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Executives

Kate Deck – Director, Investor Relations

Daniel B. Hurwitz – President, Chief Executive Officer

David J. Oakes – Senior Executive Vice President, Chief Financial Officer

Paul Freddo – Senior Executive Vice President of Leasing and Development

Christa A. Vesy – Chief Accounting Officer

Analysts

Christy McElroy - UBS

Paul Morgan - Morgan Stanley & Co. Inc.

Carol Kemple - Hilliard Lyons

Jonathan Habermann - Goldman Sachs

Michael Bilerman - Citigroup

David Wigginton - Macquarie Research Equities

Nick Vedder - Green Street Advisors

Michael Mueller - J.P. Morgan

Developers Diversified Realty Corporation (DDR) Q4 2009 Earnings Call February 19, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2009 Developers Diversified Realty Corporation earnings conference call. My name is Deanna and I’ll be your operator for today. (Operator Instructions) I’d now like to turn the presentation over to your host for today, Miss Kate Deck, Investor Relations Director. Please proceed.

Kate Deck

Good morning and thank you for joining us. On today’s call you’ll hear from President and CEO, Dan Hurwitz; Senior Executive Vice President and CFO, David Oakes; and Senior Executive Vice President of Leasing and Development, Paul Freddo.

Please be aware that certain of our statements today may be forward-looking. Although we believe 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 31, 2008 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 February 18, 2010. This release and our quarterly financial supplement are available on our website at ddr.com.

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

Daniel B. Hurwitz

Thank you, Kate. Good morning and welcome to our fourth quarter earnings conference call. As Kate indicated, the participants on this call have changed as of late and I’d like to address the respective roles of the individuals that you will hear from today. In addition to my discussion of company philosophy, direction and goals for 2010, you will hear from Paul Freddo, our Senior Executive Vice President of Leasing and Development, who many on this call have either met during his tenure at DDR or during his 30 years at J.C. Penney. Paul will follow with his view of the leasing and the re-tenanting environment and we will conclude with David Oakes in his capacity as Chief Financial Officer. Also with us today is Christa Vesy, our Chief Accounting Officer, who is available to answer any accounting questions that you may have.

But before I launch into the business, I think I would be remiss if I did not highlight the various management transitions that have occurred since we last spoke in this conference call format. First as we announced in November, Scott Wolstein and I have worked very closely over the past year to effectuate my transition to Chief Executive Officer and Scott’s transition to Executive Chairman. I am very pleased to report that such management change occurred as planned and both of us are embracing our new roles within the organization. Scott is working diligently with our board and me on numerous governance, international, strategic and industry wide matters while the senior management team and I satisfy the more traditional roles that our titles afford.

Transitions are often not easy and I am extremely proud to say that Scott and I continue to value each other’s professional opinion, are working very well together and are friends. I am confident that the shareholders of DDR will benefit from our continued partnership in our new roles going forward. I admire Scott’s experience, intellect, value his input and have great respect for the footprint he leaves behind as our former CEO. I am also very grateful for the trust that he and the board have placed in me and the cooperative spirit maintained throughout the entire process, particularly during difficult times. And I am honored to oversee the future of our company and work so closely with our talented senior management team.

As you also know, Bill Schaefer, our former CFO, departed our company on February 15. Bill served DDR with great dedication and integrity for nearly two decades and his accomplishments are many. While we mutually agreed that it was time for both DDR and Bill to move in different directions, Bill will always remain a valued friend of our company.

In the interim, David Oakes assumed the role of CFO and oversaw the year end close to insure accuracy and a smooth transition. However, as we mentioned in yesterday evening’s press release, after an extensive national search for a new CFO and numerous meetings with well qualified candidates, it became patently obvious that the most qualified candidate for the job was David. Over the past 18 months David has developed and executed a restructuring strategy for our balance sheet, raised over $2 billion of capital, has emerged as an internal leader and is widely respected by the investing and lending communities. David’s background and experience on both the sell side and buy side, as well as his knowledge of the capital markets and ability to execute intricate transactions make him uniquely qualified to be the next CFO of this company.

We had made a commitment to find the right individual to be a strong industry advocate and communicator of our corporate message and goals without compromising transparency or integrity, and David has proven that ability. I have valued my partnership with him as CIO and look forward to his continued prudent financial leadership in his role as CFO. In our continued effort to attract and retain high quality talent, a search for David’s successor as our Senior Investment Officer has commenced.

Switching gears for a moment and getting back to the business, 2009 was a very active year for us as outlined in our January 12 press release. Operationally I am pleased with our leasing and portfolio management results with quarterly increases in our portfolio leased rate and a record setting year for leasing velocity and deal volume. On the capital raising front, we executed upon a strategy of improving liquidity and lowering leverage to prudent and strategic capital raises. We have consistently stated that there are many ways to achieve our de-leveraging objectives, and as a result we access capital from a variety of different sources and de-levered our balance sheet by $700 million in 2009.

Before turning the call over to Paul, I would like to address our recent equity offering, which allowed us to raise $338 million of net proceeds at $8.16 per share including the shoe. Despite its high cost, adding common equity to our balance sheet has always been part of our plan and we believe our recent equity offering was integral to our de-leveraging and liquidity enhancing initiatives. We have continually tried to strike an appropriate balance between reducing our balance sheet risk and diluting our current shareholders. However, we believe our primary focus in this environment should be on lowering our long-term cost of capital and we feel the recent offering will accomplish just that over time.

I will now turn the call over to Paul who will discuss portfolio operations and the retail environment. Paul?

Paul Freddo

Thanks Dan. It is a pleasure to join the earnings call and I look forward to continuing to communicate with many of you in the future regarding our leasing and operating platforms.

I’d like to begin with an update on the retail environment which is still challenged but showing signs of improvement. The 2009 holiday season resulted in better than expected top and bottom line performance for many retailers, providing positive momentum going into 2010. Retailers have proven they can operate in the current environment, improving margins through inventory and expense control. Now they need to follow that up with sustained top line and earnings growth. Encouragingly, the momentum most of our retailers are experiencing has shifted the conversations away from damage control to the topic of growth and how they are going to achieve it.

While the reduction in consumer credit and stubbornly high unemployment continue to be impediments to maintaining this momentum, retailers are buoyed by what they see as the consumer gaining clarity over their job and financial situation. As a result, while we continue to see retailers maintain many of the defensive strategies adopted in the past 18 months, most view 2010 as an important year for gaining market share. While retailers remain cautious, the improved environment is providing them with more visibility over their sales and their growth plans. The value oriented retailers that comprise the majority of our portfolio continue to win as their value proposition became even more relevant to their core customers, as well as to a new segment of consumers who are looking to trade down in price but not in value.

Turning to operations, deal velocity remained strong in the fourth quarter. We completed 166 new deals representing 1.1 million square feet and 306 renewals for 1.9 million square feet. In total we executed 472 deals during the fourth quarter, representing 3 million square feet. For the year we signed 1,662 deals representing 10.6 million square feet, comprised of 583 new leases for 3.3 million square feet and 1,079 renewals for 7.3 million square feet.

On our second quarter call, Dan outlined our leased rate outlook for 2009, stating that we had seen a trough in the lease rate at 90.7% and were expecting gradual increases for the balance of the year. This set the bar high for our leasing team as tenant fallout had offset the new leases executed in the first half of the year. Strong leasing activity in the third and fourth quarters resulted in a 20 basis point improvement in the third quarter and a 30 basis point improvement in the fourth quarter, resulting in a 91.2% leased occupancy rate at the end of 2009.

Based upon our current level of activity and our proven ability to execute, we expect to improve the core portfolio leased rate to over 92% by the end of 2010. While the leasing volume for the beginning of the year is in line with our expectations, the seasonal nature of tenant fallout in the first and second quarters could make occupancy gains lumpy in the first half of the year, but we are confident we will achieve our goal by year end.

Leasing spreads for the fourth quarter and the year were challenged. While we remained relatively flat on renewal spreads for the quarter and the year, re-tenanting space vacated by bankrupt retailers continued to negatively impact new deal spreads. Our spread on re-tenanting bankrupt boxes was negative 21.6% while our spread excluding these boxes was negative 12.1%. When combined with flat renewal spreads, which we see as a victory in this environment, our overall spreads were negative 4.6 in the quarter and negative 3.4 for the year, exactly on target with our expectations.

While retailers continue to drive tough economic deals, we are beginning to see some competition for space and accordingly expect spreads for new deals to improve modestly throughout the year but to remain negative. Spreads on renewals will remain under pressure as retailers are starting to renegotiate their renewals earlier in an attempt to lock in current rates, and as a result we expect renewal spreads to remain flat in 2010.

One other point to be aware of when considering new leasing spreads is that our calculations only include new leases signed on spaces which have been vacant for less than one year. In other words, if a space is leased which had been vacant for more than one year those deal economics are not included in our spread calculation, but the new lease income is included in the estimated revenue impact.

With regard to backfilling big box vacancies, our Lancaster redevelopment team continued to make substantial progress in the fourth quarter, leasing 15 units for over 500,000 square feet and selling two former Mervyn’s containing 136,000 square feet. We continued to make deals with many of today’s active retailers including Kohl’s; TJX; Bed Bath & Beyond; Best Buy; PetSmart; Nordstrom Rack; Jo-Ann; and hhgregg.

In 2009, 49 leases were executed on the vacant junior anchor space representing over 1.6 million square feet. Of the 6.9 million square feet of space re-termed through the five major bankruptcies, we have some level of activity on 58% of the space, including 24% leased or sold and 34% in LOI or lease negotiations.

One area that continues to mitigate revenue pressure is our renovative ancillary income initiatives which continue to augment earnings each year. Revenues from sponsorship, advertising, temporary and seasonal inline leasing and emerging areas such as solar panels have increased 23% over the prior year, resulting in $34.7 million of total portfolio income for 2009. We are budgeting to increase revenues by another 17% this year, which is partially attributable to new opportunities for business development in Brazil, including Pay for Parking at our centers and a general ramping up of the ancillary income program across the entire Brazilian portfolio.

In regard to development, we continue to minimize development spending in the domestic portfolio, with the majority of the caps being allocated to the lease up of existing development and re-development projects. We do, however, see continued opportunity for growth in Brazil. The Brazilian economy and specifically our portfolio continue to perform with thanks to our NOI growth of 9.4% during the quarter and 11.2% for the year. The portfolio leased rate remains a healthy 97% and the new mall in Manaus that opened at 96% leased in April of 2009 continues to see strong sales growth.

As an indication of our enthusiasm and potential for the Brazilian portfolio, Richard Brown, our Executive Vice President of International, recently relocated to Brazil to oversee operations and new business opportunities there.

In summary, we are pleased with the progress we made in 2009 and are encouraged by the improvement and momentum we see in the retail environment. That said, we recognize that there is much to be done in continuing to lease up our portfolio and we will continue to operate in a very realistic manner.

I’ll now turn the call over to David.

David J. Oakes

Thanks Paul. I’ll begin by talking very briefly about the de-leveraging and liquidity progress that we have made in 2009 and thus far in 2010, discuss our operating results and then move on to our goals and plans for the rest of this year.

With an intense focus on a very broad array of capital sources, we raised over $2 billion of capital in the past year through asset sales, new debt capital, new equity capital and retained earnings. As a result, we reduced total consolidated debt to approximately $5.2 billion at year end 2009, a $700 million reduction from year end 2008. We lowered pro rata debt to EBITDA to 9.5 times for the fourth quarter, a significant improvement from its peak of 10.2 times just two quarters before.

In addition, we significantly improved our liquidity position. At year end, there was $530 million available on our revolving credit facilities and today there is over $800 million available. We also improved our covenant metrics as a result of our de-leveraging activities. We remained compliant with all of our covenants throughout the trough of the cycle and we expect to see continued improvement going forward. We will operate with greater cushion relative to our covenant in all future periods, driven by continued de-leveraging activities as well as a return to historic occupancy norms that we expect to achieve over the next several years.

Turning now to our quarterly and annual financial results, operating FFO was $0.31 per share for the fourth quarter and $1.83 per share for the year. Including certain non-operating and primarily non-cash charges, FFO was a loss of $0.14 per share for the fourth quarter and a loss of $0.90 per share for the year. The quarterly results once again contain many non-operating gains and losses that we believe skew the true performance of this company. These items aggregate to negative $91 million and include several impairments, particularly related to JV development as well as gains on bond repurchases and a gain related to our redemption from the large joint venture with MDT. These operating and non-operating results are consistent with the guidance we provided in our press release last month.

Our outlook for 2010 that was also announced last month remains consistent and we are pleased that we could address much of the uncertainty that existed regarding our balance sheet targets through the equity offering that we completed last week. The equity offering was a crucial step in continuing our de-leveraging strategy. The offering helped raise approximately $338 million of net proceeds, which was used immediately to reduce the outstanding balance on our revolving credit facilities in anticipation of repaying two series of unsecured notes that mature in May and August of this year and an additional secured and unsecured mortgage debt that matures in the near future.

We believe that this offering was appropriately sized to achieve our de-leveraging goals without unduly diluting current shareholders. And we were extremely pleased by the positive response the offering received from the investment community.

As mentioned earlier with over $800 million in available capacity on our revolving credit facility and only $350 million of fully owned maturing debt left to address in 2010, our liquidity profile is sufficient to carry us through several years even if no other capital initiatives are undertaken. Prior to last weeks’ equity offering we had also used our continuous equity program to raise an additional $45 million of capital in January that has also been used to retire debt. This program has served us well as an efficient means to lower leverage over the past year-and-a-half, but we do not expect to continue to use this tool during the remainder of 2010.

As Dan mentioned at the beginning of the call, we are very conscious of the high cost of common equity and we will continue to actively look at other sources of capital to lower leverage and further improve liquidity. First, we are planning to generate $150 million from asset sales in 2010, which is DDR’s share net of any mortgage debt repaid. We have generated approximately $26 million in net proceeds from asset sales so far this year, and we currently have over $500 million under contract for sale, a majority of which are JV assets. Only a portion of those proceeds would come to us. We have additional assets under letter of intent currently and we remain comfortable with our target of $150 million. In addition to the liquidity they generate, sales of non-prime assets also have the important benefit of improving our portfolio quality.

Second, we expect to generate an excess of $200 million of retained capital in 2010, which is net of the low cash dividend that we expect to pay this year. The board will continue to assess the dividend policy on a quarterly basis, and we expect the dividend will be paid at the minimum level required to maintain REIT status for the remainder of 2010, a calculation that is reduced this year by certain asset sale losses.

Third, we will continue to look for ways to retire debt, particularly near term maturities, at a discount to par through negotiated transactions and select open market repurchases. In 2010 to date we have repurchased approximately $63 million of 2010, ’11 and ’12 notes for $59 million, or a 6% discount to par. As always, we will continue to evaluate other capital sources and opportunistically transact. The availability of new capital at terms that make sense for our balance sheet and our debt maturity profile has improved dramatically from one year ago, and significantly even relative to a few months ago. We believe that the equity offering we completed last week was an integral part of our de-leveraging and liquidity enhancing initiatives, and we will continue to evaluate all of our options to further improve liquidity, extend our average debt duration and de-lever, as we remain keenly focused on lowering our long-term cost of capital.

To date there is roughly $350 million of wholly owned debt maturing in 2010, excluding debt with borrower extension options, which includes roughly $325 million of unsecured notes and approximately $25 million of remaining mortgage maturities. There are also two consolidated JV mortgage maturities in 2010. The large maturity is a $225 million note maturing in October with a 50-50 joint venture with Macquarie DDR Trust, secured by a portfolio of former Mervyn stores. We are in active discussions with representatives of the lenders now and believe that we will achieve a relatively attractive outcome for our shareholders.

We have $740 million of unconsolidated joint venture debt maturing in 2010, excluding debt with borrower extension options, of which DDR shares $235 million. We are underway on the refinancing of many of these loans and lender interest has been solid. Our joint venture debt has been significantly reduced relative to prior quarters by a redemption from the MDT-USLOC joint venture.

As many of you are aware, our revolving credit facilities have their initial maturity this June and have a one year extension at our option that we intend to exercise. We are currently in discussions with 30 banks that participate in the revolvers in addition to several banks that are not current participants but have expressed interest in joining. It is important to note that we believe we have excellent relationships with our [line] banks which are only enhanced by our recent activities, including the recent equity offering.

Over the next several months we will be negotiating terms for the new revolver, hosting a bank meeting and working through the process with our close relationships. We expect to complete the refinancing in the second half of 2010 as a smaller company that will be much more disciplined in the acquisitions. We are choosing to right-size the new facility and are targeting a size approximately 25% below the existing capacity. We are encouraged by the feedback in the early steps of this process, as well as the overall tone from a larger group of lenders looking to extend or originate loans. However, there is much work to be done and we will update you as additional progress is made.

We remain very focused on earning our way back to a consensus view that we have an investment grade balance sheet. We have articulated and continue to execute upon a thoughtful plan to improve our credit metric, and we have received very positive feedback from lenders and fixed income investors, but we still have progress to make with several of the major rating agencies. As we continue to execute upon our plan, we will insure that this improvement is evident to all constituencies.

This will be another busy and challenging year for us as we continue to improve upon our balance sheet and we will keep you updated on our progress on the earnings call, as well as at conferences and with presentations posted to the IR section of our website. 2010 is by no means the end of the story, as more work will be needed in coming years to reach the appropriate debt levels for this company, which should result in a much lower cost of capital for this company. While we don’t know exactly when we’ll get there, we will continue to be as transparent as possible along the way to help you understand the progress we are making.

I’d like to wrap up by saying that I’m honored by the appointment to Chief Financial Officer and excited by the opportunity to take even greater responsibility within this high quality organization. We have made great strides during the past year, particularly related to strengthening our balance sheet, and I am very enthusiastic about our opportunities to continue to improve and to generate strong shareholder returns with a reduced risk profile.

I’ll now turn the call over to Dan for closing remarks.

Daniel B. Hurwitz

Thank you, David. In recent months I’ve often been asked what will be different at the company going forward? And I’d like to take a moment to discuss the philosophical changes that our management team, Board of Directors and employees envision for this company.

First, we will no longer grow our company through large portfolio acquisitions, but rather we will focus on developing and growing our prime portfolio through prudent and strategic transactions. Second, we will keenly focus on balance sheet strategy. This includes a disciplined focus on structuring our debt maturity schedule such that refinancing risk is mitigated, accessing a variety of financing sources such that our capital structure is healthy, and viewing EBITDA as a primary metric for success. Accordingly, our target leverage metric will be pro rata debt to EBITDA, with an overall leverage goal of approximately 6.5 to 7.5 times EBITDA, and work prudently to maintain investment grade credit ratings.

Third, we will evaluate all investment opportunities in such a way that EBITDA accretion is not the only consideration, but also the potential impact on our operating platform and net asset value per share. Fourth, our international portfolio, specifically Brazil and Puerto Rico, will continue to be sources of above average growth and portfolio diversification. Lastly and perhaps most importantly, we will continue to invest and develop our human capital to drive innovation and success.

Most of the changes we are making represent a fundamental shift at DDR, and I look forward to reporting the results of our strategic plan going forward. At this time we’d be happy to take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christy McElroy – UBS.

Christy McElroy - UBS

David, just wanted to follow up on your comments on dividend policy, thinking about it in the context of taxable income and potential asset sales. Can you provide some color on what assets you’re looking to sell specifically this year and does your $200 million routine cash flow estimate reflect keeping the cash dividend at $0.02 per quarter?

David J. Oakes

We’ve got a portfolio management strategy that results in a majority of our portfolio being considered our prime portfolio. The assets that fall outside of that would almost all generally be at least considered for sale at some point as we look to continue to focus on the prime assets, so the assets that we are looking to sell continue to be and have an overwhelming focus on the non-prime assets. Some of those assets do have losses that would result from a sale and we believe that, based on the transactional activity that we’re looking at today, that we should be able to maintain the dividend at a low cash level. As we said it will be something that the board has to make a decision about each quarter, but we don’t think taxable income will be a major driver for pushing the dividend higher, as we think there will be enough items that allow us to keep the cash dividend at a very low level. And that is what is implicit in our guidance for retained earnings in excess of $200 million for this year.

Christy McElroy – UBS

And then just sort of following up on that, I’m wondering if you could comment on your land held for development? Many of your peers have written down their land balances. You’ve talked about selling a portion of your land for the holding period would be pretty short on some of that. Can you walk us through the logic behind why it wouldn’t be written down at this point? And in your estimation, what do you think the land is worth today versus what it’s on the books for?

David J. Oakes

We obviously have to go through this process on a very regular basis, particularly related to the fourth quarter annual close. And so we obviously stand by the values that exist on the balance sheet. The analysis for [ups] for wholly owned land is not simply where we could liquidate that land today. That was not our intent in buying that land and it is not our stated intent today. I think we’re going to be very thoughtful with whether it makes sense to invest additional capital or whether it makes sense to sell certain land parcels. So we’re certainly considering all alternatives, but from the standpoint of an opportunity to develop this land, we do believe that the $850 million balance that includes both land as well as construction in progress on the balance sheet is very justifiable.

If forced to liquidate that land today, I think some of that land would be valued at higher than the book value and I think there’s potentially much of that land that would receive a market price today if forced to sell that would be lower than that book value. But overall, with our plans to potentially develop some of it over a long period of time, and certainly consider the sale of some of it but over some period of time, we think the valuation is justifiable. I think it’s important to note also that given the nature of our land and given the cost basis and given the progress that has been made in many cases on the entitlement side, it is the case that this land has actually been improved over the course of the period we’ve owned it. And also when you think about the potential list of buyers for development land, it is not exclusively a process of us looking for opportunity funds or other investors that would require a very high return on that land.

It may also be, in some cases, our ability to sell portions to some of the major anchor tenants that continue to be very, very profitable and as Paul mentioned, you know, are beginning in earnest to look for ways to grow in the out years. So if you look at entities there that have a very different cost of capital than potential other competing developers, so I think we view the $850 million on the balance sheet as a reasonable number. We think it is an opportunity for us over the next several years to either get some of that currently non-income producing land as either cash flowing or in some cases the potential to sell some of that land and monetize it that way. At this point we are not capitalizing interest or real estate taxes or other expense on a large portion of that land held for development. So that is hitting the operating statement right now and we think either way, whether it is developing centers and getting that land cash flowing or in certain cases liquidating land, that there would be an ability to improve the results as they show up today.

Operator

Your next question comes from Paul Morgan - Morgan Stanley & Co. Inc.

Paul Morgan - Morgan Stanley & Co. Inc.

There’s been some discussion on about cap rate compression for what you would characterize as non-prime assets this earnings season. I just wondered whether you could comment on what you’re seeing for that, sort of given the lack of A quality products in the market, reducing more interest in the category of assets, where cap rates might [inaudible] for that.

David J. Oakes

We have certainly seen some improvement in the transactional markets, certainly relative to 12 months ago at this time when there was [inaudible] little activity and when skepticism regarding our ability to achieve the $200 million of sales that we achieved last year was very high. The markets have become somewhat more [inaudible] driven simply by a world that’s a little easier to underwrite at this point in terms of go forward expectations and some of it because the lending environment has improved somewhat, not for very high value loans but for loans that are going to have a reasonable amount of equity in front of them. There is an ability to borrow against new product. Responsible people are not underwriting [inaudible] on an un-levered basis.

I think some of it is simply the fact that there were very few transactions last year and some of it does relate to some direct cap rate compression. I think the recent market comps have certainly indicated the prime assets are trading below 8% and in many cases or most cases even from what we’ve seen, well below 8%. And that the non-prime assets that were selling have compressed a little bit from an average 9.5% or so level last year to some [inaudible] maybe in the low 9% level. You know we would continue to [inaudible] the fact that we are selling assets with a little more hair on them, assets that we believe the NOI growth profile may be challenged for several years and so the cap rates for what we’re transacting in are still above 9. But that market has certainly improved somewhat just over the past few months as the availability of debt capital has improved.

Paul Morgan - Morgan Stanley & Co. Inc.

If that trend continues in the first half of this year, say, do you think it’s possible that you could exceed your expectations for?

David J. Oakes

It’s certainly something we would consider. Per the comments earlier, you know, we’re very focused on the quality of this portfolio and we’re very focused on our long-term cost of capital. We do believe that the considerable number of non-prime assets, even though they aggregate to a very small portion of our NOI stream overall, do have a disproportionately negative effect on the perception of the portfolio. So I think from that standpoint it could certainly make sense, as well as from a financial standpoint, [inaudible] once the cost of capital of selling those assets versus other alternatives. So at this point guidance is for $150 million of proceeds and we’ll update you as the year progresses on that.

Operator

Your next question comes from Carol Kemple - Hilliard Lyons.

Carol Kemple - Hilliard Lyons

Then I had one question. On the guidance that came out in January it was for FFO of $1.05 to $1.15. Was the offering a little larger than you all expected and will that lower guidance?

Daniel B. Hurwitz

The offering was the size as we expected. It just came a little earlier in the cycle than we had anticipated, but in our numbers we did anticipate an offering of that size.

Carol Kemple - Hilliard Lyons

What average interest rate are you all expecting for the year?

David J. Oakes

The interest rate on our debt is locked through the year. The important variable portion of that relates to the line of credit. And the term loan, a small amount of that is hedged but most of that is actually floating. That level of variable debt is much smaller today than it has been as we’ve been paying down the line of credit. But we still do have some exposure to variable rate debt and as we look out through the year, we’re just looking at the forward LIBOR curve. We’re not sitting around making any sort of interest rate bet, simply what the market is telling us. So increasing LIBOR throughout the course of the year from the close to zero or roughly 25 basis points today accelerating to around 1% by year end.

Operator

Your next question comes from Jonathan Habermann - Goldman Sachs.

Jonathan Habermann - Goldman Sachs

David, you mentioned the goal of reducing debt to EBITDA closer to the 6.5 times to 7.5 times range. Can you give us a sense of the timing? I mean given your increased focus on obviously improving the balance sheet and working with the rating agencies.

David J. Oakes

Yes. I think we’ve been very careful to try to balance the significant improvements we’re making with not doing anything overly drastic that would have an undue negative impact on our near term or immediate term cost of capital. As we look out over the next few years, you have a number of levers that are in our favor for leverage reduction. An important part of it, as is the case this year but probably a little less in the future, is required dividend payments will probably be higher, will be a consistent amount of significant retained cash flow that can be used for leverage reduction. Secondly, while we haven’t seen it show up in financial results in a big way over the past year, we have seen it show up very significantly in the leasing volumes, just not all those leases have had their rent commencement dates. So we do think that there’s an ability to improve the EBITDA number.

So not just the simple process of how do we reduce debt but we actually think that there’s a strong case to be made that we can return to historic levels. I mean where this portfolio operated for a very, very long period of time, we think we can return to those sort of levels and increase EBITDA because of that. This space goes from modest negative cash flow today to even the below historic norm rents that Paul mentioned we’re achieving on a considerable volume of activity today. So we think there’s an opportunity to increase EBITDA there. We think there’s an opportunity with the $850 million of construction in progress and land held for development on our balance sheet, where some of that will become cash flowing over time, even if that’s at a lower than pro forma yield. That can be helpful for the EBITDA growth over time.

And then finally, you know we continue to look to asset sales for both their help on the portfolio management side and improving the quality of this portfolio, but also for their help on the de-leveraging side where we have been able to eliminate a considerable amount of debt there. So you know we don’t want to get tied down to an exact schedule of exactly how each one of these pieces is going to play out. We think we’ve laid out the plan. We think we’ve executed very well on that plan over the past year or so, and we firmly expect to continue to do that and update you as each piece of that is put in place as we move closer and closer to those leverage targets over the next couple of years.

Daniel B. Hurwitz

You know, Jay, one of the things we’ve talked about last quarter and the quarter before was the timing of when this leasing is going to hit from an income perspective and I do think it’s important to remind everyone that even though we did 10.5 million feet of leasing, over 10.5 million feet of leasing in 2009, a small portion of that will hit in 2010. And an even smaller portion will hit for full year. Almost none will hit for full year 2010. So most of the leasing that you’re hearing about in the numbers will be full year numbers in 2011. And that will have a material impact on our EBITDA number as David mentioned. So as leasing velocity continues, and hopefully it will continue through the year, the deals that were done in ‘9 should be fully annualized in ’11 and the deals that are done in ’10 should be fully annualized in ’12, but you have portions of each one of those years that can have a positive impact in the prior year.

Jonathan Habermann - Goldman Sachs

And then in terms of the JV financing this year, you mentioned $741 million, your share roughly $275. Can you give us some sense of the debt yield there? Will you need to put more equity in or actually pay down some of that debt? And have you made an allocation for that in your assumptions for the full year?

David J. Oakes

When we look at the JV debt that’s maturing this year, monies in general higher loan to value than our consolidated debt, more conscious of that. In our liquidity planning we have certainly budgeted for some re-equitization of those joint ventures where they are prime assets that we expect to have a long-term ownership of. It has not been our recent experience that that equity has actually been required, as lenders have been willing to extend it at current terms. Over the past year those extensions were very typically one year extensions. As we talk to lenders or representatives of lenders today, it’s much more possible that those extensions could be multi-year extensions. So while we have budgeted in our own liquidity plan for a potential requirement of additional capital there, we haven’t experienced that. And as we progress through this year, I think there’s a lot of loans that can and will be replaced with new long-term debt at their current level of proceeds.

There are some that will be extended and there are certainly some that would require some equity, if we don’t move on a sale of some of those assets. That’s also why you see a considerable volume of the assets that are on the contract for sale right now are joint venture assets and some of them relate to situations exactly like that. Where as opposed to it being our equity, it may represent someone else’s equity coming in. We also continue to very actively look for new institutional capital to recapitalize certain ventures, and most of those calls are incoming calls as institutional capital is looking for some of those opportunities, where we might be able to find new partners to contribute some or all of the equity required to extend the duration of the joint venture loan book.

Jonathan Habermann - Goldman Sachs

And just to be clear with those multi-year extensions, are you assuming the same rate or does the rate increase?

David J. Oakes

In a great majority of cases those are at a comparable rate. Some up front fees paid that obviously is amortized over those couple of years, but generally at a comparable rate to what is in place today.

Operator

Your next question comes from Michael Bilerman – Citigroup.

Michael Bilerman - Citigroup

Dan, I was wondering if you could talk a little bit about, you mentioned on this call or other participants have mentioned as well, about the ability to get back to a historical 94% or 95% occupancy levels to where this portfolio had been for a long time. I mean as you think about potential structural changes in the big box retail world that obviously have impacted and you think about the supply that has been added over the last few years, certainly in the housing boom, and you look at retailers that are going smaller format rather than some of the larger formats that they’ve done, I guess what confidence do you have of the industry and then DDR specifically about really attaining back to those historical occupancy levels?

Paul Freddo

Michael, this is Paul. We’re confident but it’s going to be a several year process and I think as Dave had mentioned, you know, we don’t expect to get back to those historical norms for several years. And as we indicated with the guidance only getting to 92% over the course of 2010. You know a lot of things are working for us in terms of what you described with the retailers, downsizing or reducing their format, that’s good news for a lot of our vacant space. You know we’ve got a lot of our junior anchor boxes we talked about are in that 20,000 to 50,000 foot range and we’re seeing guys downsize that are fitting nicely into that size.

You know we also continue to see a lack for a diminishing of quality supply. You know we all know that there’s no additional supply coming on the market and we are very aware that these retailers continue to need to grow. You know they’ve been selective in the deals they’ve made in 2009. They will continue to be. But every meeting, every conversation we have with the folks that are filling that space, there is still a need to grow and that’s not going to go away in the foreseeable future.

So we have this few year period where we’re confident we can get there just through meeting the demand needs of the retail universe.

Michael Bilerman – Citigroup

And I guess when you look at the lease numbers of 91% and 89%, if you include the Mervyn, can you talk through just to really understand this EBITDA potential? You know, where are you today from a occupancy perspective, rent paying? And then what percentage of that may be dark but rent paying? And at the end of the year, was there any sort of temporary bump that you had in those numbers? And I think, Dan, you talked a little bit about the fact that you have done a substantial amount of leasing but that leasing is not going to become occupied until 2011, so maybe you can just walk us through sort of the current cash flow perspective and where we can go.

Paul Freddo

Let me first touch on the dark percentage. That’s somewhere in the 10 to 15% of our vacancy right now, Michael. But just so you know we are out there leasing that as if it’s vacant. It is counted in our lease occupancy rate as still paying rent, but we are aggressively looking to replace those dark retailers as soon as possible.

Daniel B. Hurwitz

On the EBITDA side, Mike, when we look at what it would take for us to get back to that 95% occupied, because as you correctly point out we’re going to lose some space in this whole turnover as tenants downsize and there will be some square footage mothballed as a result of that. That could be very positive. That could create opportunities for us to relocate more marketable retail space elsewhere on the site. For example, getting rid of the back of the depth of certain boxes and putting out parcels in parking lots that are very, very profitable for us. But we are going to probably be a stabilized company at about 95% versus that 96%, 96.5%. To get us back to 95% using very conservative numbers, we feel there’s an additional $30 to $35 million of EBITDA that we will pick up in that transaction over time.

The market will tell us how quickly that will happen and the market will also tell us what the rents will be, but just figuring from our past experience this past year in 2009, we’re pretty comfortable that the additional pick up that we will see on the revenue side, as a result of getting back to historic norms, will be somewhere between $30 to $40 million, depending on which cycle we’re in in the leasing environment.

Michael Bilerman – Citigroup

And then just to answer the specific in terms of what is rent paying occupancy today and as a percentage of that, how much of that is dark but rent paying? Because the 91% is a lease percentage, right?

Daniel B. Hurwitz

That’s correct.

Paul Freddo

Right. Currently occupied is about 88%, almost 89%, Michael. Which is a much greater spread than we’ve historically had but we view it as positive obviously. Historically we were in that 50 to 60 basis point spread between leased, occupancy and occupied. Today obviously with the big hit, with the five major bankruptcies and the volume of activity, to have 250 basis point spread between leased and occupied is all potential upside for us.

Michael Bilerman – Citigroup

And then of that 89%, how much is dark but rent paying?

Paul Freddo

Well again the vacancies about 10%.

Michael Bilerman – Citigroup

And just a quick follow up, just to make sure I got the debt EBITDA correct. Pro forma for the equity offering you’re down to about 8.4 and a 9 on the see through basis. And I guess pro forma for the free cash flow retention in this year, you get to call it 8 consolidated and 8.5 see through. Assuming you don’t do anything else in terms of selling non-income producing asset land development, other equity raise transactions, is that correct?

Paul Freddo

Yes. We believe just by the activity that we’ve completed over the first couple of quarters as well as the retained capital that you mentioned that a large portion of the work is done to achieve that mid 8 times range on pro rata debt to EBITDA.

Operator

Your next question comes from David Wigginton - Macquarie Research Equities.

David Wigginton - Macquarie Research Equities

I wanted to actually ask a quick question on the Mervyn box loan, David, that you touched on that’s coming due this year. I think you mentioned that you were anticipating an attractive outcome for shareholders. Could you maybe just talk a little about the details there and on I guess the flip side of that, why would you not just consider handing back the keys on those boxes at this point and realizing the benefit from I guess the drag on FFO that you’re experiencing right now as a result of this?

David J. Oakes

Well, you know, I’d stress the fact that we are in active discussions today and this is an important issue and so we can’t necessarily be as transparent right now as we will be long-term. We recognize very much what you’re saying that currently we have negative NOI from that portfolio. We’re even more negative on cash flow because of the interest expense that’s flowing through our results and for a simple NAV calculation of this company, it would result in a negative valuation coming from the Mervyn’s asset, when in reality due to the nature of non-recourse debt, that valuation cannot be negative. So I guess all we can really say right now is that we are very cognizant of all the issues and we’re working with representatives of the lender for a solution that will work for us as well as for them.

David Wigginton - Macquarie Research Equities

So is the handing back of the keys still a viable alternative in the event you can’t work out an attractive deal for DDR on the workout side or on the extension side?

David J. Oakes

It’s certainly something that we would actively consider. We do have this portfolio secured by both the Mervyn boxes as well as a pool of cash that was the letter of credit that we were originally given by the seller of the Mervyn boxes to us, so the lender has some flexibility there to use that cash flow to continue to service the loan, as they gave us two separate pieces of collateral. But we are working through that process today. And we’ve had, as Paul mentioned, good interest in many of those boxes from a leasing side but obviously until we have anything figured out with the lender, the finalization activity has to be slow there simply because we obviously could not put capital into those boxes when we don’t have clarity about the long-term outcome there. So progress has been slower than we would like, but we continue to advance those discussions.

David Wigginton - Macquarie Research Equities

Can you just remind us what the drag on that FFO is from those boxes?

David J. Oakes

Yes. In round numbers you’re talking about at the NOI level in the $2 million range and noting that that’s consolidated, so that’s showing up in our top line results, not coming through the joint venture. And then a portion of that gets backed out through the minority interest line. And then the interest expense on the roughly $225 million of debt today is an average right around 5% cost, so you’ve got another $10 million or north of $10 million of interest expense that’s showing up. Again, 100% of it shows up on our books even though 50% of it is ours economically. So you’ve got you know $12 million roughly in total that’s showing up as a drag on our results from that portfolio.

David Wigginton - Macquarie Research Equities

With respect to your Brazilian and Puerto Rican portfolios, those obviously have been performing quite strongly. And also recognizing that you’re de-leveraging I guess Mode at this point, what’s the likelihood of you investing more capital in those two markets given the high growth potential there?

Paul Freddo

Well, we are looking at various capital sources to invest more capital to facilitate additional growth, particularly in Brazil where there’s development opportunity at very attractive returns. We do not intend to export capital from the U.S. to support that operation. We view that operation as a self sufficient operation that has the ability to raise capital on its own through a variety of different sources and we’re investigating what all those are.

With regard to Puerto Rico, Puerto Rico does not really have a development opportunity. It has some redevelopment opportunity and some expansion opportunity, but the capital required to facilitate that program is really nominal. Development in Puerto Rico has really stopped and came to a standstill many, many years ago because the barriers to entry there are so high and the entitlement process so difficult. So unlike Brazil, new projects and new initiatives in Puerto Rico are few and far between other than maximizing the value that you have out of your current assets.

In Brazil where there’s obviously enormous interest from a variety of different retailers and a vastly under stored country, we have the ability to take advantage of our infrastructure that we have down there.

David Wigginton - Macquarie Research Equities

Do you have specific opportunities identified in Brazil at this point?

Paul Freddo

We do. As you know we mentioned we opened a center this April. We have broken ground on another new center just recently and we commenced two redevelopment projects as well. There are other green field sites that we are looking at in Brazil and we would like very much to be able to do one new project and one redevelopment or perhaps two projects on an annualized basis. We can’t specifically talk about exactly where they are because there are competitive forces at work in Brazil, but we feel very, very good about the program and we’re working very closely with Wal-Mart who has a very aggressive approach towards Brazil right now. And the reaction ha been very positive.

Operator

Your next question comes from Nick Vedder - Green Street Advisors.

Nick Vedder - Green Street Advisors

I just want a point of clarification. I think in the prepared remarks I heard that the expectation is that your leasing spreads improve next year on new deals as opposed to. Is that correct?

Daniel B. Hurwitz

Yes, Nick.

Nick Vedder - Green Street Advisors

I’m just thinking about that and if you can expand on that a bit just in terms of you know you made considerable progress on the lease up of junior anchor space and just looking forward I would imagine that the space that is yet to be leased is going to be a little bit more difficult to try and attract tenants. So I just wanted to a get a little bit more info on the re-leasing spread and how you’re thinking about that.

Paul Freddo

There’s a lot of interesting stuff going on out there and you know we talked earlier about the reduction in supply and the quality supply. The absorption of space that has occurred today, Nick, is also working for us. You know a lot of people have asked us about well the best has gone quickly and now you’re left with just the dregs. And that’s not necessarily the case. In fact we have some examples of space that last year certain retailers passed on but this year they have come back and expressed interest in. And again keep in mind they need to continue to fill their expansion pipeline.

You know I think as we look at the spreads and that whole conversation, you know last year the environment was lousy; we all got it; we all had a lot of vacancy and we had to address it. And that’s what we did. This year again is a little bit different dynamic out there. We are seeing increased competition, we are actually seeing some of the retailers increase their needs to expand. And so the little different dynamic is the ability to test the market this year and drive a little higher rent and we are seeing that early in the year. It’s not substantial. You know we’re not seeing $10 deals become $15 deals, but the slightest incremental gain is positive obviously and that’s what we’re seeing. And we anticipate that that will continue to improve.

But again I think an important point to remember is just that as space gets absorbed, you might have had the second or third best box in a market last year, you may be the only box left this year and we’re starting to see activity on stuff and that’s been a very pleasant surprise in that regard.

Daniel B. Hurwitz

Some of this, Nick, is also really just the math of it because in our spreads we don’t include spaces that have been vacant over a year. So on a comparative basis, a lot of these boxes that are vacant have been vacant for a year and will come out of that calculation. So we’re really talking about spreads over previous spreads from the prior year, not going back beyond that. So the comp will also be easier for us to be quite honest and we should be able to show improvement as a result. So we’re not really comparing a vacant Linens box that’s been vacant for 18 months and was paying $24 to a new deal that’s paying $12, because if it’s been vacant for over a year it’s not included in the calculation.

Nick Vedder - Green Street Advisors

It looked like on your top tenant list, some of the wholly owned space had become un-owned space and I’m just curious, was that due to the sale of some anchor boxes and how do you think about that and the long-term impact on a center versus the control of the center? And then also will you balance that with your need for liquidity?

David J. Oakes

We did sell some boxes back to tenants this year. You know, as we were in the midst of 2009 there was an extraordinary difference in cost of capital between us and our top tenants. And you know we thought that that was something that didn’t make sense for either side and we could come to an agreement on pricing that generated capital at an attractive relative price for us, given what we could do with it. We don’t take lightly giving up control of our centers. Most of these sort of situations were actually sort of freestanding anchor stores that were not part of a bigger center. So some of them were, but there were a number of situations where they were freestanding stores that came to us as part of the single tenant portfolio that was included in the England acquisition.

So we got a number of freestanding anchors from that situation and so that’s part of it. It’s also going to be impacted by the redemption out of the MDT joint venture, where we no longer have an ownership interest in the largest portion of MDT. So we can lease and manage and have a close relationship and oversight of MDT but we no longer have an ownership interest, even at the 15% level that we had had in those spots. So there are a few items there that impacted those results over the past year, but we obviously maintain great focus on owning and controlling a high quality portfolio and trying to make the right long-term decisions to lower our leverage and improve liquidity and not simply just de-leverage the most saleable to try to come up with a short term solution for the issues that were at hand.

Operator

Your next question comes from Michael Mueller - J.P. Morgan.

Michael Mueller - J.P. Morgan

A couple of other leasing questions, first of all, on the deals you’re signing either for new boxes or renewals, are any of the terms changing dramatically in terms of duration or the escalators that you’ve been able to put in leases compared to a year or two ago? And then the second question is I guess in a center where you have a dark anchor from a bankruptcy like a Circuit City or a Linens, what’s the conversation when another tenant comes up and you’ve just, you know, you’re talking about signing boxes and you signed a box let’s say to rent level 20% below, what happens in the balance of the center when those leases come up for expiration? Because it looks like your renewals were pretty flat. Just wondering if you could fill us in on how those conversations go.

Daniel B. Hurwitz

Sure, Michael. On the first question, not a lot of change from what we’ve historically done in terms of length of leases. The deals we are signing today are the typical, especially with the junior anchor boxes, ten year terms with a couple of options. You know in very few instances last year where we provided some rent relief we did it for a very short period of time and in some of the smaller shops, some of the local Moms and Pops, where there had to be a reduction at the time of renewal, we were doing it for a very short period of time. Sometimes as short as one year, two years or three years. But with the majority of the portfolio, no significant change in the term of the lease.

On the second part, you know renewals are an interesting conversation we’re having right now with most of our major retailers. The fact that market may be $10 per square foot and we fill the vacant Circuit or Linens with a $10 deal does not give everybody the ability to automatically adjust to market when their lease comes up for renewal. You know no different than when we were analyzing rent relief early last year, when someone comes to us and says hey I want to go to market at renewal, there’s a lot of things we consider. You know what’s their opportunity, what are the alternatives? How good a store is it? We’re finding a lot of success in keeping people at least flat and sometimes telling them the option is where you need to go and that’s going to be at a contractual increase in most cases.

So just the fact that we’ve leased at something less than the existing rent does not provide the opportunity to adjust to market when the other tenants are up for renewal.

Paul Freddo

I think that we just continue to stress that it’s a crucial difference between this property type and others in terms of that definition and the importance of a “market rent” figure, where for the more commodity types if there is an opportunity to [inaudible] off the street and lower your rent, there is a very natural desire and ease with which one can do that. But it’s a great difference in this property type where one, the landlord has more information because we know the sales activity that’s occurring in that box. And secondly, the retailer that actually has customers come there every day and get a certain volume of sales out of that, certainly makes a location stickier in this property type versus others.

Daniel B. Hurwitz

And I also think, Mike, that one of the things that I’ve noticed over the course of the year which I thought was pretty interesting considering how much leverage the tenants have had is if you really look at our tenant allowances, even though they are higher than in past years on a total basis because of the volume of leasing that we did on a per square foot basis, our CapEx is down about 25%. And that was a very positive change, too, to have when we are negotiating with tenants what they’re willing to accept in existing spaces. And that’s been very positive for us and quite honestly very unexpected. Because tenants with a lot of leverage usually get you pretty good on the tenant allowance side, but tenants were willing to work with us with existing conditions and that was helpful.

The other thing that I’m seeing in some leases that I haven’t seen in many, many years is tenants agreeing to an artificial breakpoint and paying a higher percentage over an artificial break. So for example if it’s really a $9 deal and we think it’s a $12 space, if the tenant reaches, they’ll agree to an artificial break and pay us a higher percentage over that artificial break to try to get us back to that $12. And that’s just a case of a landlord sometimes needing to show the tenant that he’s more confident in the real estate than maybe even the tenant is. And we’re willing to take a ride on some of those leases and its worked out well for us in the past.

I haven’t seen that kind of deal in a long time and I’m starting to see a few of those come across my desk and it’s I think a very positive development for our industry, because as the market comes back, the $9 rents that you had to swallow hard for are really going to be $12 rents and in fact you’ve got that $12 rent and gave them 25% less in TI. So I think the story isn’t completely told yet on these rental levels, and it could be very interesting as it pans out over the next couple of years.

Operator

Your next question comes from Michael Bilerman – Citigroup.

Michael Bilerman – Citigroup

Just on the JV impairment, that was one of the notes that you advanced to Coventry. I assume that was just the note advance is your equity interest? Or is that something else?

David J. Oakes

The largest portion, the impairment and reserve volume for this quarter was related to joint venture development project where Coventry was our partner, where we had an equity interest and we had also advanced the partnership money to continue that development and a loan that was made about two years ago. And at this point we have fully reserved against that.

Michael Bilerman – Citigroup

And how is that running through just the joint venture income statement in terms of was there any FFO recognized from that note that now will not be recognized? Or was it all accrued?

David J. Oakes

There was interest income on the note that was being recognized through the majority of 2009 but as the likelihood of moving forward with that project and getting repaid on that note was reconsidered, we stopped booking the interest by the end of the year. And in fact then had to reserve against the entire balance of the note as well as the interest that had been previously recorded.

Michael Bilerman – Citigroup

And this was accrued interest or cash pay?

David J. Oakes

You know the note was structured where it had an interest reserve, so you could make the case either way. There was some notion of cash paid but out of an interest reserve that we had previously funded.

Michael Bilerman – Citigroup

Is there any other major venture I guess the size of that relative to your investment in joint ventures was sizable. Is there any other large note for advances that you have that we should be concerned about?

David J. Oakes

There are not.

Operator

And there are no more questions at this time. We’d like to thank everyone for their participation in today’s conference. You may now disconnect and have a great day.

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