SITE Centers Corp. (SITC) Q2 2013 Earnings Report, Transcript and Summary

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

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Craig R. Schmidt - BofA Merrill Lynch, Research Division Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division Christy McElroy - UBS Investment Bank, Research Division Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division Vincent Chao - Deutsche Bank AG, Research Division Richard C. Moore - RBC Capital Markets, LLC, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Quentin Velleley - Citigroup Inc, Research Division Cedrik Lachance - Green Street Advisors, Inc., Research Division Jeremy Roane

Good day, ladies and gentlemen, and welcome to the Q2 2013 DDR Corp. Earnings Conference Call. My name is Stephanie, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded, and now I would like to turn the call 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 CEO, Dan Hurwitz; Senior Executive Vice President of Leasing and Development, Paul Freddo; and President and CFO, David Oakes. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and filed with the SEC on Form 8-K and in our Form 10-K for the year ended December 31, 2012, 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 all for joining us. As I mentioned on our previous calls, our goal is to provide reliable financial and operational performance by leveraging a strong operating platform focused on quality assets and being a prudent steward of shareholder capital regardless of the economic environment. Even though the last few months have been choppy on a macro basis, we are achieving our stated goal of operational consistency and reliability. Not only do our second quarter results underscore the stability and strength of our portfolio, but when looking back on our historical operating results and trends, this story is even more conclusive. I'd like to take a moment to share with you some statistics. We have enjoyed 17 consecutive quarters of leased rate gains, 13 consecutive quarters of positive blended leasing spreads and 10 consecutive quarters of blended leasing spreads greater than 5%. We've also enjoyed 13 consecutive quarters of positive same-store NOI growth and 12 consecutive quarters of same-store NOI growth of 2% or greater. Importantly, in regard to tenant demand for prime assets, we have posted 17 consecutive quarters of leasing volume in excess of 2 million square feet. We pay particular attention to leasing volume and the CapEx associated with such volume since it provides an excellent barometer of market trends and prevents any single deal or corresponding CapEx from artificially skewing the numbers to the positive or the negative. Therefore, when you have leased 44 million square feet over the past 17 quarters as we have, it obviously tells us the story. From the transactional and financing perspective, the consistent execution of our capital recycling program has led to 16 consecutive quarters of growth in the percent of NOI generated by our prime portfolio, helped greatly by 18 consecutive quarters of nonprime assets sales and 8 consecutive quarters of prime power center acquisitions. As we continue to opportunistically access the credit markets, we have decreased our weighted average interest rate for 6 consecutive quarters. And while we maintain a conservative payout ratio to provide flexibility for external growth opportunities, we have increased or maintained our quarterly dividend for 15 consecutive quarters and have continually left plenty of dry powder for future movement. Simply put, amid the marketplace noise and speculation about potential headwinds, our results have been reliable and consistent. While we are pleased with the results of the quarter and encouraged by the longer-term trends, we are not surprised. We will continue to execute on our strategic objectives, and we are obsessed with delivering consistent and reliable guidance and results while capitalizing on market opportunities in an effort to provide sustainable and long-term value for our shareholders. At this point, I'd like to take a moment to discuss our view of the potential impact of the few macro factors that have been dominating headlines lately. Over the past several weeks, there's been considerable chatter regarding the interest rate environment and what it means for REITs as well as the consumer. The market's initial reaction to the Fed's comments regarding tapering led to increased volatility in the capital markets, and there's now also speculations that consumer spending may be softening based on recent monthly retailer sales reports, primarily from tenants that specialized in the ready-to-wear category. First, in regard to potential modest interest rate increases and what it means for our business, the reality is that an increase in interest rates for the right reasons, namely economic growth, is not a threat to our business. In fact, it is a positive for the retail sector. Retailers have been operating in a price neutral to price deflationary economy for as long as we can remember and would benefit greatly from a reasonable inflationary environment. While rents per square foot within the current environment continue to climb, the growth could be more substantial with modest inflationary pressure since rent as a percent of occupancy cost is calculated by using actual or projected sales which would benefit from an inflationary lift. The challenge, of course, is defining the level of which inflation is positive versus the line that crosses into negativity. However, based on recent trends, we have plenty of room to benefit before the retail environment becomes overinflated. Second, in regard to retail sales ratings, it's important to note that the vast majority of retailers no longer report sales on a monthly basis and, therefore, the monthly information that is available is no longer a reliable barometer for broader performance in the sector. Retailers have become masters at highlighting the weather, calendar shifts or inventory initiatives as elements have impacted the store monthly numbers to a level that question relevance. Moreover, it would be shortsighted to draw any conclusion about consumer demand based on the seasonally low summer sales months, coupled with a very conservative inventory environment. Back-to-school and holiday shopping seasons are fast approaching, and it would be unwise to lead to conclusion prior to witnessing the sales trends during the peak seasons. And lastly, with regard to recent volatility in the Capital Markets and REIT share prices, it has had absolutely no impact on the fundamentals of our business. And as you can see, it is not reflective in our operating results. So our results continue to be consistent and reliable as we aggressively execute our plan and pursue our management and investment thesis. And while there is considerable market volatility that persists, our product continues to prosper and many of the perceived negatives within the market may actually be beneficial and further fuel our positive performance. I'd now like to turn the call over to Paul.

Thank you, Dan. As you saw in our earnings release last night, we achieved another quarter of consistent momentum in operating results driven by strong deal volume and corresponding growth and leasing spreads without the need to buy the growth with excessive CapEx. While I will not waste your time recapping the metrics outlined in our press release which obviously speak for themselves, I would like to bring your attention to an important trend developing across our portfolio. Contrary to prerecession trends where our portfolio was dominated by joint venture assets that were predominantly of higher quality than our wholly owned bucket, the portfolio has now flip-flopped and the dominance of the wholly-owned bucket is now driving the business. Our wholly-owned portfolio has transformed into high-quality, largely unencumbered prime power centers that remain in peak demand from growing retailers. This crossover is seen by looking at a number of statistics but most striking is that our combined pro rata leasing spreads in the second quarter were 8.6% as compared to the overall spread of 7.9%. This 70 basis point lift enjoyed by the wholly-owned portfolio represents the reversal of historic trends and is our third consecutive quarter of pro rata outperformance. In addition, when the previously announced acquisition of 30 power centers from Blackstone closes, 75% of our overall portfolio GLA will be wholly owned, up from 55% just 3 years ago. With full control over a significantly larger percentage of our portfolio and the further significant improvement of our quality metrics, we gained both additional leverage and further negotiating flexibility when dealing with our retail partners. As a result, we expect the wholly-owned operating story to continue its outsized growth going forward. Given this improvement in the quality and control of our portfolio, the current supply-and-demand dynamic in the sector and the overall retail climate, I would like to address our leased rate going forward and a significant amount of organic growth that remains. With our increasing quality and control, we are confident that a full occupancy level of 96.5% is achievable, leaving almost 200 basis points of additional growth through lease up and even when that number is within sight, we will continue to proactively create growth opportunities through terminations, downsizings and consolidation of space. This opportunity continues to be fueled by a landlord-friendly supply-and-demand dynamic and those rare retailers that struggle to remain relevant to the consumer in a very positive market. Retailer distress, no matter how limited, when combined with our quality portfolio on leasing platform continues to create value-add opportunities within prime assets that we aggressively pursue on a regular basis and add considerably to the growth story. For example, with Toys "R" Us and Babies "R" Us, over half of our contracts are ground leases with rents, typically 50% to 75% below markets. We are currently in the process of recapturing 2 Babies "R" Us locations and replacing them with Nordstrom Rack, Old Navy and Gap outlet with rental increases between 100% and 370%. In each case, not only are the economics are attractive, they dramatically improve the tenant lineup, NOI, credit quality and obviously, the overall value of the assets. In regards to Barnes & Noble, we are currently in a position to recapture 14 of our 25 locations over the next 24 months. As you know, Barnes has great locations in our portfolio with all of them being in prime centers that average 98% leased. The list of retailers interested in these assets includes Bed Bath & Beyond, Nordstrom Rack, T.J. Maxx and Sprouts Farmers Market to name a few, and we anticipate rental increases between 30% and 50% with very reasonable CapEx. As for the office supply category, we've completed or finalizing downsizing the 10 locations. While individual results vary, we are achieving rental increases of 60% on the residual space, 20% on the downsize space and have secure 10-year terms with the now rightsized office-supply retailer. More importantly, we maintain close dialogue with both OfficeMax and Office Depot regarding a post-merger strategy for their locations in our portfolio. While the merger is not final, we are confident that we will recapture up to a dozen locations, many of which will include termination fees paid by the tenant and additional mark-to-market opportunities. It's important to note that of the 12 locations targeted to recapture, all are in prime assets. These are just a few examples of the opportunities we see for currently leased space. Good things happen with good real estate, and with the continued improvements in our overall portfolio of quality, I'm extremely confident in our ability to continue to add value beyond the obvious lease up of vacancy and further expand the organic growth story we have seen over the past 13 quarters. Finally, I know Dan will speak about our Investor Day in a moment. But rest assured, we will have numerous members of our leasing team in attendance and available to discuss the trends I just mentioned or any others that may cross your mind. I encourage you all to join us and feel free to ask questions about whatever interests you regarding the leasing, development and retailer environments. And I will now turn the call over to David.

Thanks, Paul. Operating FFO was $86 million or $0.27 per share for the second quarter, 8% above last year. Including nonoperating items, FFO was $80 million or $0.25 per share. Nonoperating items were primarily related to redemption of our Class H preferred shares. We're extremely active in the capital markets in the second quarter, as we raised over $1 billion to fund the acquisition of prime shopping centers. We raised $784 million of common equity and $300 million of unsecured debt at a yield-to-maturity of 3.4%, representing the lowest unsecured nonconvertible bond rate in the company's history. We also issued $150 million of 6.25% perpetual preferred equity in early April, 25 basis points below the coupon on our preferred equity issuance in July of last year. The proceeds were used to redeem $150 million of our 7 3/8% preferred shares. Given the strength of the capital markets, we were compelled to over-equitize our first half 2013 investments to make sure we were well positioned for more volatile markets. The prudent funding of recent investment has led to the continued improvement of credit metrics, and our balance sheet advancement is now well-recognized by all of the major rating agencies, which most recently -- which was most recently exemplified by Fitch's upgrade of our bonds to investment grade. Despite meeting our strategic objective to reach consensus investment grade, we will continue to take steps to lower debt to EBITDA, extend duration and improve our fixed charge coverage ratio in order to further enhance our credit rating. At the end of the quarter, our weighted average consolidated debt maturity was 5.4 years, continued improvement from 5.2 years in the first quarter and significant expansion from the 4.3 years at the end of 2011. Looking at future capital needs, we have no maturities remaining in 2013 and no unsecured maturities until May 2015. We continue to upgrade the quality of our portfolio through the acquisition of attractively priced prime power centers located in major MSAs. Our joint ventures continue to provide a pipeline of unique acquisition opportunities as we acquired our partners' 85% interest in 5 prime power centers located in Atlanta, Tampa and Richmond that we have managed and leased for over 6 years. This low-risk investment was funded with proceeds from asset sales and the issuance of $45 million of common equity in April. The 1.3 million square foot portfolio is 98% leased and the centers are anchored by national credit quality tenants such as Walmart, Target, Costco, Home Depot, T.J. Maxx, Ross, PetSmart, Michaels and the Fresh Market. As previously disclosed, we are also under contract to acquire our partners' 95% interest in a portfolio of 30 prime power centers from our existing join venture with Blackstone for $1.46 billion. The acquisition was funded with $739 million of new common equity, $146 million of proceeds from preferred equity and mez loan repayments, $398 million of assumed mortgage debt with a weighted average duration of 4 years and $300 million of new 10-year unsecured debt. The 95% leased portfolio of prime power centers primarily located in top 40 MSAs totals 11.8 million square feet and features top tenants such as T.J. Maxx, Kohl's, PetSmart, Bed Bath & Beyond, Best Buy, Dick's, Old Navy and Lowe's. And these acquisitions will provide us the opportunity to further simplify our structure by reducing our joint ventures by 20% and enhancing EBITDA quality through the conversion of shorter-term fee and interest income in the longer duration, property level cash flow with strong growth potential. These transactions will convert approximately $26 million in fee and interest income in the long-term property NOI with growth potential, enhancing our net asset value. Additionally, 26 assets will be added to DDR's high-quality unencumbered asset pool, increasing the NOI of this pool by over 15%, the highest level on our history. We anticipate that the Blackstone transaction will close in the fourth quarter. Subsequent to second quarter end, we also acquired 2 prime regional shopping centers in Orlando and Atlanta for an aggregate $259 million. The assets are 99% leased and enjoy average trade area household income of $82,000 and population of 382,000 people and have weighted average rent per square-foot that is approximately 15% greater than the prime portfolio indicating the highly desirable and dominant shopping centers. Winter Garden Village is a 1.1 million square foot market-dominant regional power center in Western Orlando that features high credit quality tenants such as Target, Lowe's, Marshalls, HomeGoods, Best Buy, Ross, Bed Bath & Beyond, Sports Authority, Staples, PetSmart, World Market, Old Navy and Ulta. In addition to already being one of the top power centers in all of Florida, Winter Garden Village will also benefit from additional traffic in future years as Florida Hospital has purchased 58 acres adjacent to the shopping center for the construction of a medical campus. Cumming Town Center is a 300,000 square-foot prime power center in Northeast Atlanta. The assets sits in close proximity to Cumming Marketplace of 650,000 square-foot, power center also owned by DDR, allowing us to further dominate a strong Atlanta submarket. The fully leased center features, Dick's, T.J. Maxx, HomeGoods, Best Buy, Staples, Old Navy and PETCO. Both assets were acquired from a strong DDR relationship were a certainty of our execution in a short timeframe allowed for the purchase of 2 high-quality assets. These 2 acquisitions were funded from excess proceeds from a large equity issuance in May, the assumption of mortgage debt and recently closed and in-process asset sales. Our capital recycling activity remains robust on a disposition side as well. We sold $64 million of nonprime assets in the second quarter and have an additional $138 million of nonprime assets currently under contract for sale. Since the beginning of 2008, we've sold over 175 wholly-owned nonprime operational assets. And as a result, the remaining inventory of lower quality assets has shrunk considerably. To address the smaller amount of nonprime candidates for disposition and the continued desire and opportunity to recycle capital in the high-quality assets, we have reallocated internal resources to form a portfolio management department that is tasked with underwriting the portfolio to, among other things, identify the lowest tier of prime assets for future sale. This process now enables us to further upgrade portfolio quality by formally distinguishing and disposing of those centers that either lie in suboptimal markets, exhibit low growth over the medium term or carry greater risk due to tenancy or location. Regarding guidance. Operating results have exceeded our expectations for the first half of the year, and we now feel that it's appropriate to raise our guidance for same-store NOI from 2% to 3% to at least 3% growth. In addition, operating transactional activity year-to-date encouraged us in May to raise our guidance for operating FFO per share to $1.08 to $1.11, implying growth of over 6% from 2012 at the midpoint. We remain focused on the lease up of our portfolio, redevelopment and selective development opportunities and off-market acquisitions which continue to provide any of the accretion and EBITDA and dividend growth in excess of our peer group. At this point, I'll stop and turn the call back to Dan for closing remarks.

Thank you, David. And before turning the call over to questions, I'd like to spend a few minutes discussing the Investor Day we will be hosting on Thursday, October 10, in Charlotte, and let you know what you can expect from the event. We have been actively soliciting feedback and suggestions from several of you regarding expectations for a productive, efficient and interactive Investor Day format. As a result, the day will not be overly scripted. You will have full access to our deep and talented senior management bench and you will see firsthand how we've allocated capital to create value in the Charlotte market over the past 22 months to creatively sourcing acquisitions and discipline development. The start -- the day will start with brief management presentations and updates to our strategic plan from David, Paul and myself, but will also include the involvement of our Chief Investment Officer, Mark Bratt; our Executive Vice President of Capital Markets, Luke Petherbridge; our Senior Vice President of Finance, Matt Lougee; and our Senior Vice President of Corporate Operations, Joe Tichar. Additionally, we will have an interactive panel discussion with our Chief Accounting Officer, Christa Vesy; our Senior Vice President of Leasing, Bryan Zabell; our Senior Vice President of Retail Partnerships, Bill Kern; and our Senior Vice President of Development, Chris Erb; and our Vice President of Capital Markets, Scott Henderson. During this panel, you will have full access and the ability to ask any questions you would like. After the panel discussion, we will tour our recent acquisitions and recently completed development project in Charlotte and conclude the day with a cocktail hour and dinner during which you will have unlimited access to our entire management team. And it's been our experience that the less scripted the event, the more informative it is for you, and providing you the opportunity to pursue your thoughts directly with our team is our goal. We are proud of the team we have assembled and will ensure that you have the opportunity to meet and interact with the folks that run the business on a day-to-day basis. We look forward to seeing you in Charlotte in October and welcome your additional suggestions regarding format and content for the event. At this point, operator, I'd like to open up the lines for questions.

[Operator Instructions] Your first question comes from Alexander Goldfarb from Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a question on property tax. In the apartments, especially with folks with a lot of Sunbelt exposure, they have been talking about some pretty healthy double-digit property tax increases. Curious what you guys are seeing on the property tax front and if you think that some of these increases may be outpacing the tenants' ability to absorb them?

Well, we haven't seen any major issue at this point on the property tax side. I think it's important to note that this is always a trailing analysis just in the way that the taxes are reset. And when you think about the significant hit that property values in the shopping center sector took versus the extreme resiliency of the multifamily sector, I think you can see why in a lot of markets even though realtime data would indicate very strongly that property values are increasing, the trailing numbers that municipalities are looking at in resetting values is generally much more favorable for our ability to keep property tax as low. So we're not seeing anything significant on that front. We take an active approach internally to make sure we're appealing that on a very regular basis to lower taxes which really just benefits our tenants that eventually should benefit us. But we take an active approach to try to keep those costs as low as possible, and I think you see that show up all-in extras, whether it's CAM or taxes and what we pass through to our tenants.

The next question comes from Craig Schmidt from Bank of America.

When I look at the average size of the shopping centers in terms of dispositions versus acquisitions, they're almost 3x as large for the acquisitions. I know you've spoken in the past about the greater opportunity for value-add on these larger centers of redevelopment. I'm just wondering is there a sweet spot range that you look for your community shopping centers to be that sort of help aid that process of redevelopment?

Well, historically, Craig, we want to remain -- we want to be flexible and obviously, it depends on what the story is whether it's a core assets or a core-plus asset or a value-add asset, a lot will depend on how we look at it. But if you really go back and take a look, we have significant control and significant flexibility and value-add opportunities. We like to see 200,000 to 250,000 square feet of owned GLA. That has been something that is always been sort of in the back of our minds, something that we've looked at as a good number. It's not a hard and fast number, but it's a good sanity check when you want to deal with what is the relevance of your asset in any given market. Obviously, the smaller the asset, the less relevant it is. So at 200,000 to 250,000 square feet of owned and as typical on the retail sector, you always have anchor stores whether they be department stores, off-price stores, home improvement stores that add another a couple of hundred thousand square feet at least to those centers. We can get up to 400,000 or 500,000 square feet in total. That seems to be a good number on the relevance scale for what we're looking to do and how we're looking to proceed. One of the things we like, obviously, about the asset class and the size that is -- we talked about it as the flexibility. And when you see centers that are 700,000, 800,000 square feet, typically what comes with those is 70, 80, 90 acres. And those 70, 80, 90 acres give you a lot of flexibility to be nimble in a very fluid retail environment. So your observation is not by accident. We are absolutely focused on larger centers. They give us maximum flexibility and greater value-add opportunity and have a more impressive cumulative average growth rate going forward.

And what you see in the supplement doesn't even capture all the activity, given that the Blackstone transaction that has a number of extremely large centers has not closed as well as the 2 additional assets that I mentioned, that average. About 700,000 square feet apiece, and so I think you'll only see that spread accelerate in the second half of the year as we sell more smaller assets and we've made great progress at acquiring some much more significant assets in terms of their critical mass and tenancy as well as land for future opportunity.

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

Just curious with regard to the investment environment, there seems to be a lot of product available, and you've certainly been acquisitive both from third parties and from within the joint venture portfolio. I was just wondering how large is the company's appetite here and what do you think the ideal size of the company is, long term?

It's really driven opportunity by opportunity, whether it's the constant flow of packages you get from brokers or where our greater focus is the off-market sourcing of activity through relationships that we have. We're not focused on -- this is how much bigger we need to get. We're obviously very focused on making sure we grow prudently. I think we, along with much of the sector, but DDR is a standout some ways, learn some very important lessons about prudent due diligence and prudent growth and we are very much wedded to those concepts. So we will cast an extremely wide net in looking at a broad set of acquisitions. But there's no need on our part to grow the most recent acquisitions. The 2 that just recently closed were 2 extremely high-quality centers, one that we knew well in a submarket of Atlanta where we already have a presence and one that really is one of the absolute best power centers in the entire Southeast, the Winter Garden Village in Orlando. And so I think for assets like that, we're going to be very active but price is important. So we need to be able to make sure that the pricing works for us, both on going-in basis as well as on a growth over the next 5 to 10 years basis. And so there is a considerable of focus on the opportunity to improve the portfolio of quality further and make additional investments, but there's no need. We certainly think we are large enough by a significant factor to be very relevant to retailers. We are large enough by a considerable factor to be relevant to investors. And so we don't have to get bigger, but I do think as we've outlined over the past year or so, we do still see an opportunity where in general, power centers are more attractively priced than other types of shopping centers. And so we have been active in selling some smaller products, some single tenant products and grocery-anchored products and just some smaller market products and reallocating that into select acquisition opportunities. And there've been a few that we've been excited about, and we've been blown out of the water by the pricing but there have been announcement that we have been able to secure some very high quality new assets. And I think you'll see, unless pricing gets much more aggressive, we'll continue to be active on that front but very prudent in both underwriting and funding.

I think the other thing that's important to note, Todd, is if you really look to what's happened to the company over the last several years, we've gotten smaller, but really in the retail community, we've gotten more relevant because the quality of the assets have gone up. So I think from our perspective, David's right, I mean there's a certain size I think you need to be, to be relevant to retailers. We've long since passed that. But as the company has actually gotten smaller, we've become more relevant with retailers because of the asset quality improvement and the ability to provide growth opportunities for growing retailers. So I don't think there's a right number how big the company should be or shouldn't be at this point in time. But I do think there is a right type of asset that we should own to remain relevant, and that's what we are very focused on.

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

Just sort of following up on the growth question, longer term. At your last Investor Day in 2011, you talked about long-term same-store NOI growth for your portfolio in the 1.5% to 2% range. As you've obviously seen closer to the sort of 3% to 4% range in the last couple of years, I'm wondering if that longer-term outlook has changed sort of in terms of the ability for your portfolio to generate growth over time, and especially as your portfolio has changed?

Well, yes. I mean, we have -- we do have a different view of that because if you'll recall, the last Investor Day, Christy, there were a lot of execution -- there's a lot of execution risk and our ability to get the type of portfolio we wanted to put together. There really was no guarantee we've been able to sell the bottom tier of the portfolio which was obviously a growth drag, and there was no guarantee that we would be able to afford to acquire what we wanted to acquire in order to substantially increase our growth profile. Today, as we look at our portfolio, obviously, when you get the full occupancy which is nowhere near at this point, as Paul mentioned, it's going to have an impact. But today, today, we're very comfortable in the 2.5% to 3.5% same-store NOI growth range for the foreseeable future. Not only is that because of the lease-up opportunity, but because of some of the consolidations, determinations, the buyouts that we're doing with tenants, some of store closures, some of the downsizing. So all those things are adding to great growth opportunities. As you know, we don't include redevelopment on our same-store NOI numbers although they do end in the numbers from a results perspective. But we do -- we are in a position where we have a much higher quality portfolio. The demand dynamic is still way out of whack as far as demand and supply. So we are driving the rents. And we're very comfortable being at a 2.5% to 3.5% going forward when we were at 1.5% to 2.5%. But it was a very different company back then and it was a very different portfolio. I still think if we have that portfolio, we would still be in that 1.5% to 2.5% range. But thankfully, we do not and we can comfortably look at more robust growth going forward.

The next question comes from Ki Bin Kim from Suntrust Robinson Humphrey.

I just had a couple of question regarding same-store NOI. First, was it -- how is it impacted by Brazil? Second, if you had the Blackstone assets fully consolidated, what would that same-store NOI results look like? And last question, you mentioned about looking at occupancy cost as -- looking at rent as a percent of total sales for retailers. I know it's hard to get the sales data from the nail salon small shop tenant, but given that a lot of your tenants are the big national public companies, do you -- have you tracked the stat on what that occupancy cost looks like and maybe how that can trend going forward?

Yes. The couple of items regarding same-store NOI. First, for us, it is important to note that we do spend a lot of time trying to make this a true same-store calculation. And so we do have certain clear rules that we adhere to. And also, this is a cash calculation, not GAAP. So you give up something from that. We do spend a considerable amount of time separating what is simply a re-tenanting from what is a major redevelopment. And generally, that's define by amount of CapEx that we've spent on it. And so we do think we have a very legitimate and credible calculation. And also one that just passes that simple sanity check of you report 3% same-store NOI growth, then you get to 6% FFO growth for the year, 8% FFO growth for the quarter. Then I think it sort of passes that sanity check that it has to eventually flow to the bottom line if it's a legitimate calculation. If we did include the redevelopment activity, it would be significantly higher at least 100 basis points. Regarding the specific items on Brazil, given that Sonasier [ph] Brazil hasn't reported yet, we can't say anything too significant on their specific results for the quarter. But the impact on DDR's results was extremely insignificant in the 10-basis-point range of benefit. And so no real impact at all from that standpoint. A few years ago, 2010, '11, it was a much bigger deal. You were talking about mid- to high teens in Brazil and 1% in the U.S. and you got a much greater contribution. Today, it is extremely insignificant in terms of its impact on that number. The Blackstone portfolio is not at all reflected in the numbers, not even our 5% because if you recall the requirements to make it truly comparable we're in a position where we had owned 0% stake in that portfolio looking back 1.5 years. And so we just don't have -- or didn't think it was appropriate to include comparables staff even for the sub-equity stake that we had. On a go-forward basis, those assets next year will be and -- or in the next few quarters will be in and will be a driver. Over the trailing 12 months, including the Blackstone assets with the considerable lease up that happened in that portfolio, that would have absolutely driven same-store NOI for DDR. Overall, up 25 basis points or so just because there was considerable mid- to high-single-digit growth within that portfolio. And so that certainly would have helped, and I think will help going forward, but was not in the results this quarter for our definition of the term. And finally, on occupancy cost, you're right to say that we don't have the results from everyone and it's not even just the nail salons or some of the locals. Honestly, we get it from a decent amount of those guys. It's the nationals that have the market power oftentimes to not have formal reporting requirements and percentage rent requirements. But whether we get the sales formally or because of our relationships, we get them informally, we do have a pretty good view on where occupancy cost is today in the high single digits, 8-ish percent range from what we're aware off, and we absolutely think there's room to grow that noticeably without impacting retailer profitability.

I'd like to add with something on the occupancy cost David hit on. There's a couple of ways to look at it in terms of our portfolio, we are right about 8% and clearly, we could be north of 10%. So there's room. And I think that's the key when you look at occupancy cost and where retailers are today, specifically the winning retailers, there is absolutely room. There's a broad spectrum of occupancy cost that are sustainable by the different retailers we deal with. But very few of the retailers we deal with are stressed or at those levels where we see no more room for growth. You have to look back, I think, prerecession, rents, et cetera and occupancy cost. These guys wound up losing money on those rents. They've made better deals over the past few years and we've seen them climb back close to prerecession levels. But there's no stress that we're concerned about. I mean, obviously, there is some select retailers that have -- that are struggling that have extraordinarily high occupancy cost and they are a problem. But overall, there's clearly room to grow the occupancy cost in our sector.

The next question comes from Vincent Chao from Deutsche Bank.

[indiscernible] occupancy targets, 96.5% over time. Just curious, your spreads have been very consistently positive for quite some time here even -- particularly on the renewal spread side of things. And just curious how you're balancing as you get closer that 96.5%, how do you balance the... [Technical Difficulty] the spread?

Vince, I'll answer what I think we've got. Clearly, we see a consistency of the spreads going forward and it's particularly the renewal spreads, we're going to see that high single-digit that we've talked about for several quarters and we've seen consistent growth from that and that's not going to change. You got to get right back to the supply-and-demand dynamic that we've talked about all the time. There's extraordinary growth in the retail business and incredible lack of new supply, and that's what's going to drive it. So my concern is we get closer to the 96.5%, you're going to see us do some very proactive, take some very proactive steps as we continue to improve the quality of the portfolio. I talked a little bit in my script about some of the space we look to recapture. We're going to do that at significant improvements in spreads. So we're going to see consistent double-digit in the new deal spread and high single-digit in the renewal spread, even as we get closer to the 96.5%.

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

It seems that it's in vogue recently to bail out of Brazil. And I'm curious if you guys can give us an update on what you're thinking about Brazil and your whole investment there?

Well, as you know, Rich, Brazil has been a great investment for us. We've done extraordinarily well. The climate has clearly changed. The operating assets continue to perform at a very, very high level while the development program has crawl to a stop because the development projects have not produced at the level that we would have expected them to produce. So our development has slowed down, but we have 3 projects that we have to stabilize. And it's going to take us a little longer to stabilize those than we thought it would, probably an extra 12 months, that we'll be coming online and stabilizing. So when those come online and when they stabilize, we will reevaluate the entire investment, evaluate what we have going forward on an operating basis. We'll evaluate where we are and the value that we may be able to garner from the development pipeline and then take a look to see what's the smartest move for us to make in Brazil. I can't tell you -- I can't put dates around things because there was the reason why they call them emerging markets. They move very -- in a very volatile way, very quickly. And -- but we are in that market aggressively. We know what the opportunities are. We are comfortable what the opportunities maybe, and we want to make sure that we can maximize the value for our shareholders whether that's to stay, or whether that's to leave. But that's all on the table on a regular basis, and we continue to evaluate it.

The next question comes from Michael Mueller from JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Just to 2014, does it still feel like you're going to be a net acquirer into next year?

Yes, it does. There's still product out there that we think is priced attractively. We still are very disciplined in how we look at that. We pass on a lot more than we acquire, but we have access to product to continually to our joint ventures even though that's declining to some extent, there still is plenty of product in that bucket that we have rights to and many of those assets, obviously, we're very fond of. So we do feel very comfortably that in 2014, we will be a net acquirer. That being said, we will continue to call the portfolio. As David said, we have a team of folks looking at the bottom tier or even the prime assets at this point in time because we still feel it's a very, very exciting time to recycle capital on our sector and we've been active at it, we've been successful at it and that will continue. So you will continue to see sales, but I think in 2014, we will also be a net acquirer.

Yes, and I think you're likely to see the same trend you've seen the past couple of years. We're going to guide to numbers in January that we think are very reasonable and feasible, and then we will evaluate the acquisition market through the course of the year. We're obviously -- last year and this year, you've seen us massively exceed the acquisition guidance that we provided simply because we saw attractive opportunities and access to reasonable capital. So it's a constant focus for us.

The next question comes from Quentin Velleley from Citi. All right, the next question comes from -- I'm sorry, we have Quentin on the line now.

Paul, as you head back to that 96.5% leased rate and presume more growth from terminating leases, downsizing and re-tenanting, can you just talk a little bit about how you're thinking about CapEx levels and economic trend for those kinds of circumstances?

Yes, I don't see any dramatic change either way, Quentin. We're very pleased with where we are on a CapEx on a new deal basis. We are -- you're always going to see some fluctuations quarter-to-quarter based on the character of deals made. But as we've talked time and time again about the net effect of rents, and we're very pleased with how we've controlled CapEx. We think we did a very effective job of that. I mean, if you look at that net effective rent story, just Q2 -- Q1 to Q2, significantly higher starting rents, slightly higher cost on a square foot basis but nothing significant, but a dramatically increase net effective rent if you look at the bottom line. There's nothing that we've been in aggressive mode of re-tenanting space for the last several years. And I think you can plan on seeing a very similar level of CapEx over the next few years.

The next question comes from Cedrik Lachance from Green Street Advisors.

Dan, you've talked in the past about some stores in your centers going to outlet tenants or outlet-type tenants. There's reports here in the local press that you're contemplating to turn your Long Beach center into an outlet center. How many centers in your portfolio could be turned in their totality into outlet centers, and what kind of timeframe can be put on that?

My guess would be one. And it's the one that you mentioned. It's not really a -- that has been a distressed center for us for years, and we've had conventional retail in there that has come in, that's been leased a couple of different times but none of the conventional retail has been overly successful and in that particular case, we had interest from outlet tenants. We just opened restoration hardware recently that had a stunningly successful opening and that was the beginning of a thought process that we should be going out to find the compatible tenants to an outlets like restoration hardware and build from that and we've found good market receptivity to being in Long Beach and being at that center. But in general, we're very fortunate we don't have a lot of distressed centers. So we don't need to change the dynamic of the centers that we're in. In fact, while the outlet business is robust right now and obviously is doing great, we'd rather place some of the outlet tenants into our existing power centers like we're doing now, as Paul mentioned with Gap outlet, like we're doing with Nordstrom Rack, like we're doing with Saks Off-5th. They don't need to be in a pure outlet environment and our product type is very attractive to them obviously, because not only we're doing a lot of business but the occupancy costs are under control. So as a practical matter, there are very few -- I'm looking at Paul, but I can think of any other than the pipe that you mentioned that could be converted to an outlet center. And that was very few that we would even spend the time, effort or resources trying to do even if that were the case at this point in time. So we have -- we've completely transformed our portfolio and the portfolio is performing at a very, very high level. So when you have that rare opportunity to do something great. And let's face it, the only reason why the outlet opportunities are available to us in Long Beach is because it's California, the barriers-of-entry are extraordinarily high and we have space available. So even that is not a perfect outlet scenario. But at the same time, those tenants need to grow as well. They need to get into markets that they're currently not in and the pipe presented an opportunity. So I give credits to our leasing folks for being creative enough to pursue that opportunity. But the bottom line is you will not see a lot of that coming from us.

Yes, and I'll just say one other thing, Cedrik, about that location. Obviously, it's a very unique location and the only of its site in our portfolio which have been so heavily tourist-oriented, and then that obviously is something that works with an outlet concept. So that's the only one we're working on.

The next question comes from Ki Bin Kim from SunTrust Robinson Humphrey.

A question on Best Buy. It seems like there's -- I know you've been working with them pretty closely to downsize your space or release it. But it seems like they've been a pretty vocal -- the new management team about their leases, like 75% of the lease is coming back to them within 5 years. And at least on their side they've been vocal that they've been -- they said they have leverage over landlords. I was wondering what is the current status of the Best Buy leases? And if the company is trying to downsize the space, do they -- are they paying penalties? What are the economics behind that and has that change all in the past year?

Yes, there really is a downside discussion today with Best Buy and they've made that pretty clear. They've done some good things, by the way, as a company, right. We're less concerned about them than we were a couple of years ago whether it's Samsung, Microsoft initiatives, new leadership at the top, selling out of Europe. There's some momentum there. But I would tell you, I don't know how anybody thinks they have in upper hand when it comes to their lease terms and leases coming up for renewal. We feel very good about it. I could give you more than one example where we're ready to replace them, should they not take their option. I mean, that's the position we're in. We've been a good company focuses on real estate with retailers who seem to be at risk, and we've been focused on Best Buy's locations for a number of years and other at-risk retailers. And we're ready to move on these spaces, great locations and great prime centers. And as leases come up, we've got back up in just about every case. And so it's not going to be a leverage position for Best Buy. And again, we feel very good about it. But on the downsizings, they're more interested in fixing their merchandise mix within their stores, their entire business model, and downsizing is not an issue. We're ready. We initiated that conversation a few years ago and made a couple of deals and had some great downsizing stories. But we can downsize and we can make it successful, but they're not -- those conversations aren't happening right now.

Yes, I mean, at the downsizing was the strategy of the last management team. And I think what you're hearing and we all have to be cognizant. There's always a disconnect. There's often a disconnect between what senior management on a retailer tells the retail analyst, and the what the real estate people actually are doing. Paul and I both came from that environment. So we've seen it firsthand. And while each time Best Buy is going out and said, we know we're going to use our leverage, we're going to downsize. We're going to do this. We're going to do that, nothing's happened. And it really hasn't happened, and it won't happen in this next cycle either, provided you have good real estate. If they're losing money and they have -- the store's too big and they're not doing well, then there's really no -- there's nothing that you could do that will keep them and that's what a good retailer will do. They'll leave bad locations. Fortunately, we don't have those and we're very confident -- we're very comfortable with what they're doing in the store right now which is improving the merchandising but we're also very comfortable in the desirability of their location should they decide to go elsewhere. We've tried. We've tried to get them to go elsewhere at certain centers. There've been unwilling to do so, and I don't think that will change.

The next question comes from the line of Jeremy Roane from Hilliard Lyons.

I was just wondering if you could shed some light on the lease termination fees from this quarter versus the same quarter last year?

Yes. The -- it's always a tough one to model because we've given guidance on an annual basis that it's going to be roughly in line with what it's been honestly, the past few years. Now the nature of some of that is changing because it's often times more proactive on our part than on the tenant's part, but you get to around the same number on an annual basis. So I think we would downplay the quarterly impact simply because some of the stuff is lumpy and completely understand that on your side of modeling, oftentimes line items like that just get spread across the year. But the reality for us is it does and up being a little lumpier than that. So in general, the mindset from us on terminations -- at a point in the cycle like the one where we're at today, where demand meaningfully exceeds supply that we have been more proactively having those conversations trying to recapture space, but it's -- for the larger ones, it's hit or miss whether you get 1 or 2 in a quarter or not or whether you got none. And so it does just end up being a lumpier line item. So I think we can continue to provide good annual guidance on it, but we obviously don't give quarterly guidance at all on any line items. And this is just one that's always going to be a little lumpy there where 2 or 3 quarters, 1 year we're going to miss on that number. And 1 or 2 quarters, we're going to exceed just because of the nature of that business where it doesn't just gets spread across the year the way our the model could do it.

There were no more questions. I would now like to turn the call over to management for closing remarks.

Thank you, all, for joining us today. And again, we look forward to seeing you all at our Investor Day in October. Have good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining.