SITE Centers Corp. (SITC) Q2 2011 Earnings Report, Transcript and Summary

David Oakes - Chief Financial officer and Senior Executive Vice President Paul Freddo - Senior Executive Vice President of Leasing & Development Daniel Hurwitz - Chief Executive Officer, President, Director, Chairman of Pricing Committee, Member of Executive Committee and Member of Management Committee Timothy Lordan - Senior Vice President of Investor Relations & Funds Management

Jonathan Habermann - Goldman Sachs Group Inc. Omotayo Okusanya - Jefferies & Company, Inc. Ki Kim - Macquarie Research James Sullivan - Cowen and Company, LLC Christy McElroy - UBS Investment Bank Carol Kemple - Hilliard Lyons Jeffrey Donnelly - Wells Fargo Securities, LLC Richard Moore - RBC Capital Markets, LLC Alexander Goldfarb - Sandler O'Neill + Partners, L.P. David Wigginton - DISCERN Investment Analytics, Inc Paul Morgan - Morgan Stanley Michael Bilerman - Citigroup Inc Vincent Chao - Deutsche Bank AG Michael Mueller - JP Morgan Chase & Co Unknown Analyst - Craig Schmidt - BofA Merrill Lynch

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

Thank you. Good morning, and thank you for joining us. On today's call, you will hear from President and CEO, Dan Hurwitz; Senior Executive Vice President of Leasing and Development, Paul Freddo; and Chief Financial Officer, David Oakes. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and filed with the SEC on Form 8-K, and in our Form 10-K for the year ended December 31, 2010 and filed with the SEC. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued yesterday. This release, and our quarterly financial supplement, are available on our website at ddr.com. Last, we will be observing a 2-question limit during the Q&A portion of the call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue. At this time, it's my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Tim. Good morning, and welcome to our Second Quarter Earnings Conference Call. I'd like to begin the call by highlighting our continued focus on capital recycling and enhancing the overall quality of our portfolio. The successful refinancing of the term loan and the revolving credit facilities have provided greater financial flexibility in a more competitive cost of capital for our company. As a result, we are intently focused on sourcing external growth opportunities to the acquisition of prime assets and recycling capital from non-prime assets sales. As highlighted in our June 30 press release, we disposed of an additional $112 million of primarily non-prime assets during the second quarter and have $85 million of prime assets under contract to acquire. The non-prime assets sold were primarily in secondary and tertiary markets and some were single-tenant assets while others were non- income-producing assets. To the contrary, the properties under contract were creatively sourced, are located in a target market with demographics that will enhance our prime portfolio and have growth characteristics that will be maximized through our operating platform and tenant relationships. In addition to the assets under contract, our pipeline of acquisition opportunities include core, core plus and value-add assets and our underwriting will continue to be very disciplined. Acquisitions are all about growth, not asset count. In addition to the external growth opportunities that we are actively sourcing, we are keenly focused on maximizing our internal growth opportunities due to continued lease up of our portfolio, and the aggressive pursuit of redevelopments. As highlighted by our quarterly same-store NOI growth of 3.6%, we are continuing to see the benefits of the leasing momentum that has existed within our portfolio for the past several quarters, and we believe the strong NOI growth will continue in the near term as we work our way back to a stabilized lease rate of at least 95%. More over, as mentioned on prior calls, we have been working hard to identify redevelopment opportunities within our existing portfolio. Based upon our thorough review of near-term and long-term opportunities, we have identified nearly $750 million of potential redevelopments that will be pursued over the next 5 years. The reduced risk profile of redevelopments are attractive relative to ground-up development projects and provide compelling, typically double-digit, first year, unlevered cash on cost returns. Moreover, with our continued focus on improving the quality of our portfolio, we are excited about the opportunity to invest in many of our highest quality assets, further enhancing net asset value. When thinking of DDR going forward, our goal is to be viewed as a company with an increasingly high-quality portfolio that will continue to improve over time. As a company with an exciting internal growth story through continued lease-up and rent-roll growth, and an external growth story driven by acquisitions that leverage the strengths of our operating platform. Also, a company with an opportunistic redevelopment program that will maximize the value of assets already owned. Finally, you should continue to expect additional improvement to our balance sheet, credit metrics, and credit ratings. At DDR, we are constantly thinking about retail, the positives and the negatives, learning from our retail partners, and using that knowledge to energize a platform dedicated to creating value for our shareholders. I'll now turn the call over to Paul.

Thank you, Dan. I'll begin by highlighting what was another highly productive quarter followed by a brief discussion regarding a subject that deserves a great deal of attention: portfolio quality and why it matters. Regarding our quarterly leasing results, our domestic leased rate increased to 92.8%. This represents a 120 basis point increase over the second quarter of 2010, and a 40 basis-point increase sequentially. Including Brazil, our blended leased rate is now at 93%. We expect this momentum to continue in the third and fourth quarters, resulting in a blended leased rate of over 93.2% by year end. In the second quarter, we completed a total of 483 deals for over 2.5 million square feet, with a combined spread of 6%, up from 3.9% one year ago, and 5.4% in the first quarter. This represents our fifth straight quarter of positive combined leasing spreads and illustrates the consistent demand for quality space. It is important to note that this growth has been achieved with lower CapEx on a per square-foot basis, and that the impact of these results will be apparent in our income statement in the coming year, while the full impact will show up in 2013. I would now like to take a few minutes to discuss the importance of portfolio quality and how we should evaluate the quality of a specific asset. There are many ways to evaluate the quality of a portfolio or a particular asset including local demographics, comparisons to national averages, occupancy levels, rental growth, et cetera. But one factor should stand above all else, the retailers. The retailer knows the consumer better than any landlord and the consumer certainly shows that they frequent the most successful and compelling retailers. More over, it's critical to keep in mind that no consumer shops at any property based on who owns it, they shop exclusively based on the tenants that occupy it. Speaking of the tenants the consumer votes for every day, our portfolio consists mostly of power centers with destination tenants such as Walmart, Target, Kohl's, Bed Bath & Beyond, TJX, Dick’s Sporting Goods, Publix, PetSmart, and many other national credits that attract other high-quality retailers as co-tenants and generate significant sales volumes. These retailers have game-changing marketing, real estate and merchandising strategies that drive customers to their stores and therefore increase the value of our centers. These retailers and the others that we are doing business with every day are also the retailers that have consistently grown market share. Most importantly they grew market share before and during the recession and continue to grow share even coming off positive comps. Just the 8 aforementioned retailers have plans to open over 75 million square feet of new stores in aggregate over the next 2 years. As a company that has leased more than 32 million square feet of space in the last 3 years, our portfolio is a first look for successful retailers with aggressive open to buys. While we can all acknowledge that there is vacant space out there, never in my career have I seen such an imbalance between the demand for space from retailers and the lack of quality supply. In our portfolio, over 73% of our GLA consists of units that are over 10,000 square feet and these same units are over 95% leased and represent 62% of base rent. Only 17% of our GLA consists of units less than 5,000 square feet and they represent 26% of base rent. So in summary, our portfolio was more heavily weighted towards anchor and junior-anchor credit tenants than local small shops. With our shop space roughly 83% leased and approximately 3 million square feet of vacancy in space larger than 10,000 square feet, we continue to see significant internal growth potential in both categories. As a result of our tenants' operational successes and the high demand combined with the lack of quality new supply, as Dan mentioned, we are significantly ramping up our redevelopment efforts. For example, in addition to the 2 Target redevelopments in Denver and San Antonio, which we mentioned in our May 18 press release, we're currently undergoing a redevelopment at one of our largest assets, Plaza Del Norte in Puerto Rico. We are eliminating chronically vacant small shop space and previously unleaseable common area to accommodate an expansion of J. C. Penney. And we are also combining 4 vacant small shop units to provide PetSmart with another one of their early stores on the island. These 3 projects total $40 million in investment at a combined 10.5% unlevered cash on cost yield and are indicative of the opportunities that we are pursuing. Before closing, I would also like to again address the popular theme of tenants' desire to downsize and explain why this can be an opportunity for value creation. Using Best Buy as an example, there are 20 locations of over 40,000 square feet in our portfolio. As a result, we estimate we could get back as much as 250,000 square feet in residual space in the next 3- to 5-year period should Best Buy execute exactly as their public statements outlined. It could easily take longer and it is highly unlikely it would take less time to meet those stated downsizing goals. It's also important to note that all but one of those stores are in prime assets, by re-leasing the residual square footage at current market rents, we estimate over $1 million of embedded based rental growth from this potential downsizing alone, keeping in mind there are opportunities with other retailers as well. There will, in many cases, be some short-term downtime and potentially some capital spend on build out depending on the individual deal, but long-term, this is a great opportunity for DDR and Best Buy alike. But this is all at the landlord's discretion. Best Buy does not have the contractual right to downsize unless their lease is up for renewal, meaning everything is up for negotiation. And since all but one location are primed, should we be unable to come to terms and they leave all together, the growth potential is even greater. The bottom line is, we are supportive of Best Buy's plans, and we're working directly with them to create a positive result for both of us but still the deal has to make economic sense for DDR. In summary, when considering the tremendous quality endorsement that our portfolio continues to receive from our customer, the tenant, as evidenced by consistent leasing momentum, and the dynamic that exists with certain tenants expressing an interest in downsizing while others desire growth, one can conclude that the supply and demand dynamic within our portfolio presents a compelling opportunity for occupancy and rental growth today and tomorrow. I will now turn the call over to David.

Thanks, Paul. Operating FFO was $64.4 million or $0.23 per share for the second quarter, which was in line with our expectations. Including nonoperating items, FFO for the quarter was $24.1 million or $0.09 per share. Nonoperating items were primarily impairment charges and losses related to the disposition of certain non-prime assets as well as the write-off of original issuance costs related to redemption of our 8% Series G preferred shares in April. Gains of approximately $14 million on asset sales were recognized in net income during the quarter, and are excluded from both FFO measures. As you may have noticed from the press release, we are tightening our guidance for 2011 operating FFO per share by $0.03 on the low end and the high end to $0.93 to $1.02 per share. The midpoint is unchanged despite the aggressive execution of our 2011 strategic objectives. We exceeded our full year disposition objectives during the first half of the year, significantly accelerated the timing of our capital raises and refinancing and have lowered our amount of floating-rate debt. With all that, we are encouraged to still be able to maintain our full year guidance midpoint. The significant capital markets activity this quarter was the refinancing of our $550 million term loan and unsecured revolving credit facilities. Our initial 2011 plans called for the term loan to be addressed late in the year. However we decided to take advantage of attractive debt markets and we were very pleased with many of the credit facilities at the same time. Pricing on the new financings is very competitive, and over 100 basis points tighter from last year with, a spread to LIBOR of 170 basis points on the term loan, and 165 basis points on the credit facilities. These spreads are based on Moody's and S&P's credit ratings, which can improve as we work to regain our consensus in less than grade credit rating. We also took the opportunity to fix LIBOR on $100 million of the new $500 million term loan, and to be named to an interest rate swapped contract that fixes LIBOR at 1% through June 2014. At the end of the second quarter, only 13% of our total consolidated debt is variable-rate, which is consistent with our objective of having approximately 10% to 20% of our debt at floating rates. Equally as important as the cost of our debt is its duration. And these financings result in much better balance maturity schedule than ever before. At June 30, our weighted average debt maturity was 4.5 years, a significant improvement from 3.1 years at the end of last year's second quarter. Further, there are no years in which consolidated debt maturities exceed $1 billion. For a company of our size, with relatively stable and long-term revenue streams and a track record for raising over $2 billion of capital per annum recently, our debt maturities going forward are very manageable and our cost of capital is clearly competitive again. We are also taking advantage of the competitive market for property financings. Early next month we will close on a $75 million tenure mortgage secured by a lifestyle center in the Chicago MSA. Interest on this mortgage is fixed at 4.8% and it replaces a $60 million loan priced at 5.6%. Shortly after that financing, we expect to close a $65 million 10-year mortgage secured by a Power Center in New Jersey. Interest on this mortgage is fixed at 5.4%, and this replaces a $37 million loan with an interest rate of 7%. Closing these financings will further improve our weighted average debt maturity and average cost of debt. During the first half of the year, we raised more than $1.70 billion of new debt and equity capital, and it is encouraging to see our efforts to lower our risk profile and restructure our balance sheet rewarding. There is more work to do in pursuing our deleveraging goals, and we continue to expect to have pro rata debt to EBITDA ratio in the mid-7x range at the end of the fourth quarter and below-7x longer term. We will continue to actively pursue opportunities to lower leverage, and we expect to continue to make progress on this initiative without further dilution. We also continue to deliver on our capital recycling initiatives. For the first 6 months of the year, we have generated $155 million of gross proceeds through asset sales, our share of which was $107 million, which again exceeds our full year goal. We are deploying the proceeds from non-prime asset sales into the acquisition of prime shopping centers, which improves the quality of the portfolio on a balance-sheet neutral basis. While our active disposition program presents some challenges predicting our near-term earnings, we are very confident that these efforts will result in a portfolio with better than average long-term growth prospects, which we believe will create significant value for our shareholders. We are being very diligent in underwriting potential acquisitions and despite a competitive market we are pleased to be finding select opportunities, which we expect to update you on later this quarter. We are very proud of the consistent execution on the strategic objectives that we've outlined for you over the past few years. And we will continue to make decisions that are in the best long-term interest of all of our stakeholders. Finally, I'm pleased to announce that Samir Khanal has recently agreed to join our team as Senior Director of Investor Relations. Samir is joining us from Morgan Stanley and has 8 years of experience covering the REITs as a sell-side analyst, and knows commercial real estate in our sector very well. We are proud to be an industry leader in providing effective and transparent disclosure, and Samir's addition is an example of how committed we are to being proactive in this regard. We are confident he will further improve our investor communications, and make significant contributions to DDR overall. At this point, I'll stop and turn the call back over to Dan for closing remarks.

Thank you, David. In closing, I'd like to reiterate our continued focus on maximizing internal growth opportunities while taking a disciplined approach to external growth. We are creatively sourcing prime acquisition opportunities with a primary focus on enhancing net asset value. Our reduced cost of capital and successful recapitalization of the balance sheet provides far greater financial flexibility to support these growth initiatives. Additionally we are encouraged by the level of demand we are seeing from retailers for new stores, and believe our ability to work cooperatively with our tenants as they seek to downsize and reconfigure their space will result in continued strength in our portfolio. Overall, our story is getting much clearer by the day, and we expect the positive momentum that we have enjoyed to continue. At this time, operator, we'd be happy to address any questions.

[Operator Instructions] And your first question comes from the line of Paul Morgan of Morgan Stanley.

Just on the -- you went through the dispositions, could you break out -- is it a material impact on the portfolio occupancy, because you said they're under occupied as what, 700,000 square feet?

This quarter, there was not a material impact on the increase in occupancy for the quarter. We did have one prime center in the pool that was more highly leased than our portfolio average. We also had obviously the great majority of assets were non-prime assets with lower occupancy levels but overall it's just a small enough sample where there was no material impact, certainly nothing that would have been, I don't think even 10 basis points but certainly not more than that.

There will be some situations though, Paul, where we have and will continue to sell assets that may be occupied at a higher level than the overall portfolio because we are uncertain whether it would remain there. So for example, we have assets that we have sold over 94% lease and we felt quite confident they'd go to 88% before they went to 95% so we'll continue to assess that on a case-by-case basis.

Would you say that -- I mean there's momentum in terms of the asset sales based on maybe the breadth of demand widening out, is this mostly just blocking and tackling, or is everything kind of one-off or do you think you could sell things on -- in your portfolio?

I think there's a couple of ways to look at it. Most of it would be one-off, one- or two-off, but one of the things that you have to keep in mind is that we've sold over $2 billion worth of assets in the last couple of years. So our actual roster of assets to sell has gotten much smaller over time. So the idea of doing a large portfolio is going to be much more difficult because, again, the size of the portfolio that's left to sell has dwindled somewhat because of our successful execution on the disposition side and the quality of what we're selling now tends to be on the lower side as well. So I think you could fairly well expect us to maintain a one-off or maybe two-off sort of transactional pace, to get to our $100 million a year of dispositions. But I can't see a scenario in which asset dispositions will accelerate, given what's left to sell.

We're being more selective in terms of pricing when you think about sources and uses with the current time, the uses of proceeds being the redevelopment pipeline as well as prime acquisitions. Redevelopments represent attractive high-return opportunities. Acquisitions as we all know are very competitively priced for the most part at this time, so that means we need to be price sensitive on the sale side also, which is a difference relative to 2 years ago, when the more we could accelerate any sales, the more we could repurchase our debt at dramatic discounts to par where today we're much more disciplined simply because of the use of proceeds. We have to be much more careful. And so that's what you're seeing show up in the sale results and the more attractive pricing that we're achieving.

My other question is on Borders and not so much just within your portfolio because your portfolio's relatively limited but just more broadly speaking, do you think -- just your color on the way retailers are going to view this space and kind of how that may evolve over the second half of the year as it all becomes available. I mean do you think that retailers are more likely to increase their store openings because it's becoming available, they've been waiting on the sidelines for the space for a while? Or is it sort of kind of already embedded in expectations, and the fact that it's coming available earlier may mean other deals people might have in the works may get postponed?

I think the last point you made, Paul. It's clearly been anticipated, it's not going to change anything in terms of the available space dynamic and it's not going to move the needle much on the supply side either. It's been anticipated. We've been working as I'm sure every landlord with Borders in their portfolio has, on the entire portfolio. We've had deals in LOI stage while Borders was still in bankruptcy and we just hope to execute those quickly but that's really what's happened. Nobody's surprised that it turned into a liquidation. And I don't see anybody ramping up their open to buy plans but at the same time they knew that this would be an available source for dealing.

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Maybe a question for David. As you look at the midpoint of the narrowed range for guidance for the year, I guess taking the first half run rate, can you walk us through some of the factors that might move you perhaps to the upper end? I mean, you look at occupancy, I guess they expect it to be 93.2% at the end of the year. You have seen a nice tick-up in same-store NOI and leasing spreads have improved as well but what are you looking toward that could put you at the upper end of the range?

I mean there's not a ton of time left in the year for new long-term leasing but there's obviously a constant process in terms of how do we maximize the cash flow from the portfolio. Or we could think about certain acceleration of lease payments whether that's just getting someone open earlier and select cases where we've got demand for the space. For lease termination it's also, we've probably been more active than anyone of the industry on the ancillary-income side but there's still an opportunity to add additional income for later in the year. And then some of it just relates to the budget process where, while we are pleasantly surprised every day and happy to see LIBOR stay at the 25 basis-point level, it's certainly not the way that we budget anymore. And so to the extent we do see rates stay lower, it is helpful. That said, you've got some currents on the other side too and that's why we've maintained a range that we think is appropriate, where we do not foresee any reasonable circumstances where we'd fall outside of that and continue to target the midpoint of that range for the outcome of this year despite the fact that we've pulled asset sales forward, we've pulled refinancings forward and it's not at all unreasonable to assume that if we think it's the right thing to do for the company long-term, then we will continue to do that. And that could still have an impact on our cost later in the year.

I guess with bad debt trending down year-over-year, have you seen any sort of changes in terms of store closings or expectations changing at all for the back half of the year?

No I think we've got factored in everything that we anticipate, Jay, we really don't see anything -- obviously something we watch very closely with any category that we view at risk but the guidance we're talking about clearly reflects any modifications for the Borders and Blockbusters and closings such as that.

One of the things also Jay that we're very active on is obviously on the ancillary-income side so if you take a situation like we had Borders where it was not fully anticipated that they would abandon all their stores before year end, we've already replaced that income that we would lose in 2011 with ancillary income and temporary tenants. So we've mentioned a number of times that the aggressive nature of our new business development platform and our ancillary income platform helps us mitigate risks in the event that we have a negative surprise. And this is a perfect example of it. If we had not been able to replace Borders' that are closing with temporary tenants, we would have lost somewhere around $250,000 in revenue between the end of September and the end of the year but again we've already backfilled that space assuming we get it back when we think we will. And that's part of our platform that we think helps mitigate the risk of future downside.

And my second question just on the development on hold, can you give us some sense there in terms of, I guess any sort of updated thoughts on that investment, the $530 million?

On the development part of it, Jay, we're still looking. We're not overly excited about getting anything going soon. I think we last spoke to you guys on the first quarter call about taking a good look at recon in Vegas in May, and seeing what the appetite was. And there's clearly interest and appetite and it is all about locking up the anchor tenants but I'll be honest with you, we're not looking to get anything out of the ground anytime soon. We do know in some cases, it's going to be the best way to monetize that land. But we're being patient with it. We're going to wait for the right rate, for the right return, and we'll move forward once we're satisfied. We feel it coming but it's not there yet.

Your next question comes from the line of David Wigginton of DISCERN.

David, you, in your commentary mentioned your objective of getting to midsize in time I think for your debt to EBITDA ratio, are you still operating on the premise that you're going to continue to lower that ratio primarily as a result of increasing EBITDA? Or are you planning on lowering debt as well, maybe through new equity or free cash flow?

The overwhelming majority of the improvement that we forecasted for the rest of the year or for future years is from EBITDA growth. Selectively there will still be debt reduction. Debt reduction's been the primary driver of the improvement in this metric the past couple of years. On a go-forward basis we think EBITDA growth would be the larger driver, would not expect at all equity debt reductions through equity issuance or the issuance of new common shares. But could think about that through the effective creation of new equity either by the low payout ratio that continues to result in considerable free cash flow, some of which gets reinvested in the portfolio but some of which could also be used to repay additional debt. Also the monetization of non income-producing assets, which for covenants and debt to EBITDA ratio purposes works at least as well as the issuance of new common equity so there might be select improvements on the debt reduction side that would not at all expect that to be through the issuance of common equity, but more so would expect improvement in EBITDA to be the larger driver there.

So on the EBITDA front then, I guess your EBITDA has been ticking down sequentially with the disposition activity in the portfolio, and obviously you've got a pretty wide spread between your leased and in condensed rate as well. And you're generating pretty decent rent growth. How does that all balance out and actually get you to your goal?

The EBITDA reduction on a total portfolio basis year-to-date has been partially driven by the dispositions falling earlier in the year in the acquisitions while we exceeded our disposition goal for the year. We are still -- have some work to do to get to our acquisition goal. So I think that's part of it. Some of it's also just going to be the importance of seasonality. Second quarter is basically the seasonally lightest quarter for us in terms of EBITDA, both relating to tenant schedules for the most natural time for closing stores as well as opening stores for retailers as well as the amount of ancillary income that's created in various quarters. And so we would hesitate to use the second quarter as the right way to think about the run rate there, where we think about the fourth quarter even just the seasonality of it, besides the point you mentioned, on that considerable volume of leasings been signed but yet to commence cash flowing. We think all those factors combine to get us much improved on that metric over the next several quarters.

So then based on what you just said, is your pace of acquisition going to outpace the rate of dispositions? For the remainder of the year?

Over the remainder of the year the budget has the pace of acquisitions exceeding the pace of dispositions. We mentioned previously we're under contract on $85 million of acquisitions, which will represent the majority, if not all of what we complete before year end.

Final follow-up to that is, can you give us an idea what the spread between your acquisition and disposition cap rates have been year to date, and kind of where you see that going for the remainder of the year.

Year to date the spread has been approximately 50 basis points from the mid-7s on the acquisition side, to the high-7s, low-8s on the dispositions side. Going forward, we would assume it would be somewhere between that 50 and 100 basis-point range. There are going to be selected positions that trade well wide of that. There are going to be certain dispositions that trade well inside of that where we're able to reinvest the proceeds on an accretive basis, but net based on the significant increase in quality from what we're buying versus what we're selling, we would expect it to be something in that 50 to 100 basis-point range. It's also for the relatively low volume relative to prior years that you're seeing that sell and the greater pricing discipline that we've shown there. I think we're generating better pricing on the dispositions and we're also not at all pressured to force ourselves in anything on the acquisition side where we're unwilling to compromise our underwriting pricing discipline there. And so that's why you are seeing amidst the overwhelming majority of assets that trade simply because we think the pricing is particularly aggressive but the select opportunities we find, we think can actually show a pretty modest spread between the cap rates on what we're buying and what we're selling. And we think looking out a year or 2, you more than make up for that on a higher growth profile of what we're buying, at the NOI stream of we're buying.

Your next question comes from the line of Christy McElroy from UBS.

Paul, I just wanted to follow up on your comments about the 250,000 square feet of space you should get back over the next 3.5 years. Does this represent only the Best Buy space? Or are there other retailers in there that might be downsizing? And are these estimates a result of direct discussions that you guys have had with Best Buy regarding future space needs and what retailers could potentially take that residual space?

The number's clearly Best Buy related only Christy. And it is in discussions with them. Now it was used as an example, in fact we had these guys in our office this week going through the entire portfolio, but one of the things I wanted to emphasize is there's a way to be cooperative with your major retailers. It's not all downside. And we're working closely with these guys to figure out how to get this done. So that number comes specifically through conversations with Best Buy. There's a lot of the devil's in the detail, obviously, in finding the right replacements. And as I mentioned in the script, it's going to be our call at the end of the day and Best Buy gets that. There are several retailers -- we haven't gotten to the length we had with Best Buy yet, but all of the office guys, and again not every location is oversized. Jo-Ann Fabrics is another example in the arts and crafts side. But anybody who's downsizing, this is something we are regularly reviewing throughout our entire portfolio, treat it as an opportunity, get proactive with it and let's get them in here and discuss it. And trust me, the retailers love that approach.

So as a result of those types of discussions in addition to Best Buy, how much space could that potentially be in the aggregate over the next 3 to 5 years?

We don't really know. We haven't gotten that far, Christy, and again it's going to be -- not everybody has been as clear as Best Buy in their releases in terms of what they're looking to downsize to and from. So it's a little simpler with the Best Buy. If they want to be 36,000 to 40,000 in every location, it's not hard to figure it out. But we don't have that, but it's something we're working on. And again the point is there's opportunity here, it's not all risk.

There's a big gap, Christie, in the retail community between those that are talking about it and actually executing it and those that are quite frankly, talking about it because they think that's what the market wants to hear. Obviously, it's kind of like Best Buy. It's very proactive. They're working very aggressively. Like Paul said, they were here this week. We went through everything with them. We have a good working relationship, and we'll make progress. Some of the other tenants know that it's quite fashionable to talk about that. It's something they should do, but they are well behind some of their peers. And it's somewhat uncertain to us yet who's real in the downsizing effort, and who think it's fashionable to talk about a downsizing effort.

And just following up on the second part of my question, we've heard names like Trader Joe's or Sephora being thrown out there, as retailers that could potentially take the residual space. Are you seeing any other retailers sort of popping up?

There's quite a few. I mean, Ulta heads the list, Christy. I mean Trader Joe's and Sephora are clearly there but Ulta. Carter's is in an aggressive growth boat, and they're specifically asking us, "Where can we get space that some of your larger tenants want to downsize?" Five Below, Dot's, the Dress Barn, these are all guys that are looking for space in that category that, call it 8,000 to 10,000 feet.

And then just following up on your projected $750 million of redevelopment opportunities. Can you give a sense for how the timing of the investment would play out over the next 5 years and expected returns on investment?

On terms of timing, clearly it's going to ramp-up as we go into the out years. We're planning to spend somewhere around $45 million in 2011, really just the genesis of the program. But it ramps up pretty significantly in the later years.

And returns?

Returns that on average are certainly going to be in the double digits. Selectively, you might have a few that are below that but the overwhelming majority and certainly the weighted average are going to end up in the double digits, low teens sort of area.

Your next question comes from the line of Ki Bin Kim of Macquarie.

Could you break out the same-store NOI performance between your various regions, meaning Brazil and the U.S., and maybe Puerto Rico.

The biggest spread is with Brazil where it's been by far the strongest. Results down there continue to be in the mid-teens range and so well in excess of what we're able to achieve elsewhere or U.S. and Puerto Rico has generally been in mid-2% range.

And the positive lease thread is that also driven by Brazil or is that more equal?

That is much more equal. There's going to be less of an impact there, both the volume of leasing, they're signing on a quarterly basis. As well as, our leasing spreads for the Brazilian portfolio are significantly understated relative to the real economic growth because we get annual escalators. So you're seeing that NOI show up every year but it's not -- or NOI growth show up every year but it's not showing up in a rental spread. So rental spreads down there are good, but significantly understate the real economic growth because you're getting that contractual bump every year. And so on the spread side there's really not much impact and not much...

And I may add to David's point, that it is really carried by the U.S. and Puerto Rico, the domestic portfolio on the spreads.

If you can provide some quick commentary on Florida, is that market picking up?

It's soft, softer than most, let me put it that way. There's a little bit of pickup, but we're seeing better pickup in Georgia and the Carolinas. So in terms of the small-shop space, we've seen the same success in the box space down in Florida that we had experienced in the most places. But the small shop, that's really been the hardest hit and continues to be the slowest to come back. We are seeing some recovery in the shop space, but the Carolinas and Georgia have really carried that.

Just diving a little bit deeper into your portfolio, it looks like the space that is greater than 20,000 square feet, occupancy increased about 40 bps to 96.3. And I'm guessing that had a lot to do with the overall portfolio, obviously, gains and things like NOI especially in the U.S. Given that it's kind of approaching that structural level of upper 90s, for the next year going forward what are the incremental -- I guess, how do you get continuous 3%, 3.5% NOI growth with large-base being almost fully occupied?

But I would tell you also that don't look at a 95 or 96 in that box space as fully occupied. It's always been a much higher percent lease than the corporate average, but there's clearly still upside. We've got 2.5 million square feet approximately of space in that north of 10 or 20 and there's lots of opportunity there. We honestly believe we can get that up in the 98% range, and we'll do it. I mean there's still lots of activity, lots of demand, lots in our pipeline. And there's also the opportunity in the small shop. We, historically, got to a high in that less than 5,000 square feet, in the high 80s. So we're sitting as we said just below 83. There's room there too. So combined we think there's plenty of upside for the foreseeable future.

And remember that from a same-store NOI perspective where we're switching from talking about square footage as you guys had been talking about NOI, those smaller spaces, while they have been tougher and as Paul mentioned, their occupancy naturally is going to be somewhat lower over time. They do generate higher rent per square foot and maybe approximately 2x the rent per square foot. So you need a smaller amount of progress in that bucket to still make a very large contribution of same-store NOI.

And I noticed you guys provided a little bit more breakout on the small-shop space. You guys cleared [ph] it out a little more. But if you could compare it on an apples-to-apples basis over the last quarter, what was the incremental increase on occupancy or decrease?

It was up but slightly quarter-to-quarter in the small-shop space, but there's something we're going track more closely. We've broken it down a little finer, and that's part of the intention in the supplement given to show a further breakdown, so we'll be able to track this a lot closer. It's worth making a couple of other points on that small-shop space. We actually had our highest spreads in the quarter in that space, and our renewal spreads, of which there's a significant amount of renewals within the year, were solid in this category also. So I don't want to sit here and say that everything is rosy in the small-shop space because it's not but there's certainly improvement and a lot of upside.

Just last question, given just the general negative headlines and commenting on a lot of risk out there, how much, if you could somewhat quantify or qualitatively, how much demand do you think is out there that's just waiting for things to clear up before they pull the trigger?

Very little. I'll tell you, as unsettled as the macro situation is,we have been consistently pleased by how steadfast the retailers have been and how consistent they've been in seeking space. We don't get the sense some of like you do often on the investment side or the capital-market side, that there is a wall of demand out there waiting for something positive to happen. I think it's quite the opposite in the retail community. I think the retailers understand that even though the macro situation is uncertain, and may not be as stable as they would like, I think the availability of space is even less certain for them and they know if they don't act now they're going to have a real problem in the foreseeable future and as a result, that has maintained a level of interest in space that we think really will continue number one, and number two has as surprised us with its consistency. I think it's also one of the things that when you talk to tenants that are looking to downsize, it surprises them too, because as they go out and they talk to other tenants as well, they're surprised by the demand for space, and that gives them the ability to accomplish their downsizing goals in a manner in which they've outlined.

Your next question comes from the line of Alex Goldfarb of Sandler O'Neill. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Dan, just wanted to get your sort of big-picture take. A lot of talk with Amazon and Internet sales not being taxed, if it's just purely online without the brick and mortar presence, do you have any sense as you speak to your various tenants, how many sales -- how much sales they actually lose because people are deciding instead to buy it online rather than walk into a brick and mortar store. And I don't mean tenants like a Best Buy who are choosing to buy it on their website versus walking in the store. I'm talking the Amazons, the Gilts, et cetera?

H It's a good point, it's a good question. Because one of the things that you're seeing, which you might intuitively think when you talk about the impact of Internet sales, is an overall decline in comp store sales at the asset level, and we're not seeing that. So the question you almost have to ask yourself is are they taking my piece of the pie or is the pie actually getting larger? And most tenants will tell you, that online sales are supporting the bricks and mortars sales and contributing dramatically to the comp-store bricks and mortar number because there's a lot of browsing that goes on, on the Internet, a lot of buying that goes on in the store. So I don't think most of them feel that it's taking away from bricks and mortar, forgetting like you said Best Buy, and particularly in the ready-to-wear sector where most people like to touch and feel clothing before they buy it. I think most of them feel from our conversations that the Internet proposition is supportive of the bricks and mortar and is complementary to bricks and mortar, and hasn't really taken away from the sales of the bricks and mortar the way, intuitively, we might think that it would. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: So like the, using Amazon as an example, is that something more like sort of books related, where a whole category has sort of migrated online and most categories, your tenants aren't seeing people shop exclusively at online-only retailers?

I think that's right. I do think there's a difference though. I think there's a difference between categories that are vulnerable because they're flawed, versus categories that provide just an alternative shopping experience the consumers may or may not take advantage of. We've said for many years we've had this discussion that we've always been concerned about commodity goods that are at very, very low margins. And the fact that there is a more efficient distribution channel being, in particular the Internet or in some cases a catalog, versus bricks and mortar. We talked about some of those sectors and we're seeing that come to fruition. It doesn't surprise us and doesn't really concern us. It's actually just part of the evolution of retail. It's what we deal with every day. So I think category by category, if you take a look at it, our goal is to obviously identify the winners and the losers. And we feel that from a competitive standpoint, those commodity goods, that thin margins with inefficient distribution channels are the ones that will continue to struggle and eventually, I think they'll disappear. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: My second question is for David. In your discussion with the rating agencies, you've done the term loan, you did the line of credit, are there any next steps that they are looking for? Or is it purely just sort of getting to some sort of EBITDA metric or something, or some sort of threshold like that?

I think the major steps are done at this point. Everything we've outlined to them in terms of major individual transactional activity has been accomplished over the past couple of years, and in general has been accomplished at better execution than we originally budgeted with various models that we would have shared with them. And so, we are pleased that you've seen positive rating agency activity from each one of the 3 major agencies. And so we are seeing it move in the right direction. It's never going to be as rapid as we might like to reflect the progress that we certainly are confident that we're making every day. But we have seen progress there, we think there will be more, and some of it as you mentioned is just a process of seeing the EBITDA growth over time. While some of the capital-markets activity is something you can go and do in a week or a month, and the transaction is completed, on the leasing side, it's obviously a much longer-term process of getting a good tenant in place and cash flowing. And so it's been a process over time of showing more and more progress there. And we expect that to continue, and we expect the positive feedback to continue. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: So from just our perspective, is midyear next year is that sort of reasonable for thinking that one of the other 2 may also upgrade you guys to investment grade, or is that a little too ambitious?

I don't want to avoid the question but the reality is it's better placed with them than with us. We certainly can control how hard we push on the metrics and there is a constant and urgent focus on that, and a strong dialogue with each of the agencies. We've talked about having the metrics comfortably in place during 2012. When the ratings come is uncertain. And obviously when you overlie some of the crazy mattress stuff going on right now, where whether it's the agencies or any fixed-income investor in the world being dramatically more focused about the U.S. sovereign situation than DDR's credit rating, I think it makes it even harder to forecast it. So what we can control is the metrics and how hard we push and with how much urgency. We push on continued improvement there, and you can assume that we are working extremely diligently on that. When the ratings come, I don't think it's something we want to handicap. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Well at least they're discussing upgrading you guys and not the other way around.

You're next question comes from the line of Craig Schmidt of Bank of America Merrill Lynch.

Looking at certain retailers, and for one I'm thinking of TJX, who have pretty aggressive open to buys, in their case, over 100 stores in '12 and '13. In your discussions how are they planning to do that? Are they planning to build freestanding stores or go to lower quality strip centers? What is the game plan?

Haven't heard about them building any of their own, Craig, but they're -- listen, they know it's a very aggressive plan but the success of the Marshals and the T.J. Maxx and HomeGoods has a lot of runway also because it's not out there in a big way in terms of number of stores. So you're going to see a lot of HomeGoods being done, but this is the kind of conversation I think I've had with many of you individually. It's a great question, how are you going to get it done? And you get a little bit out of a Borders bankruptcy. They'll each grab a few, but not a lot, but they're going to have to be aggressive, and they're going to have to be creative. And that gets back to the flexibility story where you're going to see them smaller stores, smaller markets. So trust me that they're all looking at their research and thinking out if we thought we could do X number in a metro market maybe it's that plus 10 and because they can be closer together with a smaller format. Or just a smaller market in terms of population. And that's the kind of thing you're going to see from a TJ. You know they're blowing and going with a core [indiscernible] strategy, which wasn't there 2 years ago. So it all adds up, but they know they have their work cut out for them. It's not an easy task.

And then just given the dispositions obviously, your store count by retailer is falling, but it seems to be falling the most aggressively for what I would say kind of your more challenged retailers. And given your comments today Paul, I would assume that when you're looking at dispositions, you're not only looking at some secondary markets but you're looking at those centers with maybe some troubled real estate retailers?

Absolutely, Craig, and that would include not only dispositions but potential terminations. I mean reducing our exposure to the retailers that we believe are at risk. Dan alluded to it a little bit talking about the Internet is an important part of what we are doing. The more quality we have in the portfolio, the better quality the overall portfolio is but you hit it on the head. It's something we look at regularly, and again not only in the disposition.

The single biggest factor is going to be what we think the NOI profile is over the next several years. And so you can see or you can imagine that would be highly aligned with some of what we believe to be the more challenged tenants and how can we take a price that might not feel like the ideal cap rate today but based on what we expect the NOI stream to be 2 to 5 years down the road. It is dramatically better pricing today than we think we could achieve in the future so that's been the process on our side and that's why you see some of the more challenged retailers getting smaller on that one.

Your next question comes from the line of Michael Bilerman of Citigroup.

In terms of sources and uses in the next few years and sort of this opportunity for growth, and Dan, I think that you clearly articulated it in your opening comments. You think the best of redevelopment, it sounds like you have a number of acquisitions that are lined up. You have the development property, which doesn't sound like you're going to start, but clearly that would require capital at some point or I guess you could just write it off or sell it. But probably more of a capital need. It seems like there's a lot more capital need than capital uses. And I also think about the dividend, which obviously you kept low but eventually you're taxable income is going to revert as you take in some of the depreciation that you're going to be required to have a higher dividend that what you're paying now, so it would seem that there's a lot of capital needs and I'm just curious how you think about sourcing that capital and how much capital that is, but also the cost of capital. Because I think, you've spent a lot of time on the call talking about your -- what you think is a more competitive cost of capital. I'm just curious how you think about where that is across the different capital sources that you would have.

I don't think we would completely agree that the uses over the next several years are well in excess of the sources. I do think particularly on the redevelopment side that we're seeing a greater volume of opportunity than we expected a few years ago just because the retailer interest is much greater in terms of funding that. You were exactly right. It's thus far an extremely low dividend payout ratio, it's been an important source of capital. We don't take that lightly and we don't expect that to be the long-term case that we would keep the dividend this low. We do still think we'll generate some volume of free cash flow in any given period although we would expect the dividend payout ratio to be much higher than it is today in the not too distant future but even with that we still expect some amount of free cash flow. We continue to make progress on asset sales, whether those proceeds go to fund acquisitions, to the extent we can find select opportunities or whether those proceeds are reinvested in redevelopments. And then finally, on the development side, we probably do view that at least as much as a source of capital as of a use of capital because even some of the projects we decide to move forward with as was the case with the 2 redevelopments we announced a couple of months ago, the first step in that process is a pad sale to a major anchor. And so I think we can see development projects move forward on a cash-flow positive basis to DDR even if some of that cash ends up getting reinvested, some or all of that cash ends up getting reinvested in the project, it doesn't necessarily mean that the only way you can see us go vertical on the site is by putting net more capital in. And so whether it's the project that moves forward while we're selling pads or whether it's just some of the other monetization of non income-producing assets, we think that can be a pretty significant source of proceeds. Over the next couple of years, let's also remember that while the $750 million of predevelopment is a relatively large headline number and one that we think is very achievable, we are talking about a 5-year period there and so there's a long period of time to generate proceeds from those other sources to fund that and I think we'd also reiterate, given everything we've lived through over the past few years not only is focus on the management team and the board to continue to operate with a lower risk profile but we've also just put a lot more systems, modeling, risk controls, enterprise risk management in place where you asking this question is refreshing because it's something we talk about quite a bit internally. It's no longer a situation where you're bringing up something that could present a risk but that we haven't talked about, it's exactly that we spent time internally and you can absolutely assume that we're not going to push forward on anything that we don't believe is very, very appropriately funded with proceeds that we got identified from one of the sources we talked about. We are pleased that our cost to capital has improved. We also know the only way that, that will continue to be the case is if we continue to operate with great discipline to keep our debt spreads low by not being too reliant on that source of capital and to continue to get to a more attractive price of equity. And my understanding's that the very high cost of common equity versus other means to generate those proceeds.

I guess how much will equity factor into that? I mean clearly, when you took up the preferreds earlier this year that there's an equity swap. How much more sort of equity do you want to put back into the system. You're not at your EBITDA -- debt to EBITDA target yet. You're on target to get there through the EBITDA growth over the next 12 months but clearly things are going to be have to be match funded. Equity in your assets is one piece, but the only other equity sources is common equity. So how should we think about, at what point you see that as an option?

I don't think we have any near-term plans to use that as an option. I mean we're obviously consistently thinking about the cost of various forms of capital. We do understand that if there is net asset growth, that there is an equity requirement. But for us, we continue to believe that other sources of effective equity are dramatically cheaper than the issuance of new common shares and so when we think about the monetization of non-income producing assets, which for covenant purposes and for debt to EBITDA purposes serve at least as attractively as the issuance of new equity as well as the generation of free cash flow through even a normalized payout ratio. The capital that would come out of that, I think those are what we prioritize more highly as the forms of equity that we would be likely to include as part of funding any net growth that you might see in terms of net asset growth.

Just a clarification on same-store NOI. You show your same-store NOI on a growth share basis, as if you own 100%, of all joint ventures. And clearly with Brazil being a large portion, of which you only own 1/3 of, if you were to strip it down to your pro rata share of same-store NOI, what would that growth be? What would happen to that 3.6, and then break it out further between what would U.S. be and what would Brazil be?

If you take Brazil out, which is obviously an outlier on the high side, it's going to reduce that NOI figure. However, if you take out some of our other large joint ventures, they've been generating lower same-store NOI growth either because of the specific assets they own or because of the fact that less capital has been invested in some of those centers to fund new leasing activity. So some of those, the removal of some of the other large joint ventures would actually help if you went to a pro rata basis. All in, you would take the 3.6% for the quarter, the 3.8% year-to-date down 75 basis points to 100 basis points, depending on what period you're looking at to think about the true pro rata basis in the mid- to high-2% range.

And that's with Brazil and then you take out U.S. and U.S. would probably be 1.5%?

No, U.S. would be in excess of 2%.

Even though Brazil is 10% of the total, and was up 15% wouldn't that be 1.5% growth?

Year-to-date, from the U.S. portfolio overall we're north of 2% and if you take out the joint ventures or if you reduce the influence of the joint ventures that are lower than the consolidated portfolio. And so if you reduce that to a pro rata share you'd be somewhere in the low 2s.

You're next question comes from the line of Jeffrey Donnelly of Wells Fargo.

Just a few follow-ups, considering the redevelopment pipeline, I was just curious at some of the common themes were behind the value creation there. Is it really just following through I guess I'll call them the deferred CapEx, that could be just like facelifts to centers or are these expansions like adding grocers or creating outparcels that you're looking at?

It's not deferred CapEx, Jeff, it really comes from a couple of different areas. It is expansions of certain centers, it's reconfiguring space. But what's really driving this is tenant demand and tenant flexibility. We've had situations in centers for a long time, in particular the one center in Denver that we announced in the June press release, and we've owned that for a long time, and we really had no luck redeveloping that even though we've tried for about the last 7 years to do so but tenants' demand is up. It's a great location and tenants need to be flexible in order to achieve their open to buy goals, getting back to Craig's question of how they're going to do it, and how they're going to hit their goals is they're going to be flexible on the redevelopment side and look at existing space differently than they've looked at it in the past. So that has really been the impetus behind the growth of redevelopment because we now have space that may not have been considered viable in the past that's not only considered viable but is highly desirable. And that's going to continue, I think, to fuel the growth, because like Paul said, the development of new space is really not going to be significant at any level any time soon.

I'm just curious, Dan, do you think anchors are, their expectations around rents are adjusting, I guess I'll say quickly? Certainly there was a drop on the asking rents from the prior peak to the trough of the cycle. How quickly do you think their expectations are adjusting on the way back up?

It's coming back. They're not adjusting up as quickly as they adjusted down of course. And if you were a tenant you would do the same thing. But we are starting to see pricing power return to the portfolio. You've seen it in the spreads. We think that will continue because I think when you asked a question, how are you going to meet your growth goals? The short answer from a lot of tenants is they're not really sure how they're going to do that and that means they're going to have to become more flexible, they're going to have to become more aggressive on price. Those of us with some space are going to be a little more patient. And hopefully that will drive the rentals back to close to where they were. I don't know if we'll get back to the peak 2007 days, but our goal would be to get as close as we can get in as short a period of time as we can but rents clearly don't climb quite as quickly as they drop.

Just a second question maybe for David, what's the volume of non income-producing assets that you guys have on your balance sheet out there and separately maybe as a follow-up to the priors, do you attribute the traction in shop-space leasing, I guess I'll call it, and pricing specific to the pickup in your anchor occupancy? Or is it something just more macro going on?

First on the non income-producing assets, you're going to be less than the $1 billion number we've talked about historically just as we've modified a portion of that. I think that was the headline number we started talking about a year ago. You're still going to be approximately 10% of the balance sheet so something in that $850 million-plus range some of which will be possible to monetize near term, some of which could be quite a ways off but all in the way I still think about it is approximately 10% of the balance sheet, non-expedition assets.

And the other part of the question, Jeff, clearly there's been some improvement in leasing of the small-shop space because of the filling of vacant boxes for example. There's no secret that when you have a better mousetrap with better quality anchors and draws you're going to achieve more success. The other thing we're seeing with the small shops, that there's been improved credit available, but it's not overwhelming. We're seeing great pickup in franchisees and as we've seen in the franchise companies play bank. They know they have to lend to their respective franchisees if they're going to grow so we've seen some improvement in that but there is clearly a relationship to an improved center in terms of the leasing progress in the small-shop space.

Your next question comes from the line of Michael Mueller of JPMorgan. Michael Mueller - JP Morgan Chase & Co: Jeff got most of my questions on the redevelopments, but maybe one thing, of the $750 million, about how many projects does that include?

A significant number of projects, Michael. They run the range from -- we can have one at maybe in the $40-million or $50-million range and we've got some that are in the $5 million to $10 million. I would say most of them are going to be in that $10 million range. So as we go along, we're seeing some more that are significant spends. We had some initially, which were even in the $2.5 million to $5 million spend but a lot of the things, and I don't think we hit on it yet, one of the areas we're working is where we are converting small-shop space to anchor space. I mean that clearly is a redevelopment and the right thing for the asset and it's a great upside to the NOI. But in terms of an exact number, we have not pinned that down at this point. Michael Mueller - JP Morgan Chase & Co: And then on the new leasing spreads, I understand the rationale for focusing more on the lease, I guess the lease-spreads space that's been vacant less than 12 months but if you would throw in the vacancies greater than 12 months, how different would the lease spreads be? They would still be positive, correct?

Absolutely. They'd be less but they'd still be positive. It's not a calculation we're doing anymore, Michael. But I think more importantly, as I've talked about on a few occasions is that the rents are up quarter-over-quarter. So the first year starting rent, you can see that right in the -- there's an improvement in first year rents whether it's vacant for a year or not or greater. So we're seeing that. And the other thing is, again, I keep coming back to that renewal spread. That is a big, big deal and something we should all be focused on, and it continues to grow. I'm very confident we'll stay positive. New deal spreads, you'll see some bouncing around. It's going to be a function of the deals made in any quarter. Renewals, we're seeing consistent improvement in the renewal spreads and that is a big deal. And as leasing gets better for obvious reasons, less chance of risk of people threatening to walk away and more and more taking their options.

And to Paul's point, Mike, the importance of the renewal spread, which is where we spend most of our time focused is simply that's the vast majority of the activity in the quarter depending on the quarter or depending on even the year if you go back and look it's between 75% and 80% of our total activity is on renewals. So the renewal spread number is the one that we focus on very closely that gives us a good indicator on overall health out there, number 1 what the retention rate is and number 2, how the renewal spreads work and that's the one that we've been most enthusiastic about as we've seen the recovery within the portfolio.

Your next question comes from the line of Jim Sullivan of Cowen and Company.

Two quick questions. First of all, kind of a follow-up to the commentary on spreads. I'm curious to what extent, if any, we keep hearing that retailer margins are going to be squeezed in the second half, apparel, food and some other categories. To what extent, if any, do the retailers mention this and push back in terms of any rental spreads. Is it something that just noise enters into negotiations or does it come up at all?

It's mentioned, Jim, but it doesn't carry a lot of weight. One of the things -- first of all, they're not all sure how these margins are going to be squeezed. We're all concerned and we're going into the back half now and there's a little bit of caution but we've yet to see the margin squeeze. I mean some of it is going to be predictable but the other thing when you're negotiating a rent with a tenant is a spike in cotton prices is not a forever situation. Rent is a long-term proposition and that's one of the things we remind them of. Just the fact that you had a spike in cotton, cotton's come down. We're not going to lock in a 10-year rental based on the potential for margins being squeezed because of commodity pricing. Again, it comes up, it hasn't been a significant factor at this point.

The second question really goes to one of the slides that is in your presentation that you gave in May reads, the Five-Year Plan slide call it, if you will, where you talk about same-store NOI on a, I guess, a post-recovery period a range of 1.5 to 2. And I guess I'm trying to square that with, when we look back over the last 10 years, the average same-store NOI growth was just a little below that even if we include 2009, and given all the commentary regarding focusing on improving significantly the average asset quality, the initiatives in terms of ancillary income and how successful they've been, that 1.5% to 2% number, and also presumably that includes the impact of what you're doing outside the U.S., it seems like that's a pretty conservative estimate. I'm just curious if you would comment on that?

We agree. We think it's a conservative estimate, but of course that number as we are putting together the Five-Year Plan at the end of last year, quite frankly, there were a lot of initiatives that we had, that needed to go according to plan in order for us to meet those strategic initiatives over a five-year period of time. And a lot of things had to go right. The good news is a lot of things have gone right, and I would be disappointed if we couldn't beat that number going forward particularly with the improvement of the overall quality of the portfolio domestically. It's been very, very significant. So I think your point is a good one. We don't want to put ourselves in a position where we overpromise and under deliver at any given time to this market and at the time that we put those numbers together we're looking at things and the risk involved and the execution, we felt that, that was the appropriate numbers. That was the appropriate number in the appropriate range. If we could beat it, I think that's great. But we also have to keep in mind that there are things in the market today that are still working against us that we need to overcome. And we'll continue to work towards beating all the numbers that we present to you.

Just kind of a follow-up question. The redevelopment spending effort and initiative. Albeit it's going to be spread over many years, and there could be smaller projects and bigger projects. But I'm assuming that from a modeling standpoint, the contribution for that will be in addition to the same-store NOI growth.

That is correct.

Your next question comes from the line of Tayo Okusanya of Jefferies & Company. Omotayo Okusanya - Jefferies & Company, Inc.: Most of my questions have been answered. But just along Jim's line of questioning. When we do look back at the Five-Year Plan presented at the Investor Day, I know it's only 4 months into them, but could you talk a little bit how confident you are about hitting some of those marks and just at this point in the cycle how you would grade yourself relative to those initiatives that you're taking on?

You're exactly right. It's a short period of time since the plan was created late last year and since the plan was rolled out publicly at our Investor Day in March. That said, we're pushing hard every day to execute. We're pleased with the progress thus far through approximately 10%. But the period of time that we originally outlined in the plan, we still feel that the goals are achievable but on the other side of that no one here is going to be happy if we simply achieve those goals. So we're not just pushing to get there and take the last few years of that plan off. We're pushing to get there as quickly as possible and keep pushing beyond there so happy with execution over the first 6 months or so and expect to be able to show you a lot more as we look out over the next few quarters.

Just from a process perspective, we'll be reviewing that plan on an annual basis with our board as we do every -- at a board retreat every November. And we'll do it again this November, and we'll look at where we are right, we'll look at where we were wrong, we'll look at how the market has changed and how we'll need to adjust. And accordingly -- and obviously since we have a lot of communication with many of you on a regular basis, we'll be presenting you with changes to that plan based on what we see as market conditions that are either positive or negative.

Your next question comes from the line of Rich Moore of RBC Capital Markets.

Dave, I have a question for you on the mezzanine loan impairment. What was that exactly?

It was a sale of a loan that we had made approximately 4 years ago as part of a prior investment thesis and more of an FFO driven strategy to make some mezzanine loan investments that can generate FFO. We still have a few of those on our books. This was one where we have the opportunity to either invest more capital and potentially, or likely get all of our principal out over a multiyear period of time or to exit earlier but accept less than the par amount on the loan. Given the non-retail underlying property type we certainly thought, while there was some economic rationale for further investment, we really thought with the strategic plan we've outlined, we talked about internally and externally that it made more sense to take some capital out, reinvest that proceeds in our core business rather than go further down the path with that specific mezz loan. The majority of the mezz loans or loans at all on our books today, a great majority are tied to high-quality power centers and so while they might be wrapped in a little different portion of the capital stack, the underlying pieces of prime power centers is very much what the majority of that capital is invested in but still have a few vestiges of prior activity.

So are you doing any more of those or is that not something that you guys are looking at? Any more new mezzanine loans?

Certainly not outside of the retail space. Selectively, I think especially as competitive as the acquisition market is, if we had looked to gain involvement in a high-quality project, then we have an interest in owning, and ability to own and manage attractively, we would certainly consider it but I would expect it to represent a small minority of our overall investment activity.

And then when you guys look at dispositions. I know you had and you still have a portfolio that you're trying to get rid of as a block, how realistic-- it seems like I'm not hearing much in the way of interest, whether it's on the mall side or the community-center side, from buyers in a portfolio. Obviously they're interested in individual assets but the portfolio seems to be more difficult. What do you guys think about that?

Our portfolios are more difficult and in particular today in our case, the quality of what's left to sell, because we've sold so much already is pretty low. And as a result, if you really look at some of the larger portfolio sectors that have sold, while you could argue that overall the quality may not have been overly high, there was some very high-quality assets contained that made a certain percent of the overall portfolio. A lot of what you're seeing out there today doesn't have any percentage of high-quality assets in the portfolio. And as a result, I think, astute buyers are recognizing that they'd be wiser to cherry pick than to buy en masse.

Your next question comes from the line of Carol Kemple of Hilliard Lyons.

What percent of your portfolio was actually occupied in the second quarter in paying rent?

90.5%.

So is that spread a little tighter than from the first quarter?

Just a little bit, Carol, 250 basis points and I believe we reported 240 basis points at the end of the first quarter. We should see that come down a little bit with the openings in the third and fourth quarter. Keep in mind that's a very seasonal number because very few tenants open in the first and second quarter, third quarter things pick up with back-to-school, and obviously in the fourth quarter everyone wants to be open.

And you all talked about earlier in the call that at some point you're going to have to raise the dividend, can you give any kind of timing or estimate of when you think that will be?

Obviously dividend policy is a board decision. We've said publicly that until we had made considerable progress reducing the risk profile of the balance sheet, that it was not something that management would recommend to the board. At this point I think we had really set that last step in that process, the refinancing of the term loan, the extension of that maturity and the removal of a large majority of the maturities from 2012 is being an important catalyst for that. We've clearly executed on that at this point and so we're much more open with that behind us to thinking about higher dividend and to recommending a higher dividend over the coming quarters.

Your next question comes from the line of Vincent Chao of Deutsche Bank.

Just a follow-up question. Just as we think about the longer-term occupancy ranges in that less than 5,000 square foot range in light of the redevelopment projects you've identified, I mean, how much of the vacancy improvement comes from those redevelopment projects where you're taking back some space maybe from those smaller tenants? And then outside of that, it seems like national, and regional tenants are really the ones that are sucking that space up and small true mom and pops not really showing any signs of real growth. If that stays the case, is there enough demand from the national and regional players, the franchisees and whatnot to take that back to the 80, 80-ish, call it normalized range?

We're not getting that far ahead of it Vince, but it's clearly as I said earlier, we see 300 basis points of improvement, which would get us to about 86 in that category. Some of that, but not a significant amount yet, is because of redevelopment. I think I mentioned in the script in one of the projects in Puerto Rico, we actually took 4 vacant spaces, and vacant for a significant amount of time and turned it into one PetSmart so that's where redevelopment did reduce that vacancy rate. But we've already seen the space. Keep in mind we're 2.5, 3 years beyond when this whole problem with small-shop space started. So we've had a lot of fallout. And to grow back is what we would expect, and again we're not getting crazy and thinking 88 is in the immediate future, but we certainly see a few 100 basis points of improvement there. And it is more national there's no doubt. But I say that, there's national change, also that our franchise changed. When you're dealing with mom and pops who are the franchisees at the end of the day, they're getting credit bills from those franchise companies, and that's a significant part of the growth received in that category.

But you think to get back to the 86 range even the 300 basis points, you think that can be done via the regionals and nationals where you're seeing a demand from today?

Yes.

You don't need the small -- the true mom and pops to come back to get there?

No, but we're going to see some come back. We're not counting on it, but we will see some.

Your next question comes from the line of Cedric Lechance [ph] of Green Street Advisors.

Just in regards to TI packages, you did a great job providing us the information on that front. Would you be able to give us an idea of the average TI package on a per square foot, per year for small shop tenants versus anchor tenants?

The small shop, it's next to nothing, Cedric, I mean there's very little TI package in the small-shop space. In the larger stuff, we've been re-tenanting the boxes that came back to us a few years ago. as we've said consistently, we've seen it come down but that could be in the $20, $25 a foot range. But when you average in the small shops, there's very little and in fact, in very few cases where we've got allowances for the small shops.

And just going back to one of the earlier comments you made, Paul, actually. So if you haven't seen the GAAP in terms of demand from retailers and availability of goods supply on your part for your entire career, it would seem to suggest to me that either rents are going to spike quite dramatically at some point or that development is going to pick up. In which direction do you think we're most generally headed?

Rents. I would tell you that I don't know that spike up is the word I'd use, but it's been consistent improvement over the last 2.5 years, Cedric. We're seeing it enter the conversations we have every day. There's not enough development even when if that comes back, that's going to move the needle on that supply side. That's a big thing to remember on this. We're just not going to see retailers chase future residential growth, which isn't there, and nobody knows when it's going to come back. So limited development will take some of the demand. But we're going to see growth in rent. It's that simple.

I think it's also important, Cedric, to keep in mind that on the development side, the entitlement risk out there is still great. People talk about development almost like you can flick a switch sometimes, and it can automatically appear. Even if rents go up to the point where development becomes much more attractive, that doesn't mean the entitlement situation is going to become any easier and companies like ours are going to be able to deliver product in a timely manner. So the nice thing about having existing space is that it exists so you control exactly what you can do with it. The problem with development is while, yes, you need tenants to pay the appropriate level of rent in order to justify the investment and the return, there's a whole bunch of third parties out there who can control whether that space ever gets built or not and really controls your project, much more so than you do existing space. So that's why I mean I totally agree with Paul. I think the thing we're going to see is we're going to see rents trail up and rents may trail up to the point where developments at some point look attractive. But that still doesn't mean they get done, because of all the other factors that are necessary to actually put a shovel in the ground.

Cedric, and I'll give you one example by the way of what I'm talking about, and what's happening with the demand in the rents and on the Borders situation. We've got one that's coming back with the latest wave of liquidation, where we've got 2 of the junior anchors we've all been talking about regularly. Fighting for the space is fun. We're seeing a competition like we haven't seen. We're going to achieve somewhere in the 14 to 14.5 range on space that I'm telling you would have leased for $9, 2.5 years ago. And that's part of the story. Now that's a very positive exception to the rule but that's what we're going to see more of.

At this time, there are no further questions in the queue. And I would like to turn the call back over to management for closing remarks. Please proceed.

Thank you, all, very much for joining us, and we look forward to speaking with you next quarter. Have a nice weekend.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.