SITE Centers Corp. (SITC) Q2 2012 Earnings Report, Transcript and Summary

Samir Khanal - Senior Director of Investor Relations Daniel B. Hurwitz - Chief Executive Officer, President, Member of Board of Directors, Chairman of Dividend Declaration Committee, Chairman of Pricing Committee, Chairman of Other Committee, Member of Executive Committee, Member of Management Committee and Member of Investment Committee Paul W. Freddo - Senior Executive Vice President of Leasing & Development David John Oakes - Chief Financial Officer and Senior Executive Vice President

Paul Morgan - Morgan Stanley, Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division Cedrik Lachance - Green Street Advisors, Inc., Research Division Thomas C. Truxillo - BofA Merrill Lynch, Research Division Craig R. Schmidt - BofA Merrill Lynch, Research Division Quentin Velleley - Citigroup Inc, Research Division Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division Richard C. Moore - RBC Capital Markets, LLC, Research Division Steve Sakwa - ISI Group Inc., Research Division

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 DDR Earnings Conference Call. My name is Chanel, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Samir Khanal, Senior Director of Investor Relations. Please proceed.

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 that 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, 2011 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, and good morning, everyone. As we navigate through the slow summer months of the retail environment, with the overhang of our presidential election adding uncertainty in the market, we, at DDR, find ourselves in a position of strength with tremendous opportunity. June retail sales results were below expectations for most retailers, but not for all, and most importantly, not for many of our key tenants. Off-price retailers and discount stores grabbed profitable market share, with sales results beating expectations and earnings guidance revised upwardly. Moreover, store opening plans for our retail partners were generally maintained or raised, and the secular negative trend in the traditional grocery business, most recently highlighted by the SUPERVALU situation, will continue to benefit our prime portfolio in the long-term. From a capital markets perspective, we've made further progress with our balance sheet by opportunistically accessing the unsecured market and, most recently, the preferred market at very attractive rates, resulting in a lower cost of capital and an improved maturity profile. With regard to our capital recycling and portfolio management activities, we continue to prune the portfolio of nonprime assets and weak retailers and source acquisitions of prime power centers, while simultaneously simplifying our story. The quality of our portfolio and the credit quality of our cash flows have never been better, and the outlook for continued improvement is encouraging. Overall, we are very pleased with the consistency of our operating results and the performance of our platform, the sales results and the market share gains of our key retailers, the continued success of our capital recycling program and the continued improvement in our balance sheet to the execution of our capital markets strategy. While our progress has been steady and consistent, we are constantly reminded of our surroundings and, specifically, the concerns…

Thank you, Dan. As evidenced by another quarter of high leasing production, we continue to see strong demand for space in our portfolio. A combination of continuing growth from market share winning retailers and limited new supply is resulting in competition for space and positive trends in terms of occupancy gains and leasing spreads. During the second quarter, we executed 200 new deals for 900,000 square feet at a spread of 10.7%. We also executed 226 renewals for 1.8 million square feet at a spread of 6.1%, our highest renewal spread in 15 quarters. Combined spreads were up 6.8% overall, but more significantly, up 8.3% on a pro rata basis. Before diving deeper into what we're seeing in terms of retailer demand and growth strategies, I want to point out the impact of the 46 assets acquired in the Blackstone joint venture on our leased rate for the second quarter and year end expectations. Excluding the 46 assets that were acquired on June 20, we improved our leased rate to 94.1% as of the end of the second quarter, a 40 basis point increase sequentially and a 110 basis point increase over second quarter 2011. Including the 46 acquired assets, the leased rate at the end of the second quarter was 93.7%. Accordingly, while we are still very comfortable with our previously guided leased rate for 2012 of over 94.5% absent the newly acquired Blackstone JV. When included, our annual expectation becomes approximately 94.1% due to the lower overall leased rate of that specific portfolio. While the Blackstone JV portfolio puts short-term pressure on the overall leased rate, the good news is the portfolio consists primarily of high-quality power centers that were previously undercapitalized. As a result of the recapitalization of the venture, we expect to realize the organic growth…

Thanks, Paul. Operating FFO was $71.6 million or $0.25 per share for the second quarter, slightly ahead of our plan. Including nonoperating items, FFO for the quarter was $6.5 million higher at $78.1 million or $0.27 per share. Nonoperating items were primarily net gains resulting from our aggressive capital recycling program, offset somewhat by losses related to repurchase of $34 million of our 9.625% notes due in 2016. Operating FFO per share was 9% above 2011, clearly indicating that our operating performance is now flowing to the bottom line. We were able to achieve attractive pricing on new debt, which allowed us to accomplish a significant amount of refinancing that will positively impact our earnings and fixed charge coverage ratio in the coming quarters. Perhaps most importantly, the weighted average maturity of these new financings is 6.3 years, and as a result, our consolidated debt duration at June 30 was approximately 5 years, the longest in the company's history and a significant improvement from 2.9 years at the end of 2009. Subsequent to quarter end, we issued $200 million of 6.5% redeemable Class J preferred shares to fund the redemption of the 7.5% Class I preferred shares. The new shares are callable in 5 years, and the annual fixed charge savings are $1.7 million. Midway through the year we have substantially addressed all of our 2012 debt maturities. Our $300 million bond offering in June funded the repayment of the $223 million of unsecured notes due in October and reduced borrowings on the line of credit. In addition, we addressed the majority of our 2012 unconsolidated debt maturities primarily through the 5-year refinancing for the 2 large debt facilities in our TIAA-CREF joint venture amounting to approximately $700 million. Remaining 2012 consolidated debt maturities consists of $13 million of mortgage…

Thank you, David. Before turning the call over to questions, I'd like to thank those of you that have recently participated in our perception study. It has been 2 years since we last surveyed the market for feedback on strategy and communications with investors and analysts, and we greatly appreciate the candid feedback you provided us once again. We listened to your comments from the past, and many of those suggestions influenced our strategic plan, which we are now executing. We will certainly listen again, and I'm confident your ideas will continue to help make us a better company going forward. Your opinions are valued and your judgment of our company is not taken lightly. At this point, we'd be happy to turn the call over to questions, operator.

[Operator Instructions] Our first question comes from the line of Paul Morgan.

Just on the land bank and your kind of efforts to monetize that. I mean, could you just talk about any movements there and whether some of the improvements we've had in the housing market could bring some of these efforts either on your behalf or on third-party interest kind of back to life, and what kind of pipeline we see for making progress there?

Paul, this is Paul. We've been making progress. Year-over-year and quarter-over-quarter, we've clearly seen some progress in our land bank, and if you look in the supp [ph] even with the Belgate acquisition, we're going to be net sellers of land for 2012. And we are looking at everything, with deals we're making whether it's with department stores for pads or parts of a parcel or for residential, we look at all of that. But we are seeing some progress, and we'll continue to see some progress. And that is what's reflected in the number you see in the supplement. We're going to be net sellers of land even with an acquisition in 2012.

Yes. Although, the frustrating part last year was we were talking a lot about our goal of making progress on land sales, but you were seeing very little of it show up in the transactional results, and you were seeing even less of it show up in the income statement, and I think this year, you're certainly seeing more of that flow through. There's a conscious effort internally to focus on these nonproducing asset sales. And you've seen more of that come through, which importantly, not only generates the proceeds that can be used to reduce debt or reinvest in operating assets, but also as you might have noticed in the operating expenses this quarter, we also -- since we're not capitalizing expenses on most of that land, you also see the improvement in operating expenses, they come through when we sell this land. So it has been a major focus. You're starting to see more of it show-up and will see even more of that in coming quarters. To your specific point on is the housing market having a significant impact there, we're not necessarily seeing the single-family housing market have any direct impact there. But multifamily, as you know well, has continued to be extremely hot for new development, and there are some parcels of land where we would look at a higher and better use being non-retail.

Our next question comes from the line of Alex Goldfarb, Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: David, just going to the balance sheet for a second. You guys bought back your high coupon debt this quarter, paying a premium. I think in previous conversations, you've said that tendering and then reissuing that some of your other peers have done, you weren't as interested in. But given your activity year-to-date of paying a premium to buy back the 9.625s, would you consider just tendering for the whole thing, reissuing a new lower coupon, especially given the demand for corporate debt these days?

Yes, we certainly consider everything in terms of balance sheet improvement and improving net fixed charge coverage ratio. I think what it comes down to for us is, does the economics of it make sense. Obviously, the premium that we're paying for the 2016 notes or any of our other paper is really just prepaying that future interest. And while you can show a charge 1 quarter and a better run rate going forward, the reality is oftentimes in these tender reissue scenarios, we haven't believed that there is a true economic benefit. For our open market repurchases happening dramatically inside of a make whole sort of price, we were generating a current yield on those purchases in the high-7s, but more importantly, a yield to maturity in the mid- to high-3s for the most part when we could issue longer duration debt that a yield to maturity as we did earlier this year through the term loan in the low- to mid-3s. So I think for us, it was a focus on, economically is there a benefit to tender or to repurchase and reissue, and we came away even though you could do it in smaller volumes. But the open market repurchase and reissue had an economic benefit to us where the tender could have created a better run rate, but only at the expense of all the prepaid interest we'd have to put up and the significantly greater premium that we'd have to pay for a tender, and so economically we didn't think that makes sense for us.

Our next question comes from the line of Todd Thomas, KeyBanc Capital Markets.

Just a question, in the prepared remarks, you mentioned that the distress in the supermarket business and you mentioned SUPERVALU will benefit the prime portfolio in the long run. Can you just elaborate a little bit on that?

Well, there's clearly a secular shift on where people are buying food. And the traditional grocer, which has often -- it was the opinion of many, was often invincible to competition because everyone had to eat has proven to be very vulnerable to new trends, new retailers, better merchandising and better formats. So while it is true that everyone does have to eat and everyone has to purchase food, they don't have to do it at a traditional grocer. And if you look at where the sales are going -- and it's right across the board. It's the formats that I mentioned, but it's also formats like dollar stores. Because they sell a lot of boxed goods and a lot of dried goods that are competing directly with traditional grocers as well. So we feel that the traditional grocer as it sits today is less dominant than it's been; specialty grocers, Cost Plus -- I mean, I'm sorry Costco and Sam's and warehouse clubs and supercenters and Target, et cetera are all grabbing market share. As you know, Walmart today is the largest grocer in the United States, and it wasn't not too long ago. So there's clearly a shift away from traditional grocers and going to alternative uses, and those are the alternative uses that populate our shopping centers. And for that reason, we feel that it will benefit us in the long run.

Our next question comes from the line of Cedrik Lachance, Green Street Advisors.

When I look at the noncomparable leases on Page 32 and as part of your new leases budget, you do about twice as many noncomparable as comparable leases, but unfortunately, of course, we don't have anything when it comes to a re-leasing spread. Can you give us a sense of what those leases are in terms of the type of tenant you're able to attract for the boxes and the kind of quality of the properties that are included in here?

Yes, Cedrik, as we've talked about before, we do this count in the most conservative manner possible, which is that 1-year look, if you've been vacant for more than a year, it's not going to be in the calculation. But there are going to be other reasons that deals are not in the comp pool, whether it's a different type of deal, a consolidation of space, for example, would not be an accurate way to measure a spread. The -- you've got a significant portion of the vacancy in that category of space vacant more than a year. Then it involves varying qualities. If we look, in fact, one of the things we get because this is a question which comes up quite often. Look at if we included all of the deals in this calculation, again, it was obvious that we had a very strong new deals spread for this quarter. It would have been up over 32%, which obviously is not a true judge of market conditions and something we're not going to do. But there's space in there that's never been leased, it's first generation space, the space that we acquired in some centers which had never been occupied since we'd owned it. So it's a tremendous mix of space, but for obvious reasons, we're not going to include it. Another thing that I think is important we should look at that spread cap, as you know we're using the last rent versus the first rent. There's no straight-lining on our spreads. And again, that's a very, very conservative manner and way to look at the leasing spreads overall. Final thing I'd add is we keep coming back to -- if you want to understand where trends are and what's happening with the market, look at the renewal spread. And as I said in my prepared remarks, we have the largest renewal spread in 15 quarters. That is a very, very big deal, and that's what we're seeing happening and that's also with the last rent, first rent no straight-lining of that activity.

Our next question comes from the line of Tom Truxillo, Bank of America Merrill Lynch.

You guys have obviously made some good progress in reducing debt on your balance sheet and also lowering the cost of the capital. Can you provide any comments on what you think that your run rate fixed charge coverage is right now, given all the changes? And kind of where you see that going over the next 2 quarters with the EBITDA growth that you have baked into your guidance?

Yes, it's a great question, Tom, because especially the way the proceeds from forward equity offering hits in very late June. We had the fixed charge impact of debt, but you didn't have the excess equity proceeds beyond the Blackstone investment show up. So I do think there's additional improvement built in. Obviously, the refinancing of the preferred equity leads to additional improvement, and so I think from a fixed charge perspective, a ratio that bottomed 2 years ago or 1.5 years ago in the high-1.6s to 1.7 area is up just north, a little north of 1.8x today, and I think we see a very visible path this year to get to 1.9, and in 2013 to get north of 2x, which we think is an important metric. It doesn't represent the end game. It doesn't mean that once we get to 2x that the progress stops, but I do think we see a very credible path from the 1.8 reported this quarter pro forma, that's for a few transactions get to 1.9, and then get to 2x next year. And so I think you'll continue to see progress on that metric.

Sure. And you guys -- part of the plan was to use some free cash flow to pay down debt. You've since increased the dividend a couple of times. Any comments on use of free cash flow that you generate now if you can increase the dividend again to kind of soak up some of that? Or if you see further opportunities to delever -- I know you don't have unsecured maturities coming due, but you do have some security you can always buy back like you have been.

Yes, we -- despite the increased dividend, we still got by far I think the lowest payout ratio in the sector, and therefore, the highest free cash flow, it's being retained in the sector. And one way or another, every one of those dollars is going to improving our debt-to-EBITDA ratios. So a few years ago, you were seeing more of that go purely to debt paydown. Today, you're seeing some of that going to redevelopment spending or the acquisition of operating assets. So today, you're seeing probably more of it going to the creation of new recurring, growing and sustainable EBITDA rather than simply debt reduction. As exactly as you point out, there is less debt to be reduced. And so, you're seeing that free cash flow be redirected more often now to EBITDA increases, and I think you're going to see that show up in a more significant way in our results over the coming quarters.

Our next question comes from Craig Schmidt, Bank of America.

I hope you haven't been already touched on, but what do you think the volume of dispositions could be in the second half relative to what you were able to accomplish in the first half?

This year, somewhat the same as last year. We took advantage of a market in the first half of the year that was stronger than expected. Last year, that paid off as it positioned us to not have to push on dispositions during an uncertain second half of the year. Second half of the year for 2012, also looking a little less certain, although we certainly haven't had any impact directly on transaction pricing. But I do think you saw us accelerate a few more dispositions to the first half of the year. It doesn't at all mean if we see the market hold up like this, that you'll see us slow that math process down. We'll continue to push. The improvement in portfolio quality is a massive continued focus for us. I think today, you're seeing a few more opportunities for us to redeploy that into the acquisition of new prime centers. And so, we're not scared to beat guidance on dispositions. And so, you could see another $100 million or so of dispositions hit in the second half of the year. They get redeployed in some of the high-quality acquisitions we've already identified or talked about. And we've already been sitting down to have meetings about 2013, how can we continue to sell nonprime assets and improve the portfolio quality. We're not stopping at that 90% prime metric. We want to continue to upgrade the portfolio quality and best position ourselves to own a portfolio. We can grow NAV [ph] the most overtime.

One of the things that's also important about the dispositions, Craig, which inspires us to move forward with the program aggressively is we really saw this year at RECon the impact of the portfolio improvement, which is simply spending less time with retailers talking about bad assets and bad space and more time with retailers talking about prime assets and prime space. And that has brought a lot of creativity as you could see from the deal flow and the leasing spreads. It's improved our metrics. Our bad debt is down, as Dave mentioned in his script. Our operating margins are wider. It's just a -- it's a better business model today, and a lot of that has to do with the fact that we have been a significant capital recycler. In addition, there are those tenants out there, while we're not overly public about naming them specifically, there are those tenants out there that we are actively looking to reduce our exposure to. And we feel very comfortable that we're doing that for a good reason. As a result, as interest in certain asset with certain tenants surfaces, even though the asset may not be at the very top of our sale list, we certainly are considering it due to our desire to limit exposure to what we feel are tough credit tenants and our overall desire to improve the credit quality of our cash flows.

Our next question comes from Quentin Velleley, Citi.

Just in the second half projections on the $403 million of ground-up development on hold, the negative $69 million, can you talk us through that? And then secondly, the growth impairments and not your share, I think there was about a total of $25 million of impairments on the land, can you also just talk us through what that was?

The -- Quentin, starting with the -- what's reflected in that $66 million reduction back half, those are deals by the way not included obviously, the back half deals. But negotiations, whether they are for outright sales of an entire parcel or with anchor stores for pads on sites. But I'm not in a position to give you the exact specifics, but that's obviously stuff we have in our budget because these deals are well underway.

Yes. As we've talked about before the gestation period on these land sale was always longer, and so you've heard us talk about the progress there for a while. I think to see it show up in our budget for the second half of the year means we've got a much higher level of confidence with these longer processes. And longer due diligence periods are getting to a point where we should be able to execute on those and then show you that progress over the second half of the year even if those transactions take longer than a normal asset sale. We're getting closer to the period where we should be able to show you that. It's also as you referenced the tie-in to some of the impairments on the land, there have been some situations either due to lack of entitlement progress or lack of progress with the municipality or just the fact that we are revisiting some of our assumptions on what would be possible on some of these land sites and revisiting our thought process and where that capital can be better deployed. We have taken some impairments as we've lowered the probability that we do develop several of these sites and increasing instantly the probability that we sell them. And so your accounting -- your impairment tax changes at that time to put a greater emphasis on liquidation price rather than on discounted value of future cash flows. And so, that has triggered a few impairments there. Some of which, the largest I think for this quarter was a site that we got in the Inland transaction and a few others, were sites that we'd -- that we have acquired through other transactions. And so, I think you see a bit of that, but it's only a precursor to the progress that we're making in monetizing that, just an indication that, that immediate or near-term liquidation price is less than what GAAP requires you to do in terms of valuing the asset on the - on discounted future cash flows and an assumption that you're going to develop the site.

Our next question comes from Jeffrey Donnelly, Wells Fargo.

A few of my questions have been answered, but I was curious for your take on direction of cap rates on A versus B assets, because I think there's something of a split view among your peers in terms of which segment just may be seeing greater relative improvement in the last quarter or so. What's your sense there? And I guess as a follow-up, from this point forward, do you think the fundamentals for NOI growth and valuation growth favor A versus B?

We're seeing improvement across the board and in pricing. I think you still haven't seen a massive increase in transactional volume, but you have seen more and more transparency that would indicate that the pricing has moved higher cap rates, have moved to lower. Across the board, you get some incredible prints on coastal Class A centers and high-quality supply constrained markets going well below 6% cap rates at this point, when those used to be low 6s deals. But on the other side, you're also seeing B assets that have been in the high-7s, now in the low-7s or even at 7. The toughest of the Class B assets has seen less progress, but like you've seen improvement across the board in an environment where I think NOI growth is more credible. Debt is cheap, although not as available at sort of peak pricing periods in the past with a less reliable CMBS market today. But with cheap dept out there, as long as you're going to be sub-60% leverage, I think that supports pricing across all property types. When we look at where we see the greatest opportunity, the strongest unlevered IRRs on a go-forward basis, I do think it is going to be for the most part in the non-coastal Class A assets. So we believe that the premium being paid for some of the sub-6 transactions, it's hard to justify in rent growth over the coming years versus the opportunity for us, particularly in some of the partner transactions where we think we've gotten somewhat better than market pricing. For us to start out at a 7% cap rate and have extremely credible 2% to 3% if not higher growth and higher in some cases where there is a value-add component, but we think the visibility of a very attractive IRR is the greatest there when looking at those Class A assets, but not necessarily the trophy-caliber top 4 or 5 market, and that's where you've seen us put capital out, and I think it's safe to assume that if those top 20 to 40 markets where you'll continue to see us more likely to see opportunities because those opportunities are driven by the highest IRRs that we think are achievable.

I think it's also very important, Jeff, that when you look at NOI growth and cash flows you look at them on a risk-adjusted basis, there are clearly opportunities in B and C assets where you can get significant NOI growth and value-add returns. But at the same time the stability of that cash flow is somewhat weak. The depth in the market, it could be a little shaky, and if you're a long-term holder that's a very different proposition than if you're a short-terms flipper. And because we are a long-term holder, we do feel that the NOI growth on a risk-adjusted basis and the operating fundamentals and A assets will exceed that of Bs and Cs on a risk-adjusted basis.

Our your next question comes from the line of Rich Moore, RBC Capital Markets.

Paul, you mentioned that some of the deals you have with a couple of retailers were on hold for various reasons. And I was wondering, is there any of that going on in the electronics, with hhgregg or RadioShack, and how do you guys feel about those 2 retailers in particular at this point?

Very differently by the way, between RadioShack and hhgregg, Rich, but yes, clearly, this is something we study, and you and I have talked about this. We are constantly watching all of our tenants and performance and categories. And obviously, when I was alluding to Cost Plus World Market as an example. We were not in a position whether they wanted a site or a new site or an existing asset. We were not going to make a deal given their current situation. Big change, obviously, with the Bed Bath & Beyond acquisition. We are in no hurry to make additional deals with an hhgregg right now. We talk to them all the time. We've made a number of deals over the last few years. We don't view them as any kind of immediate risk, but it is a category we will watch obviously as we do with Best Buy. RadioShack is a much different story, and RadioShack I'm glad you brought it up. And if something -- we've been watching these guys for a few years. I mean, we've continued to reduce in a very small way our exposure to RadioShack, and if something should happen more dramatic with RadioShack in the near future, we will not be unprepared on any of the locations. One of the interesting things is somewhere in the 40% range of our exposure on a pro rata basis is in Puerto Rico. And these locations absolutely cream their average sales per square foot of their domestic portfolio. So should there be stores to close, I'm quite confident those will be the last to close, and should they all close at some point in time, we are ready to release those debt as significant increases. So you look at a company like RadioShack, they have got to figure out themselves because there is no way we would do a new deal with them today. And in fact, we would go the other way, and we are prepared to replace where necessary.

You have a follow-up from the line of Alex Goldfarb, Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Dan, just going to sales tax, the online sales tax discussion on your peer's call ahead of you guys, just curious your take if there is implemented a -- that online retailers are going to have to pay sales tax. Just your thoughts for the smaller fledgling retailers, sort of the next Charlotte Hobbs [ph] or next L.L.Bean-type retailers, do you think this could curtail their growth if they are now burdened with having to collect sales tax from all the various jurisdictions? Or you think it's pretty manageable for small up-and-coming retailers?

I think it's very manageable for small up-and-coming retailers, and part of the analysis that has been done over time, Alex, is to survey a number of those folks through the various entities that are lobbying for a Main Street Fairness Act to see what the actual impact would be. And it's not something that most retailers, regardless of size, can't handle. It's something that has been consistently reviewed, and I really don't think that the impact would be that great. We have made great progress with Main Street Fairness, and we do expect something to happen in that regard, hopefully in the lame-duck session if not shortly thereafter. And I think all retailers today, regardless of whether they are Internet-based or bricks and mortar-based or omni-channel based, which we hope most retailers are at this point in time, are prepared for that. This is not going to be a surprise. This has been a long protracted discussion and a long protracted battle, and anyone who, quite frankly, isn't prepared to deal with the eventuality of a fairness tax, which is what this is, a fairness -- a leveling of the playing field, if you will. If you're not prepared for that you're really not paying attention to your business and you probably have bigger problems. So my feeling is that I don't think that this will catch anyone by surprise. I think people are well-prepared, and I don't think it will have really a negative impact on retailers at any level.

Our next question comes from Steve Sakwa, ISI Group.

Dan, I was wondering if you could maybe talk a little bit about Amazon. Obviously, kind of relating to the last question, they are not willing to start collecting sales tax, but they're clearly building a lot more DCs across the country, at least that sort of seems to be their plan, and maybe eventually, moving kind of broad-based to kind of same-day delivery. And I'm just wondering how you sort of think about the proposition that they're offering the customer. Obviously, people have to start paying tax, but they've now got convenience [ph] and how do you think that changes the landscape over the next decade?

Well, it's a great question, Steve, and I've great respect for Amazon. I'm not quite sure why they're valued, where they're valued, and I'm not quite sure why they're not obligated to make money like every other retailer is. And I think if they're held by this -- to the same standard as most every other retailer out there, obviously, people would be looking at them very differently. They would probably be on some sort of watch list, quite frankly, if you're looking at a less than 1% operating margin on sales of their size. I fully understand the need to invest in the future, and I fully understand the need for their CapEx, which is obviously, as you referenced, growing at a pretty dramatic rate. I get it. And I understand that they're building for the future, but at a company that does over $60 billion in sales, my question is, when is the future? If the future is -- was the future at -- is it at $100 billion, was it at $20 billion? Was -- is it $60 billion? So I think at some point in time, Amazon -- the model has to show that it can make money, and it hasn't done that yet. If you listened to their call last week, they kind of downplayed the same-day delivery notion a little bit. It got played out much more in the press than it did on their call, and I think -- I thought that was pretty surprising because that was something that everyone views as minimizing what's the competitive advantage for bricks and mortar, which is that you can pick things up and having some gratification, Amazon really can't provide you with that instant gratification. So I -- Amazon, it's an interesting case study. I think it gets a lot more attention than, quite frankly, it probably deserves. I think at some point in time, they'll be held but to the same standards as the rest of the retail. And when they're held to the same standards as the rest of retail, I think there's a real question whether the model works from a profitability standpoint. And while they continue to invest enormous sums of money in their business, and I think to grow market share, and I think that's a smart thing for them to do, I think that investment on the capital side is masking the fact that operating margin is beyond thin. And that's something that ultimately they're going to have to answer to, and I'm not so sure the model can answer to it as its currently constructed.

. And there are no further questions. I'd now like to turn the call back over to management.

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

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.