SITE Centers Corp. (SITC) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 DDR Corp. Earnings Conference Call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like turn the presentation over to Mr. Samir Khanal, Senior Director of Investor Relations. Please proceed, sir.

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 risk 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 www.ddr.com. [Operator Instructions] At this time, it's my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Samir. Good morning, and thank you for joining us and for your interest in our company. The fourth quarter of 2011 was another excellent quarter for DDR, but that really should come as no surprise at this point. 2011 and 2010 overall were excellent years for our company as we continue to execute on our articulated strategy designed to enhance all aspects of our business model. We continue to be very consistent performer in very inconsistent times. And we look ahead to 2012, that consistent performance will continue. Fourth quarter 2011 marks 7 consecutive quarters of same-store NOI growth, 7 consecutive quarters of positive leasing spreads, 10 consecutive quarters of leased rate gains, 12 consecutive quarters of balance sheet improvement and 16 consecutive quarters of non-prime asset sales. In addition, the trend for small shop space over the past 2 years has been positive, with a net gain of 1% in 2010, but growing to 29% in 2011 due to move-ins outpacing move-outs. And with regard to tenant accounts receivable and bad debt expense, we have seen continued meaningful reductions over the past 3 years. We are now in the enviable position of having historically low debt maturities and historically high liquidity, with a staggered and balanced maturity profile. We continue to experience historically high leasing velocity with a historically limited tenant watch list. The credit quality of cash flow continues to improve across our portfolio specifically and our sector generally, as described in detail on Page 35 of our updated investor presentation that you can find on our website. From a balance sheet perspective, we have obvious rating agency momentum and extended debt maturity profile and a significant debt to EBITDA decline to 7.26x on a consolidated basis and 7.74x on a pro rata basis. The bottom line when looking at the DDR story today is that we are still a bit of a contradiction. While our stock continues to trade as a high beta name, our operational performance and balance sheet are increasingly devoid of risk, and we are confident that our operations will continue to improve and our balance sheet will continue to de-risk moving forward. All the above being said, we are under no illusions regarding the environment in which we operate. We all currently live in an economy impacted by quantitative easing, which artificially and temporarily provides the opportunity for businesses to correct deals of the past, improve the present and prepare for the future. As we continue our quest to further de-risk our balance sheet, we do so in acknowledgment of the fact that quantitative easing is not a policy that will last forever and financial opportunities will undoubtedly be more expensive in the future. As a result, we have pursued opportunistic refinancings, and in many cases have accelerated our plans in order to take advantage of current pricing rather than letting the market take advantage of us. Our goal is to keep it real, acknowledge the unique capital opportunity that currently exists and prepare ourselves for the future with balance and capacity. We have raised approximately $8 billion over the past 3 years, completely recapitalized our company and have taken advantage of the opportunity to dramatically improve our balance sheet, enhance our portfolio and grow our business. The current recovery is fragile at best, and absent a subsidized economy, growth is tepid. We understand that long-term investors are not fooled by short-term financial engineering, artificially inflated FFO growth or chronic spread investing at the expense of NAV. We also recognize that savvy investors know the difference between real growth and CapEx-induced growth. We absolutely believe that those who fail to seize the moment to enhance their portfolio quality and financial standing will present future opportunities for those of us currently pursuing a contrary strategy. Financial stability and a realistic view of today will lead to additional opportunity tomorrow. I'll now turn the call over to Paul to discuss portfolio operations.

Thank you, Dan. The strong level of activity in 2011, which Dan referenced, resulted in a year of significant improvement across our portfolio. In the fourth quarter, we executed 239 new leases for 1.1 million square feet and 304 renewals for 1.8 million square feet. Spreads on new leases and owned assets were 9.6% and renewals were 4.5%, resulting in an overall blended spread of 5.8%. For the full year, we executed 876 new leases for 4 million square feet and 1,232 renewals for 7.7 million square feet. Spreads on new leases on owned assets were 11.2% and renewals were 5%, resulting in an overall blended spread of 6.1%. As a result of this activity, our domestic leased rate as of December 31 was 93.3%, a 20 basis point increase sequentially and a 100 basis point increase over year end 2010. Including Brazil, our leased rate at year end was 93.6%. As Dan mentioned, we continue to show consistently strong performance and improvement in our leased rate, leasing spread and same-store NOI growth. These are all continuing trends and clearly reflect the strong demand we are seeing from retailers, who continue to validate the quality of our portfolio and overall asset class through their strategic selection process. Our same-store NOI expectation for 2012 is for 2% to 3% growth. As mentioned in our guidance, we expect to recognize the majority of this growth in the back half of 2012 due to the timing of 2011 move-outs and 2012 rent commencements, most of which are already committed through prior leasing. We expect spreads and deal velocity to remain strong throughout 2012 and the year-end leased rate to improve another 100 basis points to over 94.5% prior to the impact of the proposed EDT transaction. The forecasted improvement in the leased rate will be achieved through a combination of increases in our big box and small shop leased rates, with the majority of the increase coming from the big box lease-up. While there is clearly room for growth with our small shop space, keep in mind that nearly 75% of our total portfolio GLA is made up of spaces larger than 10,000 square feet. Approximately 60% of the expected 100 basis point improvement in leased rate will be the result of leasing spaces over 10,000 square feet and 40% will be a result of leasing spaces under 10,000 square feet. As a result, our small shop leased rate is projected to improve in 2012 by approximately 150 basis points to 86%, and the leased rate for over 10,000 square feet is expected to improve by approximately 70 basis points to 97.5% by year end. While the demand story in leasing has been primarily driven by the big box category, I would like to take a few minutes to update you on our progress with small shop space, both in terms of increased occupancy as well as reduced exposure. As Dan mentioned and you can see in further detail on Page 36 of the investor presentation on our website, small shop move-ins over move-outs increased in 2010 and even more significantly so in 2011. The opportunity for additional improvement is clear and the potential for upside is compelling. In 2011, for the portion of our portfolio that consists of space less than 10,000 square feet, we increased our leased rate by 60 basis points to 84.5%. We also reduced our exposure to this size range by 30 basis points to 26.2% of our total portfolio GLA, through a combination of small shop consolidation, acquisitions of prime power centers, non-prime asset sales and creative new leasing initiatives. Regarding small shop consolidation, in 2010 and 2011, we consolidated 290 small shop units, the majority of which were previously vacant, into 119 larger units and leased them to some of the fastest-growing retailers such as Five Below, Shoe Carnival, PetSmart, Ulta, Anna's Linens, Pet Supplies Plus, Rue21, Dots, Carter's and more. These deals represent $11 million of new income to DDR, $8 million pro rata. These expanding retailers require the creative reuse and consolidation of space to meet their growth needs as they strongly desire prime centers, which are currently trending at 95% leased in our portfolio. For further detail on this initiative and examples of recent space consolidation, please refer to Page 50 of the investor presentation on our website. As you know, we are also aggressively selling assets that have greater exposure to small shop space and acquiring prime power centers with a focus on credit quality, national anchor and junior anchor tenants. A perfect example of this is our 2011 power center acquisitions. They represent over 1.4 million square feet or over 98% leased with 75% of their GLA consisting of units greater than 10,000 square feet and are anchored by national credit tenants such as Whole Foods, Kohl's, Wal-Mart, Target, PetSmart, Ulta, Harris Teeter, Bed Bath & Beyond, T.J. Maxx, Home Depot and Lowe's. We have also launched 2 new leasing programs focused exclusively on small shop leasing, set up shop and FranchiseConnect. Set up shop is currently being piloted in the Atlanta market given our large concentration of assets and our strong local presence. Since launching this program just 2 weeks ago, we have generated over 200 leads, have executed several deals and are looking forward to rolling this initiative out to additional markets in the near future. Our FranchiseConnect portal was developed in partnership with our vast range of franchise retailers such as Dunkin' Donuts, Great Clips, GNC, Subway, Panera, Menchie's, The UPS Store and many more. It provides entrepreneurs with web-based tools to research local and site-specific franchise opportunities across our portfolio. We're extremely excited about these initiatives as they not only assist in the lease-up of small shop space and improve our recovery rates, but also create new business opportunities for entrepreneurs. Overall, we are extremely pleased with the progress we have made in addressing small shop vacancy and our entire portfolio, and are confident we will make significant further progress in 2012. And I look forward to keeping you posted in that regard. And I'll now turn the call over to David.

Thanks, Paul. Operating FFO was $72.1 million or $0.26 per share for the fourth quarter, which was in line with our expectations. Including nonoperating items, FFO for the quarter was $47.4 million or $0.17 per share. Nonoperating items were primarily noncash impairment charges related to the land held for development in Canada and debt extinguishment charges related to Town Center Plaza. Gains of $56 million or $0.21 per share related to the sale of Town Center Plaza and other assets were recognized during the quarter and are excluded from both FFO measures. January was an extremely active month for us as we raised over $600 million of capital, announced a recapitalization in EDT through a creatively structured transaction, and addressed the majority of our 2012 consolidated debt maturities. Our new joint venture with Blackstone will acquire the majority of the EDT retail portfolio, establishing a strategic relationship with one of the most successful real estate investors in the world. We issued nearly $250 million of common equity on a forward basis to fund the $214 million total investment in the venture, which will lower our overall leverage without FFO dilution. The majority of our investment in the venture is $150 million preferred equity interest with a fixed return of 10%, which represents a disciplined investment with an attractive risk-adjusted return. We are also pleased to have substantially addressed our 2012 consolidated debt maturities. We closed $353 million of new long-term financings comprised of a $250 million unsecured term loan and a $103 million mortgage loan. The $250 million unsecured term loan consists of $200 million 7-year tranche, with interest fixed at 3.6% through a swap contract and a $50 million 5-year tranche, with interest at LIBOR plus 170 basis points. The attractive pricing and duration further advanced our goals of reducing our risk profile and lowering our long-term cost of capital. Proceeds from the term loan will be used to retire $180 million of convertible notes maturing in March and outstanding balances under our revolving credit facilities. Our remaining 2012 consolidated unsecured debt maturities consist of $223 million of 5.4% unsecured notes that mature in October, and the company had no other unsecured maturities in the next 3 years. In addition, we now have nearly full capacity on our $800 million revolving credit facilities. Proceeds from the mortgage loan will be used to prefund our consolidated 2012 secured debt maturities, allowing us to unencumber assets throughout the year. It is important to note that we sit today with only $223 million of unsecured debt maturities over the next 3 years, a significant improvement from $2.3 billion of maturities at the end of 2008, $1.9 billion of maturities at the end of 2009 and $600 million at the end of 2010. At year end 2011, our weighted average debt maturity was 4.3 years, a significant improvement from 2.9 years at the end of 2009 and continued progress from the 3.9 years at the end of last year. Our annual maturities are very manageable, and we expect our cost of capital to continue to improve as well. Fitch upgraded our credit rating in January and all the rating agencies are very aware of the progress that we have made, and we will continue to communicate with them on a regular basis on our progress as we work to regain our consensus investment-grade ratings. Our recent transactions have further strengthened our maturity profile, and we remain absolutely committed to lowering our leverage further. In 2011, we generated $461 million of gross proceeds from asset sales, of which our share was $371 million, and an additional $71 million of assets are currently under contract for sale. Dispositions in 2011 include $57 million in proceeds from non-income producing asset sales, and we are currently under contract on an additional $21 million. We meaningfully exceeded our goal for full year and are proud to be the leader among retail REITs in recycling capital. Proceeds from asset sales represent a valuable source of capital as we funded $230 million of prime acquisitions and lowered leverage with this equity, and we expect more to come. We are very confident these recycling efforts will result in a portfolio with far better than average cash flow stability and 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 off-market opportunities like our new joint venture with Blackstone and hope to be able to disclose more of what we are working on in the coming months. In January we issued 2012 FFO guidance of $0.98 to $1.04 per share. This assumes recently completed and prospective financing activity and another year of visible same-store NOI growth. It also includes $100 million of non-prime operating asset sales with net proceeds reinvested into acquisitions of prime shopping centers. We continue to feel comfortable with these metrics and hope once again to exceed this volume of capital recycling. While EBITDA and NAV per share growth continue to be our focus, we are pleased to guide to our first year of FFO per share growth in 5 years, and we expect this trend to continue. We also declared a first quarter 2012 common stock dividend of $0.12 per share, representing a 50% increase from the fourth quarter of 2011 dividend and a 200% increase from the first quarter of 2011. The dividend increase is a result of the strength of our operating platform, the high credit quality of our cash flows, our proven access to capital and minimal near-term debt maturities. The company's risk profile has been significantly reduced, allowing us to prudently return more cash to our shareholders on a regular basis, and we hope to generate additional growth as we continue to make progress on operational, capital recycling and deleveraging initiatives. While we are proud of all that we have accomplished in 2011 and so far this year, we have more work to do. We are working hard and expect to be able to announce continued progress soon on numerous operating and financing initiatives on both our wholly-owned and JV portfolio. At this point, I'll stop and turn the call back to Dan for closing remarks.

Thank you, David. Before turning the call over to questions, I'd like to reiterate my opening remarks, which highlighted the consistent execution of our operating platform and balance sheet improvement initiatives. As I've said in the past, the market may be volatile, but we are not. While it is easy to become distracted by our surroundings and the market developments that are simply outside our control, we remain disciplined and committed to achieving our long-term aspirations, reducing risk and creating value for our shareholders. Operator, at this time, we -- I'd be happy to open the call to questions.

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

Dan, just in light of your comments, your initial comments about using monetary policy and how it's creating opportunities for you to sell assets and rightsize your balance sheet, how do you think, given that it's also clearly lowering cap rates on the prime assets that you're looking to acquire -- I mean, how do you think about pricing for prime assets right now and your appetite for that given it seems like in other areas you're trying to capitalize on financial conditions in the sense that it might be temporary.

I think it's a great question, Paul. I think one of the things that you'll notice when you look at what we acquired -- and it's one of the reasons why we've been as selective as we have been, is that it's hard to see how we or anyone else will make money just buying core stable assets or prime stable assets that have flat growth prospects in today's market at today's pricing. That's why we are very, very focused on what we consider to be a core-plus strategy, which is going to give us upside growth opportunity outside of what might be readily apparent to the current owner of that asset. So if we take -- if we feel that we can grow that asset at a respectable rate by putting it into our platform, then it becomes attractive to us. If it's a maxed-out asset that's just fully priced, fully auctioned, it is highly unlikely we'll be able to take advantage of that in this market. So we spend an awful lot of time due-diligencing these assets with Paul and his team and then out into the retail community, and that is part of what excites us about our redevelopment platform, because some of the assets quite frankly, that we have acquired, while they may be 97%, 98% leased, they do have redevelopment, they do have expansion opportunity. They do have remerchandising opportunity that will upsize the growth opportunity and that's something we're very focused on. But I think you're right. I think if the market comes out today with a fully baked prime asset with no "plus" part of the core story, we will not probably be a player.

Yes, in fact you're going to see us as a seller in select circumstances where we think we can recognize 6% or so cap rates on the centers that are held in joint ventures that may be prime, but where we think the future growth prospects just aren't there to justify it or the credit is a risk, and we'll redeploy that capital into 7s or an asset that we think have a better cash flow growth profile over the next several years. So even in a market that's pretty aggressively priced overall, we think the informational advantages that Dan referred to can put us in a position where we can still transact on both sides and take advantage of opportunities.

And our next question comes from the line of Craig Schmidt with Bank of America.

I had a question about the same-store NOI guidance. You just finished coming off a 3.5% year and it looks like the midpoint of your guidance is 2.5%, but in both cases you're having 100 base pickup in occupancy rates. What is it that's making you a little more cautious on that same store NOI number?

Craig, let me start a little bit with the timing of certain things here. There were certain of the bankruptcies we experienced last year that are going to hit us. It will hit us a little bit in the fourth quarter, it will hit us early in 2012. The Borders and Blockbuster -- obviously revenue we were receiving at this point last year. So it really is just a matter of timing. I mean, it's certainly no trend. We expect a significant pick-up as we move through 2012, but it's just the timing of certain of the negatives, which we all experienced in 2011.

Part of it's the simple math also of having a higher base that we're working off of, and then specifically as we look at the specific portions of the portfolio. While Brazil continues to be a strong driver with attractive fundamentals, you're comping a year that was nearly 20% same-store NOI growth in that market, and we just don't believe that's sustainable. It doesn't mean we're not going to try to hit that in every way, but we're underwriting and budgeting to a much more normal number for that market. And the numbers down there are so significant that, that does make a difference.

And our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

I'm on with Jordan Sadler as well. With regard to leverage today, the consolidated debt to EBITDA ended the quarter well below 7.5x, and I know that there's some seasonality in that number so it could bump up again next quarter. But David, you mentioned that you're looking to reduce leverage further. What are you targeting for leverage at the end of 2012, and what's sort of your longer-term target at this point?

Yes, I think more important on the longer-term target, we talked about something in the 6 to 7x range. And I don't think we'd be shy, given the market opportunity to be at the low end or even below that range. I think when we think about it from the perspective of how do we minimize our long term cost of capital, we recognize that continuing to send a clear message that risk has been lowered and will be lowered further is important. that shows up in a couple of ways. One is the dramatic progress we've made in the maturity profile, where we spread that in a dramatic way to get to a much greater balance today. And the other side of it is just the overall amount of leverage. And so I think you will continue to see leverage as defined by debt to EBITDA decrease over the next year, but even more so over the next several years.

And our next question comes from the line of Ki Bin Kim with Macquarie.

As you guys continue to gain occupancy, especially towards 2013 and the easier gains in same-store NOI are made, how do you think about longer-term same-store NOI growth in your portfolio without the full benefit of occupancy gains? Could you comment on that a little bit?

Fundamentally, I mean, when we think about these assets on a long-term basis, whether it's us looking at the history of what we've experienced over 20 years as a public company, or when we just think about the cash flow profile over the next several years for these assets, we think prime power centers in normal sort of market should be able to grow in the 2% range on an annual basis. You're going to have some years higher, some years lower, but that's sort of what the rental rates driven and active leasing should be able to do it for us without the benefits of occupancy gains. I think we hope to add to that number even though it might not be a perfect same-store definition, but add to that overall benefit to the corporate NOI growth through redevelopment activity, where we're being proactive in changing space around, changing tenants around to make sure we've got the right format going forward and the right tenants going forward, that are going to benefit most from the trends we're seeing. And secondly, and you're seeing this in the EDT transaction, there are going to be situations where we have to acknowledge today, our inventory of vacancy is dramatically lower than it was. And while that's a good piece of news for pricing power, allowing us to push rental economics -- both rents higher and CapEx lower, it also makes us think more about increasing that inventory of vacancy. And so that's one thing that you'll see happen with the EDT transaction and potentially other transactions where we're in a much stronger position today to add some vacancy through acquisitions, vacancy that we don't believe we're paying for, and then create value and create additional NOI growth, although perhaps not perfectly same-store, over the coming quarters to years after that.

I think it's important also to keep in mind that what gives us some confidence that our same-store NOI growth will be superior to what it had been historically for our company is that we have sold about $2.6 billion, $2.7 billion of assets over the last few years, and I'm very confident in stating that those assets were a drag. They were a significant drag on this company, and they were a significant drag on our growth rate and our same-store NOI. So we've been very proactive through the capital recycling effort and putting our capital into assets that have a much better growth profile than the ones that we traded out of. And I think as we look forward -- and we have good visibility on this particular issue, that we are excited about the same-store NOI prospects going forward particularly compared to where we had reported prior to 2007 even, forgetting the recession era, which is going to be somewhat distorted. But even in normal operating conditions, we had a number of assets that were an NOI drag on this company that are no longer part of our portfolio.

Yes, and let me just add one last thing because it is an important question going forward. We're in a unique environment. We're in a great environment to improve the pricing and the credit quality, and one great example I can use is replacing some 4-year [ph] entertainment stores with Dick's Sporting Goods. It won't show up in any kind of occupancy change. It's going to be neutral occupancy, but it'll be a significantly improved spread and a dramatic improvement to the quality of the tenant mix and the credit quality of the centers. So that's the kind of thing we're in a unique spot in, and we see that for the next couple of years.

And our next question is from Quentin Velleley with Citigroup.

I'm here with Michael Bilerman. Just in terms of the Set Up Shop incubator initiative, I'm just wondering if you could expand a little bit on that. And in particular, is the initiative going to be part of core occupancy and leasing statistics, or is it sort of going to be separated out and part of your ancillary income program? And I'm also curious just how much sort of capital that you're looking at investing and what kind of incremental returns you're hopeful of getting.

Okay. Quentin, it's a great question and something that we've been extremely pleased. As I mentioned in the script, we're only a few weeks into this and the reaction has been overwhelming. One thing I wanted to add that I didn't mention in the prepared remarks is that there are certain agencies we're partnered up with, loosely. SCORE is one. That's a resource organization for the SBA and this an organization of retired business professionals who help young entrepreneurs start business, grow a business, expand their business. And they're providing lots of leads for us, and it's very exciting. It's got over 13,000 members nationally. So this is really taking off in a way I didn't even expect and we'll roll it out quickly. In terms of investment, next to nothing. There may be an exception, but right now the plan is these are short-term deals, get people going with their business. And none of the negotiations we have going right now where the deals we've signed involve any investment on the part of DDR. As we've talked about previously, the initial few months we're reducing our exposure, increasing our recoveries with CAM and taxes and insurance and that's all positive. Our plan is to include these in the lease rate. We'll watch them closely, but again no investment, immediate recovery improvement and the hope is that we're finding some entrepreneurs that are going to be long-term stable tenants and grow the business, and we're bringing bodies to the centers. So it's all been extremely positive.

As we currently compute our occupancy, Quentin, anything under a year is not included. If it's a year or over, it is included in our occupancy numbers. So if there were -- and we anticipate that these particular transactions will be over a year. If there are situations where it is under a year, it will not be included. But in most cases, it will be included because we anticipate the term to be over 12 months.

Yes, and we are going with 2.5 years, Quentin, as we've discussed. And again the game plan is to turn these into longer-term leases.

And our next question is from Alex Goldfarb with Sandler O'Neil. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: As the Internet companies over the holidays noted the increased cost in their shipping expense, it seems to have weighed on profits. Dan, do you see that increase in shipping expense could drive more online retailers to open up physical stores? Or you really think that the driver is going to be more what happens with sales tax?

Well, I think it's all part of this, sort of a holistic story. It's interesting, the -- we have seen -- we've talked about this in the past and now we're starting to see signs of Amazon inquiring and looking for a bricks-and-mortar location. I think the reason why it makes sense to do that is roughly 5% of retail sales in the United States currently occurs over the Internet and 95% happens in bricks-and-mortar. And if you're a retailer, at some point I think you have to make a decision as to what is my strategy to try to access the 95% of the retail sales that are occurring in this country as opposed to just hanging out with the 5% that may someday grow to 10%, but still means you're missing the 90% that's occurring. So I do think that there is -- if you're going to talk about growth and margin, there's a huge issue obviously. I mean, Amazon does a lot of sales, but they can't make up for bad margin with more sales. So I think the model is under pressure. And I think the model, when it becomes under pressure, requires retailers to look at alternative distribution of goods because that's what they do. And when 95% of the distribution of goods in this country occur in bricks-and-mortar, and if you're a retailer you should be in bricks-and-mortar. And no different than if you are in the 95% camp, and 5% and maybe someday 10% will be happening over the Internet, you should be in that business too, which is exactly what we're seeing our retailers do in a dramatic way. So I think you need a real comprehensive strategy on both ends of the spectrum. But I do think we're going to see much, much more pressure on the Internet retailers to: number one, actually show profit. Show profit that is reasonable based on the volume, because otherwise, the model simply becomes somewhat questionable if they are unable to produce the same type of margin that bricks-and-mortar retailers produce, with really a lower expense structure in many cases. So I think the sales tax is part of it. I think that'll help. I don't think that's going to be the driver, one way or the other. I think it's where the consumer buys their goods ultimately is the driver to what your retail strategy is. And I think you're going to see it happen on both ends of the spectrum, but I do think Internet retailers are going to have to figure out how to access the 90% to 95% of the retail sales that are occurring in the United States today and that are not occurring on the Internet.

And our next question is from Jay Habermann with Goldman Sachs.

A question, Dan, on strategy. As your portfolio becomes more prime and obviously less NOI from the non-prime, I'm just curious how you're thinking about CapEx for some of the non-prime centers. Are you seeking to increase occupancy to sort of accelerate the sales? Are you looking to just sell the asset as is? And I guess also you had mentioned maybe sort of selling some of the JV assets. I'm just wondering if we might see sort of any unwinding of any partnerships this year.

Well, Jay, the answer to the first question is a little bit of both. I can tell you that there are many situations where it is not worth the dollars -- the enhanced dollars, the capitalized value of the enhanced dollars of waiting for lease-up on assets that aren't going to move the needle one way or the other. So we're being very, very prudent with our CapEx. Where we have obvious lease-up potential and we get a decent return on that lease-up potential, we are pursuing that. But the capitalized value on just pure lease-up on some of these assets that we're selling -- but again, they're very, very small. The rents are very, very low. And the cap rate is typically pretty high. So you're really not talking about any cost-benefit analysis by waiting, particularly if we have alternative investments where we can redeploy that capital in a more prudent manner. In regard to our joint ventures, we're constantly working with our joint venture partners to do what is prudent, not just for their shareholders, but for our shareholders. And if the market presents opportunities for us to unwind certain ventures, we will do that. We have done quite a bit of that in the last year or so, and I think that will continue as we want to simplify our story. And we want to partner with large institutions like Blackstone -- which helps simplify the story, not complicate the story, versus multiple joint ventures with smaller partners with sometimes an uncertain future on the back end.

And our next question comes from the line of Jeffrey Donnelly with Wells Fargo.

I guess this question's for David. When do you think we're going to see your operating and reported FFO per share converge, I guess, and the impairments and charges start to dissipate? And then specific to this quarter, I was just curious what was behind the $200 million impairment in your unconsolidated JVs and why your share seemed so small.

We've seen considerable convergence over the past couple of years between our operating FFO and FFO. Most of that is because we've cleaned up a number of aspects of the business. We've acknowledged some of the write-downs related to 2006 and '07 investment activity. And we think we're in a much stronger position today. We provide operating FFO because we do think it's the appropriate run rate number, but that also leads to exactly your question: when will it be the run rate? And we think we're very close to that today. The charges, the noncash items that impact that spread are getting smaller, and we would expect that to continue. That said, we are going to run the business to get the best long-term outcome for our shareholders, and in some cases that does mean recognizing a loss now rather than just sitting on something and carrying it at book value. So I think there's the potential to continue to see some sort of noise there, but do think directionally you've seen it get a lot smaller, and we would expect that to continue. Specifically, on the joint venture financials, the write-down related to one of the joint ventures associated with the Inland transaction, where DDR -- to your question specifically: why was our write-down so much smaller? DDR had written down, in the past, our portion of the venture. However, the venture itself had not taken that charge, so that's why you saw a large charge at the joint-venture level and an extremely small one at the DDR level.

And our next question comes from Tom Truxillo with Bank of America Merrill Lynch.

Two questions on balance sheet here. Obviously, you've done a great job in increasing your liquidity and extending your debt maturity. But by doing that, you've also kind of limited your ability to further reduce debt, at least easily reduce debt. Does that mean it's fair to say that you think EBITDA growth is going to be mainly responsible for getting you to that leverage goal of 6 to 7x? And then as a follow-on and kind of just as importantly, because it seems to be the most -- the focus of agencies right now, you've done a good job of reducing the cost of your debt as well. If your debt reduction opportunities are limited, are there other opportunities to kind of decrease your cost of debt so that you improve that coverage? Or again is that coverage improvement going to primarily come from EBITDA growth?

I do think EBITDA growth will be the primary driver on a go-forward basis. On a look-back basis, the majority of the leverage improvement related to lower debt with EBITDA that was on a same-store basis growing, but on an overall basis because of asset sales was still flat to declining. On a go-forward basis, I think EBITDA growth will be dramatically more important to that metric, but it's not at all to say that we won't continue to reduce debt. And I think we do have continuing opportunities to reduce debt. We're proud to have a much longer duration profile on our debt. But we still have $200 million of maturities this year and $300 million to $400 million -- $300 million to $500 million for the next several years, so there's still opportunities to reduce debt. It's not as if everything is fixed for 10 years, where there's no good way to get at it. And so I still think there's some opportunities there but I would absolutely say that [ph] growth is more important driver of debt to EBITDA. The [ph] improvements on a look-forward basis, and we think that hopefully we're making them more and more visible through continued same-store NOI growth, as well as primarily redevelopment and a joint venture related to [indiscernible] basis development EBITDA that is improving consistently. The second question regarding our cost of debts. We've done a lot over the past couple of years in terms of duration extension, where we've had to say we're taking much more expensive debt, replacing cheaper debt, but we're getting the duration that we think is crucial to our long-term cost of capital. Today, we think we're in a situation where we can generally replace maturing debt with cheaper debt as we look out over the next year and especially as we look out a few years and you think about the 9 5/8% notes that mature in '16 and other higher coupon debt in the out years. I think there is select opportunities where we could think about refinancing our preferred equity at a lower rate. So while we don't have massive amounts of debt maturing over the next couple of years, which we obviously view as a positive generally, we do still think there are enough ways where we can take advantage of the current low cost of capital to refinance debt lower and improve our fixed-charge coverage ratio. And you've seen that exactly with some of the financings during the quarter, where we're taking out low- to mid 3% debt and replacing debt generally at a couple-of-hundred-basis-point higher level.

And our next question is from Carol Kemple with Hilliard Lyons.

What was your spread between leased and occupancy in the quarter?

In our account, it was 240 basis points.

And where do you see that by the end of 2012?

Well, let me -- it should be narrower, but one of the pleasant surprises in the quarter was the fact it didn't narrow anywhere near as much as I thought. And that's a real credit to the amount of deals, the deal velocity we saw in the fourth quarter, because there were certainly a significant number of move-ins. And the deal velocity exceeded what I had thought going into the quarter, and that's obviously good news. And we see that trend continuing. So in the past, I typically answer that question where we should see this narrow and the fact is, we've seen it consistently in that 200 to 250, 260 basis point spread. And that's okay. The fact that we've got a lot of signed leases that haven't commenced rent yet and will in later 2012 and early 2013 is a very good thing.

We consistently wait for this to narrow, not yet to historic levels, which as you know, were sub-100. But in that 150 to 175 ranges will be consistently projected because we do not see leasing velocity -- or we hadn't thought that leasing velocity would keep up at the pace that it obviously has. And you start doing -- over the last 3 years, we've done roughly 11 million feet of leasing a year. Those are very big numbers for us. And we keep waiting for big quarters to end up with a more quiet quarter because again, sometimes the tenant -- it takes a while to refill the queue. But right now, the way the market has been and the way the retailers are receiving our portfolio, we're seeing consistent velocity that is keeping the gap wider than we would have thought. And like Paul said, that's the good news. That's the good news because occupancy continues to go up, the leased rate continues to go up and the velocity continues to stay fairly constant. And it'll be interesting to see how long that will continue, but it's something that we're very pleased with, obviously.

And our next question is from Cedrik Lachance with Green Street Advisors.

Paul, you talked about consolidating a couple of hundred small shop spaces into bigger boxes earlier. Curious about the TI [ph] cost associated with that or the overall CapEx cost. And also interested in knowing a little more about what is the ultimate net effective rent on those boxes versus what you were able to achieve on the small shop space.

Yes, Cedric, the capital investment is very consistent with what we've seen across any of our re-leasing, averages somewhere in the mid-teens. And the good news on the consolidations, and I think we've talked about this on prior calls, is that the -- we're seeing investment on the part of the retailers. That was not their position 3 or 3.5 years ago, but that's been very consistent with some of the guys who want to downsize, whether it's one of the office guys or a Best Buy or a Jo-Ann's or an Old Navy specifically. They're putting money into the deal, so we're not seeing any extraordinary level of investment, and the net effective rents are right in there with our averages. They're going to be in that $13, $14 a foot range. So there's no significant difference just because of the consolidation. Keep in mind, some of the consolidated spaces were chronically vacant spaces. We used a couple examples, and if you look into the investor presentation as I mentioned, I mean, this was stuff that hadn't earned us anything for several years. And so we're in there with the mid-teens or somewhere in that vicinity on rent, with a typical investment and it's all of a sudden producing in a big way when it hadn't produced in years for us.

And our next question comes with a follow-up from Samit Parikh with ISI.

I want to ask you about Brazil and just the future plans there really, and I guess 3 projects delivering in the next 2 years. Is there any insight you can give us sort of on future investment plans, how much more greenfield development you plan to do in the near term? And pretty much that's about it.

That's a great question. It's a question we ask ourselves all the time. Right now we have 3 greenfield projects, as you mentioned, under construction. We acquired another piece of property for a future project in Brazil, and it's a market that we have to monitor as we go. Brazil has been very exciting. It's been very positive for us in a lot of ways, but it's an emerging market and where there's emerging market, there's volatility. And things can change very quickly in those markets and we're aware of that. That's why we have structured our transaction there by doing the IPO with maximum flexibility for us. We have no plans to exit Brazil at this point in time, and in fact, we'd still see great opportunity and great value creation in Brazil. We have a team of about 145 people in Brazil. We have an outstanding development and leasing team that are out looking for opportunities on a regular basis. We're going back and looking at how we can maximize value at our existing assets as well, do an aggressive redevelopment program. We continue to see multiple tenants interested in coming to Brazil that aren't there now. And we continue to see great growth of the middle class and disposable income increasing at sort of historic levels. So we'll continue to monitor that situation. It's part of our -- it's absolutely part of our platform. Right now it's about 8% of our NOI. When the centers open, the 3 centers that you mentioned, it will be in that 12% to 13% of our NOI, and we'll continue to monitor it going from there. But right now, we've always been very prudent in Brazil in looking at the development opportunities, and we will continue to do that. But as we look forward in Brazil, it's hard to talk really about a market like Brazil on a 5-year plan, because 5 years is an awful long time in a market like that. And as David mentioned earlier, we're seeing year-to-year changes pretty dramatic. Even though the numbers are still very compelling, they go up and down pretty dramatically, from a same-store NOI perspective in particular. So we'll continue monitor that and make sure that we're capitalizing on the opportunities and maximizing the value.

Another way we address it is just our financing activity down there where because of the IPO almost exactly 12 months ago, we do sit on a considerable amount of cash that will represent the equity that funds most of that activity. And so I think we're careful and prudent not to combine financial risk along with the operating development and emerging market risk that Dan referred to. So I think that's where we see an important balance where we can take advantage of those opportunities, but do so in a very low leverage, and at this point even negative leverage net cash fashion and we think that's a prudent way to participate.

And our next question comes from Vincent Chao with Deutsche Bank.

I just want to go back to the leasing velocity commentary. It sounds like it's persisted longer than you had expected. Just wondering in terms of the 2012 occupancy guidance, what kind of leasing velocity is baked into that? I mean, it seems like it's been in the, call it, 500,000 square feet a quarter. And then as part of that, just wondering what your expeditions around the renewal rate will be for 2012.

Okay. On the velocity we're expecting slightly below what we achieved in 2011, but I'd tell you, our first quarter has kicked off in a big way. And we may address that at some other point, but right now that's what's baked into our full year occupancy. The thing to remember is the level of demand. I know we haven't talked a lot about it on this call, but we have in the past. There's a tremendous amount of demand out there, and there is still no new supply. And that is what's driving the deal velocity. And as I mentioned in my example of Dick's replacing a weaker retailer, that's not even going to show up in the occupancy rate. But it is going to show up in the deal velocity, and we're going to see more of that. So we're expecting strong velocity again, and we're seeing no signs of slowing down at this point. Renewal rate hasn't changed at all. We've typically been in that high-80s in terms of a percentage of renewals, but we're taking a much more particular and selective stance even with the renewals, and that again is based on the demand. So we feel good about where we are with the '12 renewals. We expect no dip -- in fact, improvement in the retention rate on renewals and again we can be more selective in how we're going after those renewals in terms of rate and based on the level of demand out there today.

And our next question comes from Rich Moore with RBC Capital Markets.

What do you think the yields are on those Brazilian developments, number one? And then would you look anywhere else besides Brazil that's x U.S. for other opportunities?

The yields on an unlevered cash on cost basis, Rich, are about in the middle teens on a very consistent basis as with a lot of developments. And talking to others and from past experience in emerging markets, they start higher than that. So I'm happy to tell you that when we approved the deals, they started higher than that, but that's not really where they come in. They come in more in the middle teens. And we think that, that's a good number to go on, moving forward. Right now, we're not looking to go anywhere else. Our plate is full. If you look at our domestic, our Puerto Rico redevelopment portfolio and you look at what's going on in Brazil and what we think can happen in Brazil moving forward, we think that is a sufficient amount of risk and a sufficient amount of opportunity for us to grow our business in a prudent manner.

Yes, those are markets where we think we have an advantage -- operating platform, our team, our knowledge. And I just can't say we could make the case for anywhere besides that at this point, that we have that same advantage and operating platform and information.

And our next question comes from Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: David, just a quick question, where do you see overall CapEx levels for 2012? And then tied to that as well, you've had a couple of dividend increases over the past 1 or 2 quarters. Does it feel like the next increase is coming, it's more of a 2013 event at this point?

Yes, on the CapEx side, we have been seeing elevated levels of total CapEx because the leasing velocity has been so high, so I think we're proud that the CapEx has been higher because it's been tied to velocity, while CapEx per square foot has still been relatively low. It's just been a much larger volume of square feet. I think as we continue to see a positive leasing environment, we continue to see momentum there, we continue to see the economics of leases move more in our favor, part of that shows up in better leasing spreads. And part of it shows up very importantly in lower CapEx per square foot. So I do think you'll still see CapEx in '12 that is above our historic norm, but you'll probably see it trend down on an operating, leasing CapEx basis, forgetting redevelopment. You'll see that trend down simply because the economics continue to get more in our favor even though the amount of square footage is still going to be quite high. Secondly, on the dividend, 2012 did represent an important transition -- or 2011, excuse me, did represent an important transition year for us, where we moved from the extreme caution of retaining basically as much capital as we could back to a much more normalized payout ratio. And we did that through several bumps throughout the year. We had articulated until we had dealt with a majority of our maturities, this management team really felt uncomfortable recommending increases to our board. And so when we saw the volume of refinancing activity we were able to do early in 2011, made the case that the dividend can start getting higher from there and our board agreed and approved that. We do believe with, what was approved for the first quarter of 2012 and the way that we tried to talk about it in our guidance where we guided to a $0.48 annual figure, we do think we're back to a more normal policy at this point where we absolutely forecast growth near-term and long-term in cash flow from this portfolio. And we think you'll see that show up in increased dividends over time. But I would expect at this point, unless something meaningfully changed, that we'd be back in a position where we announce an annual dividend policy -- obviously approved each quarter, but where you'd expect to see the growth come once a year and then a consistent policy for the remaining 3 quarters of the year.

And we have a follow-up question from the line of Quentin Velleley with Citigroup.

Just in terms of just putting some of your comments together in terms of increasing the proportion of prime assets and continuing to delever and simplify the story, if we look at the EDT transaction with Blackstone, I guess, was there a consideration of buying a larger equity stake or even the whole portfolio? It just seems that you sort of had the inside running on the deal. You know the assets intimately. 7.4% cap rate with occupancy upside sort of suggests that, whilst most of them are sort of core assets, there's that plus in that there's additional upside to them. And the ingoing yield was attractive, so I'm just sort of curious on how you guys thought about that.

Well, I'll start. We thought about it a lot because -- I think you're exactly right, Quentin. We saw the same things that you saw. Obviously it would have been totally contradictory to our strategy to consider increasing our debt levels to acquire more of the portfolio. And we weren't really in love with our price of equity at the time to issue more equity to increase our position. We feel that, that was -- there are times when it makes sense to issue equity below NAV. We felt that this was a prudent way to do it, because again it could help us delever without diluting our FFO. But to take a much bigger stake was a much greater cost, we felt. So we like the opportunity, and we wish our balance sheet was in a position to have been more aggressive on the transaction, but we felt that we weren't quite there yet. And that's one of the reasons. And I think probably the most important reason why we negotiated so hard for the right of first offer on the 10 best assets in the portfolio, because I'm confident that we'll get another shot at increasing our position in the 10 assets that recovered the most. And when we do get that shot, we feel very comfortable also that our balance sheet will be in much better shape than it was last month, to take advantage of that opportunity. So we get another bite at the apple, and it's our job to work hard to make sure that we're in a position to maximize the benefit of that opportunity.

And we have a follow-up question from Jeffrey Donnelly with Wells Fargo.

Yes, can you tell us what your same-store NOI and leasing spreads were in the quarter at your pro rata share, or perhaps just for the continental U.S.? I'm just curious what the effect is without Puerto Rico and Brazil.

On the spreads, they're calculated at 100%. We didn't break it down by pro rata share.

On the spreads, you're not going to see much of a difference there, just because Brazil isn't that large of a portion and because you get such significant annual bumps even though you're seeing incredible NOI growth down there. A lot of it through bumps and not leasing spreads that are that different than what we experience here, although they are a little bit higher. So I'd say on the spread side, there's not going to be much of a difference. On the overall same-store NOI, throughout the year we've been at about a 70 basis point spread between the results at 100% compared to the results at our pro rata share. And the main driver of that was the significantly higher results -- higher same-store NOI in Brazil. We think that will -- that spread will be reduced as we look out to next year. And so our guidance that we've talked about for next year of 2% to 3% same-store NOI growth is actually on a pro rata basis, because we expect that spread to be much smaller.

And we have a follow-up from the line of Ki Bin Kim with Macquarie.

A similar question. How do you account for FX and same-store NOI? Is it the completely exclusive?

Yes, we basically say what's the local growth. And so the level of FX is fixed for both periods. So obviously you do see our actual bottom line financial results impacted by FX, because we have to translate for income statement purposes at whatever the appropriate rate for the period is. But for same-store NOI, we think the appropriate way to look at it -- we think the question that you're trying to get to is how are the assets growing in local terms, not how did the currency change. And certainly our investment in Brazil is not dependent -- or wasn't a gamble on exchange rates. It was on the opportunity we see with the assets, and so our same-store stats are all reported on a fixed-FX basis. So there's no benefits -- or in the current period, more likely where you'd have a detriment. But none of that is reflected in same-store NOI. It is, however, of course reflected in the income statement at whatever the current period translation rate is.

And a follow-up question from the line of Rich Moore with RBC Capital Markets.

On the G&A, you had a charge of $1.4 million in the quarter for executive separation. What was that exactly? And do you think you have more separation charges to come this year?

As you know, Rich, we continue to build the team here, and we continue to pursue individuals that we think could have a dramatic impact on continuing to build the franchise. And that means that you have to make tough decisions at year end on individuals that have been working here, some of them for quite some time. And that would just be normal policy-driven separation charges for a few our members of our executive committee who are no longer with us and we've replaced with people that we feel can have a bigger impact on the organization.

And another follow-up from Alex Goldfarb with Sandler O'Neil. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Yes. When you guys look at your landholdings or mothballed developments, are any of those -- do you think any of those will be suitable for an outlet where one of the outlet developers would be more interested in that land than may make sense for you guys?

We've looked at that, Alex, and in fact, in my 12 years here, we looked at that on a pretty consistent basis. And we actually did sell one piece of land many years ago that is now a very successful outlet. But their criteria is very, very specific for their business and not always consistent with ours. We do -- obviously, we have great relationships with the people that are the leaders in that field. We have talked to them on a regular basis about our landholdings because we are aggressively trying to reduce it. But as of now, I would say the likelihood of that happening is pretty slim, because again their standards and their requirements are a little different than ours. Also as you know, a lot of the outlets have -- need a respectable distance from full-price retail, particularly those that are generated by large and super regional malls. And a lot of our sites are very close to malls. And so the overlap would preclude leasing in some cases. So we think about that, we look at it, we get excited when we hear about the great success and expansion that the outlet guys are having. And we certainly go to them with our land portfolio, but I think the likelihood of a transaction is pretty low.

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back to management for closing remarks.

Again, we'd like to thank you all for joining us today, and we look forward to speaking with you at the conclusion of the first quarter. Have a good day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.