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Developers Diversified Realty Corp. (NYSE:DDR)

Q2 2008 Earnings Call

July 25, 2008 10.00 am ET

Executives

Michelle Dawson - VP of IR

Scott Wolstein - Chairman and CEO

Bill Schafer - EVP and CFO

Dan Hurwitz - President and COO

David Oakes - EVP of Finance Chief Investment Officer

Analysts

Michael Bilerman - Citigroup

Christine McElroy - Banc of America Securities

Lou Taylor - Deutsche Bank

Jay Habermann - Goldman Sachs

Craig Schmidt - Merrill Lynch

Carroll Campbell - Hilliard Lyons

Michael Mueller - JPMorgan

Palone Melgiri - Wells Fargo

Kity Wong - Train, Babcock Advisors

Nick Vedder - Green Street Advisors

Operator

Good day, ladies and gentlemen, and welcome to the Developers Diversified second quarter Earnings Call. (Operator Instructions)

I would now like to turn the call over to Ms. Michelle Dawson. You may proceed, madam.

Michelle Dawson

Good morning. And thanks for joining us. On today's call, you'll hear from Scott Wolstein, Dan Hurwitz, Bill Schafer and David Oakes. Before we begin, I'd like to alert you that certain of our statements today may be forward-looking. Although we believe that such statements are based upon reasonable assumptions, you should understand those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements.

Additional information about such factors and uncertainties that could cause actual results to differ maybe found in the press release issued yesterday and filed with the SEC on Form 8-K, and in our Form 10-K for the year ended December 31, 2007 and filed with the SEC. I would also like to request that callers observe 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 Scott Wolstein.

Scott Wolstein

Good morning, everybody. I am pleased to report our earnings results for the quarter. We have reported funds from operations per share of $0.82, which is precisely in line with our guidance; although below the estimates of some sell-side analysts. These results reflect virtually no transactional income. The reported FFO is almost exclusively derived from the current operating income from the core portfolio and our operating metrics continued to be strong and well in line with our expectations.

While the other DDR participants on this call will speak at length as to the specifics of these operating results, I would prefer to speak to our operating strategy in the current environment and our view as to what lies ahead for DDR and for our industry. At the outset, I would like to emphasize that although the operating environment for retail faces near term challenges, those challenges are not the same for all landlords.

The pressure on the consumers' disposable income from the precipitous increase in energy cost is clearly resulted in a pronounced trend of trading down by the consumer from full-price retailers to value and off-price retailers. Recent sales reports by retailers have demonstrated an undeniable and significant shift in market share from those retailers that typically populates our nation's regional malls to those value retailers that typically populate developers' diversified portfolio. Investors that choose to ignore this trend, do so at their own peril.

This shift in market share will not have been evident in recent earnings of various landlords, as there is a significant timing lag before retail distress impacts landlords, but the distress among many of the full-price specialty stores will start to become evident over the next 18 months. Developers Diversified will not be immune from the distress in the economy, but we do believe that our focus on value retail will allow us to be less impacted than many other landlords.

Further, our international development initiative will enable us to achieve remarkable returns on capital in markets that are not equally discuss susceptible to the economic problems in our domestic economy.

Nevertheless, we, like all other real estate companies, will be forced to operate in an environment of radically reduced availability of traditional funding for real estate by commercial banks, investment banks, and traditional investors in corporate bonds and commercial mortgage-backed securities. Similarly, our business strategy must assume that we will not be an issuer of public common equity at any time in the foreseeable future.

We at Developers Diversified have been mindful of these challenges for quite some time and we have adopted significant changes to our investment strategy and our capital market strategy to enable us to navigate successfully through this period of constrained credit. Our strategy will focus on enhancing liquidity, protecting the quality of our balance sheet, maximizing our access to private equity, and concentrating on the investment of our own capital in areas where our returns will be in excess of our cost of capital.

While you will hear more details on this call behind this strategy, I would like to highlight the following initiatives for your consideration. We will continue to aggressively sell assets outright and into joint ventures including those asset sales that are necessary to enable us to realize the merchant building gain and our earning guidance for the balance of 2008. And we are in advanced negotiations on a transaction that will accomplish that goal.

We will fund the bulk of the capital required to build out our domestic development pipeline through a joint ventures with private equity investors instructions that will adequately compensate our common shareholders with fees and promotes whereby Developers Diversified will receive additional percent share of the value creation to be realized from these projects.

We will complete the fund raising for a new value fund that will focus on investing private equity alongside Developers Diversified in developments that have been initiated by private developers who are in desperate need of funding. We have received particularly strong interest from several large foreign institutions, one of which has committed to be the lead investor in this fund.

We will proactively address all 2009 debt maturities with new funding as we have done throughout 2008. We currently have addressed all 2008 debt maturities. We will continue to invest internally generated capital, well within our balance sheet capacity in international development initiative where our returns are truly extraordinary and we will explore the potential co-investment in these opportunities only to the extent that such investments will dramatically enhance our investment returns from these opportunities.

We will continue to avoid any investment of capital in core portfolio acquisitions as such opportunities simply cannot offer comparable returns to those available from our other investment and development opportunities.

We will enhance our scrutiny of all projects in our development pipeline and we will defer or abandon any and all projects that don't meet our pre-leasing thresholds or return thresholds, and we will continue to pursue any and all operating initiatives that will protect and enhance the growth and performance of our core portfolio and company overall, including compensation plans that enhance the alignment of interest of all of the company's key employees with shareholder returns as well as with departmental and company-wide goals and objectives.

At this point, I will turn the call over to Bill for his comments on the quarter.

Bill Schafer

Thanks, Scott. I'd like to first highlight a few items from the quarter and then give an update on our current financings, balance sheet position and what we're hearing from our lending partners. With regard to the current quarter's operating results, first, we recognized approximately $64 million of transactional income including fees in the second quarter of 2007, compared to less than $1 million in 2008. As David will discuss shortly, we expect comparable levels of transactional income to occur later this year.

Second, the asset sales that occurred late in the second quarter of 2007 make a year-over-year comparison difficult. Late in the second quarter of 2007, we sold nearly $1.5 billion of assets into joint ventures. The revenues and expenses associated with these assets with the exception of depreciation on the Inland assets that were sold continued to be reflected in the 2007 numbers and are not reflected in discontinued operations due to our continuing involvement with these assets.

There were also a significant number of asset sales that occurred in late June of 2007 that are reflected in discontinued operations. These assets contribute over $8 million of FFO in the second quarter of 2007.

Third, the 2008 tenant recoveries were impacted by the finalization of the 2007 common area maintenance true-up calculations. Certain estimates were used to finalize the accrued estimated tenant recoveries in the 2007 year-end results. During the second quarter of 2008, the final common area maintenance billings were processed, resulting in a negative $2.7 million adjustment. This adjustment is non-employing in nature.

In addition to the unique guidance just discussed, our core same-store NOI growth was consistent at 2.5%. There has been upward pressure on the company's bad debt expense when compared to recent years. Our bad debt expenses continued to approximate 1.5% of total revenues in 2008, compared to approximately 0.8% for the same time period in 2007. The driver for the increase primarily is due to an increase in the level of financial stress across the small and mid-sized tenants.

The operating results of our properties in Brazil continue to perform extremely well, including additional investment in certain assets of approximately $30 million, the portfolio has generated FFO growth of 82% and 69% over 2007 second quarter and year-to-date results, respectively. We have also acquired 62.9 million shares of MDT for $29.3 million, which produced approximately $4 million of FFO in the second quarter, 2008 and included approximately $3 million of income from mark-to-market capital hedging.

With respect to funding needs for DDR and our joint ventures, we continue to execute on our strategic plan. We originated approximately $500 million of new mortgage capital and refinanced $275 million of existing mortgage capital year-to-date. We also have signed term sheets on $445 million of refinancing and $40 million of new debt which are expected to close during the third quarter. Moreover, we're looking beyond 2008 to make sure we're appropriately prepared if the current credit market dislocation continues.

Our pending deals include three large loans. First, we have a signed term sheet and rate lock for at least $340 million of mortgage debt that will refinance the December maturity of MDT's original IPO debt. The blended pricing on the loan is approximately 6%, approximately 55% to 60% loan-to-value.

Second, we have a signed term sheet on our Horseheads, New York development at 80% loan-to-cost and price at LIBOR plus 150 basis points. We should provide proceeds in excess of $40 million, subject to the outcome of pending appraisal.

Third, we have a commitment to refinance our Ward Parkway Center in Kansas City which is held by our Coventry II joint venture. In addition, we have R$120 million of long-term Brazil-based debt under negotiation that is a hybrid of construction and permanent financing.

All remaining 2008 maturities have extension options which are expected to be exercised, with the exception of approximately $30 million of loans on two Texas developments that mature in November-December 2008, which are currently in discussions with existing lenders and approximately $40 million of mortgage loans with a weighted average interest rate of 4.65% and a loan-to-value of just under 50% that will be repaid with our revolving credit facility.

Our 2009 maturities are relatively light, consisting of $275 million of unsecured note issue in January, $120 million of consolidated mortgage debt and $430 million of joint venture mortgage debt of which our ownership interest is approximately $73 million.

Of the 2009 maturing joint venture mortgage debt, we have the option to extend over $200 million at existing terms. Our share of the joint venture mortgage debt that is not extendable is $33 million. We've already begun discussions with a variety of banks and lenders about opportunities to meet these maturities and expect to address them early and at the most competitive terms possible.

Since our last call, we've continued to find financing opportunities despite the adverse market conditions. Select commercial banks are still providing loans and participations have become more prevalent. [Light] companies remain active, but are clearly focused on the strongest relationship and best projects.

Overall, loans are taking more time to close as lenders are employing greater scrutiny and more extensive due diligence. Given this environment, we're obviously pleased to have broad, long-standing relationships with a variety of commercial banks as well as an established track record among many institutional lenders.

We're leveraging these relationships to secure the most favorable financing alternatives available. We continue to keep a close eye on our liquidity. We're committed to maintaining our debt level sufficient to maintain our ratings and sustaining adequate cushion relative to our debt covenants.

We're well below our total debt threshold of 65%, our secured debt maximum of 40% and comfortably above our debt service and unencumbered asset test. These covenants reflect how our lenders look at our leverage as opposed to simple metrics like debt-to-market cap, which can completely misrepresent a company's true leverage and risk profile.

By staying ahead of the curve, and raising capital proactively, I'm comfortable with our current balance sheet position and our outlook for 2009 despite the ongoing dislocation in the credit markets.

Now, I'd like to turn the call over to Dan.

Dan Hurwitz

Thank you, Bill and good morning.

As I mentioned on our recent conference call, there continues to be a disconnect between Wall Street and Main Street with respect to many aspects of our business. Consumer's concerns regarding the health of our economy and its impact on disposable income have caused broad changes in shopping patterns.

Clearly, consumers are more price sensitive than ever and patronizing those retailers that offer the best value for non-discretionary goods. As a result, our core retailers are actually doing quite well and are still pursuing new store locations.

Wal-Mart is still opening 140 to 150 stores this year and throughout the foreseeable future. Target is still opening over 100 stores a year. TJX, Kohl's, JCPenney, PetSmart, Bed Bath, Dick's Sporting Goods, Barnes & Noble, Staples, Ross and many other national retailers continue to be very profitable and are very focused on external growth.

Most tenants have effectively controlled inventory and debt levels and remain on plan with respect to sales. They are also maintaining margins despite somewhat lackluster same-store sales growth. It is important to note that same-store sales results in a cautious inventory environment are somewhat of a self-fulfilling prophecy. Not a good barometer of overall retail health and certainly not a reliable metric in determining overall financial performance.

Simply put, you can't sell what you don't have on the shelves, but you can maintain margin with lower sales combined with prudent inventory control and that is exactly what we are seeing from the vast majority of our key retailers.

Weaker retailers, some of which we also have in our portfolio are feeling pressure and will likely continue to experience difficulty in the foreseeable future. Furthermore, we anticipate more store closings and bankruptcies and have adjusted our 2008 budget and reserves appropriately.

We have experienced these cycles before and have made the necessary adjustments to our leasing and development strategies to accommodate the changes in our operating environment and mitigate risk. In many cases, the loss of the weaker tenant creates a great opportunity to release space at higher rents to a stronger retailer.

More importantly, the quality of our property revenue stream is very consistent as it is generally derived from retailers with strong credit profiles under long-term leases with very little reliance on [over-rents] generated by tenant sales performance.

Since 2000, there have been numerous tenants whose store closings made headlines, at the times that they were announced. OfficeMax, Eddie Bauer, KB Toys, Regal Theaters, Kmart, Food Lion, Rhodes, HomePlace, Tops Markets, Ultimate Electronics, Winn-Dixie, Zany Brainy and a host of others.

Our occupancy and rent growth remained stable despite the historic store closures and challenging retail headlines. I'd like to highlight a few case studies to illustrate what our experience has been when tenants actually vacate.

Two of the largest bankruptcies we experienced were HomePlace and Kmart, both of which were among our top ten tenants at the time of their bankruptcies. HomePlace occupied 12 locations in 2001 and represented over $7 million of rental revenue at a time when our portfolio was less than half of its current size. Within 12 months, all the stores were re-leased at rents 26% higher than previously in place.

Subsequent to Kmart's bankruptcy in 2002 they closed 18 stores within our portfolio. We re-tenanted 16 locations and received 133% higher revenues. Toys "R" Us and Kids "R" Us represented another perceived blow to our centers but resulted in an attractive outcome. We have released five of their seven units in their entirety for an 81% revenue increase.

With respect to speculation regarding Mervyns potential bankruptcy, we've been monitoring their status closely since the first signs of vendor pressure this spring and we continue to do so. Mervyns has not declared bankruptcy and is current on all rent payments. We acquired 36 of our 38 Mervyns stores in 2005. Notably we bought the first portfolio they sold post LBO and were able to select what we believe are the most attractive locations.

Approximately 70% of the assets are based in California including nearly 1 million square feet in and around Los Angeles and over 500,000 square feet in the Bay Area. If our Mervyns locations should become available to release, we believe there will be significant retailer interest in the sites we own, based on their desirable West Coast locations with high barriers to entry, infill locations and strong demographics.

Within our core portfolio alone, for example, we've re-tenanted a former Mervyns box in Utah with Ross Dress for Less, DSW and Michaels increasing rental revenues over 1500% after adjusting for TI. I would also like to emphasize that we hold a $25 million letter of credit that we can access if Mervyns files for bankruptcy or if Mervyns defaults and we terminate all the leases. In addition, we hold three other letters of credit aggregating $8 million which we can [tap] if they default on individual leases.

The combination of quality locations, and significant credit enhancement coupled with already known tenant interest clearly minimizes any risk we have should Mervyns file Chapter 11 or Chapter 7. Notwithstanding the potential upside achieved through re-tenanting, we're analyzing the near term financial impact from the bankruptcies of Steve & Barry's, Linens 'N Things and Goody's.

If each of these tenants completely ceased operations which is not expected to be the case and we were unable to re-tenant half of their stores which we clearly don't expect, based on our assessment of the quality of the real estate and our track record in past some of the tenant bankruptcies, we would still only suffer the following reductions in FFO on an annual basis until we were able to find replacement tenants.

If Linens 'N Things close half their stores in our portfolio we would lose $3.7 million of rent of $0.03 of FFO. Similarly if Goody's close half their stores we would lose $2.6 million or $0.02 of FFO. And lastly if we assume the same for Steve & Barry's we would lose $1.5 million or a $0.01 of FFO.

We are mindful of the current environment and are closely monitoring the relative strength of the tenants in our portfolio. We feel confident in our ability to create substantial value for our company and shareholders even in these difficult times.

Expecting that there are more store closings likely to occur this year, we continued to be very proactive in our leasing strategy to reflect a much more conservative stance. We already addressed most of our 2008 renewals earlier in the year. During the second quarter, we focused on maintaining future occupancy by aggressively pursuing new lease commitments within reasonable margins on pricing.

As a result of this effort, we signed a record number of new leases despite a very difficult operating environment. While our 9% blended rental rate increase is below our historical average, we strategically decided to focus on transactional volume, succeeded in that goal and we're still able to increase our average square foot rate across the portfolio by $0.25 a foot. This effort will have a very positive effect on our projected occupancies for 2009.

Just to give you a little flavor of who is active in Q2, we signed new leases in our operating portfolio with Michael's, Hobby Lobby, David's Bridal, Justice and Jos. A. Bank. In our development portfolio we signed 100,000 square feet of new deals including leases with tenants such as Petco, Barnes & Noble and Ulta.

in addition, Macy signed 103,000 square foot lease earlier this week joining J JCPenney and Sports Authority as a third anchor in our Nampa Idaho development. The Macy's deal has created considerable leasing momentum and we have another 50,000 square feet of leases near execution and over 100,000 square feet of letters of intent that are progressing.

We have tenant commitments for additional locations from Target, Barnes & Noble, [Ulta], Bed Bath Anna's Linens and HH Gregg and many other stores for additional locations at our developments. Just this past week in addition to Macy's, we have executed leases with Kohl's and J.Crew as well.

Overall, we have commitments on over 80% of our 2008 wholly-owned development deliveries and 66% for 2009. Within our JV developments, we have comparable levels of tenant interest with 77% committed for 2008 deliveries.

We continue to make significant strides with respect to our international investments and developments and I would like to provide a brief overview of our platform and the investments we've made to date. As with our domestic operations, we always seek investment opportunities with the most attractive risk-adjusted returns.

We have explored many international markets, but we've chosen to selectively invest where we believe the greatest value creation opportunities exist and are focused on success in a few markets rather than feeling the need to be everywhere.

We target countries with economies that are growing at faster rates than the US and we identify strong local operating partners with an increased focus on retail real estate development expertise and trustworthiness.

Last, we always try to leverage our full strengths of leasing, development and tenant relationships in all of our dealings and that is no different internationally. With respect to our investment in Brazil, I am pleased to report that the portfolio continues to perform exceptionally well.

Economic and real estate market conditions in Brazil remain strong as evidenced by the 5.8% economic growth that occurred during the first quarter of 08 which was the fastest first quarter growth in over 13 years. Consumer spending and retail sales growth continues to remain robust as well with an 11% growth rate in year-to-date retail sales recently reported.

Within our portfolio, retail sales have increased 13% year-to-date with commensurate same-store NOI growth, which is consistent with what we've seen in the portfolio since our initial investment nearly two years ago. We continue to see intense demand among retailers for space within our existing assets as well as for our development projects. And with the healthy sales growth we're seeing in our portfolio, rental rates are growing as well.

With respect to our portfolio, we have seen a substantial increase in the value since our initial acquisition in the fall of 2006. This is due to a variety of factors including tremendous cap rate compression, the immense demand for retail real estate in Brazil, robust economic conditions, a favorable currency exchange rate environment, and our ability to drive NOI at our existing assets.

Based on current market conditions, we are seeing development yields in the low to mid-teens while stabilized assets continue to trade below an 8% cap rate on a consistent basis. This compares to our initial acquisition cap rate of over 11%, based on third-party valuations by Cushman & Wakefield.

Based on those valuations, with reflect to factors I just mentioned, our investment has increased in value by $190 million, more than $1.50 per share. This amount includes none of the considerable value creation we expect to realize through our development of the shopping center that is currently underway in Manaus or the additional development opportunities we expect to secure in the future.

We made substantial progress at our three development projects in Brazil and Russia as well. Our developments located in Londrina and Overland are scheduled to deliver in 2010. And our development in Manaus is scheduled to open in the first half of next year; obviously those are all in Brazil.

To date, we have nearly 75% tenant commitment for space in Manaus with anchor leases signed with national retailers such as Marisa, Renner and C&A. To the end of the second quarter, we've invested approximately $200 million in Brazil and have a commitment to invest an additional $100 million over the next two years.

Now in Russia, our developments in Yaroslavl, and Togliatti continue to progress. We're currently seeing development yields in the low double-digits which is well above cap rates on stabilized assets. Both of our projects are expected to deliver in 2010. To date we've invested approximately $50 million of the total commitment of approximately $260 million. We continue to work with our partner ECE to explore additional opportunities.

Our investments in Canada to date consist of development projects, which include three with Rice Commercial Group and two with Holborn Property Investments, all of which are in the Greater Toronto area. The five projects upon completion will aggregate 2.4 million square feet with expected total costs of $530 million with expected deliveries commencing in 2011. With incredibly high barriers of entry in the Toronto market and robust retailer demand, we are extremely pleased with the momentum that each of our projects currently enjoy.

Our success internationally has attracted the attention of both retailers looking to expand overseas and private capital interested in co-investment opportunities. We continue to work very closely with Wal-Mart, for example, which is evaluating locations in Brazil and Russia as well as other countries.

With the emergence of the reais-based debt market and with potential JV partners, there are numerous opportunities to continue to seek out attractive investment opportunities in Brazil and other markets in a prudent and strategic manner.

As our international investment platform continues to evolve, our international developments could come to represent 70% of our total development investments in the future. We do not expect our international investments to represent 70% of our total asset base, as was erroneously reported recently in the press.

That all being said operationally we are very focused on navigating the choppy domestic environment and the more robust international market with the appropriate care to mitigate risk and maximize value. We continue to expedite new and renewal leases, staying extremely focused on controllable occupancy levels.

We have also continued to phase our developments to avoid capital expenditure on un-leased space, raise our return thresholds on new projects which will reduce the expansion of our pipeline, market space anticipated but not yet rejected in bankruptcy to limit downtime and continue to meet with all of our retailers to understand the ever-changing market and the potential impact on our portfolio.

When you cut to the chase the story is still pretty simple. Leasing volume is still strong even though there is some obvious pressure on pricing. The vast majority of our tenants are still growing externally. Our development pipeline in progress is substantially pre-leased and if projects are not pre-leased going forward they won't get built.

Our same-store NOI is very solid and average place rent continues to grow. Our exposure to bankruptcy is known to date is very manageable and we feel comfortable with our anticipated future exposure.

And international continues to progress regarding high value creation growth and opportunity. While we are very cognizant of the conditions in which we operate, it is important to see the conditions for what they are and not let the abundance of negative pressures cloud the numerous positives that occur in every challenging environment.

I would now like to turn the call over to David.

David Oakes

Thanks, Dan. In today's environment, we're approaching all capital allocation decisions more selectively than ever. We continue to see compelling investment opportunities created by the ongoing capital market's dislocation. While potential returns from some of these investments are better than we've seen in many years, we remain very focused on conserving capital and separating our investment decisions from our financing decisions.

Clearly, we're very focused on completing our financing plan for new investments and will not simply rely on our lines of credit. Given today's environment in which there are a variety of competing investment opportunities coupled with more stringent underwriting and approval processes, the capital partners we're working with are naturally slower to move.

These investors include both domestic and international institutions which are significantly less dependent upon the debt market and continue to be interested in the secure cash flow generated by our sort of assets. Transactional activity remains subdued, but we are getting relatively better visibility on these asset sales and our negotiations continue.

Based on feedback from the market, we expect to reach or exceed our goal of asset sales at pricing consistent with market trends. In the 6% cap rates for higher quality assets and 100 basis points to 200 basis points higher for non core assets.

Margins on sales of recently developed assets should be between 20% and 40% relative to our undepreciated development costs. Although overall transaction volume is down relative to recent years, sales are occurring. Year-to-date, we've closed $27 million in non-core asset sales, of which $19 million sold during the second quarter.

Cap rates on the assets sold and under contract averaged about 7%. Relative to our core portfolio, these assets are generally smaller, more mature, and lower growth. Buyers range from local individuals to multibillion dollar REITs with motivations ranging from the high cash flow opportunistic to tax-driven. They've generally been financed with mortgage debt at 60% to 70% loan-to-value.

We currently have over $80 million of asset sales under contract and another $100 million subject to letter of intent. We continue to move forward in negotiations with potential investors for our recently developed assets and are in negotiations with several parties on several large additional transactions. We have nearly $1 billion of merchant building product at or near stabilization representing over $180 million of potential gains, net of our deferral due to retained ownership.

From an investment perspective, we talked for several quarters about the number of co-investment opportunities we see with smaller developers. This is a very attractive opportunity to increase our returns and actually shrink the dollars we have invested in development while still participating in projects. We're primarily interested in participating in the development of large scale community center assets that are fully entitled and have some level of pre-leasing. At the same time, we're receiving interest from private capital for the precise sort of risk profile and returns that these projects generate.

Obviously, our opportunity to capture this market disconnect is divest these projects diligently, identify the best investments on a risk-adjusted basis and structure attractive investment vehicles that bridges the gap between those that are long capital and those that are long opportunity. This approach allows us to preserve our precious capital and increase our investment returns while exceeding the return requirements of our capital partners.

We also continue to see the purchase of MDT units as a compelling investment because of the significant discount that the market currently assigned to the stock. We currently control over 6% of the units and when legally permissible would expect to continue to buy units in the market. This position clearly aligns our interest with those of all MDT unitholders.

Moreover, given current market pricing, we can capture immediate and outsized returns on our investment. We also like the effective increase in our ownership of some of the highest quality assets in our entire sector. Much of MDT share price decline can be attributed to investor's concern regarding its balance sheet, which we believe were substantially addressed in a press release issued by MDT last night.

First, with the June 30th revaluations completed, MDT continues to be in compliance with all of its debt covenants. Second, with respect to near term debt maturities as Bill described earlier, the trust has agreed to turns, received approval and rate locked the refinancing of its $340 million debt facility originally due to expire December 2008.

Third, MDT has agreed to improve its debt covenants in order to provide the trust with greater balance sheet flexibility going forward. Fourth, the trust announced it's in negotiations to dispose of select property assets which will further improve the trust liquidity. We believe that these announcements may relieve some of the pricing pressure on MDT's stock and we remain committed to its long-term success.

Before I turn the call back over to Scott, I want to discuss some changes we've made in the development section of our quarterly supplemental. In response to feedback from investors regarding additional disclosure, we've added a table detailing our land held for development.

This new table provides greater color on the non-encumbering assets that we own and allows us to reserve the space in the development in process schedule for projects that are actually under construction today while still disclosing what our next starts may be.

During the quarter, we commenced construction on projects in Norwood, Massachusetts and Guilford, Connecticut and added to our landholdings in Russia and Canada as you'll see reflected in these schedules.

Now, I'll turn the floor back to Scott for his concluding remarks.

Scott Wolstein

Thanks, David. Before I open the line to questions, I'd like to reiterate some of the most important items that we discussed this morning.

First, our balance sheet remains a top priority. We continue to proactively pursue new financing opportunities to ensure a strong balance sheet position throughout the remainder of 2008 and throughout 2009. As a result of these dedicated efforts, we are very comfortable with our ability to meet all of our future debt maturities and development funding requirements.

Second, we're actively marketing dark and vacant space from recent bankruptcies and store closings. As Dan described, we've been down this road many times before and have demonstrated the stability of our assets and our ability to create value through re-leasing.

Third, we're committing less balance sheet capital to early stage domestic development. And lastly, while we're seeing many new and attractive investment opportunities, we have adjusted our underwriting assumptions to ensure that any new capital investment must be more stringent return requirements that address all potential risks appropriately.

The tougher it becomes in the broad market, the more attractive the stability of our asset class becomes. The consistency and cash flows generated by long-term leases to high quality tenant base requiring comparatively low ongoing capital investment and operating most compelling value proposition to consumers to insulate us very well from the volatility of the broad economy.

As I have said before, I am comfortable affirming our 2008 FFO guidance of $3.95 to $4.05 per share and we expect to have considerable progress on our transactional activity to report in advance of our next conference call.

At this point, we will open the line to receive your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Michael Bilerman with Citigroup. Please proceed sir.

Michael Bilerman - Citigroup

Good morning, (inaudible) is also here with me as well. David, I want to go back to a comment you made on the merchant development where you talked about having $1 billion dollar pipeline, $180 million of net gain. In the last quarter call in our discussion, you talked about a few hundred million of merchant development.

And just going back over history, I don't know if you've even developed the $1 billion to have that sort of inventory. So, I'm sort of scratching my head a little bit to what encompasses $1 billion of merchant development in your books?

David Oakes

Well, given the conversations we've had previously, we've refined our methodology for making sure that we do have that pool identified. And that pool at current market values of stabilized or nearly stabilized developments has a market value in excess or right around $1 billion currently and again, relative to current market pricing we would expect even net of taxes and net of the gain we deferred due to our continued ownership would think that the gain is recognizable for this over the next year or several years, if we chose to sell all those assets would be in excess of $180 million.

Michael Bilerman - Citigroup

What changed from last quarter where you thought it was only a few hundred million dollars?

David Oakes

I think last quarter we had spoken specifically about our plans for calendar 2008 as opposed to the entire scope of recently developed or nearly stabilized assets that would be eligible for sale at a considerable gain relative to our cost basis.

Michael Bilerman - Citigroup

And this is all in the core portfolio or some of this is JV?

David Oakes

A few of these would be partially owned projects but a majority of that would be within the core portfolio.

Michael Bilerman - Citigroup

I really think we need some disclosure. This is well over 10% of the company's assets, its north of $1 billion. And I think just understanding where and how you're booking the gains is very important for shareholders and analysts to understand.

Separate from that, can you just walk through the same-store NOI, was up 2.5% this quarter and occupancy was down 40 basis points, the reimbursement rate was 77% versus 86% last year, the NOI margin was 70% versus 72%. OpEx was higher. And so I'm just trying to piece it together, if you have all those downward movements, how is same-store NOI up?

David Oakes

Well, on the merchant building side of it, I think we understand your point. A great majority of it exists in disclosure from the past several years in our development schedule from our supplemental and then I'll leave the same-store NOI question in terms of the calculation to Bill.

Bill Schafer

I also want to correct you, Mike. $1 billion represents less than 5% of our assets, not over 10%. We've managed $22 billion in assets.

Michael Bilerman - Citigroup

For your share, and maybe there's a difference between what your share is?

Bill Schafer

Our wholly-owned portfolio alone is over $12 billion. Our assets are considerably more than what you just said. Maybe we have different idea of value but that's clearly far less than you think it is. And what you're talking about vis-a-vis in the last call and this call are apples and oranges.

We talked about merchant building assets we had determined that we would sell and that's roughly half of what is available to be sold. For instance, we have a very large asset that's well over $100 million in Miami, that we determined not to sell at this point and it was not included in the numbers that we cited on last conference call, but in terms of what we have capacity to do, it would be included.

We've also made progress on developments that were in progress that are now nearing completion that could be sold because they have greater visibility on the NOI for instance, projects that we have in Homestead, Florida, Chicago, Illinois, San Antonio, Texas, Horseheads, New York. There are lots of projects that are added to that pool as the year goes on.

So, there's nothing inconsistent at all vis-à-vis what we said on the last call and what we said today. We know exactly what we have. I think we know it better than you do. And obviously when we disclose the gains, you will see exactly what they are, where they came from as we have in every year. We've never yet failed to deliver on those transactional income items when we said we would and this year will be no exception.

Michael Bilerman - Citigroup

It's the number one question we get, Scott, constantly of where is that pool of assets? What does it encompass? Where do those gains come from? And that's where I think there's a difference and so you're not going to get credit for being able to generate those gains, if people don't feel comfortable where they're going to come from. So, I think that's part of the disconnect that the Street is feeling relative to your merchant build.

Scott Wolstein

Well, I think that's a fair comment. We will discuss internally whether we want to expand disclosure in that area to give that greater visibility. But I do think after 15 years of operating as a public company and delivering every single quarter on our promises, that we deserve a little bit of benefit of the doubt and credibility when we say something and people are suspecting that we're being disingenuous which is somewhat insulting to be quite honest with you.

Bill Schafer

With regard to the same-store NOI, Michael, as you mentioned, actually as I indicated in my remarks, during the quarter we did have an adjustment relating to the 2007 year-end recoveries which negatively impacted the current quarter's recoveries, I think which you indicated were about 77% or so.

Michael Bilerman - Citigroup

Right.

Bill Schafer

Adjusting for that number, you're going to be up in the low to mid-80s I think, consistent with historic amounts. And for this year too, we've included our operations in Brazil which are really performing very strong, down there from the same-store NOI perspective and the portfolio really is operating consistent with how it has in the past. And, again, Brazil is really showing some significant growth in the international.

Dan Hurwitz

And per our historic definition of same-store NOI at this point, we have a same-store pool that includes a broader base of assets including Inland and including the Brazilian operations and have included Puerto Rico for several years. So it's consistent with our methodology overtime to include assets once they've been in the portfolio for a period of time.

Michael Bilerman - Citigroup

Okay. Thank you.

Operator

Your next question comes from the line of Christine McElroy with Banc of America. Please proceed ma'am.

Christine McElroy - Banc of America Securities

Hi, good morning. I'm just following up on the leases on the 36 Mervyns stores you bought in 2005, are all of the stores under one master lease, such that if they wanted to close a store or amend some of the terms on a lease, it would impact all of their stores and they would have to amend the entire master lease?

David Oakes

No, there's not a master lease but there's a cross-collateralization in our favor so that in the event that there's a default on one lease we can choose to default them on all the leases, but it doesn't work the other way.

Christine McElroy - Banc of America Securities

Okay. And then you said you have a letter of credit of $25 million?

David Oakes

That's correct.

Christine McElroy - Banc of America Securities

Okay. And then my second question, David, you talked about the non-core assets that you have under contract or letter of intent. What kind of cap rates are you projecting based on your negotiations, and is it similar to the 7% you talked about on your recent asset sales?

David Oakes

Yes, it's very similar, both for the $80 million under contract as well as the $100 plus million that is subject to letter of intent behind that.

Christine McElroy - Banc of America Securities

Okay. Thank you.

Operator

Your next question comes from the line of Lou Taylor with Deutsche Bank. Please proceed, sir.

Lou Taylor - Deutsche Bank

Hi, thanks, good morning. David, in terms of the sales that are under discussion, do you have enough visibility to get a sense for when they're likely to occur over the second half? Are these fairly imminent or are these are things that are going to close to the end of the year?

Dan Hurwitz

Let me answer that, Lou. With respect to the merchant building asset sales vis-à-vis the non-core asset sales, we expect that to go under contract in the third quarter, maybe close in the third quarter. That part of it I'm not sure about. We'll probably be able to provide guidance in advance of the third quarter conference call as to where it would fall between Q3 and Q4. David would have a better handle on the non-core assets.

David Oakes

The non-core asset sales, a larger number of smaller transactions that will close spread between the third and fourth quarter where everything's progressing, but it's clearly a deal environment where everything moves a bit more slowly than the traditional pace.

Lou Taylor - Deutsche Bank

Okay. And then second question, just pertains to the international development pipeline. I mean, what are your expectations for starts for the second half and which projects were kind of which country do you think they'll occur in?

Dan Hurwitz

Its certainly the asset in Yaroslavl in Russia will start in the second half of 2008, Togliatti maybe late 2008 or early 2009. In Brazil there are three projects in the pipeline that haven't started construction. Maybe one of them will start late 2008, but more likely they're all 2009 starts. I don't think that any of the Canadian projects will start until 2009.

David Oakes

2009, fall of 2009.

Lou Taylor - Deutsche Bank

Okay last question is for Bill. In terms of your debt maturities balance this year and maybe looking into '09 next year, can you give us a flavor of the sense of the type of debt they are? In other words, are the CMBS loans which you'll have to replace with new capital versus maybe bank or life company debt that you can maybe get an extension on without actually doing a brand-new financing?

Bill Schafer

Again, as I indicated, with regard to the joint venture, there's almost half of that that is subject to extensions that would be available to us. With regard to DDR's portfolio, there is $275 million of public debt that we would have to repay and then there's I think in the neighborhood of $120 million, $130 million of various mortgages throughout.

And those a lot of times we would just pay off because those were existing mortgages that were assumed in conjunction with acquisitions and so forth and they're kind of spread throughout the year. So really, the only significant one that we have in really '09 is the $275 million of the public debt.

Lou Taylor - Deutsche Bank

Great. Thank you.

Operator

(Operator Instructions)

Your next question comes from the line of Jay Habermann with Goldman Sachs. Please proceed sir.

Jay Habermann - Goldman Sachs

Here with, [Johan] on my team as well. How you decide, you did maintain guidance for the full year and I'm just curious, sort of, zeroing in on obviously the transaction based income, but your sense that the market has slightly picked up at least a little bit. You're really banking on obviously sales really falling in the latter half of the year.

Dan Hurwitz

Jay, that's exactly what we guided before the year began and in terms of the most likely transaction that is in negotiation on the merchant building side, it really is a more of a joint venture, a sale of assets into a joint venture which has always been our preference versus trading out our trophy assets in all our sales.

Those transactions take a little bit longer to document. There is a lot more to negotiate and we're exactly on track as we guided even last October. We were quite clear that it was our expectation that the transactions would occur in the second half of 2008.

So, from our standpoint, although we certainly recognize that there seems to be some discomfort or lack of patience among investors in this regard, nothing has occurred to change our views that things will happen exactly on the schedule that we telegraphed on each call over the last three call probably.

Jay Habermann - Goldman Sachs

Right, I think just given the fact that it's roughly $0.50 of your full year number, still it's certainly the potential that some of that could roll into 2009?

Dan Hurwitz

I really don't expect that, no.

Jay Habermann - Goldman Sachs

In addition, could you just comment on the private equity fund that you mentioned, how far along are you in those discussions and how large could that fund be? What sort of interest would you take?

Dan Hurwitz

We're targeting $500 million in equity. We've received commitment from a lead investor for roughly 40% of that. And we're in advanced discussions with several more. We would expect that fund's first closing to happen late 2008 or early 2009.

The challenge quite frankly has been matching up the deep interest we have overseas with enough domestic investors to give the foreign investors domestically controlled private REIT for tax purposes. As you would imagine, the pace of commitments from domestic investors is a little bit slower than it is from overseas investors.

So we have several large domestic pension funds that are doing their work and due diligence. We have favorable indications from the consultants that they rely on with respect to this fund. So, we feel pretty good about having this thing closed late this year early next year.

Jay Habermann - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Craig Schmidt with Merrill Lynch. Please proceed, sir.

Craig Schmidt - Merrill Lynch

Thank you. There were three projects that were on your wholly-owned consolidated JV development chart that aren't on this. I was wondering if you could tell me why this fell off, two were in Tampa and one was in Raleigh.

Dan Hurwitz

I believe as we increased our development disclosure and added this category, that more clearly reflects the land that we hold, we believe that each one of those projects that were effectively land or improved land or land where that it come from Inland where a very, very small portion of the project, generally one or two outparcels had been developed, but had not been under construction by DDR in terms of any level of us adding vertical improvements.

We thought with the expanded disclosure that those projects were more appropriately reflected in the land schedule and that's the way they've been thought about and treated and invested internally at DDR.

Craig Schmidt - Merrill Lynch

So, more of a change in reporting than actual status of those projects?

Dan Hurwitz

The status of those projects has not changed to reflection of how we disclosed them, I think more appropriately currently in the supplemental package.

Bill Schafer

Craig. I think it's important to understand that what happens when we engage in a large acquisition as we did with Inland, as we did with JDN, You inherit some cats and dogs that are actually development projects that maybe are a little bit different than the type that you might initiate yourself and then you go through a little decision metrics as to is it worth pursuing the development or should we just sell it.

And I think all of these assets fall in that category. These are all part of the Inland portfolio that we're just trying to rationalize what's the best outcome for DDR. None of them are projects that really fit the profile of something we would have engaged in ourselves from the ground up.

Craig Schmidt - Merrill Lynch

Okay. And then one other question, on the MDT vis-a-vis your 6.7%. How high would you feel comfortable taking that ownership?

Dan Hurwitz

We're obviously subject to the securities laws that anyone else is that have certain costs associated with one's ability to participate in open market purchases. Outside of that, I think at recent valuation levels, we see extraordinary value in the shares and would continue to purchase them at these levels, subject to securities limitations, both regarding when we are allowed to participate in the open market, as well as the maximum ownership stake that any party can acquire before making a full tender offer.

Craig Schmidt - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from the line of [Carroll Campbell] with Hilliard Lyons. Please proceed ma'am.

Carroll Campbell - Hilliard Lyons

Good morning.

Dan Hurwitz

Good morning.

Carroll Campbell - Hilliard Lyons

I just had a question on G&A, I think on your last call you had a goal of having G&A stay around 4.5% to 4.75% of revenue. I noticed it was higher in the quarter. When do you expect to get it down to that point?

Dan Hurwitz

Actually, I think it's right in line there.

Carroll Campbell - Hilliard Lyons

Okay.

Dan Hurwitz

It's when you include all the revenues of the joint ventures which we manage.

Bill Schafer

When you include all the total revenues, it came in at 4.6%.

Carroll Campbell - Hilliard Lyons

Okay. I didn't look at it that way. Thank you.

Dan Hurwitz

Sure.

Operator

(Operator Instructions)

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed sir.

Michael Mueller - JPMorgan

Thanks, hi. A couple of development questions first. Can you comment on the cost of the Brazil project? It looks like it went up in the quarter without an increase in square footage, and on Ukiah, that was scaled back. Is that a phasing or is that permanently going to be a smaller project?

David Oakes

Well, first, in Brazil, our project in Manaus now very advanced through the leasing process and development process. A portion of that is a fundamental increase in pricing. It's a function of the boom that's going on in Brazil, the exact reason that we want to have product, an additional product there. And so we've seen our developments costs in local currency terms, increase by about 7%.

On the other side of that, now that we're north of 75% leased for the project, we've seen lease rates come in about 10% higher than our original projection. So, on that side of it I think the yield is only increasing as the overall strength of the economy down there has contributed more to rental growth than it has to construction costs, but it's certainly increased both sides.

The second part of it relates somewhat to a methodology change in the way that we have disclosed the cost in US dollars. I think initially we thought it would show less volatility and show more clear picture of the project, if we locked the currency rate from our original investment in Manaus.

So, we'd eliminate certain quarterly volatility if the currency was moving back and forth, but at this point, I think we've realized that the meaningful one way move in Brazilian currency versus the US dollar, we want to more appropriately reflect what the current cost would be, even though many of those dollars were invested at a prior exchange rate.

So, taking our original pro forma cost, increasing it by the 7% fundamental cost increase that I referenced earlier and applying current 1.57, 1.58 exchange rates get you to the current number.

So, the great majority of the change there is simply a foreign exchange rate change which again doesn't have an impact in any negative way on the project yield and all in, on our investment now in US dollars where the total project cost is roughly $120 million, we expect the yield north of 15% on that project.

Scott Wolstein

Another way of looking at it is what investors seem to interpret as an increase in cost was actually an increase in value, because the project is actually being funded primarily through internally generated cash flow in Brazil in reais and from debt borrowed in Brazil in reais.

And the costs that we're investing in reais is just worth more in dollars, because the reais is worth more than it used to be against the American dollar. So what people mistakenly looked at as dramatic increase in cost was actually an increase in value of the investment.

Michael Mueller - JPMorgan

Okay. And David, you mentioned about buying MDT stock or the units, because it's pretty cheap. Can you turn the tables a little bit and talk about your own stock in this environment? How you think about that as investment opportunity, balance sheet considerations, et cetera?

David Oakes

I think we absolutely believe that at current prices our stock represents a very attractive investment alternative. We balance that against the fact that we are making our balance sheet a very high priority and making sure that we are in very strong financial condition to weather whatever existing storm may be out there and so we think of those two items together.

We do have additional approval for additional share repurchase and I think it's absolutely something we consider at these levels, especially as we advance through and continue on a daily basis to get more clarity on the asset sales that we're progressing through in the proceeds that we'll recognize from those.

Michael Mueller - JPMorgan

Okay. Thanks.

Operator

Your next question comes from the line of with [Palone Melgiri] with Wells Fargo. Please proceed, sir.

Palone Melgiri - Wells Fargo

I'm sorry. Somebody already asked my question. Thanks a lot.

Operator

Your next question comes from the line of [Kity Wong] with Train, Babcock Advisors. Please proceed.

Kity Wong - Train, Babcock Advisors

Could you just quantify for me in order to meet your guidance for the year, for FFO, how much transaction you actually have to do in the second half of the year? And also what is your dividend expectation for 2008? Thank you.

Bill Schafer

The transactional portion of our guidance is in the $0.50 to $0.60 range out of the total guidance of $3.95 to $4.05, so to put that in dollar that ends up being in the $55 million to $70 million range of transactional volume or of gains from transactional activity.

Kity Wong - Train, Babcock Advisors

So in the sales dollar term, what would that be?

Bill Schafer

If we apply the roughly 20% margin that we've guided to and on the low end of what we've experienced historically, you'd be in the $250 million to $350 million range for merchant building sales to recognize those gains.

Kity Wong - Train, Babcock Advisors

And your dividend expectation for 2008?

Bill Schafer

Dividend expectation for 2008, we've had a consistent policy of revising the dividend at the beginning of the year when the Board of Directors makes that decision and that dividend for now has been set at $0.69 per quarter, that's been paid for the first two quarters of 2008 and historic policy would be what you would expect to see for the remainder of 2008.

Kity Wong - Train, Babcock Advisors

Is it too early to comment on your expectation for 2009 at this point?

Scott Wolstein

Yes, we complete our budgeting for 2009 in October. And traditionally speak to that on our last conference call.

Kity Wong - Train, Babcock Advisors

Okay. Great. Thanks very much.

Operator

(Operator instructions) Your next question is a follow-up from the line of Michael Bilerman with Citigroup. Please proceed, sir.

Michael Bilerman - Citigroup

Thank you. Scott, you talked in your opening comments about two funds. One was for the broken development deal. I think you also mentioned raising a potential fund for existing developments.

Scott Wolstein

Now, that would be a fund, Michael. We're really looking at that as discrete asset joint ventures. We really couldn't do that as a fund and I'll tell you why. In order to attract private capital in a fund scenario, we really can't cherry pick assets.

We would really have to give them sort of an optionality on everything we do from a development standpoint and we're not prepared to do that. So what we do on the development side from our wholly-owned portfolio is we enter into discussions with potential private equity joint venture partners on specific development opportunities on a discrete basis and not on the discretionary fund basis.

Michael Bilerman - Citigroup

And would that be for existing developments that you already have under way or this is for new developments out of your land bank or new developments that you find?

Scott Wolstein

We have basically about seven or eight projects we've identified and entered into discussions with investors on. About three of those will start in 2008 and four of them will start in 2009.

Michael Bilerman - Citigroup

And that's the existing land you have?

Scott Wolstein

It's existing land that we either own or have under option and typically we would bring in the investors at the stage where the project is fully entitled, 50% pre-leased and ready for a construction loan such that we could mark up the project at the front end and recognize some gains when the investor comes into the deal.

Michael Bilerman - Citigroup

What sort of stake would you go down to?

Scott Wolstein

Well, we would go down to as little as 10%, but our share on the upside could be as much as 50%. Typically, the way those deals are structured, we co-invest on a 80-20, 90-10 basis from capital. We have pro rata distributions up to cash flow prep and then above that prep, we have a waterfall that maybe starts at 20% and goes up to as high as 50% of the upside.

So, the goal on those joint ventures is to basically access most of the capital from our partners but, grab as much of the upside as we can after they get their returns and investors today are targeting IRRs from that kind of activity in the high teens to up to maybe 20 and on a project that you can bring in, anywhere north of an 8% return on cost, which is well below our threshold, which allows us for front end markup and you can sell on completion let's say a seven cap. It's very easy to generate IRRs well in excess of that.

Michael Bilerman - Citigroup

Okay. And then on the sort of the value add, the value funds to go after the broken development, how far along are you in identifying properties or is it sort of a blind pool upfront?

Scott Wolstein

We've created a department within the company that does nothing but that and we've had dozens of projects identified. We've had probably as many as 10 meetings with private developers recently to go over specific projects. The challenge there, Michael, is really to be quite candid, is a lot of these developers are in trouble because the returns they were willing to accept were kind of low.

So, the decision we need to make in some of these is do we want to do a deal with the developer or do we want to do a deal with the bank and that's kind of how we look at this opportunity and I think some of the best opportunities. There are plenty of opportunities right now to do the deal with the developer. Some of the best opportunities might be those that we wait for when we can deal with the lender.

Michael Bilerman - Citigroup

Another thing you mentioned in your opening comments was new comp plans; sort of align interest of your employees to stockholders. How far along you are in terms of putting in new comp plans and what sort of value and impact to earnings would it be?

Scott Wolstein

Well, the major plan that was already announced, which was a supplemental co-equity plan that we announced I think last quarter…

Michael Bilerman - Citigroup

Last year.

Scott Wolstein

Actually, last year I guess we announced it. But what I was referring to really wasn't so much a new compensation plan as much as what we've been doing internally which is establishing very specific operating metrics, both on a departmental and individual basis, so that the employees' bonuses and long-term incentive comp is very specifically tied to quantitative or qualitative metrics that are established in advance so that employees are really more aligned, if you will, with the goals that we have for them to achieve not just on a company basis but also on very specifically on a departmental basis.

Michael Bilerman - Citigroup

Okay. And just on the bad debt expense, is that in your same-store NOI or out of it?

Bill Schafer

It's not reflected. We have a definition actually in our supplement where we slow the calculations of same-store NOI. We don't include lease terms. We don't include bad debt expense in those numbers. We don't include straight-line rents.

Michael Bilerman - Citigroup

And was there anything in the true-ups that you were talking that those are in the numbers or out of the numbers?

Bill Schafer

Those true-ups would have been adjusted to make truly a comp comparison.

Michael Bilerman - Citigroup

So you adjusted both years?

Bill Schafer

Right. Actually, we really just adjusted the first year because I think the numbers would have been spread throughout the various quarters last year, so we really didn't make any adjustment for the prior year number. We did in the current year, we adjusted for the 2007 or the adjustment that we made in 2008, we eliminated the effect of that.

Michael Bilerman - Citigroup

Okay and then just on the sales that you're doing, both the core and non-core assets and also the merchant build. We've seen a lot of REITs provide seller financing to get deals done. Is that any bit realm of what your doing?

Scott Wolstein

There's a real possibility we may do that on an interim basis in order to accomplish a transaction on a timely basis, but our goal if we did that would be to refinance that debt as soon as possible.

Michael Bilerman - Citigroup

Is this all the transactions and what sort of magnitude of seller financing are you talking about and how do you get comfortable with providing that?

Scott Wolstein

How do we get comfortable with providing it?

Michael Bilerman - Citigroup

Yeah, just in terms of what terms, how long, what rate?

Scott Wolstein

We're really governed very specifically by our auditors in that regard. Whatever financing we provide has to be regarded as market rate, both in terms of proceeds and in terms of interest rate. We're not providing the financing with a way to enable us to achieve a higher purchase price, if you will. It's really much more of a timing issue.

Where those are today? Just to give you some guidance, I mean, they're in line with recently announced financings by our peers, pretty much 70% loan to cost is where the market is on the proceed side and interest rates roughly 250 to 300 over LIBOR.

Michael Bilerman - Citigroup

And how long are you comfortable providing seller financing for? Is it a short-term? We've seen guys go 30 day to a 90 day max. We've also seen in some cases a transaction where it was two years at 0%. So I'm just trying to understand where your threshold is.

Scott Wolstein

I would really rather not get into those specific details until we announce the transaction. I wouldn't expect that we would have a loan outstanding that we didn't refinance either behind the loan or in place of the loan, within 90 days.

Dan Hurwitz

And also, I think it's important relative to other transactions, this is not subsidized financing. This is market rate financing where we're not sacrificing anything regarding the economics relative to the market.

Michael Bilerman - Citigroup

But the reality is these deals couldn't get done today if you didn't provide the financing?

Dan Hurwitz

I wouldn't necessarily say that. I would say they wouldn't get done as quickly. The financing is available in the market. It just takes a long time.

Michael Bilerman - Citigroup

Right. These assets have mortgage debt on them or they're unencumbered assets?

Dan Hurwitz

Some do and some don't. The ones that do, that would remain in place.

Michael Bilerman - Citigroup

Okay. Thank you.

Operator

Your next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed, sir. Mr. Sullivan, your line is open. Your phone may be muted.

Nick Vedder - Green Street Advisors

This is Nick Vedder here with Jim. Sorry about that. Just looking at your supplemental, it looks like the estimated leasing commission/tenant improvement has been ticking up recently. I'm just curious if this is a general trend that we should expect to see going forward as an effort to maintain occupancy?

Bill Schafer

Well, I don't think the tenant improvements are a general trend. That spikes quarterly, depending on the nature of the transaction and where it fits in the portfolio, as you know. If we have a significant number of re-leasing in the lifestyle portfolio, that number will go up. If it's in the community center portfolio, it will go down. I think that's more time sensitive than anything else.

It's really not capital that you're providing the tenant, it's actual cost. We are going to see an increase in third-party leasing commissions paid as tighter economics forced tenants to move more with off balance sheet real estate departments.

So, instead of having their own internal real estate group, we're seeing a much more third-party broker-oriented representation by retailers which is adding cost to the overall transaction.

Nick Vedder - Green Street Advisors

Okay. So, you're not really seeing too much pushback in terms of lease concessions, incentives at this point?

Bill Schafer

It's all focused on price right now. We're not seeing a lot of concessions. We're not seeing a lot (inaudible) for a lot more additional capital. They're really looking for lower rent for the most part, if they can get it and we've seen some of that in the portfolio and it's reflected in some of our numbers.

In terms of the capital expenditure numbers, I think overall our numbers are so low relative to a lot of others that even just smaller increases end up being a larger percentage increase on our overall tenant improvement and capital expenditure budget, so it is going up somewhat but in terms of absolute dollars, it's on the side of this portfolio, it's not that significant, it's just relative to a small base of spending.

Dan Hurwitz

But we absolutely are seeing and I think we will continue to see as a trend increased cost to lease from a third-party perspective. Even those tenants that have had brokers historically represent them; the cost of those brokers has gone up dramatically.

Nick Vedder - Green Street Advisors

Great. Thanks. Quickly, a second question. Looking at the MDT refinancing, you mentioned that it was refinanced about $340 million at a 60% to 65% loan-to-value. What sort of cap rate could you equate with that?

Scott Wolstein

The lender equate to that?

Nick Vedder - Green Street Advisors

Yes, yeah, what was the cap rate that they were expecting on that transaction?

Scott Wolstein

I think the lenders are typically applying a cap rate in the low-to-mid seven on their financings which is probably less than the value of the assets, but that's what they're typically applying from an underwriting standard today.

Nick Vedder - Green Street Advisors

Okay. Great. Thanks.

David Oakes

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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