Site Centers Corp (SITC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the 2014 DDR Corp earnings first quarter conference call. My name is Crystal and I will be your operator for today. At this time, all participants are in a 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, Ms. Meghan Finneran, financial analyst. Please proceed.

Thank you, Crystal. 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; and 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 and filed with the SEC on Form 8-K and Form 10-K for the year ended December 31, 2013, as amended.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO and operating 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 supplements 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, Meghan. Good morning, everyone, and thank you for joining us today.

As illustrated by our first quarter operating metrics, our portfolio continues to perform at an extremely high level in historically strong and soft quarters. With over 3 million square feet of leasing in the first quarter, and the sale of our Brazil interest, I thought it would be appropriate to take a step back and reflect on the portfolio transformation that permits us to post operating numbers that continue to exceed even our own lofty expectations.

I would like to start by reflecting on the strategic and operational significance of the closing of the Brazil transaction. Several years ago, when we laid out a plan to simplify this Company, reduce risk, and eliminate the complexity that resulted from legacy transactions, the risk in the plan was market receptivity that would enable successful execution for the benefit of all our shareholders. As we sit here today, we are pleased to say that our exit from Brazil exceeded our expectations and the execution of the transaction represents a significant milestone for this Company, as we move beyond the investments that complicated our story and distracted investors' attention from our core business.

At the end of the day, while Brazil only accounted for 4% of our NOI, it represented about 75% of investor and analyst questions. While the strategic benefits of selling our stake in Brazil are obvious, it is important to note that we continue to execute with a long-term focus on NAV, not short-term FFO, which will position this Company for attractive long-term risk-adjusted growth.

Given the significance of our exit from Brazil, it is a good time to pause and reflect on what we have accomplished, what we now own, and how we are continuing to upgrade the quality of this portfolio.

Today, DDR is a pure play, power center focused Company with a dramatically reduced risk profile, simplified story and significantly enhanced portfolio. Following the sale of Brazil, we have eliminated 11 joint ventures in the past 3.5 years, and we continue to reduce our JV platform, particularly ventures that no longer align with our core business.

Since 2010, our capital recycling program has resulted in selling nearly 300 assets representing $2.7 billion, and we have purchased more than 75 prime power centers representing $2.9 billion in major markets. This portfolio transformation has enabled us to lease 48 million square feet since 2010 and achieve same-store NOI growth in excess of 3% for the past eight quarters.

Additionally, the average size of our assets has increased 27%, and base rents per square foot have increased nearly 10%, reflecting the market dominance and pent-up demand for our power center products, even in a difficult environment.

We have reduced the number of markets in which we own and operate shopping centers from 170 in 2010 to just 105 today, and increased our exposure of annual base rent derived from the top 50 MSAs from 57% in 2010 to 72% today.

Our active portfolio management platform has significantly increased our exposure to key tenants, including Whole Foods, Nordstrom Rack, Five Below, Ulta, the Ascena Retail Group of brands, Panera, and LA Fitness, all of whom are now in our top 50 tenant roster ranked by annual base rent. Moreover, Sears, Kmart, Staples, Rite Aid, and Tops Supermarket, are no longer in our top 25 tenant roster.

Looking forward, our portfolio transformation will continue and we expect operating results to follow suit.

With regard to the transactions environment, cap rates for our product continue to compress. And we see an incredible opportunity to increase nonprime and prime-minus assets, as there is significant demand and a dearth of comparable product on the market. Our increased disposition guidance is resulting in unprecedented liquidity for this Company, and we are actively sourcing off-market acquisition opportunities to reinvest capital at attractive returns in core markets, which will further accelerate our portfolio transformation process.

Specifically, we are excited about the previously announced acquisition opportunities described in our quarterly transactions press release, which are located in major metros including Chicago, Cincinnati, Denver, and Northern California, all of which we expect to close later this year.

Before turning the call over to Paul, I would like to take a moment to address the common theme of first quarter earnings for our retailers and retail REITs so far, which is the weather. There has been much chatter about the impact weather has had on first quarter operating results for both retailers and landlords. While we can all agree that the winter was harsh and retail sales were legitimately impacted in a negative manner, the overall effect across our portfolio was immaterial due to pre-negotiated and capped contracts with vendors, the realistic internal budgeting process, and proactive collection efforts.

With regard to the few recently announced store closings from retailers, please keep in mind that retailers like to use weather as an excuse for poor performance, but the reality is that these foreclosures are long overdue and make the overall retail landscape much healthier. Not surprisingly, the retailers that are closing stores are those that have experienced a rapid erosion in market share and suffer from direction-less merchandising strategies. The timing for store closure could not be better, as the list of retailers looking to expand remains robust.

Importantly, as Paul will discuss in more detail, we have not seen any pullback in store opening plans from the retailers we have done the most business with over the past five years, and we expect the recently announced store closings to be a net positive for our portfolio as we re-lease space at positive spreads and improve the overall merchandise mix of our assets.

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

Thank you, Dan. Before briefly covering a few highlights of our first quarter performance, I would like to point out that all leasing metrics as reported in our supplement, including historical metrics, now exclude Brazil and reflect the domestic and Puerto Rico portfolio exclusively.

In the first quarter, we executed 378 new deals and renewals for 3.1 million square feet, our strongest volume in 19 quarters and the second-highest quarterly volume in our Company's history. This is without the benefit of the deal flow from the Brazilian portfolio and is a strong indication of the significant retailer demand that we continue to see for prime power center space in our domestic portfolio, even in a quarter that has produced historically tepid numbers.

Not only did we deliver extraordinary results from a volume perspective, we continued to drive rents with a new deal spread of 20% and a 9% blended spread for the quarter. Our leased rate increased 10 basis points to 95.1%, which compares favorably to the historic average decline of 20 basis points in the first quarter. We remain confident we will deliver a leased rate increase of at least 75 basis points this year, consistent with our guidance.

With a leased rate now in excess of 95%, and a box leased rate of nearly 98%, the question I am most frequently asked is, how will you continue to deliver strong leasing volume and organic growth. Back in October at our investor day, we presented several initiatives and organic growth levers we are pursuing, including naked leases, small shop consolidations, anchor downsizing, proactive lease terminations, and redevelopment.

Today, I would like to focus on proactive lease terminations and provide an example of how we are generating incremental organic growth in an environment of continued strong tenant demand and new supply generation below historic levels.

We have been actively negotiating recapture deals with a number of retailers looking to rightsize their real estate footprint in the books, toys, office, and traditional department store categories. I'm excited to report that we have recently finalized or are in the process of finalizing 20 deals representing 465,000 square feet of prime box space located in power centers across the country. Importantly, many of these recaptures are structured as ongoing landlord recapture rights and not with fixed termination dates, providing maximum flexibility in terms of timing and the ability to finalize replacement deals with minimal downtime.

The below market rents for these 20 locations represent an estimated mark-to-market opportunity of over 40%, significantly improving the growth profile of these prime assets which are currently 98% leased. Our net investment in these locations, including acquisition and projected re-tenanting costs, will be approximately $33 million with an estimated unlevered cash on cost yield from the low double digits to the midteens.

In addition to the obvious upside in rental income, same-store NOI growth, asset value enhancement, and improved credit quality of cash flow, these recaptures can also lead to further redevelopment opportunities and merchandising enhancements. We will recapture seven of these initial locations in 2014 and expect that by spring of 2015 we will have exercised our right to recapture all locations, provided the tremendous demand from the retail community. Tenants such as Nordstrom Rack, Sprout Farmers Market, Ulta, Whole Foods, Five Below, Home Goods, Marshall's, Trader Joe's, White House Black Market, Gap Factory, Shoe Carnival, PetSmart, and Carter's are just a few of the names with whom we are finalizing deals to backfill these locations.

While we are excited about this first wave of opportunities, we view this as a multiyear plan. Our target list continues to grow as we remain proactive with our retailers in identifying mutually beneficial opportunities to recapture space in advance of natural lease expirations, while simultaneously capitalizing on the demand we are experiencing for high quality box locations within our portfolio. I look forward to updating you on our progress with this initiative.

Finally, as you know, RECon is just over a week away. We have a strong slate of meetings and will continue to focus on this and our other growth initiatives.

I want to remind everyone that we will be located at the Bellagio in the da Vinci ballroom this year, and not at the Las Vegas Convention Center. We have great space and look forward to seeing you there. And I will now turn the call over to David.

Thanks, Paul. Operating asset total was $100.7 million or $0.28 per share for the first quarter, including nonoperating items [at the close of the] quarter was $85.8 million or $0.24 per share. Nonoperating items primarily consisted of impairment of a joint venture investment and a charge related to the termination of a Kmart lease that is expensed under GAAP.

We made a number of announcements since the start of 2014 that I would like to touch on in further detail. First, we announced the closing of the sale of our investment in Brazil on April 28. As Dan mentioned, the transaction represents significant step in DDR's simplification process and does so in an IRR to DDR of more than 10% over the life of the investment.

More importantly, the sale of our investment in Brazil is indicative of our continued desire to decrease the risk profile of this Company over the course of the next (inaudible) cycle. By exiting Brazil, we reinforced our commitment to lowering sovereign, currency, partner, and development risk in a transaction with little friction and with strategic merit for all parties. The $344 million of proceeds to DDR present an opportunity for us to reinvest the cash accretively in the recently announced redemption of the remaining $55 million of our 7.375% Class H preferred shares as well as in our focused property type, prime domestic power centers. While the dilution associated with holding that cash for a period of time is noticeable in 2014 results, we will not sacrifice our investment criteria to reinvest the proceeds in suboptimal assets or mediocre returns.

Capital allocation remains a top priority for this Company, and NAV growth over the long term coupled with shareholder return remain more important than simple FFO growth. To that end, we encourage the investment community to look into our recently filed proxy statement to understand management's compensation metrics, and how our compensation is more closely aligned with the investment community and with long-term growth than the vast majority of our peers.

Second, we also announced an increase in our domestic disposition guidance from $200 million to $400 million. The increase was the direct result of the strong disposition environment for B-quality shopping centers that no longer fit our investment criteria.

And we have as mentioned previously, we have implemented a dedicated portfolio management team committed to underwriting each asset and ranking them based on CapEx, adjusted NOI growth, MSA, sales, credit, market dominance, and merchandising mix. This process has brought to light a number of low prime shopping centers that we decided to market and we are very positive pricing feedback on.

As of the end of the first quarter, we sold 14 nonprime assets for gross proceeds of $198 million and had an additional $133 million of nonprime and non-income producing assets under contract for sale. Of the operating assets sold under contract, a large majority are small format, neighborhood centers or single-tenant assets under 135,000 square feet, further reinforcing our investment thesis to own large format, prime power centers in top MSAs.

The low-quality assets under contract or LOI are currently projected to sell at an average cap rate in the low 7% range, indicative of the strength of the disposition market and our desire to take advantage of it. With the sale of our investment in Brazil and the increased disposition activity -- were the direct reasons for our decreased operating FFO guidance range of $1.14 to $1.18 per share. The current range outlines a midpoint growth rate of 5% per share above the sector average and consistent with our total shareholder return goal of 8% to 10% annually.

With that said, the previously announced reduction in current year FFO guidance is not something we take lightly, but one that we felt was prudent given the transactional environment and opportunity to further streamline our portfolio and position ourselves for long-term growth and lower risk. In addition, we view any dilution as short-term reinvestment dilution, as we believe our ability to reallocate this cash into high quality assets means that we can redeploy this capital and re-create this NOI in the near term, versus the long-term dilution experienced during the peak of our repositioning out of much more challenged assets several years ago.

I would also like to address our previously disclosed desire to take advantage of the secured debt market in Puerto Rico in order to highlight the lack of effect that macroeconomic headlines have had on property level fundamentals and valuations. We continue to advance a nonrecourse financing of a quality shopping center on the island from a top life insurance company in a normal loan-to-value with an interest rate just 10 to 20 basis points outside of high quality major market mainland assets and in line with historic norms. We expect to close on this financing during the second quarter.

Finally, I would like to draw your attention to our recently revised supplemental package. During the course of each year, we aggregate investor feedback and typically employ major disclosure changes in the first quarter. The new supplemental package is streamlined, but excludes none of the previous disclosures and in fact adds new information.

We now include additional disclosure on same-store NOI, including a detailed same-store income statement and same-store leased rate. As we have stated before, we feel that our calculation is sector leading in terms of legitimacy as it excludes redevelopments, bad debt expenses, lease termination fees, and non-cash items, all of which add artificial volatility to quarterly results.

I would also like to point out that our operating metrics in section 4 of the supplemental, including same-store NOI leased rate, rent per square foot and leasing spreads, all exclude the ownership of Brazil in the first quarter of 2014, despite the Company's economic ownership during the quarter for purposes of better comparability going forward. We continue to strive for sector-leading disclosure and look forward to your feedback on the current package.

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

Thanks, David. In conclusion, we remain very optimistic about the continued transformation of our portfolio and our ability to now focus exclusively on our core business in core markets. As David mentioned, we are in an unprecedented position of liquidity, and we will remain disciplined, patient, and creative in allocating capital with a focus on delivering long-term NAV growth and total shareholder return.

While there is much volatility in our sector due to new emerging companies, management turnover, and succession planning concerns, we are not distracted by this noise, but rather we like our position of stability and consistent performance. And we are encouraged by the prospects for continued portfolio quality enhancement, capital recycling, and organic growth.

Again, thank you for joining our call this morning. I will now turn the call back to the operator for your questions.

(Operator Instructions) Craig Schmidt, Bank of America.

I was wondering what you thought the total number of power centers in the nation was and your market share of that, and if you are seeing a competition increase for the acquisition of these power centers like we are seeing in the other portion of the strip category.

Well, I tell you, that is a great question, Craig, and it is hard to put your arms around it. I know that -- and I know this is not a great answer, but there is a lot of power centers and we own a small percentage of them. So it is a relatively fragmented market.

Unlike the mall business which is highly consolidated, the power center business is not. While we are clearly a consolidator and we are very focused and we differentiate ourselves as a result, the opportunities in the market continue to be pretty significant.

I will give you an example. In the first quarter alone, we saw 33 deals that we looked at across 19 states that we underwrote. And the assets are worth about $1.6 billion. And, again, this is just power centers that fit a very small criteria that we have employed.

The total square footage of those deals is 9.1 million square feet, and the average deal size was about 300,000 square feet. So there is a lot of things that we are looking at on a regular basis. There is no shortage of product out there for us.

We are seeing some more competition than we have seen in the past, particularly from some of the direct invest and sovereign wealth, et cetera, entities. But we are not seeing as much competition from people who look at the assets on a core plus basis and truly understand the value of leveraging an operating platform to enhance value of an asset that may even be 95%, 96%, 97% leased. But when we put those assets into our platform and employ some of the things that Paul talked about, and our tenant relations, we are able to take a core asset to one person and make it a core-plus for us, and we think that will sustain a lot of growth.

So we have a view of power centers in respective markets, but the total number is so large and our ownership percentage is so small that it rarely comes into our thinking. And we feel the runway is very long.

Christy McElroy, Citi.

David, just regarding the TALF mortgage loan, it comes due in October. Can you remind me, what is the timing for when you can pay that down? What are your plans for funding the paydown? And what are your plans for those assets once unencumbered? Are there any disposition opportunities there?

Yes. The TALF facility has a maturity date in early October and a 90-day prepayment window before that. Based on our budgeting at the beginning of the year, the expectation was to refinance that loan, primarily or exclusively with unsecured debt.

At this point, with the considerable amount of liquidity that we have available, the considerable amount of cash that we are sitting on today, our expectation would be simply to repay that facility with cash on hand. So I think the goal overall and clearly the balance sheet strategy has been to increase the size and even the quality of the unencumbered pool, and this should be a situation where we can increase that size and quality quite significantly, without even adding any additional unsecured debt based on where we stand today, with the disposition proceeds from US assets as well as from the Brazilian sale.

So I think we are very well positioned to deal with the only real maturity that we have this year and to significantly enhance our credit metrics by unencumbering those assets.

Todd Thomas, KeyBanc.

This is Grant Keeney on for Todd. I noticed in the lease expiration schedule that it is a portfolio that has been pruned over the last several quarters. The average rent per square foot in the in-line space has ticked down a bit, especially on leases expiring the next couple of years. So it appears that there is an even greater mark-to-market opportunity.

Paul, you touched on some retenanting opportunities in your opening remarks. But can you update us on how much below market small shop rents are in the overall portfolio and what that opportunity looks like today?

Yes. First thing you need to be aware of is those numbers that have come down with Brazil out of the mix and out of the metrics. So Brazil was a significant amount of small shop space, particularly at higher rents than our portfolio average, reduced the average rent per square foot is what you are seeing in the supplement.

Yes, we think there is great upside in both the box space and the small shop space. No specific percentage, but we are seeing great increases, whether it is a new deal that we saw the 20% spread on a pro rata basis or the renewals in the high single digits.

Our goal, as I have stated on a few of these calls, is to get that renewal spread somewhere right around 10% or even north if we can. That is going to come with negotiated extensions that are not exercises of options. About half of the renewal portfolio has options, so we would be limited by that percentage. But I would say we will continue to see something in the high teens on the new and in the high singles to low doubles on the renewal spreads.

Ki Bin Kim, SunTrust.

Dan, going back to your opening remarks about some proactive lease terminations that you guys are pursuing, and the 40% upside that you have already identified in 20 deals, how much of that -- what percent of that basket includes Sears, Office Depot type of leases versus other type of retailers? And do you -- I guess that's the first question.

Yes. There are exclusively tenants that you would expect us to be doing these transactions with. They are not the market share winners.

The reason why we can't name specific names or locations is because we have to be sensitive to the employees of those locations where the stores might be closing that haven't yet been notified by their employer that that store might close. So we are sensitive to that.

But, as Paul mentioned, you can assume that it will be in the struggling sectors from a merchandising perspective across the board, including books, toys, and office. And, in fact, that list we expect to continue to increase over time.

It doesn't make any sense, quite frankly, to terminate a tenant that is performing at or above a sales per square foot level in your center that is adding a merchandising mix to your center that makes you unique, or that is being appreciated by the consumer. But it makes perfect sense to try to remove the underperformers and folks where you are not quite sure where their merchandising strategy is going, because you're going to have to deal with that problem down the road anyway in all likelihood. So we might as well be proactive about it, because it is what we are trying to do.

And in this market where there is no new supply at all, and demand is incredibly high, we think this is a unique period to effectuate these transactions. And we would hate to be on the other side and think that we missed this opportunity. So that is why we are doing what we are doing, but it is exactly as you said with more of the struggling tenants that are pretty well known to all on this call.

Paul Morgan, MLV.

Just on the leased rate breakdown, under 5000 square feet fell a bit sequentially; maybe if you could provide a little bit of color there, whether that might have been affected by taking Brazil out. And then, as you look from where you want to get toward the end of the year, what are we going to see the drivers within the size bucket? Is it going to be the smallest shops? Is it going to be the bigger stores? A little bit of color, maybe.

You got it, Paul. Yes, you hit it on the head. I mean, the primary impact quarter over quarter was the elimination of the Brazil rate, which I think was 96%, Paul, so obviously that had our average of the under 5000 square foot space a little higher.

If you look at apples to apples, just domestic and Puerto Rico, we were basically flat quarter over quarter and up about 140 basis points year-over-year, so still a very positive trend. And, again, that all comes with the continued improvement of the portfolio, whether it's sales and acquisitions, more power center, less community center.

We haven't changed our opinion that we can drive that less than 5000 square foot category to 92%, which would be a historical high by a couple hundred basis points. Consolidations kick into that, and as I mentioned, asset sales.

But clearly we are seeing great demand from the fast foods -- the McDonald's; the Chick-Fil-As, the Five Guys, Chipotle, Panera, some of the smaller nonfood users -- Crazy Eight, Claire's, Justice, Sally Beauty, Massage Envy. There is a long list. So it is driven more by the national, regional and franchisees and not so much by the mom-and-pops, even though we have seen a little more stability in that mom-and-pop category.

Andrew Schaffer, Sandler O'Neill.

In regards to your access and pipeline, are you currently evaluating any JV partnerships as potential acquisitions?

Yes, we constantly look at our JV pipeline as a source of potential deal flow for us. As you know, we don't control those assets and the ultimate disposition of those assets the way we obviously do the wholly-owned bucket, but we do have certain governance rights depending on which joint venture it is in. And if we decide with the partner that it is time to exit those assets, and some of those assets obviously we have a high interest in, we certainly are in discussion with our partners for those properties.

A lot of our legacy JVs have assets that we are not interested in, and we think it is beneficial to take to the market and just close up entirely, particularly as it relates to our current -- our core strategy. So, yes, we have a nice list of assets that we like very much. No, they are not all on the market. No, our partner doesn't want to sell them all at this time.

But that is a constant dialogue that occurs. And there's certain pressures being put on internally and externally with partners and with the markets that could bring those assets to bear at any time in the future. So it is something that is very, very important to us.

It is important that we maintain our governance rights to the assets that we think are important to the franchise. And it won't be inconsistent with what you saw when we did the transaction with Blackstone and DRA and a few others where we purchased assets out of ventures. So that will continue.

Haendel St. Juste, Morgan Stanley.

This is Albert Lin for Haendel. When you think about your disposition strategy going forward, and the strong pricing that you are seeing in the B assets that you mentioned in your opening remarks, how do you think about balance between taking advantage of that pricing and then making sure you have the right opportunity to redeploy that capital?

I think you saw the perfect example of how we balance it with what we have announced so far this year, where obviously the ability to reinvest in a timely fashion is important. But even more important is the ability to reinvest in an attractive fashion. And so, we did stomach some dilution for 2014 to decide to increase our disposition budget, both the Brazil sale but even more so the domestic assets where we have sold more, where we plan to sell more and those sales are happening particularly early in the year.

We will not compromise on the acquisition side, but we still think we have very credible acquisition targets that this Company and this platform can execute upon. And so we made the challenging decision to accept a little lower growth in FFO per share this year because we thought the opportunity to sell more assets at attractive pricing was there.

And so I think that is the most clear way to answer that question, as well as how we think about it going forward where the focus will continue to be on long-term growth, the risk profile of this Company, and net asset value per share growth, much more than 2014 FFO per share.

Jeremy Metz, UBS.

It is Ross Nussbaum, here with Jeremy. I have got a question on page 14 of your earnings package here on the development side. Specifically, you guys are showing just under $250 million of ground-up projects on hold, another $55 million of JVs. So my first question is, can you give us an update on what the story is with those?

And then the second part of the question is, at the bottom of that page you are showing $206 million of book value of land. Is that separate from the projects on hold, or is that sort of inclusive thereof? Maybe talk about all that. Thanks.

Ross, this is Paul. First of all, on the developments in progress, and we talked about Kansas City, Kansas, which we have talked about before where we sold a big piece to IKEA to lead the project and we will be completing that this year. And Seabrook -- it's a great story. That was a significant amount in our land held for future development that we kicked off with a Walmart sale, and now we will be opening a full prime power center this summer with like a Dick's, Michael's, Ulta, PetSmart, in addition to the Walmart, Panera, so great stories.

JV -- there is one asset up in Toronto that we are still involved in from a JV perspective which will ultimately be a Target-anchored center. So that will be proceeding.

I didn't follow the question specifically on the inclusion of the (inaudible). But, before I turn anything over to David, I will update you on -- you know, we continue to make great progress, obviously, with that land bank, whether it is just sales to nonretail users or pad sales or development. We have got a couple within that bank that we are talking about bringing out of the market later this year or early next year; one in Florida, one in Connecticut. The environment gets better, the ability to develop gets better, and then we are making great progress in that regard.

Yes. So Ross, on the other piece of it, yes, the $200 million is included in that overall $240 million, $250 million of overall projects that are still on hold. It is land spread across the country -- North Carolina, Orlando, Connecticut, Chicago, a number of sites that were put on hold several years ago that we do expect to be able to monetize over time.

We do think they are appropriately valued on our balance sheet. But obviously we are going to be prudent in putting additional capital into those and making sure that we have got appropriate tenant interest, and making sure we have the appropriate use for that land relative to what might have been planned 5 to 15 years ago when that land was originally acquired.

Jason White, Green Street Advisors.

Just a quick question on your landlord-tenant balance of power in lease negotiations and what you are seeing today from a qualitative and quantitative aspect versus, call it, two or three years ago? And what are you seeing swing in your favor other than just kind of market rents?

Well, there are a number of things that have swung in our favor. And while you see it in the market rents, Jason, we really do have a very different portfolio that we had two or three years ago. So, while tenant demand is great and it is important to -- in order to drive rents you need to have more than one person bidding on a space. Otherwise, the leverage obviously swings the other way.

The impact of the improvement of the quality of the portfolio, quite frankly, we underestimated. Or maybe said another way, we underestimated the drag that poor assets had overall on the portfolio. And I will let Paul speak specifically to tenants, but I will tell you that the amount of interest that we have on a per-space basis is somewhat unprecedented.

Now, one of the things you could say is that that is because there is no new supply and the supply-demand dynamic has shifted very significantly in favor of the landlord. I don't think that is true, though, for B and C space. I think you have to combine the supply-demand dynamic with the quality of the portfolio, and that is what is leading to the fact that we can lease 3 million feet of space in our first quarter, which is really unprecedented. And we also are in a position where we can drive rents.

So, quality of the portfolio, in addition to the supply-demand dynamic is what is really putting us in a position where we feel comfortable that we can sustain the growth that you have seen in the rental levels for quite some time.

Yes. Competition is clearly the key, and you can't overstate the demand that we are seeing from these best-in-class retailers. The initiative I talked about in the prepared remarks about proactive recapture of anchor space, I mean, this is not something we considered four or five years ago. I just couldn't afford another vacancy.

Now it is how do we get -- first of all, we sit down with all of those retailers who are growing, and you hear us talk about them all the time, whether it is the TJ's or the Bed Baths or the Dick's and the Rosses of the world -- and the Racks, and we know where they want to be. And to be in that position where we can help them get space through some of our proactive aggressive initiatives is just -- it is a wonderful spot to be in as a landlord with quality space.

And I think the other thing to keep in mind, and to Paul's point, is it is not that we are really all that smart or we are guessing where they want to be. The relationship with the tenants is so important because, number one, they can rely on us as a deliverer of space on time, on budget, when they need it, which is very important. Certainty of execution is very important for the tenant.

But the other side of it is, when they tell us where they want to be and the type of asset class that they want to be in, and who the cotenant should be and this is why, and they can explain to us the importance of merchandising mix and co-tenancy from a consumer receptivity standpoint, we don't have to do a lot of guessing. These retailers know exactly who the consumer is, where they want to go, how to reach them, the type of merchandise they want to see, what the product mix should be, et cetera.

So we have the benefit of strong relationships that give us a competitive advantage in knowing what it is that we should be pursuing, to whom we should be leasing, and what the centers and the quality of the merchandising should look like. So it is, again, paying attention to the market.

And it is very, very important to do that right now more than ever because, as you know, the market is moving incredibly fast. Retail is evolving at a speed we have never seen it before. And so it is even more important to stay in front of the tenants than ever before.

David Harris, Imperial Capital.

David, a question for you and maybe I have missed this. You'll forgive me. What does the Brazilian sale net to?

It is $344 million of cash to us. So if you want to think about gross asset value, we are also reducing our amount of pro rata debt because there is some net debt down at the venture, although not significant. But the $344 million is our net number.

There is extremely little friction based on the structure and tax planning that we had done in getting that capital back to us, and so you are talking about basis points, if you are talking about friction off of that $344 million figure. That is the right number to think about it terms of capital back to us and the reinvestment opportunity.

Tayo Okusanya, Jefferies.

Good morning, everyone. I am curious; in the quarter, it seems as if the tenant reimbursement rate was higher than usual. Just curious if there was anything unique to the quarter.

Yes. It is just going to end up being -- the controllable or the reimbursable expenses were higher. And so you would see the proportion of variable expenses that the tenant is reimbursed for were higher during the quarter. And so you see that reimbursement rate higher.

It is absolutely our goal to minimize the volatility, maximize the predictability, both for purposes of The Street as well as, very importantly, for purposes of the tenant so that they know what their costs are going to be. However, there are certainly periods of time, whether it is weather or other items that do lead to expenses being higher, but the strength of our leases and the high quality and the high occupancy of our portfolio positions us to recapture the overwhelming majority of that from the tenants. And so that is why you saw expenses a bit higher, but also that reimbursement rate much higher.

Thanks for that update. I mean, are you changing lease terms? I'm just kind of curious why this is just so unique to this quarter and we should expect a higher reimbursement rate going forward or--?

No. Any quarter can be a bit off, and so it is tough to learn too much from any one period, especially with the way that some of these expenses can be volatile. And obviously, accounting requires us to -- when we bill it and when we expect to receive it, it is all booked during that period. And so you do see some quarterly volatility. But I don't think we are pointing to any major change overall.

Longer-term, I do think a higher quality portfolio will generate a higher reimbursement rate. And so, over a long period of time, I think you will continue to see gradual improvement with a better portfolio and more highly leased portfolio. But I wouldn't read too much into this quarter.

Rich Moore, RBC Capital Markets.

I was looking at what Office Depot was saying yesterday. I think they are looking at closing 400 of their 1900 Depot/Max combination stores over the next couple of years. And I was curious, first of all, if you had heard from them about specific store closings in your portfolio.

And then if you haven't, which I am guessing you might not have, they said they want to close 150 this year. And I am thinking they would probably do that with stuff at least that they don't own, that is near-term lease expiration. So I am curious what your lease expiration schedule for those guys this year looks like.

Yes. You are correct, Rich, and what you're going to see this year is probably going to be along that lease term, near-term lease expiration schedule. A couple of points to make with Office Depot. They have not identified all 400 at this point, and they have been very clear about that. They are actually going through an extensive study as we speak.

As we have talked about since the merger was first announced over a year ago, I mean, we see this is a tremendous opportunity. Clearly a company we have been in discussions with, well ahead of any closing announcements that may come out of the announcement of 400 over the next few years.

We never sit back, and we are certainly not sitting back in this Office Depot situation waiting for retailers to contact us and tell us what they want to close and what they feel they need to close. Our approach is clearly to talk about spaces where we can work together, whether it is downsizing, recaptures, or other deals we can make with them. And I would tell you, we are well ahead of the curve in knowing what is going to happen with the Office Depot portfolio within the DDR portfolio.

Jim Sullivan, Cowen and Company.

I was curious, Dan and Paul, I guess, in your April 1 release, the three assets under agreement, one was identified as being in downtown Chicago, and of course we tend not to associate downtown locations with power center type assets. As you continue to refine the portfolio, and I was curious at David's comments about lower prime assets being identified and put up to market -- put on market, I am curious whether you are looking to be more urban, more dense, where demographics will be stronger, perhaps, and in terms of where you want to put your capital, where you see better returns.

And I am curious, Paul, if you could kind of opine on this when you talk to retailers about where they want to be. Besides in your existing portfolio, are they skewing to more urban markets as well?

Let me start with that last piece, Jim. I mean, urban is obviously amiss for many retailers out there; very, very difficult to pull off. So I would tell you that, across the board, the retailers we speak to would love an urban environment.

I think of our Midtown Miami project, which you certainly can consider urban, very, very successful. In fact, there is a little piece in the Journal this morning about how hot that market is in terms of residential and retail. And we have got a situation there with Loehmann's going out and a best-in-class off-price retailer coming in. That is an urban project.

What we are talking about in Chicago is clearly the power center retailers we are talking about that we deal with every day, and Rack, Dick's, for example; TJ. And in a multilevel, but two-level environment, works very, very well.

So A, do they want urban? Absolutely. Is there a lot of urban available? Not at all. And when we see opportunities to deal with the retailers, we deal with every day, in an environment that works for us, we're going to look very hard at it.

The other thing to keep in mind about the urban -- the reason why there is not a lot available is that they're typically having subsidized deals. These are very expensive. Not only is the land expensive, but the infrastructure becomes expensive, often requiring parking decks and lots of vertical transportation, et cetera.

And a lot of the power center tenants, unless there is a subsidy available through a public-private partnership, et cetera, don't pay the rents that support that kind of development, which is exactly why you don't see, to your point, a lot of these types of developments.

That is also the reason why, when we saw one that we really liked and we were excited about, we jumped all over it because we think it's going to be extremely unique; similar to what we have, for example, when you look in Miami at our Midtown Miami project, which has been a great success. But, complicated projects, dealing with municipalities, dealing with the tenants; very difficult for the tenant to be able to get their prototypical building under any construct in an urban environment. So there would need to be a lot of store planning and design revisions.

So it is going to make this type of project very rare, but also very valuable, which is why we felt excited and we were aggressive in pursuing it.

Vincent Chao, Deutsche Bank.

I don't know if I missed this, but I'm just curious, after the $400 million of dispositions are completed this year, wondering what -- where that would put your percentage of NOI from prime assets at. And given the demand that you are seeing for the B assets, or the non-core assets, just curious if there is an opportunity to get rid of it all, or if that would even make sense. Maybe that is a source of redevelopment opportunity.

That nonprime bucket continues to get much smaller. The inventory there is down significantly. That said, we continue to refine our internal portfolio management process, where I don't think you are ever going to see it get to zero because there is always going to be something, then, that we think we are best positioned to regrade to -- whether it is our exact old definition of nonprime or not, it represents either the greatest risk or the least growth opportunity within the portfolio. And so I think you're going to continue to see a pool there.

The great news is there is no pressure on us to have to generate liquidity through asset sales the way that there would have been five years ago. And so to the extent there is a strong transactions market, which we would absolutely say that there is today, you will see us execute on a larger volume of dispositions.

In years past, you have heard us talk about our power center thesis in a major mispricing of the asset class, where you saw us as significant net acquirers. And so I think, for us, there is going to be the constant focus on evaluating opportunities within our portfolio, evaluating the opportunities within assets that we don't own, but could acquire, and then a focus on the transactions market to see if it is the right time to be a net buyer, a net seller. And we have found recently that accelerating that sales volume is the right thing to do.

So, based on simple math with a static portfolio, you could certainly see that pool of nonprime assets get down to 5% or so, remembering that some of those are held in joint ventures where our partners have considerable rights to hold those assets. So, from a static pool, you will see that percentage amount, prime assets, get lower. But I think for us it is just the constant portfolio management process of saying where should we be taking capital from, in terms of higher risk and lower growth assets in order to be able to reallocate that elsewhere, even if there is some timing lag associated with that.

Ki Bin Kim, SunTrust.

A quick follow-up. I think you mentioned 50% of your leases have options. I wasn't sure if you meant if that's small shop and large. And could you just quickly describe what does a typical option look like -- the language?

Yes. Typical option language would include -- 10% would be typical. There are just differences, some larger, some a little smaller, but 10% increases at the time of the option. So it is not like we are just renewing at flat rates.

A higher percentage of the box space would have options than the small shops. Gives us the ability to drive the higher rent per square foot, the smaller shops average rent being north of 20, and many of those are without options. The box space, with the lower rents, I would say that is more a little higher than 50%. But overall it is 50% across the portfolio.

Chris Lucas, Capital One Securities.

You guys have talked a lot about re-merchandising of existing centers and the tenant demand for that. I have a question as it relates to new center development. And I guess the way I want to think about this is, are you feeling any closer to having conversations with key retailers on new center development?

And I guess the question that is -- the natural follow-up is, where are we as it relates to pricing? In other words, what is that gap between the kinds of returns you guys would need to pencil in to actually do something and where the rents are from those anchors? And how has that trended, say, between where we are today and a year ago?

Well, first of all, our focus on the ground-up development, Chris, has been land that we have held in our pool for a number of years. So as the economies improve, the markets improve, retailer demand has improved, we have seen the ability to get to that point where we can develop those at attractive returns. And so, that obviously means that the rents are continuing to grow.

We did one project down in Charlotte that we opened June of 2013, which is one that we bought out of private developer and jumped in and finished the project quickly at returns north of 10%. So we are seeing the rents get to a point where the discussions have heated up. I mentioned earlier on the call about a couple of other pieces -- one in Florida and one in Connecticut -- where, again, demand, rents, competition for the space, as Dan talked about earlier, is now driving our desire to get those things out of the ground in the next 9 to 12 months.

I think it is important to note, Chris, to keep in mind that the reason why we are not seeing development isn't necessarily the gap in pricing between landlord and tenant. The pricing with retailers today is okay. You can justify reasonable market rents for a new development project.

The problem that we face is, number one, you have land owners who think their land is worth a lot more that it truly is. So that is not okay. So the pricing with the landowners is not okay.

And the entitlement risk is not okay, so -- because that process in and of itself creates so much uncertainty that on a risk-adjusted basis, and if you look at where you want to put your capital, the returns just are not compelling. And pricing with retailers is just one small component. It is not small; it is important. But it is just one component of many that have to be factored into your risk-adjusted returns conversation.

And, while tenants sure would love to see some new product go up because we have many tenants that are missing their open to buy because there is not enough opportunity in the market, so they would obviously like to see new projects. And they are not going to pay above market, but they are certainly willing to pay market rents.

The other components necessary to bring a project out of the ground are still overly burdensome today, where we have other opportunities for our capital where we get a better risk-adjusted return. And I think that is going to continue for quite some time.

One of the things you are seeing is, you are seeing a little more development in the grocery-anchor neighborhood center category. That doesn't compete with us. And we are seeing almost no new product in the power center category. And I think the reason why is, people just truly have better places to put their capital on a risk-adjusted basis.

David Harris, Imperial Capital.

I'm just wondering, in the context of the sales and liquidity that you referenced and your caution about redeploying capital, where do you think you we are going to be on a net debt to EBITDA basis or any other metric that you might want to focus on from a balance sheet leverage perspective?

And do you think probably by year-end is probably the timeframe? And do you think -- where do you think you want to be with this Company in the medium-term on that ratio?

Yes. Net debt to EBITDA is certainly something that we focus on and something that you have seen decline considerably over the last several years, and we never want it to be misunderstood that we think we are done yet. We think we are done with the diluted part of it, but certainly not done with the continued improvement of this balance sheet.

So from -- on a pro rata basis including all of our pro rata share of joint venture debt, we are in the mid-7s today and we would expect that to get down to the mid-6s over a multiyear period of time. Short-term, as we sit on this additional liquidity, we will make considerable progress on that. But we do expect to redeploy the majority of these proceeds.

Over time, I also think there is just some things that that calculation misses, whether it is, one, the quality of the EBITDA that we are producing today, that longer-term duration that comes from higher credit quality tenants and higher-quality centers. So it is not only more stable cash flow, it is cash flow or EBITDA that is much more likely to grow over time.

But I think there are also just some simple definitional items there that are important to note, such as there is no restructure in Brazil. There is no notion of a restructure being created in Brazil. And that means we were a full corporate taxpayer down there. And so you can talk about EBITDA as much as you like, but that T is for taxes and we were absolutely paying those taxes.

And so there are sales like that, that on a pure cap rate basis, might show up as more dilutive to that metric where you are selling it around an 8.5% cap rate versus the after-tax figure, where your reinvestment hurdle for neutrality is really in the 7% range. And so, I think for us, it is the focus on the quality of the EBITDA, the quality and duration of the debt will continue to improve, but you will also absolutely continue to see progress in debt to EBITDA.

And with the liquidity that we have today, you will see that accelerating over the next couple quarters, although, as I mentioned, we do plan and hope to reinvest the large portion of that capital. And so you won't see the entirety of that benefit over time, but you are certainly going to see a point or so lower debt to EBITDA over the next few years.

Jim Sullivan, Cowen and Company.

Very quick follow-up and this is for you, David. I think you made reference to some financing activity in Puerto Rico in your prepared comments. I could be wrong on that. But I am just curious if you can help us understand whether there have been any recent data points, be it in terms of financing or transactions that can help us understand where cap rates have been moving in Puerto Rico to the extent they are moving at all, and to what extent there is a spread between the US cap rates and Puerto Rico.

Sure. The bad news is we don't have great recent empirical evidence, either on the financing side or on the transaction side. And so there is nothing easy that we can point to the way that we can say cap rates for mainland assets have clearly gone down based on recent transactional activity. It is one of the reasons that you appropriately identified.

We did make comments in the prepared remarks about pursuing a mortgage financing on an asset in Puerto Rico, just to highlight that lenders do continue to be focused on the quality of the asset and the quality of the cash flows much more than the macro headlines regarding the island.

We have heard some people ask the question that, should we take muni bond rates in Puerto Rico and add some spread to that, to think about what debt costs would be for an asset on the island, and then add something even to that to think about what cap rates would be on the island. And I think, for us, though important -- even in a position today, where we have too much liquidity, the importance for us in executing on a new non-recourse, very standard mortgage loan on the island is simply to highlight that long-term comfortably sub-4% debt does exist. And it is a group of lenders focused on the quality of the asset, the quality of the underlying cash flows much more than the macro headlines.

So, no empirical evidence to say cap rates are here or there, but I do think lending costs are very comparable to major US markets for quality assets with comparable underlying US tenants paying that rent. Historically, supply constraints have been dramatically higher on the island. And so we continue to think there are enough indicators that would say the opportunity for cash flow stability and considerable cash flow growth on the island is significant. And so, cap rates shouldn't be any different than what we have seen around the mainland US.

Jeff Donnelly, Wells Fargo.

Just a single follow-up question to the earlier line of questioning on anchor development economics. How do you think about the prospect of the anchor boxes at malls, specifically the junior anchor and maybe reconfigured anchor box spaces that could become available? I think these are spaces that typically have very low in-place rent. And while CapEx is certainly needed to reconfigure them for a power center user, I would suspect landlords there are probably more apt to do defensive deals and it could be something of a cheaper channel for new stores than ground-up construction.

Do you see that with Dick's? Do you think it is a real tangible theme? Or do you expect that those opportunities are going to prove to be few and far between, just because power center tenants just find the mall unappealing?

You know, we will continue just to see some of that. Jeff, but I would tell you that -- while I wouldn't classify it as few and far between, we have been talking about the space that may become available in the mall sector for a lot of years now.

Sears, Penney, name your struggling anchor, they are still there and I don't see that space becoming available tomorrow.

The retailers -- the junior boxes that we speak with and meet with regularly will tell us that that is clearly not their first choice. The first choice is going to be power center format. That is where they grew. That is where they made their mark. That is how they are growing market share.

There will be some situations, and you mentioned Dick's; Dick's is a guy you know with their galleons take over, and other deals they made as Dick's, they have got a little bit of a mall presence. But the preference is going to continue to be in the power center format and I don't think we're going to see the great availability, other than maybe in some of the B and C malls and tertiary markets. But that is not where these best-in-class junior boxes are going to be focused.

I think, though, as a practical matter, when you are on the retail side of the business and you are faced with a decision of either missing a market or taking an unconventional or non-prototypical space, you have to really think hard about going into an atypical location and being flexible. And I think it just makes good sense for power center tenants to look at availabilities in malls if, in fact, they have no other way to effectively get into the market.

So I don't see it as a competitor to space that we may have available, but I do see it as a viable opportunity for our tenants to continue to meet their open to buy needs if, in fact, they can't get into their preferred asset class. And that just makes good sense.

And there are people out there that are doing a terrific job in the B mall universe right now, spending lots of time with our tenants. So we know what is being discussed. Our tenants discuss a lot of what is happening out there with us. And you don't give up markets, particularly if you have no new developments or there is no new way to get in.

But tenants in our sector would prefer to see newer development, quite frankly, where they can put a prototypical box in, which is the most efficient and also most profitable box that they can build. But that is just not happening, and I don't think that is going to happen. So I think smart retailers today, the ones that are grabbing market share, should consider what is available in a regional mall. And a number of them are.

Ladies and gentlemen, that concludes our questions. The presentation has now concluded. You may now disconnect. Have a great day.