Site Centers Corp (SITC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 DDR Corp earnings conference call. My name is Gwen, and I will be your operator for today.

(Operator Instructions)

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

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

Please be aware that certain of our statements today may be forward looking. Although we believe such statements are based upon reasonable assumptions, you should understand these statements are subject to risks and uncertainties, and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the press release, issued yesterday, and found with the SEC on Form 8-K and our Form 10-K for the year ended December 31, 2012, 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 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 is my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Samir. Good morning, and thank you all for joining us.

I would like to started today's call by reiterating that we are very pleased with our fourth-quarter and 2013 results, and even more pleased with our 2014 guidance and 15% dividend increase. These results would not be possible without the continued transformation of our portfolio through active portfolio management and capital recycling, a robust and strategic leasing and redevelopment platform, and prudent capital allocation and balance sheet management.

2013 was another year of continued progress and achievement toward the goals and objectives contained within our strategic plan. We creatively sourced and acquired over $2.3 billion of prime assets, on a one-off basis, as well as through larger portfolio transactions, while opportunistically raising and allocating shareholder capital.

Operationally, we generated same-store net operating income growth of 3.3%, signed over 1,700 leases, achieved blended leasing spreads of more than 8%, and transitioned premier tenants, such as Nordstrom Rack, Whole Foods, LA Fitness, and Five Below, into our top-50 tenant roster, while achieving consensus investment-grade ratings. 2013 ended on a strong note, and the momentum has accelerated into 2014.

As announced in our 2014 guidance press release, we are expecting another year of operating FFO growth north of 7%, driven by continued improvements in operational metrics and strategic capital allocation. 2014 will see the continuation of our efforts to actively monitor and participate in market opportunities as we pursue the creation of long-term shareholder value on a risk-adjusted basis. In spite of the obvious operating momentum, like clockwork, this time of year always seems to have investors and market participants tepid about growth prospects, with their outlooks clouded by bearish headlines and volatile prognostications.

Whether it's headlines regarding holiday sales reports, the impact of unpredictable weather on retailer fundamentals, conclusions drawn about the consumer, or changes to fiscal policy and leadership, we tend to begin each year with varied speculation and trepidation. Last year, we talked about the potential impact of higher payroll taxes, Washington dysfunction, and gasoline prices. The year before was also gasoline prices, warm weather, and the impact of cotton inflation on ready-to-wear margins.

Suffice it to say, while relevant discussion points at the time, over the course of the year, these issues were overcome by the consumer, who, once again, remained resilient and continued to vote with his and her dollar in favor of retailers offering the best merchandise, value, and convenience.

This year, mixed in with the headlines of our holidays sales, cold weather, and shopper traffic, are the recent macroeconomic trends being reported in Puerto Rico. Given that a volume of inquiries from several of you on this call regarding our stake in Puerto Rico, I would like to address the growing discussion regarding the implications of the recent trends being observed, and what it means for owners of high-quality retail properties. You have heard me say several times before, that the great thing about our business is you don't have to guess who the winners and who the losers are in retail, due to the transparency offered by operating results. Puerto Rico is no different.

Given the size and scale of our portfolio on the island, we have disproportionate access to market information, and we don't have to speculate about the economic impact on the performance of our portfolio or the pulse of the local consumer. For those of you who have been on our recent property tours and have witnessed the foot traffic in sales, or those of you who have accessed our website to review our presentation on Puerto Rico, will not be surprised by the following statistics regarding the stability and performance of our portfolio.

First and foremost, due to the domestic acquisitions, primarily the Blackstone transaction in 2013, Puerto Rico now accounts for 12.7% of pro rata NOI, down from 14.3% last quarter. On a blended basis, base rents per square foot are up 21% since 2010, with new lease rentals up 33% over the same period. Over the past three years, we re-leased 38% of the entire portfolio, while maintaining an average occupancy rate of 96.5%, and bringing several US base retailers to the island to improve the credit quality of cash flows.

Occupancy is on track to grow by 50 basis points in 2014 to over 97%. In 2013 alone, NOI grew over 4% and is expected to grow by more than 5% in 2014. Also in 2013, leasing spreads were a positive 34% on new deals and 10% on renewals. This is on top of positive 15% spreads on new deals and positive 4% spreads on renewals in 2012.

In perhaps one of the most likely reported metrics, yet most telling in an area of focus for us internally as an indication of retailer health, our accounts receivable in Puerto Rico are now at an all-time low. Over the past two years, the accounts receivable balance in Puerto Rico has declined by 71%.

Based on the statistics I just highlighted, and similar to the commentary you have heard from other significant owners of retail, like our friends at Kimco, the macro story in Puerto Rico simply does not translate to the micro performance of our assets. Retail is a local business. Portfolio operations in Puerto Rico continue to be solid; and in several cases, outpace the fundamental results of many US states with superior demographic forces.

Rest assured, however, that we are watching the situation very carefully, are sensitive to government policy that may result in a negative impact, and have joined forces with our friends on the island to ensure that our investment interests are protected. I am very pleased that under the present circumstances and current narrative, we are not attempting to move capital through acquisitions, dispositions, or new development.

Conversely, we are operating an existing portfolio of high-quality assets that are well leased and dominate the densely populated trade areas. As a result, our portfolio in Puerto Rico is at the low end of the risk spectrum and the high end of performance levels.

Simply put, rent, occupancy, and NOI continue to rise, while accounts receivable continue to decline. The numbers and performance are clear, Puerto Rico is a story of prosperity, not distress.

Before turning the call over to Paul, I would like to briefly address the small-shop leasing environment, and in particular, the impact small-shop leasing is having on our portfolio. Given the concentration of big boxes in our portfolio, and limited amount of small-shop space relative to our peer group, our leasing activity of small-shop space tends to get lost in the discussion and is perhaps under appreciated. Small-shop leasing has been an area of growth in our portfolio, and several operational metrics have been accretive to overall portfolio operations.

We could not post the strong leasing spreads, occupancy gains, and rental increases that we have reported without our small shops. Year over year, our small-shop lease rate increased 230 basis points to 86.6%, and outperformed our overall portfolio in the fourth quarter with combined leasing spreads 180 basis points higher.

Given the quality improvement of our asset base, we are confident we can increase the lease rate of this portion of our portfolio to 92%, which represents significant organic growth, and approximately 800,000 square feet of future positive net absorption, and a mark-to-market rate of approximately $25 per square foot on currently vacant space. While the credit quality of cash flow in this category pales in comparison to the junior-box category, the opportunity is indisputable, and certainly adds to our overall growth story, and is clearly an area of focus and appreciation internally.

At this point, I will now turn the call over to Paul.

Thanks, Dan.

The operational momentum we saw during the first three quarters of 2013 clearly continued into the fourth quarter, and we are extremely proud of our team and the results delivered in the quarter and for the full year. As a result, we surpassed our guidance and year-end leased rate goal of 95%, with a 95.1% leased rate, up 30 basis points sequentially and 90 basis points year over year.

We completed 2.5 million square feet of new deals and renewals in the quarter and 10.3 million square feet for the year. This was the fifth consecutive year we topped 10 million square feet in deal volume. Pro rata spreads were again strong, with a positive 20.7% new-deal spread, a 7.9% renewal spread, and a 10% combined spread for the quarter.

We continued to execute on the growth levers we laid out at Investor Day, and I wanted to highlight a few specific examples of our proactive approach, which continues to go well beyond the obvious vacancy. In Jupiter, Florida, we terminated an underperforming Stein Mart and are backfilling the space with Marshalls/Home Goods combo store, resulting in a 185% rental comp, as well as dramatic improvement in the credit quality of cash flow. Furthermore, the addition of Marshalls/Home Goods is allowing us to drive leasing and rents for the adjacent small-shop space by 20%, improving the NOI of this asset by 50%.

As you may have seen in our recent press release, we also completed two new Nordstrom Rack deals in the quarter, recapturing the Babies R Us lease in Brandon, Florida, and a Barnes & Noble lease in Columbia, South Carolina, with rental comps up 160% and 15%, respectively. These deals were made possible through a combination of strategic leasing initiatives, the consolidation of small-shop space, the creation of new GLA and repurposing of a former storage unit. All of which resulted in a better merchandising mix and a 20% blended NOI improvement.

In regards to continuing this growth in our outlook for 2014, while a lot has been said and written about the recent holiday season, what I would like to make crystal clear is that we are not seeing changes to the long-term strategies of the successful retailers, nor any slowdown in their demand for space. Healthy retailers continue to aggressively expand their footprint. Given this demand for space, I am challenging our team to again deliver over 10 million square feet of leasing in 2014.

Our pipeline of deals coming out of the fourth quarter, and early indications in the first quarter of 2014, give us great confidence in our revenue and occupancy guidance for the full year. We can and will capitalize on this unique environment of strong demand with virtually no new supply.

We continue to view every asset and space with an eye to maximizing growth and net asset value. One great example of this is in Westlake, Ohio, where we have recently terminated an underperforming Kmart, which was paying low-single digits per square foot, and we will have full control of this space at the end of May.

More important than simply having control of this highly valuable underutilized space is the fact that we are now in a position to redevelop this entire center to a higher and better use. The spreads on the 90,000-square foot Kmart box alone are in the 600%-plus range, and we will now have the ability to redevelop the entire site and grow NOI even further.

Before turning the call over to David, I want to provide an update on our redevelopment program, as it is our most significant internal growth driver, with cash-on-cost yields continuing to average above 10%. Since launching the redevelopment program in 2011, we have completed 45 projects, with a net investment of $240 million, at an average cash-on-cost yield of over 12%. Our active project list now includes 60 projects with a projected net investment of $570 million, with an average cash-on-cost yield continuing to be over 10%.

In 2014 alone, we will spend over $150 million and bring in at least $100 million into service at various times during the year. We remain confident this program will grow to over $1 billion.

I will, now, turn the call over to David.

Thanks, Paul.

Operating FFO was $104.5 million, or $0.29 per share, for the fourth quarter, a 7.4% increase over last year. Including non-operating items, FFO for the quarter was $117.2 million, or $0.33 per share.

Non-operating items primarily consisted of the gain on change of control of interest related to the acquisition of 30 prime power centers from a joint venture with Blackstone. For the full year 2013, operating FFO was $366.7 million, or $1.11 per share, an 8% increase over 2012.

2013 was another robust year of capital raising, as we raised over $2.8 billion of equity and debt capital. For the year, we issued $827 million of common equity at average price of $18.76 per share, just on the acquisitions of prime power centers, and $150 million of 6.25% preferred stock to redeem $150 million of 7 3/8% existing preferred stock.

We also raised $300 million of 10-year senior unsecured notes at a 3 3/8% rate in May, and $300 million of 7-year senior unsecured notes at a 3.5% rate in November. The average spread over US treasuries on the two issuances was 154 basis points, which is over 80-basis-points tighter than the average spread on three prior debt offerings in 2011 and 2012.

In addition, we opportunistically accessed attractively priced long-term debt with a proactive refinancing of our credit facilities and secured term loan in advance of their maturity, decreasing the average spread of 20 basis points. As we head into 2014, we have an unencumbered asset pool that is now valued at $5.5 billion by our bank covenants and much more by the transactional market. A significant increase from $4.3 billion at the end of 2012, and consisting of assets that are of materially higher quality than in the past.

The Talf mortgage loan that encumbers 27 low loan-to-value assets matures in October of this year and will provide a sizable opportunity to further increase the size and quality of the unencumbered pool. Our progress was acknowledged with an upgrade by Moody's to Baa2 in the fourth quarter, further solidifying DDR as an investment-grade credit.

Despite the negative macro headlines on Puerto Rico in recent months, financing from top life insurance companies continues to be available at attractive rates for mortgage debt on high-quality shopping centers on the island. Although our overall strategy is not to encumber many more assets, particularly those with redevelopment potential, we have recently explored the possibility of adding additional mortgage debt on one asset on the island and have received quite positive feedback from lenders that know the commonwealth well.

These lenders indicate that their is considerable interest in lending on a long-term, non-recourse basis on our typical assets in Puerto Rico at normal LTVs, with an interest rate of approximately 4.5%, 10 to 20 basis points higher than available on high-quality mainland assets, which is in line with historic norms, and which supports the fundamental strength, stability, and high-credit quality of our assets, specifically in the attractiveness of retail in Puerto Rico in general.

Turning to transactional activity, we completed $2.3 billion of acquisitions and $430 million of dispositions in 2013. We acquired 46 prime shopping centers, totaling over 17 million square feet, with an average size of approximately 380,000 square feet, and located primarily in the top-40 MSAs. Over two-thirds of the acquisition value is financed through new common equity or asset sales, consistent with our commitment to lowering leverage.

We sold 80 non-prime assets, totaling $433 million, of which our share was $296 million for the year, and 20 non-prime assets totaling $184 million, of which our share was $98 million in the fourth quarter. 27 additional non-prime assets, totaling $185 million at our share, are currently under contract for sale, including $49 million of non-income producing assets.

Regarding pricing, we continue to see a steady increase in the number of institutions, such as pension funds, private REITs, and sovereign-wealth funds, with a growing appetite for power centers. A trend that continues to drive cap rates down for our property type in the face of a rising interest rate environment. Despite the demand for our preferred property type, a healthy spread still exists between more power centers and similarly located grocery-anchored neighborhood centers trade in the private market, and we believe this gap should narrow as the market share shifts to our top tenants.

This strong pricing environment has allowed us to make considerable progress in our disposition goals only six weeks into the year. However, we are advancing several acquisition opportunities and continue to believe that both sides of our transactional guidance are achievable.

As we look forward to the remainder of the year, we currently see no major assumption changes that would lead to a guidance revision from our January release. The 2014 operating FFO-per-share guidance range, therefore, remains at $1.17 to $1.21 per share, implying year-over-year growth of 7.2% at the midpoint.

Finally, we declared a first-quarter 2014 common-stock dividend of $0.155 per share, representing a 15% increase from the prior year. Our payout ratio is approximately 50% of operating FFO, which continues to be lowest in our peer group, and allows us to the opportunity to fund our significant development pipeline, and also the potential to raise the dividend at a growth rate in excess of operating FFO growth over the coming years.

At this point, I will stop and turn the call back to Dan for closing remarks.

Thank you, David.

I would like to conclude by reiterating that our story remains intact and performance continues to accelerate. Portfolio quality is excellent, growth is extremely visible, macro challenges have become more micro opportunities, and 2014 guidance contemplates competent execution in the face of perceived headwinds. Moreover, this management team is committed in 2014 to remaining visible, available, and transparent regarding our specific performance and the overall market conditions that we experience daily.

Again, I thank you for joining our call, and I will now turn it over to the Operator for your questions.

(Operator Instructions)

Our first question comes from the line of Christy McElroy from Citigroup. Please proceed.

Hi, good morning, everyone. Dan, sort of a longer-term, bigger-picture question for you, you touched on this a little bit in your opening remarks, and Paul you also reiterated continued strong fundamentals, but I'm wondering if you could provide some additional high-level thoughts on the continued noise around the potential for future big-box closures?

It's consistently a pushback that we get from the investment community, given the increasing competition of Amazon for many of your tenants. And that goes beyond the typical areas of concern in consumer electronics and book stores and office suppliers.

How do you address that argument against the future of power center retailers? Can you provide sort of a sense for how your retailers are using the Internet to compete?

Sure, that's a great question. And it's an interesting question, Christy, because there is chatter, obviously, and we deal with the possibility of store closures on a regular basis. And, the truth is, we haven't seen it.

You have seen the Sears announcements; you've seen the Penny announcements. For years we heard about Best Buy store closures. We had one over the years. There is a lot of noise about it, but there's not a lot of evidence that it's happening in the power-center community and that it is going to affect us in any meaningful way.

What it does, though, however, is it creates an opportunity for us that we are pursuing very aggressively. So for example, we are of the opinion that the office-supply business, in general, should shrink. It should shrink in square footage, and it should shrink in number of stores. But when you have a portfolio that's 95% leased overall and 97% in prime asset, and you have record demand for space, that's a great opportunity for us, and we are aggressively pursuing those retailers in an attempt to get back that space.

The problem is, is that they don't want to give back space in good assets. They want to give back space in bad assets. And fortunately, we don't have a lot bad assets left. And, the good assets require a lot more work to try to get a retailer to give up that real estate, particularly if that happens to be a store that's making money.

Retailers can't close stores that make money; it really is that simple. If they start liquidating profitable stores, then they're really in the real estate business, they're not really in the retail business. So, we continue to battle that.

Overall, though, we're seeing less discussion about store closures than we have in prior years. And, one of the reasons is, in fact, the Internet. The shop online, pick up in store concept continues to accelerate, and it's been very successful with our tenants. We are piloting a program right now with Wal-Mart, out in Denver at one of our assets, just to see exactly how we can make it a convenient experience for the consumer.

If you really believe that shop online, pick up in store, is going to be an important part of your future business plan, and we happen to think that it will for most retailers, then you need to ensure that you have the right inventory levels. And, you need to really ensure that you have the right location that's convenient for the consumer to actually pick up the goods. Because if it's inconvenient, or it's a bad experience, they're just simply not going to do it.

And, the worst-case scenario is for a consumer to arrive at your store, and you not have the inventory. That's the fastest way to make an enemy. Retailers understand that.

Store square footage isn't shrinking. Stores aren't closing in quality assets. And, with the upgrades that we've done to our portfolio, and with our occupancy levels where they are, our asset quality is at the very high end for the very tenants that people perceive as being somewhat at risk. So, we actually become more important, not less important, to those retailers.

And Paul, is there anything you want to add to --?

No, I would just add that, that said, we're not sitting back waiting for any of the retailers that you might pick out, Christy, such as books or electronics or office supply or toys. We're engaged with these retailers on a regular basis, and we know the demand is great out there for some of their good real estate and what we'd like to have back.

So, we are in active negotiations and discussions with these retailers. To Dan's point, not all want to close good stores. We'll be taking the initiative as we look at what we would like back to improve the merchandise mix and the cash flow of the center.

Your next question comes from the line of Ross Nussbaum with UBS. Please proceed.

Hello, guys, good morning. I appreciate the comments on Puerto Rico, because I think you're right, that's been a focus lately. Can you add some color on what you've been seeing in Brazil lately, and if you can give some of those same operating stats? And then, talk a little bit more about your strategic thoughts in terms of Brazil's fit into the portfolio going forward? Thanks.

Sure. We don't have that significant of an update on Brazil relative to what we've consistently said in the past on performance down there. Also, I have to acknowledge that they report earnings in less than two weeks, with a report on the 26th and a call on the 27th. So, their operating stats will come out at that time in great detail. But in general, operating fundamentals remain strong at the stabilized malls.

All of our Greenfield assets have now opened. They did present more of a challenge, both in terms of cost as well as in terms of time to stabilization, but I think that's very consistent with our comments over the past several quarters.

In terms of our long-term thought process, I think the bar is set high for anything that complicates this company, and the expectation is that it would require a well-above average, long-term return to justify that complication. We will continue to evaluate all options and choose the course that maximizes shareholder value for that investment.

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

Good morning out there.

Good morning.

Echoing it as well, thanks for the Puerto Rico comments, because that's been just huge from folks, especially who cover the financials. A question, David, as you guys -- you talked about acquisitions. So one, if you can remind us what's in your guidance for acquisitions?

And then, two, how you guys think about doing acquisitions, especially if it's a larger-scale thing, if it still would be a JV structure, sort of like what you used with Blackstone? Or, if you guys are getting more confident in your ability to accelerate IRRs, where you are fine issuing your own equity, which on our numbers is around a [7%, 7.1%] to buy maybe [mid-6%s] that maybe on an IRR basis, you can get a mid return? Just want to understand that better, especially if there is this disconnect where you guys have an skill set and an operational understanding to act quicker than others, and take advantage before the gap continues to close.

Sure. Our guidance included very modest net acquisitions for the year, so about $250 million of acquisitions and $200 million of dispositions. As you can see so far, we are well on our way on the disposition pace, and making good progress, although not as advanced, on the acquisition pace. It is safe to assume that a large reason for that is that, even with the increasing interest rates we've seen, we have not seen any downtick at all in the pricing for power centers, or uptick at all in the cap rate for power centers. And so, we've advanced the sell side a little more rapidly than the buy side.

We continue to look at a very large number of opportunities, some of those marketed, most of those non-marketed. Most of those continue to be one-off assets, where we believe that we can add some specific value to a center, based on our knowledge of the center, the trade area, or specific tenant interest within that center.

But, we also have evaluated a number of portfolio deals. I don't think you will see us lose any discipline regarding portfolio deals, in terms of underwriting and how cautious we would be with it. And, at times, that does make it more challenging to underwrite a very large portfolio in a short period of time, given the level of due diligence that we would absolutely expect to do.

And secondly, the competition for the larger deals is, as more capital comes to the space, has only been more significant, so we continue to look at everything. Some of which is known, some of which, certainly, is not known broadly. And, we continue to evaluate deals and feel comfortable that we can achieve that $250 million or so of acquisitions for the year. We have guided to that level the past several years, and we have massively exceeded it.

But, I think we've tried to be prudent with guidance, where we're not going to force ourselves to take on a deal where we don't think, either the pricing is appropriate or the risk profile is appropriate. So, I think the reasonable guidance is something that benefits us in a year when pricing has been a little higher than we expected. And so, we continue to evaluate deals.

I think, number one for us is always the evaluation of the transaction. Can we make money on this shopping center or not? And number two, then, is how we would finance that.

And at today's, or at the recent share prices, we have not issued equity. We have not been at all inclined to issue equity. And so, I think that's an important signal in terms of how we would think about funding deals going forward, and especially as we sit ahead on the disposition volume, that puts us in a strong position to fund any acquisitions that we're looking at this point.

Your next question comes from the line of Craig Schmidt with Bank of America. Please proceed.

I guess tagging on Alex's question, with your focus to continue to improve DDR's portfolio quality, does that look like it may be coming less from acquisitions and more from redevelopment?

I think redevelopment, obviously, is a great opportunity, and it is really the best use of our capital, so we'll continue that redevelopment will be a big part of how we intend to improve the quality of our existing portfolio. A lot of that redevelopment, though, keep in mind, Craig, is really at our very best assets, as well. So, the improvement and the quality, it's hard to go from an A to an A, in some cases, but the improvement really becomes merchandise mix and offering to the consumer.

As far as acquisitions are concerned, we still live in an extraordinarily fragmented universe. The owners of quality power centers across the US has been -- is as fragmented as it has ever been. And, we still do view that as an opportunity to improve the portfolio. So, it will be a combination of both.

I think the fragmentation, and in some cases, the mispricing gives us the opportunity on the acquisition side. And, the real gap between the supply-and-demand dynamics that currently exist on the landlord-tenant relationship side gives us extraordinary redevelopment opportunities, so I think you'll see a healthy dose of both.

Your next question comes from the line of Paul Morgan with MLV. Please proceed.

Hi, good morning. It was encouraging to hear the target for the small-shop occupancy. I don't think you were tracking it that closely, in terms of break out prior to the recession, so I'm just trying to get a sense of how do you get to the 92% number? Is that based on where your top centers are and getting others up there?

And then, also, where are you seeing this strength coming from? Is it larger franchisees, is it segments within the space, like restaurants or healthcare or anything like that? Is there any color you can provide to show how you're going to get from where you are now to 92%?

Yes. It's a great question, Paul. I don't know if you remember last quarter or Investor Day, we were probably talking about 90%. The fact is, as we have improved the quality of the portfolio and we're more of a power center across the board versus the grocery-anchor community center, there's a higher quality of small-shop space within those assets. Higher-quality anchors, a higher-quality small-shop space, a lower percentage of shop space within those assets.

We took a hard look, over the last couple of months, and quite frankly, we were aiming too low. Historically, this group -- this less-than-5,000 square feet hit about an 89%, maybe 90%. We're quite confident, as we look at it now, we look at the improvement in the quality of the portfolio, that 92% is very achievable. And as I have said on other goals we have internally set before, I'm not sure we stop there, it's something that's reaching beyond where we've been in the past, and it is all about quality.

In terms of who we're leasing to, it is all the categories you mentioned. The traditional food, some of the newer non-traditional, Chipotle, Panera, the cell-phone users, the service-oriented shops, franchisees in general. We are seeing improved health, in the part of mom and pops, but they're really not going to be the story in our portfolio that power-center format going forward.

But again, quality, better quality of small-shop space, and quite frankly, we were aiming too low. And, we're confident we can hit that over the next several years.

We do struggle, Paul, a little bit. You mentioned healthcare, for example, and I know there's been quite a bit of conversation about that. We do have internal discussions on a regular basis as whether we should lease space to non-retail users. And, one of the problems with doing that, of course, is it's typically not an acceptable co-tenant to retail users. So, while it fills space and it pays rent, from a merchandise-mix standpoint, if you have a high-quality center, you've got to be very careful where you grow in the service industry, because the perception of your asset can change depending on who you lease to.

We probably are doing less healthcare, less non-retail, if you will, uses in our small-shop leasing, and I think that will continue out of availability of interest, quite frankly. We have enough small-shop interest in the typical retail uses that we don't have to go sort of off the reservation and lease to folks that aren't really compatible with our anchors or the other small shops in the shopping center.

Your next question comes from Jonathan Pong with Robert W Baird. Please proceed.

Hello. Good morning, guys. You've been sitting on some ground-up development projects for a while, about $250 million on hold. Can you talk a little bit about where you see that activity going in 2014, and maybe the composition of projects there that you'd like to sell versus continue to build?

Yes, Jonathan, we've made some great progress, obviously, over the last couple of years, whether it's been pad sales, anchor sales, non-retail users. We brought Seabrook, which is seeing is up, a great ground-up development project, which will open late second quarter of this year. That's land we've held for a number of years.

As the market, the economy, the demand got better, we now have a center with Wal-Mart, Dick's, Michael's, Ulta, PetSmart -- name your best-in-class retailers. It's a great story. Merriam, Kansas recently showed up on our projects under development, it was also land held for a number years. Sold a big piece to IKEA and developing around that, again, a great story.

We have got a couple more, which are not fully active at this point, but again, as demand increases and the market improves, we see more and more of our land that has been in that held category becoming ground-up development. We've got one in Connecticut and one in Florida that we're very focused on, and moving towards either a late 2014 or 2015 start for those projects.

So, it's all great news. Couldn't have told you the same story four years ago, but again, that's a function of the demand that's out there and the improving market.

Your next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed.

Dan, just wanted to go back to your opening comments about the headlines and some of the noise we hear every year at the start of the year. Just curious, the headlines had been fairly negative on the retail side, just wondering what your major takeaways were from holiday 2013?

Well, my major takeaways really were that, while it was just a fair season overall for retail, I would much rather be a retailer, today, than a vendor. The amount of pressure that retailers are putting on the vendors -- because it's interesting, while sales sometimes aren't great, and even reported margins aren't always terrific, balance sheets are pretty darn good. And, one of the reasons why that is, is because vendors are supporting these retailers in a variety of different ways and supporting the sales and supporting the markdowns.

So, my general feeling was that I'm not concerned, from a retail perspective, because there's always support coming from the vendor community. But, I think it's going to be an extraordinary difficult year on the vendor community, and I think the pressure that they were under on this holiday season was somewhat unprecedented, particularly because we had a shorter selling season, therefore markdowns came earlier and markdown support had to come earlier. So, it's interesting to watch it.

I think one of the things that's really happened is that the holiday-shopping season has changed dramatically over the years. We used to sit around and really feel that on December 26, if the numbers weren't great between Thanksgiving and Christmas, we were going to lose retailers, things were going to happen. But, if you really look at how retailers are adjusting to the holiday season, it's not nearly as significant, from a life-and-death perspective, as it used to be.

Tenants can take a tough holiday season. They're not in a position where they're going to disappear overnight, the way they were 5 years ago, or even 10 or 15 years ago, quite frankly. Most tenants have, not only do they have reserves, but they have inventory controls in place today, that far exceed the risk that you have by having a weaker holiday season.

I was somewhat disappointed that some of our retailers didn't go for the holiday season the way I would have liked. If you walked into the stores, for example, right after Black Friday, inventory levels were relatively low and often very unexciting. And, when inventory levels are low and the store's not very exciting, it's not going to translate into good sales.

However, that was done intentionally for a variety of different reasons, and I think balance sheets will prove that retailers managed the holiday season pretty well. So, I think it was a decent season for retailers. I don't think it was great. I think it will be less than decent for the vendor community.

Your next question is from the line of Steve Sakwa with ISI Group. Please proceed.

Thanks, good morning. Dan, I know you talked a lot about capital deployment and development and redevelopment, in particular, and kind of highest and best use of capital. I guess given the demand for your product type and the disconnect that you believe exists between the public and private market, do share buybacks ever make sense?

I know you issue equity in the [$18s], but the stock's below $16 today. Does that sort of enter your thought process? Or, does the selling and buying of stock just create too much friction, and you just have to grin and bear it, at this point, and wait for the market to turn?

Well, it's certainly something that we discuss. It's not something that we're enthusiastic about or that we are excited about doing. In my view, you have to trade at an extraordinarily significant discount to NAV and have really no other options for your capital in order to do that.

I think that, right now, we are in sort of an interesting cycle where headlines are grabbing people's attention, and operating fundamentals are being relatively ignored, to a large extent, and that won't last forever. And, I don't think it's really in our best interest, at this point in time, to put a share buyback at the high end of our priority list, particularly given some of the other opportunities that we have.

Your next question is from Ki Bin Kim with SunTrust. Please proceed.

Quick question about your -- you guys used to talk a lot about splitting up big boxes and creating two junior boxes, so I have a couple questions regarding that. First, does that show up in your lease spreads, or is that categorized as non-comp, so there is no true lease spread? And the second part of that is, how much have you done, in terms of square footage in 2013, and how much is there more to do in 2014? And, what would the impact look like to your top line?

Yes. On the first question, we do not include the split up of box. Any reconfiguration will not make it into the spreads. And to be honest with you, what would happen is they would be so overstated. Typically, if you had a box that was leased at $12 a foot and you split it, you're going to be in the $16 to $18 range easily, so we are including that, which again lends to the conservative nature of our reporting on spreads.

Over the last two years, we've done over 18 of these downsizings, which were for about 650,000 square feet. There's no specific number out there in terms of what we have left to do. We're going to do what's right for the asset in terms of what's the merchandise mix. Ulta is clearly a player that comes to mind when you talk about downsizings or splits, and they're still very aggressive looking for 100-plus-a-year new locations.

So, there's no given number that we expect we can do X amount of square feet or X locations. It's really just what's best for the mix. What the demand is for the space.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Hi, good morning. Dan, in your opening remarks, you said that momentum has accelerated. I understand that there's still upside in terms of small-shop leasing and occupancy and that rents are trending higher, but there's arguably less occupancy upside today. David mentioned the cap rates are unchanged, or even lower, despite higher rates, making it more difficult to buy property.

I was just wondering when you say that momentum has accelerated, what part of the business is gaining momentum, specifically? And, does DDR augment its strategy at all to take advantage of this acceleration at all?

Yes. The momentum is accelerated, basically in everything that has to do with a tenant. Because the demand has continued to increase, as Paul said, there's been no pullback at all from any of our tenants in any significant way. And, demand is still there.

We do augment our business model because we are being much more aggressive on redevelopment. We're being much more aggressive on potential tenant buyouts, lease terminations, if we can, trying to get back space. Because, we know that won't last forever, and we think this is a very interesting time. I can't remember a time, in recent memory for sure, where we had tenant demand as high as it is, and landlord leverage as high as it is. That's not going to last forever, and while we're still in this particular cycle, I think we do have to take advantage of it.

So, capital markets aside for a minute, I think you've seen we've got a lot of momentum in the capital-market side. We have been very transactional in that area. Anything related to tenants in our particular product type right now is high, and we need to take advantage of that as best we can. It also includes on the acquisition side, because some assets that we look at, because of the fragmented nature of our sector, are under managed. They are either under managed because those landlords didn't have the leverage, or they may not have had the capital.

So, there's value-add opportunities, or core-plus opportunities, that if we put assets into our platform, given the tenant demand, we can really accelerate our returns on that particular asset regardless of our going-in cap rate. Those are the assets we're looking for.

So, yes, we are augmenting our strategy by being much more aggressive in the markets and areas where we can leverage our operating platform and maximize value as quickly as possible.

Your next question is from Jason White with Green Street Advisors. Please proceed.

Good morning. I was wondering, is there any evidence that those tenants that have been desiring to shrink their sales-floor footprint have plans to utilize that excess GLA as distribution space to support their online-sales formats in the long term?

Jason, at this point, it's more of a discussion. I don't have any real evidence, but it's clearly something we kick around with the guys, like the Best Buys, where is going to be the space need going forward. Right now, they have not shrunk their sales floor, but it's something they're thinking about.

It's something that they should do at some point in time, if that's what the market calls for. Because, you will need, like I mentioned earlier, you will need to be in stock if shop online, pick up in store, is important. And, not only do you have to be in stock, but you have to be convenient to get to, and the experience when the consumer gets there has to be pleasant. You can't have shop online, pick up in store and have your consumer going to the loading dock next to the dumpster to pick up the merchandise. That's not a pleasant experience.

So, retailers are all looking at that now, and I think that is one of the reasons why we haven't seen a decline in square footage from the people that often are being publicized as desiring that because they need to know -- they need to have the square footage to support the inventory necessary to satisfy the consumer who shops online to pick up in store. So, I think as that evolves, the actual square-footage requirements will also evolve, but it's not going to be necessarily distribution facilities, as much as it's going to be inventory areas that, not only support the online sales through pick up, through shipping, as well, and also support the actual store and the walk-in consumer, also.

Next question is from Michael Mueller with JPMorgan. Please proceed.

Yes, hi. I was wondering, could talk a little bit about where shop and box rents are compared to pre-downturn? And then, what are the implications for when we'll start to see national development pick up?

We're right about where we were pre-recession, Michael. Not all categories, not all locations, but we're very happy, and I think you see that reflected in the spreads quarter after quarter. We're up in those mid-teens to 20% this quarter. We're seeing rents that are right there.

You've got to keep in mind, pre-recession, different rents for ground-up development versus second-generation space. We have been dealing mostly with second-generation space in the last five years, but to get those rents back to where they were pre-recession is a big deal, and we're there. And, I don't see it slowing down, to be honest with you. The demand we have been talking about on the entire call is terrific, and if you just look in the best-in-class guys who are looking to grow aggressively, their numbers aren't slowing down.

In terms of what that means for ground-up development, ground-up development that makes sense will get done. We haven't really been waiting just for rents to be at a certain level. There's got to be demand, the site's got to be right, everything has to be right, and if that means it's the best way to monetize some of the land we've had on the books, that's what we're going to do. It really hasn't been, let's wait for that magic day when rents are the same as they were pre-recession.

Next question is from Jim Sullivan with Cowen Group. Please proceed.

Good morning. Back on the Analyst Day, Paul, you talked a good deal about the mark-to-market opportunity as option terms and some of the anchor leases burn off. I'm curious how those negotiations are going, as a general point?

And also, to what extent, if any, anchor-lease terms on new or renewal leases are becoming more favorable, generally, to DDR? What I'm thinking of particularly there is whether or not you're getting more or better bumps in base rents in new leases, whether you're giving fewer or shorter options, that kind of thing?

The mark-to-market opportunity is there, Jim, and that's what's really driving the numbers. The two examples I gave with Rack in Columbia, South Carolina, was a deal where we did not renew a naked Barnes and Noble lease, but the Babies R Us in Brandon, Florida was one that we terminated the lease. I have mean the [growth leverage] is exactly as we laid out at Investor Day. That continues to be our focus.

Dan and I were both talking earlier about some of the other headline retailers, again, whether it's office, toys, electronics, books. That is a big focus of our entire team to make sure we're figuring out a way to get that space back, whether through natural expiration or negotiation, and market to market because that's what's going to drive the spreads and the growth in these assets going forward.

I think one of the things that's interesting to look at is the leased rate -- one of the other callers asked about, you're at 95%-plus leased. Just to look at the volume of deals that we're still doing, given that leased rate, which is 600-basis-points higher than our low, back in 2009, and that's a function of what we're doing to recycle the space to higher and better uses, higher rents, better mixes, et cetera.

In terms of the lease terms, I would tell you that even some of the non-economic are improving. Some of the non-economic terms, whether it's co-tenancy, we can negotiate harder, as space is in demand. People are competing for space. That's an obvious -- it's a little bit of leasing 101, right, when you have demand for a space and people competing for that space, you drive a harder bargain. It starts with the rent, but certainly, lays out into the options, the bumps, and the non-economic issues within the lease.

Your next question is from Tayo Okusanya with Jefferies. Please proceed.

Yes, good morning. My question has to do with disposition -- just given that cap rates remain so tight and your target of generating most of your NOI from your prime assets -- just curious how much more, by way of disposition, do you see happening in the portfolio to hit those targets? And, what that means for potentially doing more dispositions in 2014 versus what's in guidance?

Yes. I think we've, obviously, been very active on the disposition front. It's been, by far, the largest sellers of assets, particularly non-prime assets for over the past five, six years, and continue to be at the head of the class. You've seen us, based on the strong pricing environment, accelerate the timing and pace of dispositions this year, with the considerable amount that we are under contract on.

So, I think you can assume that guidance for the $200 million or so of dispositions is very achievable, and hopefully something we can exceed. We don't look at that side on its own. We also are obviously spending considerable amounts of time looking for the reinvestment opportunity and the high-quality prime asset. But, given where the market is today, we've certainly seen more progress at the very earliest stage of the year on the disposition side, given where pricing is.

And, we would expect to continue to make progress from the 91.5%, or so, prime portfolio that exists today, up to the 95% target that we established in the five-year plan. The guidance the past few years has been that $200 million, or so, a year of dispositions. We have exceeded that the past few years. And, I think to the extent we continue to see a strong environment this year, we'd be happy to accelerate that process.

Some of it is always going to be subject to debt that's on assets, or specific tenant-related items, but we are extremely focused on continuing to dispose of those non-prime assets. There's less of them remaining, there's less inventory, there's less of the true dregs left that represented the hardest, and yet smallest dollar amount of sales, but it continues to be a major focus for our transaction.

We have a follow-up question from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed.

Yes. Dan, just want to circle back with the increased attention that B malls are getting. Obviously, you have the Simon SpinCo, and then you've got the Starwood platform out there.

Do you think that, as these companies consolidate the B malls, they're going to increasingly look to big-box tenants more than just anchors, and try and do another round of de-malling, if you will, like we saw last decade. Or, you think the de-malling thing didn't work, so at the end, all we're going to see is big box as anchors, but that's probably about it as these guys acquire more B malls?

Yes, that's a great question, Alex. De-malling doesn't work for a B mall, it works for like an F mall, and the reason being is that you have -- B malls still have tenants that have contractual rights that you need consent from in order to de-mall. It's very expensive, it's very time consuming, and the returns are very low. So, it didn't really work well with malls.

A mall really has to be dead in order to be de-malled effectively and in order to make money. So, I don't think you'll see it much in the B-mall business. And, we had not seen it much in the B-mall business.

If you look at the de-mallings that have been done historically, including some of the ones that we did, there were like no tenants, or three or four tenants that you could afford to buy out. But, there wasn't a situation where you're 70% leased, or 75% leased, or even 80% leased, it makes it extraordinarily difficult to get the consent to do what you want to do on a de-malling basis.

I think the B-mall operators will continue to look at power-center tenants and others, as they look to fill space, because obviously, keeping that space filled and keeping it filled at the right price and keeping the shopping center attractive to the consumer has been a challenge. And, there are some folks out there that are doing a great job of it, and there are some folks that are just getting started. But I will say that the opportunity does exist, today, to do deals with some of our tenants, because again, there is really very little new supply. Demand is still very high.

If tenants have to make a decision between whether going to a power center and a B mall, our tenants will always pick a power center because that's what their prototype and that's what their economic basis is for their operation. However, if there is no power center available, and they have to make a decision between whether skipping a market or going to a B mall, they would be wise to go to a B mall, and those opportunities certainly exist. And, we're seeing some of that, and we think that's very healthy for the retail environment

I would now like to turn the call back over to management for closing remarks.

Thank you all, again, for joining us. We're very excited about 2013, and we're even more excited about 2014, and look forward to speaking with you soon. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a wonderful day.