SITE Centers Corp. (SITC) Q1 2014 Earnings Report, Transcript and Summary

Meghan Finneran - 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

Craig R. Schmidt - BofA Merrill Lynch, Research Division Christy McElroy - Citigroup Inc, Research Division Grant Keeney - KeyBanc Capital Markets Inc., Research Division Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division Paul Morgan - MLV & Co LLC, Research Division Andrew Schaffer Albert Lin - Morgan Stanley, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Jason White - Green Street Advisors, Inc., Research Division David Bryan Harris - Imperial Capital, LLC, Research Division Omotayo T. Okusanya - Jefferies LLC, Research Division Richard C. Moore - RBC Capital Markets, LLC, Research Division James W. Sullivan - Cowen and Company, LLC, Research Division Vincent Chao - Deutsche Bank AG, Research Division Christopher R. Lucas - Capital One Securities, Inc., Research Division Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Good day, ladies and gentlemen, and welcome to the 2014 DDR Corp. Earnings First Quarter Conference Call. My name is Crystal, and I will be the 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 your host for today, Ms. Meghan Finneran, Financial Analyst. Please, proceed.

Thank you, Crystal. 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 these 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 Form 10-K for the year ended December 31, 2013, as amended. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO and Operating 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 supplements are available on our website at www.ddr.com. Last, we will be observing a one-question limit during the Q&A portion of our call in order to give everyone a chance to participate. [Operator Instructions] At this time, it is my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Meghan. Good morning, everyone, and thank you for joining us today. As illustrated by our first quarter operating metrics, our portfolio continues to perform at an extremely high level in historically strong and soft quarters. With over 3 million square feet of leasing in the first quarter and the sale of our Brazil interest, I thought it would be appropriate to take a step back and reflect on the portfolio transformation that permits us to post operating numbers that continue to exceed even our own lofty expectations. I'd like to start by reflecting on the strategic and operational significance of the closing of the Brazil transaction. Several years ago, when we laid out a plan to simplify this company, reduce risk and eliminate the complexity that resulted from legacy transactions, the risk in the plan was market receptivity that would enable successful execution for the benefit of all our shareholders. As we sit here today, we are pleased to say that our exit from Brazil exceeded our expectations, and the execution of the transaction represents a significant milestone for this company as we move beyond the investments that complicated our story and distracted investors' attention from our core business. At the end of the day, while Brazil only accounted for 4% of our NOI, it represented about 75% of investor and analyst questions. While the strategic benefits of selling our stake in Brazil were obvious, it is important to note that we continue to execute with a long-term focus on NAV, not short-term FFO, which will position this company for attractive long-term risk-adjusted growth. Given the significance of our exit from Brazil, it's a good time to pause and reflect on what we have accomplished, what we now own and how we are continuing to upgrade the quality of this portfolio. Today, DDR is a pure play, power center-focused company with a dramatically reduced risk profile, simplified story and significantly enhanced portfolio. Following the sale of Brazil, we have eliminated 11 joint ventures in the past 3.5 years and we continue to reduce our JV platform, particularly ventures that no longer align with our core business. Since 2010, our capital recycling program has resulted in selling nearly 300 assets, representing $2.7 billion, and we have purchased more than 75 prime power centers representing $2.9 billion in major markets. This portfolio transformation has enabled us to lease 48 million square feet since 2010, and achieve same-store NOI growth in excess of 3% for the past 8 quarters. Additionally, the average size of our assets has increased 27% and base rent per square foot has increased nearly 10%, reflecting the market dominance and tenant demand for our power center product even in difficult -- even in a difficult environment. We have reduced the number of markets in which we own and operate shopping centers from 170 in 2010 to just 105 today, and increased our exposure of annual base rent derived from the top 50 MSAs from 57% in 2010 to 72% today. Our active portfolio management platform has significantly increased our exposure to key tenants including Whole Foods, Nordstrom Rack, Five Below, Ulta, the Ascena Retail Group of brands, Panera and LA Fitness, all of whom are now in our 50 tenant roster ranked by annual base rent. Moreover, Sears, Kmart, Staples, Rite Aid and Tops Supermarket are no longer in our top 25 tenant roster. Looking forward, our portfolio transformation will continue and we expect operating results to follow suit. With regard to the transactions environment, cap rates from our -- for our product continue to compress, and we see an incredible opportunity to increase non-prime and prime-minus assets as there's significant demand and a dearth of comparable products on the market. Our increased disposition guidance is resulting in unprecedented liquidity for this company, and we are actively sourcing off-market acquisition opportunities to reinvest capital at attractive returns in core markets, which will further accelerate our portfolio transformation process. Specifically, we are excited about the previously announced acquisition opportunities described in our quarterly transactions press release, which are located in major metros including Chicago, Cincinnati, Denver and Northern California, all of which we expect to close later this year. Before turning the call over to Paul, I'd like to take a moment to address the common theme of first quarter earnings for our retailers and retail REITs so far, which is the weather. There has been much chatter about the impact weather has had on first quarter operating results for both retailers and landlords. While we can all agree that the winter was harsh and retail sales were legitimately impacted in a negative manner, the overall effect across our portfolio was immaterial due to prenegotiated and capped contracts with vendors, the realistic internal budgeting process and proactive collection efforts. With regard to the few recently announced store closings from retailers, please keep in mind that retailers like to use weather as an excuse for poor performance. But the reality is that these store closures are long overdue and make the overall retail landscape much healthier. Not surprisingly, the retailers that are closing stores are those that have experienced a rapid erosion in market share and suffered from directionless merchandising strategies. The timing for store closure could not be better as the list of retailers looking to expand remains robust. Importantly, as Paul will discuss in more detail, we have not seen any pullback in store opening plans from the retailers we have done the most business with over the past 5 years, and we expect the recently announced store closings to be a net positive for our portfolio, as we re-lease space at positive spreads and improve the overall merchandise mix of our assets. At this point, I'd like to turn the call over to Paul.

Thank you, Dan. Before briefly covering a few highlights of our first quarter performance, I would like to point out that all leasing metrics as recorded in our supplement, including historical metrics, now exclude Brazil and reflect the domestic and Puerto Rico portfolio exclusively. In the first quarter, we executed 378 new deals and renewals for 3.1 million square feet, our strongest volume in 19 quarters and the second highest quarterly volume in our company's history. This is without the benefit of the deal flow from the Brazilian portfolio and is a strong indication of the significant retailer demand that we continue to see for prime power center space in our domestic portfolio, even in a quarter that has produced historically tepid numbers. Not only did we deliver extraordinary results from a volume perspective, we continued to drive rents with a new deal spread of 20% and a 9% blended spread for the quarter. Our leased rate increased 10 basis points to 95.1%, which compares favorably to the historic average decline of 20 basis points in the first quarter. We remain confident we will deliver a leased rate increase of at least 75 basis points this year, consistent with our guidance. With the lease rate now in excess of 95% and a boxed leased rate of nearly 98%, the question I am most frequently asked is, "How would you continue to deliver strong leasing volume and organic growth?" Back in October, at our Investor Day, we presented several initiatives and organic growth leverage we are pursuing, including naked leases, small-shop consolidations, anchor downsizing, proactive lease terminations and redevelopments. Today, I would like to focus on proactive lease terminations and provide an example of how we are generating incremental organic growth in an environment of continued strong tenant demand and new-supply generation below historic levels. We have been actively negotiating recaptured deals with a number of retailers looking to right-size their real estate footprint in the books, toys, office and traditional department store categories. I'm excited to report that we have recently finalized or are in the process of finalizing 20 deals representing 465,000 square feet of prime box space located in power centers across the country. Importantly, many of these recaptures are structured as ongoing landlord recapture rights and not with fixed termination dates, providing maximum flexibility in terms of timing and the ability to finalize replacement deals with minimal downtime. The below-market rents for these 20 locations represent an estimated mark-to-market opportunity of over 40%, significantly improving the growth profile of these prime assets which are currently 98% leased. Our net investment in these locations including acquisition and projected re-tenanting costs will be approximately $33 million, with an estimated un-levered cash on cost yields from the low double-digits to the mid-teens. In addition to the obvious upside in rental income, same-store NOI growth, asset value enhancement and improved credit quality of cash flow, these recaptures can also lead to further redevelopment opportunities and merchandising enhancements. We will recapture 7 of these initial locations in 2014 and expect that by spring of 2015, we will have exercised our right to recapture all locations, provided the tremendous demand from the retail community. Tenants such as Nordstrom Rack, Sprouts Farmers Market, Ulta, Whole Foods, Five Below, HomeGoods, Marshalls, Trader Joe's, White House Black Market, Gap Factory, Shoe Carnival, PetSmart and Carter's are just a few of the names with whom we're finalizing deals to backfill these locations. While we are excited about this first wave of opportunities, we view this as a multiyear plan. Our target list continues to grow as we remain proactive with our retailers in identifying mutually beneficial opportunities to recapture space in advance of natural lease expirations while simultaneously capitalizing on the demand we are experiencing for high-quality box locations within our portfolio. I look forward to updating you on our progress with this initiative. Finally, as you know, recon is just over a week away. We have a strong slate of meetings, and we'll continue to focus on this and our other growth initiatives. I want to remind everyone that we will be located at the Bellagio in the Da Vinci ballroom this year and not at the Las Vegas Convention Center. We have great space and look forward to seeing you there. And I will now turn the call over to David.

Thanks, Paul. Operating FFO was $100.7 million, or $0.28 per share for the first quarter. Including nonoperating items, FFO for the quarter was $85.8 million, or $0.24 per share. Nonoperating items primarily consisted of impairment of a joint venture investment and a charge-related determination of a Kmart lease that is expensed under GAAP. We have made a number of announcements since the start of 2014 and I would like -- that I would like to touch on in further detail. First, we announced the closing of the sale of our investment in Brazil on April 28. As Dan mentioned, the transaction represents a significant step in DDR's simplification process, and does so in an IRR to DDR of more than 10% over the life of the investment. More importantly, the sale of our investment in Brazil is indicative of our continued desire to decrease the risk profile of this company over the course of an economic cycle. By exiting Brazil, we reinforced our commitment to lowering sovereign, currency, partner and development risk in a transaction with little friction and with strategic merit for all parties. The $344 million of proceeds to DDR present an opportunity for us to reinvest the cash accretively in the recently announced redemption of the remaining $55 million of our 7 3/8% Class H preferred shares, as well as in our focused property-type prime domestic power centers. While the dilution associated with holding that cash for a period of time is noticeable in 2014 results, we will not sacrifice our investment criteria to reinvest the proceeds in suboptimal assets or at mediocre returns. Capital allocation remains a top priority for this company, and NAV growth over the long term coupled with shareholder return remain more important than simple FFO growth. To that end, we encourage the investment community to look into our recently filed proxy statement to understand management's compensation metrics, and how our compensation is more closely aligned with the investment community in the long-term growth than the vast majority of our peers. Second, we also announced an increase in our domestic disposition guidance from $200 million to $400 million. The increase was the direct result of the strong disposition environment for B-quality shopping centers that no longer fit our investment criteria. As we have mentioned previously, we have implemented a dedicated portfolio management team committed to underwriting each asset and ranking them based on CapEx-adjusted NOI growth, NSA, sales, credit, market dominance and merchandising mix. This process has brought to light a number of low-prime shopping centers that we decided to market and have received very positive pricing fee backups. As of the end of the first quarter, we sold 14 non-prime assets for gross proceeds of $198 million and have an additional $133 million of non-prime and non-income producing assets under contract for sale. Of the operating assets sold or under contract, the large majority of small-format neighborhood centers are single-tenant assets under a 135,000 square feet, further reinforcing our investment thesis to own large format prime power centers in top MSAs. The low-quality assets under contract or LOI are currently projected to sell an average cap rate in the low 7% range, indicative of the strength of the disposition market and our desire to take advantage of it. The sale of our investment in Brazil and the increased disposition activity was a direct reasons for our increased Operating FFO guidance range of $1.14 to $1.18 per share. The current range outlines a midpoint growth rate of 5% per share, above the sector average and consistent with our total shareholder return goal of 8% to 10% annually. With that said, the previously announced reduction in current-year FFO guidance is not something we take lightly, but one that we felt was prudent given the transactional environment and opportunity to further streamline our portfolio and position ourselves for long-term growth and lower risk. In addition, we view any dilution as short-term reinvestment dilution, as we believe our ability to reallocate this cash in a high-quality asset means we can redeploy this capital and recreate this NOI in the near-term versus the long-term dilution experienced during the peak of our repositioning out of much more challenged assets several years ago. I would also like to address our previously disclosed desire to take advantage of the secured debt market in Puerto Rico in order to highlight the lack of effects that macroeconomic headlines have had on property-level fundamentals and valuations. We continue to advance the non-recourse financing of our quality shopping center on the island from a top life insurance company and a normal loan to value with an interest rate just 10 to 20 basis points outside of high-quality major market mainland assets, and in-line with historic norms. We expect to close on this financing during the second quarter. Finally, I would like to draw your attention to our recently revised supplemental package. During the course of each year, we have been getting investor feedback, and typically employ major disclosure changes in the first quarter. The new supplemental package is streamlined, but includes none of the previous disclosure, and in fact adds new information. We now include additional disclosure on same-store NOI including a detailed same-store income statement and same-store leased rate. As we've stated before, we feel that our calculation is sector-leading in terms of legitimacy, as it excludes redevelopments, bad debt expenses, lease termination fees and non-cash items, all of which add artificial volatility to quarterly results. I would also like to point out that our operating metrics in Section 4 of the supplemental including same-store NOI leased rate rent per square foot leasing spreads all exclude the ownership of Brazil in the first quarter of 2014, despite the company's economic ownership during the quarter, for purposes of better comparability going forward. We continue to strive for sector-leading disclosure and look forward to your feedback on the current package. At this point, I'll stop and turn the call back to Dan for closing remarks.

Thanks, David. In conclusion, we remain very optimistic about the continued transformation of our portfolio and our ability to now focus exclusively on our core business in core markets. As David mentioned, we are in an unprecedented position of liquidity, and we will remain disciplined, patient and creative in allocating capital with a focus on delivering long-term NAV growth and total shareholder return. While there is much volatility in our sector due to new emerging companies, management turnover and secession planning concerns, we are not distracted by this noise, but rather, we like our position of stability and consistent performance, and we are encouraged by the prospects for continued portfolio quality enhancement, capital recycling, and organic growth. Again, thank you for joining our call this morning. I'll now turn the call back to the operator for your questions.

[Operator Instructions] Our first question will come from the line of Craig Schmidt from Bank of America.

I was wondering what you thought the total number of power centers in the nation was and your market share of that, and if you're seeing a competition increase for the acquisition of these power centers like we're seeing in the other portion of this category?

Well, I'll tell you, that's a great question, Craig, and it's hard to put your arms around it. I know that -- and I know this is not a great answer, but there's a lot of power centers and we own a small percentage of them. So it's a relatively fragmented market. Unlike the mall business, which is highly consolidated, the power center business is not. While we are clearly a consolidator and we're very focused and we've differentiated ourselves as a result, the opportunities in the market continue to be pretty significant. I'll give you an example. In the first quarter alone, we saw 33 deals that we looked at across 19 states that we underwrote. And the assets were worth about $1.6 billion. And again, this is just power centers that fit a very small criteria that we've employed. The total square footage of those deals is 9.1 million square feet, and the average deal size was about 300,000 square feet. So there's a lot of things that we're looking at on a regular basis. There's no shortage of product out there for us. We are seeing some more competition than we've seen in the past, particularly from some of the direct invest and sovereign wealth, et cetera, entities. But we're not seeing as much competition from people who look at the assets on a core-plus basis and truly understand the value of leveraging an operating platform to enhance value of an asset that may even be 95%, 96%, 97% leased. But when we put those assets into our platform and employ some of the things that Paul talked about and our tenant relations, we're able to take a core asset to one person and make it a core-plus for us, and we think that will sustain a lot of growth. So we have a view of power centers in respective markets but our -- the total number is so large and our ownership percentage is so small that it rarely comes into our thinking and we feel the runway is very long.

Our next question will come from the line of Christy McElroy from Citi.

David, just regarding the TALF mortgage loan that comes due in October, can you remind me what's the timing for when you can pay that down? What are your plans for funding the paydown? And what are your plans for those assets once unencumbered? Are there any disposition opportunities in there?

Yes. The TALF facility has a maturity date in early October and a 90-day prepayment window before that. Based on our budgeting, at the beginning of the year the expectation was to refinance that loan primarily or exclusively with unsecured debt. At this point, with the considerable amount of liquidity that we have available, the considerable amount of cash that we're sitting on today, our expectation would be simply to repay that facility with cash on hand. And so I think the goal, overall, and clearly, the balance sheet strategy had been to increase the size and even the quality of the unencumbered pool, and this should be a situation where we can increase that size and quality quite significantly without even adding any additional unsecured debt based on where we stand today with the disposition proceeds from U.S. assets as well as from the Brazilian sale. So I think we're very well positioned to deal with the only real maturity that we have this year and significantly enhance our credit metrics by unencumbering those assets.

Our next question will come from the line of Todd Thomas from KeyBanc.

This is Grant Keeney on for Todd. I noticed in the lease expiration schedule that -- noticed the portfolio has been pruned over the last several quarters, the average for rent per square foot in the inline basis tick down a bit, especially in leases expiring next couple of years. So it appears that those -- and given greater mark-to-market opportunity, Paul, you touched on some retaining opportunities in your opening remarks, but can you update us on how much below market small-shop rents are in the overall portfolio and what that opportunity looks like today?

Yes. First thing you need to be aware of is those numbers that have come down with Brazil out of the mix and out of the metrics. So Brazil, with a significant amount of small-shop space, particularly at higher rents than our portfolio average, reduced the average rent per square foot to what you're seeing in the supplement. Yet we think there's great upside in both the box space and the small-shop space. No specific percentage, but we're seeing great increases, whether it's a new deal that we saw the 20% spread on a pro rata basis or the renewals in the high single digits. Our goal, as I've stated on a few of these calls, is to get that renewal spread somewhere right around 10% or even north if we can. That's going to come with extensions -- negotiated extensions that are not exercises of options. About half of the renewable portfolio has options. So we've been limited by that percentage. But I would say, we're continuing to see something in the high-teens on the new and in the high singles or low doubles on the renewal spreads.

Our next question comes from the line of Ki Bin Kim from SunTrust.

Dan, going back to your opening remarks about some proactive lease terminations that you guys are pursuing and the 40% upside that you've kind of already identified in 20 deals, does that -- how much of that -- what percent of that basket includes Sears, Office Depot type of leases versus other type of retailers? And do you -- I guess, that's the first question.

Yes. That's -- they're exclusively tenants that you would expect us to be doing these transactions with. They're not the market share winners. The reason why, Ki Bin, we can't name specific names or locations is because we have to be sensitive to the employees of those locations where the stores might be closing that haven't yet been notified by their employer that, that store might close. So we're sensitive to that. But as Paul mentioned, you can assume that it will be in the struggling sectors from a merchandising perspective across the board including books, toys and office. And in fact, that list, we expect to continue to increase over time. It doesn't make any sense, quite frankly, to terminate a tenant that's performing at or above the sales-per-square-foot level in your center that's adding a merchandising mix to your center that makes you unique or that is being appreciated by the consumer. But it makes perfect sense to try to remove the underperformers and folks where you're not quite sure where their merchandising strategy is going. But you're going to have to deal with that problem down the road anyway in all likelihood. So we might as well be proactive about it, which is what we're trying to do. And in this market where there's no new supply at all and the demand is incredibly high, we think this is a unique period to effectuate these transactions. And we hate to be on the other side and think that we missed this opportunity. So that's why we're doing what we're doing. But it is exactly, as you said, with more of the struggling tenants that are pretty well known to all in this call.

Our next question will come from the line of Paul Morgan from MLV. Paul Morgan - MLV & Co LLC, Research Division: Just on the leased rate breakdown, on -- the under-5,000-square-feet got -- fell a bit sequentially. Maybe if you could provide a little bit of color there, whether that might have been affected by taking Brazil out? And then as you look from where you want to get toward the end of the year, what are we going to see the drivers within the size buckets? Is it going to be the smaller shops is it going to be the bigger stores, a little bit of color maybe?

You got it, Paul. Yes, you hit it on the head. I mean, the primary impact quarter-over-quarter was the elimination of the Brazil rate, which was, I think it was 96%, Paul. So obviously, that had our average of the under-5,000-square-foot space a little higher. If you look at, apples-to-apples, just the domestic and Puerto Rico, we were basically flat quarter-over-quarter and up about 140 basis points year-over-year. So still a very positive trend. And again, that all comes with the continued improvement of the portfolio, whether it's sales and acquisitions, more power center, less community center. We haven't changed our opinion that we can drive that less-than-5,000-square-foot category to 92%, which would be a historical high by a couple of hundred basis points. Consolidations kick into that, and as I mentioned, asset sales. But clearly we're seeing great demand from the fast foods, the McDonalds, the Chick-fil-A, the Five Guys, Chipotle, Panera, some of the smaller non-food users, Crazy 8, Claire's, Justice, Sally Beauty, Massage Envy there's a long list. So it's driven more by the nationals, regionals and franchisees, and not so much by the mom-and-pops, even though we've seen a little more stability in that mom-and-pop category.

Our next question will come from the line of Andrew Schaffer from Sandler O'Neill.

Regards to your acquisition pipeline, are you currently evaluating a JV as far as sheer size of potential acquisitions?

Yes. We constantly look at our JV pipeline as a source of potential deal for us. As you know, we don't control those assets and they open the disposition on those assets the way we obviously do a wholly-owned bucket, though we do have certain governance rights depending on which joint venture it's in. And if we decide with the partner that it's time to exit those assets and some of those assets, obviously, we have high interest in, we certainly are in discussion with our partners for those properties. A lot of our legacy JVs are -- have assets that we're not interested in. And we think it's beneficial to take to the market and dispose of entirely, particularly as it relates to our current -- our core strategy. So yes, we have a nice list of assets that we like very much. No, they're not all on the market. No, our partner doesn't want to sell them off at this time. But that is a constant dialogue that occurs. And there's certain pressures being put on internally and externally with partners and with the markets that could bring those assets to bear at any time in the future. So it's something that's very, very important to us. It's important that we maintain our governance rights to the assets that we think are important to the franchise. And it won't be inconsistent with what you saw when we did the transaction with Blackstone and DRA and a few others that we really purchase assets out of ventures. So that will continue.

Our next question will come from the line of the Haendel St. Juste from Morgan Stanley.

This is Albert Lin for Haendel. When we think about your disposition strategy going forward and the strong pricing that you're seeing in the B assets that you mentioned in your opening remarks? How do you think about balance between taking advantage of that pricing and making sure you have the right opportunity to redeploy that capital?

I think you saw the perfect example of how we balance it with what we've announced so far this year. Where obviously, the ability to reinvest in a timely fashion is important, but even more important is the ability to reinvest in an attractive fashion. And so we did stomach some dilution for 2014, set-aside the increase our disposition budget both the Brazil sales but even more so the domestic assets where we've sold more or where we plan to sell more, and those sales are happening particularly early in the year. We will not compromise on the acquisition side, but we still think we have very credible acquisition targets that this company and this platform can execute upon. And so we made the challenging decision to accept a little lower growth in FFO per share this year because we thought the opportunity to sell more assets at attractive pricing was there. And so I think that's the most clear way to answer that question as well as how we think about it going forward, where the focus will continue to be on long-term growth, the risk profile of this company and that asset value per share growth much more than 2014 FFO per share.

Our next question will come from the line of Jeremy Metz from UBS.

It's Ross Nussbaum here with Jeremy. I've got a question on Page 14 of your earnings package, here on the development side, specifically, you guys are showing just under $250 million of ground-up projects on hold, another $55 million of JVs. So my first question is can you give us an update on what the story is with those? And then the second part of the question is, at the bottom of that page, you're showing $206 million of booked value of land. Is that separate from the projects on hold, or is that sort of inclusive thereof? And maybe talk about all that.

Ross, it's Paul. First of all on the developments in progress and we talked about Kansas City, Kansas, which we've talked about before where we sold a big piece to Ikea to lead the project, and we'll be completing that this year. And Seabrook, it's a great story, that was a significant amount in our land-held for future development that we kicked off with the Wal-mart sale, and now we'll be opening a full prime power center this summer center with the like of Dick's, Michael's, Ulta, PetSmart, in addition to the Wal-mart Panera. So great stories. JV, there's one asset up in Toronto that we're still involved from a JV perspective, which will ultimately be a Target anchored center. So that will be preceding. I didn't follow the question specifically on the inclusion of the $240 million. But let me -- before turning it over to Dave, but I will update you on -- we will continue to make great progress obviously with that land, I think, leverage to sales to non-retail users or pay at sales or development. We have got a couple within that bank that we're talking about bringing that to the market in later this year or early next year, one in Florida, one in Connecticut. The environment gets better, the ability to develop gets better and we're making great progress in that regard.

Yes. So Ross, on the other piece of it, yes, the $200 million is included in that overall $240 million, $250 million of overall projects that are still on hold. It is land spread across the country, North Carolina, Orlando, Connecticut, Chicago, a number of sites that were put on hold several years ago. But we do expect to be able to monetize over time. We do think they are appropriately valued on our balance sheet. But obviously, we're going to be prudent in putting additional capital into those then making sure that we got appropriate tenant interest, and making sure we have the appropriate use for that land relative to what might have been planned 5 to 15 years ago when that land was originally acquired.

Our next question will come from the line of Jason White from Green Street Advisors.

Just a quick question on your kind of landlord tenant balance of power and lease negotiations, and really what you're seeing today from qualitative and quantitative aspects versus call it 2 or 3 years ago, and what are you seeing swinging your favor other than just kind of market rents?

Well, there's a number of things that are strong in our favor, and well, you see it the market, rents chase REIT. We really do have a very different portfolio than we had 2 or 3 years ago. So while tenant demand is great, and it's important to drive -- in order to drive rents, you need to have more than one person bidding on a space otherwise the leverage obviously swings the other way. The impact of the improvement of the quality of the portfolio, quite frankly, we underestimated. And -- or maybe said another way, we underestimated the drag that poor asset had overall on the portfolio. And I'll let Paul speak specifically to tenants, but I will tell you that the amount of interest that we have on a per space basis is somewhat unprecedented. Now one of the things you could say is that that's because there's no new supply and the supply demand dynamic has shifted very significantly in favor of the landlord. I don't think that's true through for B and C space, I think it's -- I think you have to combine the supply demand dynamic with the quality of the portfolio, and that's what's leading to the fact that we can lease 3 million feet of space in our first quarter, which is really unprecedented. And we're also in a position where we can drive rents. So quality of the portfolio, in addition to the supply demand dynamic, is what's really putting us in a position where we feel comfortable that we can sustain the growth that you've seen in the rental levels for quite some time.

Yes. Competition is clearly the key, and you can't overstate the demand that we're seeing from the best-in-class retailers. The initiative I talked about in the prepared remarks about proactive recapture of anchored space. This is not something we consider 4 or 5 years ago. I just couldn’t afford another legacy. Now it is how do we get -- first of all, we sit down with all of those retailers who are growing, and you hear us talk about them all the time. That was the TJs, or the Bed Baths, or the Dick's, and the Ross's of the world -- and the Rack's. And we know where they want to be, and to be in that position where we can help them get space through some of our proactive but less of initiatives is just -- it's wonderful spot to be in as a landlord with quality space.

I think, Jason, just keep in mind, it's a pulse point. It is not that we're really all that smart, or we're guessing where they want to be. The relationship with the tenant is so important because #1, they can rely on us as to deliver of space on time, on budget when they need it, which is very important, certainty of execution is very important for the tenant. But the other side of it is, when they tell us where they want to be and the type of asset class that they want to be in, who the co-tenant should be and this is why. And they can explain to us the importance of the merchandising mix and cotenancy from a consumer lease activity standpoint. We don't have to do a lot of guessing. These retailers know exactly who the consumer is, where they want to go, how to reach them, the type of merchandise they want to see, what the product mix should be, et cetera. So we have the benefit of strong relationships that give us a competitive advantage in knowing what it is that we should be pursuing, to whom we should be leasing and what the centers and the quality of the merchandising should look like. So it's again paying attention to the market, and it's very, very important to do that right now more than ever, because as you know, the markets are moving incredibly fast. Retail is evolving at a speed we have never seen it before. And so it's even more important to stay in front of the tenant than ever before.

Our next question will come from the line of David Harris from Imperial Capital.

Dave, I have question for you and maybe I missed this, do forgive me. What was the Brazilian sale net to?

It is $344 million of cash to us. So if you want to think about gross asset value, we are also reducing our amount of pro rata debt, because there is some net debt down essential but not significant of $344 million, is our net number, there is extremely little friction based on the structure and tax planning that we have done in getting that capital back to us. And so you're talking about basis points. If you're talking about friction off of that $344 million figure. So that's the right number to think about in terms of capital back to us and the reinvestment opportunity.

Our next question will come from the line of Tayo Okusanya from Jefferies.

Just curious. In the quarter, it seems as if the tenant reimbursement rate was higher than usual, just curious if it was anything unique to the quarter?

Yes. It's just going to end up being the controllable or the reimbursable expenses were higher, and so you see the proportion of variable expenses that the tenants reimbursed for were higher during the quarter. And so you see that reimbursement rate higher. It's absolutely our goal to minimize the volatility, maximize the predictability, both for purposes of the street as well as very importantly for purposes of the tenants, so they know what their costs are going to be. However, there are certainly certain periods of time where there is weather, other items that do lead to expenses being higher, but the strength of our leases and high quality and the high occupancy of our portfolio positions us to recapture. The overwhelming majority of that from the tenant. So that's why you saw expenses a bit higher, but also the reimbursement rates much higher.

Is there something, I mean, are you changing the lease terms, I'm just kind of curious why is it just so unique to this quarter, and we should expect a higher reimbursement rate going forward or?

No, any quarter can be a bit off, it's tough to learn too much from any one period, especially with the way that some of these expenses can be volatile. And obviously, accounting requires us to -- when we bill it, when we expect to receive it, it's all booked during that period. And so you do see some quarterly volatility, but I don't think we're pointing to any major change overall. Longer term, I do think a higher-quality portfolio will generate a higher reimbursement rate. And so over a long period of time, I think you continue to see gradual improvement with a better portfolio and more highly leased portfolio, but I wouldn't read too much into this quarter.

Our next question will come from the line of Rich Moore from RBC Capital Markets.

I was looking at what Office Depot was saying yesterday. I think they're looking at closing 400 of their 1900 Depot-Max combination stores over the next couple of years, and I was curious, first of all, if you had heard from them about specific store closings in your portfolio? And then if you haven't, which I'm guessing you might not have, they said they want to close a 150 this year, and I'm thinking they'd probably do that with stuff, at least if they don't own it, that is near-term lease expirations, so I'm curious, what your lease expirations scheduled for those guys this year looks like?

Yes, you're correct. What you're going to see this year is probably going to be a longer lease term, near-term lease expiration schedule. Couple of points to make with Office Depot, they have not identified about 400 at this point and they've been very clear about that. They're actually going through an extensive study as we speak. As we've talked about since the merger was first announced over a year ago, I mean, we see this as a tremendous opportunity. Clearly, a company that we've been in discussion with well ahead of any closing announcements that may come out of the announcement of 400 over the next few years. We never sit back, and we're certainly not sitting back in this Office Depot situation, waiting for retailers to contact us and tell us what they want to close, what they feel they need to close. Our approach is clearly to talk about spaces where we can work together, whether it's is downsizing, recaptures, or other deals we can make with them. And I would tell you, we're well ahead of the curve in knowing what's going to happen with the Office Depot portfolio within the DDR portfolio.

Our next question will come from the line of Jim Sullivan from Cowen and Company.

I was curious, Dan and Paul, I guess the -- in your April 1 release, the 3 assets under agreement, one was identified as being in downtown Chicago, and of course, we tend not to associate downtown locations with power-center-type assets. As you continue to refine the portfolio, and I was curious of David's comments about lower prime assets being identified and put up to market -- put on market. I'm curious whether you're looking to be more urban, more dense, where demographics will be stronger perhaps, and in terms of where you want to put your capital, where you see better returns? And I'm curious, Paul, if you could kind of opine on this when you talk to retailers about where they want to be besides in your existing portfolio, are they skewing to more urban markets as well?

Let me start with that last piece, Jim, I mean urban is obviously a myth from many retailers out there. Very, very difficult to pull off. So I would tell you that across the board, the retailers we speak to will love an urban environment. I think of our midtown Miami project, which you certainly can consider very, very successful. In fact, a little piece in the journal this morning about how hot that market is in terms of residential and retail. We got a situation there with Loehmann's going out and the best-in-class price retailer coming in. That's an urban project. What we're talking about in Chicago is clearly a power center retailers we're talking about, that we deal with every day and that gets for example, TJ in a multi-level, but 2 level environment, works very, very well. So A, do they want urban, absolutely. Is there a lot of urban available, not at all. And where we see opportunities to deal with retailers, we deal with every day in an environment that works for us, we're going to look very hard at.

The other thing to keep in mind about the urban, the reason why there's not a lot available, is that they typically how we subsidize deal. These are very expensive. Not only is the land is expensive, but the infrastructure becomes expensive, often requiring parking decks and lots of vertical transportation, et cetera. And a lot of the power center tenants, unless there's a subsidy available through our public-private partnership, et cetera, don't pay the rents that support that kind of development, which is exactly why you don't see to your point, a lot of these types of developments. That's also the reason why when we saw one that we really liked and they we're excited about, we jumped all over, because we think it's going to be extremely unique, similar to what we have, for example, if you look in Miami and our midtown Miami project, which has been great success. But complicated projects, dealing with the municipalities, dealing with the tenants, very difficult for the tenant to be able to get their proto-typical building under any construct in urban environment. So there need to be a lot of store planning and design revisions. So it's going to make this type of project very rare, and -- but also very valuable, which is why we felt excited and we were aggressive in pursuing it.

Our next question will come from the line Vincent Chao from Deutsche Bank.

I don’t know if I missed this, but I was just curious, after these $400 million dispositions are completed this year, wondering what -- where that would put your percentage of NOI from prime assets add, and given the demand that you're seeing for the B assets or the noncore assets, just curious if there's an opportunity to get rid of it all, or if that would even make sense, as that -- maybe that's a source of redevelopment opportunity?

That non-prime buckets continues to get much smaller, the inventory there is down significantly. That said, we continue to refine our internal portfolio management process, where I don't think you're ever going to see it get to 0, because there's always going to be something then that we think we're best positioned to regrade to whether it's our exact old definition of non-prime or not, it represents either the greatest risk of the lease growth opportunity within the portfolio, and so I think we're going to continue to see a pool there. The great news is there's no pressure on us to have to generate liquidity through asset sales, the way that there would have been 5 years ago. And so to be there's a strong transaction market, which we would absolutely say that there is today. You'll see us execute on a larger volume of dispositions. In your past you heard us talk about our power center thesis in a major mispricing of the asset class, where you saw a significant net acquirers and so I think for us, there's going to be the constant focus on evaluating the opportunities within our portfolio, evaluating the opportunities within assets that we don't own but could acquire and then focus on the transactions market to see if it's the right time to be a net buyer or net seller, and we have found recently that accelerating that sales volume is the right thing to do. So based on simple math with a static portfolio, you could certainly see that pool of non-prime assets get down to 5% or so, remembering that some of those are held in joint ventures where our partners have considerable rights to hold those assets. So from a static pool, you'll see that percentage of non-prime assets get lower but I think, for us it's just a constant portfolio management process of saying where should we be taking capital from in terms of higher risks and lower growth assets in order to be able to reallocate that elsewhere, even if there is some timing lag associated with that.

Our next question will come from the line of Ki Bin Kim from SunTrust.

Just a quick follow-up. I think, you mentioned 50% of your leases have options. I wasn’t sure if you meant if that's small shop and large, and could you just quickly describe what is the typical option look like to language?

Yes. Typical option language keep would include 10% would be typical there. There's these differences, some larger, some little smaller, but 10% increases at the time of the options. So it's not like we're just renewing at flat-rates. Higher percentage of the box phase, we have options than the small shops. Gives us the ability to drive the higher rent per square foot. The smaller shops, average rent being north of 20%, and many of those that we got options, the box space with a lower rent, I'd say that's more a little higher than 50%, but overall, it's 50% across the portfolio.

Our next question will come from the line of Chris Lucas from Capital One Securities.

Guys you talked a lot about remerchandising of existing centers and the tenant demand for that. I have the question as it relates to new center development. And I guess, the way I want to think about this is, are you feeling any closer to having conversations with key retailers on new center development? And I guess, the question that sort of, the natural follow-up is, where are we as it relates to pricing, in other words what's that gap between the kinds of returns you guys would need to pencil in to actually do something and where the rents are from those anchors, and how is that trended, say, between where we are today and a year ago?

Well, first of all, we're more focused on the ground-up development, Chris, it's been land that we held in our pool for a number of years. So if the economy improved, the markets improve, retail and demand is improved. We've seen the ability to get to that point where we can develop those at attractive returns. And so that's obviously means that the rents are continuing to grow. We did one project down in Charlotte that opened June of 2013, which is one of the brought out of private developer and jumped in and finished the project quickly at returns north of 10%. So we're seeing the rents get to a point where the discussions had heated up. I mentioned earlier on the call, about a couple of other pieces, one in Florida, one in Connecticut, where the demand, rents, competition for the space, as Dan talked about earlier, is now driving our desire to get those things out of the ground in the next 9 to 12 months.

I think, its' important to know, Chris, to keep in mind that the reason why we're not seeing development isn't necessarily the gap in pricing between landlord and tenant. The pricing with retailers today is okay. You can justify reasonable market rents for a new development project. The problem that we face is #1, you have landownership who think their land is worth a lot more than it truly is. So that's not okay. So the pricing with the landowners is not okay, and the entitlement risk is not okay. So because that process in and of itself creates so much uncertainty that on a risk-adjusted basis, if you look at where you want to put your capital, the returns just aren't compelling. And pricing with retailers is just one small component, that's not small, it's important, but it's just one component of many that have to be factored into your risk-adjusted returns conversation. And while tenants sure would love to see some new product go up, because we have many tenants that are missing, their open to buy because there's not enough opportunity in the market. So they would obviously like to see new projects. And they're not going to pay above market, but they certainly willing to pay market rents. The other components necessary to bring a project out of the ground are still overly burdensome today, where we have other opportunities for our capital where we get a better risk-adjusted return. And I think that's going to continue for quite some time. One of the things you are seeing, you're seeing a little more development in the grocery anchor neighboring center category that doesn't compete with us, and we're seeing almost no new product in the power center category, and I think the reason why, is people just truly have better places to put their capital on a risk-adjusted basis.

Our next question will come from the line of David Harris from Imperial Capital.

I'm just wondering, in the context of the sales and liquidity that you referenced and you cautioned about redeploying capital, where do you think we're going to be on the net debt to EBITDA basis or any other metric that you might want to focus on from a balance sheet leverage perspective? And do you think, probably by year end as probably the time frame, and do you think -- where do you think you want to be with this company in the medium term on that ratio?

Yes. Net debt to EBITDA, it's certainly something that we focus on and something that you've seen decline considerably over the last several years, and we never want it to be misunderstood that we think we're done yet. We think we're done with the dilutive part of it, but certainly not done with the continued improvement of this balance sheet. So from -- on a pro rata basis, including all of our pro rata share of joint venture debt, we're in mid-7s today, and we would expect that to get down to the mid-6s over a multiyear period in time, short-term as we sit on this additional liquidity, will make considerable progress on that, but we do expect to redeploy the majority of these proceeds. Over time, I also think there are just some things that, that calculation misses, whether it's one, the quality of the EBITDA that we're producing today, the longer-term duration that comes from higher credit quality tenants of higher quality centers. So it's not really more stable cash flow with cash flow or EBITDA that's much more likely to grow over time. But I think there are also just some simple definitional items there that are important to note such as -- there is no restructure in Brazil. There is no notion of a restructure being created in Brazil. That means, we were full corporate taxpayer down there, and so you can talk about EBITDA as much as you like, but that -- key is the taxes and we were absolutely paying those taxes. And so there are sales like that, that on a pure cap rate basis might show up as more dilutive to that metric where you're selling it around 8.5% cap rate versus the after-tax that your -- where your reinvestment hurdle for neutrality is really in the 7% range. And so, I think for us, it's the focus on the quality of the EBITDA, the quality and the duration of the debt, we'll continue to improve. But you'll also absolutely continue to see progress in debt to EBITDA and with the liquidity that we have today, you'll see that accelerating over the next couple of quarters although, as I mentioned, we do plan and hope to reinvest a large portion of that capital. And so, you won't see the entirety of that benefit over time, but you're certainly going to see a point or so lower debt to EBITDA over the next few years.

Our next question, will come from the line of Jim Sullivan from Cowen and Company.

Yes. A very quick follow-up, and this is for you, David. The -- I think you made reference to some financing activity in Puerto Rico in your prepared comments, I could be wrong on that, but I'm just curious if you can help us understand whether there have been any recent data points, be it in terms of financing or transactions, that can help us understand where cap rates have been moving in Puerto Rico to the extent they are moving at all? And to what extent there's a spread between the U.S. cap rates and Puerto Rico?

Sure. The bad news is we don't have grades recent empirical evidence either on the financing side or on the transaction side. And so there's nothing easy that we can point to the way that we can say cap rates for mainland assets have clearly gone down based on recent transactional activity. It's one of the reasons that you appropriately identify, we did make comments in the prepared remarks about pursuing a mortgage financing on an asset in Puerto Rico, just to highlight that lenders do continue to be focused on the quality of the asset and quality of the cash flows much more than the macro headlines regarding the island. We've heard some people ask the question that should we take muni bond rates in Puerto Rico and add some spread to that to think about what debt cost would be for an asset on the island, and then add something even to that to think about what cap rates would be on the island. And I think for us the importance, even in the position today where we have too much liquidity, the importance for us in executing on a new non-recourse, very standard mortgage loan on the island is simply to highlight that long term comfortably sub-4% debt does exist, and it is a lending -- group of lenders focused on the quality of the asset, the quality of the underlying cash flow is much more than the macro headlines. So no empirical evidence to say cap rates are here or there. But I do think lending costs are very comparable to major U.S. markets for quality assets, with comparable underlying U.S. tenants paying that rent. Historically, supply constraints have been dramatically higher on the island. And so we continue to think there are enough indicators that would say the opportunity for cash flow stability and considerable cash flow growth on the island is significant, and so cap rates shouldn't be any difference than what we've seen around the mainland U.S.

Our next question will come from the line of Jeff Donnelly from Wells Fargo.

Just a single follow-up question to the earlier line of questioning on anchor development economics. How do you think about the prospect of the anchor boxes at malls, specifically the junior anchor and maybe reconfigured anchor boxes, spaces that could available. I think these are spaces that typically have very low in-place rent, and while CapEx is certainly needed to reconfigure them for a power center user, I would suspect landlords there are probably more have to do defensive deals and it could be something of a cheaper channel for new stores than ground-up construction, like, you see that with Dick's. Do you think that's a really tangible theme or do you expect that those opportunities are going to prove to be few and far between, just because power center tends to find the mall unappealing?

We'll continue to see some of that, Jeff. But I would tell you that while I wouldn't classify it as few and far between we've been talking about the space that may become available in the mall sector for a lot of years now. Sears, Penny many are struggling anchor, they're still there, and I don’t see that space becoming available tomorrow. The retailers, the junior boxes that we speak with and meet with regularly will tell us that that's clearly not their first choice. First choice is going to be the power center format, that's where they grew, that's where they -- they made their markets, how their growing market share. There will be some situations and you mentioned Dick's, this is guy what their gallons takeover and other deals that made as Dick's, they got a little bit of a mall preference. But the preference is going to continue to be in the power center format, and I don't think we're going to see a great availability, other than maybe in some of the B and C malls and tertiary markets, but that's not where these best-in-class junior boxes are going to be focused.

I think though as a practical manner, when you are on the retail side of the business, and you are faced with a decision of either missing a market or taking an unconventional or non-prototypical space, you have to really think hard about going into an atypical location and being flexible, and I think it just makes good sense for our center tenants to look at availabilities in malls, if in fact, they have no other way to effectively get into the market. So I don't see it as a competitor to space that we may have available, but I do see it as a viable opportunity for our tenants to continue to meet their open to buy needs, if in fact, they can't get into their preferred asset class. And that just makes good sense and there are people out there that are doing a terrific job in the B mall universe right now, spending lots of time with our tenants. So we know what's being discussed, our tenants discuss a lot of what's happening out there with us, and you don't give up markets, particularly if you have no new developments, or there's no new way get in. But tenants in our sector would prefer to see newer development, quite frankly, where they can put a prototypical box in which is the most efficient and also the most profitable box they can build. But that's just not happening, and I don't think that's going to happen. So I think the smart retailers today the once that grab market share should consider what's available in a regional mall, and a number of them are.

And ladies and gentlemen, that concludes our questions. The presentation has now concluded. You may now disconnect. Have a great day.