Site Centers Corp (SITC) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the 2012 DDR Corp.'s earnings conference call. My name is Andrew, and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Samir Khanal, Senior Director of Investor Relations. Please proceed, sir.

Good morning, and thank you for joining us. On today's call you will hear from 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 risk and uncertainties, and actual results may differ materially from the forward looking statements.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and filed with SEC on form 8-K and in our form 10-K for the year ended December 31, 2011 and filed with 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 web-site at www.ddr.com. Last, we will be observing a one question limit during the Q&A question 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, it is my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Samir, and good morning, everyone. Our third quarter results highlight the continuation and execution of our strategic plan and the operational benefits of our investment and portfolio thesis. As you've heard me mention before, the great thing about our business is that we don't have to guess about who's winning or losing the attention of the consumer. As a result, we're not surprised that our retailers continue to gain marketshare, expand margins, and aggressively seek new store opportunities. All of which continue to benefit our portfolio operations.

Consistent with the various reports that have recently been published regarding the retail sector in general and power-center tenants specifically, the vast majority of our retailers continue to experience marketshare gains in general merchandise, apparel, domestics, and grocery sales. While there are certainly some structural issues that persist for specific retailers, overall demand for space far outstrips supply, and as a result, we continue to see lease rate gains and strong same-store NOI growth across our portfolio.

While we are pleased to benefit from the continued strong performance of our assets, cap rates have yet to reflect the stability and credit quality of cash flows commensurate with prime power centers. Recently, this has created the unique opportunity for us to accelerate our acquisitions activity while sourcing off-market transactions with a variety of our joint venture partners. This effort has allowed us to a achieve pricing that is 25 to 50 basis points wide of the already mispriced market CAP rates while prudently financing to continue our deleveraging efforts. Not only does this further simplify our story by reducing our number of joint venture partners, it gives us access to a proprietary pipeline of low-risk acquisitions that are not broadly marketed.

As you read in our third quarter transactions press release, we were a net buyer during the quarter, and we expect to be a net buyer going forward particularly during this period of asset mispricing. In the long term, we all know that markets are efficient. However, no different than many of you whose job it is to identify market inefficiencies in the near term, we are taking advantage of such opportunities that currently exist.

In addition to our ability to source off market transactions at attractive pricing, our recent upgrade to investment grade from S&P and reiteration of our investment-grade status, coupled with an outlook upgrade from Moody's has allowed us to be more competitive from a cost-of-capital perspective. Since the upgrade from S&P in mid September our bond spreads on ten-year paper have tightened by approximately 100 basis points.

Our dramatically reduced cost of capital has further enhanced our ability to make prudent investments on behalf of our shareholders, and we expect this trend to continue. We will also continue to actively execute our capital recycling program, manage our balance sheet, pursue additional positive feedback from the rating-agency community, and prudently pursue broad access to all forms of capital.

We are pleased with the progress we have made improving our overall cost of capital and the opportunities it has created to pursue attractive investments. We are cognizant of the fact, however, that the market is too smart to let the current condition of asset mispricing to persist.

Asset pricing efficiency is sure to return to the marketplace as private and public market investors realize that long term operating results in the high quality power-center space represents an extremely attractive investment opportunity on a relative and absolute basis.

As a result, we expect further CAP rate compression going forward, enhanced value creation and NAV growth further supporting our desire to continue advancing our strategic direction.

At this point, I would like to turn the call over to Paul.

Thank you, Dan. I would like to spend some time today discussing the leasing environment and our expectations for holiday sales, but first I will briefly address the quarterly results. As evidenced by another quarter of strong leasing volume, we continue to see robust demand and increasing competition for quality space resulting in positive trends in both occupancy and leasing spreads.

In the third quarter, we executed 230 new deals for 1.2 million square feet. This was the second highest level of quarterly leasing volume by square footage in Company history, and it was achieved with a new-deal spread of 9.8%.

We also executed 286 renewals for 1.7 million square feet at a spread of 6.5%, our highest renewal spread in sixteen quarters. Combined, we leased 2.9 million square feet during the quarter which brings us to 8.9 million square feet year-to date and over 42 million square feet leased in the past fifteen quarters. Combined spreads for the quarter were positive 7.0% representing the tenth consecutive quarter of positive leasing spreads.

As a result of these achievements, our lease rate is now 94.0% up 30 basis points over the second quarter. These strong results have been supported in large part by the dramatic shift in the supply and demand dynamic as today's most successful retailers seek new-store growth opportunities and favor the high quality power-center format which offers the most sought after co-tenancy, greatest access and visibility, and dramatically lower operating expenses.

We are not surprised by this growing trend, and we expect this dynamic to continue supporting consistently strong operating metrics for the foreseeable future. Out top 40 tenants alone are on track to open 77 million square feet of new stores in 2012 and project to open another 82 million square feet per year in 2013 and 2014.

In addition to the continued demand from anchor and junior anchor retailers, there's equally strong demand for small smaller space from retailers such as Ulta, Five Below, Tilly's, Carter's, Shoe Carnival, Anna's Linens, and Kirklands.

These retailers are looking to aggressively open new stores and represent great candidates for small shop consolidation as well as ideal users of residual space from big-box downsizings in the 5,000 to 10,000 square foot range.

Furthermore, several traditional department store chains are continuing to aggressively expand their off-price divisions by opening new stores in our power centers specifically, Nordstrom Rack, Saks off 5th, and Bloomingdales outlet.

Fortunately, our assets are in high demand by these retailers, and we continue to source opportunities for these growing companies. With only 16 million square feet or less than 1% of existing inventory of opening at retail, expected to be delivered in 2013, demand for space is far out pacing supply.

As a result, and despite having already achieved significant improvement in our leased rate, we are not done leasing up the portfolio. We see continued future growth from the combination of leasing the existent vacant boxes, the releasing of boxes that we are actively trying to recapture from underperforming weaker credit tenants, the vacancy from recent acquisitions, and creative inline leasing through small shop consolidation, downsizings, and our extremely successful set-up-shop program.

A specific example of maximizing a recent acquisition by leveraging our operating platform is Brookside Marketplace in Tinley Park, Illinois, a suburb of Chicago. This asset was acquired in the first quarter of this year and is anchored by Target, Kohl's, Dick's Sporting Goods, Home Goods, PetSmart, and Ulta. In just seven months we have improved not only the merchandise mix, but also increased occupancy and NOI.

We executed a new lease with Ross Dress for Less on a previously undeveloped parcel and are in final negotiations with a national credit retailer to consolidate a chronically vacant small shop wing into a junior anchor box. The addition of these two junior anchors, combined with the lease up of two other previously undeveloped out parcels will further position this asset as the dominant power center in the market. Once complete, we will have added to the rent roll over 50,000 square feet of new rent paying GLA, improved the leased rate from 90% to 99%, increased NOI by 40%, reduced exposure to small shop space by 10%, and most importantly we will have improved our yield by 110 basis points over the acquisition CAP rate to nearly 8%.

Another example of creating value in a recent acquisition is Ahwatukee Foothills in Phoenix, Arizona, a center we acquired from a joint venture partner in the third quarter. This power center features anchor tenants such as Ross Dress for Less, Petco, Jo-Ann, Babies"R"Us, AMC Theaters, and Old Navy. Here we relocated and downsized RoomStore Furniture achieving a 50% positive comp on the new space. We split RoomStore's former box and provided a new location for Sprout's Farmers Market adding a specialty grocery component to the power center, driving additional daily foot traffic, and adding value to the surrounding units. We are finalizing a lease for the remaining portion of the former RoomStore box to accommodate a national junior anchor. Combined, this new activity will increase NOI by 15%, improve occupancy from 90% to 95% and improve our acquisition yield by 60 basis points to over 7.5%.

Another opportunity for additional future growth is through downsizings. For example, at Eastern Market in Columbus, Ohio a 500,000 square foot power center, we recently completed the downsizing of a former Kittle's furniture box and provided Nordstrom Rack with its first store in the Columbus market. Additionally, in a residual space we signed leases with Tilly's for its first store in the Columbus market and Carter's as they expand their presence in Columbus.

With the ability to mark this space to market we improved the rent per square foot by 80% on Nordstrom Rack space, 150% on Tilly's space and 170% on the Carter's space. Clearly, the ability to grow through downsizing is impactful, and we are pursuing these opportunities with several of our oversized tenants.

Overall, we see numerous similar opportunities across our portfolio today and expect to uncover additional growth initiatives as we work with retailers to creatively meet their open to buys. We are also growing through small shop consolidation. Over the past eleven quarters, we have consolidated 400 previously vacant small shop units into 160 mid-box spaces representing 1.2 million square feet at an average rent of $14 per foot and highlighting the continued strong demand from retailers in the 5,000 to 10,000 square foot range.

Over the same time frame, we have increased our leased rate for units less than 5,000 square feet from 80% to 84.5% and have reduced our exposure to these units from 19% to 16.4% of total GLA. We will continue to increase the leased rate of our small shop space with a long-term occupancy goal of over 90% while continuing to reduce exposure to this same category given its nature of lower-credit quality tenants and higher unpredictable turnovers.

Overall, the combination of maximizing acquisitions with value-add leasing in the vacancy we are buying or creating, consolidating small shops, and aggressively pursuing downsizings will lead to continued growth across our portfolio.

Before I turn the call over to David, I want to quickly remind everyone what we should watch for as we head into the holiday sales season. Volatile headlines may suggest a slowing economy due to the uncertainty created by the election, variable gas prices, conditions in Europe, or fluctuating consumer sentiment.

However, it is important to remember that successful retailers continue to perform in the face of these head-winds and retailers are planning their holiday selling season accordingly. What we do know is that the retailers who carry the right merchandise at the right price at the right time will undoubtedly thrive during the holiday sales season.

And when it comes to margins, nothing is more important than controlling inventory levels and well managed inventory levels will be the theme again this year. Other positives this year include two extra shopping days, a cooler selling season, improving the prospects for winter goods, and the continued consumer shift to value and convenience.

We will be very focused on the timing and percentages offered for holiday markdowns which often tell the story in advance of official results. And I will now turn the call over to David.

Thanks, Paul. Operating FFO was $83 million or $0.27 per share for the third quarter, slightly ahead of our projections and 12.5% above last year. Including non-operating items FFO for the quarter was $30 million higher to $113 million or $0.37 per share. Non-operating items were primarily gains resulting from the acquisition of our joint venture partners interest offset partially by a write-off of issuance costs associated with the redemption our Class-I preferred shares in August.

We are very pleased to report another quarter of significant progress improving the quality of our balance sheet, portfolio, and our long-term growth prospects driven largely by the acquisition of high quality, attractively priced and financed prime power centers.

As we said throughout the year, and Dan just previously mentioned we believe that the current market for power centers represents a unique acquisition opportunity, and we have and will continue to take advantage of that dynamic without compromising our investment discipline.

During the quarter, we acquired three prime power centers for $250 million and year-to-date, we have invested more than $600 million in primarily off-market purchases of prime power centers. Since the majority of these investments represent recapitalizations of legacy joint ventures and purchases of partners' interest in shopping centers that we have leased and managed for many years, we have mitigated risk and are confident in our continued opportunity to leverage our operating platform to improve initial yields consistent with the case studies cited by Paul.

We have continued to fund our growth initiatives in a manner that lowers leverage and risk and improves our long term cost of capital. Investments during the year were funded with proceeds from asset sales and the issuance of $435 million of new common equity. By match funding investments with equity, we have grown our portfolio of unencumbered assets considerably.

During the year, we have added 8 prime power centers comprised of 3.4 million square feet of GLA to the unencumbered asset pool, and today this pool of assets is conservatively valued at $5.2 billion, a significant increase from the $4.3 billion at the end of 2010. In early October, we renewed our at-the-market common equity program which provides us flexibility to issue up to $200 million of additional equity to fund growth initiatives growing forward.

We don't take equity issuance lightly, but we want to have an ATM program in place so that we can efficiently fund investments and further improve the balance sheet when we find opportunities. We have been very active in the capital markets in 2012, and we are pleased with our ability to access numerous forms of capital during the year which has continued to extend our duration and lower our fixed charges.

In addition to our equity funded investments, during the quarter we issued $200 million of 6.5% perpetual preferred equity and used the proceeds to redeem our 7.5% preferred shares. We have also taken advantage of attractively priced long term debt raising $650 million of unsecured debt and $1.2 billion of secured debt including our partners share.

These 2012 financings have a weighted average maturity of 6.2 years and a weighted average interest rate of 4% and this capital is largely used to retire debt with a weighted average interest rate of 5.1%.

Last, we were successful in accessing private equity capital during the year closing the new $1.4 billion joint venture with Blackstone in January. Looking at future capital needs, we have little near term debt maturing. There are no remaining consolidated maturities in 2012 and no unsecured maturities until May of 2015. Debt maturities in 2013 of approximately $390 million consists of secured mortgages the majority of which is a $350 million loan secured by six properties.

We recently received approval for a seven-year $265 million mortgage from a life insurance company secured by four assets with interest fixed at less then 4% to refinance 75% of this loan. The balance will be funded by drawing on the $100 million accordion commitment of our seven-year unsecured term loan which will further expand our unencumbered asset pool, increase our fixed charge coverage ratio, lower our percentage of secured debt, and further extend our debt duration.

In recognition of our considerable progress in recent year recycling capital, meaningfully improving the quality of our portfolio, lowering leverage, and increasing the size of unencumbered asset pool combined with stronger than expected operating results, Standard and Poor's upgraded our bond rating to triple B-minus in September, and just last week Moodys upgraded our credit rating outlook, to positive on their current B double A three rating.

Although, we are by no means done improving our balance sheet and lowering our cost of capital the recent progress with the rating agencies represents a meaningful acknowledgement of how much we have accomplished financially and operationally to lower our risk profile.

DDR bonds are now investment grade rated by both S&P and Moodys and we expect further improvement in EBITDA as well as a continued monetization of nonproducing assets to further improve our credit metrics and lower our cost of capital.

The more than $600 million of capital that we have invested during the year has funded the acquisitions of large format prime power centers that enhance the quality of our portfolio and expand our presence in major MSAs such as Chicago, Portland and Boston, Dallas and Phoenix. We have also improved the quality of our portfolio through dispositions and while we were net acquirers in the first nine months of the year, we are not finished pruning non-prime assets.

Through the first nine months of the year, we disposed of $137 million of nonprime assets and in early October we closed the $113 million sale of a 750,000 square foot primarily lifestyle center owned in a joint venture. We will continue to review the portfolio regularly to identify disposition candidates and currently have $164 million of assets under contract for sale. During the year, we have disposed of $46 million of nonproducing assets a significant increase from the $30 million of dispositions over the same period in 2011.

As you likely notice from our press release, our 2012 guidance remains $1.00 to $1.04 per share of operating FFO consistent with the first half of year, stronger than expected domestic performance continued in the third quarter and offset the considerable negative impact of a lower than expected Brazilian currency that has lowered FFO nearly $4 million year-to-date relative to last year.

We remain focused on growing EBITDA and NAV and further improving our portfolio quality while lowering our leverage and risk. All of which should translate into results that drive growth in FFO, dividends, and total returns over time. With respect to 2013, we are in the process of finalizing our plans and expect to release guidance and significant assumptions underlying our expectations in early January as we have in the past.

With that said, we are optimistic about our prospects for 2013 and expect solid earnings growth combined with the potential for strong relative growth and the dividend should generate an attractive total return in the coming years. At this point, I will stop and turn the call over to the operator, and we will begin addressing your questions. Thanks.

Thank you. (Operator Instructions). Your first question comes from Craig Schmidt, Bank Of America. Please proceed.

Thank you. Your recent acquisitions have included some of the larger power centers in the country, and given that you already own some midsize and very large power centers, I wondered if you could outline the opportunities and challenges of these uber-sized power centers relative to their more midsized product.

Well, Craig, we're in a position right now where we really do feel that size matters. We like the larger centers for a number of reasons. Number one, they offer great co-tenancy variety to whatever retailers may be interested in occupying vacant space. So there's a very diverse merchandise mix that we can offer to the consumer, and probably most importantly, we are definitely in an era of retail fluctuation. Retail is evolving and flexibility is incredibly important.

We like the fact that the large power centers are not sitting on a 12 acre site, and I would much rather have a 60-acre site today where we have the flexibility to move buildings, add buildings, expand buildings, take buildings down or whatever it may take to accommodate the evolution of the retail environment. The large power centers are attractive to us, tenant demand for those centers is extraordinarily high. Co-tenancy is absolutely a high priority for retailers today, and they give us maximum flexibility.

So, as a result, we will continue to pursue those centers. The medium-sized power centers that we have offer a similar opportunity, but just slightly less flexibility and given the current environment, we obviously like having that flexibility in our back pocket.

Craig, I think it's also worth pointing out that as we look at any acquisition regardless of the size of the power center, we are seeing opportunity. I think the examples I cited in the script were great examples of that. We are confident that we are seeing something that maybe others aren't in terms of upside.

I think it's just a less competitive acquisition environment. While there's tons of capital out there, across the board, you just look at the transactional activity even just to the public companies let alone digging into the data of all the private companies and the volume of transactions and the competition that I think you are seeing for some of the smaller format centers in addition to the fundamental opportunity that Dan and Paul outlined, we think has allowed us to achieve better pricing on some of the larger format centers in addition to them having better growth profiles over time.

Thank you, your next this question comes from Alex Goldfarb, Sandler O'Neill. Please, proceed.

Good morning. Obviously, a fun time for you guys out in Ohio. Just - -you mentioned some outlets or outlet concepts that are opening up and touring your assets recently sounds like there's more demand from some of these outlets concepts to open up at your centers. Do you think this cannibalizes the overall outlet market, the sales for outlets? Or you think that this will expand the pie?

I think this expands the pie a little bit, Alex. I will have Paul comment in a second, but I think it expands the pie. The outlet business is while it is an important and growing part of the retail environment of our country, it's still relatively small.

You won't be surprised when a lot of the centers that are currently proposed don't get built. I think they will be far less built than are currently on the table, and as a result, these tenants like Gap and Saks off 5th and Bloomie's Outlet, and Nordstrom Rack, etc. need growth opportunities. And the expense structure of our asset class and going back to Craig's question about size and opportunity and flexibility gives them the ability to open new stores and satisfy their open-to-buys without relying on what could be somewhat questionable development projects that may or may not be delivered at any given time.

I think there's plenty of room for growth. I think it's not likely that these stores will cannibalize anything else from the outlet business. I think it's just retailers evolving their format and evolving their desires to attract the consumers who are interested in value and convenience and obviously our centers do that.

Yes, Alex, you know the three we mentioned in the script with the Rack and Bloomie's Outlet, and Saks off 5th. These guys are very confident they can perform in the traditional center and that's what's really driving us. As Dan mentioned briefly Gap, we are going to see nothing but negative movement with the traditional Gap stores in the mall locations, but Gap outlet is the driver of the growth for that division. And that's exciting. They are quite comfortable in a center with discount-oriented center with a Ross or a TJ and a Bed Bath. They know they can achieve the same results or even better than they do in a traditional outlet setting.

Thank you and your next question comes from Todd Thomas, KeyBanc Capital Markets. Please proceed.

Good morning, thanks. The question is, as you think about your rollover next year. What are your expectations for leasing spreads for non-anchored tenants?

It looks like the expiring rent is fairly low, it's about 10% below the portfolio average. Are we through all the prerecession leases, and I imagine that you have been working on some of these deals. How much visibility do you have on that right now?

The visibility we do have Todd is that we will continue to increase the spreads on those non-anchor tenants. One thing you have to be aware of when we quote a spread it will vary quarter to quarter. You may have a quarter where the smaller space has a more positive spread than the anchor space.

The anchor space, we are clearly beyond the recession, and we actually have leased up most of that came back to us in 2008 and 2009. So you're looking at a more consistent growth rate in the spreads. I would tell you even in the non-anchors we have seen continued improvement in those spreads.

Thank you for your question. And the next question we have comes from Paul Morgan, Morgan Stanley. Please proceed.

Hello, good morning. Just looking a couple of your operating metrics. I mean you are at 94% occupancy. You were from 2005 to 2007 kind of regularly in the 96% territory, and your lease spreads were sort of double around where they are now. You have obviously done a lot of work on improving the portfolio composition over the past five years. How quickly can we get to those levels and I guess presumably potentially exceed them, and what are the catalysts that you need to get to get there in terms of market conditions?

Well clearly the catalyst, Paul is the lack of new supply and the continued demand. It's a great question because we think about it and we talk about it all the time. I would have told you a few years ago that 95% 95.5% might feel like full occupancy in what could be considered a new normal. I don't feel that way anymore. I can't say exactly when we will get there.

But we are quite confident as we improve the quality of our assets of our portfolio, and we continue to see strong demand, and as we continue to reduce the smaller shop space as a percentage of our total GLA, we are going to see that full occupancy number be a little higher. When we hit that, I don't know at this point, but the momentum is good. The demand is great. And I'm confident it will be higher then we would have thought a few years ago.

And I think Paul's comments hit it exactly on a same store basis, but don't forget that while he's trying to push occupancy as high as possible for the total portfolio, Dan and I are trying to buy vacancy and find opportunities out there in the market and make his job more challenging by giving him more inventory of that product.

We think that's where some of the most attractive returns are available where we know more about tenant demand than an existing owner. We can buy something very selectively in the high 80%, 90% percent occupancy range like the example in Chicago that Paul talked about earlier, and then challenge the leasing team to lease that up. We have had great success with that so far, but just when you think about those overall portfolio metrics you might see continued progress on that same store pool, but we hope we are successful in sourcing some attractively priced vacancy that can lead to good returns and good NOI growth over the year or so after we initially make that acquisition.

Thank you. And your next question comes from Jeff Donnelly, Wells Fargo. Please proceed.

Good morning, guys. Dan you mentioned in your remarks that prime assets are mispriced. I think on last quarter's call David, you had touched upon how some of the top coastal markets might in fact be overpriced and that I think A-quality product was seeing greater improvement in CAP rates than other peers. Can you guys give us a little more detail on your thinking about the mispricing maybe just where do you think it is today on prime? Where do you think it could be? Which cities you think present the best opportunities, and does that imply that B-product is also mispriced too?

In general there is an extraordinary amount of capital out there chasing most if not all income oriented opportunities particularly those that are perceived to be lower risk. When we look at real estate in general and shopping centers in general, a disproportionate amount of that capital has been focused exclusively on coastal markets.

A disproportionate amount of that capital has been focused largely on grocery anchored product where thus far there hasn't been nearly as much capital focused on major MSAs, but not necessarily with immediate ocean access that have larger footprints as Dan talked about earlier that usually do have a grocery component, but aren't that smaller format just grocery anchored neighborhood center.

And so we think it's just an environment where there's less capital currently looking at the product; we are and that's why you have seen us be a much larger acquirer this year because we do still think there's an opportunity there. I would be cautious going too far to your question down the quality spectrum and saying what that means for B or even C assets because there is certainly massive retailer demand overall, but it is disproportionately focused on the higher quality centers in larger MSAs whether you can drive to the ocean in a day or not. I think we are seeing good demand consistently for those higher quality A-centers even A-minus B-plus centers. When you get lower than that it's a challenge and that's why you haven't seen us active in that market and you probably won't.

So I think you have seen pricing there tighten a bit especially with a maturing or improving CMBS market, but that hasn't been where we've been focused and not where we see the most significant opportunity today.

Thank you, and your next question comes from Quentin Velleley from Citi. Please proceed.

Good morning. Just following on in terms of acquisitions. You get the sense that you are sort potentially ready to ramp acquisitions. Can you maybe talk a little bit about the size of the current pipeline that you're seeing, and also what your preference on funding that pipeline would be. Would you look to do it on a leverage-neutral basis or match fund deals with equity?

The pipeline we are looking at continues to be significant as it has been for a while. We continue to close a very small proportion of those deals simply because we are very focused on maintaining our investment discipline. You know this Company suffered mightily from losing that at times in the past, and that is not at all lost on this management team or board. And so I think it continues to be very disciplined process where we look at a ton of stuff and end up buying a very small percentage of the overall product we look at. We continue to be much more focused on one off or very small portfolio opportunities. We continue to be very focused on opportunities with assets that we've owned and managed oftentimes in joint venture for many years given the lower risk profile there.

I think the profile of what you've seen throughout the course of this year is consistent with what we're looking at going forward. We obviously think we have got an operating platform that provides us information that puts us in an extremely strong position to underwrite assets.

In most cases, that means we know too much to bid as aggressively as others. In some cases though it means we know more and can get a greater level of comfort.

So, I think you will see us continue to be active in major MSAs and large format prime power centers like we have been year-to-date. From a funding perspective, the natural means of funding that we have used over the past few years has been the disposition of non-prime assets. I think acquiring good assets is important if we're improving portfolio quality, but selling the bad stuff is probably even more important in terms of the way it changes the overall metrics and the overall efficiency of an operating platform.

And so, we'll continue to be active on the disposition front. We have acknowledged we were a little lower on dispositions during the quarter, but we have quite a bit in the hopper for the fourth quarter, so I think that will continue to be a major driver through the end of this year as well as into next year.

And to the extent that we see acquisition opportunities that exceed that we have obviously been open to funding that primarily with equity over the past year. I think on a go-forward basis, equity would continue to be an important piece of that. But again, it has got to be driven by finding attractive enough opportunities to justify us selling equity to fund that.

So I think you could look at equity as a portion of the funding at least half of that. So you're talking about transactions that are still going to be beneficial to the balance sheet. But at this point, with the dramatically improved cost of capital, particularly related to our unsecured debt, I think you could also think about a portion of the transactions being funded with ten-year bond issuance now that we are talking about comfortably sub 4% levels for that capital, but would still look to make transactions both balance sheet and portfolio quality accretive and not just solving for FFO growth by throwing acquisitions on the line.

Just to expand a little bit on what David is saying, Quentin. In our investor presentation which is obviously online there's a list of proprietary pipeline and joint venture assets that we have some sort of governance rights to. We have been very pleased with acquiring assets off market, assets that we already manage, assets where we know where the opportunity is. Assets quite frankly that may have been capital starved for example like the EDT portfolio we did with Blackstone where we knew there was a lot of pent up demand and a lot of deals available, a lot of opportunities to grow it's just that the venture was not in a position to take advantage of it from a capital perspective.

There's great opportunity. We like to keep certain assets certainly in the family. We are working with our joint venture partners on a regular basis to do that. It's highly unlikely that we will be involved in a market bid where you have multiple people coming in and bidding for an asset through a process. that's something that often does not lead to the efficiency of pricing that we're looking for.

Thank you. And your next question comes from the line of Cedrick Lachance, Green Street Advisors. Please proceed.

Dan, I think a few quarters ago you talked about looking at a $750 million redevelopment pipeline over the next five years. Now, that you're increasing your acquisition activity, what do you think it will mean for the redevelopment pipeline over time?

Cedrick, This is Paul. Clearly the $750 million we initially talked about and are working towards includes some future acquisitions. As we continue to go, we've identified quite a bit of that $750 million today. Some of that through our existing portfolio. Some of it through the recent acquisitions we talked about in the script. It's certainly something we'd considered in the $750 million as we plan a final number going forward. It obviously continues to be a very big part of our -- a big growth initiative for us.

The spend continues to ramp up, and we remain on track to spend about $120 million this year which is well in excess of the $30 million we spent last year, and we will see more of that ramp up in 2013 and beyond. But at this point, we are not going beyond the initial $750 million as we do include future acquisitions as part of that initiative.

Thank you. Your next question comes from the line of Tom Truxillo, Bank Of America Merrill Lynch. Please proceed.

Thanks for taking the call. Obviously you guys have made tremendous strides in terms of your balance sheet. You have got gotten recognition from that from the agencies finally.

Just looking forward. You don't have a lot of maturities coming due. You already took care of most of the 2013s, but your secured debt seems still relatively high for the peer group. Can you provide any comments on continuing to look to use more unsecured debt and to continue to grow that unencumbered asset as secured debt matures in 2014 and 2015.

Yes, we are absolutely in agreement I think with the direction of your question. Over time, secured debt did get to be a higher and higher percentage of the balance sheet partially because of joint ventures and partially because even for consolidated assets. There was a period of time a few years ago where secured was either the only thing available or a much more efficient means of financing.

We recognize that in the stronger environment that exists today where we do have opportunities for multiple sources of new capital, that our interest in unsecured meaningfully exceeds our interest in secured and I think you will continue to see the progress in the proportion of secured debt going down over time. It's obviously a portion of the initiative with the 2013 refinancings where you will see mortgage debt replaced by unsecured debt. I think we have an even more significant opportunity in 2014 with an opportunity to further replace secured with unsecured. The biggest individual maturity in 2014 is the TALF CMBS deal that we had done a few years ago. If you remember the challenges of that period of time being the first CMBS deal back in the market as well as the Fed's involvement in that process ended up with just about the most stringent underwriting that has ever occurred for a securitization.

And so I think today that leaves us with an extraordinarily underlevered pool that at minimum would allow us to remove a considerable number of assets and grow that unencumbered pool, but could also let us easily replace some or all of that secured debt with unsecured. I think that's clearly the direction you see us going. We made progress this year. We will make more progress next year, also as some of our joint ventures are rationalized whether it's just selling assets or whether it's us buying those assets.

You have seen a considerable number of those assets move from a joint venture structure where they almost have to have secured debt to a wholly-owned structure where we could look at putting those in the unencumbered pool and effectively applying unsecured debt to those. And so you have seen us make progress, and you will see considerably more in the coming years that we will continue to show you on a regular basis including the refinancing activity we outlined for the very early 2013 maturity.

Thank you the next question comes from Vincent Chao, Deutsche Bank. Please proceed.

Hello everyone. Just wanted to get your thoughts on the initiatives by retailers like Walmart to deliver online orders through their stores. Just wondering if that's something you think -- or you're seeing others adopt more and more of, and whether or not you think that's really going to make a material difference in the ongoing battle between the online only retailers versus the bricks and mortars guys?

That's a great question, Vincent. I will tell you, we are seeing a lot more of it and I think we are going to see even more of it. It makes a heck of a lot of sense.

Buying online and pick up in store is one way of not eroding margin. One of the things that's happening as you look across the retail community is that as Internet sales in a traditional sense grow, operating margin erodes because of the shipping costs in particular or the inability to charge for shipping. You have to give free shipping. We think that shopping online, buying in store, buying online, pick up in store, buying online and returning in store, all of which are positive because it is bringing people to the store and is an acknowledgement of the convenience and the dominance of the brick and mortar location has all been very, very positive.

I think we are going to see buying online and picking up in store, or shopping online and buying in store all increase as smart retailers continue to evolve in a multi channel environment. I also think it has a significant effect on profitability. While it is also taking advantage of the consumers demand for instant gratification. People like to have what they want when they want it. If you see something online, and you can go down the road and pick it up in the store, that's a very very attractive way to communicate with the consumer and it's a very attractive and efficient way to distribute goods.

I think we will continue to see various aspects of online and store interaction, but buying online, pick up in store, shop online, buy in store, or buy online and even return to store or exchange in store is all going to become ever more active in our business.

Vincent it's also worth noting as we go into this holiday season, we have heard many of the larger retailers, the discounters, the electronics guys, and others talk about price matching and same day delivery. These guys are not sitting back. They are obviously going after the business that the pure online plays are doing.

I also think that's one of the reasons why we are seeing a little bit less of the downsizing that had been previously reported because if shop online and pick up in store accelerates which it is, than the real size of the store- - you may need lesser square footage of actual selling space, but you might need more stockroom space because you have people coming to pick up. The competitive advantage is of course that can get same day goods, and in order to have same day goods, you must have a sufficient inventory levels to deliver those same day goods. So I think that's why you see some hesitation from some of the retailers that had previously talked about downsizing and from actually executing the downsizing strategy because they are not quite sure exactly how the store is going to layout and how much stockroom space they need as they continue to push for a store relationship between online and the consumer.

Thank you. Your next question comes from Alex Goldfarb, Sandler O'Neill. Please proceed.

Just following up that question. Are you guys seeing more retailers trying to reinvigorate the concept of a genuine sales force? If you look at what happened at Best Buy or Circuit City. They didn't really have sales people. So you've got customers walking into the store touching the product, going on their iPhone ordering it. Which seems crazy. Are you seeing more retailers rediscover the importance of having a well-trained commission-based sales force? Or is that not really how they're tackling the Internet?

Alex, they have rediscovered the need for that. That's where we are right now. I think there's still a lot to be proven, but start with the electronics guys and then Best Buy specifically.

There's no doubt where they are focused. That's almost to be Appleseque in terms of their sales staff and how they treat and educate the customer.

Right now I would tell you that it's probably at the stage where they have indemnified, we have to do that, and we are seeing some initiatives on the part of the retailers and some progress, but they still have a long way to go. You are going to see it more and more from especially that category.

And while I think having a professional sales force and a motivated sales force is important it's not nearly as important as having the right merchandise in the store. A great sales force trying to sell bad merchandise won't work.

So while I think that's important, I don't think anyone should think that's going to be the solution for stores that are struggling in gaining consumer acceptance of their merchandise, and it will take some time in some cases for some of the retailers to realize that, but again no matter how good your sales folks are, if you don't have the right product in the store and some of the retailers you mentioned, Alex are exactly what the issue is. They don't have the right merchandise in the store. A good sales force is not going to help them. Just like great real estate cannot bail out a bad retailer. Great real estate cannot bail out a bad merchant. The consumer is just simply too smart.

Thank you, and your next question comes from Cedrick Lachance, Green Street Advisors. Please proceed.

Thanks. Just wanted to follow up on Brazil, actually. Can you comment a little bit on the performance of your portfolio in Brazil currently. And then what was the impact of the Brazilian operations to your reported same-store NOI this quarter?

Conditions in Brazil continue to be relatively strong. I would characterize it as an absolute deceleration from last year, but I think we tried to be very candid at that time in saying we thought the results and the growth in 2011 was unsustainable. While the full results for the third quarter will come out and some [I'd say] Brazil reports results early next week, I think we can say that conditions continue to be relatively strong; growth in the high single digits has replaced growth in the high teens from twelve months ago.

It's been further impaired by a currency that's depreciated 20%-ish, 15%-20% depending on what exact period your looking at. And so it's certainly been a drag on our overall results when you have that currency overlay on the decelerated growth for this year. It's still a market where we see a considerable opportunity for our operating assets and for the remaining couple of developments that we have in the works, but certainly a slower growth environment than last year. That said, still stronger growth than we see available just about anywhere else from a macro standpoint.

It did have a slightly positive benefit to same-store NOI for the quarter. So on a pro rata basis the 3.7% same-store NOI growth we reported was improved by approximately 20 basis points relative to what it would have been on a just domestic basis. So a slight help, but 3.5 versus 3.7 we think both very strong numbers and much less of a skew relative to last year when Brazil was a meaningful driver of the overall same-store results. So this year you are seeing the overwhelming majority of that growth come domestically, but Brazil continues to be a bit of a helpful driver and we would expect that to continue.

Thanks you, and your next question comes from Samit Parikh. Your line is now open from ISI. Please proceed.

Good morning. David, earlier this year you were out repurchasing your 9.625% unsecured. Is DDR still in the market repurchasing longer dated unsecureds?

Year-to-date, we have repurchased $60 million of our 9.625% 2016 notes. I think at the time we were buying those we made the case that while it's a no brainer from a current yield deal perspective, more importantly from a yield to maturity perspective, were we able to raise longer term capital at a lower yield to maturity than what the 2016s were trading at. So from a true economic standpoint, we were better off by effectively prepaying a portion of that interest and getting to replace it with new cheaper debt had not only the current yield benefit, but a true economic benefit.

Where we look at pricing today as well as the relatively low liquidly in those bonds, we haven't seen opportunities recently. And so you did not see us active. In the third quarter I think we bought more of our debt back in the open market than any REIT by a pretty significant amount.

So, we're constantly aware of what's going on in that market. Both in terms of our incremental cost of capital to fund that as well as where our bonds are trading, but we haven't seen opportunities lately the way that we did earlier in the year. It's something we continue to monitor but haven't been active real recently. And also when we think about a tender for those bonds and anything close to make-hold sort of pricing I think that's just a premium and an extremely low yield-to-maturity at which we would be buying those back. Where while you might have a current yield benefit, we just don't see the economic gain to DDR from prepaying those. We'll continue to be opportunistic, but you didn't see anything happen in the third quarter.

Thank you, and your next question from Michael Mueller, JPMorgan. Please proceed.

Hello. In terms of the acquisitions, a lot of what you have done it looks like it's on balance sheet. You have been buying out partner interests. And I know, Dan you mentioned there are partnership or JV agreements where you have certain rights. If we look down the road say three or five years and look at the JVs that are remaining and outstanding today. Do you have the sense that number is going to be very different a few years from now?

I do think that we'd expect the number of joint ventures to be different as we look out a few years. It's already changed pretty significantly from a point when we had fifteen to almost twenty total joint ventures including a number of one-off joint ventures and today we are right around ten. I do think that we make the case that there's a value to that business. There's value to us being able to rent out what we think is certainly the highest quality operating portfolio out there.

There's value to having access to private equity which might be priced differently at certain points of the cycle than what public equity is available at. But I think that historic perspective of let's work with as many people as possible, even on very small joint ventures is one that we just don't think makes a lot of sense going forward.

So I think you could expect that number to certainly be smaller as we look out a few years, but a smaller number of larger potentially joint ventures than the average size of our venture today and with higher quality best of breed sort of partners that have a long term alignment of interest. And so when you've seen us add people like Blackstone to that mix, who doesn't necessarily have a perfect alignment of interest because they do have a little greater interest in debt and a little shorter term time horizon to recognize their profits versus our longer term ownership mindset.

I do think you have seen us actively work on a larger deal with a group like that rather than some of these one-off transactions you've seen in the past. We have been actively working our way out of some of these smaller ventures. And I think you could expect to see that continue and us deal with less people on a joint venture basis going forward.

Thank you. And I would now like to turn the call over to management for closing remarks.

Thank you, all for joining us this morning. For those of us who -- those of our friends on the call who are still having difficulty with power and telephones etc. we appreciate the efforts, and we hope that you get a sense of normalcy back as soon possible. Thank you very much.

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