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BUYBUY

Aiken

Overton

Parks

Robertson

““Ibbotson Analysis Shows Ibbotson Analysis Shows REITsREITs Lower Risk, Raise Return”Lower Risk, Raise Return”

Creates valuable asset class exposure

Helps us meet Equity Profile goal

We are not overpaying for this security

Diversified holding which helps provide portfolio stability

DDR follows demographic shifts while maintaining important coverage

Provides a stable stream of income for the portfolio

90.0090.7094.30% Occupied GLA

2.992.001.79Proj. PEG

6.10%6.60%6.90%EPS Growth (Proj. 5 Yr)

5.206.36%12.00%EPS Growth (CFY-NFY)

3.512.071.03PEG Ratio

2.5 Bill4.7 Bill2.8 BillMarket Cap

24.7519.67614.86P/E (ttm)

0.520.490.59Beta

$ 28.71$ 42.20 $ 33.25Price

WeingartenWRI

KimcoKIMDDRKey Statistics

Developers Diversified Realty Corporation currently owns and

manages approximately 360 retail operating and development

properties in 44 states comprising over 82 million square feet of real estate. DDR is a self-administered

and self-managed real estate investment trust (REIT) operating

as a fully integrated real estate company which acquires, develops,

leases and manages shopping centers.

Business Summary

Multex, Yahoo, Annual Reports Merrill

WWW.DDRC.COM

DDR Supplemental 10Q

Exhibit 1

Exhibit 2

Price TargetPrice Target

$39.22 $39.22 -- $43.69$43.69

2

A REIT is a company that owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels, and warehouses. Some REITs also engage in financing real estate. The shares of most REITs are freely traded, usually on a major stock exchange.

A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. However, like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its’ investors.

Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to smaller investors. Congress decided that a way for average investors to invest in large scale commercial properties was the same way they invest in other industries, through the purchase of equity. In the same way as shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages for investors: greater diversification through investing in a portfolio of properties rather than a single building and management by experienced real estate professionals.

What is a REIT?

Types of REITS

The REIT industry has a diverse profile, which offers many alternative investment opportunities to investors. REIT industry analysts often classify REITs in one of four categories: equity, mortgage, hybrid or private.

Equity REITsEquity REITs own and operate income-producing real estate. Equity REITsincreasingly have become primarily real estate operating companies that engage in a wide range of real estate activities, including leasing, development of real property and tenant services. One major distinction between REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.

Mortgage REITsMortgage REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities.

WWW.NAREIT.COM

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Today’s mortgage REITs generally extend mortgage credit only on existing properties. Many modern mortgage REITs also manage their interest rate risk using securitized mortgage investments and dynamic hedging techniques.

Hybrid REITsAs the name suggests, a hybrid REIT both owns properties and makes loans to real estate owners and operators.

Private REITsAlthough most REITs trade on an established securities market, there is no requirement that REITs be publicly traded companies. REITs that are not listed on an exchange or traded over-the-counter are called “private” REITs. There are three typical types of private REITs:

(1) REITs targeted to institutional investors that take large financial positions;

(2) REITs that are syndicated to investors as part of a package of services offered by a financial consultant (some of these have more than 500 shareholders and must file statements with the Securities and Exchange Commission just like publicly traded companies); and

(3) “incubator” REITs that are funded by venture capitalists with the expectation that the REIT will develop a sufficient track record to launch a public offering in the future.

WWW.NAREIT.COMWhy do we need to be invested in a REIT?

According to efficient frontier analysis by previous practicum classes we have a long term goal of holding 5% in real estate. With this goal in mind, allocating a portion of the financials funds will help bring our holdings in line with the aforementioned goal. There is a relatively low correlation between REIT and publicly traded real estate stock returns and the returns of other market sectors. Thus, including REITs and publicly traded real estate stocks in your investment program helps build a diversified portfolio.

Ibbotson

Exhibit 3

Ibbotson

Exhibit 4

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REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of high-growth stocks and somewhat more than the returns of bonds. Because most REITs also have a small-to-medium equity market capitalization, their returns should be comparable to other small to mid-sized companies.

REITs offer investors: • Current, stable dividend income • High dividend yields • Dividend growth that has consistently exceeded the rate of

consumer price inflation • Liquidity: shares of publicly traded REITs are readily

converted into cash because they are traded on the major stock exchanges

• Professional management: REIT managers are skilled, experienced real estate professionals

• Portfolio diversification, which minimizes risk • Performance monitoring: a REIT’s performance is monitored

on a regular basis by independent directors of the REIT, independent analysts, independent auditors, the Securities and Exchange

As one can see here in these charts, REITs have provided a strong economic benefit for those who include them in their asset allocation. Also the stability associated with REITs is evident in their return over fixed income securities and their competitive return with small cap stocks. REITs also pay larger dividends as compared to other dividend yielding instruments.

Exhibit 6

IbbotsonWWW.NAREIT.COM

Exhibit 5

5

Controlling Volatility

In addition to fulfilling allocation goals, real estate holdings will decrease some of the volatility associated with equity assets. It is well known that risk, or volatility, can be reduced through diversification. This principle applies not only to diversification within the stock market, but to diversification among different asset categories. Because returns to real estate, venture capital, foreign securities, oil and gas, etc. are not highly correlated with domestic stock and bond markets, including these asset classes within an endowment investment pool will reduce volatility. For instance, when interest rates climb, stock and bond prices tend to decline, while real estate and oil and gas valuations tend to rise.

WWW.NAREIT.COM ; PRACTICUM ALLOCATION

The U.S. Population on the Move!

The total population in the United States grew by about 10 percent between 1990 and 1999, but the situation varied across the country. The fastest growth occurred in the West, especially among several "Rocky Mountain states": Arizona, Colorado, Idaho, Nevada, and Utah. All of these states grew by more than 20 percent.

Exhibit 7

Ibbotson

Enhancing Returns

Diversification into alternative assets can have the additional benefit of enhancing returns. Although stocks are the best performing readily marketable asset, less liquid assets can provide superior returns. Correlation of return analyses indicate that an endowment can both enhance returns and reduce risk by diversifying as much as one-third of the portfolio into a carefully constructed basket of alternative equity assets including REITs.

As you can see here, diversifying one’s allocation leads to enhanced performance as compared to a portfolio with less or no REIT allocation. This is further justification for our having REIT exposure in the Portfolio.

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The population in Nevada increased by 45 percent since 1990. The slowest growth (5 percent change or less) was recorded among states in the Midwest and Northeast. The populations in Connecticut, the District of Colombia, North Dakota, and Rhode Island declined. Of the southern states, Georgia had the biggest gains, but there was also substantial growth in Florida and Texas. In the United States, such short-term, rapid growth is most often caused by migration flows, but birth and death rates also have an impact in some places. Utah, for example, has among the highest fertility rates and longest life expectancies of any state. (Note: These estimates do not reflect 2000 Census counts.)

These ongoing migration flows cause shifts in the geographic distribution of the U.S. population. In 1999, Illinois surpassed Pennsylvania as the fifth most populous state, and by 2025, Florida is projected to take over as the third largest state, replacing New York. In the case of Florida, migration has fundamentally altered the state's age, racial, and ethnic composition and has put a strain on environmental resources.

This graph shows from census results the areas of the US which have grown the most. Focus has been placed on the South and the West. Despite demographic changes, areas of no growth or losses still have significant population centers associated with them. DDR still maintains various retail centers to capture this existing population.

This graph shows that DDR is maintaining large amounts of square footage in areas of growing populations while also keeping a focus on areas of intense population presence. One correction needs to be made to this graph as a recent acquisition has increased DDR’sholdings in New York to over 2 million SF.

Population Reference Bureau

DDR Supplemental 10Q

Exhibit 8

Exhibit 9

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Consumer spending is a crucial element in any retail REITs performance. As patrons to various retail centers gain confidence from increased job growth and overall GDP improvement then they feel more able to spend on comforts and luxuries like clothes, food, and entertainment.

The biggest increase in payrolls in almost four years last month may be giving consumers the confidence to spend some of the extra $11.1 billion in tax refunds they've received. Wal-Mart Stores Inc. and J.C. Penney Co. are among retailers to benefit from the windfall. Consumer spending, which includes retail sales and accounts for 70 percent of gross domestic product, is likely to buttress the economy as it grows at the fastest pace in two decades this year.

Retail sales soared 1.8% in March from February, suggesting American consumers will remain solid contributors to economic expansion this year as job growth picks up and the effects of tax cuts fade. Excluding autos, a large and volatile component of the total, sales were still up 1.7%. Gains were broad-based, with clothing stores and restaurants also posting solid increases.

Separately, the Commerce Department said business inventories rose 0.7% in February from January after a revised 0.2% gain in January. Business sales rose 0.5% in February, which kept the inventory-to-sales ratio at a record low of 1.33. The ratio measures how long it would take, in months, for a firm to run out of inventory at the current sales pace.

The economy will probably grow 4.6 percent this year, the most since 1984, according to the median estimate of economists surveyed by Bloomberg News earlier this month. Consumer spending is projected to grow 3.7 percent after a 3.1 percent gain last year, the survey showed.

Consumer Spending

Wall Street Journal ; Bloomberg ; Reuters

When analyzing REITs we decided to choose retail REITs because we felt their performance would be most consistent with our economic outlook. In addition retail will outperform office, industrial, residential, and mortgage on a growth basis. Retail REITs should see rent growth, on high occupancy due to what we expect to be solid retail sales and consumer sentiment. With future prospects having more people in this country at their peak earning and buying years, retail will continue to perform well as they clothe and feed their families as well as furnish their homes.

The glut of available office space makes any increases in job growth unlikely to fill unleased area. Investing in an office REIT would be a play far exceeding our current projections in job growth.

Why Retail?

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As compared to its competition DDR is the most diversified across growing target regions as well as being a better value based on various valuation variables. We decided to focus on maintaining some liquidity by focusing on the larger REITs in the market. DDR is the number two retail REIT by market capitalization size with its major competitors Kimco Realty and Weingarten being number one and three respectively.

One of the major factors in choosing a REIT is the dividend it pays out to shareholders. DDR has a strong dollar value dividend of $1.84 per share which is in the mid range of its comparables. DDR’s dividend yield is also very strong at 5.53% which stands to grow considerably for reasons to be discussed.

DDR has announced it is acquiring Benderson Development Co. for $2.3 billion which will add a significant amount of real estate and gross leasable area to DDR’s portfolio while giving them valuable exposure to the New York market which they previously had little of. In order to pay for this acquisition DDR retained some of its earnings by lowering its payout ratio to 73% and by issuing stock for the remaining capital needed. With the merger completed, DDR will be able to increase its payout ratio back to the more standard 100% range which in turn will increase its dividend yield to a range higher than its competition.

DDR is well positioned to take advantage of demographic shifts because of its diversified regional presence. As people continue to move South and West DDR’s large amount of GLA in these regions will capture the spending this growth will bring.

DDR’s tenant quality is very high as their major leases are focused on large profitable anchor tenants. This is important because peripheral leases are often contractually linked to anchor tenants. The better your anchors the better your peripherals and the more traffic you get at your centers resulting in increased rents and percentage rents. In their shopping center format DDR’s top tenants are Wal-Mart/Sam’s, Kohl’s, TJ Max, and Lowe’s all of which are stronger retailers in today's market.

Occupancy levels are very important in any real estate property and DDR has maintained an occupancy level company wide 95%. DDR’s levels are 5% higher then the comparable companies. Management expects a continued growth in occupancy rates in their acquired properties which are currently occupied at 91%. This will bring the new properties in line with their past management performance.

Why DDR?

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DDR’s management effectiveness has significantly improved the credit quality of the company by eliminating a large portion of its variable loans. This gives DDR a stronger balance sheet and brings the coverage ratio up to 3.9. They have a continued goal of decreasing their variable interest rate debt in the foreseeable increasing interest rate environment. Because of the recent acquisition there will be an increase in dividend of 5 cents per common share commencing with the third quarter dividend to be paid in October. DDR’s ROE is higher then its two comparables as management has shown a continued ability to control costs and increase earnings.

Valuation

ComparablesBased on our comparables and Dividend Discount Model (DDM), we have concluded that we are buying into DDR at a cheap price. According to the valuation multiples, DDR does not trade at as much of a premium as its competitors although it has posted a substantially higher return over the past year.

$1.66$2.28$1.84Annual Div.

$2.50$3.46$3.01FFO/Share (’04)

5.56%6.26%8.01%FFO Growth (’04-05)

12.612.811.8P/FFO (’05)

13.313.612.7P/FFO (’04)

3.042.372.21P/B (MRQ)

2.5 Billion4.7 Billion2.8 BillionMkt. Cap

11.9515.36%21.98%ROE

5.78%5.40%5.53%Div. Yield (TTM)

24.7519.6814.86P/E (TTM)

11.712.311.2Est. P/E

13.47%24.578%41.31%1 Yr. Return

$28.71$42.20$33.25Stock Price

WRIKIMDDR

Comparables

As you can see one major conclusion from this table should be the undervaluing that is shown by the low P/E multiple both TTM and projected as compared to DDR’s comparables. Special notice needs to be mentioned concerning the relatively high ROE as compared to Kimco and Weingarten. This helps support the conclusion that DDR’s management has successfully guided the company towards better overall performance. Drawing attention

Exhibit 10

10

to the price/book ratio, one can see that DDR is undervalued in relation to other comparables. This helps to support the recommendation that DDR is ripe for a buy. In both 2004 and 2005 the P/FFO are lower for DDR than for either Kimco or Weingarten. This shows that over the next two years evidence supports that there is more room for appreciation in DDR. In addition projected FFO growth is significantly higher for DDR than for the comparable.

DDM Assumptions

One-Stage Model and Two-StageThe one-stage model assumes using only one growth rate over the specified period. While the two-stage model assumes two growth rates, one used in the first ten years and the second used for the remaining. This two-stage model evens out growth by using a more stable growth rate for years further out. These can be found in Exhibit 11.

Risk Free Rate AssumptionsWe are assuming a 3.5% risk free rate based on our analysis of the average existing length of leases and the appropriately timed treasury security. We have included a sensitivity table to show impacts from various risk free rates in Exhibit 12.

Finite Age AssumptionsBased on the typical function of REITS which often have a finite age associated with their corporate operations we are using a 31 Year Model based upon the deprecation years as reported in their annual report. Included is a sensitivity analysis showing the value if an 18 Year Model and Perpetual Life Model are assumed.

Dividend Growth RateWe assumed a continuation of the historical growth rate of 5% which we feel could be conservative as it is also the low end of consensus projections. This is used to project future dividends which are then discounted back to present value. It also plays an important function in the projected terminal value we use in the two stage model.

Stable Dividend Growth RateWe assume GDP (4.25%) to equal the stable dividend growth rate in our two stage model.

BetaWe used a Beta found on Bloomberg which is the correlation of the performance of DDR in relation to the NAREIT Index.

11

CAPMRisk free rate 3.5%Market risk premium 6.0%Beta 0.59 Cost of equity 7.0%Current Price 33.25$

Dividend 1.69 Discount rate 7.0%Dividend growth rate 5.0%Intrinsic value per share 43.69$ % undervalued/(overvalued) 31.39%

Risk free rate 3.5%Market risk premium 6.0%Beta 0.59 Cost of equity 7.0%

Dividend 1.69 Discount rate 7.0%Stable Dividend growth rate 4.25%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Projected dividends 1.77 1.86 1.96 2.05 2.16 2.26 2.38 2.50 2.62 2.75 Discounted dividends 1.66 1.63 1.60 1.56 1.53 1.51 1.48 1.45 1.42 1.39 Value at year 5 61.68 Present value 31.24 Value of discounted dividends 7.98 Intrinsic value of DDR 39.22$ % undervalued/(overvalued) 17.94%

One-Stage Model

Two-Stage Model

One-Stage and Two-Stage Models

Exhibit 11

12

Current price 33.25$

3.5% Risk Free RateOne-Stage Model Two-Stage Model

18 year model 34.03$ 31.86$ 31 year model 43.69$ 39.22$ Perpetuity 86.99$ 60.07$

2.5% Risk Free RateOne-Stage Model Two-Stage Model

18 year model 41.21$ 38.13$ 31 year model 54.02$ 48.65$ Perpetuity 170.63$ 97.39$

4% Risk Free RateOne-Stage Model Two-Stage Model

18 year model 31.77$ 29.42$ 31 year model 40.16$ 35.57$ Perpetuity 69.86$ 50.04$

Sensitivity Analysis

Exhibit 12