Site Centers Corp (SITC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 DDR Corp earnings conference call. My name is Jasmine and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Samir Khanal, Senior Director of Investor Relations. You may proceed.

Good morning, and thanks for joining us. On today's call, you will hear from President and CEO, Dan Hurwitz; Senior Executive Vice President of Leasing and Development, Paul Freddo; and Chief Financial Officer, David Oakes. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand those statements are subject to 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, filed with the SEC on Form 8-K, and in our form 10-K for the year ended December 31, 2011, and filed with the SEC.

In addition we will be discussing non-GAAP financial measures on today's call, including FFO. Reconciliations of these non-GAAP financial measures, to the most directly comparable GAAP measures, can be found in our earnings press release, issued yesterday. This release, and our quarterly financial supplement are available on our website, at www.ddr.com. 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. If you have any additional questions, please rejoin the queue.

At this time, it is my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Samir. Good morning, and thank you for joining us. We continue to be very pleased with our operating results, performance of our platform, sales results in growth aspirations of our retail partners, and the recent activity we continue to receive from the capital markets. All factors, when combined, continue to provide consistent performance, long-term value creation, and a simplified story, that continues to enjoy very positive momentum. Paul and David will provide you with more details in a moment, but suffice it to say we are very pleased with our progress, and remain firmly committed to the strategic objectives that we have articulated to the market, over the past few years.

The strategy is working, and we have no reason to doubt its continued success. Undesirable assets are being sold. Quality assets are being bought. Vacancy is being leased and occupancy rates continue to grow with improved credit-quality of cash flows. Projects are being redeveloped, providing new store opportunities for our retail partners. Access to capital is abundant, as leverage metrics continue to improve, and our maturity profile continues to expand, and NAV continues to grow as financial engineering and short-term FFO focus continues to become a distant memory. So overall, we are very pleased, and see continued runway for additional positive results, moving forward.

Before turning the call over to Paul, I'd like to share with you one observation that I have noticed over the past few months, as I have traveled to meet with many of you through the [non-DO]-road-show-process. Whether it is folks trying to grab catchy headlines at the expense of actual-retail operating results, or individuals attempting to paint a specific business with an inappropriately broad brush, it is important to keep in mind that the success of our tenants is completely dependent on the merchandising presented to the consumer by our retailers, and the recent activity that consumer has to the inventory contained in the store. While many attempt to link the issues of a retailer like Best Buy, with the fate of other junior-anchor retailers, it is important to keep in mind that comparing the market conditions of a Best Buy to the market conditions of a TJ Maxx or Bed, Bath and Beyond, for example, is equal to comparing the results of Sears to that of a department store, such as Macy's. There simply is no link.

These are vastly-different companies with vastly-different strategies, different merchandising expertise, and therefore, vastly different results. There is no broad generalization that one can make intelligently about merchandising, except the obvious conclusion that great merchants win, and bad merchants lose. And since we live in a world with great transparency, guessing and sweeping generalization is simply not necessary. The future of the department store is not linked to the fate of a struggling company, no differently than the future of a junior anchor is linked to the fate of a struggling co-tenant, especially when they consistently trade in different merchandise at a different price point.

The numbers are what they are. That is why retailers that operate side-by-side, in the same asset, consistently show vastly different results. It's not primarily about the real estate, and it is not primarily about the box; it's what's inside the box that matters, and will ultimately determine the success or failure of a retail concept. It's not about whether you operate in a mall, outlet center, power center, or grocery-anchored neighborhood center; it is about the merchandise you present to the consumer as a merchant, whose primary task is to distribute the right goods, at the right time, at the right price.

Clearly, certain retail asset-classes are better suited for some retailers over others. That is why some of us have unique, proprietary relationships with our top tenants. And, quality real estate absolutely enhances the opportunity to succeed. However, if you are a lousy merchant, in the best Simon mall or outlet center, or a lousy merchant in the best Regency or Federal neighborhood center, or a lousy merchant in the best DDR power center, the real estate will not bail you out. We have seen this play out, time and time again, since the inception of the shopping center, and this fact will not change. Retailers win on product, and not on just location, marketing, public relations, and image campaigns.

While those aspects are important as part of the business, they will not prevail if they drive consumers into the store for a consistently-disappointing experience. Again, that is why you see vacancy in assets at superior locations, with enviable overall-sales productivity, and we also see surprising structural vacancies at the most-celebrated and well-managed portfolios that produced the highest sales-per-square-foot results in all of retail. The real estate provides the opportunity, for sure, but clearly, not all retailers are successful in capitalizing. So, as retailers in every asset class are forced to retool their merchandising strategy, to adjust to the changing needs and demands of the consumer, it is important to keep in mind, that effort is very individual. It makes almost no statement about the visibility of the asset class in general. Some will adapt, and some will disappear.

[Iven] speaks directly to the retailer merchandising strategy, the response to competition, and the competence of the corporate-merchant group. At the end of the day, while there are many aspects of the retail business that must be considered, none is more important than the merchandising strategy of the individual retailer, and the consumer acceptance, or rejection, of the inventory contained within the four walls of the box, whether that box is 2,000 square feet, or 200,000 square feet. As you think of the challenging business headlines for every retail sector, whether it is certain department stores, a particular junior anchor, grocer, or even mom-and-pop results, keep in mind that retail is an intensely competitive, un-protected business.

Good ideas today are employed by your competitors tomorrow. But strong competition breeds excellence, for those well-prepared and talented enough to respond. So, like the retail real estate business, platform matters for retailers as well, and ultimately the merchandising strategy of the platform will determine the fate of an operator over time, regardless of what may be happening in the space next door.

I'll now turn the call over to Paul.

Thank you, Dan. Today I want to call attention to one aspect of our leasing results that speaks volumes about the operational performance of our platform, and that is the positive trends we are experiencing within our lease-renewal results. It is easy for these results to be overshadowed by the variety of good news being generated by our portfolio, but renewals make the strongest, and most economically meaningful statement about existing sales, productivity, profitability and asset quality.

In Q1, we had a record volume of renewals with 367 deals, representing 2.3 million-square-feet of space. This number is approximately 20% higher than the quarterly square-foot average we achieved in 2011, which in and of itself, was a record year. This success is directly attributable to the quality of our portfolio, combined with the landlord-friendly supply-demand dynamic. Our results also highlight the fact that retailers are increasingly unwilling to lose an irreplaceable store at a prime asset. Economically, we executed these renewals at a 5.4% rental increase on a cash basis, and more importantly, on a pro-rata basis the spread grows to 5.9%. Similarly, first-quarter new deals were executed at a 6% rental increase, and on a pro-rata basis, the spread is 300 basis points higher, at 9%. These spreads are bolstered by our continued efforts to dispose of non-prime assets to enhance our overall portfolio quality.

Clearly, this strategy has been a great success, and we continue to enjoy the addition of positive metrics, through the subtraction of lesser-quality assets. Importantly, this quarter's renewal metrics represent a continuation of positive renewal spreads that date back to the second quarter of 2010. Moreover, as our overall occupancy number continues to increase, and the supply-demand metric continues to favor the landlord community, I fully expect renewal rates to stabilize in the mid- to high-single digits going forward. As also disclosed in our supplement, renewals are achieved with little-to-no CapEx, and require no downtime, so the economic impact of these transactions is even more meaningful, as we are enhancing overall-portfolio rental growth, without buying the gain. As a result of strong overall first-quarter activity, our leased-rate, as of March 31, was 93.7%.

This represents a 10-basis-point increase sequentially, and a 110-basis-point increase annually. This increase is particularly impactful as historically we have seen an average decline in occupancy in the first quarter, due to the seasonal nature of tenant fallout, lease expirations, and limited commencements. It is also important to note that the first-quarter stability is highly indicative of a vastly improved credit-quality of cash flow, and the strong credit profile of our key tenants.

Going forward, we expect continued stability, as our tenant watch list continues to be slim and dispositions, when coupled with recent acquisitions, additionally fortify that segment of our income stream. From a leasing perspective, we remain confident in our ability to maintain momentum throughout 2012, and will keep you posted on future occupancy guidance, as the year progresses. In that regard, we will be attending ReCon in Las Vegas in a few weeks, where we will get additional color on the leasing environment for the remainder of 2012, and beyond.

Since we meet with our tenants on a regular basis, we are rarely surprised by any news that comes out of ReCon, but we are always inquisitive, as we determine our role in the delivery of space for future retailer open-to-buys, that are often discussed in detail at this show. As I'm sure many of you saw on our press release after the Best Buy store closing announcement, the impact to us was negligible. You may ask yourself why that was, and the answer is very simple, the stores that populate our centers make money, and that is the quintessential factor for a viable retailer making such a real estate decision. In that regard, you can also assume that the stores slated to close do not make money, and the Company would be more profitable without them.

Interestingly, the decision to close had nothing to do with store size, or how close to one of the coasts the store was. Also not shocking to us, it had nothing to do with how many people reside in a three-mile radius. In fact, the store closings announced included coveted markets such as New York City, Boston, Chicago, Los Angeles, San Francisco, and Washington, DC; markets that many have paid, and will continue to pay a premium to enter. Using a 7-mile ring, those actual store closings had average populations of about 1.5 million people, with over $100,000 in average household income. While these numbers are staggeringly impressive, to Dan's earlier point, they do not guarantee success.

Best Buy closed just 50 of their least-profitable stores, and economics drove the decision, not demographics, and not proximity to an ocean. Smart investment decisions are based on operating results, and profitability driven by merchandising, and once again, great MOs and great real estate cannot bail-out poor performance. Going forward, we are encouraged that Best Buy is pursuing a management change, and hopefully a revised merchandising strategy will not be far behind. But once again, this closure list proves that retail is a local business, driven by local results, and regardless of who occupies the space at any given time, the results can and will be dramatically different. This is why we stay close to our tenants, evaluate our real estate accordingly, and do not become intoxicated with numbers that often have no bearing on future success.

And finally, as Dan mentioned, there are winners and losers in the retail game of market share. If you haven't already read the note published on Monday by Adrianne Shapira, Managing Director and Retail Equity Analyst at Goldman Sachs, you should. Adrianne's note estimates the significant market-share loss of JCPenney, and points out who the obvious winners are in picking up that business, most of whom are value-oriented retailers and key tenants in our portfolio. This shift in market share goes well beyond this specific example.

Over the past decade, we have seen a secular shift in the business, away from department stores, to value-oriented retailers, such as Ross, TJ Maxx with its various concepts, Target, Bed, Bath and Beyond, and others. As we all know, retail is a game of taking market share, and it is very reassuring to see our primary tenants capture the market-share loss of a struggling competitor.

With that I'll now turn the call over to David.

Thanks, Paul. Operating FFO was $66.8 million, or $0.24 per share, for the first quarter. Including nonoperating items, FFO for the quarter was $59.7 million, or $0.21 per share. Nonoperating items were primarily the loss on retirement of a portion of our 9.625% unsecured notes during the quarter. Operating results and operating FFO per share came in above our internal projections, as reflected in our guidance, for slower growth in the first-half of 2012. We are pleased with our operating performance this quarter, with pro-rata-same-store NOI growth of 2.3%, including approximately 2% growth in our domestic portfolio, and we continue to feel comfortable that these results will accelerate in each of the next three quarters of the year, based upon a visible pipeline of signed leases.

Over the last years you have seen us aggressively pursue opportunities to position DDR for above-average long-term growth in net-asset value, while also lowering the Company's risk profile, and cost of capital. We are very pleased with what we've been able to accomplish in that regard, so far in 2012. Since the beginning of the year, we raised close to $700 million of capital, comprised of nearly $320 million of equity, at over $350 million of debt, with an average interest rate of 3.3%, and term of 6.6 years.

During the first four months of the year, we committed $340 million of investments in high-quality, prime shopping centers, all of which will be funded with proceeds from equity issued and asset sales proceeds. Financing attractively priced acquisitions with equity, and the proceeds of asset sales, has allowed us to significantly grow our portfolio of unencumbered, wholly owned, prime shopping centers. Our recent high-quality balance sheet acquisitions in Chicago, Portland, and Phoenix, were added to the unencumbered pool, further improving the size and quality of that portfolio. Today our unencumbered pool consists of 193 shopping centers that generate approximately $300 million of NOI.

During the first quarter, we substantially addressed all of our 2012 consolidated debt maturities. The debt capital I referred to earlier was used to retire $184 million of convertible notes that matured in March, reduce outstanding balances on our revolving-credit facilities, and effectively pre-fund all of our 2012 mortgage-debt maturities. Remaining maturities consist of $223 million of unsecured notes maturing in October, and $13 million of mortgage debt, and we have nearly-full availability on our $815 million revolving-credit facilities.

We have no other unsecured bonds maturing in the next three years, further enhancing our flexibility. On March 31, our weighted-average debt maturity was 4.5 years, a significant improvement from 2.9 years at the end of 2009, and continued progress from the 3.9 years at the end of 2010, and 4.3 years at the end of 2011. Our annual maturities are very manageable, and we expect our cost of capital to continue to improve as well. Fitch upgraded our credit rating in January, and S&P upgraded our outlook to positive in February. Our progress since then has lowered leverage, and strengthened our maturity profile, and we remain absolutely committed to lowering leverage further, as we work to regain our consensus in investment-grade ratings.

With respect to unconsolidated debt maturities, our DDR-TC venture has obtained commitments for the refinancing of the $540 million term loan, and the $200 million revolving credit facility, and we expect to close those three-to-five year financings in the coming weeks. These transactions addressed the majority of our 2012 unconsolidated maturities, and we are actively making progress on the remainder. In the first quarter, we generated gross proceeds of $45 million through asset sales. Included in these figures is $27 million from the sale of non-income-producing assets, including our development site in Yaroslavl, one of two land parcels in Russia. An additional $81 million of assets are currently under contract for sale, including $29 million of non-income-producing assets.

Since 2010, DDR has disposed of $1.3 billion of primarily non-prime assets, in secondary and tertiary markets. The non-prime assets sold were 72% leased, and average household incomes in populations within a 7-mile radius were approximately $69,000 and 239,000 people, respectively. In comparison, our $450 million of prime investments since 2011 were 96% leased, and average household incomes in populations were approximately $84,000 and 360,000 people, respectively. As you can see, through our capital recycling program, we have been able to significantly strengthen the quality of the portfolio from the demographic, credit-quality of cash flow, and long-term NOI growth and stability perspectives. We are being very diligent in underwriting potential acquisitions, and despite a competitive market, we are pleased to be finding select off-market opportunities.

As you probably noticed from our press release, we have raised the low-end of our 2012 guidance by $0.02, and now project operating FFO per-share of $1 to $1.04 for the full year, up from the range of $0.98 to $1.04 originally provided in January. Strong operating results during the first four months of the year, relative to budget, combined with the volume of tenant closures below what we projected in the lower-end of our range, drove the change in our 2012 guidance. We continue to project same-store NOI growth of 2% to 3% for the year, with the majority of this growth in the back-half of 2012, and we are pleased to be comfortable in raising our guidance at this time, despite accelerated steps to improve portfolio and balance sheet quality. While EBITDA and NAB per-share growth continue to be our focus, we are encouraged to guide to our first year of FFO per-share growth in five years, and we expect this trend to continue.

At this point, operator, we would be happy to turn the call over for questions.

(Operator Instructions) Craig Schmidt, Bank of America.

Dan or Paul or whoever, I'm just wondering, have the best power centers in the nation's already been built? Are we approaching some maturity, and it seems like when development slowed, it was more cyclical, but as time passes, you start to think that maybe it is somewhat systemic?

I think it is a great question, Craig and I don't think we really know the answer to that. We know that there is not a lot of great power centers being built, and I don't think there is going to be a lot being built going forward, and certainly in the near-future. I do think there's going to be a additional opportunity over time, because there are lifecycles to retail projects as we see. All retail projects have a lifecycle, and there is going to be an opportunity to recycle some of those properties, and with new formats, new merchandising strategies, new tenants, there is going to be an opportunity at some point for growth of development in our business, but I don't think it's going to happen anytime soon.

I think that, as we continue to watch market shares shift to the primary tenants in power centers, that will beg the question of whether there should be additional external growth to accommodate that market share shift, and we're going to have to address that going forward. But, I think are going to start having that conversation a lot more in the next 12 months, and the reason is, is 2012 open-to-buys, I think, are in good shape. 2013, I think we will find, and when we talked to tenants in Vegas, are not in great shape, and certainly 2014 are certainly not in great shape. Meeting open-to-buy requirements is going to put an awful lot of pressure on the retailer.

What that actually does for development, and whether that generates new opportunity, we will have to wait and see. But it is definitely a topic that is going to be discussed thoroughly, and I think it's going to become a more substantial discussion, in the next 12 months.

Christy McElroy, UBS.

I noticed you talked about every quarter, and all of you guys have talked about getting a better sense for the leasing environment at ICSC, but I just wanted to hear your updated thoughts. The lease to commence occupancy gap is about 200 basis points now. You've talked about the potential for that narrowing down to, maybe 150 basis points to 175 basis points, or in the longer-term, back down to a more normalized (technical difficulty) -- leasing velocity has been good, and the leased-rate keeps increasing.

So I'm wondering after another quarter of leasing, embedded in your guidance, where do you see the Company at year-end, in terms of both the leased rate and the lease to occupancy gap. David, you talked about higher same-store NOI growth in the back-half of the year, is that because of the timing of lease commencement?

Christy, this is Paul, and I'll start with the spread between the commenced and leased and the leased occupancy. We are comfortable four months into the year, with our prior guidance of 100 basis point improvement over year-end 2011 in occupancy, and it is still early. We don't want to get too far ahead of ourselves, so we are comfortable with that number. There might possibly be some adjustments as we close on the EDT/ Blackstone transaction later in the second quarter, but again, we're comfortable with the 100 basis point improvement.

In terms of the spread, you and I talked have about this for many quarters, now. It's -- we are in uncharted waters with the 200 basis point spread between commenced and leased rate, and it has to come down. It hasn't come down as quickly as we thought. It actually came down a little bit in the first quarter, and part of that was fewer move-outs and some activity in Brazil, but the fact is, it has to come down as we move closer and closer to a full occupancy number. But I wouldn't even venture a guess, because we've been wrong before, in terms of where that spread is going to be over the next few quarters.

But it certainly not going to get down to that historic rate of 50 to 100 basis points by the end of this year. We should still have that spread, but it has to come down.

On the back half of your question, Christy, the higher same-store NOI growth later in the year, the direction of your question was exactly in line with the way were looking at it at, and budgeting it. It's really, mostly, signed leases, that commence later this year, that drive that growth. On top of that, you're comping a period where we were getting back some Blockbuster and Borders space in the back half of last year. So, I think it's very strong results forecasted, based on visible leasing, as well as a period where we did take a little bit of a hit late in fourth quarter. You saw that flow into the first quarter, and we comfortably expect an acceleration in same-store NOI, as we look at over the rest of the year.

Paul Morgan, Morgan Stanley.

If I can just stay on the leasing side, and look at your disclosure by size. You continue to make progress on the small shops, and 70 basis point improvement on the under 2,500 square feet. But then it went back a little bit on the 5,000 square feet to 20,000 square feet. It sounds like you're pretty constructive on, based on what you see, regaining that momentum. But is there anything specific, in terms of that, you mentioned maybe Blockbuster rolled into the first quarter as well. In terms of the 5,000 square feet to 20,000 square feet, anything noteworthy there, in terms of the 50 basis point or so decline. Then on the small shops, is it too early to say that Set Up Shop could be doing anything for the small guys?

Yes, let me start with the smallest size, Paul. That has been a real focus, obviously, of ours and some of our peers, that 2,500 square feet or less, and Set Up Shop, well, it is not moving the needle. It certainly has been positive, we have been pleasantly surprised. We probably have about 15 deals signed, or close to being signed, and that's been in only two months of this initiative. It really has been a pleasant surprise, and we're going to move on, and as we've announced recently, were going to roll it out in Florida. It doesn't sound like a big deal, but if there's 15 deals done in Atlanta, we only identified about 100 specific spaces for the program.

So, immediately we're picking up on our recovery rate in the centers, and hopefully as we continue to work with these new tenants, and establish their business, we're going to have some long-term play at some significantly higher rents. But that is not the entire story behind the improvement in the 2,500 square feet. Consolidation of shop space is a big deal, and that really has more of an impact on that smallest space, versus the 5,000 square feet to 10,000 square feet, or even the 5,000 square feet to 20,000 square feet.

Since 2010, I think we're -- I know we have this in our Investor Presentation (technical difficulty) about 100 feet of 300 units --, almost 800,000 square feet, that we've combined to larger units with players like Ulta, and Shoe Carnival, and Kirkland's, and Carter's. So that's all good news, and we'll continue to -- I look at the first quarter in terms of that 5,000 square feet to 20,000 square feet as a -- where that decline, while the lower square footage improved, as just a blip. That space will come back.

Again, it was just focused on the small shop space. They've been the big beneficiary of the consolidation. Whether it's expanding existing units, or combining three units into one tenant, such as PetSmart. But again, it's a real focus of ours, and we're pleased with the improvement today.

It might be worth taking a look, we do have a revised Investor Presentation online. There is -- we do discuss, at length, on page 34, where we talk about small shop absorption, and what is happening in the portfolio. On page 49, we talk about small-shop consolidation, and it is right with what Paul is talking about. So while the absorption rate continues to improve, so move-ins are exceeding move-outs fairly dramatically, and that is something that didn't occur, obviously, in the last couple of years. We've also started to materially impact the portfolio from a consolidation perspective. So, if you go to the Investor Presentation that we have on our website, those two sections, I think, are pretty illustrative of what we are seeing in the market.

(Operator Instructions) Jason White, Green Street Advisors.

Just had a quick question, hopefully you can provide some color on breaking out the releasing spreads, and the same-property NOIs for the US and Brazilian portfolios.

On the same-store NOI, think we wanted to be responsive to feedback we got regarding, not just the internal way that the operating platform here looks at all the assets is the same -- so looks at the 100% view. We wanted to make sure that we were addressing what the investment community thought was most valuable, so we have a good amount of disclosure on pro-rata operating stats. So, while we disclosed was that at 100% same-store NOI, with 2.9% on a pro-rata basis, looking at our economic ownership interest in all the assets, it was 2.3%, and if we dissect that number, between domestic and Brazil. Brazil was still, by far, the highest, at around 9%, the domestic same-store NOI growth was around 2%, for the quarter.

On leasing spreads, there hasn't been that much of a difference between the two, whether you are looking back, or on a forecast basis looking forward. Largely because, while the growth overall has been higher in Brazil, a lot of that is captured through more significant annual rental bumps. So, the re-leasing spreads in Brazil have not been meaningfully different than domestically. Certain quarters they've been higher, certain quarters they've been lower. In general, they have probably been slightly higher, but not a material difference there. Just because so much has picked up from the annual bumps. So, the end of the lease season is meaningful down there, for the re-leasing spreads.

Also, on the renewal and new deals spreads, the difference with the pro-rata, it's important to note and point out the strength of the wholly-owned portfolio, and that's one of the reasons were showing this.

Todd Thomas, KeyBanc Capital Markets.

I'm on with Jordan Sadler as well. Dan, appreciate your comments in your prepared remarks about the merchandising of retailers. I was just wondering, how do you underwrite or evaluate that view, with your decisions to signed leases today? Should we read into that, that DDR has become more selective, with regard to signing leases with new tenants? Then also, how do you view new leases versus renewals, with all of that in mind? Can you elaborate on that a bit?

Sure, Todd, it's a great question, and we have become more selective because we paid a price. We made some mistakes down the line. Primarily, not in leases that we wrote ourselves, but on the acquisition side. Really not being critical enough of some of the leases that were on -- in assets that we acquired, when we didn't have great faith in some of the merchandising strategy of some of the retailers that we paid full price for. That is something that we are being very careful, not just in who we signed leases with, but how we are evaluating acquisition opportunities, as well.

The way we mitigate that, really, is by spending a lot of time with the tenants, and not just meeting with the real estate department, but often meeting with merchants or talking with the financial folks, about what their business plan and their business model is. But retail is an incredibly treacherous business. Because really, it is a voracious consumer of capital. If you are wrong, if you miss in any given season, or in some cases, with some of the tenants that are out there, you miss in multiple quarters over several years. It absolutely devours your cash situation. So, while there are many tenants out there that have very little debt and have lots of cash, that can go way very quickly if you are wrong, and if you are repeatedly wrong. So, we have to be very, very sensitive to it.

We have, fortunately, we have a number of people in this Company, starting at the Vice President level on up, that have spent a lot of time working for retailers. I think that gives us an advantage, because when we walk through a store, we understand what to look for. I think we also understand what questions to ask when we meet with retailers. We can get a good feel for what the strategy is.

There are clearly tenants that we are not anxious to do business with, and it is not because they are not great people, and it is not because they don't have beautiful stores. It is because we are not so sure how sustainable the business model is based on what we see when we tour the stores, and that is something that we discuss on a regular basis. So, it comes up, it comes up in conversation. We have become more selective. As our occupancy rate goes up, you become even more selective, because you have the opportunity to do so, and I don't see any reason why that won't continue, based on the leasing trends that we see.

The selectivity is also another positive dividend from the philosophical change from an FFO per share focused Company, to a net asset value per share focused Company. If you don't have that philosophy right, at the top it's going to drive every little decision, whether you think they'll be tied in to senior most level philosophy or not. I'll tell you, in the past, when you are underwriting who is going to tribute the most to FFO per share next year you, cared less about how much capital you might be putting into a suboptimal tenant. You cared less about credit quality and you cared more about what that day one headline rent was going to be.

At this point, when we are saying the goal is -- let's make this portfolio as valuable as possible over time, with a relatively-low risk profile. It means, let's be very cautious about putting capital into deals with tenants we don't feel great about. But it also means someone paying you a little less today, but whose the cash flow stream might be valued at a higher-multiple or lower cap rate, could be very important for us. So, you see that philosophy coming down and driving that selectivity also.

I think it is worth pointing out just one example of what both Dan and David were talking about, where we had an existing tenant in place, For Your Entertainment, FYE, in two centers. Current on their rent, with a lot of term. We had the ability to do two Dick's Sporting Goods deals -- that's the position were in now with the prime assets, where we could terminate, achieve a little bit of a fee, from FYE, and put in a much, much stronger long-term player in Dick's.

Carol Kemple, Hilliard Lyons.

In your results, when you talk about at 100% ownership, is that assuming that everything in a joint venture you all own 100%, or what is the difference between that and a pro-rata basis?

Yes, that is exactly right, Carol. Historically, because of the internal focus, and the way that our operating departments look at it, it is we own this entire portfolio. We are responsible for leasing and managing this entire portfolio. So, internally, to make sure our people are just as focused on the fiduciary duty we have on behalf of a partner, even if DDR only owns 10%, (technical difficulty) or the greater financial impact it has on our results, we own 100%.

From an investor relations and accounting standpoint, we've got to be focused on a pro-rata figures, in terms of what has the most economic impact. But the reality is, individual leasing professionals are working their hardest to lease all of our assets, and in many cases, aren't even exactly aware of how something is owned. So for us, we had historically reported everything on a 100% basis, simply because internally, that is how the operating departments look at it.

But have certainly wanted to respond to feedback we've gotten over the past year, about the value of pro-rata statistics, and so that's why we've added that disclosure. So the numbers comparable to prior periods are the, at 100%. The pro-rata disclosure is something we added this quarter, and that we will keep going on a go-forward basis.

I think it is also important to note that some of the numbers, when you look at it on a pro-rata basis, is somewhat surprising. One of the things, I think many people assumed, was that you didn't do pro-rata because the numbers would have been inferior if you did it on a consolidated basis. But if you really look at the numbers, and you go back to what Paul said during his script. For the first quarter, new deals were executed at a 6% rental increase, but on a pro-rata basis, the spread was at 9% rental increase.

So actually, the wholly-owned portfolio in many respects is performing at a higher level than some of the other assets that we have in joint venture. So, I think that's -- there's some very good news to be had, when looking at it, both from a consolidated and a pro-rata basis.

Michael Bilerman, Citi.

Just thinking about some of the lease stats, where you have the non-comparable space. It's been, give or take, 20% to 25% of total leasing. Just under 5% of the total portfolio, of the last 12 to 18 months. I am just curious what impact, because you don't give the spreads -- but what impact has it had on underlying same-store NOI, in terms of the growth of the business?

Then just, David, can you just clarify, I know were dealing with decimal points, but US, you said was about 2%. Can you just give the -- is it 1.5%, is it 1.7%, is it 2.2%, and does it include Puerto Rico? Thank you so much for putting the pro-rata, and if we could get the disclosure on the country basis, going forward, so we don't have to ask it on the call, that would be helpful as well.

Sure, Michael, a couple of things. One, for just domestic US consolidated assets, the same-store NOI growth was exactly 2%. Puerto Rico this quarter happened to be slightly lower than that. So, including Puerto Rico as that hybrid domestic, you would be slightly below 2% at 1.9%, for the consolidated domestic portfolio, with Puerto Rico included. So, we are happy to give more information there.

One of the challenges is, is of course Sonae Sierra Brazil is a public company. At this point Sonae Sierra Brazil has not reported their first-quarter earnings, and they are traditionally on a period that is slightly after ours. So, there are some stats that, just because they are a public company with other shareholders, that we are simply not going to be able to give in as great detail, and they are going to have to come out of the detailed disclosure that they provide.

The one thing that I'll say about the leasing split between comparable and non-comparable is just a nomenclature issue -- that is not meant to be what's defined in our same-store. So our same-store relates to which assets haven't changed; don't have redevelopment activity; have been owned for the requisite period of time. It is not simply a comparable, non-comparable being defined as what is in same-store NOI and not in same-store NOI.

Large portion of that non-comparable could be in the same-store NOI, it is just the space has been changed in one-way or another. It could be in some cases assets that we acquired from inland or someone else but just haven't been leased in that long period of time. Or we simply don't have comparable information. So, it is not meant to be some secret number that we have, that we go out of our way to disclose. There isn't a comparable calculation that would make any sense to disclose there.

So, I think that's why we consistently point people to the renewal spreads, which is a much more, legitimate, economic indicator of what is going on with rental rates. We provide the disclosure on new leasing, but did want to make sure you had that distinction, that comparable versus non-comparable as defined here is not consistent with same-store versus non-same-store. It could be a lot of different reasons, but it gets into that other bucket.

The other reason why renewal rates are the right indicator, and a good feel for what is happening in the portfolio, is because it makes up, in any given quarter, between 70% and 80% of the total deal volume that occurs. So, when you are putting up the numbers that we are putting up, and you have real good numbers on 70% to 80% of that. It really is the indicator of what is happening in the portfolio.

That's why you see such a wide variety of new deal spreads throughout the industry, because some folks do a lot of deals that are new, and some people do five deals per-quarter that are new. That has a huge impact on what the actual spread is. So we are very focused, as Paul mentioned in the script, we are very focused on the renewals, and we think that, that is a good leading indicator in the health of the portfolio.

Christy McElroy, UBS.

First I, actually just wanted to say thank you for the additional pro-rata disclosure, it is much appreciated. Following up on the renewal rates discussion. You talked about leasing spreads being sustainable in the mid to high single-digits, and just looking at your lease expiration schedule -- for the less than 10,000 square foot space. It seems like the average expiring rent for 2012 is much higher at about $30 per foot, than the portfolio average, is there something weird, there, going on, in terms of the space mix? Or should we be worried at all about spreads narrowing on that space this year?

Yes, there is something weird. That is a Brazil story, Christy. There are some centers turning on their 10-year turn down there. So, we are seeing a high percentage of renewals in the Brazil portfolio, that is what is really driving that less than 10,000 square foot base rent number up.

Rich Moore, RBC Capital Markets.

Dan, I think you mentioned the 2013 to 2014 open-to-buys -- (technical difficulty). Is there any chance this could lead to more redevelopment, and improve non-prime assets to the point where they're prime again?

Yes, I think it will. I think that's exactly right, Rich. We are seeing situations now, where projects are coming up on the redevelopment platform, and we are converting some assets from non-prime to prime, as a result of tenant interest. I think that will increase as folks come to the realization that development is not going to accelerate dramatically anytime soon. I do think, though, when you go to Vegas and you walk around, you will see a lot of development projects that are being presented. Many more, I think this year, than you've seen in past years, but I'm not so sure they get built.

So, I do think the opportunity of what you have, the space that you have, going forward to be worth more to tenants. It will prompt expansion of the redevelopment, if not acceleration of the redevelopment program. I think it is going to be very, very necessary for the tenants to look at redevelopment opportunities, to look at prototype size, to increase their flexibility, to look at -- even, new concepts, Rich. Because many of these concepts are -- (technical difficulty), and the opportunities to enter into markets may not be at the existing price point -- it might with new merchandise at a different price point.

So, I think we're going into a fascinating period of time, where over the next two or three years, were going to see the retail business evolve in a way that is going to be very, very exciting. That is why we spend, like I mentioned earlier, so much time with the tenants, because you never get the same answer twice. There is a lot of things happening, that's moving very, very quickly, and we need to stay in front of it. Redevelopment is something that I think will continue to be prominent, and I know a lot of folks are talking about it, and many of our peers are doing a great job with it. I wouldn't be surprised if it accelerated even further.

Michael Bilerman, Citi.

I figured I'd give it one more shot. Where I was going with the non-comp space was -- just given that it's, in the last 15 months is 3.3 million square feet. I fully recognize that renewals is almost 8 million square feet over the last 15 months, and that's well over 10% of the portfolio. But I'm just trying to get a handle on this 3.3 million square feet that has been leased over the last 15 months, it is almost 5% of the portfolio. What was underlying -- how are those lease fees affecting 2012? Is it a substantial contributor? Or is it more of the downsize opportunities, where rent on a basis is coming down -- just to really understand what that impact is on the financials?

It is a substantial contributor, Mike, and downsizing opportunities do not mean rent is coming down, by the way. In many cases it means rent is going up, and there is some good examples of that in the Investor Presentation that is online. So, the assumption that rent is coming down on a downsize, particularly in a prime asset, where you are not in a distressed situation, you are going to see what rents go up. It is an opportunity mark to market, so that is why we like downsizing, that is why we are pushing for downsizing.

The new deals, they are substantial contributor because they were vacant, for the most part. When those numbers come online, it usually takes more than a year to see the full contribution, if that is really your question. Because, as you know, most of our tenants don't open at any time during the year, and whenever we do deals we're lucky if we get a partial year, in the year that they open. Then you have to wait till the next year to get the full-year. So, the contribution, for the year in which the deal is done, sometimes is zero sometimes it's minimal, but it is significant the following full-year that you get the impact of the rent.

That is why we are seeing the same-store NOI in the portfolio go up over historical averages, even though the leasing velocity has been great. The benefit for 2012 is really for deals that were done in 2011, some actually that were done in 2010, but you don't get the full-year benefit until 2012. Same thing is going to happen in '11, for 2013. Same thing will happen in 2014 for the deals that are being done in 2012.

So the contribution is significant, we are not giving rent away. The basis in those spaces is usually zero, because they've been vacant for an extended period of time, and on consolidated yield and downsizing, the truth is we don't have to do them if we don't make money. We are not doing them if we don't make money, and if it is not positive to the overall NOI growth at the asset level.

At this time, we have no further questions I would now like to turn the call over to the DDR Management for closing remarks.

Thank you very much for joining us, and we look forward to touching base with you at the end of the next quarter. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.