Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Tom Morabito – Senior Director, Investor Relations

Scott Wolstein – Chairman and Chief Executive Officer

Dan Hurwitz – President and Chief Operating Officer

Bill Schafer – Executive Vice President and Chief Financial Officer

David Oakes – Senior Vice President, Finance and Chief Investment Officer

Analysts

Jay Haberman – Goldman Sachs

Jeffrey Donnelly – Wells Fargo Securities

Quentin Velleley - Citigroup

David Harris – Arroyo Capital

James Sullivan – Green Street Advisors

Michael Mueller – JP Morgan

Carol Kemple – Hilliard Lyons

Richard Moore – RBC Capital Markets

Alex Baron - Agency Trading Group

Developers Diversified Realty Corp. (DDR) Q2 2009 Earnings Call July 24, 2009 10:00 AM ET

Operator

Welcome to the second quarter 2009 Developers Diversified Realty Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host, Mr. Tom Morabito Senior Director of Investor Relations.

Tom Morabito

With me on today's call are Chairman and CEO Scott Wolstein, President and Chief Operating Officer Dan Hurwitz, Chief Financial Officer Bill Schafer, and Chief Investment Officer David Oakes. Following our prepared remarks we will then conduct the Q&A session.

Before we get started, I need to remind everyone that some of our statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our earnings release and in our filings with the SEC.

Finally please note that on today's call we will be discussing non-GAAP financial measures including FFO. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can also be found in the earnings release. The release and our quarterly financial supplement are available on our website at ddr.com.

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

Scott Wolstein

To start things off I would like to thank everybody who attended our Investor Day on July 1 or listened to the webcast. We appreciate your interest in our company and value your feedback on our disclosure. We hope you came away with new and helpful information that shows how diligently we have worked and will continue to work to lower leverage, improve liquidity, release recently recaptured space, and ensure that we come out of this recession as a stronger company.

We have already made good progress on our deleveraging initiatives and we plan to continue to aggressively raise capital in order to achieve our goals. We ended 2008 with roughly $5.9 billion in total consolidated debt. As of June 30, that balance has been reduced to $5.6 billion by retiring near-term maturities with retained capital, common equity and asset sale proceeds.

Our current plan calls for consolidated debt to decrease to $4.8 billion by the end of 2009 and to $4.5 billion by the end of 2010. On a consolidated debt to EBITDA basis, we forecast that we can lower this multiple to 8.3 times at year end 2009, 7.5 times at year end 2010, from 8.7 times at the year end 2008.

We are accessing a wide variety of capital sources, including retain free cash flow, asset sales, new debt proceeds and new equity. We have also continued to buy back our debt at significant discounts. We have addressed all of our consolidated debt maturities for 2009. With the capital that we are accessing, we are well positioned to address all of our maturities for 2010, '11 and '12.

I would also like to give you an update on the new debt financing that we are pursuing as part of the government's TALF program. David Oakes will go into more detail later on the call, but overall the transactions are proceeding well according to schedule, and our underwriters are seeing very strong answers from investors. Importantly, the expected proceeds should address all of our remaining 2010, 2011 and [2010] mortgage maturities, and the new five-year term will fit nicely into our maturities schedule.

Next, I would like to briefly discuss our second quarter operating results, which similar to last quarter, were solid despite the challenging macro environment. While there was considerable noise from gains in non-cash charges during the quarter, some of which were occasioned by what could only be characterized as bizarre accounting rules, FFO on an operating basis for the second quarter of 2009 was $0.51 per share.

Our business continues to perform relatively well and in line with expectations. And once again we had a very strong quarter in terms of leasing with over three million square feet leased. Given the challenges of the current environment, we were pleased with the performance of portfolio and our team.

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

Bill Schafer

As mentioned, our second quarter 2009 operating FFO was $0.51 per share and was in line with our internal projections. After adjusting to include several non-recurring and non-operational items, FFO was a loss of $1.15 per share.

Now I'll walk through some of the details regarding the specific non-operational items most of which are non-recurring and substantially all of which are non-cash. First, we incurred a non-cash change in control charge of $10.5 million associated with the Otto transaction as it relates to certain equity award plans that immediately vested upon shareholder approval.

Approximately 175 employees were impacted by this vesting. It is important to note that this vesting was required by certain provisions in the equity award plans previously approved by the shareholders resulting from the potential 20% change in control of the company's ownership interest. It is also important to note that the charge is calculated based on historical value at the time of award grant and not current market value, which would be a small fraction of this charge.

At this time, we are projecting another $5 million non-cash charge to be incurred at the closing of the second equity tranche, which is expected to occur in late third or early fourth quarter. We also had an $80 million non-cash charge related to the share price appreciation relative to the price at which the Otto family committed to make their investor.

The accounting standards require us to treat this equity sale commitment as a derivative that requires mark-to-market accounting. This has the ironic impact of generating greater non-cash charges as our share price appreciates. These so-called derivatives will continue to impact reported results until the second tranche of the equity closes and the warrants are exercised. So they have no economic impact on DDR.

This treatment also impacts our balance sheet and at June 30 a $41 million non-cash liability included in other liabilities will be reclassified to equity upon ultimate exercise of the instruments. We added a schedule to our financial supplement to provide greater transparency on these charges.

Second, consolidated impairment charges for the quarter amounted to approximately $107 million. Included in this number is approximately $61 million associated with former Mervyn's stores. This charge was based upon adjustments to current projected rental rates and cap rates. Our allocated share of this charge is approximately $31 million. The remaining impairment charge relates to assets that we expect to sell in the coming months for less than book value.

Third, we had actual losses on completed sales and impairments on assets held for sale aggregating $61 million, which are reflected in discontinued operations. Fourth, we incurred additional impairment charges of $40 million associated with our share of various investments with Coventry, partially related to our partner's inability to fund cash requirements that has forced certain actions at inopportune times.

Offsetting these negative non-recurring items are the net gains on debt repurchase of approximately $46 million. In total, the impact of non-recurring gains and losses in the second quarter was approximately negative $240 million or $1.66 per share. Even after all these non-cash charges, our book value was still approximately $14 per common share or nearly three times the recent share price.

Turning now to operating results for the second quarter, same store NOI was down 5% for the quarter which is consistent with our expectations. Our Brazil portfolio continues to perform particularly well with the same store NOI increase of over 12.5% for the quarter. Substantially all of the decrease in consolidated base rental income in the second quarter and year-to-date is directly related to the bankruptcies of Circuit City, Goody's, Linen's 'n Things, Mervyns and Steve & Barry's.

Bad debt expense for the quarter was approximately 1.5% of total revenues as compared to 1.4% in the second quarter of 2008. G&A expenses are down approximately 16% from last year, excluding the $10.5 million non-cash charge I discussed earlier. The reduction in G&A is attributed to compensation changes, a lower headcount, and reduction in general corporate expenses.

Our ratio of G&A to revenues, exclusive of the change of control charge, has decreased only slightly to 4.2%. This is partially related to our policy of expensing our leasing staff's salaries rather than capitalizing them, and clearly we are committing more resources to leasing today to address the bankruptcy driven vacancy that has resulted in lower revenue.

Turning now to our debt convents, key takeaways include the following. We are fully compliant with both bank facility and unsecured note covenants. Our tightest ratio is the unencumbered asset coverage ratio in our bank facility covenants. The value of unencumbered assets must be greater than or equal to 1.6 times consolidated unsecured indebtedness. Our calculations indicate we are approximately 1.63 times on this ratio as of June 30th.

As illustrated in our recent Investor Day presentation, we are comfortable that this ratio will trend upward each quarter going forward and we intend to operate north of 1.8 times within a year. Factors that will improve the ratio in the second half of 2009 includes $60 million of common equity that will be issued on or before October 9th from the second tranche of the auto transaction, additional asset sale proceeds, and retained capital that will be used to repay debt. Our unencumbered asset pool was approximately $5 billion as of June 30th and our consolidated indebtedness ratio in our bank facilities continues to improve at approximately 50% as of June 30th.

Leverage and liquidity continue to be a primary focus for everyone at DDR. As we raise capital from a variety of sources, you will see us continue to buy back our near-term maturing notes at a discount and reduce our revolver balances. Our cash on hand and revolver capacity was over $150 million at quarter end. We have intentionally and temporarily chosen to keep revolver balances high in favor of using funds to deal with near-term maturities at discounts to par. As we move toward the end of 2009, we will deploy more capital to lower revolver borrowings.

Finally, last week we announced the results of the second quarter 2009 dividend election. We paid approximately $3.1 million in cash and 27.4 million in common shares, which resulted in 6.1 million additional shares outstanding at an effective price of $4.49 per share.

I will now turn the call over to Dan.

Dan Hurwitz

I would like to start by providing a brief update on what we are seeing in the leasing environment as we continue to navigate ongoing economic and consumer challenges. While we are keenly aware of the fact that many retailers are facing sales declines, the reality is that there continues to be a strong segment of retailers looking to expand their store count and capture market share from their current and fluent competitors.

The short term macroeconomic headlines may suggest otherwise, but the current retail real estate environment presents a unique opportunity for retailers to aggressively seek external growth at significantly lower costs. Over the course of the second quarter, out leasing team held many key meetings with retailers to understand revolving platforms, and as a result we leased a historic amount of GLA.

Specifically, we signed 147 new leases during the quarter representing over 900,000 square feet of GLA at an average rental rate spread of negative 16.6. Additionally, there were 259 renewal deals executed during the quarter representing over 2.1 million square feet of GLA at an average spread of positive 1%. On a blended basis, there were 406 deals executed during the second quarter representing nearly 3.1 million square feet of GLA at an average spread of negative 4.72%. Compared to the previous quarter, we executed 58 more leases and leased 1.2 million more square feet of GLA.

I'd like to point out that of the 900,000 plus square feet of new deals signed during the second quarter, 45% represent space that was recently vacated by bankrupt retailers. The spread on new deals signed to backfill space formerly occupied by bankrupt retailers was negative 24.2%, which is consistent with our expectations and past guidance, while the average rental rate spread on new deals, excluding those signed to backfill bankrupt retailers, was negative 9.8%.

Despite the challenges of backfilling space formerly occupied by bankrupt retailers, we have seen solid improvement in the rental rates from the first quarter to the second quarter. In the second quarter, we leased 466,000 square feet of space that was previously occupied by bankrupt retailers versus the 233,000 square feet leased in the first quarter. And the average rent per square foot increased 63% for that space from the first quarter to the second quarter, resulting in an overall positive impact on our average base rent per square foot portfolio wide.

Overall, we are very encouraged by the leasing activity that we achieved during the second quarter. On a square foot basis, these leasing results represent the greatest level of production in the history of the company. While the resulting rent spreads are much less favorable than what we have historically achieved, it should be no surprise that rents are under enormous pressure as vacancy continues to increase across the regional sector.

From a capital expenditure perspective, the cost of executing deals has decreased 10% on a per square foot basis from the same period one year ago, as we continue to develop creative ways to utilize existing fixtures and improvements, and focus on making efficient deal with retailers. However, given the large volume of leasing we achieved this quarter, total CapEx will be higher than we have experienced in recent periods, despite our aggressive control of capital expenditures on a per square foot basis.

As evidenced by our leasing results and contrary to common perception, select retailers are in fact growing store count and increasing market share. It should be noted that year-to-date we have leased over five million square feet of space when many were predicting the lowest deal velocity in decades. Many of the same retailers we closed deals in the first half of the year are retailers that we continue to do business with.

The most active retailers include Bed, Bath and Beyond and its various concepts, Best Buy, hhgregg, Hobby Lobby, JoAnn stores, Nordstrom Rack, Dollar Tree, AC Moore and regional grocers, such as Sprouts. Also very active are Staples, Michaels, and the TJX companies, the parent company for T.J. Maxx, Marshalls, A.J. Wright and HomeGoods. We have multiple executed leases or inactive lease or LOI negotiations with each of the retailers that I just mentioned.

I would also like to highlight the fact that two of our largest tenants, Wal-Mart and TJX, recently announced significant long-term debt refinancing transactions. The low cost of capital of many of our largest tenants is likely to encourage and fund their future growth.

As I discussed on our previous call and on Investor Day, we've been very active in the tenant community with formal face-to-face meetings to discuss the temporary shifts in operating platforms for many of our tenants. The feedback we are receiving from the tenant community suggests that retailers are consistently reevaluating who they do business with, and DDR remains prominent as a trusted and desired business partner who will deliver high quality space with certainty of execution.

Despite strong leasing results and tenant feedback, we are still experiencing the effects of the retail bankruptcies that occurred in late 2008 and early 2009, as well as the general retail fallout that continues to trickle through the system. Our portfolio lease rate, as of the end of the second quarter, was 90.7%. Historically, within our portfolio, the lease rate has trended down from first quarter to second quarter.

However, we were able to hold our lease rate flat as a result of strong leasing results from prior quarters. As such and similar to what we have discussed in previous calls, we view this as further evidence that we are operating at trough occupancy barring any significant additional downturn in the economy and anticipate modest occupancy improvement in Q3 and Q4.

Addressing the big box vacancies, our anchor store redevelopment ream continues to diligently backfill the approximately seven million square feet of junior and anchor space that has been recently returned to us through the bankruptcy process. As mentioned at our Investor Day conference, we have made significant progress and currently have half of the units either sold, leased, at lease, or under LOI. We continue to work creatively to re-tenant these spaces with strong credit tenants and maximize the reuse of existing improvements to minimize capital outlays for tenant allowance.

Moreover, we are pleased with the deal flow that consistently replenishes the LOI category as the previous LOI's move to lease and then execution. To give you some perspective on velocity, since the first quarter our anchor store redevelopment ream has leased an additional 16 units, which includes five executed leases even since Investor Day. In addition to the inherent upside potential of permanent leasing within our anchor store redevelopment portfolio, it should be noted that our new business development team continues to generate significant revenue through temporary and seasonal leasing of vacant big boxes.

Our new business development initiative has proved to be a vital aspect of our overall operating platform and an effective hedge against lost rental revenues as a result of increased vacancy. To date, our new business development department has generated $3 million of revenue committed from temporary tenants within our anchor store redevelopment portfolio, and total revenues within that department have increased 20% from the same time period in 2008.

Turning for a moment to our overall portfolio, our management team has actively discussed our corporate strategy from a portfolio perspective over the past several months. As we navigate through the current economic cycle and our portfolio continues to face headwinds, there is an underlying opportunity to restructure our portfolio and re-tenant our assets.

Through active asset management, we have begun to build a best-in-class portfolio that is diversified by asset type, geography and tenant base. The opportunity to re-tenant our portfolio comes from the recent fallout of weaker retailers and provides us with the unprecedented opportunity to focus on today's best-in-class retailers that will add value to our centers and lower the overall risk profile. As you can see from this quarter's leasing results, this transformation is occurring daily.

As we consider various asset sales, we must determine which assets we want to keep in the franchise and which assts we are willing to even dispose of if motivated. Given the underlying opportunities that the current environment creates, we are thrilled to review the existing portfolio to create a list of prime assets. Our prime assets are those which we will not sell to third parties, but rather will be held as long-term franchise properties.

The excluded assets and single-tenant properties are those which we will continue to consider for outright sale with a goal toward enhancing our liquidity, strengthening the balance sheet and increasing the long-term growth profile. It should be noted the prime portfolio occupancy rate currently stands at 93%.

I would now like to take a brief moment to address rent relief and co-tenancy as these continue to be issues in topics of discussion both among retailers and investors. In terms of rent relief, we continue to receive requests, albeit at a much slower rate, from tenants seeking concessions, abatements and deferrals. We do not foresee those requests going away any time soon. We do, however, expect the impact from rent concessions to be far less than the market may perceive and our statistics indicate just that.

To date, we have granted less than 4% of the requests we have received. The average concession granted is a 23% reduction in rent usually in the form of a deferral for one year, after which the tenant reverts back to paying the base rent agreed to in their executed lease agreement and generally we pay any deferred amount in future years.

Turning to co-tenancy, I'd like to clarify the impact it has had on our portfolio. At Investor Day we indicated that only 1% of our tenants are paying rent subject to a co-tenancy provision and this is still the case. While many of the tenants in our portfolio have lease language that includes co-tenancy relief, alternative rent driven by a co-tenancy violation must be triggered by an event and, therefore, the impact is current very limited. The risk of additional triggers occurring in the future is not imminent but certainly possible and we continue to monitor the situation diligently.

Regarding our investments in Brazil, I would now like to take a brief moment to discuss the macroeconomic climate and provide an update on portfolio operations. Brazil retail sales rose more than expected in May indicating that consumer demand is driving a rebound in Latin America's largest economy. Sales rose 7.1% in April and 4% in May over the same period one year earlier. The Brazil Central Bank recently reduced the current short-term interest rate from 9.25% to 8.75%, which is a record low.

The Bovespa Exchange is up 31.8% year-to-date and the Brazil Central Bank projects 2009 GDP to grow by 1%. The forecast for inflation remains modest at 4.1%. As of May 31, our Brazilian portfolio remains 97.1% occupied and same store NOI growth for the second quarter was 12.5%. In April we opened a new shopping center in Manaus, well over 90% leased as retailers continue to look for expansion opportunities.

In addition to solid operating fundamentals, we together with our partner, closed on significant financing transactions that will enhance liquidity for our partnership. We closed on two loans totaling 95 million in reais and sold limited interest in one of our shopping centers to raise additional capital. We continue to be very pleased with our investments in Brazil and foresee the portfolio to be an imperative driver of our growth over the next several years.

In summary, we have made significant leasing progress and continue to creatively re-tenant our portfolio. However, we do not discount the environment we are currently operating in. Deals are tough, retailers and landlords alike are under enormous pressure and the consumer continues to lack confidence causing them to trade down, which ultimately provides a benefit for many of our discount tenants.

As we make our way through the remaining summer months when retail sales are at their seasonal trough and cash [outline] is at its peak, we will continue to monitor our watch list, meet with key retailers and stay apprised of industry-wide issues that may potentially cause systemic risks and disrupt retail operations.

That being said, we are pleased that June and July, thus far, have not seen any additional material bankruptcies for our portfolio. Overall, based on what we've seen over the past 12 months and even though we have taken a clear and early occupancy hit to our portfolio, our tenant base is rebounding and our operating platform continues to perform at a very high level.

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

David Oakes

At our Investor Day we laid out what we had accomplished thus far regarding our leverage and liquidity build and what we expected to accomplish in the near-term. I am pleased to report that we have made progress on various deleveraging initiatives during the three weeks since then, which I will take a moment to update you on.

We've sold four assets since July 1, bringing our total asset sales for 2009 to over $225 million of which our share is $179 million. We fully expect to continue to execute on asset sales throughout 2009 and currently have an additional $320 million of assets under contract for sale or subject to letter of intent over half of which have non-refundable deposits.

Several of these sales are generating accounting losses, but we firmly believe that selling these non-prime assets is the appropriate strategy, especially considering the attractive returns associated with reinvesting that capital. We also firmly believe that our historic accounting cost basis should not be a driver or deterrent to transactional activity. We continue to make progress on several new debt capital transactions.

This week we closed $17 million of new long-term capital. This 8.5 year 6% loan with a life insurance company brings our total new debt capital raise to over $200 million year-to-date. We continue to work through due diligence with a lender for a $125 million five-year mortgage on an asset in Puerto Rico and anticipate closing in the late third quarter or early in the fourth quarter.

We are also making good progress on our TALF eligible CMBS financing and due diligence is progressing as expected. We anticipate the first closing to occur in the fall and the expected proceeds will be used to continue to address our near-term maturities. In some cases we will be repaying existing mortgages with near-term maturities and replacing them with longer duration debt, and in other cases the new proceeds will be used to repay unsecured debt potentially at a discount to par.

We repurchased a very modest amount of our senior unsecured notes since our July 1 Investor Day due to the earnings blackout period, but we expect to continue to do so as a means to delever once this period expires. Total repurchases are now over $380 million of face value of debt year-to-date at a weighted average 65% of par and a 26% average yields maturity. Our focus will continue to be retiring near-term maturities that are trading at attractive levels using cash flow from operations, proceeds from asset sales and new debt and equity capital.

Next, I'd like to update you on our 2009 debt maturities schedule. Of the $360 million of consolidated debt on January 1, 2009 that was set to mature this year, we have paid off $287 million and have addressed either by extension or refinancing $73 million. We are now focused on 2010 maturities and beyond. Today, the company's share of unconsolidated debt maturing in 2009 is $47 million. Of that amount, all is in the process of being extended or refinanced.

In addition to our immediate maturities since January 1, 2009, we have also repaid over $80 million of consolidated 2010 maturities and over $150 million of consolidated 2011 maturities. While our revolver balances increased roughly $150 million between January 1 and June 30 of this year, we have retired approximately $675 million of debt that was scheduled to mature by mid 2012.

Lastly, I'd like to clarify a few things regarding the MDT joint venture. We announced two weeks ago that we had entered into a binding commitment with MDT to redeem our interest in the DDR McCrory Fund. I want to point out that we are redeeming 14.5% of the equity value, not the asset value. The goal of this transaction was to simplify the structure and improve flexibility for both parties, as well as to lower our leverage, which is why we agreed to receive just three assets with relatively low loan to values. We expect closing on the redemption in the fall of this year and we will continue to receive deeds for actively leasing and managing all of the MDT assets.

I'll now turn the call back over to Scott.

Scott Wolstein

As you've heard, we have certainly come a long way in a very short period of time. A great deal of work remains and we are committed to executing on the plan that we have outlined for you. As we continue to focus on our prime portfolio properties and to align ourselves with the best strategic partners in the industry to operate with lower leverage, I firmly believe that we will continue to enhance our leadership position in this sector.

Broadly speaking, the business continues to perform well and in line with our expectations and certainly better than what is generally perceived by the market. We continue to project that occupancy will improve throughout the year following its trough last quarter, and we project that same store NOI for the year will decline approximately 4%.

In terms of guidance, we are lowering our 2009 operating FFO per share expectations to a range of $2 to $2.15 per share from $2.10 to $2.25 largely based on the following factors. Number one, loss NOI due to higher asset sales volume, two, lower projected land sale gains, three, higher interest expense due to wider spread primarily related to rating agency credit downgrades, four, lower share prices have projected on the issuance of shares related to our stock dividends, five and finally, modestly more conservative functions regarding development leasing and consolidated NOI for the balance of the year.

While our new guidance provides a lower range than that provided on our fourth quarter call, it does reflect a much more conservative assumption and a far less leveraged capital structure.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jay Haberman – Goldman Sachs.

Jay Haberman – Goldman Sachs

I'm here with [Johan] as well. I guess, Scott, just to start, could you comment a bit just broadly on what you think implications of CIT might be for the industry and have you made any sort of factoring in there in terms of guidance? And as well, can you comment specifically where you expect Sam's Store to trend in the latter half of the year?

Scott Wolstein

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

Dan Hurwitz

Well, Jay, the CIT issue is one we follow pretty carefully because it concerns us. It's another negative headline for retail for sure. There's 300,000 retailers that currently have some financing relationship with CIT. Some of our bankrupt tenants, particularly Circuit City, had a long relationship with CIT. Our biggest concern, obviously, would be if the lack of funding from CIT interfered with inventory that would be coming in within the next two months for the holiday season, it could have systemic effect to retail.

And we've been working with ICSC, we've been working with NRF and we've been talking to a number of retailers to try to get the risk that we perceive across to, not just government officials, but others within the sector who could have an impact on the outcome of this. There's nothing positive that can happen for our sector for the CIT going away and we're watching it pretty closely. They are a huge supplier of capital for, not just retailers, but also for vendors. And if the supply chain of inventory gets interrupted at the holiday season that could have a material negative impact on the sector.

Jay Haberman – Goldman Sachs

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

Scott Wolstein

There's been a little bit of an increase in cap rates in terms of our pipeline. Most of it's been related to the quality of assets that we're selling. Obviously, the lower the quality, the higher the cap rate and we've been highly focused on selling the assets that we don't want to own.

But the assets have reasonably good quality that may not make the cut for our prime portfolio that are under contract and we're negotiating. We're still trading in the mid-eights to the low nine kind of cap rate range. So I think that there hasn't been a really significant change.

And I also think, obviously, there is a big print on the trade for McCrory Countrywide to CalFirst and First Washington. I think it's a little dangerous for people to extrapolate from a transaction of nearly $1 billion in size as to what it means for cap rates on individual asset sales.

In a transaction of that magnitude, as you can image, there's very limited competition and it's a much more difficult negotiation. On the one-off deals, it's a very, very different landscape in terms of leverage. And you shouldn't expect to see any significant difference in terms of future asset sales here on a cap rate basis from what we've been able to achieve earlier this year.

Jay Haberman – Goldman Sachs

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

Scott Wolstein

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

Jay Haberman – Goldman Sachs

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

Bill Schafer

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

Scott Wolstein

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

Jay Haberman – Goldman Sachs

And [Johan] has a question as well.

[Johan]

I'm just wondering if you could remind us of the revised same store NOI outlook for the year, and then maybe just how you see that trending specifically over the next two quarters.

Bill Schafer

The original guidance on same store NOI was that it would be down 3% to 4%. For the year at this point obviously through half the year and with good visibility on the second half of the year, I think we're now circling the lower end of that range and looking at a down 4% same store NOI, on a quarterly basis it will vary.

This quarter was a very tough comp, as you think about second quarter of last year before the most meaningful changes in the economic and retailer environment and bankruptcy environment, and so it was a lower number than that range this quarter. But for the year, our guidance is for around 4% decline in same store NOI.

Operator

Your next question comes from Jeff Donnelly – Wells Fargo Securities.

Jeffrey Donnelly – Wells Fargo Securities

Scott, at the conclusion of the Analyst Day you had stated, I think, that this was the management team that you were looking to working with moving forward, but I think you kind of hinted there might be some changes in the future. Any sense what those changes might be that you can highlight for us?

Scott Wolstein

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

Jeffrey Donnelly – Wells Fargo Securities

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

Scott Wolstein

I'm not sure I understand the question, although, I'll try to answer it anyway. With respect to the Otto family, they are very active investors in terms of their participation in the boardroom and it's something that I think is welcomed both by management and by the balance of the board. They are, obviously, very significantly invested both in terms of capital and reputation into the future performance of the company.

And the Otto family's investment in our company was made because of their knowledge and confidence in the existing management team, and they are highly interested in making sure that that team stays in place and that compensation plans are put in place that provide the motivations that align their interests with their interest as an investor.

With respect to the balance of the board, again, I think the board, like every board of a company that has seen their company punished by radical changes in the environment of the capital markets, is disappointed by that. But I think they recognize largely these decisions that were made on the capital side were made collectively by management and the board under the circumstances, and they're confident that we have a team in place that can operate effectively in the new world.

I do think that there will be efforts made to more properly align management with the shareholders in terms of compensation schemes, and I think that's something that probably is going on in every boardroom in the country and DDR is no exception.

Jeffrey Donnelly – Wells Fargo Securities

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

Scott Wolstein

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

Operator

Your next question comes from Quentin Velleley - Citigroup.

Quentin Velleley - Citigroup

I'm here with Michael Bilerman. Thank you for giving us the updated guidance number. It sounds like the likelihood of further impairments, write-downs and the impact of the auto derivative, I guess you could call it, will be high certainly for the remainder of this year. Can you give us some kind of indication on what you're expecting for impairments and such for the rest of this year?

Scott Wolstein

Quentin, that's a question that's impossible to answer because if we expected any further impairments we would have taken them. To do it right, and I'm not sure every company does it right, you have to look at the situation every quarter and if there is any impairment that you expect, you need to take it in that quarter. You don't have the option of deferring things into the future.

So as we sit here the only answer to that question is we expect no further impairment because if we did expect them, we would have taken them. The only thing we can say is that if the shares price continues to rise, the impairment on the auto equity will continue to rise. I think it is a somewhat ridiculous accounting treatment of that transaction, since the equity was actually issued at a significant premium at the time, but the fact that there is a delayed settlement causes the account to be treated as a derivative trade, which wasn't the way either of us looked at it.

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

David Oakes

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

Quentin Velleley - Citigroup

And on the junior anchor releasing its right to see some progress there, I'm keen to hear your thoughts and views on what's happening in some of the in-line or the shop space around the junior anchors that are remaining vacant. How are the tenants traveling? Are you seeing a decrease in occupancy in that space, are tenants asking for addition rent relief and so forth?

Dan Hurwitz

Generally speaking, within the portfolio, if you take out the bankruptcies, our occupancy is consistent with prior years it's around 95%, so the non-bankrupt portfolio is actually operating pretty well. What I think we could say, as a generalization, is because we do have exposure to virtually every type of retail within our portfolio, the greatest distress, if you will, among small shops is in the grocery-anchored neighborhood shopping center portfolio, which is primarily a joint venture with a co-mingled fund. That portfolio is where we see the most delinquencies and the most distress among small shops.

In the large community centers, power centers and certainly in our Puerto Rico and Brazil malls, we're seeing far less of that, and most of the small shops in our large community centers are national tenants. You'll see many more local tenants in the neighborhood grocery-anchored centers. And if we were to generalize anything with respect to our portfolio, by far, that's where we see the greatest amount of distress and delinquencies.

Quentin Velleley - Citigroup

I'm keen for an update on the 60 odd acres of land that you've got in Russia. Are you trying to divest that land at the moment? Just remind us whether or not the Otto family had any involvement in that JV.

Scott Wolstein

Yes, I mean we are partners with ECE, which is a development company owned by the Otto family and we're a 75%-25% partnership in the Russian venture and it's managed by ECE, they're the operating partner.

Where that venture stands currently is that we own two fully entitled, fully permitted development sites in two cities in Russia. We mothballed both projects until we either defined a third party investor or lender that wants to fund the development of those projects or until we find somebody who wants to buy the land.

We're not going to export any further capital at this point from the United States over to Russia. The situation over there is not one that is receptive to new development at the present time. But the investment we've made there we think is a sound investment in long-term and we think we will recover whatever investment we made to date and then some.

Quentin Velleley - Citigroup

Were there any changes to your joint venture with the Otto's or with ECE in relation to anything outside the U.S.? Were there any buyouts or capital calls or anything that may have changed along with them investing in the U.S.?

Scott Wolstein

No, no changes at all.

Quentin Velleley - Citigroup

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

Scott Wolstein

Well first of all I don't agree with your premise that the company was one of the highest compensated in the group. I think the schedules that we've seen are flawed in that they only look at the consolidated income of the company in terms of valuing how comp relates to overall revenues.

Almost half, or even or half of the company that we run is run on behalf of third party investors who pay fees to the company for those services. And if you take the EBITDA from the joint ventures, combine it with EBITDA for the wholly-owned portfolio I think we're actually one of the lower compensated companies as a percentage of EBITDA.

Having said that, we think that the compensation scheme that rewards employees for FFO growth without regards to the balance sheet metrics is inappropriate and has led many companies into positions that they don't want to be in. And we're no exception from that and the new compensation schemes that are being discussed would not do that.

There would be a variety of metrics that would be tied to the immediate objectives of the company in terms of deleveraging, terming out debt maturities and generating income at the top line but not at the bottom line. So we'd be much more focused on EBITDA than we would on FFO, if you will.

Also, I would expect that any new compensation schemes here will be highly tied to shareholder performance. And if the shareholders do well I expect management will participate in that. I think those are the philosophies that the board has espoused in their discussions, and I think that's what will find its way into any future schemes.

Quentin Velleley - Citigroup

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

Scott Wolstein

Absolute and relative.

Quentin Velleley - Citigroup

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

Scott Wolstein

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

Operator

Your next question comes from David Harris – Arroyo Capital.

David Harris – Arroyo Capital

I've got two quick questions for Dan if I may. With regard to rents, Dan, I believe you used the words tremendous pressure. Could you give us an idea of where you think how much pressure onto the downside we're going to see across the board on rents and a given timeframe around that, too?

Dan Hurwitz

Well, I think right now, David, what we're seeing is even in the non-bankrupt portfolio where we're executing new leases on vacant space where we had a prior tenant, we're seeing pressure around the 10% range on the rental rates, and that's a significant number. Any time we hit the double digits we're concerned with that.

As I mentioned in the script, the rental pressure on back-filling bankrupt boxes is about 24%. So the bankrupt boxes are putting on even more extreme pressure, but overall if you just look at the non-bankrupt portfolios we're still filling about 10%. We don't think that's going to end any time soon. I think right now what you're seeing is tenants that are using this opportunity in this environment to expand market share at a good price.

I think if you think of ourselves as a consumer and you look at what's happening no one is buying anything at full price today. You shouldn't if you don't have to, and right now tenants are the same. Really they're looking at it like space is for sale for some extent, no different than you and I as consumers aren't paying full price for anything that we're buying.

And I think that will continue until number one, sales go up to the point where they can fund their growth expectations through and they need to fund their growth expectations with external acquisitions, or in fact we have more competition for space because right now that's what drives rent is competition for space and that is somewhat limited. There are tenants that want space, but we don't have two and three people bidding for that space and that puts us at a lower leverage position.

David Oakes

I think it's important to note that just the credibility that Dan and we have with answering that because this is not a situation where we're speculating where rents are. This leasing team generated a record level of leasing transactions this quarter. So this is not our best guess as to where this market is.

This is nearly a million square feet of new leases executed, three million square feet of total leasing executed. So I really do think we're speaking to, not where what we think might happen or where this will fall out, I mean we're doing a huge volume of leasing today. And so this is real time in terms of where deals are actually getting done, not where we hope to get them done.

David Harris – Arroyo Capital

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

Dan Hurwitz

No, that's 10% over the prior rent on leases we're just signing.

David Harris – Arroyo Capital

So would you hazard a guess as to how much further we've got to go from here?

Dan Hurwitz

I think that's a good number to be honest with you. Again as David said, the sample is huge. Right now if you look where we are right now from January, we're over 5.2 million feet of transactions. So we have a good feel for where we are in renewals. We have a good feel on where we are for new deals and I think we have a good feel for where we are on the bankrupt space.

The one thing I would mention however though where we saw a sharp increase in rental rate is in the bankrupt space where we're 63% above the rate that we had in first quarter, in the second quarter. And some of that had to do with the nature of the tenants that we we're doing business with and the structure of the deals, but most of it has to do with I think with the quality of the real estate.

So I think our guess is that we're going to be and our strong feeling is that we're going to be in that 20% to 30% range to back-fill the bankrupt tenants, and I think the portfolio will be probably in the high single digits to low double digits overall.

Scott Wolstein

There's one other thing, David, that I'd like to point out that often gets overlooked. The tenants are really not concerned about the rent number they're concerned about the overall occupancy cost number. And we're working very, very hard to reduce the non-rent component of occupancy cost within the portfolio. And our operations team has done a phenomenal job of reducing CAM, appealing taxes.

Real estate taxes are going to come down across the country as we see property values decline. That's going to reduce tenants' occupancy cost on the tax side. And whatever we can do on the expense side in terms of other occupancy costs ultimately will be reflected in higher base rent. So it's a much more complicated equation just looking at is rent going to be $8 or $10, it really is what's rent is a percentage of occupancy, what's occupancy cost is a percentage of sales, and what can we do to reduce other occupancy cost to enable us to get more rent.

And that takes little bit of time to resonate, but in times like this people look for every opportunity to save money within the operations of these projects, in terms of energy conservation, in terms of our [bumbling] initiative, in terms of buying better and buying more efficiently, and again in terms of tax appeal. So while this is a near-term deflation, if you will, in terms of rent because of the bankruptcies, I think that some of the initiatives we've instituted during this recession are going to bear fruit in terms of higher rent in the future because we will have reduced other occupancy costs.

David Harris – Arroyo Capital

Okay and then just very quickly, on Brazil you mentioned two loans, is that secured debt in bank finance? Could you just give a little elaboration on the nature of the lending market in Brazil, Dan?

David Oakes

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

David Harris – Arroyo Capital

Any idea on pricing, David?

David Oakes

I'm sorry?

David Harris – Arroyo Capital

Could you give an idea of pricing?

David Oakes

Pricing on those loans is high relative to U.S. standards because the risk free rates, [inaudible] rate is so much higher, so all in you end up in the low to mid teens.

Scott Wolstein

Keep in mind we're borrowing in reais so it's all relative.

Operator

Your next question comes from Jim Sullivan – Green Street Advisors.

Nick Vedder for James Sullivan – Green Street Advisors

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

Scott Wolstein

Jim, a lot of the secured debt availability relates to the calendar, insurance companies get their allocations every year. So you have most capacity in the beginning of the year and then it starts to decline as you get later in the year, then it picks up again as you get closer to the next year. So I'd say right now there's probably less dialogue with life companies than there was six months ago and there will be more dialogue as we get into the year, later in the year.

Having said that, what we have seen is a lot more activity from commercial banks who felt like they were being crowded out of the market by the life companies. And a lot of the activity that we're having is actually not from life companies but from banks. And particularly in the Puerto Rico portfolio we've had significant amount of interest from commercial banks to do secured lending.

So I think it's, again, there's not a deep market out there to tap into, although we do see that there's a tremendous appetite on this TALF financing because it's a different investors that's IRR driven and they're talking about really double-digit IRR returns. And there's very significant appetite from that investment community and their funds being raised every day to really tap into those opportunities.

Nick Vedder for James Sullivan – Green Street Advisors

And specifically with TALF, does DDR have the ability to put [meds] financing on top of the first mortgages on the TALF properties?

Scott Wolstein

Well we do, but we probably won't do it because we have a facility in place with a consortium of banks that enables us to pledge second lien on low leveraged assets. And we'll probably use the low leveraged assets that are financed by the TALF to further collateralize that facility.

But, yes, there is an opportunity in the TALF structure to basically take your loan to value up as high as formally traditional levels of 60%, 65%. But, again, it comes at a fairly high price because the IRR that the investor is looking to achieve will not go down as they go higher on the loan to value, but now they're getting their IRR, you have to get it on their money not on the Fed's money.

So the blended rate would go up from something in the high fours to low fives to take something in the 7% or even 8% range. And we don't really need to tap into that kind of marginal 12% to 15% IRR money because we do have this facility in place with a consortium of banks that gives us essentially the same benefit without the incremental cost.

David Oakes

Nick, it's really a distinction between liquidity and leverage. And I think you've seen us make progress thus far through the year and with the plans we've outlined for the rest of the year considerably on the liquidity front and still making some progress on the leverage front. The notion of adding additional debt to reasonably levered assets whether they're existing or newly levered assets certainly helps liquidity.

But at this point, we believe our plans have outlined more than enough liquidity for the near-term. The focus longer term is the reduction in leverage. And so the marginal benefit from adding incremental leverage to assets just isn't as great as we look forward as it has been over the past year, as we've been focused very much on ensuring as strong liquidity position.

Nick Vedder for James Sullivan – Green Street Advisors

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

Dan Hurwitz

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

Operator

Your next question comes from Michael Mueller – JP Morgan.

Joe Desio for Michael Mueller – JP Morgan

Joe Desio here, a question on the guidance, one of the things you mentioned driving the decline was the lower assumed land sale gains. Can you just remind us how much land sale gains were embedded in both the old and the new range?

Unidentified Corporate Participant

Of each one of the factors, we outlined in the $0.10 change represented $0.01 to $0.02 of the change and so you're talking about roughly $2 million difference in prior budgeted land sales versus currently budgeted land sale gains.

Joe Desio for Michael Mueller – JP Morgan

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

Scott Wolstein

We didn't break that out, no.

Joe Desio - JP Morgan

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

Dan Hurwitz

Third quarter leasing is going well. The bulk of the activity that we're seeing, again, is in our anchor store group. Obviously, that's where we have the bulk of our vacancies, so that's where the bulk of the activity should be. But what our concern was to be honest was, as we brought a lot of deals to closure in the second quarter, that the Q would have dropped off significantly for the third quarter and that's something that we've been looking at and watching very carefully. That has not been the case.

We've been very pleased with the fact that, as we have rolled deals from LOI to executed lease, the Q in the LOI categories continued to stay robust and ultimately we'll convert the vast majority of those LOIs to leases. So originally we had projected that we would do about eight million feet of leasing for the entire year, and right now we're on a path to do a little better than that.

Operator

(Operator Instructions) Your next question comes from Carol Kemple – Hilliard Lyons.

Carol Kemple – Hilliard Lyons

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

Dan Hurwitz

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

Carol Kemple – Hilliard Lyons

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

David Oakes

We have not.

Carol Kemple – Hilliard Lyons

Do you expect any further changes to the dividend in 2009?

Scott Wolstein

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

David Oakes

[Inaudible] articulated represents paying the minimum amount required to maintain REIT status per our recent dividend declarations.

Operator

(Operator Instructions) Your next question comes from Richard Moore – RBC Capital Markets.

Richard Moore – RBC Capital Markets

How leased are the new developments and the redevelopments that you're working on?

Dan Hurwitz

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

Richard Moore – RBC Capital Markets

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

Dan Hurwitz

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

Richard Moore – RBC Capital Markets

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

Scott Wolstein

Well, you know, there's a process that you have to go through, Rich, and we are going through the steps of the process. You know, the initial step is you meet with the Fed, that's been done. Second step is you start to do the third party reports, which are being done. Third step is you meet with the rating agencies, which is being done or has been done. And then once you get your proceeds level at AAA from the rating agencies, you go back to the Fed and get them to signoff, then you go and market to investors.

We had a lot to say about the process and we are very actively engaged in it with the underwriters, but those steps must be taken and they get taken at their own pace with each step along the way, because our particular TALF financing has been so widely discussed in the public, we've kind of skipped ahead a step in that the investors are aware of it. And the investors have been calling the underwriters expressing interest in investing in the paper before we've actually been able to expose the rated securities to the marketplace.

So you'd probably have a little better feel for the ultimate outcome because we've actually had our, we and our underwriters have actually had discussions with investors. But you can't shortcut the deal by going direct to the investors because they're relying on the Fed fees, and the Fed fees have to get through the rating agencies and the Fed first.

Richard Moore – RBC Capital Markets

Did you guys talk about a cap rate on the assets that you're putting in there, an overall cap rate or some way to think about how you arrived at the total valuation?

Scott Wolstein

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

Richard Moore – RBC Capital Markets

On mezzanine investments that you guys have, I think you have about 120 million or you did, I think that was a year end number. What does that pool look like? I mean, how comfortable are you with what you have in there?

David Oakes

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

Richard Moore – RBC Capital Markets

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

David Oakes

That's not our expectations.

Richard Moore – RBC Capital Markets

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

Bill Schafer

That's really related to certain derivative activity primarily at the MDT joint venture. That was probably over between $8 million and $9 million of that activity and there had been a couple of other loans that have higher rates. But the biggest piece is the classification of the derivative activity at the MDT venture.

David Oakes

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

Richard Moore – RBC Capital Markets

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

David Oakes

Its non-cash and it could go in either direction depending on –

Richard Moore – RBC Capital Markets

Exactly.

Operator

Your next question comes from Alex Baron - Agency Trading Group

Alex Baron - Agency Trading Group

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

Dan Hurwitz

In the leased occupant, the leased rate is 90.7% and the physically occupied rate is 89.2%.

Alex Baron - Agency Trading Group

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

Dan Hurwitz

Actually, that's very close. Just to give you a little insight into how the market is moving and how tough it is. In the 3.1 million square feet that we executed in this quarter, our net increase of occupied GLA was 81,000 feet. So that gives you a feel for how much activity has to occur just to tread water. And obviously, that will change over time because we've lost the bulk of our bankrupt tenant.

The other thing to keep in mind is that the asset sales, the assets that we sold were all over 90% leased, so that had an impact on the overall rate as well. But the net gain of square footage occupied in the quarter was 81,000 square feet and there was 3.1 million square feet leased.

Alex Baron - Agency Trading Group

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

Dan Hurwitz

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

Scott Wolstein

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

Dan Hurwitz

It went up. We went up 0.6%. Yes, the average rent overall in the portfolio went up. And that was primarily driven by the fact that we had a 63% increase in the bankrupt re-leasing in the second quarter than we had in the first quarter, so that did move the needle.

Operator

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

Scott Wolstein

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Developers Diversified Realty Corp. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts