Site Centers Corp (SITC) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good morning and thank you for joining the Second

Quarter 2014 DDR Corp. Earnings Call. (Operator Instructions). And as a reminder

we are recording the call for replay. And now I will pass the call over to your

host Ms. Meghan Finneran, Financial Analyst.

Thanks, Ryan. 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 statement may be forward looking. Although we

believe such statements are based upon reasonable assumptions, you should

understand that these statement are subject to risk and uncertainties and actual

results may differ materially from the forward-looking statements. Additional

information about such risks 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 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 the opportunity to participate. If you have

additional questions, please rejoin the queue.

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

Thank you, Meghan. Good morning everyone and thank you for

joining us today. I'd like to start today's call by reiterating that we are very

pleased with the consistency and the strength of the operating results achieved

during the second quarter, and the strategic transactions we announced since our

last earnings release. Our second quarter results mark a pivotal point in the

continued execution of our strategic plan as we closed on the sale of our

investment in Brazil, identified an attractive user proceeds and formed our third

joint venture with Blackstone to acquire prime assets and posted strong operating

results with more than 3 million square feet of leasing completed in the quarter

and new leasing spreads of 19%. While the near-term benefits of these

accomplishments are obvious, the longer-term positive impact of this quarter will

be realized for many years to come and significantly enhances our ability to

focus on our core business.

As the back-to-school season approaches, I'd like to take a moment to address the

significance of this selling season, the impact it has on our retailers and the

trends we are following in the market. Back-to-school was the second largest

retail season of the year at a time when retailers are highly invested in their

inventory level as goods have been purchased for both back-to-school and the

Christmas Holiday by this point in time. Over the past few weeks we have seen a

steady increase in retail sales due to improve weather, pent-up demand and those

increased inventory levels at each of our retailers. As a result, retailers are

beginning back-to-school sales earlier than in past years to further incentivize

consumers to shop and realize gains and market share. Not all sales and

promotional activity however should be viewed as an indicator that retail sales

are in a slump and tenants are getting anxious to simply move product. In fact,

most early promotions are well-planned and margins will be maintained for those

retailers. With the highly promotional 2013 holiday season still lingering, the

consumer's unwillingness to pay full price and the necessity of offering

verifiable value, retailers are carefully planning their sales and product

offerings as promotions remain the primary motivation for consumer spending.

In regard to merchandising trends, we continue to observer strong demand for

branded goods at discount prices further demonstrating our preference for

merchants offering this product type. For example, we are witnessing value-

oriented retailers such as Kohl's offering a much broader assortment of branded

goods this back-to-school season. The back-to-school season is indicative of the

coming holiday season and it will be very important to identify which retails won

consumer dollars and which lost market share. After a long winter and spring and

the slow transition into summer, the next few months will surely be an exciting

time to study retail trends and follow merchandising strategies. Rest assured we

will be spending a lot of time surveying the tenant universe through a variety of

store visits.

As we focus on the delivery of goods to the consumer, it is impossible and

imprudent not to consider the impact of technology and the disruption it has had

on the retail landscape over the past several years. Technology in retail has

been and continues to be a significant topic of discussion, and I'd like to take

a few minutes to address the confluence of technology in the brick-and-mortar

retail operations.

As we continue to observe the lines of distinction between the physical store and

the virtual world blur, the retail industry is steadily undergoing a progressive

transformation that is providing consumers with more convenience and value than

ever before. From innovative mobile technology that continues to drive foot

traffic and sales at bricks-and-mortar locations to buy online pick up in store

and ship from store initiatives, brick-and-mortar retailers are continuously

evolving their operational capacity. To date, retail efforts show real promise as

they not only translate to enhanced operational efficiencies but also

progressively fulfilling shopping expectations of the consumer.

Overall, the impact of technology on our universe of retailers has been

exceedingly positive. As the most successful and profitable retails of the

industry continue to be those that have established both a strong physical and

online presence and are striving to achieve an integrated omni-channel operating

platform. One concept we continue to observe growth and expansion is that of buy

online, pick up in store. Examples of tenants within our portfolio offering and

continuing to roll out the convenience of buy online pick up in store include

Wal-Mart, Target, Bed, Bath and Beyond, PetSmart, Dick's Sporting Goods, Best

Buy, Home Depot, Lowe's, DSW, Nordstrom Rack and Whole Foods.

We are also seeing our retail partners growing their ship-from-store initiatives

which will allow stores to double as distribution facilities and offer retailers

operational efficiencies that were previously unrecognized. Even fast casual

restaurant tenants are realizing the advantages of investing in technology for

the benefit of their brick-and-mortar operations, offering consumers the ability

to place online and mobile orders for convenient pick up, Panera Bread and

Chipotle represent two innovative fast casual operators leading the

transformation within the restaurant sector. We continue to see significant

investment activity from retailers and restaurant operators as they aim to

provide consumers with desirable experiences associated with both the physical

and the virtual realms.

It is important to note that in the vast majority of cases, technology

integration in the retail industry is focused on enhancing the bricks-and-mortar

experience, whether synchronizing a website with local store inventory for

successful buy online pick up in store fulfillment, investing in an algorithm to

launch an efficient ship from store program or developing a mobile application

with an array of in-store capabilities, retailers investing in technology are

directly investing in their physical presence.

As our tenants in the retail industry as a whole continues to adapt and evolve in

an ever changing environment, so too has our portfolio of prime power centers. As

previously announced, we formed our third joint venture with Blackstone to

acquire 76 shopping centers from ARCP for $1.975 billion. The 16.4 million square

foot portfolio primarily consist of prime power centers located in large markets

like Los Angeles, Houston, Denver, Chicago, Atlanta, Washington DC and Phoenix

and is occupied by high-quality retailers including Whole Foods, Trader Joe's,

The Fresh Market, Costco, Target, Wal-Mart, Kohl's, PetSmart, Dick's Sporting

Goods, Bed, Bath and Beyond, and the TJX Companies. Within an expected closing of

mid-September, this transaction further enhances our partnership with a best-of-

breed capital partner as we again team up to create value in ways that align with

our respective investment philosophies. This transformation showcases our

continued ability to efficiently recycle capital and further advance our

portfolio transformation.

Having an underwriting history that dates back to several months prior to deal

announcement, we have identified significant opportunities to enhance the value

of the portfolio through active portfolio management. We are confident in our

ability to generate outsized asset level growth by leveraging our proven

operating platform and have appropriately structured our investment to produce

attractive risk-adjusted returns while securing access to acquisition

opportunities in the future. We look forward to maximizing value for our

shareholders as we capitalize on the many opportunities available to us through

the newly announced portfolio, our existing portfolio and the future

opportunities that we are currently pursuing in the market. At this point, I'd

like to turn the call over to Paul.

Thanks, Dan. Strong leasing momentum continued in the second quarter

resulting in 364 new deals and renewals for 3.1 million square feet matching the

highest quarterly deal volume in Company history. Similarly, spreads were also

indicative of the strong leasing environment with an 18.8% pro rata new deal

spread and 7.5% pro rata renewal spread. Our 2.4 million square feet of renewals

represents that highest quarterly volume in Company history and is further

evidence that retailers are focused on securing high-quality locations in prime

power centers.

While I typically spend some time addressing the supply-and-demand dynamics, we

all know that it remains heavily in the landlords' favor as demonstrated by our

quarterly results. Instead, I'd like to focus on how we're taking advantage of

this environment to continue to grow NOI and improve portfolio quality through

our previously announced Project Accelerate initiative as well as ground up

development.

As we announced in late May and discussed with many of you at NAREIT Project

Accelerate is allowing us to collaborate with retailers in the books,

electronics, toys, office and traditional department store categories to regain

control of locations in advance of natural lease expirations where we can then

re-merchandise our assets with market share winning tenants and recognize rental

upside of 30% to 40%.

As we have discussed before, this is an ongoing multi-year initiative and we

continue to work with these retailers on a regular basis to right-size their real

estate footprints. As such, in addition to the 21 previously announced recaptured

boxes representing 550,000 square feet of prime power center space, we have

finalized deals to recapture an additional five boxes totaling 160,000 square

feet in prime assets in Boston, Miami, Charleston and Rowley .

It's important to remember that while we're finalizing deals in 2014 to

proactively recapture space, the benefits of the remerchandising and the mark-to

-market opportunities will commence in the second half of 2015. Additionally,

with the ability to know for certain which spaces we are recapturing, we have the

ability to sign leases in advance of store closings, limiting the impact to our

lease rate and resulting in minimal downtime.

While we are certainly sensitive to our retail partners who have not yet informed

their employees of specific store closing, I would like to provide a few examples

of our success with this initiative. In the books category, we have several great

examples underway. In one instance at a 530,000 square foot prime power center

we're backfilling a 24,000 square foot Barnes & Noble with Ulta and GAP Factory

Outlet at a blended comp of 100%. This will enhance the center's overall

merchandise mix with two best-in-class retailers, drive NAV and provide enhanced

credit quality of cash flow.

In a separate 165,000 square foot prime power center, we are replacing a 23,000

square foot Barnes with a new Fresh Market at a 20% positive rent comp and

introducing a grocery component to the center driving daily traffic. This will

result in further upside in adjacent space as those leases come up for renewal

and reduce the overall cap rate of the asset due to the market's infatuation with

grocers.

In a final example, which takes place in a 1 million square foot prime power

center we are splitting the 28,000 square foot Barnes box into several units

featuring White House Black Market, Five Below and Carter's resulting in a

significant positive rent comp of over 130%, adding exciting new retailers to the

mix and outperforming the original underwriting assumed at acquisition in 2013.

In the office category, we have been strategically partnering with Office Depot

as they right size their footprint. One example is the recapturing of a 23,000

square foot Office Max box at a 220,000 square foot prime power center acquired

in 2013 providing the spark for a larger redevelopment. After recapturing this

box, we will proceed with the downsizing of the adjacent and oversized DSW. With

the Office Max recaptured and DSW downsized, we can then accommodate a Nordstrom

Rack, dramatically improving the merchandise mix, credit quality and traffic at

our center. Additionally, the new Nordstrom Rack deal represents an 80% rent comp

on the Office Max space and 40% positive comp on DSW space.

A second example is in a 435,000 square foot prime power center acquired in 2012

where we will recapture and split an Office Depot box for Ulta and Carter's

achieving a blended comp of 100%, and driving both stability and growth well

beyond our initial underwriting of this asset. While these are just a few

examples of the types of deals we are making, they demonstrate that by

recapturing below-market leases we are driving incremental growth, improving the

credit quality of cash flow, further positioning our asset as dominant shopping

centers, enhancing the merchandise mix offerings and eliminating potential risk

with certain retailers. The list of retailers we are dealing with to back fill

the recaptured space goes well beyond those named above and includes Shoe

Carnival, Cost Plus World Market, Total Wine, Bed, Bath and Beyond, Academy

Sports, Ross, Marshalls, HomeGoods and many more.

The concept of incentivizing our leasing team to create vacancy in highly unusual

in our business, but it speaks to the opportunities presented by the current

supply-demand dynamic and the dramatic transformation of our portfolio quality

over the past several years. Also directly related to strong retail demand, one

of the key takeaways from our 1,000 plus meetings at this year's ICSC in Las

Vegas was that retailers are now willing to commit to new development projects

without requiring a major tenant. As a result, we've made exciting steps towards

effectively monetizing our existing land bank through ground-up development and

I'd like to take a moment to update you on that progress

For those in attendance at our Charlotte Investor Day this past October, you will

recall Belgate Shopping Center which represented our first ground-up development

in over four years. Belgate opened ahead of schedule in May of 2013 and is a 100%

leased, 900,000 square foot power center located in Charlotte anchored by IKEA

and a complimentary line up of junior anchors including Marshalls, Ulta, Old

Navy, PetSmart, Cost Plus World Market, Hobby Lobby, Shoe Carnival. Given the

project's success, we are now finalizing a second phase of this project which

will represent 75,000 square feet of space occupied with other best-in-class

junior anchors while continuing to achieve an unlevered cash on cost return in

excess of 10%.

As you saw earlier this month, we announced the grand opening of Seabrook

Commons, our most recent ground-up development project located Seabrook, New

Hampshire, a northern suburb of Boston. Seabrook Commons is a 96% lease, 380,000

square foot power center anchored by Wal-Mart, Dick's Sporting Goods, PetSmart,

Michael's, Ulta, Famous Footwear and Five Below and includes a complementary

restaurant line of consisting of Panera, Outback Steakhouse and Noodles &

Company. The opening of Seabrook Commons which achieved an 8% unlevered return on

incremental capital results in the second consecutive year that we have added a

fully stabilized prime power center to the portfolio through ground-up

development.

In a few weeks, we will officially break ground on Gilford Commons, a 130,000

square foot power center consisting of three junior anchors including a specialty

grocer and 40,000 square feet of shop and specialty space located just east of

New Haven, Connecticut. With a planned opening in the second half of 2015 and

projected unlevered incremental yield of 8%, this project will represent our

third consecutive year of delivering a new ground-up development project.

Lastly, we will be breaking ground on a multi-phase development project in

Orlando, Florida later this fall with an expected opening of the first phase in

fall of 2015. Once complete Lee Vista will span 450,000 square feet and will be

anchored by theater offer a lineup of best-in-class junior anchor retailers and

consist of an array of high-quality restaurant operators. This mix will take

advantage of an abundance of surrounding office space, dense hotel offerings and

close proximity to Orlando International Airport. Lee Vista will represent our

fourth consecutive year of delivering a new group-up development project and we'

re projecting an 8.5% yield on incremental invested capital. These strategic

development projects enable us to assist the external growth aspirations of our

retail partners, monetize our land bank and achieve attractive returns on

incremental invested capital.

As the supply-and-demand dynamic continues to heavily favor the landlord

community, we are accelerating our efforts to take advantage by being extremely

aware that our industry is cyclical and opportunities are often fleeting. As

highlighted by Project Accelerate, our recent ability to generate new NOI through

ground-up development and our previously discussed $1 billion redevelopment

pipeline, we are continuing to find creative ways to grow NOI, improve

merchandise mix, enhance credit quality of cash flow and expand the overall

market share of our portfolio, all in an effort to not only benefit from the

current landlord favorable environment but also to deliver long-term stability in

any economic environment. And I will now turn the call over to David.

Thanks, Paul. Operating FFO was $101.3 million or $0.28 per share

for the second quarter, including non-operating items FFO for the quarter was

$82.1 million or $0.23 per share. Non-operating items primarily consisted of

impairments related to land held for development that is currently being sold.

The second quarter was again representative of DDR's execution of its strategic

transactional and balance sheet objectives. First, we closed on the acquisition

of four prime power centers, three of which were sourced off market for $265

million. These acquisitions were focused in the top 30 MSAs and included anchors

such as Target, Costco and Whole Foods.

The most significant acquisition was the Maxwell, a 240,000 square foot prime

plus power center locate Chicago South Loop. The Maxwell features an impressive

lineup of junior anchors including Nordstrom Rack, Dick's Sporting Goods and T.J.

Maxx sits directly adjacent to Whole Foods and offers a demographic profile of

household incomes of $105,000 and population of 681,000 people in the trade area.

DDR previously made a $21 million mezzanine loan on the project that was

accompanied by advantageous acquisition rights allowing for a seamless

acquisition prior to completion and stabilization, with additional upside for DDR

given the 90% lease rate. We closed on the acquisition in May for $118 million

and we expect the majority of the NOI to come online in the fourth quarter of

2014. The acquisition was partially financed by the issuance of 1 million OP

units in order to provide tax efficiency and the remainder of the acquisition was

financed through asset sale proceeds.

Another acquisition that I would like to highlight is Waterstone Crossing, a

425,000 square foot prime power center in Cincinnati that is anchored by Target

and Costco. DDR sourced the acquisition off market as a result of a strong local

relationship which allowed us to achieve much more attractive pricing than a

marketed sale for a class A center in a large market, providing for significant

net asset value creation before we even plugged the center into our platform. DDR

not only achieved favorable pricing but we will look to increase the yields by

bringing in top tier organic grocer to the asset in the coming months to replace

a weaker merchant.

We also announced that we have formed a 95/5 joint venture with Blackstone to

acquire 76 assets from American Reality Capital Partners for $1.975 billion. The

acquisition is scheduled to close in late 3Q, subject to loan assumptions.

Consistent with previous acquisitions and joint-ventures with Blackstone, DDR

secured acquisition rights to the top tier assets which represent 10 of the 76

assets with over 40% of the total value. As Dan mentioned, this transaction

continues to build on our deep relationship with Blackstone and highlights the

partnership's ability to source off-market opportunities below market pricing.

On the domestic disposition side we sold 11 operating assets and six land parcels

for $51 million at DDR share and we currently have $335 million of operating and

non-producing assets under contract for sale. Additionally, we also completed the

sale of our Brazilian investment for net proceeds of $344 million, a transaction

that dramatically simplifies our Company and decreases our risk profile. The

remaining wholly-owned non-prime assets now consist of only 32 assets, down from

nearly 200 shopping centers at the end of 2009, and all of which are either being

marketed for sale or a subject to either pending leases or anchor rollover in the

short term.

Regarding disposition pricing, for the full year 2014, we estimate a blended cap

rate in the low 7% range comprised of mid-7% pricing on operating assets that we

are selling into a strong market as well non-producing land.

On the capital market side, DDR also announced the closing of a $75 million

nonrecourse mortgage loan secured by Plaza Escorial the 636,000 square foot

shopping center in Puerto Rico. The loan was completed with a leading life

insurance company and included a 7-year term and a fixed interest rate of under

3.6%. The financing highlights the strong property level supply-demand

fundamentals and the attractive financing environment that continues to exist on

the island despite the macroeconomic headwinds.

In July, DDR paid off a $304 million balance of the (Inaudible) loan the

previously secured 27 prime assets and a loan to value in the 30% range further

reinforcing our desire to grow the size of our unencumbered pool, which now

stands at $6.5 billion, up from $3.6 billion in 2009. Disposition proceeds on the

Plaza Escorial loan were immediately utilized to repay the TALF debt. However,

we will look to issue long duration unsecured bonds in the second half of 2014 to

replace the CMBS debt at a comparable rate

Finally, as a result of the significant transactional and capital markets

activity, I would like to address DDR's sources and uses of capital for the

remainder of 2014 and the subsequent impact on operating FFO guidance. As we

currently stand, we are on target to exceed our current guidance for both

acquisitions and disposition activity. Year-to-date, we have closed or are under

contract to acquire $296 million of one off acquisitions plus $384 million

associated with DDR share of the ARCP acquisition totaling $680 million.

Disposition activity including assets under contract includes $548 million

domestically and $344 million in net proceeds associated with the sale of our

Brazilian investment totaling $892 million. This transaction activity highlights

DDR's desire to be a net seller in 2014 given the strong pricing environment and

further reinforces the lack of need for equity issue for either transactional

activity or debt repayment for the remainder of the year.

We have heard some recent commentary that encourages us to remind analysts and

investors that neither investment nor refinancing activity will be funded from

our line of credit for a long period of time. So it is much more appropriate

(Inaudible) long-term debt issuance in the next several quarters. At this point,

I'll stop and turn the call over to Dan for closing remarks.

Thanks, David. Before turning the call over to questions, I would

like to let you know that we are planning to host a property tour in Atlanta on

November 4th in conjunction with NAREIT. As many of you know, Atlanta represents

our largest market by square footage and second largest market by base rent and

highlights numerous assets that clearly illustrate our investment thesis.

Following the tour, we will host a dinner during which you will have unlimited

access to our senior management team as well as our local management team from

our Atlanta office which is responsible for 116 assets totaling more than 30

million square feet in Georgia, Alabama, the Carolinas, Tennessee and Virginia.

We look forward to a productive day and exchanging thoughts with those of you who

can make the trip to Atlanta and would like to join us.

Again, thank you for joining us today. I'll now turn the call over to the

operator for your questions.

(Operator instructions) Our first questions comes through from Christy

McElroy with Citi.

Good morning everyone. As retailers build out online pickup in

store and other incentives to tie e-commerce to brick and mortars, Dan, as you

talk about are you finding any changes in retailer are looking at their space

needs in a specific market as stores become increasingly a method for

distribution?

That's a great question, Christy, because it is something we

discussed with a number of our retail partners now. And it's really not a

function of space needs. It's how they're going to configure the space to make

the experience pleasant for the customer. Right now, as many of you know, in

order to pick up goods or to experience the shop online pick up in store program,

you either have to go into the store specifically and at which point there's

someone to assist you to your car with whatever good it is which is not really

convenient or you have to go to the back of the store where the dock is and

unpleasant things like dumpster and bailers and things of that nature. So the

actual physical presence of the store is in question and how they layout the

store and how they make a customer pick up experience pleasant is a topic of

conversation for sure. And there's no great answer yet to how to do that,

although, one of the things that we are seeing is for those of you who are old

enough to remember the Sears catalog and JCPenny catalog and Montgomery Ward

catalog, et cetera, where they had specific areas for catalog people to pick up

goods at the store, that does give you a clue as to probably we're going back to

the future if you will in a lot of those types of environment.

So I do think that we're going to continue dialog with retailers on this. I don't

think there's an easy answer to it. But I think there will be not necessarily

square-footage reductions or expansions, but there will be different space layout

to try to create an environment that is exceedingly convenient for the consumer

to come to the site, go to the store, pick up the goods, get in and get out

quickly with the merchandise. And I think it will require us to make physical

changes to some of our shopping centers and physical changes to the overall

experience in the near future.

Thank you.

Our next question comes through from Ross Nussbaum with UBS.

Good morning. Jeremy Metz on with Ross. You guys talked about a

number of developments you have going on. Can you just talk about what sort of

spreads versus acquisitions you are underwriting today? Is that tighter than say

a year ago? And then just more broadly where institutional assets are trading on

a cap rate basis today and if that's compressed further?

Sure. As we referenced a little bit in the opening commentary and

certainly hopefully shows up in our actual transaction activity, the private

market for quality shopping centers is extremely hot, it's extremely competitive.

There is a reasonable amount of product being listed, but it's being overwhelmed

by the amount of capital that's looking at the space. And so the acquisition

environment is very competitive, very challenging, that's why you saw our

activity for this quarter dramatically more focused on off market opportunities,

more opportunities where we had some sort of advantage on the deal and that's why

we were pleased with the acquisitions that we were able to complete this quarter.

That's why you don't see us out actively winning a great majority of the deals

that we looked at. We'd say at this point, quality power centers are clearly

trading no higher than the low six cap range and seeing many, many more deals not

just in the beloved coastal markets but in a broader list of markets and that

trading below 6% cap rate. And so an extremely competitive environment for

acquisitions.

We have sought other places to invest our capital. In some cases, it just means a

timing issue where we're patient and we're disciplined and we'll wait to put that

capital out where we do find opportunities. In other cases it means that capital

gets redeployed in a redevelopment activity which we've talked about quite a bit

or some of the new development activity that Paul referenced where I think

consistently we are talking about getting 250 basis points or more of expected

return beyond where we think those assets would trade in the private market.

Obviously, there is some development risk in the projects we're talking about,

but we're more discussing projects where we already own the land, is already

entitled land, we think you're talking about a considerable development spread

there where you're only taking a fraction of the traditional development risk if

we were to be going out and buying unentitled land to work that to the process

where we think we would need an even wider spread for that sort of activity.

Thanks.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

Good morning out there. Just a question, if you look at a

number of the expanding concept like SoulCycle and the ballet concept and yoga,

et cetera. And then you also see that expanding dental chains and things of that

sort. Are retailers more accepting of those sorts of concepts co-locating at the

shopping centers or are they still resistant because of legacy parking concerns

or other issues like that.

It's gotten better Alex in terms of the retailer's acceptance. You

mentioned a couple of different concepts, so I would have a separate dental from

fitness especially some of the smaller fitness users like SoulCycle. The

retailers have gotten to accept the L.A. Fitness of the world certainly not some

of the huge, lifetime fitness type units. But fitness in general has become very

common in a lot of shopping centers, well-planned and well-positioned is the key.

That's the comment we get back a lot of the time when we're asking for consent

for some of the ready to wear merchants or other anchors in our centers. As long

as they are positioned properly, seemed to have their own parking, not a terrible

influence on the parking right in front of the store, they're accepting.

Dental, medical, that' a different thing you're going to have some centers where

there is some small shops base, or some outline space that makes sense for. But

we're not excited about putting that in line with our traditional retail centers

anywhere and then we'd like to keep it in an off location if you will. And again,

I don't think you can compare the two uses.

Yes, I think the short answer, Alex, is yes. People are more --

the retailers are more accepting. But particularly for the medical use, we're not

more accepting. And while certainly there are certain centers where that maybe

appropriate, in most cases we've determined that those are centers that are non-

prime and those are centers that we should sell. And so we are not actively in

that market because once you go non-retail for a shopping -- obviously there are

certain services fitness is one and there's other spaces that are difficult to

lease that may be appropriate. But once you go to the medical field and that

becomes a major priority for a shopping center, it's going to be very difficult

to maintain the retail presence and the market share gains and achieve market

share gains that you like. And we typically put those centers on the sale list

and we've had success obviously selling them. And as you can tell by our leasing

numbers without doing those deals, we're doing just fine. Leasing to the people

that we want to lease to. So we really haven't needed to go to that level. And I

don't suspect that we will anytime soon.

And our next question comes through from Craig Schmidt, Bank of

America.

Thank you. Good morning. The top national retailers continue to

grow its market share of the total sales, I'm just wondering what this means by

shopping center format and particularly what that might mean for small shops in

shopping centers.

Well, you want to see in our case anyway, Craig, where the small

shops are becoming less relevant. The power center format, let me start with

that, we don't have a lot of small shop space as we think about it in small

grocery anchor or community centers. So we've been very focused on taking it to

the point you're talking about where we're consolidating shops space, bringing in

some of the national anchors, converting 3,000 foot units to one 9,000 foot unit.

So you will see a reduction in it. I think the key in our business and certainly

the way I look at it is, how much shop space should any center have, right? And

it's not going to be a big component when you talk about the power center format.

So we're going to focus on the national retailers. We're going to focus on the

large 10,000 and up primarily. Certainly there'll be some smaller that complement

the mix. But we will see less and less shop space. And that is a little bit of a

function of what's happening with the business. There's always going to be room

for service and food, fast food particularly, some of the cell phone operators.

So you will see shop space in those sort of categories. But in what we're doing

and what we're focused on, we're not going to see a heavy concentration of the

shop space as we used to know it.

Next question is from Caitlin Burrows with Goldman Sachs

Hi, good morning. As Dollar Tree is on your list of largest

tenants and I'm sure you also have exposure to Family Dollar. Could you talk

about any impact you expect the merge of those two companies to have on their

square-footage plans?

Yes, Dollar Tree is quite a large player in our portfolio. But there

is only one Family Dollar, so impact in terms of the merger. And we think it's a

great idea. In fact we'd like to see this growth exposure in some of our markets.

Eighty-six is the number of Dollar Trees we have today. So again, just with one

Family Dollar, we're up to 87. And again, no impact on the merger in terms of

closing.

And we think the merger is a positive thing. When you have

multiple retailers in the similar category with a similar pricing strategy, it

makes sense for them to join forces. We've seen it with Office Max and Office

Depot. We thought that was a good idea. And we certainly think that this is a

good idea as well. We think that in general, though, one of the reasons why these

events occur is because if you look at the companies individually, both of them

had very, very high aspirational new store GLA growth strategies. Both of which

were going to be extremely difficult to achieve on an independent basis

particularly as we have rising occupancy rates. We have nothing new being built.

And finding the square footage necessary to sustain those growth aspirations was

going to be very, very difficult and I think near impossible.

So I think as the combined chain looks for its growth opportunities, it is more

likely to succeed in the guided square footage that they have planned than they

would individually. And I think that was a big part of the conversation that

leads to the merger because retailers as you know have to grow internally or

externally. But internally is tough. Internally is tough in a non-inflationary

environment. So external growth is actually critical for a successful retailer

and growing market shares is absolutely critical. And independently when very

little is being built and the supply-demand dynamic is they heavily favor the

landlord a joining of the forces in that effort makes a lot of sense.

Next is Jonathan Pong with Robert Baird.

Hey, good morning, guys. Dave, S&P has a positive outlook on your

credit rating. Can you share anything about how those discussions are going is it

considering an upgrade to BBB and then what's the biggest hurdle to getting that

done?

Yes, I mean the outlook is obviously very important to where their

head is at in terms of their bent to continue to have the rating more positively

reflect our credit. They do very clearly their own research. We try to be as open

in front of them as possible with our disclosure that we share with everyone as

well as with specific rating agency business and disclosures. So have no secret

intel as to what their plans are, but obviously I think we keep making

considerable progress, de-risking the Company. That includes lowering debt to

EBITDA, but a much broader list of de-risking activities like the Brazilian exit.

And so we think as we continue to make progress, the rating agencies have

recognized that we think they'll continue to recognize that maybe even more

importantly, I think if you look at where our bonds trade the fixed income

investment community has certainly been supported of our name that I think

positions as well when we choose to return to the bond market.

Next comes through from Albert Lin with Morgan Stanley.

Good morning guys. Year-to-date, I think you guys are attracting

around 3.2% same stores NOI growth which is slightly towards the higher end of

your full year guidance, 2.5% to 3.5%. I'm curious what your thoughts are for the

back half of the year. And how long do you think you can sustain this level of

plus 3% NOI growth?

We're please with that activity for the first half of the year. I

would call it very consistent to modestly ahead of that guidance range. And we

think it continues to be achievable for the second half of the year. I think

everything we talked about for years with the upgrade of the portfolio quality

with the upgrade of the underlying tenant base was meant to create a portfolio

that could deliver this. And while there is much debate in the past as to whether

our portfolio quality warranted pricing on par with the other shopping center

companies, I think as results show up, it becomes harder and harder to justify

the discounted which we trade.

When you see that the underlying cash flow does not only grow on part and better

than peers, but also I think represented the sort of consistency that is

important to us and we think important to what stocks get attracted multiples or

NAV premiums or small NAV discounts over time. And so we're pleased with the

activity to date. We think everything that we put in place with the portfolio as

well as the leasing team not only the caliber of the people we have but the

mandate that they very clearly have from all of us to continue to drive growth to

focus on project to accelerate, to find those opportunities where we can create

additional rental spreads, creating near-term lease roll over, improve the

quality and value of the portfolio, but also absolutely push same store NOI. Now

counter intuitively, it may have a slight negative impact in 2014 where we're

creating vacancy or at least in the first half of 2015. But we think even with

that, we can maintain very attractive same store NOI growth on an absolute basis

in this 2.5% to 3.5% range and I think very attractive same store NOI growth

relative to the peer group.

Next question comes from Jason White from Green Street Advisors.

Good morning guys. Just a follow up on the previous discussion over

(Inaudible) SoulCycle and some of those tenants in your centers. How easy it to

add the specialty grocers with the parking they demand, is it difficult to find

the place to fit them in your centers or is it pretty easy to restructure some of

the other retailer's expectation?

It's actually been quite easy Jason to fit them in. Most of the

specialty grocers we've done have been takeovers of existing space. Like the one

example I gave with a Fresh Market will be taking a Barnes location, fit into the

exact footprint, no expansion, no reduction necessary. And Barnes and some of the

other spaces we have recaptured, they were very demanding in the amount of

parking in front of their stores initially. So we've got plenty of parking and

then we're anxious to fill those slots with folks like the specialty grocers. But

we don't see any issue in terms of the parking demand at all. In fact, many of

the centers we've built, we're probably over parked and now coming in with

somebody who's going to use up a little bit of that parking is a great add to the

center.

Next we have Todd Thomas from KeyBanc.

Hi. Thanks, good morning. Dan, in light of your comments around the

retail environment, you noted that you're spending a lot of time analyzing

retailers promotional campaigns and inventory levels and merchandising. And we've

seen a modest uptick in bankruptcies and closures this year relative to prior

years. Your comment seems to be focused more on the importance of this back-to-

school and holiday season. I was just wondering, do you feel that this season is

more important than in recent years for many retailers, maybe a tipping point of

sorts or a situation where things shake loose a bit with regard to closure or

even bankruptcies. I was just curious if you could elaborate a bit on your

comments.

Sure. I don't think this season is any more important than any

other season from that perspective. Particularly because I think in general, if

you look at the bulk of our cash flow and the credit quality of our cash flow,

the tenants are going into this holiday season in good shape. Balance sheets are

in good shape. I think they've figured out obviously, over the last several

years, regardless of the news we heard yesterday, they figured out how to operate

in a low GDP environment with modest wage growth and modest employment growth.

And I think they're well prepared for the holiday season and well prepared for

back to school.

I think what's interesting though and we did a property tour up in New England

the last two days. And one of the things you are seeing is that inventory levels

and promotional activity in retailers is early. It was early for back-to-school

and I suspect we'll see the same thing now for the holiday season. We've always

waited sort of for after Thanksgiving and then everything moved to before

Thanksgiving and I think everything is accelerating a week early or two early.

And I think that's a result of the inventory levels. I think it's a result of the

cooperation between the vendor and the retailer and the fact that the consumer

isn't skittish. The consumer smart and the consumer doesn't like to pay full

price and they need to be incentivized to shop and the retailers are figuring out

how to do that.

So I don't really think this is any more important than any other important

selling season. But I do think that you will see some changes in inventory

levels. You will see some changes in promotional activity. I also think that we

saw some changes in merchandise mix because of the importance of branded goods

off price. And that's just something to watch, to see if it works quite frankly.

To see if it's the right move and to see if that's what the consumer is looking

for as we head into the two most important shopping seasons which obviously are

back to school and holiday.

Next is Tayo Okusanya with Jefferies.

Good morning everyone. I just want to go back to follow your

comments about project accelerate. I appreciate the details and some of the

examples you shared. I was just curious though, if we take a step back and think

about 21 recaptured boxes and the five that are being recaptured. Of those, how

many are released at this point and how many have you actually physically taken

back at this point.

Physically we've only taken back one but they're happening, they

will be staggered events and that's part of the beauty of this. Part of our deals

on the 26 now are controlling exactly when we will we get the space back and made

the point that we want to be in a position where we're signing leases with the

replacement tenant prior to physically getting the space back. There will be a

few more in the third quarter, several more by the end of this year. Pretty

decent wave of recaptures early in 2015. And David mentioned, obviously, there

will be a little bit of a hit with that.

The stuff we haven't captured, we have certainly concrete ideas on every one.

Deals are not done with all 26 but we're recapturing for a reason. We want that

space. And so in many cases -- and if I just had to give a percentage I'd tell

you 50%. We've got deals soon to be executed and the others are in LOI and

negotiation stages but very comfortable with the space. We won't trigger the

recapture until we ready, minimizing downtime, obviously getting a replacement

tenant open as soon as possible. But then the upside is very dramatic, and as

you could probably tell from the script and what talk about NAREIT and at other

times this is a program that the entire leasing team is unbelievably excited

about. This is creating space in occupied centers and bringing in those best in

class retailers that we want to complement the mix and to grow the portfolio. I

will give you an example that just occurred to me yesterday. One of the examples

I gave where we were recapturing an Office Max downsizing the DSW and bringing in

Nordstrom Rack. We have an automotive use in that center that doesn't fit and

very low rent. And we went to them very recently just to downsize and

(Inaudible) make us an offer to take us out and we absolutely will. They adjacent

to Whole Foods. The upside potential in a space like that not one of the original

90 boxes we targeted, but that is what is going to happen with this initiative.

We are going to find other opportunities we haven't even though of, so extremely

exciting

I think it's very important to note to Paul's point though is

that we will stagger the take-backs. And in most cases, we will have signed

leases before we actually take back the space because our agreements with these

retailers give us the optionality of when we can take it back, obviously giving

consideration to their peak sales times et cetera. So we will stagger it out to

minimize the downtime as much as possible or maximize the cash flow as much as

possible. But we're in a good shape from a documents standpoint. So our

optionality on these spaces is what's really creating enormous value. So as we

announce these deals and as these deals come through, you will actually see deals

that are signed, ready to go but we might not have taken back the space yet. And

we still have some time before we do that.

Next question is from Ki Bin Kim from SunTrust.

Thanks. Just a couple of quick follow-ups. Along that similar lines.

If I look at your portfolio there's still maybe 25% of space that's not owned by

you. What are your plans on those types of spaces. And does that make sense for

you to take some of those back into the owned portfolio.

The unowned you're looking at is typically where you have a

shadow anchor whether it's a Target or a Lowe's or Wal-Mart. And we have looked

in certain cases where it makes sense to convert to lease. But that's not

typically the preference of those larger retailers.

You think about some of the costly capital standpoint as much as our

positioning has dramatically improved and cost of capital has decreased, it's a

real struggle to say that are our cost of capital could compete with the Costco

or a Wal-Mart who have consistently wanted to own a larger portion of their store

base. At least for Wal-Mart's large format stores.

Next question is from Michael Mueller with JPMorgan.

Hi. I was wondering for the Blackstone JV, did you consider

taking, I guess, a higher ownership stake initially or not really because you

have access to the top 10 centers that you wanted anyway?

I think the importance for us is the risk-adjusted return. And so

to be able to get a very low-risk return on a preferred equity piece for a period

of time during which we'll be doing the extremely detailed underwriting above and

beyond what you do in an acquisition process but what you do when you truly own

and manage a center to see what would make sense. Assuming we can figure out

another transaction with Blackstone to take several of those assets on a wholly

owned basis. I think it speaks to our focus on risk overall. Our focus on

portfolio quality overall where we didn't have an interest to take on 100% of

these 76 assets. But we think we have a very attractive structure here where we

absolutely expect to help our good partners at Blackstone on this transaction and

end up at the end of day with something that works extremely well for them and

very well for us where we can achieve a good return and a consistent return up

front. And potentially, an ownership interest of 100% of the smaller pool of

highest quality prime assets that we want longer term. So there's a structure

that's worked well. They are a partner that has worked extremely well, and so

we're excited to another one with them. And hopefully, we see it progress over

the next several years the way that the first one has.

Next we have Christopher Lucas with Capital One Securities.

Good morning everyone. Just wanted to follow up on the last

question which is, David, maybe you could give us sense as to aspirates between

(Inaudible) and the best quality assets (Inaudible) in that ARCP portfolio.

I think there is a relatively widespread when you simply say there

are 76 assets. When you truly look at where the value is focused, I think it's

pretty tightly focused on high quality shopping centers in major market. But to

answer the most extreme thought of your question, I think there are high quality,

major, major market asset that recent transactional activity would tell us our

five caps or sub five cap sort of assets in the Los Angeles area. And on the

other end, there are some smaller market, single kind of assets with less

attractive demographics are underlying tenancy that would probably be in the mid

-eights. And so I think you do have a wide range of cap rates by that broadest

definition of thinking about each one of the 76 assets. But when you truly look

at where the value is, it is highly concentrated in the high quality major market

prime, large scale power centers.

Next we have Rich Moore with RBC Capital Markets.

Hi guys. Good morning. I'm curious, now that development seems to be

making its way back into the conversation not just with you guys but with others

as well, where you are in terms of your development platform, in terms of your

staff, your expertise, which of course you've had before. And I'm wondering where

that is today post recession from a development standpoint.

We're in good shape, Rich. And we had the redevelopment platform

and we were very careful as we went in to the recession and during the recession.

We knew we needed the development folks in the department and we kept a couple of

key ones and we've added since. And we continue to look by the way. We're always

looking for quality people in that area, construction and development but we've

kept enough of a pool of activity, if you will, going with the redevelopment

pipeline and the occasional development that we feel good about where we are,

continue to look. We certainly don't feel that we're in a position where we're

short on quality staff for the extent of the pipeline we have laid out for you.

And it looks like we have some follow-up coming through from Ki Bin Kim

with SunTrust Robinson.

Thanks. Just a quick question, a follow up on Rich's. What do you

think -- have you guys looked at your total portfolio and just maybe put some

parameters around what you think the total redevelopment opportunity is maybe

within the next three years or so?

Yes, we have. There is quite a bit that's active today. I will

tell you that we'll be north for bringing about $100 million plus online in 2014.

And that number should be right around $150 million in 2015. That's kind of the

run rate we're looking at. It could obviously vary from year to year based upon

when projects are brought into service. But we've got several hundred million in

progress right now, different stages. That just means we're not just thinking

about it. We're actually doing something about it whether it's entitlements or

consents or working deals. But a good run rate would be about $150 million to

$200 million a year of activity and probably bringing in around $150 million a

year for the next few years.

And we have no further questions in queue, so I'll pass it back to DDR

CEO, Dan Hurwitz, for any final remarks.

I just want to thank you all once again for joining us for our

update on what was a very busy second quarter. And hope that you will be able to

join us in Atlanta on November 4th in conjunction with NAREIT. So thanks again.

Have a good day.

Wonderful. Thank everyone for your time and your participation. And

have a great rest of the day.