Site Centers Corp (SITC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2010 Developers Diversified Realty Corporation earnings conference call. My name is Kendall and I will be your operator for today. At this time all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Ms. Kate Deck, Investor Relations Director. Please proceed.

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 & Development, Paul Freddo. Please be aware certain of our statements today may be forward-looking. Although we believe that such statements are based upon reasonable assumptions you should understand those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the Press Release issued yesterday and filed with the SEC on Form 8-K and in our Form 10-K for the year ended December 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 release dated October 25th, 2010. This release and our quarterly financial supplement are available on our website at www.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 our third quart earnings conference call. To begin the call I would like to provide an update on our continued progress toward 2010 year-end goals. In January of this year, we issued earnings guidance complete with specific operational and financial targets and as of September 30th, we have made measurable progress towards achieving those goals. The metrics I will discuss represent key components to our 2010 full-year goals, and as you will see, our progress to date is significant. 2010 full-year guidance indicated a year-end lease rate of 92%. As of September 30, we have achieved that goal. We expect continued positive momentum in leasing volume and as a result, we will exceed expectations with an anticipated year-end lease rate of 92.25%. Paul will speak to this in more detail a little later in the call.

2010 guidance assumes full-year same-store NOI to be flat to slightly positive. As of the end of the third quarter, our year-to-date same-store NOI was positive 0.3% and we are on pace to meet our full-year guidance as leasing revenue from previously executed leases begins to come online. 2010 full-year guidance indicated non-prime asset sales of $150 million. As of Q3, we achieved that goal as well. To date we have achieved over 180 million in non-prime asset sales and we will continue to pursue additional sales where pricing and terms are acceptable, even if dilutive to short-term FFO results. 2010 guidance assumes total consolidated outstanding indebtedness of $4.4 billion at year-end.

As of Q3, we also achieved that goal as total consolidated outstanding indebtedness was just under $4.4 billion, and we will continue to delever the balance sheet to both debt reduction and EBITDA growth while continuing to extend our overall debt maturity profile. We also highlighted in January that we would continue to take advantage of capital raising opportunities. Year-to-date, we have raised over $2.4 billion through equity offerings, long-term unsecured note offerings, secured debt financings, and revolver refinancing including and in addition to retained earnings and asset sales.

As announced last week, we successfully refinanced our revolving credit facilities with pricing and duration terms more favorable than originally budgeted and we reduced our term loan by $200 million. The refinancing of the revolving credit facilities was one of the most significant financial goals we set for the year, and another important step in extending maturity profile of our debt and improving our risk profile. Regarding ancillary income our goal for 2010 was to increase revenue by 17%. As of the third quarter, ancillary income has increased over 25%, compared to the first three quarters of 2009. Based upon the progress achieved to date and the pace at which deals continue to be executed we expect positive trends to continue and we will exceed full-year guidance.

Overall we are pleased with the progress made to date towards achieving our stated goals for 2010, and we remain committed to our disciplined strategy of simplifying the business and reducing risk for our shareholders, bond holders, lenders and partners. The execution of our strategy combined with the strength of our operating platform and improving quality of our asset base will be the impetus to create significant shareholders value in the future. Regarding specific operational accomplishments for the third quarter, our portfolio leased rate increased by 40 basis points and we recorded our second consecutive quarter of positive leasing spreads, with a positive blended cash leasing spread for new leases and renewals of 5%. Leasing volume continues at a cadence well above expectations with 503 leases executed during the quarter representing another company record in deal volume. In same-store NOI increased by 2% as retailers began to take occupancy for the holiday season, and pre-leasing progress begins to impact revenues.

Regarding our balance sheet initiatives overall consolidated debt duration increased meaningfully since the end of the second quarter from 3.1 years to 4 years and we are comfortable in at least achieving our guided pro-RATA debt to EBITDA in the mid eight time range by year end. I'll now turn the call over to Paul who will provide greater detail on portfolio operations and the retail environment. After Paul, David will discuss financial results and balance sheet initiatives. Paul?

Thanks, Dan. As Dan mentioned, leasing momentum and deal velocity remained strong during the third quarter. In the quarter we completed 191 new leases for 1 million square feet and 312 renewals for 1.9 million square feet. As a result, our lease occupancy rate increased to 92% which already meets the goal that we set last January for year-end 2010. Based on our current level of activity, we now expect that the leased rate will increase another 25 basis points by the end of the year, and will provide a solid base for further growth in 2011. For the second consecutive quarter, we achieved positive leasing spreads for both new leases and renewals. The spread for new leases was a positive 6.9% with a positive spread of 4.5% for renewals, resulting in a combined positive spread of 5%. The improvement we are seeing in deal economics vary depending on market and property type, but in general we are seeing the most improvement in the junior anchor category.

As supply continues to be absorbed and with limited space coming online, retailers especially in the anchor and junior anchor categories are feeling the pressure to secure the space necessary to meet their store opening plans for 2011 and especially for 2012 which represents the largest challenge to meeting their open to buy goals. We expect this pressure to secure future locations to continue to assist in the re-establishment of rental growth. Another valuable metric which we introduced in our supplement last quarter is net effective rents. We remain committed to using this metric as our primary measure for evaluating deals as it better reflects total deal economics and true value creation. We believe that the improving demand dynamic mentioned earlier will result in continued increases in net effective rents. Regarding our box leasing efforts in the third quarter we signed 14 new leases for 397,000 square feet which is a 44% increase in leased square footage over the third quarter of 2009. This brings our year-to-date box leasing volume to over 1.1 million square feet and we expect this momentum to continue in the fourth quarter.

To date, we have activity on 75% of the space vacated by bankrupt retailers including 43% sold their lease, 11% half leased and 21% in LOI negotiations. We are encouraged by the continued and consistent lease execution rates that we are seeing in the pipeline as evidence by the 500 basis point improvement in completed deals and the 400 basis point improvement in the percentage of deals in final lease negotiations. While not yet at the formal LOI stage, there is an increasing level of activity on the remaining 25% as retailers show renewed interest and supply continues to be absorbed. Retenanting this box vacancy continues to be one of our most important initiatives as the results in NOI growth, improved tenant mix and traffic and an enhanced credit profile for our portfolio.

Examples of the best in class retailers that we signed new deals with this quarter are Wal-Mart, Kohl's, HomeGoods, Hobby Lobby, T.J. Maxx, Buy Buy Baby, and hhgregg. New store opportunities remain the dominant topic of conversation with our retail partners, and they continue to show flexibility in their size and configuration in an effort to achieve their desired growth plans. This flexibility has enabled many retailers such as PetSmart, Joann and Wal-Mart to gain market share by opening stores in smaller markets or adding stores within an existing market. As we've shared on previous calls, much of the box space that we have leased over the past year has not yet taken occupancy, and therefore is not yet paying rent. We current have 32 signed deals for over 1 million square feet of box space that was not open as of the end of the third quarter. The positive impact to NOI from these already leased units will be approximately $9.2 million in 2011 with DDR share being $7.2 million. It's important to note that these figures represent a partial year impact to NOI and will not fully annualize until the following year. Most of the box deals that will be signed in the fourth quarter won't begin to positively impact revenue until late 2011 or 2012.

As Dan briefly mentioned, our new business development team increased year-over-year ancillary income by over 25% in the third quarter. Much of this income is derived from temporary leasing and many of the opportunities in this area come from the vacant junior anchor boxes that have been filled with seasonal and temporary tenants.

With Halloween right around the corner and over $2.6 million in revenue generated from Halloween operators, I wanted to take a moment to highlight this business. The increased demand for Halloween space combined with the decrease in supply of available space continues to put upward pressure on rents. For the Halloween stores alone, our new business development team achieved oversized results and exceeded budget by 25%. As we mentioned on the last call, the toy sector and ToysRUs in particular have become very active this holiday season in leasing temporary space. As a retailer that does the majority of its business during the last 45 days of the year, this strategy makes a lot of sense and provides us with an exciting opportunity for future ancillary revenue growth. We anticipate 15 temporary toy locations within our portfolio, resulting in $365,000 in revenue this year.

So as you can see, between Halloween and toys, we have generated $3 million in revenue on space that would otherwise have been vacant and more revenue is possible given the potential for overage rents. We are very proud of our new business development platform and the results are measurable. In terms of the upcoming holiday season, retailers remain cautiously optimistic. They're seeing a gradual improvement in sales, despite an unemployment rate that remains stubbornly high. Retailers are clearly on much better footing this holiday season but they will need to continue to execute on the improvements they have made over the past two years, to inventory control, product mix, and pricing to achieve their planned sales and margin levels.

Additionally, consumers are shopping later and later in the season, which makes it very tempting to pull the promotional trigger too early, putting negative pressure on margins. However, there will be plenty of pre-planned promotional activity to drive traffic with the event-driven holiday consumer who is still clearly focused on value.

Our portfolio in Brazil continues to perform well with a lease rate of 98%, same store NOI growth of 14%, and positive spreads for new deals of 23% and positive spreads for renewals of 16%. It is worth noting that these increases are in addition to the annual rent bumps that occur in a majority of the leases in Brazil. Our value-add focus continues as we will complete the expansion of Parque Dom Pedro next month, on schedule and on budget. This 58,000 square foot expansion of our largest asset is fully leased and expected to generate an additional $2.6 million of annual rental revenue with an unleveraged stabilized yield on the incremental dollars invested of approximately 24%.

Several additional developments and redevelopment projects continue to advance and will impact results in future years. The ancillary income program in Brazil continues to grow and is expected to exceed $12 million in 2010, but most importantly, the ancillary income program in Brazil is still in its infancy which provides us with a strong opportunity for growth over the next several years. Finally, we will continue to be very selective in development spending.

The capital that we are now spending is to get tenants open and operating in existing developments or re-developments. We also remain focused on monetizing non-income producing land, and are beginning to see signs of life in this market. And I will now turn the call over to David.

Thank you, Paul. Beginning with our financial results, operating FFO was $0.25 in the third quarter slightly ahead of our plan including certain nonoperating primarily non-cash net charges, FFO was $0.14 for quarter. These charges include losses on non-prime asset sales and non-cash loss on the equity derivative investments related to the auto warrants. We also recorded a $5.6 million gain related to the changing control of the Mervyn's asset. In August the 25 former Mervyn's assets were placed in control of the court appointed receiver and as a result, the entity was deconsolidated for accounting purposes.

We no longer have any economic rights or obligations to the entity, therefore reducing our consolidated assets by approximately $145 million, reducing our consolidated debt by approximately $150 million, and improving NOI by $1.6 million per year as negative NOI is eliminated from our results. Of note due to its nonrecurring nature, NOI and operating FFO were negatively impacted during the quarter by $2.4 million nearly $0.01s per share due to a real estate tax assessment retroactive to 2006 for one of our largest property in California. The entire net expense for the four years appears in this quarter's results. We were appealing the assessment but we expect that process to be lengthy.

Moving on to Capital Markets activity as we mentioned in the Press Release last week, we closed on the refinancing of our unsecured revolving credit facilities which now have an aggregate capacity of just over $1 billion and a 40 month term that expires in February of 2014. The reduction in the overall size of the facilities is consistent with our plan to continue to implement a longer term financing strategy, and shift away from reliance on short term bank debt. With the closing of the new revolvers, our covenants remain largely the same, with the exception of the unencumbered asset coverage test which now has a 1.67 times minimum and the addition of an unencumbered NOI yield covenant which measures the asset NOI to unsecured debt. In addition, our consolidated and secured indebtedness ratios buildup from property level NOI, and add other assets such as the value of TDR's management platform, land and CIP, which results in a modest increase in defined asset value despite a 50 basis point higher cap rate. We are compliant with these covenants and also compliant with those contained in our unsecured note indenture and we expect to build additional cushion over time. In conjunction with the refinancing we were paid $200 million of the balance on our secured term loan, lowering the amount of the largest remaining bullet maturity by 25%. The pricing on the term loan remains the same at LIBOR plus 120 basis points and the maturity remains February 2012, we will begin discussions with our bank group on the refinancing or extension of the term loan in 2011 and remain confident in our ability to refinance it if we choose.

One encouraging aspect of getting past some of the largest maturities is the ability to now contemplate strategic and opportunistic investments. In the third quarter, we used our continuous equity program to sell 5.1 million common shares generating $58.3 million of proceeds that were used for opportunistic investments in two loans, one of which is senior and one of which is mezzanine that are secured by seven prime shopping centers, six of which we currently lease and manage. We are using a high level of discipline and cautious underwriting in evaluating investments and do not intend to make acquisitions unless the assets and the manner in which we finance them fit our long-term strategic goals. Despite high bar that we have set for investment we are feeling the immediate impact of our new CIO, Mark Brad, and we were pleased to find almost $60 million of opportunities this quarter that when combined with our equity funding should drive slight FFO accretion and noticeable covenant improvement. We are very actively yet very selectively looking for additional opportunities to invest in prime assets that can improve portfolio quality, long term growth prospects, covenants and FFO per share.

As Dan mentioned we reduced total consolidated debt this quarter from $4.6 billion to $4.4 billion, meeting our goal for the end of the year. We also reduced pro-RATA debt to EBITDA to 8.9 times for the third quarter of 2010 and continue to expect this ratio will be in the mid 8 times range or below by year-end. This debt to EBITDA ratio is down from 10.2 times when we started disclosing our calculation in mid 2009. It is also important to note that the number we are referencing includes our share of unconsolidated joint venture debt making it more conservative but we also believe more accurate measured than those published by others. The improvement in this ratio this quarter is the result of an increase in EBITDA as tenants open for the holiday season and began paying rents, the removal of the Mervyn's JV from our operating portfolio, the equity rates for investments and the retirement of almost $30 million of mortgage debt through asset sales. On a consolidated basis, our debt to EBITDA is 8.3 times and we expect to achieve our target of mid seven times by the end of the year.

We are pleased with our progress and firmly acknowledge that we plan to do more and expect this ratio to improve in the future. We have extended our weighted average duration over four years. The ten year unsecured note offering that we completed in August, and the 40 month term on the new credit facilities are the latest examples of how we have extended duration and balanced our maturity profile. Six of the investors have already responded to our progress and our spreads continue to tighten compared to our prior trading levels and those of our peers. We expect that several future refinancings may actually occur at rates cheaper than what is maturing. For example, the weighted average interest rate on the 2011 consolidated mortgage maturity is 6.8% and the loan to value is approximately 40%. We could refinance only a few of these loans to achieve comparable proceeds at interest rates roughly 200 basis points lower while still increasing the size of our unencumbered pool and extending duration. Lenders today are quoting mortgage debt in the 4% range for five year loans with a 60% loan to value and below 5 percent for ten year debt. There may also be opportunities to issue preferred stock or convertible debt, at pricing below similar issues currently on our balance sheet. As always, we will carefully monitor the Capital Markets and remain flexible and prepared.

Since June 30th this year we generated $89 million of proceeds from asset sales of which DDR share was $62 million. This includes $13 million of assets sold since the end of the third quarter. These were all non-prime assets including a portfolio of free standing Rite Aid's, a former Lowe's box, a dark Blockbuster location, a small market mall and various small strip centers. Proceeds to DDR from asset sales for the year totals $188 million surpassing our guidance of $150 million for the year. We currently have $92 million of additional assets under contract with potential net proceeds to DDR of $56 million. We continue to be very focused on selling those assets that are not part of the prime portfolio, including nonreducing or negative income producing assets. Year-to-date, we have sold approximately $54 million of non-income reducing assets of which over $35 million is DDR share. Turning now to upcoming maturities, we have addressed all of our non-consolidated debt maturing this year and our share of unconsolidated mortgages maturing this year totals approximately $23 million today. All of which is nonrecourse to DDR. These loans are in the process of being refinanced, extended or will be repaid. We have approximately $330 million of wholly owned debt maturing in 2011, we plan to pay off these maturities through free cash flow, asset sales proceeds and additional long-term financings.

Over the past year we have executed upon numerous transactions that should give our rating agencies additional comfort and be a catalyst for positive action. We are extremely focused on communication and transparency with all three agencies to insure that we are making progress with the two agencies that rate us below investment grade as well as the one that maintains us at investment grade. We are visiting each of these agencies soon and we are confident that our progress will be recognized in some manner in the near future. Turning now to the dividend, we continue to believe that a low pay out policy, we continue to maintain a low pay out policy in order to provide free cash flow to eliminate debt or reinvest in our assets. This is under regular review by management and our board and we still believe that a relatively conservative pay out policy makes the most sense while we continue to prioritize balance sheet improvement. As Paul mentioned the portfolio in Brazil continues to perform quite well. Our goal for this portfolio is to raise capital to fund growth without the need for additional DDR funding.

In order to capitalize on the tremendous growth and the opportunities for development as well as to protect against the risk of that growth being unsustainable, we believe that bringing in outside capital is the best route for us to take. We will keep you updated on our progress with this initiative I will now turn the call over to Dan for closing remarks.

Thank you, David. I would like to take a moment to discuss expectations for the remainder of 2010. As stated in my opening remarks we have made measurable progress toward achieving the year-end goals and we continue to forecast operating FFO per share of $1 to $1.05.

While we are encouraged by the operational strength o of the portfolio and the much improved risk profile of the Company, our goal to be investment grade rated credit by all three rating agencies remains a top priority for this Company. While we have remained investment grade rated by Moody's and the requirements for an investment grade rating at Fitch and S&P remain an aspiration we will continue to pursue prudent strategies we believe will result in an eventual upgrade of our corporate credit and a continued reduction of our risk profile.

In regards to 2011 guidance we are actively reviewing our revenue and expense projections and anticipate a formal 2011 guidance notification in January, similar in form to what we provided for 2010. In closing, thank you for your continued interest in and support of our Company and the strategic direction in which we are heading. We continue to monitor the tepid economic environment in which we are operating and believe we are carefully positioning this company to take advantage of the opportunities and challenges that lie ahead with the ultimate goal of continuing to meaningfully enhance shareholder value. At this point, Kendall will be happy to open up the lines for questions.

(Operator Instructions) Your first question comes from the line of Alex Goldfarb with Sandler O Neil. Please proceed.

Good morning. Just want to go back to the comments on the rating agencies, is it your idea -- is it your view that they will give you firm metrics or do you think it is going to be a Morpheus.

There's never anything exact in the way they provide feedback. I think they have given us several targets over the past several years, and I we worked hard to execute on various transactions that have allowed us to achieve those. You know, so it is their job to come up with the rating on the Company and outlook on the Company. We believe that we have continued to execute on our side of it and we will go in there once again with the hope they want to recognize those achievements in revenue sooner than later.

Okay. And then the second question is you guys mentioned a fair number of NOI benefits, there was the 9.2 million total or 7.2 million pro-RATA that are signed but not yet opened and then there was the 1.6 million benefit from the sort of handing the keys back on the Mervyn's and then the California real estate tax item. What should we expect sort of that the aggregate impact in 2011 from those changes? And then what is the full year contribution that it would l be in '12 because it sounded like next year it sort of blends -- it leads in over time whereas '12 is a full year impact.

Yes. Each one of them has a separate story, so I will quickly go through all of them. The $7.2 million is the 2011 impact or most of which will be captured in 2011 from the leasing that has been signed. Some of it won't impact the entire year, but you will see that show up, which has not at all shown up in the results today over the course of 2011. The $1.6 million from Mervyn's, is an immediate benefit for the purposes of reported FFO but we had already been excluding that for the operating FFO. So from a covenant calculation, it is beneficial to us to the extent we get rid of -- go through the final process to get rid of those assets, but it won't directly impact operating FFO. The tax impact of $2.4 million was a one-time negative that is included in NOI and operating FFO for this year. So that is simply $2.4 million that will be added back in future periods simply because that expense won't recur.

And just -- I'm sorry, David. The $7.2 million for the leasing signed but not yet opened, what's the full year -- what's the full year impact of that? For 2012?

Yes, I don't have the exact numbers but I do know its north of $10 million. We can get you that. Don't have exact number in front but --

Yes, but north of $10 million is helpful. So thank you.

Perfect.

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

Hello. Good morning, everyone. Just focusing on the leverage issue, I know you mentioned the focus on getting back to investment grade. You target mid $8s by year end and clearly to get more in line with the industry average, you'd probably drop that to the mid $7s. So a reduction say of about $500 million in your leverage, is that what you are looking forward, over time, and to even focus a little bit more acutely, would you look to do it more quickly and perhaps look at equity as an option? Or, continue to chip away at over time, through the asset sales?

We continue to target, 7 times, or low 7 times on a proRATA debt to EBITDA basis as our target. And believe that the plan that we've outlined for the next year or two will get us there without any additional equity that would just be funding and debt paydowns. So there may be other selective investment opportunities that could be funded with equity, but we believe that we can achieve that long-term goal without any equity issuance purely for the purposes of paying down debt, over the next year or

We also think from the standpoint, Jay, of our growth of EBITDA, we'll have better direction and guidance on that in January because if fourth quarter ends up being as strong as we anticipate it being from a leasing perspective, and then we can project where that EBITDA growth is going to come from and when, in addition to what's currently signed. So, those would be new signings which are going to have a little bit of impact in 2011 but mostly annual impact in 2012. That is also a significant factor obviously in reducing our debt to EBITDA ratio, and I think that's something that's out there that is growing and improving our EBITDA at a rate that exceeds our expectations currently, and if it maintains through the fourth quarter and if we have a good holiday season into the first quarter, it's going to have an impact on exactly where and how quickly that ratio is met.

Ok, no that's helpful. And could you also -- the second question is could you speak to -- you have the difference in terms of lease rate for the spaces that have been vacant for more than one year. So I guess how much more of that space remains and even following on that, is now you're trending at about a 2% same-store NOI level, I mean would you consider next year anything below that level to be somewhat disappointing? So is 2%, the bar you now hope to achieve for the next year?

Let me handle the first part of that Jay in terms of what's remaining, as we outlined in the supplement and on the call, this is where we are with the level of activity in term of the bankrupt spaces primarily. That's been the lion's share of that space that's vacant more than a year. You know there's somewhere in the 100 unit count of vacant boxes, not all within that bankrupt space, but again the level of activity continues to increase quarter by quarter as we're seeing renewed interest and that supply diminishes. So, I'll let Dan or David jump in on the 2% but I think the answer would be yes as to --

I think at the present time, we really can't guide to 2011 same-store NOI given where we are in the process and given the volatility in the market. If things continue to progress as they have been we will be very encouraged and yes, we would be somewhat disappointed if we were not in comfortably positive numbers. But again in this environment, you're not quite sure what's going to happen, you're not sure what the holiday season is going to bring us. We obviously have additional tenants that are in distress, that could have an impact on that NOI and it would be more prudent to comment on our expectations after the end of the holiday season.

Great. Thanks, everyone.

Okay Jay.

Your next question comes from the line of Christy McElroy with UBS.

Hello. Good morning guys. Just going back to the $7.2 million benefit in 2011. In Q3, did you receive any NOI from temp tenants on that space or is the $7.2 million impact the net impact? And what's your physical occupancy today?

Clearly there was some temp -- don't have it broken down, Christy, but there was some temporary income. Keep in mind that $7.2 million relates to deal's that are executed, but not yet open or rent-paying. And some of those tenants, retailers may not be taking occupancy until early 2011 or even later in '11. So we were clearly taking advantage of utilizing that space for the temporary -- for the ancillary income pool. So again without knowing the exact number, clearly there was some of that $7.2 million in space that was occupied by the temporary retailers.

Okay.

You should also keep in mind though Christy, that our growth rate in the ancillary income has been double digit for quite some time, and we expect it to be double digit again next year. So, if we were to lose space that is currently vacant to permanent tenants that occupy and pay rent, we will make up for the income elsewhere in the portfolio whether it be Puerto Rico or Brazil or some of the other initiatives that we have going. So we don't see any backward trend in ancillary income regardless of what our occupancy rate is for 2011.

Christy, on your second question, regarding fiscal occupancy is right at 88% at quarter end, so still a historically high spread but there'll be significant number of openings, keep in mind that only included stores that opened by September 30th, the end of the quarter. So there'll be a significant number of openings in the fourth quarter and we should start to see that spread decrease over time.

What would you expect that to be at year end?

Don't know exactly -- obviously something north of 88% in the physical occupancy and -- but I don't have an exact number for you.

Okay. And then what kind of cap rates are you seeing on your non-core assets sales and the stuff that you sold in the quarter and anything that you're in discussions on. And then what kind of cap rates are you seeing out there in the market on what you would consider to be more core type community and power centers?

Yes, our -- the majority overwhelming majority, of our sales activity clearly relates to non-prime assets, where in general, for a stabilized non-prime asset where there's not much vacancy involved, we have budgeted those at the beginning of the year and the 10% range. We had been executing consistently in the 9% range. And we are now seeing that maybe even get slightly lower than that. There's still selective cases where you've just got an NOI stream that's not sustainable. We know it, it's one of the reasons we're selling it.

The buyers might not completely feel the same way, but they are going to price in something higher. On the other hand there's some vacancy that we're selling that we haven't been able to lease for ten years that someone else may believe they can, and so there's some of these trades that are coming in at cap rates lower than that but all in, I think the 9% figure is one that we're comfortable about talking about today. For prime assets, which we're obviously looking at on the potential acquisitions side although very selectively as well as certain joint venture-driven sales, we are clearly seeing a market where, prime assets are trading in 7% cap rate range. And with anything overly exciting about the asset is -- we're seeing more and more transactions happen below 7%, validating that the market is getting more and more comfortable with that, and encouraging lenders and other constituencies to underwrite something closer to that, when they're looking at financing assets.

You know, Christy, it might be interesting to note that year-to-date, when we talk about prime and non-prime assets, we should probably identify that just a little bit better for you because year-to-date on the assets that we've sold from a population perspective, demographic population perspective, in the three mile radius the assets that we're selling are 17% below the assets that we have classified as prime. And on a seven mile radius, the population is 20% below the assets that we've classified as prime. From an income perspective, in the three mile radius, the incomes are 23% below where our prime portfolio is, and on a seven mile radius, the income is 11% below where our prime portfolio is. So this is true portfolio management in the truest sense and while we're pleased with the pricing that we're achieving, we're equally as pleased with the impact that disposing of these assets will have on our overall portfolio quality.

That's helpful. Thank you.

(Operator Instructions) Your next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please proceed.

Thank you. Good morning. I'm -- my question is on the ground up development projects that are primary on-hold in the wholly owned, how might this number change by the end of 2011 or 2012? I mean, would some projects be reactivated or may you sell some of the projects?

Clearly the goal is to sell some of the projects and I don't see any significant start up in '11, Craig. If there are some that -- and we are seeing renewed retailer interest obviously with that supply and demand story we continue to talk about. But we wouldn't see any expenditure on those projects until sometime in 2012 or possibly 2013, quite frankly we are not in any hurry to get that business going.

And it will be sales, we are seeing improvements in the land market everyday. Lots of discussions going on with developers and retailers who might be interested in the site because they want to get going before a retail project can be put together. But they're certainly light on that whole area of land held for development, and we would expect to complete some deals in 2011. And I'm talking about on the sales side, I don't see any construction starts on development in '11.

I think it's also important, Craig, to note that one of the hindrances to starting these projects is that while we are seeing more interest from the tenants, we are seeing no more cooperation from municipalities on the entitlement process. And you have to reenergize that process in order to get a lot of these projects off the ground because a number of these sites are not currently entitled. That takes a bunch of risk capital and it takes at least a good comfort level that you can be successful. Honestly we don't get that sense from municipalities regardless of their need and desire for tax revenue, the cooperation on facilitating new development projects just is not there.

Okay great and a second question, just given the very active expansion of dollar stores, I'm surprised that I don't see more dollar stores on top tenant lists. I see a Dollar Tree stores in your list, but is there any reason the REIT's don't have more exposure to dollar stores, restrictions or -- what accounts for that?

Well, one of the reasons why you don't see it historically, is because the dollar stores didn't typically go in high quality real estate and most of the public companies own real estate of higher quality. That is changing. That is changing quickly.

So I would not be surprised if you see dollar stores show up on the list in the next year or two because they are, as you know, as you mentioned, expanding aggressively and because of the availability of space, are getting into assets that they had not had access to in the past. So, I think it's just more of a lag than anything else, Craig, because they have become, as Paul's mentioned on other calls, a desirable co-tenant for a number of retailers that had tried to keep them out of assets in the past. And we -- those of us who own quality real estate are looking at them much more favorably than we have in the past because they pay good rents, they drive a lot of traffic, and they're a good user of space. So I think it's more of a lag than anything else, and I think the trend that you talk about you will start to see, probably next year.

Great. That's very helpful. Thank you.

Sure.

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

Thanks. Hi. Good morning. First of all, with respect to the $7.2 million of NOI again, I just want to confirm that is in your 92% leased rate, correct?

Yes.

Ok. And I think you mentioned, if I heard you correctly, that the occupied space was around 88% relative to the 92% lease. So, and hypothetically if you didn't sign another lease and that 92% stayed there, how long would it take for the 88% and the 92% to converge?

Early 2012 probably Michael.

Okay. And the $7.2 million, if we're thinking about that 88% to 92%, is that $7.2 million a significant chunk of that?

Yes, its significant, but again it's as I mentioned on -- it was an earlier question, clearly, the annualized -- if you annualize the $7.2 million, we're going to be something north of 10. Because again you have a lot in that $7.2 million that is opening fourth quarter '11.

Okay.

And on an annualized basis, Michael, it will be between 70% and 75% of it.

Yes.

Okay. Got it. And then, one other thing, on a go forward basis, is it possible to put the occupancy in the supplemental as well so we can track this a little easier with respect to a lease percentage?

Sure. We'll take a look at that.

Okay. And then I know you're still working through your 2011 budgets, but what's the best guess at this point in terms of how we should be thinking about asset sales, to what degree would be a net seller of real estate in 2011 versus 2010. Do you think the levels are comparable, do you expect it to pick up or move down?

You know, I think strategically we've been clear that portfolio management is crucial to us increasing the amount of NOI from prime -- from the prime portfolio is crucial to us. It's been more one-sided in the past where that improvement has been almost exclusively from selling non-prime assets. WE would expect that to continue, we will also, very selectively, look at acquiring prime assets. You know, I still think it is too early at this point, and finalizing things to say where those numbers end up for next year.

But we would firmly continue to expect to be a seller of nonprime assets, although with a growing appetite going forward, for reinvesting those proceeds in prime assets as opposed to exclusively using it for debt pay down. Some of it clearly could go to debt pay down, but we are selectively looking for acquisitions to redeploy some of that capital.

Okay. Okay, great. Thank you.

Your next question comes from the line of Jim Sullivan with Cowen and Company. Please proceed.

Good morning. I wanted to follow up on the comments that were made about Brazil, and I think it was David, you made the comment about utilizing outside capital to expand in that market. A couple of questions, number one, particularly in light of the returns on the expansion that you talked about in your prepared comments, what kind of hurdle rates is appropriate now in Brazil given where interest rates are and the other issues regarding taxation getting money out of that market, what kind of hurdle rates do you think are appropriate for new investment number one. Number two, the outside capital you're talking about, would that be capital that would come from within Brazil but outside your current relationship, so would it be from institutions outside Brazil. And then thirdly, does this mean that DDR will not be investing any new capital in Brazil or that you will just be investing less than you have previously on a pro rata basis?

Well, first on the hurdle rate, everything that we are doing in that market on a initial stabilized return basis is in the low teens, so I think you're 500, 800 basis points better than acquisition opportunities in the States and to the extent that development was moving forward again here, you're still 200 to 500 basis points better than that.

Which we believe it is attractive on a relative basis but not attractive if we were to allow that to become too large a portion of our balance sheet and change the risk profile of DDR as the parent company. And so that's why we have explored other capital sources as a balance in order to be able to take advantage of the growth opportunities down there, remembering that it's not just the initial yield, it's the considerable economic growth, and the inflation, and oriented bumps that are priced into leases on an annual basis. So it's the improved up front yield as well as the improved growth. All of that's quite attractive to us, but on the other side, I want to carefully balance the overall risk profile of DDR and not have too much of our balance sheet exposed to a foreign currency, a foreign government, repatriation risk, or any of the other items associated with investing outside of the US.

What we have done thus far is we have filed with the CDM which is the Brazilian version of the SEC for an initial public offering where DDR and (inaudible) would continue to maintain very significant states in the Company but would bring in additional public market investors in the documents that were filed in what's contemplated so far.

Is it contemplated that DDR would be taking any money out or would you leave your capital that's invested there in the expanded venture?

Our plan is to leave the overwhelming majority of our capital in the venture, again we're very supportive of it, we're very encouraged by the opportunities down there. The issue for us is more the decision about committing additional capital which we have not done for a period of time. And we would like to find a way to bring in other capital so we do not have to commit additional capital to fund the development opportunities over the next couple of years.

Okay. Good. And then I have a question for Dan regarding store size. There was a lot of talk back in the spring at the ICSC given the lack of new development and the appetite particularly among some of the junior anchors for more space, that some of those anchors or some of those tenants were going to become a little less -- a little more flexible rather about store size, i.e. taking smaller boxes if that was all that was available in order to meet their store opening plans.

And I have kind of a question whether number one that's still occurring, number two, have you seen any evidence, Dan, in this cycle given how generally people are trying to be a little more conservative and careful about allocating capital. That the retailers are maybe moving to smaller footprints generally, from the footprints they used to have before? Or this just an opportunistic store selection based on what's available and their store opening targets?

Well, Jim I think that's a great question because we have been a proponent of smaller store size for quite some time, we have a lot of retailers that got extraordinarily large, and all it really did was reduce their inventory turn, reduced their sales per square foot, and reduced their operating margin. So we are continuing to see retailers be extremely flexible in store size and that has resulted in a lot of the momentum that we have seen in the junior box category because a lot of the boxes that we're leasing just simply didn't fit any particular prototype, yet stores need external growth so they have been forced to become more flexible but overall in this era of inventory control, inventory turn, and sales productivity per square foot.

And let's -- we have talked about this many times before, you could even argue price deflation, particularly in ready to wear, it is in the best interest of retailers to take smaller square footage because the expansion of market share is not what it once was. It's not going to come back anytime soon. Even with a little bit of inflation, t he competitions is extremely intense, and as a result of that, it's going to continue to put pressure on pricing, even though we are seeing a little bit of inflation in commodity pricing and in China, and other places that is going to start to flow through.

If you have smaller footprints, you will -- your store productivity will go up, your profitability will go up, and the story will be a better story and you will be carrying less inventory. So, there really is no down side to that for the average retailer. That's something we will see continue, it's something that we've taken advantage of. But I think it is not just opportunistic. It is smart business and even in a more robust environment, we still would like to see retailers condense store size and focus more on profitability per square foot.

Okay. Then final question for me, Wal-Mart has been dabbling with a very small footprint, we just wonder if you have had any conversations with them about any of these new prototypes.

We have. We've got several deals in the hopper with those guys, and we completed a deal on a form which we actually sold them the asset which to date was their smallest supercenter in the chain, at only 71,000 feet.

But we are working with them on back filling vacant supermarkets, they have gotten very aggressive and it ties right into the question you asked Dan. I mean these guys are accelerating the move to smaller and there is no one size fits all and it's opened up a great number of markets for them in terms of expansion.

Okay. Thank you.

The next question comes from the line of Laura Clark with Green Street Advisors. Please proceed.

Hi. Good morning. Going back to the 7 times long term debt to EBITDA target that you mentioned earlier, why is seven times the target, why is it not a number that's a lot lower, say closer to 4 or 5 times?

I mean, we have obviously read your very thoughtful research about -- the industry's thoughts on leverage overall, and the financial theory behind it. I think from our perspective balancing what we can accomplish in the near term as well as balancing where we've consistently found debt to be available both on the secured side and on the unsecured side, that's the level where we believe that there's debt consistently available at attractive pricing.

I think it is also important to us to marry the overall leverage level with a long enough duration so that even if you do operate with you know somewhat higher than the 4 to 5 times debt to EBITDA that you mentioned, that you built in that cushion in terms of your maturity profile and refinancing risks, and so I think we want to address it on that side also. So I don't think there's any, exact number that you can prove is the right number. But I think this is a -- the seven times level is one that we have found when we just look at the way that other companies within the industry trade, that would allow us to maximize cash flow and maximize the multiple at which we can trade and with the right duration profile on that could still allow us to operate in a very low risk level.

But obviously understand, the point that you guys have written so thoughtfully about, with the way that other industries think about it outside of real estate where maybe we shouldn't just be running those correlations and running that analysis relative to where other REITs trade and their leverage levels but perhaps relative to the broader markets.

Okay. Thanks. And lastly, approximately 25% of your bankrupt boxes remain vacant. Can you give us an idea of where that remaining space is located?

Well, the concentration initially was in the southeast, Laura. So that's most of that vacancy is in the southeast. I will say, I think it is worth explaining when we see that 25% no activity, we don't put anything in the activity column if you will until there's a formal LOI being negotiated.

That doesn't mean there hasn't been some discussion or interest on the part of retailers. You know, let's face it, we know there's going to be a certain percent that's highly undesirable, no retail use, but we would anticipate that to be in the 5% to 10% range and not the 25%. You know we are seeing activity. We just haven't gotten to the formal LOI stage. You will see that number of deals with some level of activity increase over the next quarter.

Okay. Thanks.

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

Hello, guys, on that same topic that Laura was talking about, will you, you think be adding any stores to the bankrupt portfolio? In other words do we have any retailers that you're concerned about at this point that will increase that number of stores?

Well, you know Rich obviously we have got Blockbuster in chapter 11 right now, and we expect that they will emerge and probably close about half of their stores, that's not a terribly big impact to us. And by the way we are proactively and aggressively marketing their space. You know they're in good locations and we are comfortable we'll backfill it quicker.

In term of the larger boxes, obviously that leads to the book category, and we have got to see how Borders really performs in the fourth quarter. But other than that we are not anticipating any big surprises.

Ok, good. Thank you Paul. And then just a quickie on operating expenses in the joint venture portfolio. That seemed to dip unusually, is there anything of interest going on in the third quarter in the joint venture operating expenses?

I mean nothing, nothing major. We are continuing to see gradual improvement. It's occupancy and leased rate increases a bit and we are simply able to recover more expenses.

We have again tried to improve the disclosure with our joint ventures, and I think on a go forward basis, this is going to be simpler for you to see, but in the past, we have included impairments or impairments have flown through the NOI for the joint ventures and have been a little more difficult to pull out. And so ,there have been quarters where the NOI looked lumpier than it should have been from the joint ventures just because we haven't done as good of a job as we should have to make it clear what was recurring within that and what wasn't.

And so I think that the disclosure that's reflected now on the ventures which is less line items than used to exist a year or two ago but I think more of the right information to let you know not how each venture is doing but how the overall joint venture platform is doing. I think we have got to a better point now where hopefully we can make this more understandable going forward. The other individual item on the expense side for the joint ventures and somewhat for wholly owned also, is that bad debt expense was down this quarter relative to last quarter. And so you are seeing that improvement show up also.

Okay. Very good. Thank you, Dave. Is that margin then for the joint venture portfolio, the operating margin, is that a pretty reasonable margin to run forward for future quarters?

Yes. If you're looking at just the revenue and expense number where we have now broken out that impairment figure below it. That should be a reasonable margin that we would hope to be able to grow off of as new NOI hits that not only has a positive revenue impact but also should end up in less nonrecoverable expenses so we think we're at a reasonable run rate today, but one that we would hope would grow over the next several quarters.

Okay. Great. Thank you guys.

Thanks, Rich.

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

Good morning. I'm just here with Michael. In terms, just going back to the balance sheet, in terms of your fixed versus floating debt, I think you are almost at about 30% floating debt which is obviously a big help to earnings near term and not paying out of dividends that's helping you deliver as well. I am just curious, longer term what you think an ideal mix between fixed and floating rate debt would be?

I think, you know, when we discussed that at the management and board level, that something in the 20% range, maybe even a bit below that makes sense. Conscious on both sides that it can actually provide a good hedge when the world gets worse, your cost of debt immediately is reduced but on the other side, it increases earnings volatility and interest expense volatility over time, which is completely inconsistent with everything we have said about lowering the risk profile of this company. So, we're conscious of the fact that we are in high 20s right now.

We have had some swaps that burnt off. It was a good thing, as those swaps were locking LIBOR in the 4% or somewhat higher range. And we could look to put those back into place but certainly conscious of the fact that we're at the high end of what we think is acceptable and reasonable on the fixed versus floating. It is a good point and something we're very focused on as we continue to try to make sure we operate with lower risks.

How should we think about that from a 2011 perspective in terms of, you talked about having some of the secured debt coming in relative to what's maturing. Are you going to take actions next year to swap some of that floating rate exposure down to fixed? It obviously has a meaningful impact at least on current estimates.

Yes I mean I think we firmly believe we would like to operate with lower floating rate debt going forward. Part of it was the process of putting a new line of credit in place, making sure that we could achieve appropriate hedge accounting should we consider putting additional swaps in place. You need to have duration on that underlying floating rate debt in order to appropriately be able to account the way we would all want to account for this as a hedge as opposed to a derivative.

But not definitive on exactly how we would lower that, but in complete agreement with you that less floating rate debt is what we are shooting for, and we are at the higher end of what we think is an acceptable range, we don't have a view that interest rates are going to go up significantly. But we also don't care that much what our actual view on that is because that's not our business. We want to make sure that we have just taken some of that risk off the table one way or another.

Just going back to the portfolio, and obviously a substantial amount of the new license this year were for spaces that were vacant better than 12 months which is correct for NOI. I am just curious on the economics of those deals, and if you sort of have what kind of leasing spreads that space would have been done on?

We do Quenten. You know, it's not factored, obviously any space that's been vacant for more than a year, but if you just look at the deals on space vacant for more than a year, that would have been a negative 12%. On those deals alone. But I think the more important metric is --and if you look at the net effect of rents, the base rent continues to grow on the new deals. That's the trend we are watching.

Clearly the spreads and the way we have historically calculated spreads continue to improve and we are seeing improvement in the base rent quarter-over-quarter. And that's a big deal, but just on the deals that are a year or more vacant, 12% negative would have been the spread on those new deals.

It is also important to note that before the recession, we have never include spaces that were vacant more than a year, we didn't change this metric for anything that has occurred in the last 18 or 24 months. In fact as I talk to my peers in the industry, most of us do it that way because we talk about it on a fairly regular basis. So I think that we have never included space that was vacant for more than a year in our comp analysis on rent spreads.

And again, the improvement is the key. That number was more negative in prior quarters. So we are seeing consistent improvement.

And just last one for Dan, we have seen a couple of your shopping center peers, see others get new employment agreements from their boards as retention tool, is that something that we need to be mindful of for DDR?

No.

Thank you.

You have no further questions. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.