

Should we expect to see more and more writedowns as we you are putting more stuff under contract?

Potentially. I mean, there will be some gains and some losses. Obviously only the losses get pulled into impairment territory, and there certainly could be some additional impairments over the course of the year as we get the specific feedback on where market pricing is for some of these assets.

And then can you update us on dividend policy just as we lookout over the next year?

Where we stand today -- I think we continue to believe that a conservative dividend policy is a right one, and it is clearly a board decision. But the recommendation from management and I think consistent with the strategy we articulated about lowering leverage over time, free cash flow is an important part of that. So maybe it doesn't end up being the extremely low dividend that exists today, but we continue to believe we have a good use for the high amount of free cash flow that's generated by this portfolio.

At what point are you forced to raise your dividend to meet the minimum rate requirement?

We clearly have a high level of comfort that we wouldn't be forced to any high level of payout in 2010. With certain potential losses and other tax planning strategies, we believe that we will have a heavy amount of flexibility in our 2011 payout also. So that doesn't mean that strategically there might be a decision at the board level to increase the dividend, but will tactical income force us to do that? We don't believe so.

Thank you.

Your next question comes from the line of Craig Schmidt representing Bank of America-Merrill Lynch. Please proceed.

Thank you. I noticed you referenced the acceleration of the lease up of the vacant spaces over 20,000. I wondered if they are also coming with a willingness to pay a little more for that space?

Yes, absolutely, Craig. And, you know, that is clearly reflected in the new deal spread. But you guys are aware you know our calculation on the spread only includes the spaces vacant for a year or less. So if we go back and look at just the box space that came back to us late 2008, early 2009, we've seen about a 30% improvement in the rental rates over that period of time. Not always consistent quarter over quarter, but the deals we are making fourth quarter 2008 and first quarter 2009 versus today, there is a significant improvement. And as we mentioned several times in meetings and on the calls it is a gradual ramping up. Much more competition for space is really the order of the day. And that's helping drive up the rates obviously.

And I think one of the things, Craig, we tried to articulate by giving you a net effective rent calculation supplemental is the fact that the improvement of the rents is not being bought by excessive TI, like sometimes is done. So we have been very focused on keeping our TI low. Rents are sort of growing naturally. And we are pleased with the trend that we are seeing going into the last two quarters of the year.

I especially like the fact the renewals have none of the allowances at work. So I guess the beauty of renewals.

There are essentially no costs associated with those, Craig.

And do you think you could keep with the run rate of the 470,000 square feet a quarter or will that pull back a little?

The velocity is still there. I don't want to say we will hit that exact number because that was a record quarter, obviously. The pipeline is strong, and it is looking good for the next few quarters.

Great, thanks.

Thank you.

And your next question comes from the line of Jeffrey Donnelly representing Wells Fargo. Please proceed.

Good morning, guys. If I actually could continue on a leasing front -- if I look at the leasing summaries and not the net effective schedule, but the leasing summaries for Q1 and Q2, I think there was 400 leases executed each quarter, and it looks like the lease term shortened by about 12% in Q2 versus Q1. But the TI always rose a little bit. I know it is not the net effective rent calculation you are providing, but is it fair to say you need to make some degree of concessions or accommodations for tenants, or is there something unique in all those leases that explains that so-called sequential trend?

I wouldn't call it concessions, Jeff. It is a lower rate than we were achieving, obviously in prior years. Especially when we look at the boxes. The average lease term you are looking at in the supplemental can be a little misleading. We talked in terms of the anchor boxes being 10-year deals, and that's still the case. But we are showing it over the total new leases which includes our small shop space, and that is typically a five-year deal. That's what's bringing that average down. It is not a concession in terms of the term itself, the years of the lease. We have seen what we have always seen there, 10 years typical for the box space and five years for the junior space.

There is always going to be some level of investment in the new leases. And as Dan mentioned, we have worked very hard to keep that low, and we feel good about where it is. There was a slight uptick in the second quarter, but not dramatic over the first six months of the year. We are looking at that average around 993 per square foot which is a good rate, and reflective of what we are trying to achieve.

More of a mix issue, if you will?

It really is. When you look, Jeff, at what we are seeing in the actual leases themselves over the last, really, two years now., the actual term of the lease has not changed that much. What's changed in the body of the lease has been terms and conditions as it relates to exclusives and restrictions and co-tenancy and things of that nature. The things, like Paul said, the tenants that typically want 10-year deals are still getting 10-year deals. And those that were historically five-year deals were asking for five and still getting five.

Just a follow-up and just because it is a new schedule, on the new net effective rent schedule, how does that tie into the leasing summary on the prior page in the supplemental? And in your calculations, do you guys amortize the whole costs over the term of the lease or are they straight lined? I am curious for a little bit of length.

It is just straight line, Jeff. If you were to look at the tenant allowance line, that would tie back to the supplemental. That is going to average in the $9 per foot range.

From a timing perspective, you know, the calculation is not charging all that capital up front and dealing with discount rates and whatnot, so you could certainly make the case that there could be a little higher amortization because of that. On the other side though we are also expensing the landlord work, much of which will have a duration that is longer than the lease duration. And so in some cases we are not pulling the capital outlay forward enough. In other cases, we are pulling it toward too much. There is no exact answer, but we thought this was a good balance of being a fair way to disclose it without complicating it too much in terms of getting in the exact calculation that we might do on one specific lease.

Jeff, the biggest reason why they won't match is that the net effective rent calculation is over the term of the lease versus on a leasing summary page that's new rent in year one only.

Thank you guys for the additional disclosure. I appreciate it.

(Operator Instructions). Your next question comes from the line of Michael Muller representing JPMorgan. Please proceed.

Hi. David, you were talking about the yields on the nonprime asset sales improving. So if you are looking at the bucket of $150 million plus, it sounds like it will be a little more, maybe $250 million or so, what is the average yield on the operating properties there for what you are selling? And then I guess if you just look at the prime portfolio, what sort of data points would you throw out there in terms of where current rates are occurring?

For the stuff we have sold year to date as well as what's under contract with what we are moving forward with, we originally budgeted a cap rate around 10%. We have seen that come in to around 9% as we are progressing through the year and still seeing slightly more positive data points from that. Tough to pinpoint any one transaction because we could be 300 basis points in either direction for various asset based on the nature of the NOI string there. But overall seeing it in the 9% level for what will sell for the full year, with the first half of the year being a little higher and the second half being a little lower than that.

For prime assets which we are seeing trade more regularly, in the open markets we are certainly aware of it. We have certainly taken a look at what's out there, although haven't been an active part pant. There might be other companies that would have a better real-time deal from something they have bought recently. But from our perspective it is very clear that prime assets are trading at or around 7% cap rate on reasonably stabilized occupancy today from the growing number of transactions that we are seeing occur.

Okay.

Selectively inside of that for certain higher profile deals and some that are a little outside of that, but 7% feels like the number for now.

Okay, great, thank you.

And your next question comes from the line of Carol Kemple representing Hilliard Lyons. Please proceed.

Good morning. What was your occupancy rate on June 30?

The lease occupancy rate was 91.6%.

Was that leased or occupied?

Leased.

What -- would you have the occupancy rate?

Yes, it was 87.7%.

Okay. And what are you all seeing from your small shop tenants? Are they as excited about expanding some of the anchor tenants or are they a little more hesitant?

They were a little more hesitant, but we are seeing improvement, Carol. That has always been quite a bit of closings on the small shop side. And we saw that slow down dramatically in the second quarter. It is still the toughest part of all of our business in the strip center sector. And that looks like as Dan mentioned jobs and wages, and that's really what is going to drive that small shop business. It is better, but they are certainly more hesitant than the anchor stores and the national retailers.

Carol, when I talk about the unevenness of the recovery, we are seeing that in our business as much as anybody. We are the large nationals with access to capital, strong logistics, strong distribution, strong buying networks are really doing extremely well. They are aggressive and gaining market share. But the smaller mom and pop is still struggling. The access to capital is still not easy, and they are unable, really to grow their business at the level those of their larger competitors.

Okay. Thank you.

Your next question comes from the line of Vincent Chao representing Deutsche Bank. Please proceed.

Good morning, everyone. Most of my questions have been answered, but just a couple clean ups. On the NDP mortgage debt coming due in October, I think the last we heard that was heading back to the lender. Is that how we should be modeling that for the rest of the year?

Well, there would be a couple of EDT maturities over the remainder of the year. One of them that most directly impacts DDR is the Mervyn's maturity. That is the October maturity, and there's no final outcome there. We are working with the lender for the right outcome at this point. We have written those asset to where the asset value is even below the debt value, and I think that's consistent on the view of our value there.

I guess in terms of the modeling out of the interest line, I mean is that in there or is that considered to be --

We've included for our overall budgeting purposes those assets through the end of the year. For operating FFO purposes, Mervyn's has been out for the entire year.

Okay, thanks. And just a question on positions maybe looking forward a little bit, you accelerated the 2010 expectation. Is that being pulled from 2011 or should we expect a similar level of disposition in 2011 as in 2010?

You know, we will continue to react to the market. This year the market has been better than we originally budgeted, allowing us to achieve higher volume and somewhat better pricing. I think we are still clearly focused on increasing the concentration of our portfolio and prime assets. And so that means there will likely continue to be disposition activity. At some point that may be wedded up with a certain volume of prime acquisition activity, but for now it has just been the gross and net disposition activity, and I think we expect to continue to move forward with that.

Okay. But just order of magnitude, is it reasonable to think 2011 will look similar to 2010 on a net basis?

Definitely reasonable, but some likelihood that there could also -- you know, reasonable on a gross basis, but the potential that there could be some reinvestment activity with some of those proceeds into prime assets rather than purely selling nonprime asset and using those proceeds to repay debt.

Okay, great. And one last question, in terms of the commentary about junior anchors, it did seem to be pretty positive, maybe a little more positive than before. You know, has that translated -- one, it's translated into better rents, but has that caused the retailers to start shifting their attention to maybe some of the stuff they weren't looking at previously, which was really just focused on the core markets, or are they still just focused --

No, they are clearly focusing on markets and locations that might have passed on before. That's a dynamic we are seeing every day.

So they are expanding.

Yes.

And That's what is driving the flexibility on size.

Right.

A lot of the asset they passed on in the past was because the asset didn't fit their prototypical size in either total square footage, or frontage, or height, or even co-tenancy in some cases. That is all being revisited by a number of the most aggressive retailers, and that is resulting in the new prototypical size and the flexibility that we are seeing is the revisiting of assets that they liked. They liked the market. They liked their positioning in the market. They thought they could operate very profitably, but it didn't fit any prototype that they could pull off the shelf. So now they are becoming a lot more flexible in saying if we are looking for just growth off the shelf we are really not going to find that. So we need to be much more creative -- and obviously with the size of our portfolio and the quality of our prime portfolio, we are a logical place for them to come do business.

I guess outside of the sort of size expansion what they are considering in terms of markets, are they expanding that net at all in terms of where they are looking to grow?

In a rare situation. Mostly it is with the changing or being more flexible in their size, their prototype size and the box they can do business out of. You won't find many national retailers trading down, if you will to more tertiary markets.

Okay. That's helpful, thank you.

Your next question comes from the line of Laura Clark representing Green Street Advisors. Please proceed.

Good morning. First off we would just like to give you our kudos for the added disclosure on net effective rents. We think that net effective rents are an important issue that the sector as a whole doesn't shed enough light on, and we commend you all for stepping up and providing such helpful disclosure. On that note in regards to the new disclosure, can you give us a sense on how the net effective rents on page 36 have changed on a percentage basis versus a year ago?

I think one of the things that's happened is the net effective rent compared to a year ago is probably very similar, but compared to two or three years ago may actually be a little higher because our actual cost of doing the transactions has come down. One of the things we have talked about we saw last year and we are seeing again this year on a per square foot basis, our CapEx and tenant allowances are quite reasonable compared to where they were say in 2005, 2006 on a per square foot basis for a similar tenant going into the same space. So it has been pretty consistent, I think. While rents have creeped up a little bit, not enough that will move the needle dramatically, but the control on the cost is what has the biggest impact on the net effective rent. And that's been pretty consistent over the last year.

Yes, and I would say if anything, Laura, it is slight improvement. A higher net effective rent this year over last, as Dan said. But compared with several years ago it would be a little bit of a different story.

Great. And then just a follow-up, going back to the leasing on the bankrupt tenant boxes, can you tell us what the average re-leasing spreads on the box released in Q2 were?

I believe that was approximately negative 14% on those boxes.

And how has that changed versus 1Q?

Again slightly improved. I think it is important to note though, Laura, if you go back to 2008 when we really started this process of dealing with the bankrupt boxes, there is a 40% improvement in how we reduced that negative spread on those vacant boxes, bankrupt boxes.

Okay. Great. Thank you.

Okay.

(Operator Instructions). And your next question comes from the line of Rich Moore representing RBC Capital Markets. Please proceed.

Good morning, guys. With evaluations seemingly increasing every quarter and the fact that you guys do your impairment tests every quarter, are we -- is it safe to say that we are past the whole situation of impairments at this point other than some at the moment of sale?

I mean, I think the last comment you made is one that's important. So in terms of ongoing assets we expect to hold for a relatively long period of time, we wouldn't expect additional impairments, but obviously we will continue to test. And one of the biggest triggers that could cause an impairment would be if our time horizon changed on those assets. So on a development that might mean we are not going to move forward with it or we are less likely to move forward with it, and we are now looking at a liquidation scenario as opposed to a build scenario. And on an operating asset when that time horizon changes because we are actively moving forward on a sale, it would be something we would have to look at versus the selling price at which we are moving forward.

Okay. Well Dave, at this point you have rationalized the development pipeline so you only have obviously a very few developments in progress. So I would assume there would be little in the way of that kind of impairment coming. Obviously if you go to sell something I can understand that. But beyond that I would think impairment should be pretty nonexistent at this point going forward. Is that accurate?

We would certainly expect them to be much less than they have been over the past two years, exactly as you say . Asset values have been increasing. We run these tests consistently. We have had time now to review what our strategy is regarding various assets. And we certainly wouldn't expect the sort of impairment activity going forward that we have seen in the past. But obviously something we have to review every quarter based on what we are seeing in the market and what our thoughts are on various

Great, thank you. And then, Paul, there was some notion when you introduced the prime portfolio that you might do some redevelopments of some of the assets. Is that something you think is accelerating and are you seeing some opportunities on that front?

We are seeing some opportunities, Rich. We will talk more on future calls as I mentioned in the script. Right now as we mentioned before, it is tenant driven. We are seeing a lot of enthusiasm on the retailers' part in terms of infill markets and proven locations. We are working diligently to figure out exactly what the size and scope of that initiative will be, but we are definitely seeing the interest.

You know, with the flexibility of the tenants, Rich, one of the things we are doing is going back and revisiting projects that we didn't think had legs prior because we were unable to satisfy the prototypical box for some of our tenants. Now they are coming back to us, and this is exactly the type of asset and exactly the type of program that will benefit from the renewed flexibility. There are tenants that have passed on redevelopment opportunities in the past. Even though they like the location and they like the market, they are now coming back and saying let's take another look at that. Where we thought maybe we had some nos are becoming yeses and where we thought we had some yeses are becoming nos. As tenants continue to change their criteria, we have to follow suit and change ours as well.

Good, thank you, guys. And last thing, the expense recovery ratio dipped in the quarter. I think part of that was due to the higher bad debt expenses which you obviously can't recover. But it seemed that maybe it went beyond that. Was there anything special in the expense recoveries this quarter, and does that continue going forward?

It is exactly what you mentioned on the bad debt side. Some of it is going to be tied to additional expenses that are showing up in the expense line items that are not wedded to revenues. So that's going to be development projects where we are no longer capitalizing certain expenses like real estate taxes. And so that's those negative income producing assets that are showing up in results. Some of it is just going to be seasonal, as the second quarter as we mentioned earlier on the weaker side where the tenant has less capital available. And when some of these issues come out in the second and third quarter that end up with a lower recovery ratio there we would expect as occupancy rebuilds, lagging somewhat the pace of the leased rate rebuilding actually gets the tenants' cash flowing and covering the expenses on that space, giving us greater flexibility to take a harder line with some of the tenants responsible for the bad debt because we do see more opportunity to re-lease that space. As those trends come through, we would expect to see an increased recovery rate over time. Although in thinking back to the peak days where we were capitalizing the entire development expenditure, you are still going to have some drag from these additional expenses that are showing up in the expense line that aren't married up with any revenue items.

Okay. So in the near term, David the ratio probably stays down?

No, we would expect to see improvement there over the next few quarters as the leasing activity hits.

Okay, very good. Thank you, guys.

Thanks, Rich.

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

Yes, just had a quick follow-up on the land bank. Where has most of the capital -- in addition to your land book there were a number of projects that you port on hold where you had already started some sort of construction progress. You got about 170 million of actual CIP in the land balance. Where is the majority of that spend today?

That's the couple projects that are underway that was what Dan mentioned in terms of where we are allocating capital to new development. It is really going to be the leasing progress on projects that are already at least somewhat, and in many cases mostly, complete with their vertical development. And so you'll have tenant expenditures, but you won't have major additional construction expenditures. So we've got the few projects on the development side as well as a couple on the redevelopment side that shows in that bucket where a majority of that expenditure has happened already and the remainder will happen as there is leasing activity showing up.

And the leasing activity that still needs to be done, Michael, is probably in that 23%, 24% range. We are sitting in that portfolio now in, depending on the asset, between 75% and 80% leased. So the activity you will see there is some tenant allowance dollars, very little construction, and we really didn't have projects that were stopped on the wholly owned side that need to be resumed in any way.

What may be helpful, and this goes toward the increasing disclosure you are doing is just on the -- on page 30 in the supp, you have total acreage and have dollars on the bottom. If you can break out the individual projects between land and CIP, I think that would give a clearer perspective of where future opportunity is and where future impairments may be . If you think about Russia, clearly we know what happened with the real estate market post-2008, you know, carrying that at $100 million throughout last year and early this year. You know, that was a sizable number. So I was just trying to get a perspective where else there may be opportunity and where else there may be impairment during that development

That's a good point. We will take a look at that.

Is there any other -- I guess what is the next sort of -- I guess what triggered -- I know you didn't want to put more capital to work in Russia, and that's what triggered sort of looking at that and marking it down. I guess the question is what sort of process was in place during last year or early this year? Why wasn't it taken down at that point? I guess I am going more toward the processes and procedures related to the land.

You know, some of the issue last year was just a lack of transparency and the fact we hadn't made final decisions on some of these items in terms of our ability or willingness to commit capital. And so I would say a reasonably consistent process, but with more decisions today and certainly greater transparency into the market more broadly on the leasing and transactional side.

At its core, Michael, the nature of this is somewhat objective. And we tend to err on the side of being more conservative than some. And based on our decision not to invest additional capital in Russia, we thought the conservative and prudent thing to do was to take the impairment based on that decision. Others might have looked at it differently, but we have tended to be a little more conservative in our methodology as we look at impairments than others. It is more philosophical in many cases than it is factual. But we think it is consistent with how we want to run the business and how we want to provide openness and transparency and philosophically we are going to take the conservative approach when it comes to matters like this.

Great. And then Dan last one for you, in Russia, you are partners with ECE and the Otto family. Can you give us a little bit of an update as to where the relationship stands and how things are progressing?

The relationship has been terrific. The Otto group, as you know, has two representatives on our board. They have been very active and extremely professional members of our board. We have had what we are calling knowledge exchanges with the organization where their folks have been here and our folks have been there and we are trying to take what we view as best practices from them and employ them to our organization and some particularly on the property management side. And they are looking at some of our best practices, particularly on the revenue side. So it has been a very cohesive, very positive relationship that we think is long-term. And we will continue.

And this -- all this Russia stuff, this has no impact to the relationship in terms of one versus the other not putting additional capital versus them providing capital to you in the US?

None whatsoever.

Our interests are highly, highly aligned.

Very much aligned.

-- given their ownership interest.

Okay. Thank you.

Thank you.

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

Sorry, one more question. Given the comment on asset sales and making good progress there, can you touch a bit on some of your joint ventures and perhaps some of your long-standing partners, older JVs, where you have embedded gains. Is this the time they are looking to realize gains today or how do you see that progressing?

In some cases we are seeing that our partners, some institutional capital partners were slow to mark assets to market as the world started getting worse and there wasn't great transparency on pricing, but I think now everyone has a reasonably good feel for where things are, and they are not just comparing it to what their long ago basis might have been. So we are still seeing the overarching theme being that there is interest in putting more capital into real estate, but could become partners that are either reaching their life cycle on a certain product or that are simply looking to book in an environment where they haven't done that in some period of time.

So I could certainly see some activity on that front and certainly something we would consider recapitalizing with a new partner, but has to be evaluated asset by asset. Obviously not looking at large portfolios of mixed quality, but where there are prime assets, it is something we would clearly evaluate. But right now I have seen a few situations where market pricing has increased so much that we might just think the right decision is to go along with that sale. In other cases, especially if new partners approach us, it could be a case where we recapitalize with a new partner.

Keep in mind, Jay, for the first time in awhile we are seeing NOI growth. In the past 18 months where our partners are looking at assets in many cases we had NOI declines. And we had expansion of cap rates, not the compression we have seen today. And you have situations where not only was the NOI declining, but underwriting would take a haircut off a declining NOI. We are now in a different position. Cap rates have compressed and NOIs are growing. There is a lot of leasing in the pipeline that hasn't turned into rent paying tenants. And it is a good time to reevaluate the position of the asset, particularly as it relates to the growing NOI stream that we have not seen for a very, very long time.

Like I said earlier, we are not seeing a lot of our partners running for the doors just because the market has picked up. There is clearly more embedded growth in some of these assets. There is clearly more embedded growth in our portfolio internationally at a very reasonable cost, and no different than our company on a wholly owned basis, our partners want to take advantage of that.

And we have seen our lending environment improve significantly. It is no longer a process in many cases or in most cases at least where refinancing need or a lender requirement is forcing action there.

Great, thanks. Was just trying to get a sense again if this would be an additional source of capital. So thank you.

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