UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

DEVELOPERS DIVERSIFIED REALTY CORPORATION

 

(Exact name of registrant as specified in its charter)

Ohio		34-1723097
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3300 Enterprise Parkway, Beachwood, Ohio 44122 (Address of principal executive offices — zip code)

(216) 755-5500 (Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

     As of May 5, 2008, the registrant had 119,781,787 outstanding common shares, without par value.

 

 

PART I
FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS — Unaudited

DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

		March 31,				December 31,
		2008				2007
Assets
Real estate rental property:
Land		$	2,103,771			$	2,142,942
Buildings			5,945,652				5,933,890
Fixtures and tenant improvements			245,980				237,117
			8,295,403				8,313,949
Less: Accumulated depreciation			(1,077,841	)			(1,024,048	)
			7,217,562				7,289,901
Construction in progress and land under development			782,534				664,926
Real estate held for sale			—				5,796
Real estate, net			8,000,096				7,960,623
Investments in and advances to joint ventures			646,627				638,111
Cash and cash equivalents			70,964				49,547
Restricted cash			49,635				58,958
Notes receivable			19,076				18,557
Deferred charges, net			31,988				31,172
Other assets			335,357				332,848
		$	9,153,743			$	9,089,816
Liabilities and Shareholders’ Equity
Unsecured indebtedness:
Senior notes		$	2,522,431			$	2,622,219
Revolving credit facilities			741,818				709,459
			3,264,249				3,331,678
Secured indebtedness:
Term debt			800,000				800,000
Mortgage and other secured indebtedness			1,645,552				1,459,336
			2,445,552				2,259,336
Total indebtedness			5,709,801				5,591,014
Accounts payable and accrued expenses			135,588				141,629
Dividends payable			89,606				85,851
Other liabilities			146,247				143,616
			6,081,242				5,962,110
Minority equity interest			113,743				111,767
Operating partnership minority interests			17,114				17,114
			6,212,099				6,090,991
Commitments and contingencies
Shareholders’ equity:
Class G — 8.0% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 720,000 shares issued and outstanding at March 31, 2008 and December 31, 2007			180,000				180,000
Class H — 7.375% cumulative redeemable preferred shares, without par value, $500 liquidation value; 410,000 shares authorized; 410,000 shares issued and outstanding at March 31, 2008 and December 31, 2007			205,000				205,000
Class I — 7.5% cumulative redeemable preferred shares, without par value, $500 liquidation value; 345,000 shares authorized; 340,000 shares issued and outstanding at March 31, 2008 and December 31, 2007			170,000				170,000
Common shares, without par value, $0.10 stated value; 300,000,000 shares authorized; 126,796,241 and 126,793,684 shares issued at March 31, 2008 and December 31, 2007, respectively			12,679				12,679
Paid-in-capital			3,031,963				3,029,176
Accumulated distributions in excess of net income			(309,800	)			(260,018	)
Deferred compensation obligation			22,364				22,862
Accumulated other comprehensive (loss) income			(8,734	)			8,965
Less: Common shares in treasury at cost: 7,195,400 shares and 7,345,304 shares at March 31, 2008 and December 31, 2007, respectively			(361,828	)			(369,839	)
			2,941,644				2,998,825
		$	9,153,743			$	9,089,816

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
(Dollars in thousands, except per share amounts)
(Unaudited)

		2008				2007
Revenues from operations:
Minimum rents		$	160,852			$	149,825
Percentage and overage rents			3,006				2,005
Recoveries from tenants			53,602				45,722
Ancillary and other property income			4,662				4,702
Management fees, development fees and other fee income			16,287				9,082
Other			3,487				7,709
			241,896				219,045
Rental operation expenses:
Operating and maintenance			36,869				27,342
Real estate taxes			27,675				25,810
General and administrative			20,715				21,518
Depreciation and amortization			57,139				52,096
			142,398				126,766
Other income (expense):
Interest income			582				3,682
Interest expense			(62,214	)			(60,471	)
Other expense, net			(497	)			(225	)
			(62,129	)			(57,014	)
Income before equity in net income of joint ventures, minority equity interests, tax (expense) benefit of taxable REIT subsidiaries and franchise taxes, discontinued operations and gain on disposition of real estate, net of tax			37,369				35,265
Equity in net income of joint ventures			7,388				6,281
Income before minority equity interests, tax (expense) benefit of taxable REIT subsidiaries and franchise taxes, discontinued operations and (loss) gain on disposition of real estate, net of tax			44,757				41,546
Minority equity interests:
Minority equity interests			(1,776	)			(1,488	)
Preferred operating partnership minority interests			—				(3,782	)
Operating partnership minority interests			(595	)			(569	)
			(2,371	)			(5,839	)
Tax (expense) benefit of taxable REIT subsidiaries and franchise taxes			(1,045	)			15,061
Income from continuing operations			41,341				50,768
Discontinued operations:
(Loss) income from discontinued operations			(93	)			2,939
(Loss) gain on disposition of real estate, net of tax			(191	)			2,819
			(284	)			5,758
Income before gain on disposition of real estate			41,057				56,526
Gain on disposition of real estate, net of tax			2,367				6,010
Net income		$	43,424			$	62,536
Preferred dividends			10,567				13,792
Net income applicable to common shareholders		$	32,857			$	48,744
Per share data:
Basic earnings per share data:
Income from continuing operations		$	0.28			$	0.37
Income from discontinued operations			—				0.05
Net income applicable to common shareholders		$	0.28			$	0.42
Diluted earnings per share data:
Income from continuing operations		$	0.28			$	0.37
Income from discontinued operations			—				0.05
Net income applicable to common shareholders		$	0.28			$	0.42
Dividends declared per common share		$	0.69			$	0.66

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
(Dollars in thousands)
(Unaudited)

		2008				2007
Net cash flow provided by operating activities:		$	82,325			$	129,672
Cash flow from investing activities:
Real estate developed or acquired, net of liabilities assumed			(99,314	)			(2,352,926	)
Equity contributions to joint ventures			(18,993	)			(212,402	)
Proceeds from joint venture advances, net			1,590				1,574
Proceeds from sale and refinancing of joint venture interests			736				—
Return on investments in joint ventures			7,970				4,285
Issuance of notes receivable, net			(519	)			(238	)
Decrease in restricted cash			9,323				—
Proceeds from disposition of real estate			11,214				57,242
Net cash flow used for investing activities			(87,993	)			(2,502,465	)
Cash flow from financing activities:
Proceeds from revolving credit facilities, net			30,945				350,000
Repayment of senior notes			(100,000	)			(100,000	)
Proceeds from term loans			—				900,000
Repayment of term loans			—				(200,000	)
Proceeds from mortgage and other secured debt			391,299				35,126
Principal payments on mortgage debt			(205,083	)			(148,231	)
Proceeds from issuance of convertible senior notes, net of underwriting commissions and offering expenses of $288 in 2007			—				587,712
Payment of deferred finance costs			(3,109	)			(2,661	)
Proceeds from issuance of common shares, net of underwriting commissions and offering expenses of $208 in 2007			—				746,645
Purchased option arrangement on common shares			—				(32,580	)
Proceeds from issuance of common shares in conjunction with the exercise of stock options, dividend reinvestment plan and restricted stock plan			87				4,599
Proceeds from issuance of preferred operating partnership interest, net of expenses			—				484,204
Return of investment—minority interest shareholder			1,210				(4,399	)
Purchase of operating partnership minority interests			—				(683	)
Distributions to operating partnership minority interests			(541	)			(502	)
Repurchase of common shares			—				(117,000	)
Dividends paid			(89,452	)			(78,094	)
Net cash flow provided by financing activities			25,356				2,424,136
Cash and cash equivalents
Increase in cash and cash equivalents			19,688				51,343
Effect of exchange rate changes on cash and cash equivalents			1,729				—
Cash and cash equivalents, beginning of period			49,547				28,378
Cash and cash equivalents, end of period		$	70,964			$	79,721

Supplemental disclosure of non-cash investing and financing activities:

     For the three-month period ended March 31, 2008, other liabilities included approximately $32.7 million, which represents the fair value of the Company’s interest rate swaps. At March 31, 2008, dividends payable were $89.6 million. In 2008, in accordance with the terms of the outperformance unit plans, the Company issued 107,879 of its shares. The foregoing transactions did not provide for or require the use of cash for the three-month period ended March 31, 2008.

      For the three-month period ended March 31, 2007, in conjunction with the merger of Inland Retail Real Estate Trust, Inc. (“IRRETI”) with a subsidiary of the Company, the Company acquired real estate assets of $3.0 billion, investments in joint ventures of approximately $22.3 million and accounts receivable and other assets

aggregating approximately $111.1 million. A portion of the consideration used to acquire the $3.0 billion of assets included assumed debt of $446.5 million, accounts payable and other liabilities aggregating approximately $12.1 million and common shares of approximately $394.2 million. Other liabilities included approximately $2.9 million, which represents the fair value of the Company’s interest rate swaps. At March 31, 2007, dividends payable were $90.1 million. In January 2007, in accordance with performance unit plans, the Company issued 466,666 restricted shares of which 70,000 vested as of the date of issuance. The remaining 396,666 shares will vest in 2008 through 2011. The foregoing transactions did not provide for or require the use of cash for the three-month period ended March 31, 2007.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

DEVELOPERS DIVERSIFIED REALTY CORPORATION

Notes to Condensed Consolidated Financial Statements

1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION

     Developers Diversified Realty Corporation and its related real estate joint ventures and subsidiaries (collectively, the “Company” or “DDR”) are engaged in the business of acquiring, expanding, owning, developing, redeveloping, leasing, managing and operating shopping centers and enclosed malls.

     Use of Estimates

     The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

     Unaudited Interim Financial Statements

     These financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the periods presented. The results of operations for the three-month periods ended March 31, 2008 and 2007 are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2007.

     The Company consolidates certain entities in which it owns less than a 100% equity interest if the entity is a variable interest entity (“VIE”), as defined in Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R) “Consolidation of Variable Interest Entities” (“FIN 46(R)”) and the Company is deemed to be the primary beneficiary in the VIE. The Company also consolidates certain entities that are not a VIE as defined in FIN 46(R) in which it has effective control. The Company consolidated one entity as a result of the adoption of Emerging Issues Task Force (“EITF”) 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights.” The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined by FIN 46(R), or does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.

     Comprehensive Income

     Comprehensive income is as follows (in thousands):

		Three-Month Periods
		Ended March 31,
		2008				2007
Net income		$	43,424			$	62,536
Other comprehensive (loss) income:
Change in fair value of interest rate contracts			(21,439	)			1,344
Amortization of interest rate contracts			(364	)			(364	)
Foreign currency translation			4,104				4,029
Other comprehensive (loss) income			(17,699	)			5,009
Total comprehensive income		$	25,725			$	67,545

     New Accounting Standards Implemented

The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 — SFAS 159

     In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which gives entities the option to measure eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings. The Company adopted SFAS No. 159 on January 1, 2008 and did not elect to measure any assets, liabilities or firm commitments at fair value.

Fair Value Measurements — SFAS 157

     In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. SFAS No. 157 also provides for certain disclosure requirements, including, but not limited to, the valuation techniques used to measure fair value and a discussion of changes in valuation techniques, if any, during the period. The Company adopted this statement for its financial assets and liabilities on January 1, 2008.

     For nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis, the effective date is fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact that this statement, for nonfinancial assets and liabilities, will have on its financial statements.

     New Accounting Standards to Be Implemented

Business Combinations — SFAS 141(R)

     In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141 (R)”). The objective of this statement is to improve the relevance, representative faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, this statement establishes principles and requirements for how the acquirer: (i) recognizes and measures in its financial statements, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest of the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company is currently assessing the impact the adoption of SFAS No. 141 (R) would have on its financial position and results of operations.

Non-Controlling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 — SFAS 160

     In December 2007, the FASB issued Statement No. 160, “Non-Controlling Interest in Consolidated Financial Statements — an Amendment of ARB No. 51” (“SFAS No. 160”). A non-controlling interest, sometimes called minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by other parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity, (ii) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of operations, (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in a subsidiary be accounted for consistently and requires that they be accounted for similarly, as equity transactions, (iv) when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value, the gain or loss on the deconsolidation of the subsidiary is measured using fair value of any non-controlling equity investments rather than the carrying amount of that retained investment and (v) entities provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interest of the non-controlling owners. This statement is effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company is currently assessing the impact the adoption of SFAS No. 160 would have on the Company’s financial position and results of operations.

Disclosures about Derivative Instruments and Hedging Activities — SFAS 161

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), which is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing the objectives and strategies for using derivative instruments by their underlying risk as well as a tabular format of the fair values of the derivative instruments and their gains and losses. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently assessing the potential impact that the adoption of SFAS No. 161 will have on its financial position and results of operations.

Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) — FSP APB 14-a

     In May 2008, the FASB issued FASB Staff Position (“FSP”), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-a”) which prohibits the consideration of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, as debt instruments within the scope of FSP APB 14-a and requires issuers of such instruments to separately account for the liability and equity components by allocating the proceeds from issuance of the instrument between the liability component and the embedded conversion option (i.e., the equity component). The difference between the principal amount of the debt and the amount of the proceeds allocated to the liability component should be reported as a debt discount and subsequently amortized to earnings over the instrument’s expected life. As a result, a lower net income could be reflected as interest expense would include both the current period’s amortization of the debt discount and the instrument’s coupon interest. This statement is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. Early adoption will not be permitted. The Company is currently assessing the impact that the adoption of FSP APB 14-a will have on its financial position and results of operations.

Accounting for Transfers of Financial Assets and Repurchase Financing Transactions — FSP FAS 140-3

     In February 2008, the FASB issued a FSP on “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP FAS 140-3”). This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a “rebuttable presumption” linking the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP is effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be permitted. The Company is currently evaluating the impact, if any, the adoption of FSP FAS 140-3 will have on its financial position and results of operations.

2. EQUITY INVESTMENTS IN JOINT VENTURES

     At March 31, 2008 and December 31, 2007, the Company had ownership interests in various unconsolidated joint ventures which, as of the respective dates, owned 273 shopping center properties and 44 shopping center sites formerly owned by Service Merchandise Company, Inc.

     Combined condensed financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):

		March 31,				December 31,
		2008				2007
Combined Balance Sheets:
Land		$	2,386,799			$	2,384,069
Buildings			6,269,832				6,253,167
Fixtures and tenant improvements			113,309				101,115
			8,769,940				8,738,351
Less: Accumulated depreciation			(463,607	)			(412,806	)
			8,306,333				8,325,545
Construction in progress			260,845				207,387
Real estate, net			8,567,178				8,532,932
Receivables, net			119,732				124,540
Leasehold interests			13,634				13,927
Other assets			439,253				365,925
		$	9,139,797			$	9,037,324
Mortgage debt		$	5,581,082			$	5,551,839
Amounts payable to DDR			8,196				8,492
Other liabilities			269,393				201,083
			5,858,671				5,761,414
Accumulated equity			3,281,126				3,275,910
		$	9,139,797			$	9,037,324
Company’s share of accumulated equity (1)		$	628,817			$	614,477

		Three-Month Periods
		Ended March 31,
		2008				2007
Combined Statements of Operations:
Revenues from operations		$	238,187			$	145,258
Expenses:
Rental operation			80,918				48,443
Depreciation and amortization			56,604				30,502
Interest			77,295				45,669
			214,817				124,614
Income before income tax expense and discontinued operations			23,370				20,644
Income tax expense			(3,780	)			(2,249	)
Other gain, net			6,439				—
Income from continuing operations			26,029				18,395
Discontinued operations:
Loss from discontinued operations			—				(157	)
Loss on disposition of real estate			(2	)			(341	)
			(2	)			(498	)
Net income		$	26,027			$	17,897
Company’s share of equity in net income of joint ventures (2)		$	7,489			$	6,511

     Investments in and advances to joint ventures include the following items, which represent the difference between the Company’s investment and its share of all of the unconsolidated joint ventures’ underlying net assets (in millions):

		March 31, 2008				December 31, 2007
Company’s share of accumulated equity		$	628.8			$	614.5
Basis differentials (2)			109.0				114.1
Deferred development fees, net of portion relating to the Company’s interest			(4.3	)			(3.8	)
Basis differential upon transfer of assets (2)			(96.6	)			(97.2	)
Notes receivable from investments			1.5				2.0
Amounts payable to DDR			8.2				8.5
Investments in and advances to joint ventures (1)		$	646.6			$	638.1

     Service fees earned by the Company through management, acquisition, financing, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures are as follows (in millions):

		Three-Month Periods
		Ended March 31,
		2008				2007
Management and other fees		$	12.9			$	7.2
Acquisition, financing, guarantee and other fees (1)			—				6.3
Development fees and leasing commissions			3.2				1.9
Interest income			0.1				0.1

     In February 2008, the Company began purchasing units of Macquarie DDR Trust (“MDT”), an Australian Based Listed Property Trust sponsored by Macquarie Bank Limited (ASX: MBL), an international investment bank, advisor and manager of specialized real estate funds. MDT is DDR’s joint venture partner in the DDR Macquarie Fund LLC Joint Venture (the “Fund”). Through March 31, 2008, the Company purchased 29.7 million units at an aggregate purchase price of $14.0 million. Through the combination of its purchase of the units in MDT and its direct and indirect ownership of the Fund, DDR is entitled to an approximate 17.2% economic interest in the Fund at March 31, 2008. As the Company has the ability to exercise significant influence over operating and financial policies, the Company accounts for both its interest in MDT and the Fund using the equity method of accounting.

3. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION

     Acquisitions

     On February 22, 2007, IRRETI shareholders approved a merger with a subsidiary of the Company pursuant to a merger agreement among IRRETI, the Company and the subsidiary. Pursuant to the merger, the Company acquired all of the outstanding shares of IRRETI for a total merger consideration of $14.00 per share, of which $12.50 per share was funded in cash and $1.50 per share was paid in the form of DDR common shares. As a result, on February 27, 2007, the Company issued 5.7 million DDR common shares to the IRRETI shareholders with an aggregate value of approximately $394.2 million valued at $69.54 per share, which was the average closing price of the Company’s common shares for the 10 trading days immediately preceding the two trading days prior to the IRRETI shareholders’ meeting.

     The IRRETI merger was initially recorded at a total cost of approximately $6.2 billion. Real estate and related assets of approximately $3.1 billion was recorded by the Company and approximately $3.0 billion was recorded by the TIAA-CREF Joint Venture. The Company assumed debt at a fair market value of approximately $443.0 million. At the time of the merger, the IRRETI real estate portfolio consisted of 315 community shopping centers, neighborhood shopping centers and single

tenant/net leased retail properties, totaling approximately 35.2 million square feet of Company-owned GLA, and five development properties. In connection with the merger, the TIAA-CREF Joint Venture acquired 66 of these shopping centers totaling approximately 15.6 million square feet of Company-owned GLA. During 2007, the Company sold 78 of the assets, valued at approximately $1.2 billion, acquired in the merger with IRRETI, 21 of which were sold to an independent buyer and the remaining 57 were contributed to unconsolidated joint ventures.

      Pro Forma Financial Information

     The following supplemental pro forma operating data is presented for the three-month period ended March 31, 2007, as if the IRRETI merger, the formation of the joint venture with TIAA-CREF and the contribution of 57 assets to unconsolidated joint ventures were completed as of January 1, 2007. Pro forma amounts include general and administrative expenses that IRRETI reported in its historical results of approximately $48.3 million for the three-month period ended March 31, 2007, including severance, a substantial portion of which management believes to be non-recurring. The supplemental pro forma operating data does not present the formation of the Dividend Capital Total Realty Trust Joint Venture.

     This acquisition was accounted for using the purchase method of accounting. The revenues and expenses related to assets and interests acquired are included in the Company’s historical results of operations from the date of purchase.

     The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisitions occurred as indicated, nor does it purport to represent the results of the operations for future periods (in thousands, except per share data):

		Three-Month
		Period Ended
		March 31,
		2007
Pro forma revenues		$	231,367
Pro forma income from continuing operations		$	8,451
Pro forma income from discontinued operations		$	5,758
Pro forma net income applicable to common shareholders		$	6,561
Per share data:
Basic earnings per share data:
Income from continuing operations		$	0.01
Income from discontinued operations			0.05
Net income applicable to common shareholders		$	0.06
Diluted earnings per share data:
Income from continuing operations		$	0.01
Income from discontinued operations			0.05
Net income applicable to common shareholders		$	0.06

4. OTHER ASSETS

Other assets consist of the following (in thousands):

		March 31,				December 31,
		2008				2007
Intangible assets:
In-place leases (including lease origination costs and fair market value of leases), net		$	29,524			$	31,201
Tenant relations, net			21,317				22,102
Total intangible assets (1)			50,841				53,303
Other assets:
Accounts receivable, net (2)			197,552				199,354
Prepaids, deposits and other assets			86,964				80,191
Total other assets		$	335,357			$	332,848

5. REVOLVING CREDIT FACILITIES

     The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, for which JP Morgan serves as the administrative agent (the “Unsecured Credit Facility”), which was amended in December 2007. The Unsecured Credit Facility provides for borrowings of $1.25 billion, an accordion feature for a future expansion to $1.4 billion and a maturity date of June 2010, with a one-year extension option. The Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to 50% of the facility. The Company’s borrowings under the Unsecured Credit Facility bear interest at variable rates at the Company’s election, based on either (i) the prime rate, as defined in the facility or (ii) LIBOR, plus a specified spread (0.60% at March 31, 2008). The specified spread over LIBOR varies depending on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Unsecured Credit Facility is used to finance the acquisition, development and expansion of shopping center properties, to provide working capital and for general corporate purposes. The Company was in compliance with these covenants at March 31, 2008. The facility also provides for an annual facility fee of 0.15% on the entire facility. At March 31, 2008, total borrowings under the Unsecured Credit Facility aggregated $716.8 million with a weighted average interest rate of 3.9%.

     The Company also maintains a $75 million unsecured revolving credit facility, amended in December 2007, with National City Bank (together with the Unsecured Credit Facility, the “Revolving Credit Facilities”). This facility has a maturity date of June 2010, with a one-year extension option, and reflects terms consistent with those contained in the Unsecured Credit Facility. Borrowings under this facility bear interest at variable rates based on (i) the prime rate, as defined in the facility or (ii) LIBOR, plus a specified spread (0.60% at March 31, 2008). The specified spread over LIBOR is dependent on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s

Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these covenants at March 31, 2008. At March 31, 2008, total borrowings under the National City Bank Facility aggregated $25.0 million with a weighted average interest rate of 3.6%.

6. FAIR VALUE MEASUREMENTS

     As of March 31, 2008, the aggregate fair value of the Company’s interest rate swaps that have been designated and qualify as a cash flow hedge was a liability of $32.7 million, which is included in other liabilities in the condensed consolidated balance sheet. The effective portion of the gain or loss on the interest rate swaps is reported as a component of other comprehensive income and will be reclassified into earnings in the same period or periods during which the hedged interest payments are a charge to earnings. For the three-month period ended March 31, 2008, the amount of hedge ineffectiveness was not material.

     The Company adopted the provisions of SFAS No. 157, as amended by FSP FAS 157-1 and FSP FAS 157-2, on January 1, 2008.

      Fair Value Hierarchy

     SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance with SFAS No. 157, the following summarizes the fair value hierarchy:

•   Level 1	—	Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
•   Level 2	—	Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly such as interest rates and yield curves that are observable at commonly quoted intervals and
•   Level 3	—	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

     In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

      Measurement of Fair Value

     At March 31, 2008, the Company used pay-fixed interest rate swaps to manage its interest. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.

     Although the Company has determined that the significant inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

      Items Measured at Fair Value on a Recurring Basis

     The following table presents information about the Company’s financial assets and liabilities (in millions), which consists of interest rate swap agreements that are included in other liabilities at March 31, 2008, measured at fair value on a recurring basis as of March 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

		Fair Value Measurements
		at March 31, 2008
		Level 1				Level 2				Level 3				Total
Derivative Financial Instruments		$	—			$	32.7			$	—			$	32.7

7. CONTINGENCIES

     The Company and its subsidiaries are subject to various legal proceedings which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

8. SHAREHOLDERS’ EQUITY

     The following table summarizes the changes in shareholders’ equity since December 31, 2007 (in thousands):

						Common
						Shares								Accumulated								Accumulated
						($0.10								Distributions								Other				Treasury
		Preferred				Stated				Paid-in				In Excess of				Deferred				Comprehensive				Stock
		Shares				Value)				Capital				Net Income				Obligation				Income				at Cost				Total
Balance, December 31, 2007		$	555,000			$	12,679			$	3,029,176			$	(260,018	)		$	22,862			$	8,965			$	(369,839	)		$	2,998,825
Issuance of common shares related to exercise of stock options, dividend reinvestment plan, performance plan and director compensation											(1,429	)															6,700				5,271
Issuance of restricted stock											(5,184	)															6,081				897
Vesting of restricted stock											7,113								(498	)							(4,770	)			1,845
Stock-based compensation											2,287																				2,287
Dividends declared—common shares															(82,639	)															(82,639	)
Dividends declared—preferred shares															(10,567	)															(10,567	)
Comprehensive income:
Net income															43,424																43,424
Other comprehensive income:
Change in fair value of interest rate contracts																							(21,439	)							(21,439	)
Amortization of interest rate contracts																							(364	)							(364	)
Foreign currency translation			—				—				—				—				—				4,104				—				4,104
Comprehensive income			—				—				—				43,424				—				(17,699	)			—				25,725
Balance, March 31, 2008		$	555,000			$	12,679			$	3,031,963			$	(309,800	)		$	22,364			$	(8,734	)		$	(361,828	)		$	2,941,644

     Common share dividends declared, per share, were $0.69 and $0.66 for the three-month periods ended March 31, 2008 and 2007, respectively.

     In June 2007, the Company’s Board of Directors authorized a common share repurchase program. Under the terms of the program, the Company may purchase up to a maximum value of $500 million of its common shares over a two-year period. As of March 31, 2008, the Company had repurchased under this program 5.6 million of its common shares at a weighted average cost of $46.66 per share.

     During the three months ended March 31, 2008, the vesting of restricted stock grants to certain officers and directors of the Company, approximating 0.2 million common shares of the Company, was deferred through the Company’s non-qualified deferred compensation plans and, accordingly, the Company recorded approximately $4.0 million in deferred obligations. Also, in the first quarter of 2008, in accordance with the transition rules under Section 409A of the internal revenue code, an officer elected to have his deferrals distributed to him in 2008 which resulted in a reduction of deferred obligation of approximately $4.7 million.

9. OTHER INCOME

     Other income for the three-month periods ended March 31, 2008 and 2007 was composed of the following (in millions):

		Three-Month Periods
		Ended March 31,
		2008				2007
Acquisition fees (1)		$	—			$	6.3
Lease termination fees			3.3				1.3
Other, net			0.2				0.1
		$	3.5			$	7.7

10. DISCONTINUED OPERATIONS

     Pursuant to the definition of a component of an entity in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), all earnings of discontinued operations sold or held for sale, assuming no significant continuing involvement, have been reclassified in the Condensed Consolidated Statements of Earnings for the three-month periods ended March 31, 2008 and 2007. The Company considers assets held for sale when the transaction has been approved and there are no significant contingencies related to the sale that may prevent the transaction from closing. Included in discontinued operations for the three-month periods ended March 31, 2008 and 2007, are two properties sold in 2008 (including one property held for sale at December 31, 2007) aggregating 0.1 million square feet, and 67 shopping centers sold in 2007 (including one property held for sale at December 31, 2006 and 22 properties acquired through the IRRETI merger in 2007), aggregating 6.3 million square feet. The operating results relating to assets sold are as follows (in thousands):

		Three-Month Periods
		Ended March 31,
		2008				2007
Revenues		$	119			$	11,916
Expenses:
Operating			134				3,257
Interest, net			10				3,220
Depreciation			68				2,500
Total expense			212				8,977
(Loss) income before (loss) gain on disposition of real estate			(93	)			2,939
(Loss) gain on disposition of real estate			(191	)			2,819
Net (loss) income		$	(284	)		$	5,758

11. EARNINGS PER SHARE

     Earnings Per Share (EPS) has been computed pursuant to the provisions of SFAS No. 128, “Earnings Per Share.” The following table provides a reconciliation of net income from continuing operations and the number of common shares used in the computations of “basic” EPS, which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and “diluted” EPS, which includes all such shares (in thousands, except per share amounts):

		Three-Month Periods
		Ended March 31,
		2008				2007
Income from continuing operations		$	41,341			$	50,768
Add: Gain on disposition of real estate			2,367				6,010
Less: Preferred stock dividends			(10,567	)			(13,792	)
Basic and Diluted — Income from continuing operations applicable to common shareholders		$	33,141			$	42,986
Number of Shares:
Basic — Average shares outstanding			119,148				114,851
Effect of dilutive securities:
Convertible notes			—				13
Stock options			151				604
Restricted stock			50				193
Diluted — Average shares outstanding			119,349				115,661
Per share data:
Basic earnings per share data:
Income from continuing operations		$	0.28			$	0.37
Income from discontinued operations			—				0.05
Net income applicable to common shareholders		$	0.28			$	0.42
Diluted earnings per share data:
Income from continuing operations		$	0.28			$	0.37
Income from discontinued operations			—				0.05
Net income applicable to common shareholders		$	0.28			$	0.42

     The exchange of the minority equity interest associated with operating partnership units into common shares was not included in the computation of diluted EPS for the three-month periods ended March 31, 2008 and 2007, because the effect of assuming conversion was anti-dilutive.

     The Company’s senior convertible notes issued in March 2007, which are convertible into common shares of the Company with an initial conversion price of approximately $74.75, were not included in the computation of diluted EPS for the three months ended March 31, 2008 and 2007. The senior convertible notes, which are convertible into common shares of the Company with an initial conversion price of approximately $65.11, were not included in the computation of diluted EPS for the three months ended March 31, 2008. The Company’s stock price did not exceed the strike price of the conversion feature of the senior convertible notes in these periods.

12. SEGMENT INFORMATION

     The Company has two reportable business segments, shopping centers and other investments, determined in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). Each shopping center is considered a separate operating

segment; however, each shopping center on a stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under SFAS No. 131.

     At March 31, 2008, the shopping center segment consisted of 710 shopping centers (including 317 owned through unconsolidated joint ventures and 40 that are otherwise consolidated by the Company) in 45 states, plus Puerto Rico and Brazil. At March 31, 2007, the shopping center segment consisted of 773 shopping centers (including 211 owned through unconsolidated joint ventures and 39 that are otherwise consolidated by the Company) in 45 states, plus Puerto Rico and Brazil. At March 31, 2008 and 2007, the Company also owned seven business centers in five states.

     The table below presents information about the Company’s reportable segments for the three-month periods ended March 31, 2008 and 2007 (in thousands).

		Three-Month Period Ended March 31, 2008
		Other				Shopping
		Investments				Centers				Other				Total
Total revenues		$	2,686			$	239,210							$	241,896
Operating expenses			(1,180	)			(63,364	)							(64,544	)
Net operating income			1,506				175,846								177,352
Unallocated expenses (1)										$	(141,028	)			(141,028	)
Equity in net income of joint ventures							7,388								7,388
Minority equity interests											(2,371	)			(2,371	)
Income from continuing operations														$	41,341
Total real estate assets as of March 31, 2008		$	103,160			$	8,974,777							$	9,077,937

		Three-Month Period Ended March 31, 2007
		Other				Shopping
		Investments				Centers				Other				Total
Total revenues		$	1,301			$	217,744							$	219,045
Operating expenses			(427	)			(52,725	)							(53,152	)
Net operating income			874				165,019								165,893
Unallocated expenses (1)										$	(115,567	)			(115,567	)
Equity in net income of joint ventures							6,281								6,281
Minority equity interests											(5,839	)			(5,839	)
Income from continuing operations														$	50,768
Total real estate assets as of March 31, 2007		$	96,429			$	10,357,581							$	10,454,010
Total real estate assets as of December 31, 2007		$	101,989			$	8,882,749							$	8,984,738

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the consolidated financial statements, the notes thereto and the comparative summary of selected financial data appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations. The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Readers should exercise caution in interpreting and relying on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements and could materially affect the Company’s actual results, performance or achievements.

     Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

	•		The Company is subject to general risks affecting the real estate industry, including the need to enter into new leases or renew leases on favorable terms to generate rental revenues;
	•		The Company could be adversely affected by changes in the local markets where its properties are located, as well as by adverse changes in national economic and market conditions;
	•		The Company may fail to anticipate the effects on its properties of changes in consumer buying practices, including sales over the Internet and the resulting retailing practices and space needs of its tenants;
	•		The Company is subject to competition for tenants from other owners of retail properties, and its tenants are subject to competition from other retailers and methods of distribution. The Company is dependent upon the successful operations and financial condition of its tenants, in particular of its major tenants, and could be adversely affected by the bankruptcy of those tenants;
	•		The Company may not realize the intended benefits of acquisition or merger transactions. The acquired assets may not perform as well as the Company anticipated, or the Company may not successfully integrate the assets and realize the improvements in occupancy and operating

results that the Company anticipates. The acquisition of certain assets may subject the Company to liabilities, including environmental liabilities;

	•		The Company may fail to identify, acquire, construct or develop additional properties that produce a desired yield on invested capital, or may fail to effectively integrate acquisitions of properties or portfolios of properties. In addition, the Company may be limited in its acquisition opportunities due to competition and other factors;
	•		The Company may fail to dispose of properties on favorable terms. In addition, real estate investments can be illiquid and limit the Company’s ability to promptly make changes to its portfolio to respond to economic and other conditions;
	•		The Company may abandon a development opportunity after expending resources if it determines that the development opportunity is not feasible, or if it is unable to obtain all necessary zoning and other required governmental permits and authorizations;
	•		The Company may not complete development projects on schedule as a result of various factors, many of which are beyond the Company’s control, such as weather, labor conditions, governmental approvals, material shortages, or general economic downturn resulting in increased debt service expense and construction costs and decreases in revenue;
	•		The Company’s financial condition may be affected by required debt service payments, the risk of default and restrictions on its ability to incur additional debt or enter into certain transactions under its credit facilities and other documents governing its debt obligations. In addition, the Company may encounter difficulties in obtaining permanent financing;
	•		Debt and/or equity financing necessary for the Company to continue to grow and operate its business may not be available or may not be available on favorable terms;
	•		The Company is subject to complex regulations related to its status as a real estate investment trust (“REIT”) and would be adversely affected if it failed to qualify as a REIT;
	•		The Company must make distributions to shareholders to continue to qualify as a REIT, and if the Company borrows funds to make distributions, those borrowings may not be available on favorable terms;
	•		Joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that a partner or co-venturer may become bankrupt, may at any time have different interests or goals than those of the Company and may take action contrary to the Company’s instructions, requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT;
	•		The Company may not realize anticipated returns from its real estate assets outside the United States. The Company expects to continue to pursue international opportunities that may subject the Company to different or greater risks than those associated with its domestic operations. The Company owns assets in Puerto Rico, an interest in an unconsolidated joint venture that owns

properties in Brazil and an interest in consolidated joint ventures that will develop and own properties in Canada, Russia and Ukraine;

•

International development and ownership activities carry risks that are different from those the Company faces with the Company’s domestic properties and operations. These risks include:

	•		Adverse effects of changes in exchange rates for foreign currencies;
	•		Changes in foreign political or economic environments;
	•		Challenges of complying with a wide variety of foreign laws including taxes, addressing different practices and customs relating to corporate governance, operations and litigation;
	•		Different lending practices;
	•		Cultural and consumer differences;
	•		Changes in applicable laws and regulations in the United States that affect foreign operations;
	•		Difficulties in managing international operations and
	•		Obstacles to the repatriation of earnings and cash;

	•		Although the Company’s international activities are currently a relatively small portion of its business, to the extent the Company expands its international activities, these risks could significantly increase and adversely affect its results of operations and financial condition;
	•		The Company is subject to potential environmental liabilities;
	•		The Company may incur losses that are uninsured or exceed policy coverage due to its liability for certain injuries to persons, property or the environment occurring on its properties;
	•		The Company could incur additional expenses in order to comply with or respond to claims under the Americans with Disabilities Act or otherwise be adversely affected by changes in government regulations, including changes in environmental, zoning, tax and other regulations and
	•		Changes in interest rates could adversely affect the market price of the Company’s common shares, as well as its performance and cash flow.

Executive Summary

     The Company is a self-administered and self-managed REIT, in the business of acquiring, developing, redeveloping, owning, leasing and managing shopping centers. As of March 31, 2008, the Company’s portfolio consisted of 710 shopping centers and seven business centers (including 317 properties owned through unconsolidated joint ventures and 40 properties owned through consolidated joint ventures). These properties consist of shopping centers, lifestyle centers and enclosed malls owned in the United States, Puerto Rico and Brazil. At March 31, 2008, the Company owned and/or managed approximately 162 million total square feet of Gross Leasable Area (“GLA”), which includes all of the aforementioned properties and 12 properties owned by third parties. The Company also has assets under development in Canada and Russia. The Company believes that its portfolio of shopping center properties is one of the largest (measured by the amount of total GLA) currently held by any publicly-traded REIT. At March 31, 2008, the aggregate occupancy of the Company’s shopping center portfolio

was 94.5%, as compared to 95.0% at March 31, 2007. The Company owned 710 shopping centers at March 31, 2008 as compared to 773 shopping centers at March 31, 2007. The average annualized base rent per occupied square foot was $12.42 at March 31, 2008, as compared to $11.83 at March 31, 2007. The Company also owns seven office and industrial properties.

     Net income applicable to common shareholders for the three-month period ended March 31, 2008, was $32.9 million, or $0.28 per share (diluted and basic), compared to net income of $48.7 million, or $0.42 per share (diluted and basic), for the prior-year comparable period. Funds From Operations (“FFO”) applicable to common shareholders for the three-month period ended March 31, 2008, was $99.6 million compared to $106.2 million for the three-month period ended March 31, 2007, a decrease of 6.2%. The decrease in FFO applicable to common shareholders of approximately $6.6 million is principally attributable to the release of certain tax reserves and transactional income that occurred in 2007 that was not repeated in the first quarter of 2008. These decreases were partially offset by a full three months of operating results for the merger with Inland Retail Real Estate Trust, Inc. (“IRRETI”).

     During the first quarter of 2008, the Company remained focused on its balance sheet, identifying and obtaining financing at reasonable pricing and evaluating opportunities created by the distress in the financial markets. This strategy reflects the Company’s primary interest in maintaining a strong balance sheet, while still capitalizing on attractive investment opportunities that have been created by current market conditions. The Company continues to review prospective investments based upon risk and return attributes; and the current markets offer some opportunities that the Company has not seen in recent years.

     Since the second quarter of 2007, the debt capital markets have been volatile and challenging and numerous financial institutions have experienced unprecedented write-offs and liquidity issues. Currently, the Company believes that lenders’ appetites for new financing are mixed. Rates available from commercial and investment banks are widely divergent. Often, the larger banks are interested in offering greater loan participations, which provides increased opportunities for local or regional banks. The Company also has noted that life insurance companies are becoming more selective in relation to new lending opportunities. Life insurance companies also appear to be more interested in smaller loans versus large portfolios. The overall trend from lenders is that the quality of sponsorship and relationship strength are critical factors in their decision making process. The Company has established strong relationships with various financial institutions since its inception as a public company in 1993, which have enabled the Company to continue to effectively access the debt markets despite the challenging environment.

     During the first quarter of 2008, the Company closed on over $500 million in new financings including a five-year, $350 million secured financing on a portfolio of six wholly-owned properties with a coupon interest rate of 5%. Other loan closings in the first quarter of 2008 included a $71 million construction loan on a development in Homestead, Florida and the refinancing of $72 million of unconsolidated joint venture debt. The Company’s 50% joint venture with Sonae Sierra in Brazil also closed on a R$50 million reais revolving credit facility with Bank Itau. The Company continues to actively pursue additional secured project refinancings, primarily for its unconsolidated joint ventures, and expects to close on these refinancings throughout the remainder of 2008.

     Also in 2008, the Company began purchasing units of Macquarie DDR Trust (“MDT”), an Australian Based Listed Property Trust sponsored by Macquarie Bank Limited (ASX: MBL), an international investment bank, advisor and manager of specialized real estate funds. MDT is the Company’s joint venture partner in the DDR Macquarie Fund LLC joint venture. Through March 31, 2008, the Company purchased 29.7 million units at an aggregate purchase price of $14.0 million. Through the combination of its purchase of the units in MDT and its direct and indirect ownership of the Fund, DDR is entitled to an approximate 17.2% economic interest in the Fund. The Company views the purchase of these units as an attractive investment alternative. By purchasing MDT’s units, the Company is able to increase its ownership in high quality assets in the Company’s portfolio in a manner that provides an immediate return on investment. Purchasing these units also ensures that the Company has aligned its interests with the interests of other unit holders of MDT.

     Retail Environment

     In a decelerating economic environment, it is natural to see retailers that offer shoppers a compelling value proposition and a have a strong balance sheet greatly expand market share at the expense of competitors that are less well-positioned. As a retail landlord, the Company knows that this competition can and will occur. The Company’s leasing staff continues to evaluate the credit quality of its tenants. In this regard, they are often marketing space that is currently leased to take advantage of the opportunity to re-lease the space as a means of maximizing revenue potential and limiting downtime.

     Considering the current economic environment, the Company is pleased with its portfolio performance and outlook for the remainder of the year. As the Company’s portfolio has long-term leases with high credit quality retailers that appeal to consumers’ demand for value and convenience, the portfolio has historically performed well in times of macroeconomic stress. While some deceleration in retailer new store growth is expected, many tenants actually do well in tougher economies and view these challenges as an opportunity to gain market share. The Company is well-positioned to benefit from the current economy in which consumers are increasingly price-sensitive and less inclined to buy fully-priced discretionary items because the Company’s portfolio is founded on retailers that offer price leadership and value. These retailers are the clear beneficiaries of consumer spending. The Company has observed this trend evolve in the performance of department stores versus discount retailers and among discount apparel retailers versus specialty retailers.

     DDR Portfolio

     Several aspects of the Company’s portfolio quality, aside from the Company’s long-term consistency of portfolio metrics (occupancy, rent growth and leasing spreads), which illustrate the stability and quality of the portfolio, that help it to better withstand against macroeconomic volatility, include, but are not limited to, the following:

	•		Tenant credit quality;
	•		A relatively low amount of capital expenditure needed to maintain the portfolio in a condition to achieve income growth and a meaningful impact on the cash flow and
	•		Overall asset quality. Retailers make location decisions on far more than simply demographics. Asset quality is also impacted by tenancy and physical location. While

demographics play a part in defining asset quality, retailers’ also analyze markets based on trade area, which often are irregularly-shaped to reflect variables such as asset size or critical mass, competition, physical or geographic barriers and transportation.

     In conclusion, from both an operating standpoint and a leasing standpoint, the Company expects the portfolio to continue to demonstrate solid results, despite the threat of a weakening economy.

Results of Operations
Revenues from Operations (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
Base and percentage rental revenues		$	163,858			$	151,830			$	12,028				7.9	%
Recoveries from tenants			53,602				45,722				7,880				17.2
Ancillary and other property income			4,662				4,702				(40	)			(0.9	)
Management fees, development fees and other fee income			16,287				9,082				7,205				79.3
Other			3,487				7,709				(4,222	)			(54.8	)
Total revenues		$	241,896			$	219,045			$	22,851				10.4	%

     Base and percentage rental revenues relating to new leasing, re-tenanting and expansion of the core portfolio properties (shopping center properties owned as of January 1, 2007, and since March 1, 2007 with regard to IRRETI assets, excluding properties under development/redevelopment and those classified as discontinued operations) (“Core Portfolio Properties”) increased approximately $3.2 million, or 2.5%, for the three-month period ended March 31, 2008, as compared to the same period in 2007. The increase in base and percentage rental revenues is due to the following (in millions):

		Increase
		(Decrease)
Core Portfolio Properties		$	3.2
IRRETI merger and acquisition of real estate assets			17.8
Development/redevelopment of shopping center properties			1.4
Disposition of shopping center properties in 2007			(10.7	)
Business center properties			0.4
Straight-line rents			(0.1	)
		$	12.0

     At March 31, 2008, the aggregate occupancy rate of the Company’s shopping center portfolio was 94.5%, as compared to 95.0% at March 31, 2007. The Company owned 710 shopping centers at March 31, 2008, as compared to 773 shopping centers at March 31, 2007. The average annualized base rent per occupied square foot was $12.42 at March 31, 2008, as compared to $11.83 at March 31, 2007.

     At March 31, 2008, the aggregate occupancy rate of the Company’s wholly-owned shopping centers was 92.7%, as compared to 94.2% at March 31, 2007. The Company had 353 wholly-owned shopping centers at March 31, 2008, as compared to 475 shopping centers at March 31, 2007. The average annualized base rent per occupied square foot for wholly-owned shopping centers was $11.63 at March 31, 2008, as compared to $11.37 at March 31, 2007.

     At March 31, 2008, the aggregate occupancy rate of the Company’s joint venture shopping centers was 96.1%, as compared to 97.0% at March 31, 2007. The Company’s joint ventures owned 357 shopping centers including 40 consolidated centers primarily owned through the Mervyns Joint Venture at March 31, 2008, as compared to 259 shopping centers including 39 consolidated centers primarily owned through the Mervyns Joint Venture at March 31, 2007. The average annualized base rent per occupied square foot was $13.12 at March 31, 2008, as compared to $12.41 at March 31, 2007. The increase is a result of the mix of shopping center assets in the joint ventures at March 31, 2008, as compared to March 31, 2007, primarily related to the 2007 formation of the TIAA-CREF Joint Venture, DDR Domestic Retail Fund I and Dividend Capital Total Realty Joint Venture.

     At March 31, 2008, the aggregate occupancy rate of the Company’s business centers was 70.5%, as compared to 60.5% at March 31, 2007. The increase in occupancy is primarily due to a large vacancy filled at a business center in Boston, Massachusetts. The business centers consist of seven assets in five states at March 31, 2008 and 2007.

     Recoveries from tenants increased $7.9 million for the three-month period ended March 31, 2008, as compared to the same period in 2007. This increase is primarily due to an increase in operating expenses and real estate taxes that aggregated $11.4 million due to the merger with IRRETI in February 2007. Recoveries were approximately 83.1% and 86.0% of operating expenses and real estate taxes for the three-month periods ended March 31, 2008 and 2007, respectively.

     The increase in recoveries from tenants was primarily related to the following (in millions):

		Increase
		(Decrease)
IRRETI merger and acquisition of real estate assets		$	4.5
Development/redevelopment of shopping center properties 2007			1.4
Transfer of assets to unconsolidated joint ventures in 2007			(2.9	)
Increase in operating expenses at the remaining shopping center and business center properties			4.9
		$	7.9

     Ancillary and other property income is a result of pursuing additional revenue opportunities in the Core Portfolio Properties. The Company believes its ancillary income program will continue to be an industry leader among shopping center developers. Continued growth is anticipated in the area of ancillary or non-traditional revenue as new revenue opportunities are identified and as currently established revenue opportunities grow throughout the Company’s core, acquired and development portfolios. The slight decrease in ancillary and other property income is related to the conversion of operating arrangements at one of the Company’s shopping centers into a long-term lease agreement. This conversion resulted in a decrease in ancillary and other property income of $2.0 million and a corresponding increase in base rent. Ancillary revenue opportunities have in the past included short-term and seasonal leasing programs, outdoor advertising programs, wireless tower development programs, energy management programs, sponsorship programs and various other programs.

     The increase in management, development and other fee income for the three-month period ended March 31, 2008, is primarily due to the following (in millions):

		Increase
		(Decrease)
Newly formed unconsolidated joint venture interests		$	4.8
Development fee income			(0.1	)
Other income			1.0
Sale of several of the Company’s unconsolidated joint venture properties			(0.2	)
Leasing commissions			1.4
Increase in management fee income at various unconsolidated joint ventures			0.3
		$	7.2

     Management fee income is expected to continue to increase as unconsolidated joint ventures acquire additional properties and as assets under development become operational. Development fee income was primarily earned through the redevelopment of assets through the Coventry II Fund. The Company expects to continue to pursue additional development unconsolidated joint ventures as opportunities present themselves.

     Other income for the three-month periods ended March 31, 2008 and 2007 was composed of the following (in millions):

		Three-Month Periods
		Ended March 31,
		2008				2007
Acquisition fees (1)		$	—			$	6.3
Lease termination fees			3.3				1.3
Other, net			0.2				0.1
		$	3.5			$	7.7

(1)

Includes acquisition fees of $6.3 million earned from the formation of the joint venture with TIAA-CREF in February 2007, excluding the Company’s retained ownership interest. The Company’s fee was earned in conjunction with services rendered by the Company in connection with the acquisition of the IRRETI real estate assets.

Expenses from Operations (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
Operating and maintenance		$	36,869			$	27,342			$	9,527				34.8	%
Real estate taxes			27,675				25,810				1,865				7.2
General and administrative			20,715				21,518				(803	)			(3.7	)
Depreciation and amortization			57,139				52,096				5,043				9.7
		$	142,398			$	126,766			$	15,632				12.3	%

     Operating and maintenance expenses include the Company’s provision for bad debt expense, which approximated 1.4% and 0.7% of total revenues for the three-month periods ended March 31, 2008 and 2007, respectively (see Economic Conditions).

     The increase in rental operation expenses, excluding general and administrative, for the three-month period ended March 31, 2008, compared to 2007, is due to the following (in millions):

		Operating				Real				Depreciation
		and				Estate				and
		Maintenance				Taxes				Amortization
Core Portfolio Properties		$	4.9			$	—			$	1.5
IRRETI merger and acquisition of real estate assets			2.2				3.1				7.1
Development/redevelopment of shopping center properties			1.1				0.5				(0.4	)
Transfer of assets to unconsolidated joint ventures in 2007			(1.1	)			(1.8	)			(4.1	)
Business center properties			0.6				0.1				0.3
Provision for bad debt expense			1.8				—				—
Personal property			—				—				0.6
		$	9.5			$	1.9			$	5.0

     General and administrative expenses for the three-month period ended March 31, 2008 includes increased expenses due to the merger with IRRETI and additional stock-based compensation expense. Total general and administrative expenses were approximately 4.3% and 5.7%, respectively, of total revenues, including total revenues of unconsolidated joint ventures, for the three-month periods ended March 31, 2008 and 2007, respectively. The decrease in general and administrative expenses for the three-month period and this percentage in comparison to total revenues is primarily due to additional compensation expense of $4.1 that was recorded by the Company in 2007 in connection with the Company’s former president’s departure as an executive officer.

     The Company continues to expense internal leasing salaries, legal salaries and related expenses associated with certain leasing and re-leasing of existing space. In addition, the Company capitalized certain direct and incremental construction and software development and implementation costs consisting of direct wages and benefits, travel expenses and office overhead costs of $3.9 million and $3.1 million for the three-month periods ending March 31, 2008 and 2007, respectively.

Other Income and Expenses (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
Interest income		$	582			$	3,682			$	(3,100	)			(84.2	)%
Interest expense			(62,214	)			(60,471	)			(1,743	)			2.9
Other expense, net			(497	)			(225	)			(272	)			120.9
		$	(62,129	)		$	(57,014	)		$	(5,115	)			9.0	%

     Interest income for the three-month period ended March 31, 2008, decreased primarily due to excess cash held by the Company immediately following the closing as a result of the IRRETI merger in February 2007.

     Interest expense increased primarily due to the IRRETI merger and associated borrowings combined with other development assets becoming operational, yet this interest expense was significantly offset by a decrease in short-term interest rates. The weighted average debt outstanding and related weighted average interest rates are as follows:

		Three-Month Periods
		Ended March 31,
		2008				2007
Weighted average debt outstanding (billions)		$	5.7			$	5.2
Weighted average interest rate			4.9	%			5.3	%

		At March 31,
		2008				2007
Weighted average interest rate			4.8	%			5.4	%

     The reduction in weighted average interest rates is primarily related to the Company’s issuance of $600 million of senior convertible notes in March 2007 with a coupon rate of 3.0% and the recent decline in short-term interest rates. Interest costs capitalized, in conjunction with development and expansion projects and development joint venture interests were $9.1 million and $5.7 million for the three-month periods ended March 31, 2008 and 2007, respectively.

     Other income/expense primarily relates to abandoned acquisition and development project costs and litigation settlements or costs.

Other (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
Equity in net income of joint ventures		$	7,388			$	6,281			$	1,107				17.6	%
Minority equity interests			(2,371	)			(5,839	)			3,468				(59.4	)
Income tax (expense) benefit of taxable REIT subsidiaries and franchise taxes			(1,045	)			15,061				(16,106	)			(106.9	)

     The increase in equity in net income of joint ventures is primarily due to increased income at the joint ventures. A summary of the increase in equity in net income of joint ventures for the three-month period ended March 31, 2008, is composed of the following (in millions):

		Increase
		(Decrease)
Acquisition of assets by unconsolidated joint ventures		$	0.2
Decrease in gains from sale transactions as compared to 2007			(0.9	)
Acquisitions and increased operating results of a joint venture in Brazil			1.5
Various other increases			0.3
		$	1.1

     In addition to the sale of the DDR Markaz LLC Joint Venture assets in June 2007, the Company’s unconsolidated joint ventures sold the following assets during 2007.

2007 Sales
One 25.5% effectively owned shopping center
Six sites formerly occupied by Service Merchandise

     Minority equity interest expense decreased for the three-month period ended March 31, 2008, primarily due to the following (in millions):

		(Increase)
		Decrease
Preferred operating partnership units (1)		$	3.8
Mervyns Joint Venture (owned approximately 50% by the Company)			(0.1	)
Net increase in net income from consolidated joint venture investments			(0.2	)
		$	3.5

     The aggregate income tax benefit of $15.1 million for the three-month period ended March 31, 2007, is primarily due to the Company recognizing an income tax benefit of approximately $15.4 million in the first quarter of 2007 resulting from the reversal of a previously established valuation allowance against certain deferred tax assets. The reserves were related to deferred tax assets established in prior years, at which time it was determined that it was more likely than not that the deferred tax asset would not be realized and, therefore, a valuation allowance was required. Several factors were considered in the first quarter of 2007 that contributed to the reversals of the valuation allowance. The most significant factor was the sale of merchant building assets by the Company’s taxable REIT subsidiary in the second quarter of 2007 and similar projected taxable gains for future periods. Other factors include the merger of various taxable REIT subsidiaries and the anticipated profit levels of the Company’s taxable REIT subsidiaries, which will facilitate the realization of the deferred tax assets. Management regularly assesses established reserves and adjusts these reserves when facts and circumstances indicate that a change in estimate is necessary. Based upon these factors, management determined that it is more likely than not that the deferred tax assets will be realized in the future and, accordingly, the valuation allowance recorded against those deferred tax assets is no longer required.

Discontinued Operations (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
(Loss) income from discontinued operations		$	(93	)		$	2,939			$	(3,032	)			(103.2	)%
(Loss) gain on disposition of real estate, net of tax			(191	)			2,819				(3,010	)			(106.8	)

     Included in discontinued operations for the three-month periods ended March 31, 2008 and 2007, are two properties sold in 2008 (including one property classified as held for sale at December 31, 2007), aggregating 0.1 million square feet, and 67 shopping centers sold in 2007 (including one property held for sale at December 31, 2006 and 22 properties acquired through the IRRETI merger in 2007), aggregating 6.3 million square feet.

Gain on Disposition of Real Estate (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
Gain on disposition of real estate, net of tax		$	2,367			$	6,010			$	(3,643	)			(60.6	)%

     The Company recorded net gains on disposition of real estate and real estate investments for the three-month periods ended March 31, 2008 and 2007, as follows (in millions):

		Three-Month Periods
		Ended March 31,
		2008				2007
Land sales (1)		$	2.1			$	5.4
Previously deferred gains and other loss on dispositions (2)			0.3				0.6
		$	2.4			$	6.0

Net Income (in thousands)

		Three-Month Periods Ended
		March 31,
		2008				2007				$ Change				% Change
Net income		$	43,424			$	62,536			$	(19,112	)			(30.6	)%