Site Centers Corp (SITC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth-quarter 2012 DDR Corp earnings conference call. My name is Lisa and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

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

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

Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand the 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 additional questions, please rejoin the queue.

At this time it's my pleasure to introduce our CEO Dan Hurwitz.

Thank you, Samir. Good morning, and thank you for joining us today. Let me start by reiterating that we are very pleased with our fourth quarter and 2012 results, and even more pleased with our 2013 guidance and dividend increase, none of which should be a surprise given the transformation of our portfolio through significant capital recycling, rebuilding our balance sheet, and the successful execution of our numerous other strategic objectives and corporate initiatives that David and Paul will address in more detail momentarily.

However, before that, I like to address the macroeconomic backdrop we see in 2013. There have been several headlines and conversations regarding headwinds facing the consumer, particularly concerns surrounding fiscal policy, higher payroll taxes, and less supportive interest rate expectations.

While there is certainly merit to these concerns, I encourage you to look at the factors that truly influence the consumer and consistently translate into retail sales. Recent improvements in the jobs market, coupled with wage increases and rising home prices, continue to serve as tailwinds for the consumer.

Specifically in December, American incomes posted the greatest increase since 2004 with personal income growth of 2.6%, according to the Commerce Department. Moreover, consumer net worth continues to improve with rising home prices, and personal balance sheets reflect increased strength and liquidity as debt service payments as a percent of disposable income are near an all-time low.

All of this led to strong retail sales in January and increases in full-year guidance for many of our key retailers in the value-driven sectors. While there is certainly plenty of risk in the market caused by instability in Washington and elsewhere, the consumer continues to tell us that the most important factors that influence retail sales are jobs and wages. It's not consumer confidence, payroll taxes, events in Europe, or even gas prices.

We have seen this quarter after quarter and month after month with each passing retail sales report. With wage growth and greater job stability, we continue to see increases in retail sales to those retailers who deserve it most. And those market share gains are visibly going to several of our key retailers.

Markets clearly have a psychology. And as we have seen in recent months, this market has shrugged off legislative dysfunctionality that created justifiable cause for concern.

The greatest downside risk for the continued momentum is that we legislate ourselves back into a recession, and while I think that's very unlikely, certainly not outside of the realm of possibility given past action and conduct from our leaders in Washington. However, the consumer is once again proving to be resilient and our portfolio continues to enjoy the macro tailwinds that benefited us in 2012 and continue in 2013. The clear consumer preference is for value and convenience.

What does this mean for DDR? As you saw in our 2013 guidance press release, we are expecting FFO growth of 6% at the midpoint driven by continued improvements in operational metrics, as well as our capital recycling efforts to advance the improvement in portfolio quality. Retailers continue to seek new store growth in a supply-constrained market and our portfolio has become the first look for several of the fastest-growing, most financially successful retailers.

As a result, we expect to increase our portfolio lease rate to 95%; grow same-store NOI between 2% and 3%, while improving our credit quality and cash flow beyond the current historic levels. Additionally, our revamped balance sheet and reduced cost of capital from its prudent transactional volume, and we continue to find attractive investment opportunities relative to current market pricing. We are not done growing our portfolio, improving our balance sheet, or executing any of our strategic objectives.

As a result, 2013 will be the continuation of our effort to actively monitor and participate in market opportunities as we prudently pursue the creation of long-term shareholder value.

I'll now turn the call over to Paul to discuss portfolio operations.

Thanks, Dan. Before spending some time discussing the current leasing environment, recent retail sales results, and 2013 guidance, I would like to highlight our accomplishments in the fourth quarter, which led to continued improvement across our portfolio.

In the fourth quarter we executed 471 new leases and renewals for 2.4 million square feet. Spreads on renewals were up 6.8% and new leasing spreads were up 11.7%. More importantly, on a pro rata basis, new deal spreads were 260 basis points higher at 14.3%.

Combined leasing spreads were positive 7.6%, and on a pro rata basis spreads were 20 basis points higher at 7.8%. For the full-year we executed 1958 new leases and renewals for 11.3 million square feet, resulting in a year-end leased rate of 94.2%. This represents a 20 basis point improvement sequentially.

As evidenced by another quarter of double-digit new deal spreads and our strongest renewal spread in 16 quarters, the current leasing environment, coupled with our improved portfolio quality, is clearly having a positive impact on our portfolio metrics. Same-store NOI was up 4.3% at 100% and 4.4% pro rata for the fourth quarter. And it's worth noting that our consolidated US portfolio was up over 5% for the quarter.

Regarding 2013, our expectation for same-store NOI growth is 2% to 3%. As mentioned in our guidance, we expect to recognize the majority of this growth in the back half of 2013 due to the timing of move-out and 2013 rent commencements. Importantly, the majority of this growth is already committed through leasing completed prior to year-end 2012.

Of approximately 7.5 million square feet of lease expirations in 2013, 55% were renewed or took options prior to year-end and the positive results of those deals are reflected in the renewal spreads we've reported. Given the strong head start to 2013 we are confident that we will achieve a high retention rate for renewals and continue to grow our renewal spreads in 2013. Additionally, as of the end of the fourth quarter, we have completed over 60% of the new deals with a budgeted rent commencement date in 2013.

Our optimism going into 2013 is based on our progress to date, our deep pipeline of potential new deals, the lack of new supply and the growing demand we continue to experience across our portfolio. On a macro basis, in 2013 less than 16 million square feet of new open air space will be developed, with only a fraction of that space being competitive with our prime power centers. In addition, 30 of our top tenants alone have combined open-to-buys for more than 150 million square feet in the next two years.

This dynamic results in a more strategic approach to leasing, allowing for the re-tenanting of under-performing tenants with high credit quality retailers; the right-sizing of boxes; and the consolidation of the historically vacant small shop space. Even with less obvious vacancy in our portfolio, we are confident we will creatively lease another 11 million square feet of space in 2013.

As it relates to our retail outlet, I'd like to first update you on our takeaways from a year of retailer meetings, portfolio reviews, and market observations. 2012 marked a year of greater cooperation, flexibility, and agility on behalf of retailers. Nearly every retailer with whom we met highlighted flexibility in store size and configuration as being crucial in this low-supply market.

Examples of this include anchor retailers such as Walmart, with their smaller neighborhood market footprint; box users such as TJX, Dicks Sporting Goods, and Bed, Bath and Beyond, with their ability to take a variety of space configurations; and mid-box users such as Shoe Carnival, Five Below and Tilly's, all of which are aggressively expanding in the power center sector with high levels of flexibility in store size and configuration.

Another recurring theme during our discussions was e-commerce. While nearly every retailer discussed future investments in e-commerce, none said that it would be at the expense of new brick-and-mortar locations as margins clearly remain in store, not online.

Retailers further emphasized the importance of maintaining and improving profit, primarily through margin expansion. Given this importance of margins in the relationship to sales, I'd like to spend a few minutes discussing holiday winners and losers.

While headlines and opinions were volatile, our value- and convenience-oriented retailers were consistent winners. They not only won market share, but maintained or improved margins. Ross and TJX are great examples that they both outperformed the retail sector by posting positive same-store comps of 6% and raised guidance after Christmas, and then again after reporting strong January results.

Even less often discussed power center retailers such as Stein Mart and Pier 1 participated in the marketshare grab, posting high-single-digit comps and reporting that they were able to grow market share without negatively impacting margins.

Target is an example of a retailer that is not willing to sacrifice margins for the benefit of sales. Over the holiday season their sales were relatively flat, which might have appeared disappointing on the surface. Through disciplined inventory management and controlled promotional events, they were able to maintain a strong margin level, allowing them to guide to a meet or beat for fourth-quarter earnings.

You've heard me say this before. Sales are nice, but margins are better.

Conversely, traditional department stores such as JCPenney, Sears, and Bon-Ton continued to post anemic sales while watching their margins erode, putting their marketshare up for grabs and resulting in disappointing earnings. We expect this trend of winners and losers to continue and are confident that our tenants are the obvious beneficiary of consumer preferences and marketshare gains.

We also continue to see a significant shift in consumer spending patterns in the grocery segment. Competition for traditional grocers includes discounters such as Walmart and Target; warehouse clubs such as Sam's, Sam's Club, BJ's and Costco; and specialty grocers such as Whole Foods, Sprouts Farmers Market, Trader Joe's and The Fresh Market. We expect this trend to continue given that traditional grocers operate with razor-thin margins, making it difficult to compete with the low-cost, discount and warehouse club providers on one end, as well as specialty grocers that continue to carve out a strong, high price point niche.

Bottom line is that the traditional grocer is being squeezed at both ends. And this dynamic, based on reported marketshare gains, has no end in sight.

As we continue to experience these changes in consumer shopping patterns, our strategy to improve the quality of our portfolio and to align ourselves with high-credit, value- and convenience-oriented retailers has remained consistent. In the last three years we've leased 34 million square feet. And one-third of that space was leased to high credit retailers such as Walmart, Target, Kohl's, Dicks Sporting Goods, TJ Maxx, Marshalls, Home Goods, Ross, Bed Bath and Beyond, buybuy BABY, World Market, PetSmart, and others. These are the retailers winning the wallets of the consumer every day.

Given our growing exposure to best-in-class retailers, our strong start to the year, and the continued shift in consumer spending preferences, we expect strong deal velocity in 2013 resulting in a positive impact on rental spreads.

And I'll now turn the call over to David.

Thanks, Paul. Operating FFO for the fourth quarter was $84 million, or $0.27 per share, slightly ahead of our plan. Including non-operating items, FFO for the quarter was $62 million, or $0.20 per share. Non-operating items during the quarter were mainly a non-cash loss from the deconsolidation of development land in Canada and transaction costs related to the recapture of an anchor [pad and] shopping center in Pasadena, California.

For the full year, operating FFO was $312 million, or $1.03 per share, an increase of 6.2% over 2011 results.

From an investment standpoint, the fourth quarter was another period of strong execution of our strategic objective to improve the quality of our portfolio while lowering leverage and risk, and preparing the Company for long-term growth at the same time. In December we purchased two market-dominant power centers in North Carolina for $151 million, funded primarily with $75 million of new common equity as well as our share of asset sale proceeds during the quarter of $62 million.

Carolina Pavilion in Charlotte was acquired for $106 million in Poyner Place in Raleigh, for $45 million. These properties have a combined lease rates of 95%; average trade area household incomes of $80,000; and trade area populations of 590,000 people.

Carolina Pavilion was purchased in an off-market transaction from Blackstone and features anchor tenants such as Target, Kohl's, Nordstrom Rack, Ross, buybuy BABY, Bed Bath & Beyond, JoAnn, and AMC Theatres. Additionally, two new national retailers, PetSmart and Golfsmith, will soon join the Carolina Pavilion anchor line-up, filling a portion of the 85,000 square feet of currently vacant space.

Poyner Place features anchor tenants such as Target, Ross, Old Navy, World Market, Shoe Carnival and Pier 1. Carolina Pavilion and Poyner Place are not secured by mortgages and have been added to our growing, high-quality unencumbered asset pool.

For the full year we closed $2.1 billion of acquisitions, our share of which was $760 million. Investments in 2012 were funded mainly with $511 million of new common equity issued throughout the year and our share of disposition proceeds, which were $239 million.

It is very important to note that 2012 disposition proceeds include the sale of nearly $100 million of non-income-producing assets. We were pleased with the increased level of non-income-producing asset sales in 2012 and expect to continue this monetization process in 2013.

Our capital recycling efforts over the last five years have resulted in significant value creation for all DDR stakeholders and position the Company well for strong [revenue] growth in the future.

The great majority of high-quality, attractively priced prime power centers that we acquired in 2012 were off-market transactions, properties that we have managed for many years and sourced through relationships with existing partners. The tenancy in these centers include some of our closest retail partners and the nation's most profitable retailers including 11 Targets, 20 TJX concepts, 19 Bed Baths, 10 Rosses and 9 Dick's Sporting Goods. We continue to match fund investments with equity, further improving our balance sheet and growing our portfolio of unencumbered prime shopping centers.

During the year we added eight large-scale power centers to the unencumbered asset pool, increasing our unencumbered NOI by 18%. Today over 60% of our consolidated NOI is generated by the unencumbered asset pool, which provides us the greatest opportunity to leverage the DDR operating platform.

The last four months were also a period of strong execution of our strategic objective to opportunistically raise attractively-priced capital. In November we issued $150 million of 10-year unsecured notes at a yield to maturity of 3.5% by reopening our 2022 bond offering at a premium to par. And in January we announced the $1.2 billion refinancing of our unsecured revolving credit facilities and secured term loans, significantly extending debt duration and lowering interest costs.

Our new $815 million unsecured revolving credit facility is maturing 2018 and pricing is currently LIBOR plus 140 basis points, a decrease of 25 basis points from the rate on the prior facilities. Further, annual facility fees were reduced 30 basis points.

Our new $400 million secured term loan also matures in 2018. Pricing is currently set at LIBOR plus 155 basis points, a decrease of 15 basis points from the prior rate.

Also, the size of the term loan was reduced from $500 million with proceeds from the November bond issuance, advancing our goal of lowering secured debt. During 2012 we closed $1.2 billion of long-term financings with an average maturity of 7.9 years and interest fixed at 3.8%, with the proceeds used to retire nearly $1 billion of 4.8% debt.

Our aggressive capital raising efforts over the past few years have certainly lowered our overall cost of capital, balanced our debt maturities, and positioned us well for growth. We have no near-term capital needs with only $41 million of debt maturing in 2013; no unsecured debt maturities until 2015; and nearly 80% capacity on our revolving credit facilities.

As you know, in January we issued 2013 guidance on operating FFO of $1.07 to $1.11 per share. As Paul mentioned earlier, our guidance assumes same-store NOI growth of 2% to 3%, weighted toward the second half of the year; $250 million of acquisitions; and $200 million of dispositions, including $50 million of non-income-producing asset sales.

We were pleased to meaningfully exceed our guidance for acquisitions and dispositions in 2012 and hope to be able to do so again. However, we will not compromise our investment discipline and we will only pursue attractively-priced acquisitions with strong, long-term growth prospects in major markets with leading tenants.

As Dan mentioned earlier, in recognition of our significantly-reduced risk profile, our board of directors approved a $0.135 per share common stock dividend for the first quarter of 2013, a 12.5% increase over 2012's quarterly rate. At an annualized level of $0.54 per share, this represents payout ratio of 50% of our operating FFO. The strength of our operating platform, high credit quality of our cash flows and access to competitively-priced capital should continue in 2013 and beyond, and we expect further strong relative growth in the dividend over the next few years while still generating significant free cash flow for reinvestment.

Earlier this month we announced a new dividend reinvestment and direct share purchase plan, which provided a convenient and efficient opportunity for new investors to purchase the DDR shares and for existing shareholders to increase their holdings, while also enjoying the benefits of compound returns through reinvestment of the dividend. The investor relations section of our website has a page devoted to the benefits of the new plan with instructions on how to enroll.

Finally, we are pleased to announce that we'll be hosting an investor day this fall in Charlotte on October 10. In addition to a corporate update, we will include case studies and a tour of significant recent investment activity which highlights our thoughtful and opportunistic capital allocation strategy. We hope that you will be able to join us.

At this point I'll stop and turn the call over to the operator for questions.

(Operator Instructions) Craig Schmidt, Bank of America.

I guess my question has to do with the lack of new development and what that means to retailers. I think you touched on it in your comments; they are being more flexible. I'm wondering if also they are more willing to accept increases on renewals because of that difficulty.

And are we seeing any -- trying to seek out alternative avenues like triple-net leases to open freestanding stores or anything like that?

Yes, Craig, as we've talked about consistently, while there will be a little bit of new development in this sector, it's going to have very, very little if any impact on the dynamic we talk about all the time. And it absolutely does change. You see it in the spreads.

In our negotiations there -- there is a reason we see our spreads continue to increase and our rents continue to increase. And that's because they need space. That drives the creative approach we take to our leasing, where we're now in a position that we weren't in four years ago where we can get people out and get the right people in. And clearly they are willing to pay for it.

In terms of the triple-net aspect, that doesn't work for everybody. There are very few retailers that can go it alone, if you will. Certainly some of the larger boxes like a Walmart and the home supply guys, and Target and some examples.

But it would not work for a Bed Bath & Beyond, as one example, to do a freestanding triple-net deal. It's just -- they like to function in shopping centers anchored by people like Walmart and Target. So it's not a real opportunity.

It is -- and you've heard me say this before -- they will struggle to hit their open-to-buys and their growth expectations. But that, again, works very, very well for us. And our job is to figure out how to get those winning retailers into our centers and continue to improve the mix, credit quality, and the rent.

I think the other thing to keep in mind, Craig, is that development is not just determined on the financial viability of the project, because I cannot remember a time in the 27 years I've been in this business where the entitlement process is more burdensome. And there's more risk associated with it. Whether it be local, state, or federal entitlements for projects, the risk profile has expanded dramatically.

The amount of up-front capital needed for development to put at risk has been dramatically increased. And of course, the certainty of execution is not there. So even though I think tenants -- the natural and sort of the intuitive thought is that tenants are having a hard time finding space, which is driving rent spreads.

And one of the things that they can do is maybe pay less than they are paying us, but paying more than they would previously for a new development project to spark development. That doesn't mean that it's going to happen, because even if the faucet was turned on today, the average entitlement process for a project of our size -- keep in mind ours are larger than some of the others in the sector -- is two to three years to get to the entitlement process.

So even if the spigot was turned on, you wouldn't see anything new for quite some time. And I'm not encouraged by what I see in the municipal side and the governmental side of cooperation to spur development.

Alex Goldfarb, Sandler O'Neill.

You guys are clearly a power center company. Small shop spaces -- no pun intended -- is a small part of the business. But just curious; there's been strong rebound that we've seen in the results from your peers. And while it is small for you guys, just curious what improvements you've seen in your small shop space, both on an occupancy, perhaps rent. And also if you can remind us the percent of your portfolio that is small shop.

In the under 5000-square-foot category, Alex, which we refer to as a small shop, we are at about 16%, which is down over the course of the year about 100 basis points. So that's one of our objectives, obviously, is to reduce the amount of small shop space in our portfolio.

In the fourth quarter if you look at the supplemental, we were down a little bit in occupancy in that category, but that is solely related to the sale of some assets in Brazil; obviously, a lot of small shop space. That was at a fairly high leased rate. Absent that sale of the Brazil assets, we would have shown about a 30 basis point improvement in our occupancy in the small shop space.

So I would tell you that -- and there's no perfect measurement. I think 15% of portfolio in that smaller space is about right. Obviously, it's got to be the right space and the right assets. That's about 1 million square feet less than we have today and we achieve it through small shop consolidation, asset sales, redevelopment.

And in terms of the deals, the spreads -- the spreads were right on with the -- we see some fluctuation quarter to quarter between the spreads for the box space versus the small shops. But this quarter, as an example, we saw the right about that double-digit increase in new deal spreads on the small shops.

So we're going to continue to make progress. Some of our initiatives have been very successful, such as set up shop and the Franchise Connect program. But again, I want to drive it a little lower in terms of exposure, maybe another 100 basis points, and get it somewhere in that 15%.

Paul Morgan, Morgan Stanley.

On your same-store NOI guidance of 2% to 3% and your comment that you expect that to be back-end loaded, can you does help me triangulate that with what you did in 2012 along with your --? It sounds like you are expecting as at least as much pickup in occupancy; lease spreads at least as strong. I'm just trying to see what would prompt a slowdown to that level for the full year given the strength that you're talking about through all the other relative metrics.

And then should we expect flatter than that number for the first part of the year? And would that be true with occupancy as well, and then ramping later in the year?

Paul, we generally expect 2013 to look somewhat like you saw in 2012. The supply/demand dynamics Paul talked about earlier are still very strong and certainly landlord favorable. Last year we guided to 2% to 3% with a back-end load to that. And so that's the same guidance for this year.

I think we hope to see the same outperformance of that, but where we stand today I think we believe it's prudent to be at that 2% to 3% range and hope we can exceed it. The seasonality does drive more of that to the latter half of the year. Obviously, retailers are not agnostic as to when they open.

And so we do always face a little greater level of move outs in the earlier part of the year and openings in the second half of the year. So I think that leads to the back-end loading. So you could see some deceleration in the first half of the year, but I think we feel very comfortable with the ability to at least meet the 2% to 3% guidance that we've outlined for same-store NOI for 2013.

And as you mentioned, comprised of both the occupancy increases to the same-store pool, which you don't always see flow to the bottom line, because we have been adding inventory through acquisitions of some vacancy. But on a same-store basis, certainly expect to see the occupancy increase as well as continued positive rental spreads in the high single, low double digits and a considerable volume of leasing activity that justifies our ability to push those rents.

(Operator Instructions) Quentin Velleley, Citigroup.

Just in 2012 you'd effectively match-funded that $760 million of acquisitions with equity asset sales and retained earnings. I know in 2013 your guidance for acquisitions is only $250 million. But if you do beat that significantly, how are you thinking about funding that? Would you continue to match fund with equity? Or would you now be happy to do more of it on a leverage-neutral basis?

For us, the first part of it has to be can we source attractively-priced acquisition opportunities. We were pleased with what we were able to find in 2012 and we think there are opportunities out there in 2013. But the driver will be -- can we find what we believe to be well-priced, low-risk acquisition opportunities where we can take an asset and plug it into our platform and get a good initial return and growth after that.

So I think the deals are going to drive the volume of activity, rather than just the funding considerations. But obviously the funding of those transactions is important when you look at the overall picture for DDR.

Exactly, as you said, last year we did overwhelmingly fund acquisition activity with new common equity. It was important for us to not only improve portfolio quality, but also to show noticeable balance sheet improvement by disproportionately funding those deals with equity.

On a go-forward basis, to the extent that we do find attractively-priced acquisition opportunities, I think it's reasonable to expect that the net portion of that, so the portion of that that exceeds disposition activity, will be somewhat funded with new common equity. If we can justify the attractiveness of the deals, I think we would add additional equity to fund those.

But I do think the proportion of that equity would probably be lower than it was in 2012. And so a greater balance in 2013 where acquisition opportunities that we find are going to improve portfolio quality, you will see continued balance sheet improvement.

But also, I think there can be a portion of debt funding on those acquisitions where you do also see a better balance, where instead of FFO neutrality from fully equity-funded acquisitions, you have some amount of benefit to FFO from funding a portion of the net investment activity with debt.

Michael Mueller, JPMorgan.

If we're thinking about the 80 basis point leased increase guidance for this year, for 2013, the question is, do you see the same sort of increase on an occupancy basis? And then where specifically is it coming from? Is it more pure big-box leasing? Is it small shop leasing, or is it kind of combining the small shops? So is it one aspect of that stuff that's really driving the increase?

Well, in terms of the guidance, first of all in the comparison to the occupied rates, Michael, I see that moving pretty much in lockstep. We were about 120 basis points spread between occupied and leased at the end of the third quarter as well as the fourth quarter. As you've noted over the several quarters, down significantly from that peak spread of [300]; still not back to that [50 to 100] normalized spread between occupied and lease.

So I would see over the course of 2013 that we stay in that 100 -- there will be fluctuations obviously, by quarter, but 100 to 150 basis points. And gradually, as we get closer to that full occupancy number, we will see it get under 100 basis points. But I would think that we're going to have a spread that is pretty consistent with the 120 basis points we reported for the third and fourth quarters.

Box space drives the leasing just because it's bigger space. And that happens through whether it is filling vacancy, replacing existing tenants, consolidations of small shop space, redevelopments -- those are the guys. And you see that in high demand book and as we talked about some of the winning retailers out there who are growing in big numbers, they are the ones that are going to continue to drive it.

Get on the small shop, as I mentioned earlier, where you're going to see continued improvement in the lease up. But we are also going to dispose of some of that also through asset sales or through the redevelopment avenue.

I think one of the other things to keep in mind and keep an eye on is this small shop consolidation effort, because it's been extremely successful. And in a supply-constrained market, the creation of space -- that's what I think Paul mentioned in his script, that we'll creatively lease another 11 million square feet. It's not intuitively obvious from looking at our portfolio, which is going to be a 95% lease, exactly where that 11 million square feet comes from, except for the fact that tenants are extremely flexible right now.

We do have a desire, as Paul mentioned, to reduce our exposure to small shop space. And when you combine all that, it's going to give us a good opportunity to consolidate small shop space into box users or juniors. So I think that's going to be an interesting statistic to follow through the course of the year, because we are basically going to have to create space in order to meet the growth demands of our retailers.

And even being creative isn't going to solve the problem that tenants are under enormous pressure to find growth opportunities and they are having difficulty doing so. It's good for the rent story; it's going to be good for the occupancy story; it will be good for the leased rate story. I'm not convinced it's going to be great for the development story yet, as I mentioned earlier. But I think creatively consolidating small shop space is going to be a trend that is with us for a very long time.

Samit Parikh, ISI Group.

Just a follow-up question to the back-half weighted NOI guidance. In your guidance are you assuming and historical average level of move-outs, call it for Q1 and early Q2? Or are you assuming the same level that you saw in 2012 as to what you'll see in 2013?

We're assuming about the same level as 2012. One great example, I think, is Fashion Bug. We're always going to see more move-outs early in the year than we will later in the year. And that's why you see the inconsistency, if you will, on the same-store NOI number over the quarters.

Fashion Bug, we've got 19 right now. They are all closing early in the first quarter. Over half of them are leased. But obviously, there is going to be downtime. And that's just one example of what we see.

With the move-outs, a lot of it is already leased and it's reflected in the leased rate. But you're not going to see those income-producing until later in the year. But it's a consistent story year after year. We don't see any movement up or down. We anticipate about the same number of move-outs early in this first quarter.

(Operator Instructions) Todd Thomas, KeyBanc Capital Markets.

Last quarter you spoke about the mispricing of assets in the marketplace floors some larger format power centers. It was just wondering, do you still say that pricing disconnect today or has the pricing come in a bit over the last few months? And maybe some comments on just pricing for the properties that you are underwriting today would be helpful.

Well, we do see continued pricing disconnect on what we're underwriting. They've come in a little bit and there has been some cap rate compression on some of the large power centers that we're looking at currently, primarily because year-end sales results were very good. And the balance sheets and the credit quality of those cash flows are very attractive to some institutional capital.

So we are seeing a little bit, but not enough to discourage us from pursuing some of these assets aggressively. We think that if you look at some of the other sectors and some of the alternative investments, we still feel that power centers are attractively priced. We feel that our portfolio could create value on assets that others look at as core, we look at as core-plus.

We have very, very close relationships with the tenants that are giving us a lot of direction on assets that they think could be more than they currently are. A number of the assets are still owned today by over-levered or under-capitalized private owners who need to figure out a strategy on what to do with the asset. And we're here to help.

So I think that you'll continue to see us effectively assess the market. Like David said, I'll be very disappointed if we hit our guided number of $250 million of acquisitions and I fully expect that we'll exceed it.

Wes Golladay, RBC Capital Markets.

I'm just going back to this guidance of $250 million of acquisitions. In light of what you guys did last year and the improvement of the cost of capital, what is holding you back from meaningfully exceeding that goal? Is it the lack of deal volume you're seeing? Or are you waiting for more dispositions to fund the acquisitions?

Last year we guided to $150 million of acquisitions. And our share, by year-end, we ended up closing on $760 million of acquisition activity. So it will be opportunity-driven. And we do think this is a very achievable number based on what we're seeing today, as well as just being early in the year. And we think our relationships will continue to source some attractive and unique opportunities.

I think the biggest risk for us to only achieving or even not achieving the $250 million of acquisitions is the pricing for power centers goes up significantly in the near term. I'd characterize that as a risk to the acquisition opportunity, but I don't think that's a risk to the Company overall as we're obviously very well-positioned for that trade.

So to the extent that the environment remains as it has been recently, and of course, things slowed down around year end and they're just actively ramping up again for 2013 where transactional activity is becoming a bit more significant. And we are still seeing acquisition opportunity that allows us to find some assets without having to compromise our discipline. To the extent that environment continues, we think the $250 million is extremely achievable.

To the extent that asset pricing goes up significantly, we think that our portfolio is very well-positioned for that. But we are active in the market and hope that we can exceed that guidance.

Tom Truxillo, Bank of America.

David, obviously you guys have done tremendous work in getting your balance sheet in order. But if I look at your five-year plan, you still have about a turn of leverage either way you look at it, pro rata or consolidated, a turn of leverage that you need to go down in order to meet your five-year plan. And you only have about a year and a half left to do it.

So I guess the question goes back to acquisition pace and the earlier question on how you fund that. Don't you have to acquire more assets, and with an equity-heavy focus on funding those acquisitions in order to accomplish those goals?

I certainly wouldn't say we have to acquire more assets or fund it with all equity. I think that's certainly one tool. In our normal investor slide deck may show the various sources of opportunity to lower debt to EBITDA from free cash flow, from the non-income-producing assets sales.

I think one of them that's going to be more important on a go-forward basis is we've been ramping up the redevelopment program and putting additional capital into there, as well as ramping up development in Brazil. We've putting more capital into some of those activities where you haven't seen the EBITDA come out the other side.

And so I do think there remain a number of significant and important levers for us to continue to reduce debt to EBITDA acquisitions that are somewhat equity funded is absolutely one of those. It was a key for us last year and I think it can still be an important one for us going forward, but it's certainly not the only arrow that we have to achieve those goals.

I'd also note one thing that is difficult when you look at these stats for any individual period is the acquisition activity was disproportionately in the second half of 2012. So year-end balance sheet is reflecting the entirety of the debt that was taken on, or of the funding that was done for those deals, however, were reflecting much less in a year of the actual impact that's coming from that.

So even though the Blackstone deal was announced in early January, it didn't close until midyear. And the majority of the other transactional activity was all in the second half. The $150 million of North Carolina deals we closed in the fourth quarter were in the last 10 days of December.

And so I think there are -- there is a good case for some built-in improvement to those metrics just because of showing a point-in-time balance sheet that reflects the funding of transactions, but not by any means reflecting -- certainly not a full year, but in a lot of cases, not even a full quarter for the fourth quarter of that EBITDA. So I think there are quite a few ways that we expect to continue to reduce debt to EBITDA on a consistent basis.

(Operator Instructions) Cedrik Lachance, Green Street Advisors.

Sorry to keep asking questions about acquisitions, but when you look at your joint ventures, how important do you think they could turn out to be as a source of acquisitions over the next two or three years?

I think it's going to be a great source of acquisitions, because number one, the great thing about that relationship is that the underwriting and the due diligence risk is basically removed from any of those assets. So we can be very, very confident in not only the performance of the asset but the appropriateness of our pricing.

So we do have an internal preference to acquire assets from joint venture partners, particularly assets that we have a long operating history with, and many of the assets that we actually to build. So I think that is an area of absolute focus for us on an internal basis.

That being said, we are obviously active outside. We can't rely on that solely because we don't control when those assets trade. But we do certainly have great relationships with our partners who own the assets that we want to own, and we will continue to pursue that as a primary opportunity to provide us product.

Andrew Rosivach, Goldman Sachs.

Digging in, you had a really big move in the development projects, primarily on [hold line]. It was [409] September 30 and now you're down to [273]. And it looks encouraging because obviously you didn't have $130 million of impairments. So I thought maybe you could walk through what you sold. And maybe did some stuff get promoted, that there were some old pre-developments that now actually make sense to build?

There are a few different pieces of that. I think, most importantly, we did have our largest quarter of sale activity in terms of non-income-producing assets in the fourth quarter, including one large site in Toronto and a number in the US, one significant one that now shows up as a development in progress.

The first part of that was an asset -- a land sale to a major anchor for that project, so not only cash in the door, but also a project that moves into the CIP line, as we've now got an anchor building their store, and certainly increased value of the land next door. As we think about the opportunity to monetize these sites, some of it is going to be a land sale.

And in certain circumstances we'll certainly evaluate whether it makes sense for us to build box space, given how strong the demand is next to that. So I think that was another important part of that as some -- as at least one asset moved from the on hold into CIP.

We continue to make progress on asset sales. We've talked about it, the monetization of non-income-producing assets for several years. And I think it's been an area of disappointment internally that it has taken so long.

But the fourth quarter was certainly a highlight for us, both in terms of what we got sold as well as certain projects where a portion was sold and then a portion moves into CIP, and may end up being space that we develop over the next several years.

Alex Goldfarb, Sandler O'Neill.

Just going to Brazil quickly, obviously we've heard from GGP that potentially they may do a direct investment down there. You guys have been pretty clear in the past that you would only execute through Sonae Sierra.

So assuming -- just want to confirm, one, that is still the case; two, how you think about Brazil, especially given that there were a few minority interests where the companies sold out of or Sonae Sierra sold out of. So should we expect more dispositions from down there?

And then what should we expect on the acquisition/development [front] line? Should we expect more of that or just a steady state?

Well, first, we are only interested in investing in Brazil through our Sonae Sierra entity. We have a very strong partnership there. We are actively involved in the operations of the company. We have 154, I believe, employees down there.

And David, Paul and I are very active with our partners in Portugal. And we're very pleased with the relationship. So we would not be looking for direct investment opportunities in Brazil at this time.

Yes, we've got a good team down there. They are executing on the plan. We were active late in the year in selling some non-prime assets.

I think that is part of the DDR mentality that we have been practicing for a number of years -- how do we best position the portfolio as a whole for long-term growth. There are a lot of aspects to that, that relate almost exclusively in directly to the operating platform. But there's some of that that is on the investment side, where we need to be redeploying capital out of what we believe to be slower growth investments and into higher-growth investments.

And so that's exactly what you saw with Sonae Sierra Brazil's announced dispositions in the latter half of the year. And so I think you'd take that capital out of non-prime assets in that market. And for Sonae Sierra Brazil, that largely is getting then reinvested into the couple greenfield developments that we have under way and in lease-up today.

We're also evaluating acquisitions in that market, but that's certainly a challenging endeavor down there.

Tom Truxillo, Bank of America.

Just a simple question first. Do you think you will accomplish those leverage goals you laid out in the five-year plan in the next year and a half, given that if you give yourself credit for a run rate of EBITDA that would be consistent with recognizing a full year of your acquisitions?

And then, two, if you do accomplish that goal, given the work that you guys have done in improving the portfolio, a greater percentage of prime assets, large or unencumbered asset-base, much better balance sheet, do you look at those metrics and compare yourselves to your higher-rated peers and think that you'll continue to move up the credit rating spectrum?

On the first one, will we accomplish the goals we've outlined, yes, we will. I would like to give a more conservative answer, but Dan gave me a dirty look, so I think we can be very clear on that one.

As we've built that credibility over the past couple years, an important part of that has been telling people what we were going to do and then executing on it -- not changing that plan; not deviating from that; not explaining, here's why it was hard or this is what changed. So I think we want to absolutely indicate that we continued down the path that we've outlined.

That includes the improved balance sheet, the improved portfolio quality, but also growth to the bottom line that you'll see more going forward. And so I think we believe all that is achievable.

And to the second part, yes, we absolutely comp ourselves to more highly-rated peers. We even further comp ourselves to the best-of-breed aspirational peers in the industry as a whole. And I think we've tried to be clear in our investor presentations that we're not done yet.

We're proud of the accomplishments of the past couple of years, but we're not done yet. And we do consistently reset those goals internally to make sure that we're challenged to continue to improve.

So I think for a long time the story was very clear and simple -- that we needed to get back to a consensus investment-grade rating on our bonds. Having achieved that, it certainly doesn't mean we're done. We do think over the next several years that there are additional steps to that.

I think Moody's positive outlook on our investment grade rating with the potential to move that a notch higher is a clear indication of that. And we continue to look to make more progress on our leverage metrics, and hope that both fixed income investors as well as the rating agencies recognize that and reward that with further upgrades over the next several years.

I would now like to turn the presentation back over to DDR management.

Thank you very much for joining us and we look forward to speaking with you with our first quarter results.

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