Developers Diversified's Results Contradict Retail Assumptions

| About: DDR Corp. (DDR)

Some very interesting items were discussed recently on the Developers Diversified (NYSE:DDR) earnings call. As I read it I was struck how much of what was being said contradicts some of what is being assumed out there regarding the retail environment. Diversified is seeing strong leasing activity, rental rates that are not collapsing and assets they do not want (not prime) are selling for cap rates of 8.5% to 9%. One could assume from that prime properties would go for below 8.5%. These cap rates gel with what Macquarie CountryWide Trust [MCW.AU] recently sold assets for.

None of these numbers are nearly as dire as you would be lead to believe when watching / reading media reports.

Here are some highlights:

Regarding leasing activity:

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.

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.

From the Developers Diversified Q & A:

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- Chairman and Chief Executive Officer

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.


Carol Kemple – Hilliard Lyons

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

Dan Hurwitz- President and Chief Operating Officer

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.

Again, does this mean it is all system go? Of course not. But I think some of the more dire CRE predictions out there may prove to be well off base, especially if the TALF-CRE program actually get the traction many are now thinking it may and the host of CMBS REITs that are planned to gain traction.

Now this does not mean there will not be significant CRE stress and probably more REITs that go under. But it also means that there will be survivors and simply avoiding the whole sector due to armageddon scenarios I think will cause many to miss some significant opportunity.