Site Centers Corp (SITC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Developers Diversified Realty Corporation earnings conference call. My name is Crystal, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kate Deck, Investor Relations Director. Please proceed, ma'am.

Good morning, and thank you for joining us. On today's call, you will have from President and CEO Dan Hurwitz, Senior Executive Vice President and Chief Financial Officer David Oakes, and Senior Executive Vice President of Leasing and Development Paul Freddo.

Please be aware that certain of our statements today may be forward-looking. Although we believe that 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 our 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, 2009 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 dated February 17, 2011. This release and our quarterly financial supplement are available on our website at DDR.com.

Lastly, we will be observing as to question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue.

At this time, I will turn the call over to Dan Hurwitz.

Thank you, Kate, and good morning, everyone. Beginning with the Company's operations, I'd like to reflect upon the progress made during 2010 and the strategic direction of the Company going forward. After surviving the most challenging periods of the late 2008 and 2009 and strategically executing on a plan to address short-term problems with long-term solutions, the last few quarters have presented a period of discovery and reflection.

As a management team, we took the opportunity to reflect and debrief on the lessons learned and the obstacles faced during tough times for this Company. After much analysis, reflection, and strategic planning, management and the Board have made a collective commitment to operate this Company with significantly less risk going forward, with a keen focus on enhancing our operating platform and providing industry-leading transparency and candor.

As the economic environment improves and the appetite for risk grows, we will remain prudent in our operational execution and capital allocation plan and maintain our singular focus on long-term value creation for our shareholders. We understand the responsibility for which we are charged, to storage shareholder capital in a responsible and strategic manner, and we'll continue to do so with a heightened sense of responsibility and respect for the market in which we operate.

A significant focus in 2010 was to build back credibility in the market. As a management team, we know the only way to do so is to deliver on what we say we are going to do. In January of 2010, we issued written guidance with several operational and financial goals. I'm proud to say that one year later, we met or exceeded the majority of our goals. In 2010, we planned to achieve flat to slightly positive same-store NOI compared to 2009, a prediction that raised many eyebrows at the time, given the operating environment, and for good reason. At year-end 2010 however, we met that target with a full-year same-store NOI of positive 1.1% and a positive 3.6% increase for the fourth quarter alone.

We set out to increase our portfolio leased rate by 100 basis point over year-end 2009. By year-end 2010, we realized an increase of 130 basis points over 2009 and reached 92.3%. We set out to increase ancillary income by 17%. At year-end, we realized an increase of 22%, exceeding our target by approximately $2 million.

We set out to sell $150 million of non-prime assets to reduce our exposure to underperforming property and improve the overall quality of our prime portfolio. By year-end, we sold $250 million net of joint venture interests, exceeding our goal by $100 million and highlighting our commitment to actively manage our portfolio and emphasizing our determination to continually improve asset quality. Moreover, our execution of attractively priced and strategic asset sales, exceeding budget, underscores our focus to navigate market opportunities for the long-term benefit of our shareholders, even if those decisions put pressure on short-term FFO results.

We set a goal to reduce total consolidated outstanding indebtedness to $4.4 billion by year-end 2010. At year-end, our total consolidated outstanding indebtedness was $4.3 billion, beating our target by nearly $100 million. Additionally, our goal was to reduce pro rata debt to EBITDA to the mid- eight times range, and we ended the year nearly a half turn lower at 8.1 times.

We set out to take advantage of opportunistic capital raising, resulting in $2.9 billion of a variety of capital raised, representing significant and important steps towards enhancing overall liquidity and balance sheet flexibility. Our 2010 results are indicative of a strong operating platform that is performing at a very high level and an economic backdrop that shows signs of improving fundamentals.

In our business, platform matters greatly. As shopping center landlords, we all like to ascribe the value of our respective portfolios based on demographic analysis and market positioning. However, many of us own the same or very similar product in the same or very similar markets, and while DDR and many of our highly regarded peers have successfully bounced off the bottom with gains in occupancy and same-store NOI, some are still searching for the floor. There are many short-term variables as to why one portfolio may be performing differently than another, but one aspect that is consistently overlooked and underappreciated over the long-term is the quality of the operating platform.

Shopping centers do not operate themselves. Rather, they require a significant and consistent level of active management and industry engagement. A high-quality operating platform can grow net operating income and increase occupancy while fundamentals remain challenging. A high-quality operating platform is able to attract talent and drive organizational advancement amid market dislocations. A high-quality operating platform can be leaned upon when times are tough and drives out performance when the market permits. And most importantly, a high-quality operating platform doesn't need to rely upon financial engineering as a means to cloud portfolio performance results.

We will continue to invest in our operating platform and promote a corporate culture that supports excellence in execution and recognizes success, as we believe this philosophy will continue to attract industry talent, reward long-term shareholders, and further enhance the quality and performance of our assets individually and our Company collectively.

I will now turn the call over to Paul, who will provide greater detail on portfolio operations and the retail environment. After Paul, David will discuss financial results and balance sheet initiatives. Paul?

Thanks, Dan. Leasing momentum and deal velocity remained strong during the fourth quarter. During the quarter, we completed 161 new leases for 976,000 square feet and 235 renewals for 1.6 million square feet. For the year, we completed 738 new leases for 4.4 million square feet and 1,060 renewals for 6.8 million square feet.

This full-year level of activity represents a Company record for total deals on both a count and square footage basis, despite a smaller portfolio than in the past two years. The fourth-quarter improvement of 3.6% in same-store NOI which Dan mentioned, is a direct result of this extremely high level of leasing activity, which has been sustained for several quarters. We are now seeing some of the deals we've been talking about coming on line and that dynamic will continue.

Our leased occupancy rate increased to 92.3%, which exceeded guidance from last January by 30 basis points. We expect to increase the leased rate by another 100 basis points by year-end 2011. Of this 92.3% leased occupancy rate, approximately 170 basis points represents leases which have been fully executed, but are not yet open or paying rent. These tenants will open and commence paying rent throughout 2011, but will not fully annualize until 2012. For 2011, these openings will produce $9.7 million in revenue for the partial year, and when annualized in 2012, will produce $15.1 million in revenue. These figures represent only DDR's share of the total revenue.

For the third consecutive quarter, we achieved positive leasing spreads for both new leases and renewals. As noted in our release, spreads for new deals were positive 8.3%, and renewal spreads were positive 4.8%, resulting in a combined spread of positive 5.4%. This compares very favorably to the negative 3.4% for year-end 2009.

As supply continues to be absorbed and with limited space coming online, retailers, especially in the anchor and junior anchor categories, are continuing to make deals to meet their store opening plans for 2011 and 2012. We expect the continued demand and increased competition for space to continue to drive rental rate growth.

Regarding our box leasing efforts in the fourth quarter, we signed 10 new leases for 302,000 square feet. This brings our 2010 box leasing volume to almost 2.9 million square feet, and we expect this momentum to continue. To date, we have activity on 80% of the space vacated by bankrupt retailers, including 49% sold or leased, 9% at lease, and 22% in LOI negotiations. The other 20% of the space with limited activity is comprised of 20 boxes totaling 715,000 square feet.

We anticipate a positive momentum on approximately half of those remaining boxes, many of which are still high quality. But consistent with past leased up experience, the final 10% will be more difficult and will require more creative solutions. We continued, during the quarter, to make deals with strong retailers, including Dick's Sporting Goods, Bed, Bath & Beyond, hhgregg, buybuyBABY, Joann Fabrics, and Ross Dress for Less.

As you know, Borders filed for Chapter 11 bankruptcy on Wednesday of this week. We currently have nine locations aggregating 0.2% of our total portfolio GLA and 0.4% of our pro rata annual base rent. Seven of these are wholly owned, and the other two are held in joint venture. We currently expect five of the nine to be rejected and vacated by the end of April. We have been actively marketing the Borders locations in anticipation of a bankruptcy filing and have strong indications of interest on several locations. As you know, we've had quite a bit of experience leasing vacant bankrupt boxes recently, and are very well equipped to handle this immaterial bump in the road. Additionally, based on improvement throughout the year and holiday sales results, we are not anticipating any other material bankruptcies in the near-term.

Turning to international, our portfolio in Brazil continues to perform well, with a leased rate of 97.4%, same-store NOI growth of 16%, positive new deal spreads of 13%, and positive renewal spreads of 22%. The expansion of Parque Don Pedro opened in November, on schedule and on budget. This 58,000 square foot expansion of our largest asset in Brazil, and the largest enclosed mall in South America, is fully leased and expected to generate an additional $2.6 million of annual rental revenue with an unleveraged stabilized yield on the incremental dollars invested of 28%. We also have three developments underway that will be funded by proceeds from the recent IPO, which David will discuss in more detail. Unleveraged stabilized returns on those developments are expected to be in the mid teens.

Finally, as we have indicated on prior calls, we continue to be very selective with domestic development spending. The capital that we are spending is to get tenants open and operating in existing developments. With regard to our domestic redevelopment initiative, we have identified several viable projects with attractive returns and will provide more detail on the strategy at Investor Day. I'll now turn the call over to David.

Thanks, Paul. Beginning with our financial results, operating FFO was $0.27 per share for the fourth quarter. Including certain non-operating and primarily non-cash net charges, FFO was a loss of $0.17 for the quarter. The charges included a $22 million non-cash charge related to a development project in Norwood, Massachusetts, and a $50 million income tax expense due to the establishment of a reserve against certain deferred tax assets within our taxable REIT subsidiary. The Norwood charges are result of our decision no longer pay ground rent on the only development project we have that sits on unowned land. The project was inherited when we purchased the JDN portfolio in 2003. This will result in a cash savings of approximately $1 million annually that had previously been expense.

In January, we issued FFO guidance of $0.90 to $1.05 per share. The midpoint of this range assumes same-store NOI growth of 3%, $100 million of non-prime operating asset sales with net proceeds reinvested into acquisitions, LIBOR increasing to 1%, and no major capital raising activity. While this range is larger than our historic guidance, we wanted to be especially careful to make sure that was highly achievable and that we provided sufficient cushion to include unforeseen tenant bankruptcies in interest rate increases, and to allow for flexibility to accelerate refinancing activity or continue as a net seller of assets as market pricing continues to escalate.

Our primary goal remains value creation for shareholders, and we will not sacrifice that for short-term FFO outperformance. We do expect to return to FFO per share growth in the near-term, but we will not compromise our asset value or our balance sheet in order to achieve it. We will keep you updated at least quarterly on our progress towards this guidance range.

While our expected success in leasing, financing, and investing may cause reason to believe that our results for 2011 should be meaningfully higher than 2010, the major factor that will offset this is increased interest expense. As a result of recent duration extension, we have lowered our overall risk profile, but we have also increased interest expense. In 2010, we replaced approximately $1.3 billion of debt at a 2.6% higher average interest rate, which translates to a $34 million increase in interest expense, or approximately $0.13 per share.

The main drivers are a 200 basis point spread increase on the revolver, higher interest expense relating to longer term unsecured notes, the accrual of interest on our new convertible notes at 5.3% gap interest rate instead of the actual interest rate of 1.75%, and budgeted increases to treasury and LIBOR rates. This impact may be partially offset by paying down debt with free cash flow and refinancing mortgages at lower interest rates. Lenders today are quoting mortgage debt in the high 4% to low 5% range for five-year loans with a 60% loan to value, and upper 5% to lower 6% range for 10-year debt, which considers spread compression, but also increased treasuries and swap rates.

Our next large debt maturity is the $600 million term loan expiring in February of 2012. We are in regular discussions with the 30 participating banks, many of whom participated in our revolver refinancing in October of last year, and we remain confident in our ability to refinance at least the amount outstanding. We expect to refinance this facility at a higher interest rate than the current rate of LIBOR plus 120 basis points, and will likely choose to further reduce the size of the term loan. We expect that the refinancing will occur late this year. The covenants have already been amended to match our new revolver and are expected to remain consistent.

Turning to our 2011 maturities, we have already reduced the $330 million of consolidated debt maturing in 2011 to $230 million by the early repayment of $100 million of 6.9% mortgage debt that was set to mature in April. We used the revolver to repay the loan on the first day we could do so without penalty, but we will refinance three of the four assets with a new seven-year loan at a lower rate in March. The other asset will go to the benefit of our unencumbered asset pool. The remaining $230 million of debt maturing in 2011 will be paid off with free cash flow, active sale proceeds, and additional long-term financings.

We also currently have over $600 million available on our $1 billion revolver today. Joint venture debt maturing in 2011 totaled $213 million as of year-end, of which our pro rata share was $64 million. We have already refinanced $21 million of this debt and are currently in the market to refinance much of the remainder. We are also beginning to refinance 2012 JV maturities this year.

As Dan mentioned, we reduced total consolidated debt this quarter from $4.4 billion to $4.3 billion, surpassing our goal for the end of the year by almost $100 million. We also reduced pro rata debt to EBITDA to 8.1 times for the fourth quarter, down from 9.3 times at the end of the fourth quarter of 2009 and down from 10.2 times when we started disclosing our calculation in mid-2009. On a consolidated basis, our debt to EBITDA is 7.5 times, down from 8.7 times in the fourth quarter of 2009. We are pleased with our progress, but we plan to do more and expect this ratio to continue to improve in the future.

Most of our bank and bond covenants improved during the quarter, including outstanding debt to undepreciated real estate assets, secured debt to total assets, and the unencumbered asset past. We are compliant with all of our covenants and will build additional cushion over time. We generated $791 million of proceeds from asset sales in 2010, of which DDR's share was $250 million. This includes $163 million of assets sold in the fourth quarter.

These included a dark Blockbuster location, a dark CVS location, a former Circuit City that we re-tenanted, a small market mall, and various small strip centers. We currently have $40 million of additional assets under contract, all wholly owned by DDR. We continue to focus on selling those assets that are not part of our prime portfolio, including non income-producing or negative income-producing assets. In 2010, we sold approximately $54 million of non income-producing assets, of which over $34 million is DDR's share. These sales actually enhance our NOI due to the removal of property operating in real estate tax expenses.

As we mentioned in the guidance press release in early January, we expect these proceeds from dispositions for strategic and opportunistic investments. In January, we acquired our JV partner's 50% interest in a high-quality, prime power center, anchored by a recently expanded Super Walmart, Home Depot, Kohl's, and Cinemark. The asset was simultaneously refinanced with an 11-year loan and an interest rate more than 30 basis points lower than the prior loan.

We have a pipeline of additional acquisition opportunities that we are carefully and strategically reviewing. We believe that we will miss many opportunities due to our stringent review process, careful discipline, and informational advantage due to tenant relationships, but believe that the calculated investments that we do make will improve portfolio quality, covenants, FFO per share, and ultimately, shareholder value.

We continue to be very focused on communication and transparency with all three rating agencies in order to return to a consensus investment grade credit rating. In 2010, we executed upon numerous transactions to give our rating agencies additional comfort and service catalysts for positive action, and we are confident that our progress will be recognized in some manner this year.

Turning now to the dividend, which has increased 100% to $0.04 for the first quarter of 2011. We continue to maintain a low payout policy in order to provide free cash flow to eliminate debt or reinvest in assets. This is under regular review by management and our Board, and we still believe that a relatively conservative payout policy makes the most sense while we continue to prioritize balance sheet improvement.

As announced earlier this month, our joint venture, Sonae Sierra Brazil, completed an IPO on the Sao Paolo stock exchange in early February. Total proceeds from the IPO of BRL585 million, or approximately $261 million, will be used primarily for new development and redevelopment or expansion of our existing centers. We now own approximately 25 million shares for a 34% stake in the company and have three of the seven board seats. Part of the proceeds were also used to repay a $45 million loan from Sonae Sierra Brazil's parent company, of which we are a 50% owner.

Our shares are locked up for six months, and we have no plans to sell after that, but we would always prefer liquidity versus illiquidity in a venture. We are pleased that through the IPO, we are still able to capitalize on the tremendous growth opportunity that Sonae Sierra Brazil has in Brazil, while keeping our ownership interest in a comfortable range and ensuring that growth is funded through local equity, rather than international debt. I will now turn the call over to Dan for his closing remarks.

Thank you, David. And just before closing our prepared remarks, I'd like to remind you of our Investor Day being held on March 7 in New York. We will have a detailed presentation by senior management, outlining the objectives of our five-year strategic plan and providing more detail on the remaining vacancy within the portfolio, income generated from leased but unoccupied space, the prime portfolio, acquisition and disposition opportunities, as well as redevelopment and development initiatives.

We look forward to seeing you in New York and sharing our outlook with you in greater detail. In the meantime, we'd be happy to answer any questions that you may have today. Thank you.

(Operator Instructions). Today's first question comes from the line of Christy McElroy with UBS. Please proceed.

Hi. Good morning.

Paul, I'm just trying to reconcile the numbers that you provided around the leases executed but not yet open. What was your physical occupancy at year-end? And in your guidance, you're forecasting a 100 basis point rise in the lease rate. What is your projection for an increase in physical occupancy by year-end 2011?

You know, what I -- when I was laying out, Christy, I think it's a great question, because I've read several reports which really, you know, are all over the place on this physical occupancy. And I want to make sure we are all on the same page. Different interpretations of our occupancy numbers. And that's why I went to the length to point out the 170 basis points of signed but unopened.

That's the upside spread. In our 92.3%, as I mentioned, 170 basis points represents the fully executed leases. And in the script, obviously, I mentioned the anticipated upside in rent from those deals.

You know, it's a wider spread than we've historically had. We've talked in the past about a 50 to 100 basis point spread between leased rate and signed but unopened. Debt is down slightly from where we were in the fourth quarter, and that's because we opened about 1 million plus square feet of space in the fourth quarter. But we are going to see that 170 basis points -- I think it's going to remain pretty constant for the next year or so, because of the strong volume of deals. And as we open, you will see it level off a little bit more as store openings get more in line with lease signings, but we're going to consistently see something wider than our historic norm when you talk about the leased rate versus the rent paying.

Okay. So given the progress that you've started to make on leasing this year, if that spread remains fairly constant, there's probably further upside from occupancy upside in 2012, then?

Absolutely.

Okay.

And then can you disclose the cap rates on the income-producing assets that you sold in the fourth quarter, both wholly owned and in the JV? And what's your expectation for cap rates on the asset sales in 2011?

We did have one prime asset, and as joint venture, that was included in the fourth quarter asset sales. And so we ended up with an average cap rate in the low- to mid-7% range, as that one asset pulled it down. But it, versus the non-prime assets that were in the 8% to 9% range. In our guidance for 2011, for asset sales we've assumed 100% non-prime asset sales at a cap rate of approximately 9%.

Our next question comes from the line of Jay Habermann with Goldman Sachs. Please proceed.

Good morning.

Dan, this might be a question for the Investor Day, but can you try to put some context around just the size of the non-prime portfolio and maybe the expected timing of the sell down? I mean, should we think of it as sort of $700 million to $1 billion in probably four years of -- three to four years to sort of rationalize it?

Yes.

In total, about $750 million worth of assets. Some of the assets though, Jay, because of the momentum that we are seeing a market that were previously designated as non-prime, then because of tenant interest in redevelopment opportunities are becoming prime. We will discuss that in detail at Investor Day.

Whether all of them get sold within the three- to four-year period of time is really going to be up to the market. We have a number of them on the market currently. As David said, we are looking at cap rates for 2011 at about a nine cap. But as you know, cap rates continue to compress, as there is an abundance of capital that is available out there looking for yield, which is why the last two years, we have surpassed our budgeted amount of asset sales. And I suspect that might happen again this year as well.

So, I think we're somewhere in that $700 million, $750 million range, and our goal would be not necessarily to have all those assets sold in our five-year strategic plan by 2015, but we are really looking at it from an NOI participation. That is, an NOI participation rate. And what we would like to have is the NOI of this Company, over 90% of it to come from the prime portfolio by 2015. And that's how we are really gauging the difference between the two buckets. So we are up from 80% to about 83.5% of our current NOI from the prime portfolio, and over the next number of years, we'd like to get that up to 90%. And that's part of our five-year strategic plan that we will discuss in detail on Investor Day.

Helpful.

And then, a separate but related. On the land bank, are the development projects primarily on hold? Are those -- I mean, as you think about the cycle coming back and development returning, is that the land bank you want to have as you position yourself for the next phase of the cycle? Or do you think that the land bank will be part of that disposition process as well, and then you'll have to rebuild your pipeline?

Well, it's going to be a combination of both.

Right now, clearly, there are parcels of land in our land bank that we will not develop, that the cycle has passed them by, and retailer interest just is not there. However, we do have some of the land where the best way to monetize that land may very well be to develop and get a decent incremental return on additional dollars that we put in. And with the pressure that tenants are under to grow, the fact that space is disappearing at a fairly rapid rate, it is going to put some more interest into the development bucket and some of the land that we currently had envisioned selling and monetizing just as vacant land, I suspect we absolutely will develop. But there will be a significant portion of the land that we will dispose of without having to invest any incremental development dollars.

And overall, we are still closer to land and construction in progress representing about 10% of our consolidated balance sheets, although that's come down somewhat to maybe the high single-digits, and we'd like to see that more in the 5% range.

(Operator Instructions). Our next question comes from line of Craig Schmidt with Bank of America. Please proceed.

Thank you.

I was wondering, is Blockbuster current on their lease payments?

They did not pay February, Craig, and it's my understanding they hadn't paid anyone.

Oh, I'm sorry. I was speaking to Borders, Craig.

Okay.

Blockbuster is current, and they are still in Chapter 11 bankruptcy and required to pay those rents, so they are current.

So if -- when they, I guess just in a broader show, when a company enters bankruptcy, they need to pay the rents first, right?

They have to post sufficient rent. They are absolutely required to pay that. Yes.

And if they don't, does that push them to a Chapter 7, or what would be the next course of action?

I'm not sure exactly what the legal ramifications are --

When you think about the bankruptcy process, and representing the bankruptcy estates, the goal of the court is to maximize value for that estate. And so, rent payments are an important part of that. So, while we often see a tenant skip one month right before they declare, once they are in bankruptcy, it's important, because otherwise, the landlord gets in a much stronger position to default and potentially impair the value that the bankruptcy estate can recognize. So while we often see one month of missed payment right before or pre-petition, after bankruptcy, generally, the stores are quite good at paying rent, because it's an important priority payment that they are making at that point

That landlords and the vendors on a post-petition basis get a priority payment, because the intent there is obviously to enhance, as David said, as much value as possible. And assuming for the sake of argument they didn't reject our store, that means that they obviously are either making money or anticipate making money in the future. So you have to pay your landlords to operate, and you have to pay your vendors to ship goods. So we get a priority payment in a post-petition client.

That's helpful.

I don't know if I have one more question, but just -- I noticed you have big exposure in Georgia and Florida, and we are hearing, particularly in Georgia, that things are starting to turn around. Are you experiencing that?

We are, Craig. We are seeing some pickup in both. But Atlanta, which we have a high concentration, is clearly a little ahead of the curve as in respect to Florida. But we are seeing pickup.

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

Thank you. Good morning.

Just with respect to your current lease portion of your portfolio of about 800 basis points, what percentage of that space can you give us an idea has been vacant for more than a year? And I guess as you look at the -- your expected lease up of about 300 basis points up to your long-term average, what portion of that expected lease up do you think or estimate would be space that has been vacant for more than a year?

I don't want to wing it on a percentage, but there is a significant amount in getting to, yes, it's going to be north of 50% anyway, David, that's going to be involved in the getting up to the full, you know, the 95 plus.

The first part of your question, I'm not sure I -- what was the question again?

Just I guess, of your -- of the unleased portion of your portfolio, about roughly 100 basis points here, what percent of that space has been vacant for more than a year?

Again, significant percentage of it.

It will be a large percentage, Dave, because we have about 300 basis points to get us to our historic average, and we have about 500 basis points of structural vacancy, if you will, that -- some of which has been vacant for a very, very long time and we don't anticipate will get leased. So of the 800 basis points that's a target to get you to 100%, you know, 500 basis points of the 800 will stay vacant forever.

Okay, so then I guess as we think about the lease up and focusing on that 300 basis points, and looking quite kind of at what you've achieved in 2010 with respect to the lease space for spaces that have been vacant for more than a year, it seems like the rents are quite a bit lower than the average new and renewals that you are signing at this point. I mean, how big of an impact does that have on --

Keep in mind, David, this is earning zero, and quite a bit of it has been earning zero or are costing us money with taxes, cam, et cetera, for the last couple of years. So the impact is positive, and the trend in the rent is clearly positive.

You know, it's not something we're looking at in terms of what's the rent in 2011 versus a space that's been vacant for two and a half years or more of -- This is all positive, it's all incremental, and the trend we are seeing is clearly positive on almost a quarter-to-quarter basis. You know, as we have talked about several times before, the demand, the competition for space, the sense of urgency we're seeing from retailers, that is doing nothing but heating up. And that's all good news.

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill. Please proceed.

Yes. Hi.Good morning.

Going back to the development question, if you look back over the, let's say the past, you know, 12 months or so, how have the rent trends been as far as the gap where retailers are willing to pay the rents that make new deals pencil? Are we -- is that gap pretty narrow right now, where we could see development start sooner, or is there still, is it still pretty wide and therefore, you know, we're not going to -- is still too soon to see development resume in a material way?

It is still pretty wide. And I don't think we'll see development resume in a material way.

There is two major aspects, obviously, in our development projects. There is what tenants will pay and -- we are still in the middle teens, if not higher, away from where we need tenants to be to justify investing additional capital into development projects. But there's also land costs. And, if you're looking for new sites today, and we have seen some, obviously, come into the house and we've looked at them, land costs still are also not where they need to be. And in our particular sector, land costs run about 30% of the total cost of the project, so they need to come down dramatically and rents need to go up dramatically in order for development, new development on new sites to become of interest to us.

Now, we do own some land, obviously, and that does give us the ability to monetize that land if, in fact, tenants can justify the incremental dollars, if they're willing to pass to rent to justify the incremental dollars to put into those sites. But overall, the gap is still very healthy and pretty wide, and we think it will narrow. We think it will narrow in 2011, as tenants get more and more concerned about delivering on 2012 open to buys, but to be honest with you, by then it's going to be too late to deliver 2012 open to buy, and you're going to be looking at 2013 and '14.

Okay.

And then, my second question, just going to Brazil, how much of your long-term interest there is -- or your comments about retaining your stake -- how much of that is driven by your enthusiasm for Brazil versus potential repatriation issues?

It's really the opportunity we see in Brazil, much more so than the friction of taxes getting back. So this is -- this is not, you know, waiting on the administration for a tax holiday on getting capital back. It's more driven by the incredible opportunity that we see down there. And even the little bit of capital that we did take back we were able to do pretty efficiently through a structure.

Okay. Thank you.

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Yes. Hi.

Turning back to asset sales for a second -- in the fourth quarter, you sold wholly-owned as well as a handful of joint venture assets from a number of different ventures. Looking at the JV sales going forward, are we more likely to see kind of the same sort of smattering across the board, across the ventures, or do you think there's a possibility of just seeing a whole venture go away at one time?

It's certainly possible, I mean in general, as pricing has come back as significantly as it has. Some of our partners, along with our selves, are looking favorable at that, if an asset is at the time in its life cycle where we don't think there's enough NOI upside to counter the fact that, you know, cap rates are pretty darn close to where they were at the peak. And so, possible that you see additional asset sales among the ventures, but for the most part, the sales efforts for us are focusing on the non-prime assets, and our guidance to our joint ventures is the same on that. So selectively, you might see a few more assets of a little higher quality sold, but the overwhelming majority of what you're likely to see is the non-prime stuff. Don't think it's likely, certainly that you would see any of the large ventures go away, but we are continuing to try to rationalize some of the smaller ventures.

Got it. Okay.

And then can you talk a little bit about, with all the leasing, TI leasing commission, CapEx expectations over the next couple of years compared to, say, what you put up in 2010?

We see it continuing to decrease, Michael. That's really been the trend. We had a couple of deals in the fourth quarter that were high cost deals, such as an anthropology deal, but that has been a trend that we've been very focused on, and driving better deals in terms of TI. So we do not see any improvement over the -- I mean any increase in that cost to us over the next couple of years.

Yes, 2010 should probably be the peak there. You know, you're going to see, based on our expectation, continued very strong leasing volume. But just, you know, given that we don't have the inventory of available space that we once had, you probably won't see it at the absolute peak levels that existed in 2010. Also, as the environment has improved, we've been put in an incrementally stronger position to put less capital into transactions. So, while we were never overly aggressive in effectively lending to tenants just to have them pay us a little higher rent, as the leverage has shifted a bit, I think we're in an even stronger position to reduce those expenses on a per square foot basis.

And so, still well above the historic average of sort of the $30 million to $40 million of leasing CapEx that we had in the past, but would see 2010 likely as the peak year for leasing CapEx of some decline from that level.

Okay. Thank you.

Our next question comes from line of Carol Kemple with Hilliard Lyons. Please proceed.

Good morning.

And you all sent out a press release earlier this week about the retirement of Scott Wolstein, and there said there would be a charge in the first quarter. How much is that expected to be?

Per the terms of his employment contract that was filed in July of 2009, he is entitled to the payment of salary and target bonus through the end of the contract period. That contract period ends at the end of 2012, and that amounts to about $8 million of cash for that salary and bonus.

He also owns or has been granted over the past several years about 550,000 shares of stock that would also see accelerated vesting and would also be reflected in a charge that would also be around $8 million. But again, that stock that's already been granted and belongs to him, that's just, really, the accounting reality of that.

So $16 million in total for the quarter?

Something around there is a good estimate.

Okay.

And then in 2011, I think I read that you all expect to use any proceeds from the sale of assets for acquisitions. And what are your plans to actually pay down debt to lower debt levels from where they are at this point? Or are you comfortable where they are?

We've guided, overall, to continued focus on improving the balance sheet. That's going to happen in a few ways. In terms of debt reduction, we've indicated that consolidated debt that ended the year -- ended 2010 at $4.3 billion would be reduced to approximately the $4.1 billion level, so about $200 million of additional consolidated debt reduction.

More importantly in terms of how we're going to lower debt to EBITDA or other important leverage metrics, though, is going to be the increase in EBITDA, most of which is highly visible from leases already signed but not yet rent paying, or certainly not yet annualized in terms of their rent paying status. And so we think the EBITDA increases will be a meaningful part of making it clear that the overall leverage profile of DDR is much lower than simply a static, or trailing, view would be on a debt to EBITDA basis.

Okay, so the -- overall, would the $200 million be mostly from free cash flow? Or if you sell more assets than you expect to buy?

The sale of assets -- we've talked about the operating asset sales being reinvested into investments or acquisitions. We are also continuing to monetize the non-income producing assets. So you'll have some proceeds there that could reduce debt and, in fact, be accretive in that reduction of debt, because you are eliminating negative EBITDA assets, and you're also eliminating interest expense. But also with the low dividend payout policy currently in place, we do produce a considerable amount of retained cash flow that can go toward debt reduction.

(Operator Instructions). And our next question comes from the line of Rich Moore with RBC. Please proceed.

Hey, good morning, guys.

In 4Q you had, I think, a $3.2 million separation charge in G&A. And if that's correct, what was that about, just out of curiosity?

At the end of the year, we did a restructuring of a number of departments and came to the determination, quite frankly, that the business was not going to change back to the way it was prior to the recession. And as a result, we felt that in certain areas we were overstaffed and ended up effectuating termination agreements with approximately 22 different people, of which -- five of which were actually members of our executive committee.

So, it was a determination that the business model had changed, that some of our departments were not properly structured for the ongoing business model that we have employed, and as a result, it was time to make some tough decisions on some very long-term and senior employees.

I can't speak to -- tied to the exact severance charge, but I mean, the focus was broader than that in terms of eliminating some open positions, eliminating some executive perks. You know, it shouldn't just be our shareholders that have suffered through this. And we made a lot of difficult decisions to lower the expense structure of this Company in the fourth quarter.

Okay. So is there any -- is there any of that continuing into the first quarter at all, or was that all taken care of in 4Q?

With the exception of the announcement regarding Scott Wolstein that came out earlier this week, we would believe that it was all reflected in the fourth quarter.

Our next question comes from line of Quentin Velleley with CTI. Please proceed.

Good morning.

Just wanted to talk a little bit about guidance. David, I know you went through what you are assuming in the midpoint of guidance. But if you look at the low end and the high end, what are you assuming in terms of, firstly, interest rate movements, but secondly, opportunistic capital raisings, which you had mentioned in the guidance release? Just at the low end and the high end.

Yes, I mean, we obviously run through quite a large number of scenarios in coming up with a range that we think is reasonable, highly achievable, and also provides us a considerable amount of flexibility. In thinking about the way we flexed interest rates, you can take LIBOR up 200 plus basis points for the entire year and make our interest expense that much -- that much higher. We went through scenarios where we took the entirety of the tenants on our -- currently in bankruptcy are on our tenant watch list and removed that income stream from the entire year. And so as we advance through the year and those eventualities don't play out, we clearly eliminate some of those scenarios.

On the other side, in thinking about items that might be short-term dilutive but long-term attractive, you know, we also thought about situations where we might choose to pull forward the refinancing of our term loan -- which is $600 million, currently costing us about 1.5% -- and said, you know, what if we term that out sooner rather than later. Then our debt costs would be in the low 5% range for sort of seven-year debt or high 5% range for 10-year debt.

So I think we've given ourselves flexibility should we decide to and should we think it's the right thing for our risk -- or the right decision for our risk profile, we've given ourselves the flexibility to pull forward a significant amount of that refinancing activity into 2011 and still come out within this guidance range. But at the same time meaningfully lower, the refinancing risk going forward, so really just pulling forward some of that dilution.

So I guess there's nothing sort of significant in terms of an opportunistic capital raise on either end.

I mean, we think it's significant, but certainly nothing different than we've talked about in the past, where we continued to state that to reach our leverage goals, which are certainly in line with investment grade metrics, we do not need additional common equity to replace -- simply for the purposes of paying down debt.

Okay. Thank you.

And just secondly, going back to David's questions on the leasing of the space that's vacant for more than a year. And I know you exclude those from the spreads, and obviously it's incrementally positive to lease up all that space. I'm just wondering if you calculated spreads for space that was leased but vacant for more than a year. What would they be, roughly?

There's really only about a 100 basis point decline in those spreads if you include those, Quentin.

Okay. So, if you include both together, it would have been down about 100 basis points?

That's correct.

Okay. Thank you.

Our next question is from the line of Vincent Chao with Deutsche Bank. Please proceed.

Good morning, everyone.

Just wondering if you could comment on what you're seeing in Florida, particularly your smaller tenants. And has the credit availability situation improved from what you were seeing? And then are you starting to see some net demand from that tenant type?

We believe we've bottomed. Florida and elsewhere in the small shop space (inaudible). You know, it's an interesting-- I just looked at this the other day, where we released about 1.1 million square feet of space that we refer to as small space, which is under 10,000 feet. And we lost just about that much through expiration, but that's an improvement over where we were in 2009. We've clearly seen improvement in the level of activity. It's still nothing like the good news we continue to talk about in terms of the box space, but honestly believe we've bottomed.

Where we are actively pursuing, one of the areas that I am very excited about is in the franchise area. And we just saw yesterday or the day before where UPS, because of that lack of credit availability, smaller users, is extending credit directly to potential franchisees. We're hearing that from other franchisors. We think we'll see more activity in that area. It's not going through the roof, but we believe we've seen the bottom in 2010 and we'll see gradual improvement in that space.

I think it's also safe to assume that over the course of the year, as credit in general becomes more available, that we will start to see some of that flow to the smaller tenants. They're sort of at the bottom of the food chain, and the recovery that's occurring, obviously, starts at the top of the food chain, and it's starting to move its way down.

So we are starting to see some movement, not just from -- as Paul mentioned, from franchisors guaranteeing the leases of franchisees, but we think that the market will open up a little bit for that local mom-and-pop who wants to open a store. And again, for us, it's a very small percentage of our portfolio, but it could be a meaningful opportunity to create upside for our overall occupancy. So we are watching it very carefully.

Okay, thanks.

And just in terms of the interest rate environment and your asset sale, I mean, if we started to see an acceleration in interest rates and maybe faster than what's currently predicted, would you feel pressure to sell ahead of that, or would you be okay just hanging on to the non-core stuff until your cap rates may be settled out or interest rates settled out a little bit more?

You know, we've been more active than anyone else in this space with asset sales. Part of that was because of a relatively attractive interest rate environment that existed, although during part of that period, that lending environment, overall, wasn't participating with a positive treasury environment. But I think, you know, we really haven't been driving it too much on the pure market timing of that. And it's been much more -- where we firmly expected NOI declines and therefore value declines over time that were likely to trump any sort of reasonable increase or any reasonable sort of change in cap rates. And so, you know, couldn't at all say we're agnostic to the interest rate environment.

We are trying to push more product out today that we believe to be non-prime while there is still an attractive lending market. We don't see that attractive lending market changing any time soon. And so it just continues to be the strategic goal of how do we lower the amount of non-prime assets that we have. And if we see a massive change in interest rates, we'll adjust the strategy then, but for now, we think this -- it makes sense to continue to push forward.

Okay. Thanks.

Our next question comes from line of Michael Gorman with Cowen Group. Please proceed.

Thanks. Good morning.

I was hoping you could talk a little bit more about the 12 non-income producing assets and I guess, more specifically, what is the NOI drag from those 12 assets right now? And it sounds like there isn't any assumed dispositions from this segment of the portfolio in the 2011 guidance. Is that correct?

There is not.

And what is the sort of NOI drag from those 12 properties on the portfolio right now?

I mean, you're going to be somewhere in a -- we go through the gross book value in the $100 million range, and you're probably in the, you know, negative 1% to negative 2% return on those particular assets.

(Operator Instructions). And our next question comes from the line of Laura Clark with Green Street Advisors.

Hey, good morning.

You mentioned that cap rates continue to compress. Is this compression taking place across the quality spectrum, and if so, can you give us a range of how cap rates are changing and higher versus lower quality assets today?

The cap rate compression is occurring across the quality spectrum. However, more focused on the higher quality assets, the lower quality assets still benefiting from a more robust lending environment, more robust meaning more availability and higher loan to values.

But the height of the compression remains on the higher quality assets where, you know, for the best assets, we have seen numerous assets trade in the sub 6% cap rate range. The majority of the prime assets we are seeing trade are higher than that, but you're certainly in a world of 6% cap rates or very low 7% cap rates. When you think about prime assets across, you know, pretty much any market in this country, that's not just the sexier coastal markets.So I think a mid-six sort of assumption is a reasonable one there.

So the non-prime assets -- it is a wide spread, depending on the specific characteristics of those assets that often times have hair on them. On average, we'd say, in the 8% to 9% range, but with a broad spread, where some of it's even still going to be in the low double digits. But most of it's going to be, you know, in that 8%, 9% area.

You know, one of the things that we're seeing, Laura, is that institutional capital, in particular, tends to be somewhat underallocated in our asset class, because we were considered the dangerous asset class in late 2008 and a good portion of 2009. And then after that rash of bankruptcies and when people see what we are doing and others as far as lease up is concerned and the strength of our tenants, again the asset class is proving itself to be somewhat resilient. As a result, people are underallocated in this class, and we have an enormous amount of capital that is chasing and obviously putting pressure on cap rates. So as more and more institutional capital gets put out in our sector, you may see a little easing of cap rate environment, but we don't see it happening anytime soon because of that underallocation. And we hear that consistently from a number of investors.

Okay.

And what type of buyers are you seeing for your non-prime property? And has this pool changed or increased over the past few months?

Well, we're seeing a number of different buyers. It hasn't changed too much, except what we are seeing is we are seeing more folks interested. You know, there was a period of time where we would see maybe one bid come in for an asset, maybe two. Now we are seeing three and four. We're seeing some of the private REITs. We're seeing one-off individuals, and there are also other public REITs that have been looking at some of the assets.

So the pool of potential buyers is very, very similar. There's just more of them than we've seen in the past year and a half.

Okay. Great. Thanks so much.

Thank you.

Our next question comes from the line of David Wigginton with Discern. Please proceed.

Hi, guys.

Just a quick follow-up. On the convert offering in November, did the Otto family participate in that?

They did not. They did not.

Okay. So just for my own understanding -- in the event that there was, say, a conversion down the road, would you be required to issue more equity to enable them to maintain their current position in the Company?

Absolutely not.

Okay. Thank you.

Our next question comes from the line of Rich Moore with RBC. Please proceed.

Hi again, guys.

Could you give us an update on your investment grade progress work? I know that was a big thing for you last quarter to try to get investment grade from the agencies -- the three agencies, and I'm curious where you think you stand on that.

It's a slow process. We continue to very actively be in front of all three. Pleased that Moody's throughout maintained us at investment grade, and actively working with them to make sure they continue to feel quite comfortable there.

And then very actively in front of S&P and Fitch, as we continue to make progress highlighting that to them, making sure we understand the hurdles they are thinking about. There is no, you know, perfect road map to exactly how and when you get to an investment grade rating, but we are, you know, having very, very regular dialogue with them. They will be -- at least several of them will be at the Investor Day meeting coming up in a few weeks. And so as they continue to go through their processes, we continue to try to make it as easy as possible for them to understand how much our credit has improved and is comparable to others that they regard as investment grade peers.

Okay.

And a second thing. I want to make sure I understand what's going on with development. Dave, you were saying that the proceeds of the Brazilian IPO would go toward development. And then at the same time, I'm hearing basically that we don't think we are going to do too much development. Are there going to be more starts this year, or are we thinking just finishing what's currently in the pipeline and waiting to see what happens?

There is a differentiation there, Rich, between international development and domestic development. We will be an active developer in Brazil, and that is exactly what the capital that was raised will be used for. We have three identified locations that have strong tenant interest, and two of them are under construction. Actually, all three of them are under construction, two of them are far along. And we will continue on the development path, as Paul mentioned in the script, and we are looking for unlevered returns in Brazil in the mid teens on development projects.

Where we are limiting development and where we were saying that the pricing was still not compelling, either on land or what tenants are willing to pay for rent today, is domestically. And we may see one or two starts this year from situations where we already own the land and tenant interest has been renewed, but it will be a very rare occurrence, where we are putting any significant capital into development domestically. But we are very excited about our domestic pipeline in Brazil. We're very excited about the fact that it's funded, and we have a lot of runway there with the tenants. So, we are going to continue to pursue that. At the same time, we are going to be very, very cautious about our domestic development pipeline.

Okay. Got it. Thank you, guys.

Okay. Thank you.

Our next question comes from line of Ben Williams with Brookfield. Please proceed.

Thank you.

I was just curious. I just want to confirm that total compensation to Scott Wolstein is $16 million?

Well, there's $8 million of cash that represents the salary and target bonus expectation over the next, basically two years. And then there's the accelerated vesting of stock that currently -- that has already been granted over the past several years that would be valued at current prices at about $8 million.

Okay.

Could you walk me through how you came up with the $8 million in compensation, just how that all works as far as awards?

It is directly from the contract that Scott executed in the middle of 2009 that at the time was a 3.5-year contract that went through the end of 2012. And, you know, indicated that under a situation of termination without cause, that he would be paid his salary, which was $875,000 plus a target level bonus based on the metrics outlines in the contract through the end of 2012. And so you've basically got two years remaining of salary and target bonus.

And what were those metrics that essentially derive the bonus, the key drivers that made up its spread between the base and the bonus?

The bonus metrics for Scott were threefold. One was total shareholder return relative to a peer group.

I'm sorry. Dan had three. Scott just had two. So he was 50-50 between total shareholder returns, and then the other 50% is other strategic objectives, as defined by the Board.

Okay, well, I just wanted to make it clear that we've actually discussed it here. And we think that it's somewhat appalling that Scott is being paid such an excessive amount of money, given the fact that he almost drove the Company into bankruptcy. And anyway, I just wanted to express my views on that point.

Thanks a lot.

Thank you, Ben.

(Operator Instructions). And our next question comes from line of Quentin Velleley with Citi. Please proceed.

I promise I'll be brief.

Just in terms of the debt to EBITDA ratio, 8.1 times on a pro rata basis for the fourth quarter, and now there's a slight seasonal impact there, and if I did the math we sort of get to about 8.4 times. Is that roughly right, if you remove some of those seasonal items that you get in the fourth quarter?

Yes. I think -- I think the math in your note was quite reasonable where, you know, adjusting for a little higher than normal lease termination income that was recognized in the fourth quarter, as well as just the seasonality in the fourth quarter, that you would get to something in the 8.3 to 8.4 range, exactly as you outlined. Our guidance had been the mid eights, and that's sort of how we were thinking about it, but we ended up with everything that happened in the fourth quarter in the very low eights.

And so we shouldn't be surprised to see just a slight increase in the first quarter of this year?

That's correct. On that quarterly annualized -- it really won't show up as much in the first quarter. I mean, the lack of the lease termination income will, but first quarter is still, you know, relatively, seasonally strong, just based on the way that leases oftentimes work. The two trough quarters for us on a typical seasonality -- forget the healthy lease up period we're going through now that will mute some of that -- but in a normal year of flat occupancy, second-quarter and third-quarter would be the lowest. So you might see a little bit increase through the middle of the year but then decrease again on a full year-over-year basis.

Got it. Thank you.

Question-and-answer session. And I'd like to hand the call back to Ms. Kate Deck for closing remarks.

Thank you all very much for participating in today's call, and we look forward to seeing you or having you participate in the webcast for our Investor Day on March 7.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.