Developers Diversified Realty Corporation Q1 2010 Earnings Call Transcript

Developers Diversified Realty Corporation Q1 2010 Earnings Call Transcript
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Developers Diversified Realty Corporation (DDR)

Q1 2010 Earnings Call

April 23, 2010 10:00 am ET

Executives

Kate Deck – Investor Relations Director

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

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

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

Analysts

Jay Habermann – Goldman Sachs & Company

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

Jay Habermann – Goldman Sachs

Christy McElroy – UBS

Craig Schmidt – Bank of America Merrill Lynch

Jeff Donnelly – Wells Fargo Securities, LLC.

[Quincent Bellei] – Citi

Michael Bilerman – Citi

Mike Mueller – JP Morgan Securities, Inc.

Jim Sullivan – Green Street Advisors

Carol Kemple – Hilliard Lyons

Rich Moore – RBC Capital Markets

David Harris – Broadpoint Gleacher

Presentation

Operator

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

Kate Deck

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

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

In addition, we will be discussing non-GAAP financial measures on today’s call including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release dated April 22, 2010. This release and our quarterly financial supplement are available on our website at DDR.com.

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

Daniel B. Hurwitz

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

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

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

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

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

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

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

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

Paul W. Freddo

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

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

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

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