Developers Diversified Realty (DDR)

Q2 2011 Earnings Call

July 29, 2011 10:00 am ET

Executives

David Oakes - Chief Financial officer and Senior Executive Vice President

Paul Freddo - Senior Executive Vice President of Leasing & Development

Daniel Hurwitz - Chief Executive Officer, President, Director, Chairman of Pricing Committee, Member of Executive Committee and Member of Management Committee

Timothy Lordan - Senior Vice President of Investor Relations & Funds Management

Analysts

Jonathan Habermann - Goldman Sachs Group Inc.

Omotayo Okusanya - Jefferies & Company, Inc.

Ki Kim - Macquarie Research

James Sullivan - Cowen and Company, LLC

Christy McElroy - UBS Investment Bank

Carol Kemple - Hilliard Lyons

Jeffrey Donnelly - Wells Fargo Securities, LLC

Richard Moore - RBC Capital Markets, LLC

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

David Wigginton - DISCERN Investment Analytics, Inc

Paul Morgan - Morgan Stanley

Michael Bilerman - Citigroup Inc

Vincent Chao - Deutsche Bank AG

Michael Mueller - JP Morgan Chase & Co

Unknown Analyst -

Craig Schmidt - BofA Merrill Lynch

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Developers Diversified Realty Co. Earnings Conference Call. My name is Chantilly, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Tim Lordan, Senior Vice President of Investor Relations. Please proceed, Sir.

Timothy Lordan

Thank you. Good morning, and thank you for joining us. On today's call, you will hear from President and CEO, Dan Hurwitz; Senior Executive Vice President of Leasing and Development, Paul Freddo; and Chief Financial Officer, David Oakes.

Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and filed with the SEC on Form 8-K, and in our Form 10-K for the year ended December 31, 2010 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 issued yesterday. This release, and our quarterly financial supplement, are available on our website at ddr.com.

Last, we will be observing a 2-question limit during the Q&A portion of the call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue. At this time, it's my pleasure to introduce our CEO, Dan Hurwitz.

Daniel Hurwitz

Thank you, Tim. Good morning, and welcome to our Second Quarter Earnings Conference Call. I'd like to begin the call by highlighting our continued focus on capital recycling and enhancing the overall quality of our portfolio. The successful refinancing of the term loan and the revolving credit facilities have provided greater financial flexibility in a more competitive cost of capital for our company. As a result, we are intently focused on sourcing external growth opportunities to the acquisition of prime assets and recycling capital from non-prime assets sales.

As highlighted in our June 30 press release, we disposed of an additional $112 million of primarily non-prime assets during the second quarter and have $85 million of prime assets under contract to acquire. The non-prime assets sold were primarily in secondary and tertiary markets and some were single-tenant assets while others were non- income-producing assets.

To the contrary, the properties under contract were creatively sourced, are located in a target market with demographics that will enhance our prime portfolio and have growth characteristics that will be maximized through our operating platform and tenant relationships.

In addition to the assets under contract, our pipeline of acquisition opportunities include core, core plus and value-add assets and our underwriting will continue to be very disciplined. Acquisitions are all about growth, not asset count. In addition to the external growth opportunities that we are actively sourcing, we are keenly focused on maximizing our internal growth opportunities due to continued lease up of our portfolio, and the aggressive pursuit of redevelopments.

As highlighted by our quarterly same-store NOI growth of 3.6%, we are continuing to see the benefits of the leasing momentum that has existed within our portfolio for the past several quarters, and we believe the strong NOI growth will continue in the near term as we work our way back to a stabilized lease rate of at least 95%.

More over, as mentioned on prior calls, we have been working hard to identify redevelopment opportunities within our existing portfolio. Based upon our thorough review of near-term and long-term opportunities, we have identified nearly $750 million of potential redevelopments that will be pursued over the next 5 years.

The reduced risk profile of redevelopments are attractive relative to ground-up development projects and provide compelling, typically double-digit, first year, unlevered cash on cost returns. Moreover, with our continued focus on improving the quality of our portfolio, we are excited about the opportunity to invest in many of our highest quality assets, further enhancing net asset value.

When thinking of DDR going forward, our goal is to be viewed as a company with an increasingly high-quality portfolio that will continue to improve over time. As a company with an exciting internal growth story through continued lease-up and rent-roll growth, and an external growth story driven by acquisitions that leverage the strengths of our operating platform. Also, a company with an opportunistic redevelopment program that will maximize the value of assets already owned.

Finally, you should continue to expect additional improvement to our balance sheet, credit metrics, and credit ratings. At DDR, we are constantly thinking about retail, the positives and the negatives, learning from our retail partners, and using that knowledge to energize a platform dedicated to creating value for our shareholders. I'll now turn the call over to Paul.

Paul Freddo

Thank you, Dan. I'll begin by highlighting what was another highly productive quarter followed by a brief discussion regarding a subject that deserves a great deal of attention: portfolio quality and why it matters.

Regarding our quarterly leasing results, our domestic leased rate increased to 92.8%. This represents a 120 basis point increase over the second quarter of 2010, and a 40 basis-point increase sequentially. Including Brazil, our blended leased rate is now at 93%. We expect this momentum to continue in the third and fourth quarters, resulting in a blended leased rate of over 93.2% by year end.

In the second quarter, we completed a total of 483 deals for over 2.5 million square feet, with a combined spread of 6%, up from 3.9% one year ago, and 5.4% in the first quarter. This represents our fifth straight quarter of positive combined leasing spreads and illustrates the consistent demand for quality space. It is important to note that this growth has been achieved with lower CapEx on a per square-foot basis, and that the impact of these results will be apparent in our income statement in the coming year, while the full impact will show up in 2013.

I would now like to take a few minutes to discuss the importance of portfolio quality and how we should evaluate the quality of a specific asset. There are many ways to evaluate the quality of a portfolio or a particular asset including local demographics, comparisons to national averages, occupancy levels, rental growth, et cetera. But one factor should stand above all else, the retailers. The retailer knows the consumer better than any landlord and the consumer certainly shows that they frequent the most successful and compelling retailers. More over, it's critical to keep in mind that no consumer shops at any property based on who owns it, they shop exclusively based on the tenants that occupy it.

Speaking of the tenants the consumer votes for every day, our portfolio consists mostly of power centers with destination tenants such as Walmart, Target, Kohl's, Bed Bath & Beyond, TJX, Dick’s Sporting Goods, Publix, PetSmart, and many other national credits that attract other high-quality retailers as co-tenants and generate significant sales volumes.

These retailers have game-changing marketing, real estate and merchandising strategies that drive customers to their stores and therefore increase the value of our centers. These retailers and the others that we are doing business with every day are also the retailers that have consistently grown market share. Most importantly they grew market share before and during the recession and continue to grow share even coming off positive comps.

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