UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from                      to                     
Commission file number      1-11690                    

DEVELOPERS DIVERSIFIED REALTY CORPORATION

     3300 Enterprise Parkway, Beachwood, Ohio 44122

(216) 755-5500

Indicated 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

Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act) Yes þ No o

As of May 2, 2005, the registrant had 108,572,218 outstanding common shares, without par value.

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS — Unaudited

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

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

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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)

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

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

Supplemental disclosure of non-cash investing and financing activities:

For the three months ended March 31, 2005, in conjunction with the acquisition of 15 assets, the Company assumed mortgage debt at a fair value of approximately $673.2 and other liabilities of approximately $4.4 million. At March 31, 2005, dividends payable were $65.6 million. Included in other assets and debt is approximately $1.2 million, which represents the fair value of the Company’s reverse interest rate swaps at March 31, 2005. In January 2005, in accordance with a performance units plan, the Company issued 200,000 restricted shares to the Chairman and Chief Executive Officer, of which 30,000 shares vested, as of the date of issuance. The remaining 170,000 shares will vest in 2006 through 2009. The foregoing transactions did not provide for or require the use of cash for the three month period ended March 31, 2005.

At March 31, 2004, dividends payable were $43.7 million. In 2004, in conjunction with stock for stock option exercises, the Company recorded $1.9 million to deferred obligation. The deferred obligation represent the portion of the common shares issuable upon exercise that were not currently issued but rather deferred pursuant to a deferral plan for which the Company maintains a separate trust. In connection with the adoption of FIN 46, the Company consolidated real estate assets, net of $26.4 million and a mortgage payable of $20.0 million. In connection with the acquisitions of its partner’s 50% interest in a shopping center, the Company acquired a property with a book value of $63.6 million and assumed debt of $47.0 million. Other liabilities include approximately $0.5 million, which represents the fair value of the Company’s fixed rate interest rate swaps. Included in other assets and debt is approximately $5.8 million, which represents the fair value of the Company’s reverse interest rate swaps. The foregoing transactions did not provide for or require the use of cash.

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

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DEVELOPERS DIVERSIFIED REALTY CORPORATION

Notes to Condensed Consolidated Financial Statements

1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION

     Developers Diversified Realty Corporation, 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 business centers. In January 2005, the Company completed the acquisition of 15 Puerto Rican retail real estate assets from Caribbean Property Group, LLC and its related entities (“CPG”), at an aggregate cost of approximately $1.15 billion. The Company accounted for the acquisition of assets utilizing the purchase method of accounting. The amounts reported are based on the Company’s preliminary purchase price allocation and certain estimates. As a result, the purchase price allocation is preliminary and subject to change.

Reclassifications

     Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.

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

     The Company consolidates certain entities in which it owns less than a 100% equity interest if it is deemed to be the primary beneficiary in a variable interest entity, as defined in FIN No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). The Company also consolidates entities in which it has a controlling direct or indirect voting interest. The equity method of accounting is applied to entities in which the Company does not have a controlling direct or indirect voting interest, but can exercise influence over the entity with respect to its operations and major decisions.

     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 presentation of the results of the periods presented. The results of the operations for the three months ended March 31, 2005 and 2004 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

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financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2004.

New Accounting Standards

Stock Based Compensation – SFAS 123R

     In December 2004, the FASB issued SFAS 123R, “Share-Based Payment.” Public companies with calendar year-ends would be required to adopt the provisions of the standard effective for fiscal years beginning after June 15, 2005, rather than periods beginning after January 1, 2005. The Company is currently evaluating the effects of this proposed standard, but does not expect it to materially impact its financial position, results of operations, cash flows or its future compensation strategies.

Comprehensive Income

     Comprehensive income (in thousands) for the three month periods ended March 31, 2005 and 2004 was $114,835 and $50,861, respectively.

Stock Based Compensation

     The Company applies APB 25, “Accounting for Stock Issued to Employees,” in accounting for its plans. Accordingly, the Company does not recognize compensation cost for stock options when the option exercise price equals or exceeds the market value on the date of the grant. Assuming application of the fair value method pursuant to SFAS 123 as amended by SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, the compensation cost, which is required to be charged against income for all plans, was $1.4 million for both the three months ended March 31, 2005 and 2004 (in thousands, except per share amounts).

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2. EQUITY INVESTMENTS IN JOINT VENTURES

     At March 31, 2005 and December 31, 2004, the Company had ownership interests in various joint ventures, which owned 111 and 103 shopping center properties, respectively, and 60 and 63 shopping center sites, respectively, formerly owned by Service Merchandise Company, Inc.

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

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

MDT Joint Venture

     During the first quarter of 2005, the Company sold nine properties to the MDT Joint Venture for approximately $284.2 million and recognized gains totaling $62.6 million and deferred a gain of approximately $10.6 million relating to the Company’s effective 14.5% interest in the MDT Joint Venture. The Company has been engaged to perform all day-to-day operations of the properties and will receive its share of ongoing fees for property management, leasing and construction management, plus periodic fees for financing and due diligence.

3. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION

     In January 2005, the Company completed the acquisition of 15 Puerto Rican retail real estate assets from CPG for approximately $1.15 billion. The financing for the transaction was provided by the assumption of approximately $660 million of existing debt and line of credit borrowings on the Company’s $1.0 billion senior unsecured credit facility and the application of a $30 million deposit funded in 2004.

     In March 2004, the Company entered into an agreement to purchase interests in 110 retail real estate assets with approximately 18.8 million square feet of GLA from Benderson Development Company, Inc. and related entities (“Benderson”). The purchase price of the assets, including associated expenses, was approximately $2.3 billion, less assumed debt and the value of a 2% equity interest in certain assets initially valued at approximately $16.2 million, which are classified as operating partnership minority interests on the Company’s consolidated balance sheet. At March 31,

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2005, the book value of this interest is $14.2 million as certain of these assets were sold to a joint venture with Prudential Real Estate Investors.

     The Company completed the purchase of 107 properties (of which 93 were purchased by the Company and 14 were purchased directly by the MDT Joint Venture) at various dates commencing May 14, 2004 through December 21, 2004. The remaining three properties will not be acquired.

     The Company funded the transaction through a combination of new debt financing of approximately $450 million, net proceeds of approximately $164.2 million from the issuance of 6.8 million cumulative preferred shares, net proceeds of approximately $491 million from the issuance of 15.0 million common shares, asset transfers to the MDT Joint Venture which generated net proceeds of approximately $194.3 million (Note 2), line of credit borrowings and assumed debt. With respect to the assumed debt, the fair value was approximately $400 million, which included an adjustment of approximately $30 million to increase its stated principal balance, based on rates for debt with similar terms and remaining maturities as of May 2004. The Company entered into this transaction to acquire the largest, privately owned retail shopping center portfolio in markets where the Company previously did not have a strong presence.

     Benderson also entered into a five-year master lease for vacant space that was either covered by a letter of intent as of the closing date or a new lease with respect to which the tenant had not begun to pay rent as of the closing date. During the five-year master lease, Benderson agreed to pay the rent for such vacant space, until each applicable tenant’s rent commencement date. The Company recorded the master lease receivable as part of the purchase price allocation. At March 31, 2005, the master lease receivable from Benderson aggregated $3.3 million.

     The following supplemental pro forma operating data is presented for the three month period ended March 31, 2005 as if the acquisition of properties from CPG was completed on January 1, 2005. The following supplemental pro forma operating data is presented for the three month period ended March 31, 2004, as if the acquisition of assets from Benderson and related financing and the acquisition of properties from CPG and the common share offering completed in December 2004 were completed on January 1, 2004.

     The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transactions had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods. The Company accounted for or will account for the acquisition of assets utilizing the purchase method of accounting. The pro forma adjustments relating to the acquisition of properties from CPG are based on the Company’s preliminary purchase price allocation and certain estimates. The Company engaged an appraiser to perform valuations of the real estate and certain other assets. As a result, the purchase price allocation is preliminary and subject to change. Therefore, the amounts included in the pro forma adjustments are preliminary and could change. There can be no assurance that the final adjustments will not be materially different from those included herein.

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4. OTHER ASSETS

Other assets consist of the following (in thousands):

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5. REVOLVING CREDIT FACILITIES

     The Company maintains its primary unsecured revolving credit facility with a syndicate of financial institutions, for which JP Morgan serves as the administrative agent. The facility was amended in March 2005. Following the amendment, the facility was increased to an available borrowing capacity of $1.0 billion and to allow for the future expansion to $1.25 billion and extend the maturity date to May 2008. The facility includes a competitive bid option for up to 50% of the facility amount. The Company’s borrowings under this facility bear interest at variable rates based on the prime rate as defined or LIBOR, at the Company’s election, plus a specified spread (0.675% at March 31, 2005). The specified spread over LIBOR could vary depending on the Company’s long term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. The facility is used to finance the acquisition, development and expansion of shopping center properties, to provide working capital and for general corporate purposes. At March 31, 2005, $440 million was outstanding under this facility with a weighted average interest rate of 3.4%.

     In March 2005, the Company also consolidated its two secured revolving credit facilities with National City Bank aggregating $55 million into a $60 million unsecured revolving credit facility with a maturity date of May 2008. Following the amendment, borrowings under this facility bear interest at variable rates based on the prime rate as defined or LIBOR plus a specified spread (0.675% at March 31, 2005) depending on the Company’s long term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. At March 31, 2005, there were no amounts outstanding under this facility.

6. DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow and Fair Value Hedges

     In February 2005, the Company entered into an aggregate notional amount of $298.0 million of treasury locks. The treasury locks were executed to hedge the benchmark interest rate associated with forecasted interest payments expected to commence during the second quarter of 2005. The expected interest payments are associated with the anticipated issuance of fixed rate borrowings, with a maximum term of ten years, in connection with the financing of the CPG acquisition. The treasury locks have been designated and qualified as a cash flow hedge at March 31, 2005, and had a positive fair value of $9.9 million at March 31, 2005 and are included within other assets in the consolidated balance sheets. All components of the treasury locks gain were included in the assessment of hedge effectiveness, and the amount of hedge ineffectiveness recorded in the three months ended March 31, 2005 was not material. Upon commencement of the forecasted interest payments, which are expected to occur in the second quarter of 2005, the Company will reclassify its gain or loss on the effective portion of the treasury locks from other comprehensive income into earnings over the maximum ten-year period, based on the effective-yield method. The treasury locks have a weighted average strike price of 4.08%, and expire in May 2005.

Joint Venture Derivative Instruments

     In March 2005, one of the Company’s joint ventures in which the Company has a 50% interest entered into a notional amount of $277.5 million of treasury locks. The treasury locks were executed to hedge the benchmark interest rate associated with forecasted interest payments expected to commence during the third quarter of 2005. The expected interest payments are associated with the anticipated issuance of fixed rate borrowings, with a maximum term of five years, in connection with the refinancing of the joint ventures mortgage indebtedness. The treasury locks have been designated and qualified as a cash flow hedge at March 31, 2005, and had a negative value of $1.3 million at March 31, 2005, and are included in investments in and advances to joint ventures in the consolidated balance sheets. All components of the treasury locks gain were included in the assessment of hedge effectiveness, and the amount of hedge ineffectiveness recorded in the three months ended March 31, 2005 was not material. The treasury locks have a weighted average strike price of 4.3%, and expire in April 2005.

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

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claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

8. SHAREHOLDERS’ EQUITY AND OPERATING PARTNERSHIP UNITS

     The following table summarizes the changes in shareholders’ equity since December 31, 2004

     (in thousands):

     Common share dividends declared, per share, were $0.54 and $0.46 for the three month periods ended March 31, 2005 and 2004, respectively.

     In 2005, restricted stock grants to certain officers of the Company, approximating 0.1 million shares of common stock of the Company, vested and were deferred through the Company’s equity award plan and, accordingly, the Company recorded $1.4 million in deferred obligations. The shares associated with the restricted stock vesting were deferred into the Company’s deferred compensation plans, which are non-qualified compensation plans.

9. OTHER INCOME

     Other income for the three month periods ended March 31, 2005 and 2004 was comprised of the following (in millions):

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10. DISCONTINUED OPERATIONS

     Included in discontinued operations for the three month period ended March 31, 2004, are 15 properties sold in 2004, aggregating 0.8 million square feet. The operating results relating to assets sold are as follows (in thousands):

     The gains on disposition of real estate for the three month period ended March 31, 2005 are not included in discontinued operations due to the Company’s continuing involvement following the sale, as provided in SFAS No. 144 “Accounting For the Impairment or Disposal or Long-Lived Assets”.

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11. EARNINGS PER SHARE

     Earnings Per Share (EPS) have been computed pursuant to the provisions of SFAS No. 128, “Earnings per Share.” The following table provides a reconciliation of net income 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.

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12. SEGMENT INFORMATION

     The Company has two reportable business segments, shopping centers and business centers, determined in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Each shopping center and business center is considered a separate operating segment. However, each segment on a stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segments and meets the majority of the aggregation criteria under SFAS 131.

     The shopping center segment consists of 463 shopping centers, including 171 owned through joint ventures (two of which are consolidated by the Company), in 44 states, plus Puerto Rico, aggregating approximately 76.5 million square feet of Company-owned GLA. These shopping centers range in size from approximately 10,000 square feet to 750,000 square feet of Company-owned GLA. The business center segment consists of 32 business centers in 11 states aggregating approximately 4.0 million square feet of Company-owned GLA. These business centers range in size from approximately 10,000 square feet to 330,000 square feet of Company-owned GLA.

     The table below presents information about the Company’s reportable segments for the three month periods ended March 31, 2005 and 2004.

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13. SUBSEQUENT EVENTS

     In April 2005, the Company issued $400 million of senior unsecured notes, consisting of $200 million of five-year notes and $200 million of ten-year notes. The five-year notes have an interest coupon rate of 5.0%, are due on May 3, 2010 and were offered at 99.806% of par. The 10 year notes have an interest coupon rate of 5.5%, are due on May 1, 2015 and were offered at 99.642% of par. Proceeds from the offering were primarily used to repay indebtedness of the Company’s consolidated subsidiary formed in connection with the CPG acquisition, DDR PR Ventures LLC, S.E. (“DDR PR”), under the Company’s primary revolving credit facility.

     In April 2005, the Company sold an additional three properties to the MDT Joint Venture for approximately $63.8 million. The Company maintains an approximate 14.5% ownership in the properties. The Company has been engaged to perform all day-to-day operations of the properties and will receive its share of ongoing fees for property management, leasing and construction management, plus periodic fees for financing and due diligence.

     In April 2005, one of the Company’s RVIP joint ventures, in which the Company has a 20% ownership, sold a 77,000 square foot shopping center in Richmond, California (Richmond City Center) for approximately $13 million.

     In April 2005, the Company advanced $65.0 million to certain joint venture partners in the Community Centers V and VII joint ventures. The advance is evidenced by a note with interest at LIBOR plus 2.5% and a maturity date of earlier of October 2005 or the refinancing of the joint ventures’ mortgage indebtedness.

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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 which 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 since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control 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 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 certain of its major tenants, and could be adversely affected by the bankruptcy of those tenants;
	•	The Company may not realize the intended benefits of an acquisition transaction. The 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 will be subject to Puerto Rican laws governing certain properties acquired in 2005, with which the Company has no prior experience;

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	•	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;
	•	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 projects on schedule as a result of various factors, many of which are beyond the Company’s control, such as weather, labor conditions and material shortages, resulting in increased debt service expense and construction costs and decreases in revenue;
	•	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;
	•	Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that the Company’s partner or co-venturer might become bankrupt, that the Company’s partner or co-venturer might at any time have different interests or goals than does the Company and that the Company’s partner or co-venturer 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 must make distributions to shareholders to continue to qualify as a REIT, and if the Company borrows funds to make distributions then those borrowings may not be available on favorable terms;
	•	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 potential environmental liabilities;
	•	The Company could 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 for the Company’s common shares, as well as its performance and cash flow.

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Executive Summary

     The Company’s portfolio continues to demonstrate strong leasing fundamentals, which reflects both the growing strength of the Company’s asset class and the quality of the Company’s portfolio. Moreover, DDR continued to structure and execute transactions during the quarter that support the Company’s investment strategy and result in long term value creation for shareholders.

     A contributor to the higher net income for the three months ended March 31, 2005 as compared to 2004, was the amount of gains recognized in the first quarter of 2005. Often, these gains are overlooked, although important, and the investment community appears to focus solely on operating cash flow. The Company believes that this approach is not appropriate in the valuation of a real estate company. The gains recognized evidence real value creation and the Company’s development capabilities. While most REITs have benefited temporarily from the significant cap rate compression in the market, DDR made these benefits permanent by harvesting these gains through asset sales. Asset sales have allowed the Company to grow by $3.9 billion in real estate assets of the Company and its joint ventures since December 31, 2003, while issuing only $753.6 million in gross proceeds from the sale of common shares and the issuance of operating partnership units. Asset sales have allowed DDR to recycle capital into higher yielding development opportunities which should generate gains in the future.

     In January 2005, DDR acquired 15 Puerto Rican shopping centers from Caribbean Property Group, LLC and related entities (“CPG”) for $1.15 billion. This acquisition positions DDR as the dominant retail landlord in Puerto Rico, a U.S. Commonwealth whose economy is fueled by consumerism and whose developable land is highly constrained by physical barriers. To date the integration of CPG into our Company has not resulted in any unforeseen operational issues.

     Additionally, during the first four months of 2005, the MDT Joint Venture in which the Company has an effective ownership interest of approximately 14.5% acquired 12 DDR wholly-owned shopping centers. These included several recently completed development assets, primarily acquired from JDN, that generated gains on the Company’s income statement.

     During the first quarter of 2005, the Company extended and modified several provisions of its credit facilities. These changes provide the Company with additional financial strength through improved pricing, greater operating flexibility, an extended maturity and additional banking relationships. DDR remains committed to preserving the Company’s strong balance sheet, and the Company’s financial ratios continue to clearly reflect this objective.

     In regard to the Company’s overall development pipeline, DDR is pursuing several viable development opportunities. In the Company’s current pipeline, the Company is engaged in either pre-development or development activities on 24 new locations in 15 different states. These projects represent between 9 and 10 million of newly developed gross leaseable area. Although the Company does not anticipate that all of these projects will be constructed by DDR, these projects do represent opportunities for future growth.

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     Lastly, there is significant opportunity for value enhancement available through expansion and redevelopment projects. As such, DDR maintains an internal division within its development department dedicated to this aspect of asset management. Currently, the Company’s group has 24 projects either in progress or scheduled to commence construction in 2005.

Results of Operations

Revenues from Operations

     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, 2004, excluding properties under development and those classified as discontinued operations) increased approximately $0.9 million, or 1.4%, for the three months ended March 31, 2005 as compared to the same period in 2004. The increase in base and percentage rental revenues is due to the following (in millions):

     At March 31, 2005, the aggregate occupancy of the Company’s shopping center portfolio was 94.9% as compared to 94.4% at March 31, 2004. The average annualized base rent per occupied square foot was $11.27 at March 31, 2005 as compared to $10.94 at March 31, 2004.

     At March 31, 2005, the aggregate occupancy rate of the Company’s wholly-owned shopping centers was 94.2% as compared to 93.0% at March 31, 2004. The average annualized base rent per leased square foot was $10.32 at March 31, 2005 as compared to $9.78 at March 31, 2004.

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     At March 31, 2005, the aggregate occupancy rate of the Company’s joint venture shopping centers was 96.4% as compared to 98.8% at March 31, 2004. The average annualized base rent per leased square foot was $12.06 at March 31, 2005 as compared to $13.59 at March 31, 2004. The decrease in occupancy and rent per square foot is primarily related to the change in properties owned through joint ventures and not to a decrease in operating performance of the joint venture properties.

     At March 31, 2005, the aggregate occupancy of the Company’s business centers was 73.0%, as compared to 78.8% at March 31, 2004. The decrease in occupancy is a function of tenant downsizing of space.

     The increase in recoveries from tenants was primarily related to the acquisition of properties from Benderson Development Company, Inc. and related entities (“Benderson”) and CPG which contributed $13.9 million for the three months ended March 31, 2005. These increases were offset by a decrease of $2.1 million related to the transfer of 18 of the Company’s core portfolio properties to joint ventures. The remaining increase of $1.1 million related to the Company’s development properties becoming operational and an increase in operating expenses at the remaining shopping center and business center properties. Recoveries were approximately 81.9% and 81.1% of operating expenses and real estate taxes for the three months ended March 31, 2005 and 2004, respectively. The slight increase is primarily attributable to changes in the Company’s portfolio of properties and occupancy increases.

     Ancillary income increased due to income from the acquisition of properties from CPG and Benderson. The Company anticipates that this income will grow with additional opportunities at these portfolios. Continued growth is anticipated in the area of ancillary, or non-traditional revenue, as additional revenue opportunities are pursued and currently established revenue opportunities proliferate throughout the Company’s core, acquired and development portfolio. Ancillary revenue opportunities have in the past included, but are not limited in the future to, short-term and seasonal leasing programs, outdoor advertising programs, wireless tower development programs and energy management programs, among others.

     The increase in management fee income is primarily from joint ventures formed in 2004 and 2005, which aggregated $1.3 million. This increase was offset by the sale of several of the Company’s joint venture properties, which contributed approximately $0.1 million of management fee income in 2004. Management fee income is expected to continue to increase with the sale of assets to the MDT Joint Venture in the first half of 2005.

     Development fee income was primarily earned through the redevelopment of four assets through the Coventry II Joint Venture. The Company expects to continue to pursue additional development joint ventures as opportunities present themselves.

     Other income is comprised of the following (in millions):

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Expenses from Operations

     Operating and maintenance expenses include the Company’s provision for bad debt expense which approximated 1.3% and 0.8% of total revenues, for the three months ended March 31, 2005 and 2004, respectively (See Economic Conditions). The increase in operating and maintenance expenses is due to the following (in millions):

     Real estate taxes increased due to the following (in millions):

     The increase in general and administrative expenses is primarily attributable to the growth of the Company through recent acquisitions, expansions and developments, primarily the acquisition of assets from Benderson and CPG. Total general and administrative expenses were approximately 4.8% and 5.1% of total revenues, including total revenues of joint ventures, for the three months ended March 31, 2005 and 2004, respectively.

     The Company continues to expense internal leasing salaries, legal salaries and related expenses associated with the leasing and re-leasing of existing space. In addition, the Company capitalized certain direct construction administration costs consisting of direct wages and benefits, travel expenses and office overhead costs of $2.1 million and $2.2 million for the three months ended March 31, 2005 and 2004, respectively.

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     Depreciation and amortization expense increased due to the following (in millions):

Other Income and Expenses

     Interest income decreased primarily as a result of the acquisition of one of the Company’s joint ventures in which the Company advanced funds.

     Interest expense increased primarily due to the acquisition of assets combined with other development assets becoming operational. The weighted average debt outstanding for the three month period ended March 31, 2005 and related weighted average interest rate was $3.2 billion and 5.5%, respectively, compared to $2.1 billion and 5.3%, respectively, for the same period in 2004. At March 31, 2005 and 2004, the Company’s weighted average interest rate was 5.4% and 5.1%, respectively. Interest costs capitalized, in conjunction with development and expansion projects and development joint venture interests, were $2.5 million for the three month period ended March 31, 2005, as compared to $2.4 million for the same period in 2004.

     Other expense is primarily comprised of abandoned acquisition and development project costs.

Other

     Equity in net income of joint ventures decreased $11.7 million primarily as a result of a decrease in gain on sales of joint venture assets in 2005 as compared to 2004. This amount was partially offset by an increase in joint venture income from newly formed joint ventures in 2004, including assets acquired by the Company’s MDT Joint Venture. In 2004, the Company sold its interest in a 20% owned shopping center, a 35% owned shopping center, and several sites formerly occupied by Service Merchandise and recognized an aggregate gain of approximately $24.1 million of which the

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Company’s proportionate share was $7.7 million. In addition, in 2004, the Company recognized promoted income of approximately $3.3 million relating to the sale of a shopping center transferred to the MDT Joint Venture in November 2003 upon elimination of contingencies and substantial completion and lease up in 2004. These transactions in 2004 aggregated a net decrease in income of approximately $12.2 million comprised of gain on sale and operating income. The joint ventures formed in 2004 contributed additional net income of approximately $1.3 million compared to the three months ended March 31, 2004. The remaining net decrease of $0.8 million is primarily due to increased depreciation and amortization charges at various joint ventures.

     Minority equity interest expense increased primarily due to the issuance of common operating partnership units in conjunction with the acquisition of assets from Benderson offset by the conversion of 0.2 million operating partnership units into an equal amount of common shares of the Company in 2004.

     Income tax expense and franchise tax of the Company’s taxable REIT subsidiaries decreased due to a reduction in franchise taxes from assets disposed of in 2004.

Discontinued Operations

     Discontinued operations includes the operations of 15 shopping center properties and six business center properties aggregating approximately 0.8 million square feet of GLA.

     Loss on the sale of discontinued operations is primarily due to the sale of properties in 2004.

Gain on Disposition of Assets and Cumulative Effect of Adoption of a New Accounting Standard

     Gain on disposition of real estate in 2005 relates to the transfer of nine assets to the MDT Joint Venture which aggregated $62.6 million and are not classified as discontinued operations due to the Company’s continuing involvement resulting from its retained ownership interest. In addition, land sales, which did not meet discontinued operations disclosure requirement, aggregated $1.9 million of gains in 2005 and other items related to assets previously sold aggregated to $0.2 million.

     Gain on disposition of real estate in 2004 relates to land sales, which did not meet discontinued operations disclosure requirement, aggregated $4.4 million.

     The cumulative effect of adoption of a new accounting standard is attributable to the consolidation of the partnership that owns a shopping center in Martinsville, Virginia upon adoption of

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FIN 46. This amount represents the minority partner’s share of cumulative losses in the partnership that were eliminated upon consolidation.

Net Income

     Net income increased primarily due to the acquisition of assets and gain on sale of assets. A summary of the changes from 2004 is as follows (in millions):

Funds From Operations

     The Company believes that Funds From Operations (“FFO”), which is a non-GAAP financial measure, provides an additional and useful means to assess the financial performance of real estate investment trusts (“REITs”). It is frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs, most of which present FFO along with net income as calculated in accordance with GAAP.

     FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and real estate investments, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions and many companies utilize different depreciable lives and methods. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from depreciable property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, acquisition and development activities and interest costs, which provides a perspective of the Company’s financial performance not immediately apparent from net income determined in accordance with GAAP.

     FFO available to common shareholders is generally defined and calculated by the Company as net income, adjusted to exclude: (i) preferred dividends, (ii) gains (or losses) from sales of depreciable real estate property, except for those sold through the Company’s merchant building program, which are presented net of taxes, (iii) sales of securities, (iv) extraordinary items, (v) cumulative effect of adoption of new accounting standards and (vi) certain non-cash items. These non-cash items principally include real property depreciation, equity income from joint ventures and equity income from minority

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equity investments and adding the Company’s proportionate share of FFO from its unconsolidated joint ventures and minority equity investments, determined on a consistent basis.

     For the reasons described above, management believes that FFO provides the Company and investors with an important indicator of the Company’s operating performance. This measure of performance is used by the Company for several business purposes and for REITs. It provides a recognized measure of performance other than GAAP net income, which may include non-cash items (often large). Other real estate companies may calculate FFO in a different manner.

     The Company uses FFO (i) in executive employment agreements to determine incentives based on the Company’s performance, (ii) as a measure of a real estate asset’s performance, (iii) to shape acquisition, disposition and capital investment strategies and (iv) to compare the Company’s performance to that of other publicly traded shopping center REITs.

     Management recognizes FFO’s limitations when compared to GAAP’s income from continuing operations. FFO does not represent amounts available for needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. Management does not use FFO as an indicator of the Company’s cash obligations and funding requirement for future commitments, acquisitions or development activities. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, including the payment of dividends. FFO should not be considered as an alternative to net income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of liquidity. FFO is simply used as an additional indicator of the Company’s operating performance.

     For the three month period ended March 31, 2005, FFO applicable to common shareholders increased $36.3 million, to $99.1 million as compared to $62.8 million for the same period in 2004. The increase in total FFO in 2005 is principally attributable to increases in revenues from the Core Portfolio Properties, the acquisition of assets, developments and the gain on sale of certain recently developed assets.

     The Company’s calculation of FFO is as follows (in thousands):

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Liquidity and Capital Resources

The Company’s cash flow activities are summarized as follows (in thousands):

     The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all interest and monthly principal payments on outstanding indebtedness, recurring tenant improvements, as well as dividend payments in accordance with REIT requirements and that cash on hand, borrowings under its existing revolving credit facilities, as well as other debt and equity alternatives, including the issuance of common and preferred shares, OP Units, joint venture capital and asset sales, will provide the necessary capital to achieve continued growth. The increase in cash flow from operating activities for the three months ended March 31, 2005 as compared to March 31, 2004 was primarily attributable to the acquisition of assets and various financing transactions. Also, in 2004 the Company funded other accrued obligations, including a $8.7 million litigation settlement. The Company’s acquisition and developments completed in 2005 and 2004, new leasing, expansion and re-tenanting of the Core Portfolio Properties continue to add to the Company’s cash flow. Changes in cash flow from investing activities are described in Strategic Real Estate Transactions. Changes in cash flow from financing activities are described in Financing Activities.

     In November 2004, the Company’s Board of Directors approved an increase in the 2005 quarterly dividend per common share to $0.54. The Company anticipates that the increased dividend level will continue to result in a conservative payout ratio. The Company’s common share dividend payout ratio for the first three months of 2005 approximated 59.9% of reported FFO, as compared to 64.5% for the same period in 2004. A low payout ratio enables the Company to retain more capital, which will be utilized towards attractive investment opportunities in the development, acquisition and expansion of portfolio properties or for debt repayment. The Company believes that it still has one of the lowest pay-out ratios in the industry. See “Off Balance Sheet Arrangements” and “Contractual Obligations and Other Commitments” sections for discussion of additional disclosure of capital resources.

Acquisitions, Developments and Expansions

     During the three month period ended March 31, 2005, the Company and its joint ventures invested $1.3 billion, net, to acquire, develop, expand, improve and re-tenant its properties which is comprised of $1.0 billion from its wholly-owned properties and $0.3 billion from its joint ventures. The Company’s expansion, acquisition and development activity is summarized below:

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Strategic Real Estate Transactions

Caribbean Properties Group

     In January 2005, the Company completed the acquisition of 15 Puerto Rican retail real estate assets, totaling nearly 5.0 million square feet from CPG, at any aggregate cost of approximately $1.15 billion. The financing for the transaction was provided by the assumption of approximately $660 million of existing debt and line of credit borrowings on the Company’s $1.0 billion senior unsecured credit facility and the application of a $30 million deposit funded in 2004.

MDT Joint Venture

     During the first quarter of 2005, the Company sold nine properties to the MDT Joint Venture for approximately $284.2 million and recognized gains totaling $62.6 million of which $23.7 million represented merchant building gains from recently developed shopping centers and deferred a gain of approximately $10.6 million relating to the Company’s effective 14.5% interest. In April 2005, the Company sold three properties to the MDT Joint Venture for approximately $63.8 million and will recognize additional merchant building gains of approximately $14.5 million in the second quarter of 2005. The Company maintains an approximate 14.5% effective ownership in the MDT Joint Venture. The Company has been engaged to perform all day-to-day operations of the properties and will receive its share of ongoing fees for property management, leasing and construction management, in addition to other periodic fees for financing and due diligence.

Expansions

     During the three month period ended March 31, 2005, the Company completed four expansion and redevelopment projects located in Tallahassee, Florida; Suwanee, Georgia; Hendersonville, North Carolina and Johnson City, Tennessee at an aggregate cost of $13.5 million. The Company is currently expanding/redeveloping six shopping centers located in Gadsden, Alabama; Ottumwa, Iowa; Gaylord, Michigan; Princeton, New Jersey; Allentown, Pennsylvania and Erie, Pennsylvania at a projected incremental cost of approximately $17.9 million. The Company is also scheduled to commence construction on two additional expansion and redevelopment projects at its shopping centers located in Ocala, Florida and Amherst, New York.

     During the three month period ended March 31, 2005, a joint venture of the Company completed the expansion of its shopping center located in Merriam, Kansas at an aggregate cost of $1.2 million. Three of the Company’s joint ventures are currently expanding/redeveloping their shopping centers located in Phoenix, Arizona; Lancaster, California and Kansas City, Missouri at a projected incremental cost of approximately $47.7 million. Two of the Company’s joint ventures are also scheduled to commence additional expansion/redevelopment projects at their shopping centers located in Deer Park, Illinois and Kirkland, Washington.

Development (Consolidated)

     During the three month period ended March 31, 2005, the Company substantially completed the construction of its shopping center located in Overland Park, Kansas at a cost of $9.1 million.

     The Company currently has seven shopping center projects under construction. These projects are located in Miami, Florida; Chesterfield, Michigan; Lansing, Michigan; Freehold, New Jersey; Mount Laurel, New Jersey; Apex, North Carolina (Beaver Creek Crossings – Phase I) and Pittsburgh, Pennsylvania. These projects are scheduled for completion during 2005 and 2006 at a projected aggregate cost of approximately $285.2 million and will create an additional 2.8 million square feet of

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retail space. At March 31, 2005, approximately $170.4 million of costs were incurred in relation to these development projects.

     The Company anticipates commencing construction in 2005 on two additional shopping centers located in Norwood, Massachusetts and McKinney, Texas with an aggregate net project cost of approximately $32.8 million.

     The wholly-owned and consolidated development funding schedule as of March 31, 2005 is as follows (in millions):

Development (Joint Ventures)

     The Company has joint venture development agreements for four shopping center projects. These projects have an aggregate projected cost of approximately $107.4 million of which the Company expects to contribute approximately $15.4 million. These projects are located in Merriam, Kansas; Jefferson County (St. Louis), Missouri; Apex, North Carolina (Beaver Creek Crossings – Phase II), adjacent to a wholly-owned development project; and San Antonio, Texas. The projects located in Merriam, Kansas and San Antonio, Texas are being developed through the Coventry II program. A portion of the project located in Jefferson County (St. Louis), Missouri has been substantially completed. The remaining projects are scheduled for completion in 2005 and 2006. At March 31, 2005, approximately $33.8 million of costs were incurred in relation to these development projects.

     The joint venture development funding schedule as of March 31, 2005, is as follows (in millions):

Dispositions

     In April 2005, one of the Company’s RVIP joint ventures, in which the Company has a 20% ownership, sold a 77,000 square foot shopping center in Richmond, California (Richmond City Center) for approximately $13 million, which exceeds it carrying value.

Off Balance Sheet Arrangements

     The Company has a number of off balance sheet joint ventures and other unconsolidated arrangements with varying structures. The Company has investments in operating properties,

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development properties and a management and development company. Such arrangements are generally with institutional investors and various developers located throughout the United States.

     In connection with the development of shopping centers owned by certain of these affiliates, the Company and/or its equity affiliates have agreed to fund the required capital associated with approved development projects aggregating approximately $18.0 million at March 31, 2005. These obligations, comprised principally of construction contracts, are generally due in 12 to 18 months and are expected to be financed through new or existing construction loans.

     The Company has provided loans and advances to certain unconsolidated entities in the amount of $10.6 million at March 31, 2005 for which the Company’s joint venture partners have not funded their proportionate share. These entities are current on all debt service owing to DDR. The Company has guaranteed base rental income from one to three years at 12 centers held through the Service Merchandise joint venture, aggregating $3.3 million at March 31, 2005. The Company has not recorded a liability for the guarantee as the subtenants of the KLA/SM affiliates are paying rent as due. The Company has recourse against the other parties in the partnership in the event of default.

     The Company is involved with overseeing the development activities for several of its joint ventures that are constructing, redeveloping or expanding shopping centers. The Company earns a fee for its services commensurate with the level of oversight provided. The Company generally provides a completion guarantee to the third party lending institution(s) providing construction financing.

     The Company’s joint ventures have aggregate outstanding indebtedness to third parties of approximately $2.1 billion and $1.8 billion at March 31, 2005 and December 31, 2004, respectively. Such mortgages and construction loans are generally non-recourse to the Company and its partners. Certain mortgages may have recourse to the Company and its partners in certain limited situations such as misuse of funds and material misrepresentations.

     One of the Company’s joint venture arrangements provides that the Company’s partner can convert its interest in the joint venture into DDR’s common shares under the provision that existed at March 31, 2005. The Company amended and restated this agreement in the second quarter of 2005 which eliminated the provision permitting the conversion of the equity interest of the Company’s partner into DDR stock. The number of common shares that DDR were required to issue was dependent upon the then fair value of the partner’s interest in the joint venture divided by the then fair value of DDR’s common shares. The Company was able to elect to substitute cash for common shares. At March 31, 2005, assuming such conversion option was exercised, and shares were issued, assets currently aggregating $228.3 million would be consolidated and an additional $156.0 million of mortgage indebtedness outstanding at March 31, 2005 relating to the joint venture which contains this provision would be recorded in the Company’s balance sheet, since this entity is currently accounted for under the equity method of accounting.

Financings Activities

     In April 2005, the Company issued $400 million of senior unsecured notes, consisting of $200 million of five-year notes and $200 million of ten-year notes. The five-year notes have an interest coupon rate of 5.0%, are due on May 3, 2010 and were offered at 99.806% of par. The 10 year notes have an interest coupon rate of 5.5%, are due on May 1, 2015 and were offered at 99.642% of par. The effective interest rate, after taking into account the treasury rate locks that were previously entered into by the Company will adjust the five-year rate to approximately 4.95% and ten-year rate to approximately 5.37%. Proceeds from the offering were primarily used to repay variable rate

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indebtedness of the Company’s consolidated subsidiary formed in connection with the CPG acquisition, DDR PR Ventures LLC, S.E. (“DDR PR”), under the Company’s primary revolving credit facility.

     In March 2005, the Company amended and restated its $1 billion primary revolving credit facility with JP Morgan Securities, Inc. and Banc of America Securities LLC as joint lead arrangers. The amendments extended the maturity date to May 2008, decreased the borrowing rate over LIBOR to 0.675%, modified certain covenants and allowed for the future expansion of the credit facility to $1.25 billion.

     In March 2005, the Company consolidated its secured revolving credit facilities with National City Bank. This consolidation created a $60 million unsecured facility, reduced the interest rate over LIBOR to 0.675%, extended the maturity date to May 2008 and modified certain covenants.

     As of March 31, 2005, the Company had a shelf registration statement with the Securities and Exchange Commission (“SEC”) under which $754.0 million of debt securities, preferred shares or common shares may be issued. After the issuance of $400 million of unsecured debt in April 2005, the Company has $354.0 million remaining on this shelf registration statement.

Capitalization

     At March 31, 2005, the Company’s capitalization consisted of $3.6 billion of debt, $705 million of preferred shares and $4.4 billion of market equity (market equity is defined as common shares and OP Units outstanding multiplied by the closing price of the common shares on the New York Stock Exchange at March 31, 2005 of $39.75) resulting in a debt to total market capitalization ratio of 0.42 to 1.0. At March 31, 2005, the Company’s total debt consisted of $2.2 billion of fixed rate debt, including $30 million of variable rate debt which has been effectively swapped to a fixed rate and $1.4 billion of variable rate debt, including $60 million of fixed rate debt which has been effectively swapped to a variable rate. As indicated above, in April 2005, the Company issued $400 million of senior unsecured fixed rate debt, the proceeds of which were used to repay floating rate debt.

     It is management’s strategy that the Company have access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional equity offerings or debt financings or joint venture capital in a manner consistent with its intention to operate with a conservative debt capitalization policy and maintain its investment grade ratings with Standard and Poor’s (BBB stable) and Moody’s Investors Service (Baa3 stable). The security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

     As of March 31, 2005, the Company had cash of $51.4 million and $620.0 million available under its $1.1 billion revolving credit facilities. As of March 31, 2005, the Company also had 214 operating properties generating $83.8 million, or 46.8%, of the total revenue of the Company for the three months ended March 31, 2005, which were unencumbered, thereby providing a potential collateral base for future borrowings.

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Contractual Obligations and other Commitments

     At March 31, 2005, the Company had letters of credit outstanding of approximately $22.3 million of which $1.6 million relates to letters of credit provided on behalf of equity affiliates. The Company has not recorded any obligation associated with these letters of credit. The majority of letters of credit are primarily collateral for existing indebtedness and other obligations accrued on the Company’s accounts.

     In conjunction with the development of shopping centers, the Company has entered into commitments with general contractors for its wholly-owned properties of $96.6 million March 31, 2005. These obligations, comprised principally of construction contracts, are generally due in 12 to 18 months and are expected to be financed through operating cash flow and/or new or existing construction loans or revolving credit facilities.

     In connection with the sale of one of the properties to the MDT Joint Venture, the Company deferred the recognition of approximately $3.6 million at March 31, 2005 of the gain on sale of real estate related to a shortfall agreement guarantee maintained by the Company. The MDT Joint Venture is obligated to fund any shortfall amount that is caused by the failure of the landlord or tenant to pay taxes when due and payable on the shopping center. The Company is obligated to pay any shortfall to the extent that is not caused by the failure of the landlord or tenant to pay taxes when due and payable on the shopping center. No shortfall payments have been made on this property since the completion of construction in 1997.

     The Company entered into master lease agreements with the MDT Joint Venture in 2003, 2004 and 2005 with the transfer of properties to the joint venture which has been recorded as a liability and reduction of its gain. The Company is responsible for the monthly base rent, all operating and maintenance expenses and certain tenant improvements and leasing commissions for units not yet leased at closing for a three-year period. At March 31, 2005, the Company’s master lease obligation, included in accounts payable and other expenses, totaled approximately $9.4 million.

     The Company entered into master lease agreements with the DDR Markaz II joint venture in October 2004 in connection with the transfer of properties to the joint venture at closing. The Company is responsible for the monthly base rent, all operating and maintenance expenses and certain tenant improvements and leasing commissions for units not yet leased at closing for a two or four-year period, depending on the unit. At March 31, 2005, the Company’s master lease obligation, included in accounts payable and other expenses, totaled $3.9 million.

     The Company enters into cancelable contracts for the maintenance of its properties. At March 31, 2005, the Company had purchase order obligations payable, typically payable within one year, aggregating approximately $7.7 million related to the maintenance of its properties and general and administrative expenses.

     The Company continuously monitors its obligations and commitments. There have been no other material items entered into by the Company since December 31, 2004 through March 31, 2005 other than as described above. See discussion of commitments relating to the Company’s joint ventures and other unconsolidated arrangements in “Off Balance Sheet Arrangements.”

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Inflation

     Substantially all of the Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive additional rental income from escalation clauses, which generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales. Such escalations are determined by negotiation, increases in the consumer price index or similar inflation indices. In addition, many of the Company’s leases are for terms of less than ten years, which permit the Company to seek increased rents upon renewal at market rates. Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.

Economic Conditions

     Historically, real estate has been subject to a wide range of cyclical economic conditions, which affect various real estate markets and geographic regions with differing intensities and at different times. Different regions of the United States have been experiencing varying economic recession. Adverse changes in general or local economic conditions could result in the inability of some existing tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company’s ability to attract or retain tenants. The Company’s shopping centers are typically anchored by two or more national tenant anchors (Wal-Mart, Kohl’s, Target), home improvement stores (Home Depot, Lowe’s) and two or more medium sized big-box tenants (Bed Bath & Beyond, T.J. Maxx/Marshalls, Best Buy, Ross Stores), which generally offer day-to-day necessities, rather than high-priced luxury items. In addition, the Company seeks to reduce its operating and leasing risks through ownership of a portfolio of properties with a diverse geographic and tenant base.

     The retail shopping sector has been impacted by the competitive nature of the retail business and the competition for market share, where stronger retailers have out-positioned some of the weaker retailers. This positioning is taking market share away from weaker retailers and requiring them, in some cases, to declare bankruptcy and/or close stores. Certain retailers have announced store closings even though these retailers have not filed for bankruptcy protection. Notwithstanding any store closures, the Company does not expect to have any significant losses associated with these tenants. Overall, the Company’s portfolio remains stable. While negative news relating to troubled retail tenants tends to attract attention, the vacancies created by unsuccessful tenants may also create opportunities to increase rent.

     Although certain individual tenants within the Company’s portfolio have filed for bankruptcy protection, the Company believes that its major tenants, including Wal-Mart, Kohl’s, Target, Lowe’s, T.J. Maxx, Bed Bath & Beyond and Best Buy are secure retailers based upon their credit quality. This stability is further evidenced by the tenants’ relatively constant same store tenant sales growth in this economic environment. In addition, the Company believes that the quality of its shopping center portfolio is strong, as evidenced by the high historical occupancy rates, which have ranged from 92% to 96% since 1993. Also, average base rental rates have increased from $5.48 to $11.27 since the Company’s public offering in 1993.

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Legal Matters

     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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     The Company’s primary market risk exposure is interest rate risk. The Company’s debt, excluding joint venture debt, is summarized as follows: