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Developers Diversified Realty (NYSE:DDR)

Q3 2007 Earnings Call

October 26, 200711:00 am ET

Executives

Michelle M. Dawson - IR

Scott A. Wolstein - CEO

William H. Schafer - CFO

Daniel B. Hurwitz – President, COO

David J. Oakes – EVP, CIO

Analysts

Ambika Goel - Citi

Jay Habermann - Goldman Sachs

Christeen Kim - Deutsche Bank

Michael Mueller - JP Morgan

Matt Ostrower - Morgan Stanley

Jeff Miller - JMG Capital

Rich Moore - RBC Capital Markets

Jim Sullivan - Green StreetAdvisors

Operator

Welcome to the Developers Diversified Realty earnings conferencecall. (Operator Instructions) I would now like to turn the call over to ourhost, Michelle Dawson. Please proceed, ma’am.

Michelle M. Dawson

Thank you, Lacey. Good morning, and thanks to everyone forjoining us. On today’s call, you’ll hear from Scott Wolstein, Dan Hurwitz, BillSchafer and David Oakes.

Before we begin, I’d like to alert you that certain of ourstatements today may be forward-looking. Although we believe that suchstatements are based upon reasonable assumptions, you should understand thosestatements are subject to risks and uncertainties and actual results may differmaterially from the forward-looking statements.

Additional information about such factors and uncertaintiesthat could cause actual results to differ may be found in our press releaseissued yesterday and filed with the SEC on Form 8-K, and in our Form 10-K forthe year ended December 31, 2006 and filed with the SEC.

I’d also like to request that callers observe a two questionlimit during the Q&A portion of our call in order to give everyone a chanceto participate. If you have additional questions, please rejoin the queue.

At this time, I’ll turn the call over to Scott Wolstein.

Scott A. Wolstein

Thank you, Michelle, and good morning, everybody. I ampleased to report this quarter’s funds from operations of $0.80 a share. Thisfigure includes approximately $0.03 per share, or $4.2 million of aggregategains. This transactional income compares to approximately $0.15 per share or$16.8 million of gains in the same quarter of 2006.

After adjusting for these items, our core FFO per shareincreased by more than 12% from the prior year. Similarly, on a nine-monthbasis after adjusting for these items, core FFO per share increased byapproximately 15% as compared to the prior year, reflecting the quality of ourportfolio and the continued strong demand for well-positioned retail space.

As you will hear throughout the call, our accomplishmentsover the last three months reflect our continued focus on creating value forshareholders as follows:

(1) By improving the quality of our portfolio through activeportfolio management.

(2)By increasing the size and scope of our developmentpipeline.

(3)By formalizing and growing our funds management business.

(4) By broadening our investment strategy to include selectemerging markets with high growth profiles.

(5) Strengthening our balance sheet to levels at leastcomparable to where we were prior to the Inland acquisition.

These initiatives clearly leverage our core competencies andnational platform in an efficient and profitable manner that will enable us togrow long-term earnings, dividends and asset value.

At this point, I’d like to turn the over to Bill Schafer forhis comments on the balance sheet.

William H. Schafer

Thank you, Scott. To add to Scott’s remarks, I’d like tohighlight a few important items from the quarter and their impact on ourfinancial position. As we indicated on our second quarter call, we soldapproximately $600 million of assets in late Q2 and early Q3, including threeredevelopment assets acquired from Inland that were sold to MDT forapproximately $50 million.

The remaining assets were non-core, smaller, older assets inmore remote locations with limited growth potential and higher capital andmanagement requirements; and therefore, were sold to a third party. Thisportfolio included assets acquired from Inland as well as our existingportfolio.

While the sale of these assets was slightly dilutive tocurrent FFO, the result had a significant positive impact on the quality of ourasset base, the effectiveness of our operations, and the strength of ourbalance sheet as sales proceeds were used to repay debt.

We continue to operate with a conservative balance sheet andhave already returned our debt and coverage ratios to levels that existed priorto the Inland acquisition. Over the last few years, the company has grownsignificantly, providing us with considerable and stable critical mass andstrengthening our position as a leader in our industry. This growth has beenachieved without any deterioration in our balance sheet. In fact, the balancesheet is much stronger than it was a few years ago simply due to thesignificant increase in total equity.

Our growth has been, and will continue to be, financedthrough various sources of capital. We’ve demonstrated this broad access tocapital through all our previous acquisitions over the last few years includingJDN, Benderson, CPG and now Inland. As our development pipeline continues togrow, having access to both public and private debt and equity capital will continueto provide the funding necessary while enabling us to maintain a solid balancesheet. We have made great strives to diversify our sources of funding and limitour reliance on any one source, especially the most costly source, commonequity.

I would like to comment more specifically on our capitalposition given the recent volatility in the debt markets. During the last fewmonths, spreads have increased to levels higher than I can remember. In fact,there was a period of time in which certain CMBS financings may not have beenavailable at any price.

This uncertainty reemphasizes the need to access diversesources of capital, maintain liquidity and stage debt maturities carefully.Most significantly, it underscores the importance of a conservative balancesheet that provides flexibility and access in capital and enhances our abilityto manage assets with limited restrictions. This position consequently allowsus to be opportunistic in our investment strategy and in accessing the mostefficient and lowest cost of financing available.

With regard to debt maturities, I believe we are in a strongposition that will help insulate us from continued volatility. On our balancesheet, we’ve addressed all remaining 2007 maturities, which aggregate less than$10 million. Our 2008 aggregate maturities are less than $400 million,approximately 75% of which relates to mortgage debt.

We’ve also made sure our liquidity continues to be strong.At September 30, 2007 wehad over $600 million available on revolving credit facilities. In addition, weexpect to increase our secured term loan facility through our accordion featureby over $100 million within the next few months to incorporate certain Inlandassets that are already subject to low loan-to-value first mortgage loans. Thiscapacity, combined with our retained cash flow and additional asset sales, willprovide us with flexibility in funding our development pipeline and otherinvestment opportunities.

With regard to joint venture debt maturities, I also believewe are in a good position. The remaining $85 million in debt that matures in2007 is already being extended. I’d also like to emphasize that over half ofthe $600 million in 2008 debt maturities are not scheduled to mature untilDecember of 2008 and more than half of the remaining 2008 maturities haveextension options available.

I believe we have effectively mitigated our refinancingrisks and maximized our flexibility. Our banking relationships, which are broadand competitive, will reduce the impact of volatility in capital markets, andwe have taken proactive steps to maintain and improve the strength of ourbalance sheet in recent quarters. We will continue to do this in the future.

Now I’d like to turn the call over to Dan.

Daniel B. Hurwitz

Thank you, Bill and good morning. The third quarter wasanother successful quarter for our leasing and development teams. Strongoccupancy and leased rates, continued rental growth with modest capitalexpenditure, and record volume of leasing have all been a function of ourcontinued focus on improving the quality of our portfolio through active assetmanagement and a consistent demand from tenants, which we continue to seeacross our portfolio.

Of particular note this quarter, our leasing team had arecord quarter in terms of number of deals signed, volume of space leased, andrental spreads on new leases. Specifically, there were 179 new leases signedrepresenting over 940,000 square feet of GLA with an average spread on a cashbasis of over 41%.

As mentioned, the 41% spread on new leases is the highestlevel we’ve achieved within our portfolio. This impressive figure was driven bymany deals at many different locations across the country, but a few highlightsinclude: in Amherst, New York we had added a 15,000 square foot EasternMountain Sports where the former tenant was paying a $1.55 a foot and the newrent was $21 a foot; in Monaca, Pennsylvania we added Office Depot and CircuitCity to re-tenant a former Shop ‘n Save Supermarket where the old rent was$3.80, with the new rent being $12.95; and in Chester, Virginia, we had aformer Rite Aid that was paying us $3.23 on 15,500 square feet thatwas replaced with a Petco with a new rent of $15.

We also executed 299 renewal leases comprising 1.6 millionsquare feet of GLA at an average spread of 7.4%. In total, our leasing teamsexecuted 478 leases aggregating 2.5 million square feet of GLA at an averagespread of 13.8%. The 478 leases signed and the 2.5 million square feet of GLAare record highs for our leasing department.

Our leasing team has consistently performed at a very highlevel, and this quarter is obviously no exception. The record leasing activitythis quarter is a testament to the hard work of our leasing professionals inthe various support departments with whom they work within our company. I’m justifiably proud of what they have allachieved this quarter.

We’ve all seen the headlines recently lamenting the plightof sub-prime borrowers and the general troubles in the housing market, and howthis has the potential to impact overall consumer spending and the retailindustry in the midst of the current economic turbulence. The reality is thatour portfolio is well insulated from this uncertainty and has consistentlyperformed well throughout many economic cycles.

Broadly speaking, national retail sales have grown veryconsistently since World War II including during several recessions and housingslowdowns, a fact that we believe is missed in most press coverage of thecurrent environment. More specifically, over the last seven years, we’ve hadover 20 quarters of overall leasing spreads in excess of 11%. Similarly, we’vehad very little volatility in our long-term portfolio lease rate, which hasremained at approximately 96%.

Moreover, we’ve been able to consistently achieve these resultswithout significant capital investment in tenant improvements or leasingcommissions. While tenants may come and go over time, shopping centers that arewell located and actively managed will continue to perform well.

Clearly, we are very conscious of and sensitive to the risksposed by the current economy. But we feel comfortable with where our portfoliois positioned and the general diversity and credit quality of our tenant base.

On the development front, I’m pleased to report that wecontinue to find opportunities in under-served regions. The shakeup in debt marketshas clearly impacted lower-tiered developers to the benefit of larger ones andas a result, we are rapidly seeing more opportunities and less competition.

Due to these current conditions, we have increased ourinvestment in development where spreads between development yields andacquisition pricing still reflect prime opportunities to create value. Ourdevelopment pipeline has grown considerably from $3.5 billion in the thirdquarter of ‘06 to over $4 billion today. Total construction in process hasincreased from $450 million in the third quarter of ‘06 to over $600 million inthis quarter. As a result of this ramp up in our development pipeline, we areanticipating record deliveries in 2009 and 2010.

In addition to our robust domestic pipeline, we have alsoincreased our presence in faster growing economies through investments indevelopment projects in Brazil,Canada and Russia.We have pursued investments in these markets in a prudent and strategic manner,allocating a nominal amount of capital to these markets relative to our totaldomestic asset base.

Of particular note this quarter, we entered Canadathrough a 50% joint venture with Rice Construction, a strong Toronto-based developer.The joint venture’s first development project will be a 74-acre mixed-useproject, comprised of approximately 700,000 square feet oflifestyle, retail, office and residential uses in suburban Toronto.The estimated cost of the project is expected to be approximately $150 millionCanadian, with construction expected to begin in spring of 2009 and retailtenants opening as early as fall of 2011.

We are pleased to be able to enter the market in this mannerbecause the opportunity presents a very attractive development project in amarket with strong demographics and considerable supply constraints due torecent greenbelt regulations that permanently restrict new development in areassurrounding the Toronto MSA.

This is an exciting opportunity to control one of thelimited remaining large parcels of developable land in this rapidly growing andnearby market. We look forward to finding additional attractive investmentopportunities to increase our presence in Canada.There was a presentation on our website that illustrates the many reasons whywe believe this is an attractive investment.

In addition to the myriad of leasing and developmentinitiatives that were ongoing throughout the quarter, we also completed a verysuccessful company-wide portfolio review. At this two-week annual event, morethan 100 departmental representatives, alongside Scott, David, Bill, and myselfevaluated each asset’s strategic position within our portfolio, identifyingopportunities and challenges based on the assets’ performance and competitivemarket positions.

This comprehensive asset management exercise resulted inover 300 action items to improve portfolio performance, pursue opportunities tocreate value, and generate better shopping venues for our tenants and consumers.Importantly, the portfolio review identified additional assets to consider fordisposition as well, continuing our capital recycling initiative.

This quarter was a very active and successful quarter forour company on many fronts. Our leasing department produced record results. Ourdevelopment pipeline expanded. Our international footprint increased throughour joint venture in Canadaand finally, we completed a very important asset management review of ourportfolio, which will help us add additional value going forward.

We look forward to building on these successes andmaintaining the positive momentum that we clearly enjoy in the current market. Withthat, I will turn the call over to David.

David J. Oakes

During the quarter, we continued to sharpen our capitalallocation strategy, further implementing the relative value framework,executing key transactions, and broadening the scope of opportunities that weare evaluating.

For example, we completed the sale of three value-addedredevelopment assets to Macquarie DDR Trust. Our current portfolio has aconsiderable number of potential redevelopments on which we expect to executeand we were happy to find a partner whose refined investment strategy lined upideally to participate with us. This preserves our capital, while alsogenerating attractive returns for us and our partner. Further, these propertysales and the accompanying list of assets to which we gave MDT a right of firstoffer underscore our long-term commitment to this relationship.

We also continue to formalize our funds management business,which includes our long-term relationship with MDT as well as Teachers TIAA,the investors in our first commingled fund, as well as many others. Our jointventure program has historically generated significant returns for both us andour partners, and we recognize that continuing to operate with the sameperformance-driven philosophy is crucial to our growth in this arena.

While there may be some softening in the demand and pricingfor lower quality assets, we continue to see strong investment demand from ourinstitutional clients for well-positioned properties with a visible growthprofile. We also continue to see very intense demand for our platform andexpect to see our assets under management increase in the coming years, and weare staffing the department appropriately to ensure its success.

Also during the quarter, we repurchased more than $100million of our stock at prices that we believe represented a material discountto the value of our assets.

Now, I will turn the call back to Scott for his concludingremarks.

Scott A. Wolstein

Thanks, David. The strategies and achievements we’vehighlighted during the last few minutes are initiatives you’ve been hearing ustalk about for several quarters: improving the overall quality of our portfoliothrough disposition, development and acquisition; returning the balance sheetto levels comparable to or better than where we were prior to our Inlandacquisition; increasing our investment in development where our capital canearn the highest return; selectively investing a reasonable amount of capitalin international markets that offer superior growth and outstanding valuecreation opportunities; and investing in our stock at prices many cents belowthe value of our assets.

As we look to the coming year, we’re refining our strategyto focus on further upgrading our portfolio through active portfoliomanagement, including redevelopments and dispositions, which will have along-term positive impact on our internal growth and cash flow; improving thequality of our FFO; growing our funds management business through execution forexisting partners, and by adding new clients; using the current dislocation inthe credit market to our advantage by finding broken developments orredevelopments or other unique investment opportunities created by the dramaticchange in liquidity and the repricing of the risk; deepening our domesticdevelopment pipeline and broadening our international investments.

Based on this activity, we expect FFO per share for 2008 tobe in the range of $3.95 to $4.05. The key assumptions that drive this guidanceare as follows: same-store NOI growth of 2% to 2.5%, which is in line with 2007and driven by consistent leasing spreads and stable occupancy; anticipateddisposition of additional non-core assets; and a consistent level oftransactional income.

In addition, 2008 development deliveries will be well belowthe 2007 level and well below our expectations for 2009 and beyond. There is noparticular driver for this other than the projected timing of completions. Infact, we expect 2009 to be by far the strongest level of development deliveriesin the company’s history by a rather wide margin.

We acknowledge that this FFO growth is slightly lower thanour historic norms, but we believe that the constitution of 2008 FFO will behigher quality and we would expect our FFO growth to accelerate dramatically in2009 and beyond. The strategies and assumptions I just mentioned reflect the constantand strategic evolution of our business model as we continually strive tocreate value and enhance returns for our shareholders and clients. We arelooking forward to putting these strategies to work at all levels throughoutour organization.

With that, I would like to open the phone lines for questions.

Question-and-AnswerSession

Operator

Your first question comes from Ambika Goel - Citi.

Ambika Goel - Citi

Can you comment on the level of transaction volume that’sembedded in 2008 guidance? Is it specific deals that you have already set upthat you expect to occur? Given that the level of transaction activity in 2007was quite high, I just wanted to see what got you comfortable with 2008 levels.

David J. Oakes

We expect, at this point, the transaction volume in 2008 tobe lower than the record volume in 2007. We’ve budgeted some expected assetsales, continuing to recycle capital and work on the assets that Dan mentionedspecifically that came out of the portfolio reviews that might be good candidatesfor sale and do not have acquisitions identified at this point. So our budgetcurrently is to be a net seller of real estate for 2008.

Ambika Goel - Citi

Specifically focusing on the gains, do you have deals inplace that make you comfortable with transactional profits to be in line withthe previous year?

David J. Oakes

We are comfortable with our guidance that transactionalgains would be consistent with or somewhat lower than the level of 2007 thatsupport the range that Scott provided.

Scott A. Wolstein

Ambika, most of that is merchant building gains based onactual development completions that already exist, which will probably beconveyed into joint ventures with financial partners, as we’ve done in pastyears. So yes, we’ve identified actual properties, the yields on thoseproperties are already in place. We pretty much know what the cap rates wouldbe on any sale or contribution to a joint venture.

Operator

Your next question comes from Jay Habermann - Goldman Sachs.

Jay Habermann - GoldmanSachs

Good morning, everyone. On the ‘08 guidance, calling for 5%,6% growth year over year which again looks reasonable, but a bit of adeceleration. Can you just comment to what degree being a net seller next year,what sort of dilution you’re expecting there? To what degree will you be a netseller in 2008?

David J. Oakes

Right now, for the budget we are expecting to be a netseller of several hundred million dollars of real estate in 2008.

Jay Habermann -Goldman Sachs

Can you just characterize the pipeline of acquisitions thatyou’re actually looking at today?

David J. Oakes

I would say despite the slowdown a few months ago, therecontinues to be a healthy amount of products on the market and we continue toevaluate a very large number of acquisition opportunities across the spectrumof retail that are available today.

Scott A. Wolstein

Jay, just to elaborate on that a little bit, I think whatyou’re seeing in the marketplace today is we are seeing an acceleration ofportfolio opportunities, largely from private developers who are facing aliquidity crunch. The conundrum is, of course, that our cost of capital is hightoday as well, and the core co-investors that we typically invest with arelittle bit nervous about going heavily into core at low cap rates because ofrisk in terms of potential inflation of cap rates. So, it’s going to be aninteresting year to see how all that plays out.

There are going to be a lot of assets in play. We’recertainly not going to be issuing equity to buy those assets. We would investin core, as we said in many prior conference calls, only in a joint venturewith private capital. Our ability to execute on those transactions will belargely dictated by whether private capital has an appetite to buy core assets inthis environment. Right now I think it’s a little unclear and that’s why wehaven’t included any of that in our guidance.

Jay Habermann -Goldman Sachs

Can you just talk about the decision to enter Canadaand obviously go with a joint venture with Rice and pursue mixed-use? Just talkabout the expected returns there?

David J. Oakes

I think the decision to enter Canadawas a recognition that while we see the greatest opportunity and the greatestneed around the world for new development in some of the emerging markets thatare meaningfully underserved for retail space, that there are also someopportunities closer to home. The reality is, Torontois closer to our headquarters here in Cleveland and three-quarters of the restof our portfolio. I think it was a natural extension in many ways.

The project overall is a mixed-use project. However, the netcost of roughly $150 million that we’ve outlined -- so the great majority ofthe overall budget -- relate to the retail section of about 700,000 square feet oflifestyle space. Demographics of this particular site are extremely attractive,and also the greater comfort that we feel, especially due to new supplyconstraints in the Toronto market. So,we feel like those sides of it line up very well in addition to having found apartner that we feel extremely good about.

I think we would continue to look for those sort ofopportunities in all the markets in which we operate, but particularly in andaround Toronto.

Jay Habermann -Goldman Sachs

Is this a one-off transaction or do you expect to pursueadditional projects with Rice?

David J. Oakes

This is a one-off transaction, but we’ve had a very positiveexperience with the Rice Group so far and would be very open to working withthem on additional projects. They have additional land bank in and around Toronto,and I think that’s a conversation that we are very willing to have.

Jay Habermann -Goldman Sachs

Dan, any pullback from retailers in terms of the developmentbusiness?

Daniel B. Hurwitz

We’re not seeing a real pullback from retailers from adesire to open new stores. What we are seeing is retailers are using thecurrent economic climate as an opportunity to renegotiate or at the very least,poor mouth a little bit the deals that we’re working on with them. Retailershave gotten a little tougher. I think they are trying to grab back some of thepricing power that we’ve enjoyed over the last four or five years. Sometimesthat works for them, sometimes it doesn’t.

One of the beauties of our business right now is thatthere’s still a lot of competition for space. So if you have a desirablelocation and you can generate competition and an auction for the space, you’restill able to get your price. So even though they’re getting tougher, the dealsare getting a little tougher, but there are other parts of the developmentbusiness that are getting a little less tough.

One of the things that we are seeing is a little lesscompetition for land. One of the things that has been driving costs up andmargins down a little bit in development is land costs. With some of thedislocation in the capital markets, we’re starting to see that lighten up alittle bit which should give us the opportunity to recapture some of themargin.

Operator

Our next question comes from the line of Christeen Kim -Deutsche Bank.

Christeen Kim -Deutsche Bank

Scott, you’d talked a little bit about how investors arefeeling a little bit more nervous about getting involved in these largerportfolio acquisitions. Is there any price differentiation between thedifferent asset classes; A quality product versus B?

Daniel B. Hurwitz

Yes. Imean, there’s always been a clear differentiation among institutional investorsbetween A and B quality assets. There’s never been a broad institutional bidfor B quality assets unless they had a value-added component to them wherethere was an opportunity to create A assets out of a B asset and have a greatopportunity for value creation.

I think today, the appetite among institutional investors isclearly more towards the value add than core, to protect themselves frompossible changes in pricing. I haven’t seen it necessarily translate intotransactions being priced at lower prices yet on A assets. I haven’t seen thatand I don’t know if we will. But there certainly is a less voluminous demandfrom the capital side to invest in blind pools to go out and acquire core assets,if you will, vis-à-vis value-added opportunities.

Christeen Kim -Deutsche Bank

Does that imply that you haven’t seen much movement in caprates then?

Daniel B. Hurwitz

We haven’t seen it yet. But what I am saying is thereclearly is some concern that might happen, and that has an impact on the depthof demand on the institutional private equity front.

David J. Oakes

I think also in terms of the institutional demand for realestate at this point, we’ve clearly gone through a great period of uncertainty.The reason that we have such great interest in working with us and our platformin general is because we are able to go out there and take some of the risk outof these opportunities, and that’s what a large portion of the core investoruniverse wants. I think in the uncertainty we’ve seen in the market in the pastfew months, it just causes this slowdown in activity as everyone somewhat waitsto see where it settles out.

I think another aspect is just a calendar issue, in terms ofthis time of year you either get to a point where institutions have put out thecapital they need to for the year, in which case they are focused on ‘08planning, or they haven’t and they’re fighting for deals to close in these lastcouple of months. As it stands today, given the incredible record volume oftransactions across all property types in the first half of 2007, I think manyinstitutions are simply done with the allocation that they needed to invest for2007. And are making their plans for the best ways to put out capital in 2008and very actively having those conversations with us and others about whatopportunities we are seeing to invest more capital.

Christeen Kim -Deutsche Bank

Just quickly on the ‘08 NOI growth guidance, given how muchportfolio re-positioning you have done this year, why isn’t that range a littlebit higher?

Scott A. Wolstein

You are talking about the same-store NOI growth?

Christeen Kim -Deutsche Bank

Yes.

Scott A. Wolstein

It really takes time for that to resonate. I mean, a lot ofour assets are new developments either that we built or that we acquired. Leasesdon’t roll every year. They roll every three to five years. I think you will beseeing that in the coming years. There’s no question about it. There’s also alittle bit of -- to be quite candid with you -- our budgets come from ourleasing people. They have to perform as they guide us to what will happen atthe portfolio level. We certainly hope that they will do better than what theyproject. They are not likely to give us forecasts that are major stretch fromwhat they think they can achieve. So oftentimes we do better than what we guideto at this point in time.

Daniel B. Hurwitz

I also think one of the things to consider along the leasingbudgeting that Scott mentioned is that we were more conservative for 2008primarily because we have an economy that people are concerned about. So, wethink it would’ve been imprudent for us to be overly aggressive in 2008. So wedid go through the portfolio and we did make some projections on some tenantsthat we may have had concerns with. If it proves out that the economy is betterthan people think and the world actually isn’t coming to an end, we hopefullywill be in a position to outperform.

Operator

Our next question comes from the line of Michael Mueller - JPMorgan.

Michael Mueller - JPMorgan

Dan, going back to the question about tenant demand in thedevelopment pipeline, when we look out at the ‘08, ‘09 pipeline, can you giveus a sense as to what’s under letter of intent? What’s pre-leased? If theeconomy softens further and -- I don’t want to say it’s going into recession,but gets a little bit weaker -- what should we think of as being at risk? Or isthe visibility high enough where you’re not necessarily worrying about that?

Daniel B. Hurwitz

Well, the visibility is pretty high so we are not overlyconcerned about it. If we are buying land out there, Michael, which is theultimate in exposure to a development project, we have a very, very goodunderstanding of the majority of the tenants that are going to be on that site.We may not have every lease signed or even every letter of intent signed, butwe clearly have visibility as to who the tenants are; and in some cases, thetenants sent us to those markets, so that makes it even easier from thatperspective. We know who the supporting cast will be around those tenants.

When you talk about ‘09, for example, and in particular ‘10,which is we have a number of deals also that we’re working for ‘10, it a littleearly to be pre-leasing those sites other than the actual anchors. So we havegreat visibility on our anchor interest and we have a lot of confidence on whothe followers are after you secure those anchors. If we don’t, to be honestwith you, we won’t close on the land. If we don’t have a good feel for what wecan do there based on the marketing that’s currently going on within ourdevelopment or leasing departments, we will pass on the site. We do that on aregular basis.

There are times when we had projects that tenants just won’tcommit to at this time or they feel that the market is too green, or in somecases, the housing projection seem unrealistic from a development perspective,particularly in the current climate. If that’s the case, then we move on.

The good news is that the pipeline is very, very full andprobably even exceeds our capacity if it all were to hit. So therefore, we continueto work the ones that are most profitable and where we have the most tenantinterest. We’ve never really done a project, quite frankly, where it’s beenbuilt that we haven’t been able to lease it. I don’t see any change in that.

Michael Mueller - JPMorgan

When you talk about the pipeline getting bigger in ’09 and‘10, should we think of that as popping or running at a higher level? You are hittingyour stride and that seems to be a good number for the foreseeable future?

Daniel B. Hurwitz

Well, it’s going to continue to accelerate. As Scottmentioned, ‘08 on deliveries is going to be lighter than ‘07, but ‘09 will be aconsiderable acceleration and ‘10 should be as well.

Michael Mueller - JPMorgan

You did some stuff with MDT; is their access to capitalbetter these days?

David J. Oakes

You can see where the stock trades on the AFX and where thereported MTA of the company is. Clearly there is a relatively meaningful spreadthere that I think they have to evaluate if they are thinking about equitycapital. Overall, our view is that their balance sheet continues to be in verystrong shape. I think they clearly have access to capital, but I think ingeneral that question is much better posed to Nick Ridgewell and the MDT team.

William H. Schafer

I’d like to lever in a little bit on what Dan was talkingabout with respect to our development pipeline. I think it’s important to notethat when we are talking about 2009 deliveries, that’s typically a projectthat’s been in the pipeline now since 2006. The gestation period for ourprojects at this point tends to be about three years. So by the time we’resitting here at the end of 2007, we have a very good idea of the anchor lineupfor all of those properties and probably have letters of intent with theanchors in most of them.

That is different from the way it used to be where we usedto have a year to year-and-a-half gestation period. The leasing was going on aswe were going through the entitlement process. At this point in time, sometimesthe leasing is actually preceding the entitlement process and gets donequicker. So we have a much higher visibility on leasing than we do onentitlements in many places.

The other thing relates to your other question about whetherthe increase in volume in 2009 is indicative of a trend. It very clearly is forno other reason than we broadened our universe of opportunities by addinginternational development deals to the mix. We have several deals in thepipeline in Brazil.As David mentioned, we have one in Canadaand others that we’ll look at beyond that. We have a few deals in Russiaqueued up as well. So the development pipeline going forward quite naturally isgoing to become larger just because it’s a greater universe that we are dealingin.

Operator

Our next question comes from the line of Matt Ostrower -Morgan Stanley.

Matt Ostrower -Morgan Stanley

I may have missed it, but just looking at your guidance, itlooks like the midpoint is in the 5% range, 4% to 5%. If I look at yoursame-store NOI growth we’re talking about 2%, 2.5% growth there; lever that upto the 4%, 5% growth level. Transactional income is flat but then gains godown. Doesn’t that get you below the mid-point of your guidance? What’s theoffset there? If you already answered this question, I apologize.

Scott A. Wolstein

Matt, we did answer it, I think. That is, that we are a netseller which is dilutive to earnings. So while we have a same-store NOI growthin the core assets that continues to be held in core, the amount of the coreassets in the core will decrease under our guidance.

Matt Ostrower -Morgan Stanley

Right. I’m actually wondering, the guidance is a little highto me given that you will be a net seller and that your development gains aregoing down. Why would you still be in the mid single-digit range guidance-wise?Why wouldn’t you be lower than that under that base case scenario?

William H. Schafer

Well, that’s a very difficult question to answer on aconference call. There are so many things that go into the budget. You’ve justgot to trust us that in all the moving parts, this is where it comes out.

David J. Oakes

Mid-point this year to mid-point next year of 5.5% growth, Ithink, based on the assumptions we’ve outlined is a level that we’re verycomfortable with.

Matt Ostrower -Morgan Stanley

You guys disclosed your capitalized G&A. You’ve talkedabout, I think, it is $8 million to-date of Construction Associates. Are theremore administrative costs that you capitalize there, senior management andother stuff that’s in there or is that really your full capitalized G&A?

Scott A. Wolstein

That is really the full capitalized G&A. There is notsenior executive capitalization in there. It’s basically the development andrelated leasing activities that are associated with development that are prettymuch capitalized there.

Operator

Our next question comes from the line of Jeff Miller - JMGCapital.

Jeff Miller - JMGCapital

What’s your liquidity at this point? You mentioned, I think,over $600 million?

Scott A. Wolstein

Yes. At the end of the quarter, we had over $600 millionavailable on our lines. There’s not a whole lot of re-financings that we havefor the balance of the year. I think there’s $100 million of notes that comesdue in the first quarter of next year and we continue to evaluate options on adaily basis.

Jeff Miller - JMGCapital

You said of that just under $400 million in ‘08 coming due,maturing, most are mortgages, mortgage debt and half had extension optionsavailable?

Scott A. Wolstein

I think that was with regard to the joint ventures as towhere we had half of the joint venture maturities of about $600 million were inDecember of ‘08. The remaining half of that, more than half of it was subjectto extension options.

Daniel B. Hurwitz

I think it’s important for you to know that all of the jointventure debt is project debt. There’s no unsecured corporate debt. There are nocorporate guarantees on any of the joint venture debt.

Operator

Your next question comes from Rich Moore - RBC CapitalMarkets.

Rich Moore - RBCCapital Markets

Dan, you sound a little bit hoarse. I assume that’s fromrooting for the Indians, or at least I hope that’s the case.

I’m curious a little bit about the dynamics of the merchantbuilding sales. When you guys complete these projects, everybody knows you areready to sell. So in this tougher environment for pricing, does it pressure theselling process just to put more pressure on the pricing? If so, might you pullback on some of the actual sales and put the product inside the portfoliorather than sell it?

David J. Oakes

I think from our perspective, we’re focused on doing theright thing with the asset. It’s a strategy decision in terms of where we wantour capital allocated. The merchant building program has worked well becausebrand new, high quality assets fit exactly what some institutions are lookingfor, for that relatively low growth, almost no CapEx profile of very visiblecash flows over the coming years.

To the extent that pricing for some reason that weabsolutely have not seen today would not make selling those assets acceptable. Ithink the reason we were in the development projects from the beginning is thatwe had an interest in owning them. So if the pricing for some unforeseen reasonis not there, I think there’s absolutely a willingness to own it and not justtry to push our quality product out the door at prices that we don’t feelcomfortable with.

Rich Moore - RBCCapital Markets

Dave, you don’t think there’s any reason to think we’d seelower margins on sales in 2008 than we’ve seen previously?

David J. Oakes

I don’t think so. The pro forma for the project get us torelatively comparable returns and cap rates are in a relatively comparablerange. Generally, we would be in the same range. We sold some very high qualityassets in this year and I think we would think about doing the same next yearand so could expect margins to be comparable.

Rich Moore - RBCCapital Markets

I’m curious as well guys, how the stock buyback is workingfor you? You bought back $100 million worth of stock. You have another, Ithink, $400 million you could buy back. Is that still an attractive option, doyou think? Or is that sort of meaningless at the current share prices? How areyou thinking about that?

David J. Oakes

I absolutely don’t think it’s meaningless. The boardauthorized a $500 million repurchase. The balance sheet is in a strong positionwhere we could comfortably execute on that based on all the opportunities weare seeing, that was the best opportunity to buy the stock at a big discount tonet asset value. With the exception of our blackout periods, I think it issomething we absolutely consider very, very regularly.

Rich Moore - RBCCapital Markets

So we can anticipate probably more buybacks in the comingmonths?

David J. Oakes

You can anticipate that it’s something we’re going to thinkabout every day.

Operator

Your next question comes from Jim Sullivan - Green StreetAdvisors.

Jim Sullivan - Green Street Advisors

Can you give an update on Nampa, Idaho and your bigger development projects?

Daniel B. Hurwitz

J.C. Penney opened in Nampaand is doing extremely well. We’re under construction with the lifestyle phaseof the project, and we’ll have store openings in ‘08 on that portion. We’re inactive negotiations with another department store for a second anchor on the site.

Jim Sullivan - Green Street Advisors

What kind of pre-leasing do you have on what you’reconstructing?

Daniel B. Hurwitz

We’re about at 40% to 45%; not executed leases, but strongindications of interest and letters of intent.

Jim Sullivan - Green Street Advisors

Following up on a question raised earlier, can you commenton the pre-leasing for your overall development pipeline at this point?

Daniel B. Hurwitz

Well, like I mentioned earlier, our pre-leasing is focusedon the anchors because once you have the anchors committed, the other tenantsusually follow if you have the right merchandise mix. We have yet to have aproblem with a project where we had anchors committed where we couldn’t leasethe additional GLA.

So that being said, if we are proceeding with the project,you can be very comfortable with the fact that our anchors are committed andthat we’re very comfortable that we can lease the rest of it up.

One of the things that I’d mentioned on past calls, one ofthe mistakes that we’ve made in our development pipeline overall is in somecases bowing to market pressure to pre-lease at a high level too early, whereyou leave money on the table because a project that’s coming on the groundleases a lot better than a project off a piece of paper. So, we gauge thatinterest from tenants. We have a dialog with these tenants every day. Weunderstand what their expectations are from a co-tenancy perspective and we goget it when it’s the appropriate time to do so. But overall, you should keep inmind our portfolio is 96% leased, and overall, we’ve opened up our developmentprojects, in many cases, mostly in the mid to high 90s, unless we’ve made aconscious effort not to because we felt that the space would be higher valueafter the project has some operating history.

Operator

Thank you for your participation in today’s conference. Thisconcludes your presentation. You may now disconnect. Good day.

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Source: Developers Diversified Realty Q3 2007 Earnings Call Transcript

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