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Executives

Kate Deck – Investor Relations Director

Daniel B. Hurwitz – President, Chief Executive Officer & Director

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

Paul W. Freddo – Senior Executive Vice President Leasing and Development

Analysts

Jay Habermann – Goldman Sachs & Company

Alexander D. Goldfarb – Sandler O’Neill & Partners, LP.

Jay Habermann – Goldman Sachs

Christy McElroy – UBS

Craig Schmidt – Bank of America Merrill Lynch

Jeff Donnelly – Wells Fargo Securities, LLC.

[Quincent Bellei] – Citi

Michael Bilerman – Citi

Mike Mueller – JP Morgan Securities, Inc.

Jim Sullivan – Green Street Advisors

Carol Kemple – Hilliard Lyons

Rich Moore – RBC Capital Markets

David Harris – Broadpoint Gleacher

Developers Diversified Realty Corporation (DDR) Q1 2010 Earnings Call April 23, 2010 10:00 AM ET

Operator

Welcome to the first quarter Developers Diversified Realty Corporation conference call. At this time all participants are in listen only mode. We will be conducting a question and answer session towards the end of today’s conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Kate Deck, Investor Relations Director.

Kate Deck

On today’s call you’ll hear from President and CEO Dan Hurwitz; Senior Executive Vice President and Chief Financial Officer David Oakes; and Senior Executive Vice President of Leasing and Development Paul Freddo. Please be aware that certain of our statements today may be forward-looking.

Although we believe that such statements are based on reasonable assumptions, you should understand those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. For additional information about such factors and uncertainties that can cause actual results to differ may be found in a press release issued yesterday and filed with the SEC on Form 8K and in our Form 10K for the year ended December 31, 2009 and filed with the SEC.

In addition, we will be discussing non-GAAP financial measures on today’s call including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release dated April 22, 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

To begin our call I’d like to highlight the progress made since the end of the first quarter of 2009 as I believe it underscores our commitment to reduce debt and enhance the quality of our portfolio. During the last 12 months we reduced total consolidated indebtedness by $1.1 billion from $5.8 billion as of March 31, 2009 to $4.7 billion as of March 31, 2010, through incremental and strategic transactions including equity raise, retained cash flow, asset sales, open market debt repurchases and tender offers.

As a result of these various transactions and again, on a year-over-year basis, we were able to reduce our prorate debt to EBTIDA from 10 times to 9.1 times, well on our way to our goal of the mid eight times range by year end. In addition to leverage reductions, we also increased the weighted average maturity of our debt by over one year, resulting in greater financial flexibility and a more balanced debt maturity profile.

With respect to our liquidity position, the balance available on our revolving credit facility has increased by over $900 million from the cycle low availability of less than $100 million a year ago. Regarding portfolio operations, over the trailing 12 month period we were available to increase our leased rate from 90.7% to 91.3%. Overall, we are encouraged by the progress we have made over the past year and believe the execution of our strategy signifies a disciplined focus of delivering results based upon the expectations that we set for ourselves and partnership with our investors.

As we navigate the first half of 2010, we remain keenly focused on the operating and balance sheet initiatives that we identified in January. From an operational perspective, our commitment to improving our lease rate has resulted in marginal gains within our portfolio and record setting deal volumes. We have seen momentum building in the junior anchor box category as market dominance and expanding retailers seek external growth in high quality shopping centers amid a diminishing supply of such space.

Deal economics are still challenged and lease spreads remain negative. However, we are encouraged by the aggressiveness we are seeing with some of our stronger retail partners. The decline in same store NOI has moderated and we expect further improvement throughout the year as new leases come on line in Q3 for the back to school selling season and Q4 for the holidays. In addition to enhancing the quality of our shopping centers through lease up, we remain focused on overall portfolio management by pruning the portfolio of underperforming centers and selling non-prime assets.

Before turning the call over to Paul, I’d like to take a minute to highlight and improvement we are seeing with regard to our accounts receivable balances across the portfolio. Accounts receivable in general is often a good indicator of future retailer health and typically tells a story one way or another. On a positive note, within the month of March, our collections group was able to record the largest monthly reduction of receivables within the past four years. We have all learned over the past few years that just because you bill a tenant that doesn’t necessarily mean that they will automatically pay you.

But, through a combination of aggressive collecting and improving conditions, our tenants are paying their bills. We obviously view these results as very encouraging from both a macroeconomic perspective and retailer operational perspective as there appears to be less distress among tenants and more overall liquidity resulting in our collection team growing more effective in its efforts to reduce our outstanding balances.

We certainly understand that one month does not foretell the results for the remaining nine but we will continue to monitor this effort very closely as it may indicate a positive trend over time and a healthier outlook for retailers as the years continue. I’ll now turn the call over to Paul who will discuss what we’re seeing in the retail environment and provider greater details about our portfolio operations.

Paul W. Freddo

I’d like to begin with a brief update on the retail environment which continues to show signs of improvement. After a better than anticipated holiday season retailers continued their momentum in to the late winter and Easter season by posting better than anticipated results in February and March. The March sales results were notable not because of the headline comp increase which benefited from the calendar shift and favorable weather but because of the underlying sales trends.

While April sales will be negatively impacted by the calendar shift, the upward revisions that many retailers made to their first quarter earnings guidance reflects their improved sales outlook, much cleaner inventory position, strong initial reaction to spring fashions and a favorable margin outlook due to the increase in discretionary spending.

Strong sales and solid earnings growth for retailers translate in to expansion plans and we are working with numerous retailers who need space to meet their open to buys for store openings in the next two years. Top line sales are now in the sport light and our core retail partners in the value and office price channels are increasingly viewing square footage expansion as their primary vehicle for top line growth particularly in low inflationary to even deflationary environments for some categories.

This is evidenced by the volume of new deals that we executed in the first quarter and the increased representation that may retailers are bringing to the Las Vegas ICSC show in May. We are also seeing retailers become more flexible in size and location in order to meet their goals which marks a significant change from 2009 when retailers could be more selective. Quality space continues to be in demand and this bodes well for the lease up of our portfolio.

As Dan mentioned, deal velocity continued to be strong in the first quarter. In addition to breaking a company record for new leases signed in a single quarter, we increased our lease to occupancy rate by 10 basis points to 91.3%. This compares favorably to a historic average decline of 20 basis points in the first quarter due to the seasonal nature of tenant fall out. During the first quarter we completed 180 new deals representing 1.2 million square feet and 242 new renewals for 1.4 million square feet. In total, we executed 422 deals during the first quarter for 2.6 million square feet.

These results include the cumulative efforts of our leasing team for both owned and managed assets though our supplemental disclosure does not match exactly, it is only centers in which we have an ownership interest are included in the supplement. Based on current deal flow, we remain confident that we will achieve a lease occupancy rate of at least 92% by year end.

Spreads remain challenged but we are starting to see some improvement in deal economics. Spreads for new deals were -5.9% for the quarter. This compares favorably with the -15.3% for the fourth quarter of 2009. Renewal spreads for the quarter were -1.9%. This was impacted by the decision to negotiate some short term renewals at reduced rates enabling us to negotiate more favorable longer term rates in an improving economic environment.

In total we executed 39 one year renewals with the expectation that we will be in a better environment to discuss longer term deals a year from now. Our combined spreads for new deals and renewals was -2.9%. Looking forward to the balance of the year, we expect spreads on new leases to remain slightly negative and for renewals to be roughly flat.

In regard to back filling big box vacancies and our anchor store redevelopment team continues to make substantial progress in the first quarter leasing 12 units for over 524,000 square feet. Of the 6.9 million square feet of space returned through the five major bankruptcies, we now have some level of activity on 63% of the space, including 31% leased or sold and 32% in LOI or lease negotiations. In the first quarter we executed deals with many of today’s most active retailers including the Fresh Market, Kohls, buybuy Baby, Forever 21, TJ Maxx, Burlington Coat Factory and Hobby Lobby.

Our prime portfolio continued to perform well and ended the quarter with a leased occupancy rate of 92.9%. We’ve introduced additional disclosure to the supplement regarding the prime portfolio including the number of centers, GLA and percent of our total NOI. It is important to note that these 265 shopping centers make up roughly half of our total owned assets but generate over 80% of our total NOI. Our strategy continues to be to hold these assets for the long term and sell the non-prime assets where it makes financial sense further simplifying the focus on the high quality assets that dominate our results.

Our ancillary income department continues to mitigate NOI losses from vacant space while also helping our retail partners meet their increasing demand for seasonal space. For the first quarter, ancillary income for the combined portfolio was $8.8 million which is a 13% increase over the same period in 2009. The deal volume for the remainder of the year is very encouraging especially in the seasonal categories which are benefitting from the entrance of additional players in to the market for temporary locations for the Halloween and Christmas season.

Turning to operations in Brazil, our portfolio continued to perform well with same store NOI growth of 11.2% for the quarter and a portfolio leased rate of 97.7%. We continue to see opportunities for growth in Brazil and recently started construction of a new mall in Uberlandia with a planned opening in the fall of 2011. Uberlandia is an underserved market located north of Sao Paulo. Last week we secured an $81 million construction loan on the mall which is currently 53% leased and will be anchored by Wal-Mart and Cinemark. We also recently started a 60,000 square foot expansion at our largest and most successful asset Parque dom Pedro which is expected to open this fall.

With regard to the development in the domestic portfolio, we continue to minimize ground up development spending while allocating capital to the lease up of existing projects. However, we do see a great opportunity to redevelop a number of our existing assets. We view this as a strong growth opportunity that we intend to fully capitalize on. We recently hired a professional experienced in development and redevelopment to oversee this program and are excited about the opportunity to create value without the risk of capital requirement of new developments.

In summary, we had another strong quarter for leasing activity and expect the momentum to continue throughout the year. Our number one focus continues to be on leasing up vacant space. We’re encouraged by the increasingly optimistic mood in the retail community heading in to recon in Las Vegas and expect to capitalize fully on the various opportunities to fill space with best in class retailers.

Now, I will turn the call over to David.

David J. Oakes

I’d like to begin by highlighting the various changes and improvements that we’ve made to our quarterly earnings supplemental. Our goal is to consistently provide best in class transparency and deliver disclosure that provides the most comprehensive view of our company in the most efficient fashion. This prompted us to complete an intensive internal review of our current disclosure and take direction from our analyst and investors which lead us to add new information, remove less relevant information and clean up our existing documents so that it is easier for investors and analysts to understand and to use.

Many of the changes appear this quarter and we will roll out additional changes for the second quarter supplemental as well. We hope that you find the new and improved supplemental useful and your continued feedback is always appreciated.

Turning now to our quarterly financial results; operating FFO was $0.28 per share for the first quarter. Including certain non-operating and primarily non-cash net charges, FFO was $0.12 per share for the quarter. Once again, impairments and other non-cash charges skewed our true operating results. The charges taken this quarter aggregate $36 million and are primarily to a loss on equity derivative instruments related to the auto warrants as well as impairments and losses associated with assets being marked for sale.

As evidenced by our capital markets activity this quarter, we continue to actively and opportunistically raise capital, reduce leverage and extend our debt duration. We started the quarter by raising $46 million through our continues equity program at an average price of $9.30 per share. We stopped selling shares in this manner in January. In February we completed a $350 million common equity offering and in March we issued $300 million in senior unsecured notes with a seven year term.

We also tendered for $83 million of our 2010, 2011 senior unsecured notes, generated retained earnings of approximately $45 million and sold $456 million of assets which after JV partner interests netted $95 million of proceeds to DDR for leverage reductions. All of this activity netted the company over $800 million of capital this quarter which was predominately used to delever and secondarily reinvest in our assets.

Additionally, we were part of the first multi borrower CMBS transaction to close since 2008 for our DDR domestic retail fund joint venture. This $30 million financing is for a five year term at a rate of 4.2%. It replaces three loans with a comparable balance maturing in 2010. Availability of capital has improved significant for our industry and especially for our company over the past year and we have been taking advantage of these conditions to raise considerable amount of new capital.

Many of these financings were initially budgeted to occur later in 2010 but we recognized the opportunity to reduce risk and we took it in the first quarter. For the past year, we have articulated a strategy of lowering leverage, increasing liquidity and extending duration with the goal of lowering our risk profile and our long term cost of capital and we are pleased with the progress made during this year, especially this quarter.

The proceeds from our various capital raising activities this quarter went primarily to repay debt. We repurchased $156 million of near term unsecured notes, paid off over $150 million of consolidated mortgage maturities in addition to removing $392 million of mortgages affiliated with assets sold. We also paid down our revolving credit facilities by over $400 million this quarter. We reduced total consolidated debt from $5.2 billion a year end to $4.7 billion today which is more than half way to our goal of $4.4 billion by year end 2010.

We lowered our pro rata debt to EBITDA ratio from 9.54 times at year end to 9.12 times today and we expect this ratio to be in the mid eight times range by year end driven primarily by continued asset sales and retained capital as well as improving EBITDA. Additionally, we extended the weight average maturity of our debt from March 2013 to July 2013 and increased liquidity to roughly $1 billion of cash and availability on our revolving credit facilities.

Today, we have approximately $310 million of wholly owned debt maturing this year which consists of almost $300 million of two series of senior unsecured notes maturing in May and August and one small mortgage. We will address our maturities using availability on our revolving credit facilities, proceeds from assets sales, retained cash flow and funds from available discretionary capital raising activities.

After several refinancing completed in April, our share of unconsolidated mortgage maturities in 2010 totaled approximately $200 million. Most of these loans are in the process of being refinanced, extended or in some cases the assets are being sold. We have also made progress reducing our 2011 wholly owned maturities which total roughly $750 million including $346 million outstanding on the revolvers. As many of you are aware, our revolving credit facilities have their initial maturity this June but have a one year extension at our option that we expect to exercise shortly.

We are currently in discussions with participating banks as well as several banks that are not current participants that have expressed an interest in joining. We’ll reduce the size of our revolvers by at least 25% as we implement a longer term financing strategy and shift away from reliance on short term debt. This strategy has been demonstrated by the $900 million reduction in our borrowing on our revolver since this time last year.

Smaller facilities will still provide ample borrowing ability without incurring the cost to support excess capacity that we do not intend to use. The facilities will be more appropriately sized for our disciplined growth strategy going forward. We’re encouraged by the feedback we have received from banks this far and we plan to close on the new facilities in the fourth quarter of this year.

We remain compliant, as we always have with our credit facility and bond covenants and the cushion on some of these covenants have hit positive levels that we have not seen in several years but expect to maintain. Our historically tightest covenant has been the consolidated outstanding debt to consolidated market value ratio and the unencumbered asset coverage ratio as calculated for the revolving credit facilities. In the first quarter the consolidated debt ratio was 57%, well within the 65% limit and the unencumbered asset coverage ratio was just over two times, well above the 1.6 times minimum. This marks the first time since the second quarter of 2006 that the unencumbered ratio has been over two times.

Enhancing the size and quality of our unencumbered asset pool has been important for us as we seek to solidify investment grade credit ratings. We continue to proactively raise capital to repay first mortgages on wholly owned assets and have not replaced many of them which results in more property being added to the unencumbered pool. In May we will repay a 9% $60 million loan which will release two large prime assets in to the unencumbered asset pool and will further reduce our cost of capital.

Recently we formerly engaged Fitch to provide corporate credit ratings for us going forward. We are now formerly covered by three rating agencies. As you recall we are still investment grade rated at Moodys and remain focused on earning our way back to that level with S&P and Fitch. We continue to work closely with all rating agencies to ensure that they have the most up to date information and that they are aware of the balance sheet progress that we continue to make.

Finally, I’d like to provide an update on MDT. As we stated in a press release yesterday morning, MDT completed a provide placement with EPN of $9.5 million Australian dollars and plans to construct and entitlement offer to raise an additional $200 million Australian dollars. The proceeds from both capital raises will be used to stabilize MDT’s balance sheet by reducing leverage and extending duration.

As part of the recapitalization EPN will buy Macquarie’s 50% stake in the US manager and will become our new partner in managing the trust. EPN is a joint venture of two public companies, Elbit Imaging and Plaza Centers and one private group, Eastgate Property, all of which have long and successful track records of real estate investing.

Since the redemption of our interest in the main MDT joint venture last year, our only real economic involvement with MDT is through our asset management, leasing and property management contracts all of which stay in place with their current fee streams. We are pleased to see the trust raise capital from an experienced real estate investors in order to stabilize its balance sheet and we look forward to working closely with EPN to create value for MDT unit holders through our services.

I’d like to wrap up by stating that although we have made significant strides reducing leverage, extending maturities, enhancing portfolio quality this quarter, we remain extremely focused on continued improvement and we look forward to updating you throughout the year with our progress. I’ll now turn the call back over to Dan for his closing remarks.

Daniel B. Hurwitz

As you’ve heard, we had a very active first quarter and made significant progress on our balance sheet and operating initiatives. As David mentioned, the major financing transactions that took place during the quarter were initially budgeted to occur in the middle of the year. As a result of the timing of these transactions and the higher weighted average share count and higher short term interest expense that will exist for 2010, we are lowering our operating FFO guidance to $1.00 to $1.05 per share.

The lower guidance is exclusively a function of the timing of capital raises and there is no change to our EBITDA projections as operations continue to track on budget. Consistent with our articulated strategy and given the still fragile state of the economic environment, the uncertainty surrounding capital market conditions and the strong advice received from the market through various sources, we firmly believe we made the right decision to reduce risk and to execute transactions when we did and as a result has significantly enhanced our company’s balance sheet and long term capital structure at the short term expense of 2010 FFO.

From a quarterly standpoint, second quarter FFO will be our weakest as the full dilution of the capital raising will be reflected at the same time that the smallest amount of the rental income from all our leasing activity will be in place. Simply put, tenants rarely open new stores in the second quarter. The third and fourth quarters should show solid growth sequentially as more of this rental income comes on line.

Before turning the call over to questions, I’d like to address a few corporate initiatives that I believe highlight our commitment to shareholders and forward thinking ideas. First, as many of you know, we have engaged a third party consultant to conduct a perception study of investors’ sentiment towards our company. This is the second consecutive year we have engaged this firm to conduct a perception study in an effort to gage progress made and identify additional areas for improvement.

Last year’s survey uncovered various strengths and weaknesses of our investor relations and strategic planning efforts and that feedback was greatly appreciated and acted upon. Our consultant was in the market for the past several weeks to finish this year’s survey and I would like to personally thank each of you that participated for taking your time to share your thoughts. Your perspective and feedback is truly valued and will certainly be considered by the management team and our board of directors just as it was last year.

Second, we recently conducted a research study designed to reveal how evolving consumer behavior, changing demographics and the economy will shape shopping center leasing, development and property management well in to the future. The study focused on projections for the years 2014 to 2020 and included interviews with several industry resources including shopping center industry executives, major retailers, authors, academics and economists. The research was rather revealing for our property type and more specifically for our portfolio and will serve as a guideline for future operating initiatives.

We are currently preparing an executive summary that will be made available to the investment community upon completion. This is a very thought provoking study that will be an invaluable tool in understanding future trends and strategies within our business. At this time operator we’d be happy to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alexander D. Goldfarb – Sandler O’Neill & Partners, LP.

Alexander D. Goldfarb – Sandler O’Neill & Partners, LP.

The first question is just thinking about guidance and it sounds like retail activity has been picking up. I think at the end of last year you guys gave guidance for about $40 million of leasing costs this year. One, I want to know if you’re still comfortable with that or if you think it could be higher. Then two, I think you still have some remaining ATM capacity so I just want to know if that’s factored in to your new revised $1 to $1.05, whether that’s in there or not?

Paul W. Freddo

On the first question we’re clearly okay with the $40 million. We are right at it and tracking to that number at this point. By the way, if it’s slightly higher we would view that as good news in terms of leasing activity but right now it’s exactly what we’re tracking.

David J. Oakes

And very much sticking to our discipline of not incentivizing retailers simply by writing them checks to occupy our space but trying to sign efficient and appropriately economic deals. On the second item on the ATM program, we do have additional capacity there and could certainly put additional capacity in to place. At this point based on the equity that we raised in the first quarter, we don’t have plans to do to raise additional equity but we do have the capacity to do it and certainly as we look around at opportunities, it would be a potential tool to help fund that as any sort of investment activity that we would look at would be funded with a very high component of equity and the tests for if it made any sense would be compared to that cost of equity as opposed to anything like our line of credit costs. But, at this point don’t have plans and have not been active in the market with the ATM additional capacity.

Alexander D. Goldfarb – Sandler O’Neill & Partners, LP.

My second question is if I just look at the stock reaction today it’s off versus the group and the rest of the REITs. I’m wondering if it’s possibly driven by sort of the items, the charges that you guys took in this quarter and what some other potential charges or items could be in the balance of the year that may show improvement for the company or may be reflected in like the auto derivatives which investors can think about so as not to be surprised when those sorts of things come out?

David J. Oakes

We acknowledge that the results have been messier than would be ideal over the past two years really. We’re pleased that this quarter has less of those items than was the case in most quarters over the past at least year and a half but still some of that remains. The auto derivative which is by far the largest charge this quarter related to the revaluation of their warrants is something that we will have to deal with until those warrants are exercised so potentially an additional four years of that. It’s completely counterintuitive in some ways where the positive performance of the stock was the exclusive driver of what that charge exists and if the stock would trade down that would actually be a gain in future periods and so very, very far away from the real economic impact that you’d think of there but one we won’t be able to get away from.

As we do sell assets there may be additional impairment charges and losses on sales. We certainly don’t think it will be anything as large as has existed over the past two years but constantly some ability for that to happen. Most importantly though I think as we’ve said many times, after years of this company driving growth in FFO per share and having a heavy focus at the board and management and strategic level on maximizing FFO per share, it is not the primary metric we are looking at today. So we won’t let our investment strategy be driven by the short term maximization of FFO per share.

So in the cases where we continue to look at asset sales that may generate losses or impairment that conversation is exclusively happening in the context of do these asset sales make sense at this pricing? Is this real estate we don’t want to own? Is this real estate where we expect the NOI to be lower in the coming years rather than higher? So there will continue to be FFO impacts from activity like that but we firmly believe it is the right strategic decision.

Operator

Your next question comes from Jay Habermann – Goldman Sachs.

Jay Habermann – Goldman Sachs

Dan or Paul, maybe starting off with a comment on retail sales and the strength you saw in March and obviously the positive picture for much of this year. Obviously, that’s had an impact on tenant demand but can you talk about the potential for stronger demand in 2011 say versus ’12 openings?

Daniel B. Hurwitz

One of the things that we’re clearly seeing Jay is tenants very, very concerned about 2012. 2012 is a year that as you know we’re going to have significant increases in occupancy throughout the industry for 2010 and 2011. There’s really no new supply of space being built. Tenants have been indicating that they’re comfortable with 2010, they’re somewhat comfortable with the opportunities in 2011 but they’re very concerned about their opportunities in 2012 because the supply and demand ratio should shift dramatically as company’s like ours and all the other companies quite frankly in retail continue to increase their occupancy levels. We think demand for space in 2011 for 2012 will be extremely strong and we think it will be equally as strong as we’re seeing now for 2011 in 2010 if not stronger.

Paul W. Freddo

Jay, I would add on to that that in our conversations with these retailers, clearly there’s concern and I know that Dan mentioned that. But we need to emphasize that there’s concern about where they’re going to meet their square footage growth needs and nobody is indicating that this is a short term growth plan and then we’re going to be satisfied with our store count, quite to the contrary. It’s going to be an interesting dynamic in the next few years as the demand increases and the supply diminishes.

Daniel B. Hurwitz

I think we’re going to see and hear some of the results of that pressure on retailers at recon in May because it’s really not too early to start talking about 2012 especially for some of the larger boxes who are trying to allocate capital for future years. I think this year at recon will be vastly different than last year, hopefully. I think we’ll start to feel or see some of the pressure under retailers to secure space as opposed to all the pressure on the landlords to fill space.

Jay Habermann – Goldman Sachs

Can you comment a bit about say rents versus occupancy, the trade off there? I know you mentioned strength in the junior anchor box spaces but it’s my understand that some of the remaining spaces are now either the more challenges spaces to lease? So can you comment a bit sort of about that dynamic between rent versus occupancy for the balance of this year? Should we see leasing spreads continue to soften?

Paul W. Freddo

We will continue to see the spread soften and part of that is the increase demand. A couple of things we’re seeing Jay, I mean a lot more competition for space. That’s one of the things and we’ve talked about it on prior calls, there was no competition for space last year. They were all very selective and picking and choosing and we rarely saw two retailers looking at the same box. That has changed dramatically and so with that competition comes certainly a different discussion when it comes to rent.

Retailers are clearly remaining disciplined in the rents they are willing to pay but again, we are seeing movement in that. One of the things we also mentioned previously is that retailers are coming back to markets and locations that they passed on a year ago. They’re not going crazy and considering markets that they shouldn’t be in but they are being more flexible in the markets that they will go to. A typical call would be, “Hey that market we told you no interest in last August let’s talk about.” That’s also improving our situation.

Flexibility and size is another thing we’re seeing especially with the junior anchors. A lot of them realize that their prototype doesn’t fit what’s available so we’ve seen several of them come with a smaller prototype and just try and figure out how they’re going to get more space. I’m not overly concerned about the fact that the best goes first and what’s left is not desirable because we’re seeing more and more activity on a great majority of the space.

Jay Habermann – Goldman Sachs

Lastly maybe for David, did you give a specific asset sales target for the balance of the year to get to your mid eight target on leverage?

David J. Oakes

We indicated in the portion of the press release where we updated guidance that the assumptions on all the operating metrics were the same so I apologize that we didn’t go in to detail on that. But, we’re still looking at for DDR’s pro rata share of asset sales to be $150 million for the year and very much believe we are on pace to hit that, of course that number netting out our joint venture partner’s share of some of those things.

Operator

Your next question comes from Christy McElroy – UBS.

Christy McElroy – UBS

David, just following up on Alex’s question, with a longer term goal of further deleveraging given your stock is up pretty substantially from where you issued equity back in February, how do you weigh your options in terms of thinking about potentially raising more equity at this level? Arguably much lower implied cost of capital in February versus other options for raising capital and reducing debt? Is there an opportunity to pay down more debt as you look to refinance your credit facilities over the next few months?

David J. Oakes

We’re certainly encouraged by the market’s response to the progress we’ve made thus far and by the strong performance of the stock year-to-date and particularly since the equity offering. We are constantly thinking about our access to capital and our cost of capital and we are most driven by our goal of lowering that long term weighted average cost of capital and so we’re evaluating that on a regular basis. From the plan that we’ve been articulating, we believe we can achieve our leverage targets in a reasonable period of time without additional equity being raised simply for purposes of debt repayment.

So, I think if we would look at additional equity raising activity it would more likely be with some investment activity that we thought was opportunistic enough to justify a high level of equity funding. At this point we don’t have anything that we’re too active on or that we’re willing to talk about today. It’s something that we think about but we truly believe there are other initiatives that there are other ways that we can lower our debt in ways that are less costly from a long term perspective than selling common equity even at $13 a share with both our ability to improve EBTIDA and our ability to lower debt in other means.

Christy McElroy – UBS

Then just sort of following along those same lines, we’ve seen signs of cap rate compression for high quality assets in good markets but have you seen more interest in or pricing that would make sense that you might sell more of the assets in your non-core portfolio than maybe you’re sort of targeting right now, the $150 million? I’m just trying to get a sense for whether or not there’s been much cap rate compression for BC assets in secondary tertiary markets?

David J. Oakes

I would firmly agree with your initial point that there has been continued compression in cap rates and no longer is that just a talking point, there’s much more tangible evidence that that is occurring and there are many more prints out there that would clearly, clearly indicate that prices have come up and cap rates have come down. That is somewhat separate from the world that we are living in with many of our asset sales where the institutional players purchasing the high quality assets which represent most of our portfolio are clearly paying higher prices than they would have even three months ago, let along 12 months ago.

We’ve seen a bit of that flow through to the non-prime assets that we’re selling. We’re particularly seeing some benefit there as the financing market improves and the ability to put financing on assets that aren’t of the highest quality has clearly improved. So we’ve seen a bit of tightening with the assets in the caliber of stuff we’re trying to see but nowhere near what’s occurred to market pricing for the core of what we own and what we’re not looking to sell.

For now, the budget remains $150 million of asset sales this year. But we certainly view it as a long term strategic initiative to lower the amount of exposure we have to non-prime assets and so we’ll see how the transaction market turns out over the rest of the year to evaluate if it could make strategic sense for this company to push that figure a little higher for next year and leave a little less to do in the coming years.

Christy McElroy – UBS

So of your targeted dispositions this year what kind of cap rates are you sort of projecting on those transactions?

David J. Oakes

We have budgeted in the 9% to 10% range for some of the stuff that we’re selling that really is non-prime B and probably much, much closer to C quality real estate.

Operator

Your next question comes from Craig Schmidt – Bank of America Merrill Lynch.

Craig Schmidt – Bank of America Merrill Lynch

When I look at the lease expiration schedules between December 31, 2007 and the one that you just posted for March 31, 2010, the total rent roll for shops basis is essentially flat but the anchor drops from 1,492 to 1,104. I just wondered what is accounting for that drop in the anchor space?

Kate Deck

Craig we were including temporary tenants in the fourth quarter disclosure and we have decided with our new disclosure to not include those as it skews the 2010 and 2011 years in particular. But, to give you a more accurate representation of our long term leases we decided to exclude those so that’s the reason for the drop.

Craig Schmidt – Bank of America Merrill Lynch

I assume at some point with the releasing of the junior anchors there’s going to be some spaces you just aren’t able to lease in their current configurations. What goes in to the decision to consider reconfiguring that space to maybe lease to a more flexible size box?

Paul W. Freddo

Well obviously there’s a process Craig. You start with the next best retail available interested in your box and we work right down through less desirable retail and this enters in to our whole prime non-prime discussion and which assets we’re going to be more selective about who we release with. But clearly we’re looking at a small bottom percentage of that portfolio of vacant box and what do we do with it. We’re very aggressive in how we’re looking at repositioning them.

We’ve had a couple of examples where we’re going to consider knocking down, razing that box and then replacing it with some much more valuable outparcels, just trade GLA for GLA if you will. But, you start with who is the best in class that you can get in and you work your way through the retail line up and then you get down to where we may have some non-retail uses of which there are some or simply again scraping the box and replacing GLA with GLA in a more desirable configuration and location.

Operator

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

Jeff Donnelly – Wells Fargo Securities, LLC.

Dan, at the prior peak many of the retail REITs, I think you guys at well, were running at occupancies over 96%, sometimes closing in on 97%. As you look down the road, I don’t know three to five years forward, do you feel that’s a threshold the shopping center REITs or even DDR in specific can retain or do you think that was unique to the last cycle and the next peak might be a little lower?

Daniel B. Hurwitz

I think the next peak is going to be a little lower Jeff for a couple of reasons. Number one, overall today if you were to really look at the inventory of potential tenants for space there are fewer of them. We’ve lost a few, more than a few and if we don’t have some new ones come in to the market which we haven’t seen in a very, very long time there just aren’t going to be enough people to take all the space.

As we look at our portfolio we feel that full occupancy going forward will be in that 95.5% range, down from that 96.5% to 97% where we were at our peak in the past. We think that’s a stable number that can be maintained. That gives us as you know another couple of hundred basis points of occupancy that’s available for internal growth within our portfolio and we feel that the market is going to be able to sustain that going forward.

Jeff Donnelly – Wells Fargo Securities, LLC.

Just a follow up and I’m not sure if this is better put to you David but how do the average bumps in the new leases that you’ve been signing in 2009 and 2010 compare to what the growth is that’s in your existing lease base? I guess I’m wondering on one hand have you lost a little bit of pricing power? But, on the flip side how are you incorporating the opportunity you talk about for 2012 and beyond in to the way you’re setting leases today?

Paul W. Freddo

The deals we’re cutting today Jeff, the bumps are very typical of historic bumps. Obviously, we’re starting at a lower base and I’d say on the one hand we’ve been more successful in getting sooner and large bumps from some of the anchor boxes just because of the low starting point. But, we haven’t given anything away in terms of the growth, particularly in those anchor box leases over the typical would be some percentage at year five and 10, etc., etc. But, we’ve been trying with that lower start rate to at least get some more significant and sooner bumps.

Jeff Donnelly – Wells Fargo Securities, LLC.

If I can just ask maybe one last question then, Dan you mentioned about that opportunity over 2012, how do you think that manifests itself in investment opportunities because retailers it’s not that they just want space, they want space that they can access their customers. So, does that paint a picture where there’s going to be much greater compression in cap rates or high demand for in fill properties or do you think there’s an opportunity to go by the outlining more vacant centers or so called busted developments?

Paul W. Freddo

Let me start with something that I alluded to in my script and then I’ll let David and Dan answer the cap rate compression story. But, one of the things that we mentioned was this idea of redevelopment of reexisting assets. Dan and I both hit on the fact that there is clearly diminishing supply, no new supply being created and we see demand at least steady with today’s rate and possibly increasing.

That’s really the background to our decision to look hard at redevelopment of existing assets which I think fits in to that in fill question you’re asking Jeff. There are lots of great locations that retailers have wanted that are just not properly configured today or tenanted. We’re going to look very hard at that opportunity. I’m not sure what that means right now which is why we’ve hired someone to come in and help us understand it. But, we’re going to spend a lot of time trying to figure out how big an opportunity that is. We think it’s a great one and we’re going to fully capitalize it.

We believe that’s a great way for retailers to meet that need, redevelopment of existing space comes without a lot of the risk of new ground up development obviously and we’re excited about that opportunity and think it’s a way we will meet some of the retailers demand.

David J. Oakes

I think the cap rate question on certain sub sectors within the property type is still particularly hard to answer as it is so asset by asset versus other property types, suburban versus downtown or CBD office question can always be talked about. We see just as many in fill assets trading at much higher than average cap rates simply because they’ve got rents in place that are so far above market and don’t allow for retailer profitability as you do suburban assets where sometimes you have more reasonable rents in place.

It’s hard to say there’s a specific rule there. It’s really just going to be driven by where the tenant can do the best sales and what the right configuration is for the consumer to make it convenient for our sort of value oriented tenants.

Operator

Your next question comes from [Quincent Bellei] – Citi.

[Quincent Bellei] – Citi

Just going back to the guidance, the revised guidance, can you just clarify how much additional dilution there is the revised guidance number in terms of any further debt issuance and the asset sales and whether there are any land sales? The magnitude of how many cents of dilution you have in that guidance number?

David J. Oakes

As far as our guidance for the rest of the year, we talked about the amount of asset sales we’ve completed thus far and so we expect to get to that full $150 million number for the year as a whole, potentially could exceed that based on activity we have today which is why we provide a range rather than a single point estimate. In terms of additional capital markets activity, we don’t want to be overly specific but we’re clear in the fact that extending the duration of our debt is extremely important and so while our line of credit doesn’t actually mature until June ’11 I think we’d very much plan to have something done this year and incorporate a little extra cost from that happening sooner rather than riding the 1% wave for the cost of the current revolver longer.

Secondly, to give ourselves room to raise additional long term debt over the course of this year which we absolutely believe is the right strategic decision to lower the risk profile of this company. So we have incorporated additional progress on delivering and duration extension through the remaining eight months of this year.

[Quincent Bellei] – Citi

About how many cents of dilution is in the revised guidance number?

David J. Oakes

I mean for additional activity there’s a few additional cents in there. The reality is it was a range previously that for ease we’ll all talk about the midpoint and so you can say that the total difference is that $0.07 to $0.08 from prior guidance to new guidance. The reality is there’s still some assumptions that go in to this. We could end up at the high end of that range but not necessarily be completely pleased with our activity if we’d have foregone what we believe are the right capital markets activity or we could stress it and be at the low end of that range for 2010 but not have made the continued balance sheet progress that we want.

We’re looking at that $0.05 range as something that we feel comfortable, is achievable today over the next eight months even with several additional transactions that will improve the balance sheet whether it’s through deleveraging or whether it’s through duration extension.

[Quincent Bellei] – Citi

We’re seeing some preferred issues by some other retail REITS, is that something that you’ve been looking in to?

David J. Oakes

Certainly something we’d consider. I think we’ve all been clearly reminded that leverage and fixed charges were not the only issues that companies had but very importantly a balance and as extended as possible maturity schedule is extremely important and so looking at tight spreads between where perpetual preferred is available versus long term debt, there’s some interest there. On the other hand we do have a good amount of preferred in our capital structure today so it’s certainly something that we look at, believe we have access to and have had conversations regarding but no plans today on any specific additional capital raising.

Michael Bilerman – Citi

David, I guess do you think about some of the capital markets activities that you did and clearly part of it was just bringing dilution forward. I think some of the reduction in guidance clearly reflected that you did things earlier rather than later but that dilution was eventually going to come. It sounds like in some of the things that you’re talking about now is you’re still trying to figure out how aggressive you’re going to be in pulling future dilution forward in to 2010 which is why you’re sort of saying guidance for this year could still change potentially or you may come in at the high end.

I guess when you step back from it, how much more I guess capital raising negative spread if you think about it over a two to three year time frame should we be thinking about? I’m just trying to get a sense of when you look at your capital stack and the cost of capital, how do you think about where you are today in terms of your in place debt and what sort of rate you would target at on a refinance and how much dilution is there still on the come whether it be in 2010 guidance already or whether it’s an ’11 or ’12 event?

David J. Oakes

I think a big part of what you’re talking about is the right way to think about it Michael in terms of if we were out there with 2011 guidance today and I know you guys certainly model 2011 already, the activity that we’ve completed year-to-date and the activity that we expect to complete through yearend while it has had an impact on 2010 FFO, we really don’t believe it’s had an impact on 2011 FFO.

It’s exactly as you say, it’s a timing issue of improving this balance sheet a little sooner and so it’s a lower 2010 FFO stream from a better balance sheet and it’s a balance sheet that we had always targeted and talked about but not necessarily one that we would count on we could put in place as quickly as we did. If you look at the maturity profile for the next few years, there’s still some very attractively priced debt in place. There’s still $350 million on the revolver that costs barely over 1% today. There’s still $800 million on a term loan that costs marginally above 1% today.

Some of that floating rate has been swapped and we give the details on those swaps where LIBOR is locked at 4% or even higher so you’ve probably already got that baked in. But, there are certainly some attractively priced debt that exists on balance sheet today that we believe will have to be rolled in to a somewhat more expensive costs almost under any scenario that you look at over the next few years. That number is dramatically smaller than what needed to be done six to 12 months ago but there’s still some attractively priced debt in place.

Mitigating that on the other side we’ve got a heck of a lot more non-income producing assets than we’ve had at any other point in time and that’s directly related to some of the stuff that Paul was talking about the vacancy in the core prime portfolio that we expect to be cash flowing over the next couple of years but it also relates to nearly $1 billion in non-income producing land and construction in progress on the balance sheet that will be coming online. So we don’t think it’s completely fair to just talk about the dilutive side of the changes that are being made because there are some benefits, especially as we’ve stopped capitalizing interest and real estate taxes on a bigger and bigger portion of our development pipeline and we’re taking those costs for an asset that benefits us in no way from the typical ratios we’re talking about and so could benefit us in a big way if we would explore more aggressively which we certainly are today, the sale of some of those assets.

I think you continue to see an interest expense line item that moves up but we would hope that you see an EBITDA line item that can outpace that over the coming years. One other item I’d mention is that while we don’t view FFO per share as the exclusive focus especially for the current year of what this company is trying to deliver, we do take our guidance very seriously and we do think this is the appropriate range to think about for the rest of the year even incorporating additional balance sheet improvement activities.

Operator

Your next question comes from Mike Mueller – JP Morgan Securities, Inc.

Mike Mueller – JP Morgan Securities, Inc.

Just two quick questions, one is any color at this point on line of credit pricing and secondly, any thoughts on the dividend as you move through 2010 and in to 2011? Let me actually throw a addendum on there too, the yearend target for 8.5 times for debt to EBITDA, any thoughts on the year end 2011 target?

David J. Oakes

First on the line of credit, actively involved in the dialog today. We still have 16 months until the final maturity so we’ve got a good amount of time, 15 months I guess. But, we believe we will have something done well before that. As a few other quality investment grade REITs have put lines in place recently I think there’s more that we can point to as third party evidence of where that pricing is coming out more so than directly talking about anything coming out of our conversation but our spreads relative to LIBOR somewhere in the 300 basis point range seem to be where other transactions are happening today for unsecured lines of credit.

We hope as we continue to make progress that there’s an opportunity to improve that even further but I think that’s pretty representative of market turns from what other quality competitors have reported thus far. On the dividend it’s obviously a decision of our board of directors. From a taxable income perspective, we expect to maintain low enough taxable income this year to give ourselves an extreme level of flexibility with how that dividend can turn out and so it really just becomes a constant and quarterly evaluation in terms of management’s recommendation and then the board’s approval for a dividend policy there.

So for now we’ve stuck with the $0.02 a quarter. It provides considerable retained cash flow. We believe that we have very good uses for that retained cash flow today and it’s an important part of our process to continue to lower leverage. Debt to EBITDA, we haven’t outlined a specific target for yearend 2011. We’ve talked about on this pro rata debt to EBITDA which we believe is the more conservative calculation. We’ve talked about the mid eights target for the end of 2010. We’ve also talked about a long term target of seven times so we haven’t exactly filled in that blank for where you end up for 2011 but I think we know where we’re headed for this year and we know where we’re headed for the longer term but obviously want to continue to stay nimble as this market evolves.

Operator

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

Jim Sullivan – Green Street Advisors

A question regarding receivables and the bad debt expense for the quarter. In the prepared comments there was favorable commentary regarding collections and where the receivables are at the end of the quarter and yet the bad debt expense for the quarter was actually higher than the year earlier number. So first question is, that seems counterintuitive, maybe you can address that? Then secondly your full year FFO guidance, I wonder what kind of full year bad debt expense number you’re assuming? I’m assuming in your same store NOI, kind of a related point, I’m assuming in the same store NOI definition that that hasn’t changed and it still excludes the bad debt expense number?

David J. Oakes

That’s correct on your final point in terms of bad debt being out of same store NOI not because we’re trying to hide anything but just because in terms of providing a number that tries to be as comparable as possible between the periods given all the timing issues with bad debt where we’re still suffering today from certain of the 2008 bankruptcies, we do exclude that from the same store NOI calculation but try to show you all the details possible in that.

Traditionally, we would expect to see receivables actually go up in the first quarter now that we are getting our TAM bills out to tenants and our true ups out to tenants earlier in the year than was historically the case and so you’re billing more with less time for the tenants to respond to that so we would naturally expect receivables to go up on probably peak in the first quarter so we were pleased to see that that balance did not go up as much as we would have thought even though we got the bills out in the first quarter.

In fact, we saw those receivables go down. What Dan was exactly referring to was between February and March so not exactly quarter periods that you get to see but an important improvement in terms of us managing this on a real time basis. So I think some encouraging signs on the accounts receivable side both based on what’s happening in the world overall and the improvement there in some cases. Secondly, based on the extreme efforts of our accounting and collection department in getting everything that we can.

Bad debt expense for the quarter was in line with what we budgeted for the year depending on what exactly you’re using as your denominator. The ways we look at it where we also include the joint venture portfolio internally, you’re going to be between 1.5 and 1.75% of the total revenue figures so that’s where we were for the quarter and that’s where we expect to be for the year.

There are some longer term items that factor in to that related to some of the bigger bankruptcies where we’re just getting to the point in those long term liquidations where we find out the answer to what some of those claims are and then there’s some of it that’s just directly related to the continued struggles that we still see with some of the small shop tenants within the portfolio that also impact that number.

Jim Sullivan – Green Street Advisors

So in the FFO guidance, the 1.5 to 1.75 is kind of the number we should be using?

David J. Oakes

That’s correct.

Operator

Your next question comes from Carol Kemple – Hilliard Lyons.

Carol Kemple – Hilliard Lyons

What was your spread in the quarter between occupied space and leased space?

David J. Oakes

Between occupied and leased, about 280 basis points. We had a great number of deals done that obviously haven’t opened or commence rent paying but that’s a positive obviously.

Carol Kemple – Hilliard Lyons

Who of your small shop tenants is looking for more space in this environment?

Paul W. Freddo

It’s a good mix. Our small shop space, not a lot of nationals other than some of our lifestyle centers so a lot of moms and pops and local retailers. But, what we are seeing is a significant pick up again in the franchise business which dropped off dramatically in the last year and a half. So the most positive sign in the small shop space is clearly coming through the franchises whether it’s the food guys such as Subway or UPS is a big one, so we’re seeing much more pick up in the franchise business.

Operator

Your next question comes from Rich Moore – RBC Capital Markets.

Rich Moore – RBC Capital Markets

Paul, the bankruptcy environment, how would you characterize that today?

Paul W. Freddo

Certainly much better than we viewed it a year ago Rich, all of us. I talked before about maintaining a locks list and keeping tabs on those tenants, especially with the high exposure to the company. That list is greatly reduced. It’s just a much better environment. We saw the office category come through the fourth quarter with the capital events which was great news. Borders even recently had a capital event and it’s still a brick and mortar video store, books would still be the most challenge but it’s just a much improved environment obviously.

Rich Moore – RBC Capital Markets

It seems to me that it’s unusually good, is that accurate you think?

Paul W. Freddo

Yes, we were pleasantly surprised. I don’t want to have you believe that we thought it was going to be as good as it turned out to be but yes, it is surprisingly good and that’s a good sign for all of us obviously.

Rich Moore – RBC Capital Markets

Then the $1.7 million of litigation expense could you guys give us an update on what’s going on there?

Daniel B. Hurwitz

We provide disclosure in the public filings about the couple larger cases. It’s obviously sensitive matters, whenever there’s litigation so I apologize that we can’t say too much. But, we continue to be involved in a few cases, most of which have been reflected in the press and we continue to have to spend some amount of capital on defending those and at the end of the day some verdict comes across. There was one big one late in 2008 that was against us, there have been others historically that have been in our favor but we try to separate off the litigation costs both on an ongoing basis until we know what that final results is. But it is an absolute expense that continues to show up to operate this business especially in tougher economic times.

Rich Moore – RBC Capital Markets

Does that sort of continue Dave at that kind of run rate do you figure for the foreseeable future?

David J. Oakes

For the near term I think you’re going to continue to see litigation expenses at least somewhat around that level. We try to be smart about it in terms of being as careful as possible with our spending but the reality is we have to defend ourselves in these cases.

Rich Moore – RBC Capital Markets

Last thing guys, if you think of your prime portfolio as about 80% of your NOI, you probably have $1 billion or so of assets that are undesirable I guess. Does the $150 million seem a bit tepid for dispositions? I mean, is this a seven or eight year program that you’re thinking of with dispositions?

David J. Oakes

Well in terms of the volume I think we’re trying to outline what we can get done and what we can’t get done on terms we think are appropriate. We prioritize them on that sales pool what’s more important to get done sooner versus later. We do want to continue to lower the size of that non-prime pool but that happens a couple of ways. The most obvious way and potentially easiest way although our disposition team might not agree with that is the sale of those assets.

It’s a tough process, it’s a long process but we’ve been able to make progress there. But also as Paul talked about earlier, the redevelopment efforts the opportunities to really rethink about some of these projects in some cases could also help move non-prime assets to prime and so it doesn’t need to be a pure liquidation of that entire pool but increasing the focus on prime is crucial and the asset sales part is a big part of it.

We moved from an environment last year where the large transactions were absolutely not possible, today we continue to evaluate that whether selling assets on a one off basis is either the only or even the best way to transact or is even the best way to transact or if there is an opportunity to do something larger and accelerate that progress.

Daniel B. Hurwitz

You’re point Rich is a good one because at the time we put together our model there really was no opportunity for large scale portfolio sales. That market has changed. If it continues to provide an opportunity for us we would want to take advantage of it and that number could increase if the market gives us the opportunity to do so. But, at the time we were looking at the $150 million we were doing $5 to $10 million deals and doing 50 of those a year and no one was looking at a transaction anywhere near the size of $100 million, let alone a $200 million transaction. As those opportunities present themselves and we have seen a few potential opportunities, we are going to pursue those and it if it’s in the best interest for us to execute we will.

Rich Moore – RBC Capital Markets

Just extending that for a second, if there is truly $1 billion of sort of non-prime assets and maybe more if you could the joint ventures, is any of that or I guess the better question is how much of that Dave would you consider redevelopment? I mean is 20% to 30% of that redevelopable?

David J. Oakes

That’s probably too high on that percentage Rich but as I mentioned earlier we are just really getting in to this. Time will tell as we continue to have these discussions with the retailers, see where their needs are and what their demands are and we’ll be able to give you a better number going forward. But right now that sounds high to say that much of that non-prime portfolio would be appropriate for the redevelopment pool.

Daniel B. Hurwitz

Ultimately, that redevelopment portfolio is going to be defined by the tenant interest. One of the reasons why we’ve become so focused on it is because tenants have come back to us and are talking about markets where we are absolutely certain that nothing new is going to be built. So if you have an existing asset with expansion possibilities on an entitled site with improvements already in place, it’s going to create a unique opportunity for us to expand a center and it’s also going to create a unique opportunity for a tenant to enter a market that really the barriers to entry are extremely high. We’re going to have to follow the tenant market with that because they ultimately will tell us where they want to be and that will define what the redevelopment opportunity truly is.

Operator

Your next question comes from David Harris – Broadpoint Gleacher.

David Harris – Broadpoint Gleacher

Are there any rent relief agreements still in place or are they largely burnt off?

Paul W. Freddo

No, we’re seeing very little in terms of requests today and I don’t believe we’ve even granted one over the course of 2010 first quarter. It’s a problem that has gone away for the moment.

Daniel B. Hurwitz

[Inaudible] last summer so some of that will still be in place.

David Harris – Broadpoint Gleacher

They were typically 12 months?

Daniel B. Hurwitz

Yes, we limited them to a year or less.

David Harris – Broadpoint Gleacher

Dan, if I remember a conversation you and I had about a couple of years ago when you had just come back from a tour of Asia and Europe and you were enthused about the exciting experiences of shopping in many of those [inaudible] compared to what we have here in the United States, is there really any way to express that today? I mean I guess what that means is looking at smaller local tenants with perhaps less credit standing than taking the big guy selling the me too product that makes the shopping experience a very homogenous experience in the US compared to those other locals?

David J. Oakes

It’s a great question and I wish I had good news for you in that regard but I really don’t. If you really look at US retail today it still is not nearly as exciting as our foreign competitors. One of the things that came out in the research report that I mentioned was the fact that we are really operating the local entrepreneurial retailer that dominates European and even in Brazil, dominates the scene there, we’re really operating those folks out of the business either through our hours of operation or our expense structures or the unavailability of capital for them to invest in inventory or even new prototypes.

So we’re very fortunate, we had a situation here this past week where we had a new tenant concept come in to meet with us and Paul and I were commenting on that is the first time that has happened in about three years. Usually they all stop here because of the size of the portfolio. That just tells you that we really don’t have an awful lot of creativity here. There is much more creativity abroad and I don’t see that changing any time soon and I really don’t see the availability of capital going in to retail R&D today.

If you really talk to the existing tenants who have the best availability or capital, particularly the nationals they really don’t feel comfortable right now investing in new prototypes. They just feel the risk profile is not appropriate for the market.

David Harris – Broadpoint Gleacher

But don’t you feel there’s a risk long term that rival shopping centers might be prepared to take a risk on less creditworthy established tenants and you might lose market share overtime? I realize that’s not the priority now, you’ve got to fill the space available and get the best credit but longer term it’s a sort of health of the industry issue isn’t it?

David J. Oakes

I think that’s true and it’s certainly something to monitor but keep in mind the real estate expenses for a retailer as a percentage of the total expenses is really relatively nominal. We could not wake up one day and decide that we wanted to be an incubator for great retail space and take market share from others because that retailer would still have to find someone to finance their inventory, their construction and run their operation for them all of which today is very, very difficult.

I think it’s something to watch, I think it’s something that as an industry it’s concerning, the lack of new and exciting fresh ideas to keep the consumer excited about shopping. I think that’s part of what all existing retailers and part of what landlords should be focused on. But, at the same time I think everyone is sort of in the same boat and the homogenous nature of retail in the US seems to be here to stay for a while.

Operator

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

Jeff Donnelly – Wells Fargo Securities, LLC.

Just a follow up Dan and certainly the rest of the team too, we’ve had a few people out there talk about the opportunity to be a little bit more speculative and invest in what I think I referred to as busted developments, projects that might be entitled, partially leased or partially built. Are retailers bringing you those deals? Do you think that is a deep market? Is that worth pursuing or do you think it’s going to be a really slim opportunity?

David J. Oakes

Right now I would say it’s a very slim opportunity. The short answer is yes, retailers are bringing us opportunities but they’re not bringing you anything that you would want to invest in. The stuff that we’re seeing is extremely distressed, distressed to the point that even if we were to leverage our portfolio we really couldn’t resuscitate it. It’s really amazing some of the stuff that’s out there and retailers do come to us on a fairly regular basis and say, “Hey, would you guys take a look at this?” And we do look at things but we’re pretty honest because we certainly don’t want to disappoint the retailers if we say we’re going to get involved, we certainly don’t want to get involved in something and fail.

Right now what we’re seeing is the distress level is so high on what’s available out there it’s really not anything you would want to leverage your platform or certainly invest in, either your time or your capital. The rest of the potential distressed assets that you think you might be able to help just aren’t coming back to the market yet. Lending institutions are working with landlords, retailers are working with landlords, they’re trying to get some of these assets that are very close to getting over the hump, over the hump.

Those assets are not coming to us at this point in time. But, the things that we’re looking at, some of it brand new, beautiful, $130 to $140 a foot construction that’s going to need a bulldozer to fix and that’s pretty tough to undertake.

Jeff Donnelly – Wells Fargo Securities, LLC.

I was going to ask what’s the nature of the distress? Is it the financial terms that you’ve got to buy in to or is it just the fact that some of these projects are just more in markets or locations that just basically won’t work?

David J. Oakes

It’s interesting because some of them are in good markets and good locations but the design of the center, the layout, the fact that a lot of people put in second or in some cases third story retail in order to help the pro forma and we can note today no matter how good the market is in some of these it will never get leased. It’s really not deal economics because the tenants will work with you on deal economics number one, the lenders will certainly work with you. Some of the private developers will clearly just do anything to get themselves off personal guarantees at this point in time but you really can’t work with a physical infrastructure that’s in place. You really have to start from scratch.

If that’s going to be the case it’s going to take an enormous amount of additional capital and no one is really in a position where they want to put more capital in. They just want someone to fix it, they don’t want someone to rebuild it. Some of these are very good locations but they will not lease, you cannot get tenants to take some of the space that was created and it’s unfortunate but it’s prevalent.

Operator

If there are no further questions, I would like to thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: Developers Diversified Realty Corporation Q1 2010 Earnings Call Transcript
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